2023 (9) TMI 264 - HC - Income Tax

Exemption u/s 11 - appellant company had made an investment into the joint stock company towards equity, the assessing officer found the same to be in violation of Section 11 (5) of the Act - Whether the word fund in Section 13(1)(f) can apply only to service income and not to corpus of the trust? - HELD THAT - The appellant is a society, registered under Andhra Pradesh (Telangana Area) Public Societies Registration Act and is registered u/s 12A and exempted u/s 80G of Income Tax Act, 1961. The principal object of the society was, used to impart training, promotion of education, research etc, in the field of construction and allied industries. However, contrary to the objects of the society, an amount of Rs. 1.5 crore was invested in HITEX, the objects of which are not similar to that off the appellant society and in fact, it is also involved in using the land for commercial purpose. Apart from investment of Rs. 1.5 crore in HITEX, the appellant society had also transferred 100 acres of land on lease out of 167.30 Acres of land which was allotted by the Government to the Appellant. The Assessing Officer had taken note of transfer of 100 acres by the appellant society to HITEX, however, in his wisdom, he did not further enquire into the terms and conditions of such transfer and as to whether lease rental or any amounts are being received by the appellant society. Thus, investment of Rs. 1.5 crore and transfer of 100 acres of land by the Appellant to HITEX squarely covered under Section 13(1)(d) of the Act, 1961 and, therefore, the appellant society made themselves disentitle to the benefit under Section 11 of the Act, 1961 in view of violation of section 11(5) of the Act, 1961. The High Court of Kerala in Agappa Child Centre 1996 (8) TMI 52 - KERALA HIGH COURT dealt with a similar issue wherein Assessee a public charitable trust, purchased a refrigerator and kept it at the residence of its managing trustee. The Court held that the Managing Trustee was one of the prohibited persons as per Section 13(3). Therefore, the Court held that the entire exemption of the trust is to be denied. Decided against assessee trust.

Summary

Issues Involved:
1. Refusal of exemption claimed under Section 11 of the Income Tax Act.
2. Applicability of the term 'fund' in Section 13(1)(f) of the Income Tax Act.
3. Whether the denial of exemption should be confined to the amount invested in HITEX.

Summary:

Refusal of Exemption Claimed under Section 11:
The appeal under Section 260-A of the Income Tax Act, 1961 was filed against the order of the Income Tax Appellate Tribunal (ITAT), which affirmed the orders of the Commissioner of Income Tax (Appeals) and the Assessing Officer. The Assessing Officer had determined the income of Rs. 7,16,56,700/- and refused the exemption claimed under Section 11 due to an investment of Rs. 1.50 crores in the equity of HITEX, which was considered a violation of Section 11(5) of the Act. The Tribunal upheld this decision, leading to the appellant's challenge.

Applicability of the Term 'Fund' in Section 13(1)(f):
The appellant argued that the term 'fund' in Section 13(1)(f) should apply only to service income and not to the corpus of the trust. They contended that the contributions made to HITEX were from the corpus and not from the funds of the society, thus not violating Section 11(5). However, the court found that the investment in HITEX and the commercial use of the land allotted to HITEX were in clear violation of the society's mission, leading to a denial of the exemption under Section 11.

Denial of Exemption Confined to the Amount Invested in HITEX:
The appellant alternatively argued that the denial of exemption should be limited to the amount invested in HITEX. The court rejected this, stating that the investment and the transfer of 100 acres of land to HITEX, which was used for commercial purposes, contravened the society's objectives. This deviation from the mission and object of the society disentitled them from claiming the benefit under Section 11.

Conclusion:
The court concluded that the appellant's actions were in violation of Section 13(1)(d) and Section 11(5) of the Income Tax Act, leading to the denial of the exemption under Section 11. The concurrent findings of the lower authorities were upheld, and the appeals were rejected. No order as to costs was made, and any pending miscellaneous petitions were closed.