2016 (5) TMI 588 - AT - Income Tax

Exemption u/s 11 - violation of section 13(1)( c) - a sum of ₹ 6,76,132/- was received by the assessee society as donation from Society of St. Joseph of Cluny, Kolkata for building construction at Kanchrapara and the assessee society gave donation of ₹ 18,30,000/- to the said Society of St. Joseph of Cluny, Kolkata. - Held that - When the donation given by one trust to another trust out of current year s income is permitted in section 11 of the Act as an application of income, the same cannot be curtailed by another provision of the Act (i.e section 13(1)(c ) (ii) read with section 13(3) of the Act) as it would defeat the very purpose of such provision. It is not the case of the revenue that the funds of the trust have been applied /diverted for the private benefit of the trustees, settlors or any individuals /relatives. This is what is the true intention of section 13(1)(c ) of the Act. In the instant case, it is a case of simple donation by one public charitable trust to another public charitable trust, wherein no individual could hold any substantial interest. In view of the above findings, we hold that the payment of donation by assessee trust to another registered public charitable trust is not in violation of section 13(1)( c) of the Act as the said payment is not made for the benefit of any person either directly or indirectly referred to in section 13(3) of the Act. - Decided in favour of assessee

Issues Involved:
1. Whether the donation given by one trust to another trust could be considered as an application of income.
2. If such donation exceeds ?50,000/-, whether the same would fall within the ambit of provisions of section 13(1)(c)(ii) read with section 13(3)(b) of the Act.
3. In any event, whether the assessee would lose exemption u/s 11 of the Act for the whole of its income or only to the extent of violation of section 13(1)(c) of the Act.

Detailed Analysis:

Issue 1: Application of Income
The Tribunal examined whether the donation given by one trust to another trust is considered an application of income. It was held that charitable trusts are constituted for charitable purposes, and giving donations is a philanthropic activity that qualifies as charity. The Tribunal referred to amendments in the provisions of section 11 by the Finance Act 2002 and 2003, which restrict donations to other charities only out of accumulated funds, not out of current year’s income. The Tribunal concluded that donations from current year’s income are permissible under section 11 of the Act. This was supported by various judicial precedents, including decisions from the Hon’ble Calcutta High Court in CIT vs Hindustan Charity Trust, the Hon’ble Bombay High Court in CIT vs Trustees of the Jadi Trust, and the Hon’ble Gujarat High Court in CIT vs Sarladevi Sarabhai Trust No. 2.

Issue 2: Provisions of Section 13(1)(c)(ii) and Section 13(3)(b)
The Tribunal analyzed whether donations exceeding ?50,000/- fall within the ambit of section 13(1)(c)(ii) read with section 13(3)(b). Section 13(1)(c)(ii) disallows exemption if income or property of the trust is used for the benefit of certain persons, including substantial contributors. However, the Tribunal clarified that section 13(3)(b) refers to payments made to individuals or their relatives, not to another registered charitable trust. Since the donee trust is a public charitable trust with no individual holding substantial interest, the Tribunal held that the payment does not violate section 13(1)(c)(ii).

Issue 3: Extent of Loss of Exemption under Section 11
The Tribunal addressed whether the entire income loses exemption under section 11 or only to the extent of the violation. The assessee argued that even if there were a violation, only the part of the income related to the violation should be taxed at the maximum marginal rate. The Tribunal referred to the expression "if any part of such income" in section 13(1)(c)(ii) to support this argument. However, since the Tribunal concluded that there was no violation of section 13(1)(c), it did not need to provide a detailed opinion on this issue.

Conclusion:
The Tribunal allowed the appeal, holding that:
1. Donations from one trust to another trust out of current year’s income are considered an application of income under section 11.
2. Such donations do not fall within the ambit of section 13(1)(c)(ii) read with section 13(3)(b) as they are not payments to individuals or their relatives.
3. Consequently, the assessee did not lose exemption under section 11 for the whole of its income.

The appeal was allowed, and the order was pronounced on 11.05.2016.

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