2016 (4) TMI 1337 - AT - Income Tax

Exemption u/s 11 denied - assessee has violated the provisions of the Act under section 11(5) r.w.s. 13(1)(d) by investing its funds to the extent of .17, 00, 000/- in Kumari Chit Fund - Held that - On an identical issue and similar facts and circumstances the Coordinate Bench of the Tribunal in the case of DDIT (EXEMPTIONS) -I CHENNAI VERSUS THE INDIA CEMENTS EDUCATIONAL SOCIETY DHUN BUILDINGS 2016 (3) TMI 73 - ITAT CHENNAI wherein held that 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 - decided against assessee.

Summary

Issues Involved:
1. Confirmation of disallowance under section 11(5) of the Income Tax Act, 1961.
2. Violation of provisions under section 11(5) read with section 13(1)(d) by investing in Kumari Chit Fund.
3. Denial of exemption under sections 11 and 12 of the Act.
4. Applicability of maximum marginal rate on the income violating section 13(1)(d).

Detailed Analysis:

1. Confirmation of Disallowance under Section 11(5):
The primary issue in the appeal was the confirmation of the disallowance under section 11(5) of the Income Tax Act, 1961. The assessee, a public charitable trust, had invested ?17,00,000/- in Kumari Chit Fund, which was deemed a violation of section 11(5) read with section 13(1)(d) of the Act. The Assessing Officer (AO) denied the exemption under sections 11 and 12, leading to the determination of total income at ?73,94,752/-. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, confirming that the investment contravened section 11(5) and rendered section 11 inoperative.

2. Violation of Provisions under Section 11(5) read with Section 13(1)(d):
The Tribunal noted that the assessee had indeed violated the provisions of the Act by investing in Kumari Chit Fund. According to section 13(1)(d), any income or property of the trust applied for the benefit of specified persons results in the denial of exemption under sections 11 and 12. The Tribunal referenced similar cases, such as DDIT(E) v. The India Cements Educational Society, where similar violations led to the denial of exemptions.

3. Denial of Exemption under Sections 11 and 12:
The Tribunal upheld the denial of exemption under sections 11 and 12 due to the violation of section 11(5). The CIT(A) observed that the investment in Kumari Benefit Fund contravened the provisions, causing section 11 to become inoperative. Consequently, the application of income towards capital assets and donations could not be allowed as expenditure.

4. Applicability of Maximum Marginal Rate:
The assessee argued that only the income violating section 13(1)(d) should be taxed at the maximum marginal rate, not the entire income. The Tribunal examined section 164(2), which states that income not exempt under sections 11 or 12 due to violations of section 13(1)(c) or (d) should be taxed at the maximum marginal rate. The Tribunal referenced the case of CIT v. Working Women’s Forum and the judgment of the Karnataka High Court in CIT v. Fr. Mullers Charitable Institutions, which supported the view that only the income from the violating investment should be taxed at the maximum marginal rate.

However, the Tribunal also considered the Supreme Court's judgment in CIT v. Rattan Trust and the jurisdictional High Court's judgment in CIT v. Nagarathu Vaisiyargal Sangam, which supported the denial of exemption for the entire income due to violations. The Tribunal concluded that the benefit of section 112 could not be extended to the deemed Association of Persons (AOP), and the entire income should be taxed at the maximum marginal rate.

Conclusion:
The Tribunal dismissed the appeal, confirming the CIT(A)'s order and upholding the denial of exemption under sections 11 and 12 due to the violation of section 11(5) read with section 13(1)(d). The Tribunal emphasized that the entire income should be taxed at the maximum marginal rate due to the contravention of the provisions. The appeal was dismissed, and the order was pronounced on 26th April 2016 at Chennai.