2024 (10) TMI 918 - AT - Income Tax

Trust's section 11 exemption restored as shares received as corpus donations, not investments of trust funds

Sir Ratan Tata Trust Versus DCIT (Exemption) -2 (1), Mumbai, Addl. /Joint/Deputy/Asst. CIT, National Faceless Assessment Centre-2 (1), Mumbai

Sir Ratan Tata Trust Versus DCIT (Exemption) -2 (1), Mumbai, Addl. /Joint/Deputy/Asst. CIT, National Faceless Assessment Centre-2 (1), Mumbai - TMI Issues Involved:1. Denial of exemption under section 11 due to alleged violations of sections 13(1)(d), 13(2)(h), 13(1)(c), and section 2(15) of the Income Tax Act for AY 2014-15 and AY 2018-19.Issue-wise Detailed Analysis:1. Violation of Section 13(1)(d):The assessee, a Public Charitable Trust, was denied exemption under section 11 on the grounds that its investments in shares of Tata Sons Ltd. violated section 13(1)(d). The Assessing Officer (AO) argued that the trust's funds were invested in shares not specified under section 11(5), thus breaching section 13(1)(d). However, the assessee contended that the shares were part of the corpus as of June 1, 1973, and any accretions were bonus shares, falling under the exceptions in section 13(1)(d). The Tribunal found merit in the assessee's argument, noting that the investments were held as corpus and were covered by the exceptions, thus section 13(1)(d) was not applicable.2. Violation of Section 13(2)(h):The AO claimed a violation of section 13(2)(h), asserting that Mr. Ratan Tata, a trustee, held substantial interest in Tata Sons Ltd. The Tribunal, however, noted that Mr. Tata held only 0.83% of shares, far below the 20% threshold for substantial interest as defined in Explanation 3 to section 13. Furthermore, being a Chairman does not equate to holding substantial interest. The Tribunal concluded that there was no violation of section 13(2)(h) and upheld the exemption under section 11.3. Violation of Section 13(1)(c):For AY 2018-19, the AO alleged violation of section 13(1)(c) due to payments made by Tata Sons Ltd. to trustees for past services. The Tribunal observed that section 13(1)(c) applies when a trust's income is used for the benefit of specified persons. Since the payments were made by Tata Sons Ltd. and not from the trust's income, section 13(1)(c) was not applicable. The Tribunal held that the AO's application of section 13(1)(c) was incorrect, and the exemption under section 11 should not be denied.4. Violation of Section 2(15):The AO argued that the trust violated section 2(15) by allegedly controlling Tata Sons Ltd., thus engaging in business activities. The Tribunal, however, clarified that holding shares and exercising shareholder rights does not constitute business activity. The trust's income was primarily from dividends, not business operations. The Tribunal concluded that the trust did not violate section 2(15) and was entitled to exemption under section 11.Conclusion:The Tribunal allowed the appeals for both AY 2014-15 and AY 2018-19, holding that the assessee trust did not violate sections 13(1)(d), 13(2)(h), 13(1)(c), or 2(15). Consequently, the denial of exemption under section 11 was overturned, and the trust was granted the benefit of exemption for both assessment years.