2019 (12) TMI 376 - HC - Income Tax

Exemption u/s 10(23AA) - exemption u/s 11 - proof of charitable activity u/s 2(15) - income on behalf of regimental fund or non-public fund established by the armed forces of the Union - HELD THAT - In the instant case, the assessee has failed to prove income on behalf of regimental fund or non-public fund established by the armed forces of the Union. The establishment should be of armed forces of the Union with receipt of the fund of the nature given under the said provision. The issue aforesaid has been ignored by the tribunal so as by the CIT(Appeals). It seems to have been persuaded only by one issue which was initial denial of the exemption under Section 10(23AA) as it was not claimed at the time of submission of return but during the course of assessment. It may be that assessee can claim the exemption under Section 10(23AA) at the time of assessment but entitlement for it was required to be decided by CIT(Appeals) and the tribunal. On the facts of the case, we do not find that the assessee was entitled for exemption under Section 10(23AA) of the Act of 1961 when it failed to prove it case. Thus, the order of the CIT(Appeals) and the tribunal to allow the exemption under the aforesaid provision cannot sustained. Addition u/s 40(a)(ia) - CIT(Appeals) deleted the addition - HELD THAT - It is after ignoring the fact that the assessee was not found entitled to the exemption under Section 11 in view of the violation of Section 13. An order for denial of exemption under Section 11 was passed on 12.02.2016. Ignoring the aforesaid and treating the assessee to be entitled for the exemption on its registration under Section 12A of the Act of 1961, deletion of the addition was made. The tribunal upheld the order passed by the CIT(Appeals) ignoring the fact of denial of exemption under Section 11 of the Act of 1961. Once the exemption under Section 11 was denied, the assessee was required to deduct the TDS and thereby the addition was rightly made by the Assessing Authority. Accordingly, CIT(Appeals) so as to the tribunal was not justified to delete addition by referring to Section 40(a)(ia) while ignoring proviso appended to it and the order dated 12.02.2016 where the exemption under Section 11 of the Income Tax Act of 1961 was denied to the assessee. Thus, order of the CIT(Appeals) so as to the tribunal needs interference even on that count. Maximum marginal rate - maximum marginal rate was not applied on the total income despite the fact that the assessee was not found entitled to the exemption under Section 11 - HELD THAT - A reference of Section 164(2) of the Act of 1961 would be relevant for the aforesaid. If the assessee was not entitled to the exemption under Section 11, the maximum marginal rate should have been applied on the total income and not on the addition of ₹ 1,54,745/- and ₹ 2,95,185/-. Since the assessee conducted itself in violation of Section 13 of the Income Tax Act, exemption under Section 11 was denied in the assessment order dated 12.02.2016. The CIT(Appeals) and the tribunal was required to consider aforesaid aspect while restricting the maximum marginal money on the addition of ₹ 1,54,745/- and ₹ 2,95,185/-. - Decided in favour of revenue

Summary

Issues involved:
1. Exemption under Section 10(23AA) of the Income Tax Act of 1961.
2. Deletion of addition under Section 40(a)(ia) of the Act.
3. Application of maximum marginal rate under Section 13 of the Income Tax Act 1961.

Exemption under Section 10(23AA) of the Income Tax Act of 1961:
The appellant challenged the order passed by the Income Tax Appellate Tribunal regarding the exemption under Section 10(23AA). The revenue contended that the exemption is only applicable when income is received from a fund established by the armed forces of the Union. The tribunal allowed the exemption without proper consideration, as the fund in question was established by the wives of army personnel, not the armed forces of the Union. The court held that the exemption was not available to the assessee, as there was no proof of income from a fund established by the armed forces of the Union. The order granting exemption under Section 10(23AA) was set aside.

Deletion of addition under Section 40(a)(ia) of the Act:
The appellant also contested the deletion of an addition made under Section 40(a)(ia) by the CIT (Appeals) and upheld by the tribunal. The revenue argued that the exemption under Section 11 was denied due to a violation of Section 13, and thus, the addition should not have been deleted. The court agreed, stating that once the exemption under Section 11 was denied, the addition was justified. The deletion of the addition without considering the denial of exemption under Section 11 was incorrect.

Application of maximum marginal rate under Section 13 of the Income Tax Act 1961:
Regarding the application of the maximum marginal rate, the court found that it was not correctly applied. The assessee, having violated Section 13 and being denied exemption under Section 11, should have faced the maximum marginal rate on the total income, not just on specific additions. The court held that the maximum marginal rate should have been applied on the entire income, as per Section 164(2) of the Act. The orders of the CIT (Appeals) and the tribunal were set aside on this issue.

In conclusion, the court ruled in favor of the revenue and against the assessee on all three substantial questions of law. The orders of the CIT (Appeals) and the tribunal were set aside, and the appeal by the revenue was allowed.