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2022 (3) TMI 565 - AT - Income TaxExemption u/s 11 - violation under Section 13(1)(d) and 13(2)(h) - income earned from non-prohibited investments - HELD THAT - It is only when shares of the concern carrying not less than 20% of voting power are owned by authors / founders of the trust, such person shall be deemed to have a substantial interest in the concern. It is evident from the facts of the present case, as also noted by the Assessing Officer, that Shri Ratan N. Tata, founder trustee of the assessee, was holding 3,368 ordinary shares of Tata Sons Ltd. constituting only 0.83% of the aggregate paid up ordinary share capital of Tata Sons Ltd., which was much less than the threshold requirement of provision of Explanation 3 to section 13 of the Act. Therefore, Shri Ratan N. Tata cannot be held to be having substantial interest in Tata Sons Ltd. Accordingly, the investment by the assessee trust in shares of Tata Sons Ltd. is not affected by the vice of section 13(2)(h) of the Act. In the present case, the only basis for invoking the provisions of section 13(2)(h) of the Act by the AO was that Shri Ratan N. Tata, being the Chairman of Tata Sons Ltd., could have influenced the decision of Tata Sons Ltd. as well as of the assessee trust at the time of investment, is nothing but conjectures/surmises which is not even supported by the statutory requirements of section 13(2)(h) read with Explanation 3 to section 13 of the Act. As in a recent decision in the case of Sir Dorabji Tata Trust v. DCIT (Exemption) 2020 (12) TMI 1121 - ITAT MUMBAI held that observation made in the said decision of Jamsetji Tata Trust 2014 (5) TMI 890 - ITAT MUMBAI is a sweeping observation based on conviction rather than material available on record, as it observes that As far as the violation of clause(h) of section 13(2) is concerned we find that the author of the assessee trust and its relative definitely have a substantial interest in the Tata Sons Ltd., therefore, the investment in the shares of Tata Sons Ltd. is clear violation of clause(h) of section 13(2) . We hold that by making investment in shares of Tata Sons Ltd., assessee trust didn t violate provisions of section 13(2)(h) of the Act. Accordingly, ground no.1 raised in assessee s appeal, insofar as it pertains to violation of section 13(2)(h) of the Act, is allowed. Denial of benefits of section 11 of the Act only in respect of the income from prohibited investments - HELD THAT - In the present case, the assessee had made investment in redeemable preferential shares of Tata Sons Ltd. which the AO, inter-alia, held to be in violation of provision of section 13(1)(d) of the Act. The income that could be derived from such an investment would be dividend income or the capital gains on sale of such investment. However, due to violation of provisions of section 13, income derived from property held under trust is not exempted under section 11 of the Act. The issue which arises in the present case is whether the entire income of the trust shall become ineligible for exemption under section 11 of the Act or it is restricted to only the income derived from prohibited investments. Hon ble Jurisdictional High Court in the case of CIT v. Audyogik Shikshan Mandal 2018 (12) TMI 1344 - BOMBAY HIGH COURT held that on a plain reading of sections 11 and 13 of the Act, it is clear that the legislature did not contemplate the denial of benefit of section 11 of the Act to the entire income of the Trust. Thus we direct the AO to only consider income from prohibited investments while denying the benefits of section 11, and, at the same time, grant the exemption under section 11 of the Act on interest income and income earned from non-prohibited investments by the assessee. Accordingly, ground nos. 2 to 4 raised in assessee s appeal are allowed. Levy of interest under section 234C - HELD THAT - Under the provisions of section 208 or section 209 of the Act, advance tax is to be computed on the estimated current income of the assessee and in case such income is not taxable, there is no liability imposed on the assessee to pay any advance tax. In the present case, as the assessee trust at the relevant time of deposit of advance tax had NIL taxable income, there was no liability to deposit any advance tax. Consequently, no default can be attributed to the assessee for non-deposit of advance tax while estimating its income - it is pertinent to note that section 234C refers to the term returned income in comparison to section 234B which refers to the term assessed tax for imposing interest. In the present case, it is not in dispute that returned income in case of assessee trust was NIL. As only in the case of default / shortfall in payment of advance tax as compared to tax due on returned income, interest is chargeable under sections 234C of the Act. Thus, we hold that no interest is chargeable under section 234C of the Act in the present case. The AO is directed to delete the interest levied under section 234C of the Act. Accordingly, ground no. 7 raised in assessee s appeal is allowed. Levy of interest under section 234B / 234D - HELD THAT - While ground no. 9 in assessee s appeal pertains to addition of interest received under section 244A of the Act. During the course of hearing, learned counsel submitted that all these grounds are consequential in nature. Thus, the AO is directed to compute the interest under sections 234B and 234D, if leviable, in accordance with law. Further, the AO may grant the interest under section 244A of the Act in accordance with law. Accordingly, ground nos. 6, 8 and 9 in assessee s appeal are allowed for statistical purpose. Exemption under section 10(34) of the Act on dividend income received on shares by the assessee - HELD THAT - It is pertinent to note that vide Finance (No.2) Act, 2014, sub-section (7) was inserted in section 11 of the Act whereby it has been provided that benefits of exemption provided in section 10 shall not be available to any Trust/Institution registered and claiming the benefit of section 11 of the Act. This amendment was brought w.e.f. 1st April, 2015 and therefore, is only applicable to assessment year 2015-16 and onwards. Thus, respectfully following the aforesaid decision of M/S. JASUBHAI FOUNDATION 2015 (4) TMI 305 - BOMBAY HIGH COURT , order passed by the CIT(A), inter-alia, granting benefit of exemption under section 10(34) of the Act in respect of dividend income received by assessee is upheld. Accordingly, ground nos. (i) to (iii) raised in Revenue s appeal are dismissed. Claim of depreciation by the assessee trust - HELD THAT - As decided in RAJASTHAN AND GUJARATI CHARITABLE FOUNDATION POONA 2017 (12) TMI 1067 - SUPREME COURT in case of charitable institution registered under section 12A, even though expenditure incurred for acquisition of capital assets was treated as application of income for charitable purpose under section 11(1)(a), yet depreciation would be allowed on assets so purchased. Vide Finance (No.2) Act, 2014, sub-section (6) was inserted in section 11 of the Act whereby it has been provided that benefits of depreciation shall not be available to any Trust/Institution registered and claiming the benefit of section 11 of the Act. This amendment was brought w.e.f. 1st April, 2015 and therefore, is only applicable to assessment year 2015-16 and onwards. In view of the above, respectfully following the aforesaid decision of Hon ble Supreme Court, we, inter-alia, upheld the order passed by the CIT(A) allowing the claim of depreciation on fixed assets to the assessee. Accordingly, ground no. (iv) raised in Revenue s appeal is dismissed. Carry forward of excess application/ deficit to subsequent assessment year - HELD THAT - We find that on similar issue Hon ble Supreme Court in the case of CIT(Exemption) v. Subros Education Society 2018 (4) TMI 1622 - SC ORDER held that any excess expenditure incurred by trust/charitable institution in earlier assessment year would be allowed to be set off against income of subsequent years by invoking section 11 of the Act - we, inter-alia, upheld the order passed by the CIT(A) allowing the carry forward of deficit. Accordingly, ground no. (iv) raised in Revenue s appeal is dismissed.
Issues Involved:
1. Denial of exemption under Section 11 due to violation of Section 13(1)(d) and Section 13(2)(h) of the Income Tax Act. 2. Denial of benefits of Section 11 only in respect of income from prohibited investments. 3. Levy of interest under Section 234B, 234C, and 234D of the Income Tax Act. 4. Reversal of interest received under Section 244A of the Income Tax Act. 5. Claim of exemption under Section 10(34) of the Income Tax Act on dividend income. 6. Claim of depreciation by the assessee trust. 7. Carry forward of excess application/deficit to subsequent assessment years. 8. Levy of interest under Section 234A of the Income Tax Act. Detailed Analysis: 1. Denial of Exemption under Section 11 Due to Violation of Section 13(1)(d) and Section 13(2)(h): The assessee, a charitable organization registered under Section 12A of the Income Tax Act, had its exemption under Section 11 denied by the AO due to alleged violations of Section 13(1)(d) and 13(2)(h). The AO observed that the assessee had invested in shares of Tata Sons Ltd., where the founder trustee, Shri Ratan N. Tata, was the Chairman, thus violating Section 13(2)(h). However, the Tribunal found that Shri Ratan N. Tata did not have a substantial interest in Tata Sons Ltd. as per Explanation 3 to Section 13, as he held only 0.83% of the shares, far less than the required 20%. Therefore, the investment did not violate Section 13(2)(h), and the exemption under Section 11 should not have been denied. 2. Denial of Benefits of Section 11 Only in Respect of Income from Prohibited Investments: The assessee argued that even if there was a violation of Section 13, only the income from prohibited investments should be denied exemption under Section 11. The Tribunal agreed, citing the Hon'ble Jurisdictional High Court's decision in the case of Sheth Mafatlal Gagalbhai Foundation Trust, which held that only the income from prohibited investments should be taxed at the maximum marginal rate, not the entire income of the trust. Therefore, the AO was directed to grant exemption under Section 11 for income from non-prohibited investments. 3. Levy of Interest under Section 234B, 234C, and 234D: The Tribunal addressed the levy of interest under Sections 234B, 234C, and 234D. For Section 234C, it was held that since the assessee had filed a NIL return, no interest was leviable. For Sections 234B and 234D, the Tribunal directed the AO to compute the interest, if leviable, in accordance with the law. The Tribunal also directed the AO to grant interest under Section 244A in accordance with the law. 4. Reversal of Interest Received under Section 244A: The Tribunal directed the AO to grant interest under Section 244A in accordance with the law, considering the reversal of interest received by the assessee. 5. Claim of Exemption under Section 10(34) on Dividend Income: The AO had denied the exemption under Section 10(34) on the grounds that the entire income of the trust was governed by Section 11. However, the Tribunal upheld the CIT(A)'s decision to grant exemption under Section 10(34) for dividend income, citing the Hon'ble Jurisdictional High Court's decision in the case of Jasubhai Foundation, which held that income excluded under Section 10 cannot be included under Section 11. 6. Claim of Depreciation by the Assessee Trust: The AO had disallowed the claim of depreciation on the grounds of double deduction. However, the Tribunal upheld the CIT(A)'s decision to allow the claim of depreciation, following the Hon'ble Supreme Court's decision in the case of Rajasthan & Gujarati Charitable Foundation Poona, which allowed depreciation even if capital expenditure was treated as application of income for charitable purposes. 7. Carry Forward of Excess Application/Deficit to Subsequent Assessment Years: The AO had denied the carry forward of the deficit, but the Tribunal upheld the CIT(A)'s decision to allow it, following the Hon'ble Supreme Court's decision in the case of Subros Education Society, which allowed excess expenditure to be set off against income of subsequent years. 8. Levy of Interest under Section 234A: The Tribunal directed the AO to verify whether the return of income was filed within the time and levy interest under Section 234A only in case of delay. Conclusion: The Tribunal partly allowed the appeals of the assessee and dismissed the appeals of the Revenue, providing detailed instructions on how the AO should proceed with the computations and exemptions in accordance with the law and judicial precedents. The Tribunal's decisions were based on thorough analysis and reliance on higher judicial authorities' rulings, ensuring that the principles of justice and fairness were upheld.
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