2018 (6) TMI 95 - AT - Income Tax

Benefit of exemption u/s 11 denied - whether the assessee can be denied the benefit of exemption u/s 11 on the ground that the assessee was holder of shares in violation of provisions of section 13(1)(d) ? - Held that - It is well settled that where investments or deposits have been made by a charitable trust which 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 and only the investments / deposits made in violation of provisions of section 11(5) would attract maximum marginal rate of tax - See CIT vs. FR Mullers Charitable Institutions 2014 (2) TMI 1033 - KARNATAKA HIGH COURT - Decided in favour of assessee.

Summary

Issues:
1. Denial of exemption u/s 11 due to violation of provisions of section 13(1)(d) read with section 11(5) of the Income Tax Act, 1961.

Analysis:
The appeal before the ITAT DELHI was filed by the department against the order passed by the Ld. CIT (A)-40, New Delhi for the assessment year 2010-11. The case revolved around a charitable institution registered under section 12AA(1) of the Act, which received a donation of shares and dividend income. The AO denied exemption u/s 11(1) due to the violation of section 13(1)(d) read with section 11(5) of the Act. The Ld. CIT (A) granted exemption on all income except the dividend income. The department challenged this decision before the ITAT.

The department argued that the benefit of exemption should be denied as the assessee violated the provisions of section 13(1)(d) read with section 11(5) of the Act. On the other hand, the assessee contended that only income from investments made in violation of section 11(5) should be taxed, not the entire income. The authorized representative cited various case laws in support of this argument.

After considering the submissions, the ITAT analyzed the legal position. It referred to the judgment of the Hon'ble Karnataka High Court and held that only income from investments or deposits made in violation of section 11(5) would attract tax, not the entire income. The ITAT also cited judgments from the Bombay High Court and Delhi High Court supporting this interpretation. The ITAT further referred to a Delhi Bench decision reinforcing that violation of section 13(1)(d) does not result in the denial of exemption u/s 11 to the total income of the assessee trust.

Based on the settled judicial precedent and legal interpretation, the ITAT upheld the decision of the Ld. CIT (A) to restrict the addition made by the AO to the extent of dividend income earned. Consequently, the ITAT dismissed the grounds raised by the department, leading to the dismissal of the appeal.

In conclusion, the ITAT affirmed that violation of section 13(1)(d) does not automatically result in the denial of exemption u/s 11 for the total income of the assessee trust. The judgment emphasized that only income from investments made in violation of section 11(5) would be subject to tax, in line with established legal principles and precedents.