2016 (2) TMI 380 - AT - Income Tax

Exemption u/s 11& 12 - Held that - As decided in ITPO V. DG IT (Exemptions) (2015 (1) TMI 928 - DELHI HIGH COURT ) is relevant in this particular case. The said judgment held that the expression charitable purpose is not to be construed in a vacuum but in the specific context of Section 10(23C)(iv) which specifically deals with income received by any person on behalf of, inter ala, an institution established for charitable purposes. Therefore, the meaning of the expression charitable purposes has to be examined in the context of Section 10(23C)(iv). The expression has a reference to income. Because it is only when such an institution has an income that the question of not including that income in its total income would arise. Therefore, merely because an institution, which otherwise is established for a charitable purpose, receives income that would not make it any less a charitable institution. In the present case the Assessing Officer as well as the CIT(A) has ignored this aspect that the assessee s main activity of providing medical facility at the subsidies rate does amount to charitable purpose. It is admitted that the assessee has violated the provisions of Section 13(1)(d) r/w/s Section 13(3) and Section 11(5) of the Income Tax Act, 1961 and added income of ₹ 2,22,000/- has to be taxed at the maximum marginal rate of tax as per the provision of Section 164(2) of the Income Tax Act, 1961 as per the various case laws submitted separately, which have also held that the denial of exemption should only be to the extent of income which was violative of Section 13(1) (d) and not the total denial of exemption u/s. 11.

Summary

Issues:
1. Denial of exemption under sections 11 & 12 of the Income Tax Act
2. Addition of notional interest on advances given to specified persons
3. Denial of exemption to entire income of the trust
4. Making an addition towards notional income of interest on amounts given out of capital and reserves

Analysis:

Issue 1: Denial of exemption under sections 11 & 12 of the Income Tax Act
The appellant, a charitable trust registered under sections 12A and 80G of the Income Tax Act, appealed against the denial of exemption under sections 11 & 12 by the Assessing Officer (AO) and confirmed by the CIT(A). The AO found a violation of Section 11(5) due to interest-free loans given to relatives of the managing trustee, resulting in an addition of notional interest. The CIT(A) upheld the denial of exemption under Section 11, stating that the trust did not engage in charity to the public at large as required by Section 11(1). However, the appellant argued that charging concessional rates did not negate its charitable character, as most of its receipts were used for charitable purposes. Citing relevant case laws, the appellant contended that the trust's activities fell within the definition of charitable purpose. The Tribunal agreed with the appellant, emphasizing that providing medical relief at subsidized rates constituted a charitable purpose, and allowed the appeal in part.

Issue 2: Addition of notional interest on advances given to specified persons
The AO added notional interest on interest-free loans given by the trust to specified persons, amounting to Rs. 2,22,000, for violating Section 13(1)(d) and Section 11(5) of the Act. The CIT(A) upheld this addition. The Tribunal acknowledged the violation of these sections but held that the denial of exemption should be limited to the income related to the violation, not the total denial of exemption under sections 11 & 12. Therefore, the Tribunal ruled that the added income should be taxed at the maximum marginal rate, as it was not linked to the charitable purpose under sections 11 & 12.

Issue 3: Denial of exemption to entire income of the trust
The AO denied exemption under sections 11 & 12 to the entire income of the trust due to the violation of provisions related to interest-free loans. The CIT(A) affirmed this denial. However, the Tribunal disagreed with the blanket denial of exemption and stated that only the income violating Section 13(1)(d) should be taxed, not the entire income. The Tribunal emphasized that the trust's main activity of providing medical facilities at subsidized rates aligned with charitable purposes, leading to the partial allowance of the appeal.

Issue 4: Making an addition towards notional income of interest on amounts given out of capital and reserves
The AO made an addition of Rs. 2,22,000 towards notional income of interest on amounts given out of the trust's capital and reserves. The CIT(A) upheld this addition. The Tribunal, while acknowledging the violation of provisions, emphasized that the denial of exemption should be proportionate to the income related to the violation. Therefore, the Tribunal allowed the appeal in part, directing that the added income be taxed at the maximum marginal rate, as it was not connected to the charitable purpose under the relevant sections of the Act.

In conclusion, the Tribunal partially allowed the appeal, emphasizing that the denial of exemption should be limited to the income violating specific provisions, rather than a blanket denial of exemption under sections 11 & 12. The Tribunal highlighted that the trust's activities aligned with charitable purposes, particularly in providing medical relief at subsidized rates, warranting the allowance of the appeal in part.