2017 (3) TMI 673 - AT - Income Tax

Benefit of sections 11 and 12 - investment in mutual funds - AO denied the benefit of exemption u/s. 11 and 12 of the Act on the entire surplus generated by the assessee merely for the reason that the assessee has made investment in funds not approved u/s. 10(23D) - Held that - It is no more res integra that where the investments or deposits are made by charitable trust are in violation of section 11(5) of the Act, the benefit of exemption u/s. 11 of the Act would not be denied on the entire income of the assessee. It is only the investments or deposits made in violation of provisions of section 11(5) of the Act that would attract maximum marginal rate of tax as per the provisions of law. As decided in Commissioner of Income Tax Vs. FR. Mullers Charitable Institutions 2014 (2) TMI 1033 - KARNATAKA HIGH COURT it is only the income from such investment or deposit which has been made in violation of Section 11(5) of the Act that is liable to be taxed and that violation under Section 13(1)(d) does not tantamount to denial of exemption under Section 11 on the total income of the assessee . Where the whole or part of the relevant income is not exempted under section 11 by virtue of violation of section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. - Decided in favour of assessee

Summary

Issues:
1. Denial of exemption under sections 11 and 12 due to investment in unapproved mutual funds.
2. Disallowance of surplus as income due to violation of section 11(5).
3. Interpretation of the applicability of maximum marginal rate of tax on income.

Issue 1: Denial of exemption under sections 11 and 12 due to investment in unapproved mutual funds:
The case involved a public charitable trust engaged in providing education, enjoying benefits under sections 12A and 80G of the Income Tax Act. The Assessing Officer observed investments in unapproved funds, leading to denial of exemption under sections 11 and 12. The Commissioner of Income Tax (Appeals) partially upheld the disallowance, taxing the investments in mutual funds at the maximum marginal rate of tax.

Issue 2: Disallowance of surplus as income due to violation of section 11(5):
The Assessing Officer treated the trust as an Association of Persons (AOP) and added the entire surplus as income due to alleged violations of section 11(5). The Commissioner of Income Tax (Appeals) restricted the disallowance to the extent of investment in the unapproved mutual funds, following the precedent set by relevant case laws.

Issue 3: Interpretation of the applicability of maximum marginal rate of tax on income:
The appeal raised questions regarding the correct application of the maximum marginal rate of tax on the entire income of the trust in case of a violation of section 11(5). The case law cited by the appellant emphasized that only the income from investments made in violation of section 11(5) should attract the maximum marginal rate of tax, not the entire income. The Tribunal upheld the Commissioner's decision, citing precedents and confirming that the law does not warrant taxing the entire income due to a breach of section 11(5).

In conclusion, the Tribunal dismissed the Department's appeal, upholding the Commissioner's order based on established legal principles and precedents. The judgment clarified the correct application of tax rates in cases of violations, emphasizing that only income from specific investments made in contravention of the law should attract higher tax rates, not the entire income of the trust.