2011 (8) TMI 510 - HC - Income Tax

Exemption u/s. 11 - Assessing Officer noted certain irregularities of the assessee in managing its funds as pointed out by SEBI - However, there is no conclusion that any part of the funds were diverted or applied as not permitted under sub-section (3) of Section 13 - Therefore, it was not open for the Assessing Officer to resort to Section 13 of the Act to withhold exemption under Section 11 of the Act - Thus, the Assessing Officer made certain general observations to point out that some of the application of the funds of the stock exchange were not approved by the SEBI - But that itself would not be sufficient to activate sub-section (3) of Section 13 without any specific finding - Decided in favour of assessee.

Summary

Issues Involved:
1. Entitlement to exemption under Section 11 of the Income Tax Act, 1961.
2. Validity of the assessment of income being excess of income over expenditure.
3. Applicability of Section 13 of the Income Tax Act, 1961.

Detailed Analysis:

1. Entitlement to Exemption under Section 11 of the Income Tax Act, 1961:
The primary issue revolves around whether the assessee, a stock exchange, is entitled to exemption under Section 11 of the Income Tax Act, 1961. The assessee had been granted registration under Section 12A of the Act by the Commissioner, with a condition allowing the Assessing Officer to examine the applicability of Section 11 during each assessment year. The Assessing Officer denied the exemption, citing that the assessee's objectives were not charitable and referenced the Supreme Court decision in Delhi Stock Exchange Association Ltd. vs. Commissioner of Income Tax. The Tribunal reversed this decision, relying on the precedent set in Hiralal Bhagwati vs. Commissioner of Income Tax, which held that once registration under Section 12A is granted, the Assessing Officer cannot re-examine the charitable nature of the trust's objectives. The High Court upheld the Tribunal's view, stating that the condition in the registration order does not permit the Assessing Officer to re-evaluate the trust's eligibility for exemption under Sections 11 and 12.

2. Validity of the Assessment of Income Being Excess of Income Over Expenditure:
This issue is consequential to the first. The Assessing Officer had assessed an income of Rs.1,60,86,248/- as excess of income over expenditure, denying the exemption under Section 11. Since the High Court upheld the Tribunal's decision that the assessee is entitled to exemption under Section 11, this assessment is also invalidated. The High Court concluded that the Assessing Officer was not justified in denying the exemption and, consequently, the assessment of income as excess of income over expenditure is reversed.

3. Applicability of Section 13 of the Income Tax Act, 1961:
The Assessing Officer invoked Section 13, which disqualifies certain income from exemption if it benefits specific persons associated with the trust. The Tribunal did not extensively examine this issue, but the High Court found no evidence in the Assessing Officer's or CIT Appeals' orders indicating that the funds were used for the benefit of any person specified under Section 13(3). The High Court noted that while SEBI had pointed out irregularities in fund management, there was no specific finding that any funds were diverted in a manner prohibited by Section 13(3). Therefore, the High Court concluded that the Assessing Officer's general observations were insufficient to deny exemption under Section 11 based on Section 13.

Conclusion:
The High Court dismissed the Revenue's appeal, affirming the Tribunal's decision that the assessee is entitled to exemption under Section 11 and that the assessment of income as excess of income over expenditure was invalid. The Court also found no grounds to invoke Section 13 to deny the exemption.