2012 (8) TMI 422 - AT - Income Tax

Denial exemption u/s 11 of the Act whether because of these violations as mentioned by the Assessing Officer (a) whether the appellant forfeits the entire exemption available to it or (b) whether the denial of exemption should only be proportionate to the diversion of the funds made by the appellant. - held that - the assessee is not eligible for exemption u/ss 11 and 12 of the Act.

Issues involved:
1. Violation of Section 13(1)(d) of the Income-tax Act, 1961.
2. Violation of Section 13(2)(h) of the Income-tax Act, 1961.
3. Eligibility for exemption under Sections 11 and 12 of the Income-tax Act, 1961.
4. Application of CBDT Circular No. 387 dated 06.07.1984.
5. Proportionate denial of exemption versus complete forfeiture.

Detailed Analysis:

1. Violation of Section 13(1)(d) of the Income-tax Act, 1961:

The assessee, a foundation registered under Section 25 of the Companies Act, 1956, and granted registration under Section 12AA of the Income-tax Act, 1961, invested Rs. 20 lakhs in Jagannatha Financial Services Limited (JFSL), a non-public company. The Assessing Officer (AO) observed that this investment violated Section 13(1)(d) of the Act as it was not in a public company or as prescribed under Section 11(5). The AO concluded that this violation disqualified the assessee from claiming exemption under Section 11.

2. Violation of Section 13(2)(h) of the Income-tax Act, 1961:

The AO further noted that trustees and management of the assessee foundation held substantial shares in JFSL, thereby violating Section 13(2)(h) read with Section 13(4) of the Act. The AO highlighted that the trustees and their relatives held approximately 37% of JFSL shares, and the foundation's investment amounted to around 10% of JFSL's paid-up capital, reinforcing the violation.

3. Eligibility for exemption under Sections 11 and 12 of the Income-tax Act, 1961:

The AO rejected the exemption claim under Sections 11 and 12, stating that the foundation's activities were contrary to its registered objectives. The foundation borrowed funds at 14% interest and invested in JFSL without receiving any returns, which was seen as benefiting JFSL rather than fulfilling the foundation's charitable purposes.

4. Application of CBDT Circular No. 387 dated 06.07.1984:

The CIT(A) considered the CBDT Circular No. 387, which states that in case of contravention of Section 13(1)(c) or (d), the maximum marginal rate of tax applies only to the income that has forfeited exemption, not the entire income. The CIT(A) held that only the investment amount of Rs. 20 lakhs should be taxed, and the remaining income should retain exemption under Section 11.

5. Proportionate denial of exemption versus complete forfeiture:

The CIT(A) decided that the denial of exemption should be proportionate to the funds diverted, not a complete forfeiture. The CIT(A) relied on the CBDT Circular and judicial precedents, including the Bombay High Court's decision in Sheth Mafatlal Gagalbhai Foundation Trust, to support this view.

Conclusion:

The Tribunal, after considering the submissions and reviewing the facts, upheld the AO's decision, rejecting the proportionate approach suggested by the CIT(A). The Tribunal emphasized that the foundation's activities and investments were contrary to its registered objectives and violated specific provisions of the Income-tax Act. Consequently, the appeals filed by the Revenue were allowed, and the cross-objections by the assessee were dismissed. The Tribunal concluded that the assessee was not eligible for the claimed exemptions under Sections 11 and 12 due to clear violations of Sections 13(1)(d) and 13(2)(h) of the Act.

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