2018 (12) TMI 1344 - HC - Income Tax

Denial of exemption under Section 11 for income diversion limited to diverted funds; broader denial not upheld.

Denial of tax exemption for charitable trusts is confined to the quantum of income actually diverted to prohibited beneficiaries; a blanket forfeiture of ... Denial of benefit u/s 11 - diversion of income - restriction of denial to income of the Trust which was used/applied directly or indirectly for the benefit of the prohibited persons by tribunal - Held that:- The decision of the Karnartaka High Court in Fr. Mullers Charitable Institutions [2015 (9) TMI 395 - SUPREME COURT OF INDIA], dealt with the very issue herein viz. the denial of exemption of entire income under Section 11 of the Act, or is the denial restricted only to the quantum of diverted funds. This, as it is hit by Section 13 of the Act. The Court held that the benefit of Section 11 of the Act will not be available only in respect of the diverted income. On a plain reading of Sections 11 and 13 of the Act, it is clear that the legislature did not contemplate the denial the benefit of Section 11 of the Act to the entire income of the Trust. If the interpretation sought to be advanced by the Revenue is accepted, it would lead to grave injustice as any mistake minor and/or misdemnour involving a small amount takes place by the Trust, the consequence would be denial of the benefit of exemption to the entire income otherwise admittedly used for charitable purposes. In the above view, the view taken by the Tribunal in the impugned order is in accord with the view of the Karnataka High Court in Fr. Mullers Charitable Institutions (supra), Delhi High Court in Agrim Charan Foundation [2015 (9) TMI 395 - SUPREME COURT OF INDIA] and this Court in Sheth Mafatlal Gagalbahai Foundation Trust [2000 (10) TMI 26 - BOMBAY HIGH COURT]. Hence, the proposed question does not give rise to any substantial question of law. Thus, not entertained. Issues Involved:Interpretation of Section 11 of the Income Tax Act, 1961 regarding denial of benefit to a Trust due to diversion of income for prohibited persons.Detailed Analysis:Issue 1: Denial of Benefit under Section 11 of the IT ActThe case involved a Trust running an educational institution, which purchased a car for a trustee specified under Section 13(3) of the Act. The Assessing Officer denied the benefit of exemption under Section 11 to the entire income of the Trust due to this transaction. The Tribunal, however, limited the denial of exemption to the amount diverted for the car purchase. This decision was based on the interpretation of Section 13(2)(b) read with Section 13(3) of the Act.Issue 2: Appeal ProcessThe Trust appealed to the Commissioner of Income Tax (Appeals) after the Assessing Officer's decision, but the appeal was dismissed. Subsequently, the Trust filed an appeal with the Tribunal. A difference of opinion arose among the Tribunal members regarding the extent of denial of tax benefit under Section 11. The matter was referred to a third member, who decided that the denial should be limited to the diverted income for the car purchase, in line with relevant legal precedents.Issue 3: Judicial InterpretationThe High Court analyzed the decisions of the Supreme Court and the Karnataka High Court in similar cases to determine the correct interpretation of Section 11. The Court noted that the denial of exemption should be restricted to the diverted funds, as per the Karnataka High Court's decision in a related case. The Court emphasized that the legislature did not intend to deny the benefit of Section 11 to the entire income of a Trust for minor infractions, as it would lead to unjust outcomes.ConclusionThe High Court upheld the Tribunal's decision to limit the denial of exemption under Section 11 to the amount diverted for the car purchase by the Trust. The Court found this interpretation consistent with previous judicial rulings and the legislative intent behind Sections 11 and 13 of the Act. Therefore, the appeal was dismissed, and no costs were awarded.