2020 (9) TMI 458 - AT - Income Tax

Exemption u/s 11 - assessee society is registered u/s 12AA - Assessee trust has provided undue benefit in lieu of salary and allowances to the persons specified u/s 13(3) - whether there is a violation of section 13(1)(c) or 13(1)(d) of the Act and whether exemption u/s 11 and 12 of the Act is to be denied in toto or only the relevant part of the income is to be charged to tax u/s 11 in view of Section 164(2) ? - HELD THAT - Where the whole or any part of the relevant income is not exempt u/s 11 or 12 because of the provisions of the section 13(1)(c) or 13(1)(d), tax is chargeable on the relevant income or part of the relevant income at the maximum marginal rate (MMR). Therefore, in case there is violation of sec.13 of the Act then the entire income of the trust is not liable to tax at MMR, but only the relevant part of the income which violates sec.13 attracts the MMR. In the present case, even if it is held that there is violation of sec.13, then only the amount of benefit given to the persons specified u/s 13(3) out of the income of the trust is chargeable to tax at MMR. Hence, the action of AO in taxing the surplus at maximum marginal rate without considering the provisions of section 11 12 is bad in law. Provision of Section 164(2) lays down that where relevant income or part of the income is not exempt u/s 11 due to violation of Section 13(1)(c ) or 13(1)(d) of the Act, then in that eventuality tax shall be charged on the relevant income or part of the relevant income at MMR and not that entire income of the trust would be charged to tax at MMR. - Decided against revenue. Disallowing travelling expenses, staff expenses, staff welfare expenses, social welfare expenses and student welfare expenses to the extent of 95% - no proper bills vouchers were maintained by assessee - CIT-A restricted the addition to 5% - HELD THAT - As during the course of assessment proceeding, the assessee had filed complete ledger account of these expenses alongwith bills and vouchers and the affidavit of temporary staff to whom salary has been paid but debited under the head social welfare and student welfare expenses. In the vouchers, complete details of the nature of expenses are mentioned. In social and staff welfare expenses the assessee had debited mainly the salary of the temporary employees in respect of which no PF was deducted. Since the assessee could not produce some of the documents of the employees as they were working in different schools of the society. Therefore, the ld. CIT(A) considering the details mentioned in the vouchers and facts circumstances of the had rightly restricted the disallowance out of these expenses at 5% - Decided against revenue.

Summary

Issues Involved:

1. Exemption under Sections 11 and 12 of the Income Tax Act.
2. Violation of Sections 13(1)(c) and 13(1)(d) of the Income Tax Act.
3. Applicability of Section 164(2) of the Income Tax Act.
4. Disallowance of various expenses due to lack of proper bills and vouchers.

Issue-Wise Analysis:

1. Exemption under Sections 11 and 12 of the Income Tax Act:

The Revenue contended that the assessee trust provided undue benefits in the form of salary and allowances to specified persons under Section 13(3) of the Act, thereby violating the provisions of Section 13(1)(c)(ii) read with Section 13(2)(g). Additionally, the trust made interest-free advances against the provision of Section 11(5), violating Section 13(1)(d) read with Section 13(2)(g). The AO denied the exemption under Sections 11 and 12, assessing the surplus under "Income from Business & Profession" and charging it to tax under Section 164(2) at Maximum Marginal Rate (MMR).

2. Violation of Sections 13(1)(c) and 13(1)(d) of the Income Tax Act:

The AO observed that the trust paid excessive salaries and allowances to specified persons and made advances against the purchase of immovable properties without proper justification, violating Sections 13(1)(c) and 13(1)(d). However, the CIT(A) deleted the disallowance of salaries and allowances but confirmed the addition of ?45 lakhs as notional interest on advances, directing the AO to reduce this amount from the application of income.

3. Applicability of Section 164(2) of the Income Tax Act:

The core issue was whether the entire income should be taxed at MMR due to violations of Sections 13(1)(c) and 13(1)(d) or only the relevant part of the income. The CIT(A) held that only the part of the income violating Sections 13(1)(c) or 13(1)(d) should be taxed at MMR, not the entire income. This interpretation was supported by various judicial precedents, including the Supreme Court's decision in DIT vs. Working Women’s Forum and CIT vs. Fr. Mullers Charitable Institutions, which clarified that only the non-exempt portion of the income should be taxed at MMR.

4. Disallowance of Various Expenses:

The AO disallowed 20% of the expenses (?35,42,481) due to incomplete bills and vouchers. The CIT(A) restricted the disallowance to 5% (?8,85,620), considering the details provided in the vouchers and the nature of the expenses. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had provided sufficient documentation and affidavits for the expenses incurred.

Conclusion:

The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s decision to allow exemption under Sections 11 and 12, restrict the disallowance of expenses to 5%, and charge only the relevant part of the income violating Sections 13(1)(c) or 13(1)(d) at MMR. The Tribunal emphasized that the entire income should not be taxed at MMR, aligning with judicial precedents and the proviso to Section 164(2). The decisions for the assessment years 2014-15 and 2015-16 followed the same rationale as the 2013-14 assessment year.