2013 (12) TMI 722 - HC - Income Tax

Exemption u/s 10(23AAA) - Held that - Both the financial institutions namely Veerashiva Sahakara Sangha and Karnataka Veerashaiva Vidyabhivrudhi Samsthe do not fall within Section 11(5) of the Act as they are not approved - Once the fund is approved by the Commissioner in accordance with the Rules made in this behalf the contribution made by the employees to the said fund do not form part of the total income and consequently it does not attract tax - Decided in favour of assessee.

Summary

Issues:
Violation of Section 11(5) of the Income Tax Act, 1965 in investment, Exemption under Section 11 and 12/10(23AAA), Assessment order denial of exemption, Appeal to Commissioner of Appeals, Appeal to Tribunal, Entitlement to exemption in contravention of Section 11(5).

Violation of Section 11(5) in Investment:
The assessee, a trust fund, made deposits with two institutions not falling under Section 11(5) of the Income Tax Act, leading to denial of exemption. The Assessing Officer issued a notice under Section 148 for a revised return. The Appellate Authority attributed the violation to a mistaken impression and directed to restrict denial of exemption to the income generated from the investment in violation of Section 11(5). The Tribunal upheld this decision, justifying denial only to the extent of income from the non-compliant investment.

Exemption under Section 11 and 12/10(23AAA):
The assessee, registered under Section 12A, claimed exemption under Section 11 and 10(23AAA) of the Act. Section 10(23AAA) outlines conditions for exemption related to funds established for employee welfare. The Appellate Authorities noted compliance with Section 10(23AAA) conditions, approving the exemption for contributions not forming part of total income. The order passed by the Appellate Authorities was upheld, dismissing the Revenue's appeal.

Entitlement to Exemption in Contravention of Section 11(5):
The critical question was whether the assessee could be entitled to exemption for an investment of Rs.1,40,00,000 despite contravening Section 11(5). The judgment clarified that while the investment did not comply with Section 11(5), once the fund is approved by the Commissioner, contributions made by employees do not attract tax. Therefore, the Appellate Authorities were justified in holding the contribution exempt from tax, leading to the dismissal of the Revenue's appeal.

In conclusion, the judgment addressed the issues of violation of Section 11(5) in investment, entitlement to exemption under Section 11 and 10(23AAA), and the allowance of exemption despite contravening Section 11(5). The decision upheld the exemption for contributions not forming part of the total income once the fund is approved, emphasizing compliance with Section 10(23AAA) conditions. The judgment favored the assessee, dismissing the Revenue's appeal and affirming the Appellate Authorities' decision regarding the denial of exemption only to the extent of income generated from the non-compliant investment.