2013 (9) TMI 335 - AT - Income Tax

Disallowance of Exemption u/s 11 - Charitable purpose 2(15) - Subscription paid to Chit Fund company - Violation of the nature specified in Section 13(1)(d) - As per the assessee, subscriptions paid to chit funds were not deposits nor investments and it could not have been a reason for denying it the exemption claimed under Section 11 of the Act. - Held that - Subscription to chit funds itself will be utilization of the funds of the assessee since right of the assessee is only to prize a chit or participate in a draw of lots. It is not an investment or deposit of a money which is available as surplus with assessee. Lower authorities fell in error in concluding that such subscriptions were investments which violated the modes specified under Section 11(5) of the Act. - The question of denial of exemption under Section 11 would arise only if investments were there. - assessee could not have been denied exemption claimed by it under Section 11of the Act, for a reason that it had subscribed to the chit funds. There is no case for the Revenue that any of the Trustees, Managers, contributors of relatives of such persons were having interest in the two chit companies. - assessee was eligible for exemption under Section 11 of the Act and its claim was denied unjustly. Relying upon CIT v. Kottayam Co-operative Bank Ltd. 1974 (4) TMI 2 - KERALA High Court - The annual income of the Trust against which, utilization for charitable purpose which was well above the limit of 85% prescribed u/d 11(1)(a) of the Act - As per the assessee, subscriptions paid to chit funds were not deposits nor investments and it could not have been a reason for denying it the exemption claimed u/s 11 of the Act - Subscription paid by a subscriber of a chit to a chit company acting as the foreman of the chit, in our opinion, cannot be considered as an investment. Subscribing to a chit fund is not with an intention to earn interest or dividend.

Issues Involved:
1. Denial of exemption under Section 11 of the Income-tax Act, 1961.
2. Violation of Section 11(5) by subscribing to chits.
3. Interpretation of investments and deposits under Section 11(5) and Section 13(1)(d).
4. Application of maximum marginal rate of tax under Section 164(2).

Detailed Analysis:

1. Denial of exemption under Section 11:
The primary grievance of the assessee, a Trust registered under Section 12AA, was the denial of exemption under Section 11 of the Income-tax Act, 1961, for the assessment year in question. The Assessing Officer (A.O.) had noted that the Trust had placed Rs. 2,08,456/- with M/s Tern Credits & Chits Private Limited and Rs. 96,230/- with M/s K.R. Palaniappan (Chit), which were not approved investments under Section 11(5). This led to a violation of Section 13(1)(d), resulting in the taxation of the Trust's income in the status of an Association of Persons (AOP).

2. Violation of Section 11(5) by subscribing to chits:
The A.O. and the CIT(Appeals) both held that the subscriptions to the chit funds were investments or deposits that violated Section 11(5), thereby invoking Section 13(1)(d). The assessee argued that these subscriptions were not investments or deposits but were necessary for participating in the chit, aimed at raising funds when needed. The Tribunal agreed with the assessee, stating that subscribing to a chit fund is not an investment as it is not intended to earn interest or dividend but to prize the chits.

3. Interpretation of investments and deposits under Section 11(5) and Section 13(1)(d):
The Tribunal examined the nature of chit fund subscriptions and concluded that they do not qualify as investments or deposits. The Tribunal referenced the Kerala High Court's decision in CIT v. Kottayam Co-operative Bank Ltd. and the Amritsar Bench's decision in Onkar Capital Growth (P) Ltd. v. CIT, which clarified that chit fund subscriptions are not deposits or investments. The Tribunal emphasized that Section 11(5) applies to investments and deposits of money accumulated or set apart by an assessee-Trust, and chit fund subscriptions do not fall into this category.

4. Application of maximum marginal rate of tax under Section 164(2):
The CIT(Appeals) had applied the maximum marginal rate of tax on the Trust's income, citing violations of Section 13(1)(c) and Section 13(1)(d). The Tribunal, however, disagreed, stating that the subscriptions to the chit funds were neither investments nor deposits and thus did not violate Section 11(5). Consequently, the denial of exemption under Section 11 was unjustified. The Tribunal directed the A.O. to grant the exemption under Section 11 for the impugned assessment year.

Conclusion:
The Tribunal concluded that the subscriptions to chit funds by the assessee-Trust were not investments or deposits and, therefore, did not violate Section 11(5) or Section 13(1)(d) of the Income-tax Act. The denial of exemption under Section 11 was found to be unjustified, and the Tribunal directed the A.O. to grant the exemption. The appeal filed by the assessee was allowed. The decision of the co-ordinate Bench in the case of KAS Foundation, which involved acquisition of shares, was distinguished as it did not apply to the present case involving chit fund subscriptions.

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