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TMI Blog2017 (4) TMI 67X X X X Extracts X X X X X X X X Extracts X X X X ..... he excess application to the subsequent years. - I.T.A. No.4852/Mum/2016 - - - Dated:- 29-3-2017 - SHRI D. KARUNAKARA RAO, AM AND SHRI AMARJIT SINGH, JM For The Assessee : Ms. Vaibhavi Patel For The Revenue : Shri M. C. Omi Ningshan ORDER PER AMARJIT SINGH, JM: The assessee has filed the present appeal against the order dated 11.05.2016 passed by the Commissioner of Income Tax (Appeals)-1, Mumbai [hereinafter referred to as the CIT(A) ] relevant to the A.Y. 2010-11. 2. The assessee has raised the following grounds:- Assessee by: Ms. Vaibhavi Patel Revenue by: Shri M. C. Omi Ningshan Ground No.1: On facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the Assessing Officer s action of not allowing the accumulation of 15% of income as allowed under section 11(1)(a) of the Act. The addition made by the learned Assessing Officer be deleted. Ground No.2: On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the Assessing Officer s action of not allowing exemption under section 10(33) of the Act, on dividend amounting to ₹ 2,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assesse filed an appeal before the CIT(A) who confirmed the order, therefore, the assessee has filed the present appeal before us. ISSUE NO.1:- 5. Under this issue the assessee has challenged the confirmation of the order of the Assessing Officer by the CIT(A) in which the CIT(A) has confirmed the order of the Assessing Officer for not allowing the accumulation of the 15% and the income was allowed u/s.11(1)(a) of the Act. The learned representative of the assessee has argued that this issue has been covered by the order passed by the Hon ble Income Tax Appellate Tribunal, Mumbai bench in case of ADIT(E) 1(2) Vs. Sayaji Ubakhin Memorial Trust (ITA No.5646/Mum/2011) dated 17.05.2013. However, on the other hand the learned representative of the department has strongly relied upon the order passed by the CIT(A) in question. Before going further, it is necessary to advert the finding of the ADIT(E) 1(2) Vs. Sayaji Ubakhin Memorial Trust (ITA No.5646/Mum/2011) dated 17.05.2013 on record:- 5. With regard to Ground No.2 of appeal, the Assessing Officer observed that if the trust has not left with surplus and there is deficit, then there can be no accumulation made. AO h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to the extent whichever is higher. The exemption of accumulated income to the extent of 25% or ₹ 10,000/-, whoever is higher, is unqualified and unconditional.. Further to that, I also place reliance to the judgment of Hon ble Supreme court in the case of Addl. CIT Vs. A.I.N. Rao Charitable Trust (1995) 129 CTR 205, wherein it is held that exemption available u/s.11(1)(a) i.e. 15% of income is unfettered and not subject to any conditions. 6.4. Considering all the above factual position as well as the case laws referred as above, I consider it proper and appropriate to hold that the A.O. was not justified in denying the claim of the appellant for accumulation of income. Accordingly this ground of appeal is allowed. 8. We observe that ld CIT(A) has relied on the decision of Hon ble Supreme Court in the case of A.I.N. Rao Charitable Trust(supra), wherein, it is held that exemption available u/s.11(1)(a) i.e. 15% of income is unfettered and not subject to any conditions. In the case before us, assessee has claimed 15% accumulation u/s.11(1)(a) of the Act. Hence, we do not see any reason to interfere with the order of the Ld. CIT(A) and reject ground of appeal taken by d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant 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 only with the conditions prescribed in clause (d) of sub section (1) and clause (h) of subs section (2) of section 13. Both these tests are to be qualified for exemption u/s 11. First we will deal with the issue of application of income in conformity with the provisions of section 11 of the Act. For ready reference we quote section 11(1) as under:- XXXXXXXXX 6.1 As per section 11(1), the income derived from property held u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 details given above that out of total income of ₹ 714.42 crores, the assessee trust has applied during the year only ₹ 164.59 crores. The balance has been invested in the shares of Tata Sons Ltd which is not in conformity with section 11(5) of the Income Tax Act. The Ld. Senior Counsel submitted that the assessee had exercised option under clause 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 permissible investment within one year from the end of the Financial Year in which such bonus shares or other assets are received or on 31.3.1992 whichever is later. The explanatory note on the provision as issued by the CBDT vide Circular no. 621 dated 19.12.1991 reported in 195 ITR (st) 154 is relevant on this point. Para 15.2 of the said Circular reads as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the case of Tata Education Trust and Tata Social Welfare Trust (supra). 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 just ca se the assessee was not in a position to dispose of the shares of National Rayon Corporation Ltd., it should not lose exemption contemplated under S. 11 of the Act in respect of other income earned by it. In this connection h invited our attention to Circular No. 387 containing explanatory notes on the Finance Act, 1984, more particularly para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 985, 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 asset which does not form part of permissible investment under Section 11(5) shall be disposed of within one year from the end of the previous year in which such asset is acquired or by March 31, 1993, whichever is later. In the present case, the assessee was required to dispose of the shares under the said proviso by March 31, 1995 (see the judg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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 that in the present case, the maximum marginal rate of tax will apply only to the dividend income from shares in Mafatlal Industries Limited and not to the entire income. Therefore, income other than dividend income shall be taxed at the normal rate of taxation under the Act. 8.4 Following the above decision we hold that the breach of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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) Commissioner 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 assessee under two provisions of the Act, then the assessee is entitled to exemption under the provision which is more beneficial. 9.5 On the other hand, Ld. DR has submitted that as per section 11 of the Act, the income from the property held under trust is covered under this section and not u/s 10 of the Income Tax Act. He has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 overriding affect over section 10. Therefore, the benefit of section 10 cannot be denied by invoking the provisions of section 11 to 13 of the Act. Once the conditions of section 10 are satisfied then no other condition can be fastened for denying the claim under section 10 of the Act. 9.8 In view of the above discussion and following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 from property held under trust wholly for charitable purposes shall not be included in the total income to the extent to which such income is applied to such purposes in India. The question is whether this section requires the application of money in India or the carrying out of the purposes in India or both. The contention of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. The benefits of such conference will ultimate go to Assessee and its members. It cannot be said that the activities of the Assessee were carried on outside India. 10.7 Following the above decisions of Tribunal, we hold that the education grant given to the Indian students in India for education/higher education abroad fulfills the conditions of application of money for such purpose in India. Finally, the Tribunal partly allowed the appeal filed by the assessee. Respectfully following the order of the Tribunal for the earlier year we decide all the effective grounds(GOA1-5)against the AO. 8. On appraisal of the above mentioned order it is not in dispute that the matter of controversy has been decided in favour of the assessee by the Hon ble Income Tax Appellate Tribunal by following the decision of Hon ble Delhi High Court in the case of CIT Vs. Divine Light Mission. (278 ITR 659) and Commissioner Of Income-Tax. Vs. Seethakathi Trust (295 ITR 520.) and Brahmin Educational Society vs Assistant Commissioner Of Income tax (227 ITR 317) and Commissioner of Income Tax vs. Rao Bahadur Calavala Cunnan Chetty Charities [1982] (135 ITR 485 ) and Bar Council Of Uttar Prade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the subsequent years on the ground that in the case of a charitable trust, their income was assessable under self-contained code mentioned in section 11 to section 13 of the Income Tax Act and that the income of the charitable trust was not assessable under the head profit and gains of business under section 28 in which the provision for carry forward of losses was relevant. That, in the case of a charitable trust, there was no provision for carry forward of the excess of expenditure of earlier years to be adjusted against income of the subsequent years. We do not find any merit in this argument of the Department. Income derived from the trust property has also got to be computed on commercial principles and if commercial principles are applied then adjustment of expenses incurred by the trust for charitable and religious purposes in the earlier years against the income earned by the trust in the subsequent year will have to be regarded as application of income of the trust for charitable and religious purposes in the subsequent year in which adjustment has been made having regard to the benevolent provisions contained in section 11 of the Act and that such adjustment will have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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