2014 (11) TMI 805 - HC - Income Tax

Violation of section 13(1)(d) r.w section 11(5) - Effect of amendment Taxability of income Held that - The Tribunal rightly held that the assessee Society had not parked any of their funds in Cr dit Industriel et Commercial, Paris, France either as an investment or as deposit - Grants from the Government of France, which were parked in the account - The respondent Centre was earlier exempt u/s 35(1)(ii) of the Act for all years prior to 01.04.2003 - after the said provision was withdrawn and become inapplicable, the grant by the French Government could not be utilized as per the mandate of the French authorities, for insistence and enunciation that the Centre should remain a non-taxable entity/institution. The order by the CBDT affirms and accepts that the objects were charitable and in categorical and positive terms, the order grants exemption from entire income held under trust applied in accordance with the objects of the Centre, without any other stipulation - The exemption is for the period covered by AYs 2005-06 to 2009-10 - It is not averred that the income derived from the property held under trust was not applied in accordance with the objects of the Centre - Application of income is different, from accrual - the interest earned applied for the purpose/objects of the Centre will not form a part of the total income - in respect of the income, there would be no violation of Section 11(5) read with Section 13(1)(d) of the Act. Application of proviso to section 164(2) Centre to be taxed on maximum marginal rate or not Held that - The respondent Centre had excess of expenditure over income in the Profit and Loss Account for the AY 2008-09 - the Centre had suffered a loss - However, the AO held that the interest in the foreign bank account would be taxable at the maximum marginal rate - Because of that finding, benefit of carry forward to the assessment year 2009-10 was denied - In any case, once it has been held that the exemption granted by the order of the CBDT dated 12.10.2010 would apply, Section 164(2) of the Act would not be applicable Decided against revenue.

Summary

Issues:
1. Violation of Section 13(1)(d) read with Section 11(5) of the Income Tax Act, 1961.
2. Application of proviso to Section 164(2) of the Act due to violation of provisions of Section 13(1)(d).

Issue 1: Violation of Section 13(1)(d) read with Section 11(5) of the Income Tax Act, 1961:
The case involved appeals by the Revenue challenging an order passed by the Income Tax Appellate Tribunal related to the Indo French Centre for Promotion of Advanced Research for assessment years 2008-09 and 2009-10. The Revenue contended that funds deposited with a French financial services group resulted in earning interest, raising concerns about violations of relevant sections of the Income Tax Act. However, the Tribunal found that the Centre had not parked any funds in the French bank account as investments or deposits. The Tribunal noted that the Centre was earlier exempt under a specific provision of the Act, and after amendments, the grant by the French Government could not be utilized as per French authorities' mandate to maintain the Centre as a non-taxable entity. The Central Board of Direct Taxes (CBDT) later issued an order granting exemption from taxation for specific assessment years, confirming the charitable nature of the Centre's activities.

Issue 2: Application of proviso to Section 164(2) of the Act due to violation of provisions of Section 13(1)(d):
The second contention raised by the Revenue was related to the application of Section 164(2) of the Act due to the denial of benefits to the Centre based on interest earned in a foreign bank account. However, the Tribunal found that the Centre had incurred losses, and the interest in the foreign account was held taxable at the maximum marginal rate by the Assessing Officer. The Tribunal, considering the exemption granted by the CBDT, held that Section 164(2) would not be applicable. Consequently, the appeals were dismissed based on the specific exemption granted to the Centre and the factual circumstances of the case.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the unique exemption granted by the CBDT and the charitable nature of the Centre's activities. The judgment clarified the application of relevant provisions of the Income Tax Act in light of the specific circumstances and exemptions provided to the Indo French Centre for Promotion of Advanced Research.