2024 (3) TMI 775 - HC - Income Tax

Exemption u/s 11 - whether the objects of the trust were charitable? - as submitted entire benefit u/s 11 will be disallowed and it cannot be restricted only to that income of the trust which was used/applied for the benefit of the prohibited persons - HELD THAT - Having considered the judgment of the Apex Court in Bharat Bourse ( 2002 (12) TMI 8 - SUPREME COURT , in our view, the issue primarily in that matter was whether assessee was a trust entitled to the benefit of Section 11 of the Act and secondly whether there was a breach of the provisions of Section 13 of the Act, where one Bharat Shah can be said to be a founder of the institution within the meaning of sub-clause (a) of sub-Section (cc) of Section 13(3) of the Act. The judgment does not say whether the entire benefit under Section 11 of the Act will be disallowed or disallowance will be only to the extent of income diverted. The basic dispute in Bharat Bourse (supra) was whether the objects of the trust were charitable and whether the person to whom the loan was given was a person covered by Section 13 of the Act. We also find support for this view in Audyogik Shikshan Mandal 2 018 (12) TMI 1344 - BOMBAY HIGH COURT held on a plain reading of Sections 11 and 13 of the Act, it is clear that the legislature did not contemplate the denial the benefit of Section 11 of the Act to the entire income of the Trust. If the interpretation sought to be advanced by the Revenue is accepted, it would lead to grave injustice as any mistake minor and/or misdemnour involving a small amount takes place by the Trust, the consequence would be denial of the benefit of exemption to the entire income otherwise admittedly used for charitable purposes. In our view, as regards proposed question nos. (A), (B) and (C) no substantial question of law arise. Appeal is admitted on the following question of law - Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT is right in holding that expenditure incurred on new objects are eligible for exemption u/s 11 even if such new objects had not been intimated to the concerned CIT, without appreciating the fact that since the objects of the trust deed which were the basis of grant of registration u/s 12A of the Act have been altered after grant of such registration, the very foundation of registration having been removed by voluntary act of the assessee?

Summary

Issues Involved:
The appeal involves several substantial questions of law, including the entitlement to benefit under sec. 11 of the Income Tax Act, 1961, the restriction of benefit under sec. 11 to income used for prohibited persons, application of legal ratios from previous cases, determination of commercial activity by a trust, eligibility of expenditure on new objects for exemption, approval requirements for expenditure outside India, and treatment of donations for specific purposes as capital or revenue receipts.

Benefit under Section 11:
The Assessing Officer (AO) initially denied the exemption under Section 11 of the Act to the assessee trust due to a breach of Section 13 provisions. However, the Commissioner of Income Tax (Appeals) upheld the denial but enhanced the income by a specific amount. The Income Tax Appellate Tribunal (ITAT) later ruled that the denial of benefit under Section 11 would be limited to income used for the benefit of prohibited persons.

Legal Precedents and Interpretations:
The dispute over the extent of denial of benefits under Section 11 was compared to previous court decisions, including the Apex Court's ruling in Director of Income Tax Vs. Bharat Diamond Bourse. The court analyzed whether the denial should be for the entire income or only to the extent of diverted funds, emphasizing the charitable nature of trust objects and the coverage under Section 13 of the Act.

Expenditure and Donations:
The judgment also addresses the eligibility of expenditure on new objects for exemption under Section 11, despite changes post-registration, and the necessity of approval for expenditure outside India. Furthermore, the treatment of donations for specific purposes, such as building funds, was discussed, with a focus on whether such donations constitute capital or revenue receipts.

Conclusion:
The High Court admitted the appeal on the question of whether expenditure on new objects, not intimated to the CIT, remains eligible for exemption under Section 11 despite alterations post-registration. The court directed the Registrar to ensure the original record is summoned for inspection, indicating the appeal's progression for further hearing.