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TMI Blog2016 (2) TMI 1022X X X X Extracts X X X X X X X X Extracts X X X X ..... ra (Accountant Member) Challenging the order dated 27.3.2004, of CIT(A)-7 the Assessing Officer (AO) has filed the present appeal raising four effective Grounds of Appeal (Ground No.1-5). The assessee trust filed its return of income on 29.9.2011,declaring total income at Rs. Nil. The AO completed the assessment u/s. 143(3) of the Act on 25.2.2014 determining the income of the assessee at ₹ 2, 08,88,89,106/-. 2. During the assessment proceedings, the AO observed the assessee had sold one crore shares of TCS Ltd. for ₹ 537.10 crores in the earlier AY, that it had re-invested the proceeds by acquiring 8% cumulative redeemable preference shares of Tata Sons Ltd. (TSL), that it had shown profit, on sale of shares directly in the balance sheet as investment reserve instead of routing it through the income and expenditure account, that the investment of capital gain in the preference shares was violative of the provisions of section 13(1)(d) and 13(2)(h) of the Act, that the exemption u/s. 11 was denied to the assessee for the earlier AY. Following the order for AY. 2010-11, the AO held that provisions of sections 13(1)(d) and 13(2)(h) of the Act were applicable for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the income of the trust for charitable purposes, violation of the provisions of section 13(1)(d) and 13(2)(h) of the Act etc. He was of the opinion that the income should be taxed at the maximum marginal rate and that the assessee was not entitled to claim deduction u/s.10(34),10 (35). We find that all the issues raised by the AO have been dealt by the Tribunal while deciding the appeal for the earlier AY. We are reproducing the relevant part of the order and same reads as under: 6. We have considered the rival submissions as well as relevant material on record. The income of the charitable/religious trust or institution is exempt u/s 11 of the Income Tax Act subject to the fulfillment of conditions stipulated u/s 11 and 13 of the Act. There are two testes to be qualified by the trust or institution to avail the exemption u/s 11 of the Act. These two tests are broadly categorized as application of income and source of income the conditions and manner of application of income as enumerated u/s 11 (5) of the Act. Whereas the condition of source of income are provided under section 13 and particularly under sub section 1 and 2 of section 13 of Income Tax Act. We are concerned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shortfall in terms of sub section (2) and (5) of section 11. This fact is apparent from the details of the income and application claimed as under:- Details of Income Less application of income Expenses on the objects of the trust 160.93 Administrative expenses 2.73 Contribution to PTA fund - 0.93 164.59 6.3 For the purpose of application of income in terms of section 11 (1) and (2), the entire income of the trust has to be considered including the dividend and long term capital gain claimed as exempt u/s 10. It is pertinent to mention that for availing the exemption u/s 11, the income derived from the property held under trust has to be considered irrespective of the fact that some of the income so derived is also exempt u/s 10, therefore, 85% of the entire income without exclusion of dividend and long term capital gain on shares has to be applied for such purpose in India for availing deduction u/s 11. As it is clear from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gain and short term capital again derived from the shares of TCS held by the assessee in contravention of section 13(1)(d)(iii). The shares of TCS were received by the assessee in the year 2001-02 and there is no dispute that holding of these shares by assessee is beyond the permitted limit of time period prescribed u/s 13(1)(d). The Ld. Senior Counsel however has argued that the bonus shares received by the assessee on 19.06.2009 are not held by the assessee beyond the limit permitted by the proviso to section 13(1)(d) of the Act. This contention of the Ld. Senior Counsel is not acceptable simply on the reason that the time period permitted under proviso to section 13(1)(d) is to exit from non permissible investment/holding of shares and convert the same into permissible investment. Clause (iia) of proviso has been inserted by the Finance Act 1991 to secure that mere accretion of the existing holding of shares by way of bonus shares or acceptance of donation in kind or any asset not conforming to the provisions of section 11(5) will not make the fund or trust or institution lose tax exemption if the trust/institution covert the asset not conforming to section 11(5) into permissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o exit form non permissible investment, and to convert into permissible investment and not to just change one non permissible investment to another non permissible investment. If it is permitted it will defeat the very purpose of object of the said clause of the proviso. 8. The next question arises is, violation of provisions of section 13(2)(h) which reads as under:- (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub- section (3) has a substantial interest. 8.1 The AO held that investment in shares of Tata Sons Ltd is in contravention of clause (h) of sub section 2 of section 13 because Tata Sons Ltd., is a concern in which the person referred in sub section 3 has substantial interest. Ld. Senior Counsel though reiterated the assessee s stand taken before the authorities below however he has contended that violation of section 13(2)(h) would not render the entire income of the trust lose exemption u/s 11. In support of his contention he has relied upon the decision of the Tribunal in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther note that while deciding the similar issue the Tribunal in the case of Guru Dayal Berlia Charitable Trust Vs. ITO has reproduced the relevant part of the explanatory note on the Finance Act 1984 vide Circular no. 387 in para 6 of the said order which reads as under:- 6. Being aggrieved by the orders of the CIT(A), the assessee has come up in appeal before the Tribunal. The learned counsel for the assessee reiterated the submissions, which were made before the IT authorities and strongly urged that they should have accepted the assessee's contention that it would lose exemption under S. 11 of the Act in respect of the dividend income only. He was fair enough to state that it is not in dispute that by virtue of the provisions of S. 11 (5) of the Act, the assessee would lose exemption under S. 11 of the Act, as it is holding 12,000 preference shares of the National Rayon Corporation Ltd. However, he hastened to state that the assessee would lose exemption under S. 11 of the Act in respect of the dividend income received on the said shares and not in respect of other income earned by it. In other words the learned counsel for the assessee wanted to impress upon us that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haritable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of the association of persons. Therefore, a proviso was inserted by the Finance Act of 1984 with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt under Section 11 or Section 12 because of the contravention of Section 13(1)(d), then tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only the non-exempt income portion would fall in the net of tax as if it was the income of the association of persons. On the other hand, Section 11(5) lays down various modes or forms in which a trust is required to deploy its funds. Section 13(1) lays down cases in which Section 11 shall not apply. Under Section 13(1)(d)(iii), it has been laid down that any share in a company, not being a Government company, held by the trust after November 30, 1983, shall result in forfeiture of exemption. By virtue of proviso (iia) it has been laid down that any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This interpretation of ours is also supported by Circular No. 387, dated July 6, 1984 (see [1985] 152 ITR (St.) 1). Vide the said circular, it has been laid down in para. 28.6 that, where a trust contravenes Section 13(1)(d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income. We may also add that in law, there is a vital difference between eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. It is interesting to note that although the Legislature withdrew Section 164(2) by the Direct Tax Laws (Amendment) Act, 1987, which provision was reintroduced by the Direct Tax Laws (Amendment) Act, 1989, the Legislature did not touch the proviso to Section 164(2) which has been on the statute book right from April 1, 1985. The said proviso was inserted by the Finance Act, 1984, The proviso specifically refers to violation of Section 13(1)(d) and its consequences. In the circumstances, we find merit in the contention of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of Hon ble Delhi High Court in the case of CIT Vs. Divine Light Mission. (278 ITR 659) and submitted that the Hon ble High Court dealt with an identical issue regarding agricultural income exempt u/s 10(5) of the Income Tax Act held that this income is not required to be considered at all even for the purpose of section 11 of the Income Tax Act. Thus the Ld. Senior Counsel has submitted that if exemption is available u/s 10 then section 11 is irrelevant. He has relied upon the following decisions:- (i) Commissioner Of Income-Tax. Vs. Seethakathi Trust (295 ITR 520.) (ii) Brahmin Educational Society vs Assistant Commissioner Of Income tax (227 ITR 317) (iii) Commissiner of Income Tax vs. Rao Bahadur Calavala Cunnan Chetty Charities [1982] (135 ITR 485 ) (iv) Bar Council Of Uttar Pradesh vs Commissioner Of Income-Tax (143 ITR 584) (v) Commissioner of Income-tax. v. Bar Council of Maharashtra. (130 ITR 28) 9.4 The Ld. Senior Counsel referred the observations of these decisions and submitted that once the income is exempt u/s 10, same cannot be said to be taxed u/s 11 to 13. He has further contended that if the exemption is available to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered for the purpose of section 11 of the Act. In the case of his holiness Silasari Kasivasi Muthukumaraswami Thambiran AVL Ors. Vs. Agricultural Income Tax Officer Ors. (113 ITR 889) the Hon ble High Court of Madra has held that the agricultural income derived by charitable or religious trust is exempt u/s 10 could not be said to be brought to tax u/s 11 to 13. Similar view has been taken in the series of decisions as relied upon by the Ld. Senior Counsel when the question involved was the allowability of exemption u/s 10, (22), (23) Vs. section 11 and 13. In our view the exemption u/s 11 is available on the income of the public charitable/religious trust or institution which is otherwise taxable in the hands of other persons. Thus the income which is exempt u/s 10 cannot be brought to tax by virtue of section 11 and 13 of the Act because no such pre condition is provided either u/s 10 or 11 to 13 of Income Tax Act. Therefore, section 11 to 13 would not operate as overriding affect to the section 10 of the Act. The language of these provisions does not suggest that either section 10 is subjected to the provisions of section 11 to 13 or section 11 to 13 has any overri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons. Therefore, for taking education by beneficiary from abroad would not amount to application of income of the assessee outside India. In the case of Bharata Kalanji Vs. Income Tax Officer (supra) the Chennai Bench of this Tribunal while deciding a question arising from the payment of ₹ 1.55 lakh made to a travel corporation of Indian for sending a troop on tour. The AO treated the expenditure as application of income of the trust for charitable purpose. However CIT revised the assessment and was of the opinion that this expenditure was prohibited and was not applied for purpose of trust in India and, therefore, not eligible for exemption u/s 11. The main object of the trust was to advance, propagate, increase and promotion of Indian classical and Folk arts and Indian music etc. The trust was invited by the Government of Nigeria to give certain dance performance abroad. Accordingly the trust send a troop and paid a sum of ₹ 1.55 lakh being the passage money to the Travel Corporation of India. The Tribunal held in para 6 as under:- 6. The crucial question is only whether the conditions in section 11 are complied with. That section states that the income derived ..... X X X X Extracts X X X X X X X X Extracts X X X X
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