2020 (1) TMI 602 - AT - Income Tax

Exemption u/s.11 - assessee had violated the provisions of Section 11(5) of the Act as it invested surplus funds other than in the mode prescribed under the Act as assessee had subscribed to chits and also transferred the fund to a private trust - HELD THAT - Admittedly, assessee trust is duly registered u/s.12AA - It is mandatory in order to avail exemption u/s.11, the funds of the trust should be invested in one of the modes prescribed u/s. 11(5). During the previous year relevant to assessment year under consideration, the assessee trust had subscribed to chit with Sree Gokulam Chit and Finance Co. Ltd. Undisputedly, investment in chit is not one of the prescribed mode of investments. Therefore we need to examine the transaction from point of view of the activities of the assessee trust. The explanation of the assessee that subscription to the chits was made in order to mobilize the resource to meet repayment of loans availed from same party, has no bearing on the issue. The transaction of subscription to the chits is independent of the earlier transaction of loans borrowed and there is nothing on record to show that the both transactions are interconnected. Subscription to the chits is nothing but the investment which is not one of the prescribed mode of investment u/s.11(5). Therefore it is a clear case of violation of provisions of Section 11(5) of the Act, hence assessee trust is not entitled for exemption u/s.11 of the Act. As regards to the contention that only that part of income which is in violation of Section 11(5) of the Act alone should be taxed but not entire tax cannot be accepted deserves consideration in view of Section 11(3) of the Act which provides so. Therefore we direct the Assessing Officer to restrict the taxable income to the extent of violation of Section 11(5) of the Act. Appeal filed by the Revenue is partly allowed.

Summary

Issues:
Violation of Section 11(5) of the Income Tax Act regarding investment in chit funds by a trust.

Analysis:
1. The appeals were filed by the Revenue against orders of the Commissioner of Income Tax (Appeals) for Assessment Years 2009-10 and 2010-2011, concerning violation of Section 11(5) of the Act by the assessee trust.

2. The main issue revolved around whether the subscription to chit funds by the trust constituted a violation of Section 11(5) of the Act. The Revenue contended that the chit fund contributions were investments and thus breached the prescribed modes of investment under Section 11(5).

3. The Commissioner of Income Tax (Appeals) allowed the appeal, stating that the chit fund subscriptions were not investments but obligations to repay loans. Additionally, the application of funds to another trust was deemed eligible for exemption under Section 10(23C) of the Act.

4. The Revenue argued that the chit fund subscriptions did violate Section 11(5) and referred to relevant court decisions to support their stance. However, the Authorized Representative for the trust contended that the subscriptions were linked to earlier loans and should not be considered a violation.

5. The Tribunal analyzed the transactions and found that the subscription to chits was an independent investment activity not aligned with the prescribed modes under Section 11(5). Therefore, it concluded that there was a clear violation of the Act, rendering the trust ineligible for exemption under Section 11.

6. The Tribunal also addressed the issue of taxing only the income in violation of Section 11(5) as per Section 11(3) of the Act, directing the Assessing Officer to restrict the taxable income accordingly.

7. Consequently, the appeals filed by the Revenue were partly allowed, affirming the violation of Section 11(5) by the trust in subscribing to chit funds, leading to the denial of exemption under Section 11 of the Income Tax Act for the relevant assessment years.