2016 (4) TMI 1145 - AT - Income Tax

Tribunal rules in favor of charitable trust on tax exemption; advance to director's spouse not fully taxable.

M/s Rajkala charitable Trust Versus ACIT

The Tribunal ruled in favor of the public charitable trust in the case involving an advance made to a company where a trustee's spouse was a director. The ... Exemption u/s 11 denied - violation of section 13 - whether the entire income of the trust is chargeable to tax at maximum marginal rate as against only that income which has violated section 13 as mandated by provision to section 164(2) of the IT Act, 1961? - Held that:- Where there is violation of section 13, the entire income of the trust is not chargeable to tax at maximum marginal rate and it is only that income which has violated section 13 which shall suffer maximum marginal rate as per proviso to section 164(2) of the Act. Further, the appellant has submitted that the amount of ₹ 20,00,000 with interest of ₹ 2,16,000/- i.e. ₹ 22,16,000/- was received back by the trust and the interest income of ₹ 2,16,000/- was offered in the return for AY 2012-13 and there is no income generated on amount of ₹ 20 lacs advanced to M/s Rajakala Industries Limited during the year. There is nothing on record to controvert the said submissions of the appellant. Thus, there is no income during the year which can be brought to tax at maximum marginal rate in the hands of the trust in a scenario where it is held that there is violation of provisions of section 13. In view of the same, we don’t think it would be relevant to examine whether the appellant trust has violated the provisions of section 13 of the Act as the same has become infructious in the facts and circumstances of the present case. The AO is accordingly, directed to allow exemption to the appellant trust u/s 11 and the addition made by the AO and confirmed by CIT(A) is hereby deleted. - Decided in favour of assessee. Issues Involved:1. Violation of Section 13(3) by advancing Rs. 20,00,000 to M/s Rajkala Industries Private Ltd.2. Taxability of the entire income of the trust at the maximum marginal rate due to the alleged violation.Issue-wise Detailed Analysis:1. Violation of Section 13(3) by advancing Rs. 20,00,000 to M/s Rajkala Industries Private Ltd.:The assessee, a public charitable trust, advanced Rs. 20,00,000 to M/s Rajkala Industries Pvt. Ltd., where a trustee's spouse is a director. The AO issued a show cause notice questioning if the advance was for the benefit of a prohibited category under Section 13(3). The assessee contended that the advance was for a free meal distribution project, which was later dropped due to unsuitable land availability, and the amount was returned with interest.The AO rejected this explanation, citing:- Absence of specific amounts in the letters exchanged.- No resolution authorizing the project.- Lack of competitive bidding.- The amount being shown as a loan in the company's balance sheet.The AO concluded that the advance was a loan, not for a charitable purpose, leading to a violation of Sections 13(1)(c)/13(1)(d), and denied exemption under Section 11 or 12, taxing the entire income of Rs. 1,56,31,000 at the maximum marginal rate.The CIT(A) upheld the AO's decision, emphasizing the lack of a resolution and competitive bidding, and the company's non-involvement in construction, confirming the violation of Section 13(1)(c).2. Taxability of the Entire Income of the Trust at the Maximum Marginal Rate:The assessee argued that even if there was a violation of Section 13, only the amount violating the section (Rs. 20,00,000) should be taxed at the maximum marginal rate, not the entire income. They cited multiple legal precedents, including the Karnataka High Court and Supreme Court decisions, supporting this interpretation.The Tribunal agreed, referencing the proviso to Section 164(2), which mandates that only the income violating Section 13 should be taxed at the maximum marginal rate. The Tribunal cited the Supreme Court and High Court rulings in Working Women’s Forum and Fr. Mullers Charitable Institutions, which clarified that only the non-exempt portion of income due to violation should be taxed at the maximum marginal rate, not the entire income.The Tribunal noted that the assessee had received back the advance with interest, which was declared in the subsequent year's return, and no income was generated from the advance during the year in question. Thus, there was no income to be taxed at the maximum marginal rate.Conclusion:The Tribunal directed to allow the exemption under Section 11 to the trust, deleting the addition made by the AO and confirmed by the CIT(A), as the issue of violation became infructuous due to the facts of the case. The appeal filed by the assessee was allowed.