2014 (5) TMI 890 - AT - Income Tax

Denial of exemption u/s 11 of the Act - application of income - denial of exemptions under Sections 10(34) 10(35) and 10(38) of the Act on the grounds that the assessee is a Trust and its income is to be computed only under the provisions of Sections 11 to 13. Applicability of section 13(1) (d) and 13(2)(h) of the Act AO found that the sale proceeds of shares of TCS has been reinvested in the Tata Sons Ltd which is not public sector company and therefore the investment of accumulated fund is not in conformity of section 11(5) - According to AO investment not held as Corpus fund. Held that - Relying upon K.P. Varghese. v. ITO 1981 (9) TMI 1 - SUPREME Court - the trust would not lose exemption even 85% of the income applied or deemed applied during the year if the whole or part of such income is accumulated or set apart for application of such purpose in India by giving notice in writing to the AO and the money so accumulated or set apart is invested or deposited in the form or mode specified in sub section (5) of section 11 - For the purpose of application of income in terms of sections 11 (1) and (2) the entire income of the trust has to be considered including the dividend and long term capital gain claimed as exempt u/s 10 of the act - the assessee has applied Rs. 164.93 crore during the year and nothing has been brought to show that the shortfall of more than 446 crore has been applied in the immediate following year - apparently the assessee trust has not applied the shortfall of more than 446 crore in the immediate next year in terms of the Explanation to section 11(1) of the Act - the assessee has already applied the entire balance amount in the shares of Tata Sons Ltd. thus the question of application of shortfall in the immediate next year does not arise. The assessee held the bonus shares of TCS for the duration which is within the time limit prescribed under clause (iia) of the proviso to section 13(1)(d) the assessee converted the assets being bonus shares of TCS into the preferential share of Tata sons Ltd. which is not a conversion into the asset/investment permissible u/s 11(5) of the Act - clause (iia) of proviso to section 13(1)(d) would not rescue the assessee from the mischief of section 13(1)(d) (iii) of the Income-tax Act - The intent behind the insertion of clause (iia) of the proviso is to exit form non permissible investment and to convert into permissible investment and not to just change one non permissible investment to another non permissible investment. Following Gurdayal Berlia Charitable Trust. Versus Fifth Income-Tax Officer 1990 (6) TMI 92 - ITAT BOMBAY-B - The breach of section 13(1)(d) and 13(2)(h) would lead to forfeiture of exemption of income derived from such investment and not the entire income would be subjected to the maximum marginal rate of tax u/s 164(2) - the exemption u/s 11 is available to the assessee only on the income to the extent the same is derived in conformity of section 11 and applied during the year for such purpose of charitable trust. Denial of exemption u/s 10(34) 10(35) and 10(38) of the Act Claim of dividend income on shares and units and LTCG on sale of shares - Assessee being a trust Held that - The exemption u/s 10 is income specific irrespective of the status/class of person - the exemption under section 11 is person specific though on the income derived from the property held under the trust - the exemption u/s 11 is subject to the application of income and modes or form of deposit and investment Relying upon Commissioner of Income-Tax Versus Divine Light Mission 2004 (4) TMI 25 - DELHI High Court - agricultural income shall not be included in computing the total income of a previous year in view of section 10(5) of the Act - exemption u/s 11 is available on the income of the public charitable /religious trust or institution which is otherwise taxable in the hands of other persons - the income which is exempt u/s 10 cannot be brought to tax by virtue of sections 11 and 13 of the Act because no such pre condition is provided either u/s 10 or 11 to 13 of Income-tax Act - the benefit of section 10 cannot be denied by invoking the provisions of sections 11 to 13 of the Act - Once the conditions of section 10 are satisfied then no other condition can be fastened for denying the claim u/s 10 of the Act thus the dividend income on shares and mutual funds and long term capital gain on sale of shares an exempt u/s 10(34) 10(35) and 10(38) respectively and cannot be brought to tax by applying sections 11 and 13 of the Act Decided in favour of Assessee. Education grant given to Indian students for studying abroad Held that - Following CEO Clubs India Versus Director of Income-tax (Exemption) 2012 (10) TMI 895 - ITAT MUMBAI - the education grant given to the Indian students in India for education/higher education abroad fulfills the conditions of application of money for such purpose in India Decided in favour of Assessee. Denial of deduction Income applied to objects of trust in India Administrative expenses Held that - The AO denied the exemption u/s 11 and computed the income in commercial manner - CIT(A) has recorded that the AO has not made any disallowance on account of administrative expenses - the AO has computed the total income by taking the income from various sources and has not allowed any deduction - the question of exemption u/s 11 is required to be remitted back to the AO for reconsideration Decided in favour of Assessee. Denial of TDS credit Held that - CIT(A) has directed the AO to verify and allow the claim of TDS thus no grievance arises from the order of CIT(A) Decided against Assessee. Applicability of MAT to the entire income Denial of applicability of rate of tax to STCG and LTCG Held that - The rate of tax on short term capital gain arising from sale of equity shares is provided u/s IMA as 15% - relevant income which is derived from the property held under trust wholly for charitable or religious purpose is charged to tax as per the provisions of section 164(2) - When the short term capital gain arising from the sale of shares subjected to STT is chargeable to tax at 15% then the maximum marginal rate on such income cannot exceed the maximum rate of tax provided under the Act - the short term capital gain on sale of shares already subjected to STT is chargeable to tax at maximum marginal rate which cannot exceed the rate provided u/s IMA of the income Tax Act Decided in favour of Assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 11 due to provisions of Sections 13(1)(d) and 13(2)(h).
2. Denial of exemptions under Sections 10(34), 10(35), and 10(38).
3. Treatment of education grants given to Indian students for studies abroad.
4. Denial of deduction of income applied to the objects of the Trust and administrative expenses.
5. Credit for TDS.
6. Applicability of the maximum marginal rate of tax to the entire income.

Issue-wise Detailed Analysis:

1. Denial of Exemption under Section 11:
- The assessee, a charitable trust, claimed exemptions under Section 11 for various incomes.
- The AO noted that the assessee sold shares of TCS and reinvested in Tata Sons Ltd., which is not a public sector company, violating Section 11(5).
- The AO held that the assessee is hit by Sections 13(1)(d)(i) and 13(2)(h) due to investment in non-permissible assets.
- The CIT(A) concurred with the AO's view.
- The Tribunal noted that the assessee did not apply 85% of its income as required under Section 11(1) and did not invest the shortfall as per Section 11(5).
- The Tribunal held that the breach of Sections 13(1)(d) and 13(2)(h) would disqualify exemption of income from such investments but not the entire income of the trust.

2. Denial of Exemptions under Sections 10(34), 10(35), and 10(38):
- The AO denied exemptions under Sections 10(34), 10(35), and 10(38) on the grounds that the income of the trust should be computed under Sections 11 to 13.
- The CIT(A) agreed with the AO.
- The Tribunal held that income exempt under Section 10 cannot be brought to tax by applying Sections 11 and 13, as no such precondition is provided in the Act.
- The Tribunal allowed the exemptions under Sections 10(34), 10(35), and 10(38).

3. Treatment of Education Grants Given to Indian Students for Studies Abroad:
- The AO disallowed the exemption for education grants given to Indian students studying abroad, stating it was not applied for charitable purposes in India.
- The CIT(A) upheld the AO's decision.
- The Tribunal held that the application of income took place in India for the purpose of education of Indian students, and the final execution of the purpose abroad does not affect the conditions satisfied by the assessee.
- The Tribunal allowed the exemption for the education grants.

4. Denial of Deduction of Income Applied to the Objects of the Trust and Administrative Expenses:
- The AO computed the income in a commercial manner and did not allow any deductions.
- The CIT(A) noted that there was no disallowance made by the AO for administrative expenses.
- The Tribunal set aside the issue to the AO to reconsider the claim in light of its findings on other issues.

5. Credit for TDS:
- The CIT(A) directed the AO to verify and allow the claim of TDS.
- The Tribunal noted that no grievance arises from the CIT(A)'s order and directed the AO to consider and decide the claim of TDS credit.

6. Applicability of the Maximum Marginal Rate of Tax to the Entire Income:
- The AO applied the maximum marginal rate of tax on the entire income under Section 164(2).
- The CIT(A) confirmed the AO's action.
- The Tribunal held that the short-term capital gain on the sale of shares subjected to STT is chargeable to tax at the rate provided under Section 111A and not the maximum marginal rate.
- The Tribunal decided this issue in favor of the assessee.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal providing detailed rulings on each issue, ensuring compliance with the relevant sections of the Income-tax Act. The Tribunal emphasized the importance of specific provisions and the conditions under which exemptions can be claimed.