2014 (4) TMI 80 - HC - Income Tax

Entitlement for exemption u/s 11(1)(a) of the Act Held that - Income derived from sale of residential and commercial units Held that - Clause (2) of the Memorandum of Association speaks about the objects for which the Society is formed and sub-clause (c) of clause 3 confers power on the respondent-assessee to improve, manage, cultivate, develop, exchange, grant on lease, mortgage, charge, sell, dispose off, grant rights and privileges in or otherwise dealing with all any part of the property, movable or immovable, patents or copy rights held by or belonging to the assessee or donated to it - the construction of the complex would fall within the scope of the objects enumerated in the memorandum of association Decided against Revenue. Whether the Tribunal was justified in granting exemption u/s 11 of the Act, holding that an amount which had been accepted by the respondent-assessee as additional income, never reached the trust Held that - There is no material on record to show that this amount and the misappropriated amount is one and the same - That, perhaps, appears to be the reason why the CIT (A) observed that the assessee had claimed exemption u/s 11(2) of the Act to the extent of 25% of the assessee s income - the respondent-assessee would be entitled for deduction to the extent of 25% on the amount added, to the income declared by them in their returns - the order of the Tribunal as well as the order of the CIT (A) to that extent are set-aside Decided partly in favour of Revenue.

Summary

Issues:
1. Entitlement to exemption under Section 11(1)(a) of the Act for income derived from sale of residential and commercial units.
2. Justification of granting exemption under Section 11 of the Act for an amount not reaching the trust.

Analysis:
Issue 1:
The judgment pertains to income tax appeals against the Tribunal's order dismissing all appeals filed by the revenue. The appeals arose from orders passed by the CIT (A) partly allowing appeals filed by the respondent-assessee. The key question was whether the assessee is entitled to exemption under Section 11(1)(a) of the Act for income from the sale of residential and commercial units. The respondent-assessee, a charitable trust, constructed a complex and sold units. An amount discrepancy was noted between agreements and sale deeds, with a total difference of Rs.1,61,23,950. The CIT (A) had allowed a 25% exemption, which was disputed by the revenue. The High Court ruled in favor of the assessee, citing the Memorandum of Association's clauses empowering property dealings, thus falling within the trust's objectives.

Issue 2:
The second issue revolved around the justification for granting exemption under Section 11 of the Act for an amount misappropriated and not reaching the trust. The Tribunal had held that the misappropriated amount should be treated as an application of income, contrary to the revised return where the assessee offered the same amount as additional income. The High Court found no evidence linking the misappropriated amount to the added income. The Court set aside the Tribunal's decision, ruling in favor of the revenue on this aspect. The judgment highlighted the importance of distinguishing between misappropriated funds and additional income declared by the assessee.

In conclusion, the High Court's judgment addressed the issues of exemption under Section 11(1)(a) of the Act and the treatment of misappropriated funds not reaching the trust. The decision favored the assessee on the first issue based on the trust's objectives outlined in the Memorandum of Association. However, the revenue succeeded in the second issue due to the lack of evidence linking the misappropriated amount to the declared additional income. The appeals were disposed of without costs.