2016 (3) TMI 73 - AT - Income Tax

Entitlement to exemption u/s 11 - as per revenue amount advanced to M/s Anna Investment Pvt. Ltd is not an approved investment u/s 11(5) - violation of sec. 13(1)(c) - Held that - The exemption from tax will be denied only if their income is applied for the benefit of the author, founder etc. otherwise than in compliance with a mandatory term of the trust or a mandatory rule governing the institution. The requirements of sec. 13(1)(c)(ii) is that the trust should apply the funds in a concern in which they themselves are interested, if there was a mandatory provision in the trust deed for such a purpose. Such a mandate in the trust deed should have existed and could not have been brought in by amending the trust deed at a later stage after that crucial date, even if the trust deed authorized the trustees to amend the trust deed to bring in the mandatory condition or requirement for them to invest funds of the trust in a concern in which they might be interested. In is admitted fact in this case that there is a violation of sec. 13(1)(c) of the Act as the assessee invested funds in a limited company where the trustee is the Managing Director and his wife is a Director. Being so, placing reliance on the judgment of Supreme Court in the case of CIT vs Rattan Trust, 1997 (7) TMI 11 - SUPREME Court and CIT vs Nagarathu Vaisiyargal Sangam, 1998 (8) TMI 6 - MADRAS High Court , we hold that the Assessing Officer was correct in invoking the provisions of sec. 13(1)(c) of the Act and denying exemption to the assessee u/s 11 of the Act. - Decided against assessee Benefit of sec. 112 - only that portion of income i.e capital gain to be considered for tax in terms of sec. 112 of the Act at maximum marginal rate as proposed by the Assessing Officer - Held that - The provision of section 164(2) is concerned with taxability of income (i) which is derived from property held under trust wholly for charitable or religious purposes or (ii) in the form of voluntary contribution received by the trust covered by sec. 2(24)(iia), or (iii) the nature referred to in sec. 11(4A). The income of such trust which is not exempt u/s 11 or sec. 12 of the Act shall be charged to tax as if such exempt income is the income of an AOP. The proviso to sec. 164(2) inserted with effect from 1.4.1985 enjoins that where the nonexempt portion of relevant income arises as a consequence of the contravention of the provisions of sec. 13(1)(c) or (d), the said income would be subject to tax at the maximum marginal rate. Capital gain is to be assessed by applying the provisions of sec. 112 even if the income is assessed as per sec. 164 of the Act The benefit of sec. 112 of the Act so as to assess the gain from the transfer of the capital asset cannot be given to the deemed AOP. - Decided in favour of revenue

Summary

Issues:
1. Exemption u/s 11 of the Income Tax Act denied due to investment in a concern where trustees had interests.
2. Taxability of capital gain arising from the sale of land by a trust.
3. Interpretation of sec. 164(2) and sec. 112 of the Income Tax Act.

Issue 1: Exemption u/s 11 Denied:
The case involved a trust running an Arts College that sold land for expansion but advanced the sale proceeds to a company where the trustees had interests. The Assessing Officer treated the land sale income as taxable and denied exemption u/s 11. The CIT(A) disagreed, stating the Assessing Officer failed to prove benefits to the trustees. However, the ITAT Chennai upheld the Assessing Officer's decision based on sec. 13(1)(c) violations, citing Supreme Court and High Court judgments.

Issue 2: Taxability of Capital Gain:
The trust claimed exemption u/s 11 on the balance income after deducting capital gains. The ITAT Chennai rejected this, citing sec. 164(2) which taxes non-exempt trust income as an AOP. The trust's reliance on judgments for partial taxability was dismissed, and the ITAT held that the entire income was taxable due to sec. 13(1)(c) violations.

Issue 3: Interpretation of Sec. 164(2) and Sec. 112:
Regarding the tax rate for non-exempt trust income, the trust argued for sec. 112's application, while the ITAT Chennai referred to the maximum marginal rate under sec. 164(2) for violations of sec. 13(1)(c). The trust's reliance on High Court and Tribunal judgments was rejected, emphasizing the correct application of tax rates as per the Income Tax Act.

In summary, the ITAT Chennai upheld the denial of exemption u/s 11 to the trust due to violations under sec. 13(1)(c) and taxed the entire income, including capital gains, based on sec. 164(2). The trust's arguments for partial taxability and application of sec. 112 were dismissed, emphasizing the correct interpretation of tax provisions under the Income Tax Act.