TaxTMI 
TaxTMI 
2014 (5) TMI 890
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....nbsp; 3. On the facts and circumstance of the case and in law, the learned CIT(A) erred in holding that education grants given to Indian students in India in Indian Rupees for studies abroad is not spent or utilised for charity in India since the grant has been utilised for studies abroad. 4. On the facts and circumstance of the case and in law, the learned CIT(A) erred in denying deduction of the income applied to the objects of the Trust to charitable purposes in India and administrative expenses. 5. On the facts and circumstances of the case and in law, the learned CIT(A) erred in not giving credit for TDS. 6. Without prejudice to the above, the learned CIT(A) erred in holding that the maximum marginal rate of tax applies to the entire income and in denying the applicability of the rates of tax applicable to short term and long term capital gains. 2. Ground No. 1 is regarding denial of exemption u/s 11 of the Income-tax Act. 2.1 The assessee is a charitable trust. During the Financial year relevant to Assessment year under consid....
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....n 13(1)(d)(i) as well as section 13(2)(h) in terms of its investment in shares of Tata Sons Ltd and by provisions of section 13(1)(d)(iii) in terms of shares of TCS and Tata Sons Ltd held by the assessee. Accordingly a notice u/s 142(1) was issue to the assessee. The assessee responded to the notice by its reply and explanation. After considering the reply the AO held that benefit of section 11(1A) is not available to assessee because investment in shares of Tata sons Ltd as per section 11(1) and further the investment in shares of Tata Sons Ltd is not held as Corpus fund. The AO was also of the view that as per the proviso to section 13(1)(d) exempt assets from disqualification must be held by the trust as its Corpus as on 1.06.1973. Shares of TCS are held by assessee only from the A.Y. 2001-02, hence the assesseee does not fulfil the conditions of holding of TCS shares in terms of the proviso to section 13(1)(d). Accordingly the AO held that the assessee is hit by the provisions of section 13(1)(d)(i) in terms of investment in shares of Tata Sons Ltd and by provisions of section 13(1)(d)(iii) in terms of shares of TCS and Tata Sons Ltd held by it and exemption u/s 11 and 12 will ....
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....ting right and is much below 5% of the capital of the company, hence it is not hit by the provisions of section 13(2)(h) in view of Explanation 3 to section 13(2)(h). Alternatively the ld. Senior Counsel has submitted that the if it is held that the investment with Tata Sons Ltd., is hit by the provisions of section 13(2)(h) then only the income arising from such investment is disqualified from the exemption u/s 11 of the Act and not the entire income of the assessee. In support of his contention he has relied upon the decision of Hon'ble Supreme Court in the case of Addl. Commissioner of Income-tax. v. Surat Art Silk Cloth Manufacturers Association. The ld. Counsel has also referred the decision of this Tribunal in the case of Tata Education Trust and Tata Social Welfare Trust dated 26-02-2008 and submitted the Tribunal has held that the entire income of the assessee would not attract the disqualification for the purpose of section 11 but only the income derived from the investment falling under the prohibited category would be chargeable to tax. He has pointed out that the Tribunal while deciding the issue has followed the earlier decision of the Tribunal in the case of Gurudayal....
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....5), therefore, the benefit of the proviso is not available to the assessee. The ld. DR has argued that the interpretation of provisions should not conflict with the intent of the legislature and the object of the provisions as a whole. In support of his contentions he has relied upon the decision of Hon'ble Supreme Court in the case of K.P. Varghese. v. ITO [1981] 131 ITR 597. He has also relied upon the orders of authorities below. 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 fulfilment of conditions stipulated u/ss 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-sections 1 and 2 of section 13 of Income-tax Act. We are....
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....y such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income; (2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount - (i) for the reason that the whole or any part of the income has not been received during that year, or (ii) for any other reason, then - (a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and (b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return....
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.... so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:- (a) such person specifies, by notice in writing given to the Assessing Officer in the prescribed" manner", the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years; (b) the money so accumulated" or set apart is invested or deposited in the forms or modes specified in sub-section (5): Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded: Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words "ten years' at both the places where they occur, the words five years" had been substituted. Explanation. - Any amount credited or paid, out of inco....
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....estment in units of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963 ); (v) investment in any security for money created and issued by the Central Government or a State Government; (vi) investment in debentures issued by, or on behalf of, any company or corporation both the principle whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State Government; (vii) investment or deposit in any public sector company; provided that where an investment or deposit in any public section company has been made and such public sector company ceases to be a public section company - (A) such investment made in the shares of such company shall be deemed to be an investment made under this clause for a period of three years from the date on which such public sector company ceases to be a public sector company. (B) such other investment or deposit shall be deemed to be an investment or deposit becomes repayable by such company; (viii) deposits with or investment in any bonds issued by a financial corporation which is engaged in providing long- term finance for industrial development in India and which ....
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....have applied in previous year. He has referred the letter dated 13.09.2010 whereby the assessee exercised its option under clause 2 of the Explanation to section 11 (1)(a) of the Income-tax Act. It is pertinent to note that while computing the application of the income the assessee has excluded dividend and long term capital gain as well as short term capital gain and shown the income at Rs. 25.78 crore. Whereas the total income of the assessee including capital gain and dividend income is Rs. 714.42 crore. To meet the requirement of 85% of the income of Rs. 714.42 crore, the assessee was required to apply or deemed to have been applied the income to the extent of Rs. 607.43 crore. As per the details, the assessee has applied Rs. 164.93 crore during the year and nothing has been brought before us to show that the shortfall of more than 446 crore has been applied in the immediate following year. Therefore, apparently the assessee trust has not applied the shortfall of more than 446 crore in the immediate next year in terms of the Explanation to section 11(1) of the Act. Because the assessee has already applied the entire balance amount in the shares of Tata Sons Ltd., therefore, the....
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....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 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 Circula....
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....ection 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 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 in....
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....ra 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 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. 1....
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....ble, 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 asset which does not form part of permissible investment under Section 11(5) shall be disposed of withi....
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.... 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 that in the present case, the maximum marginal rate of tax will apply only to the dividend income from....
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....itted 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) CIT. v. Seethakathl Trust [2007] 295 ITR 520 (Mad.). (ii) Brahmin Educational Society v. Asstt. CIT [1997] 227 ITR 317 (iii) CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 (Mad.) (iv) Bar Council of Uttar Pradesh v. CIT [1983] 143 ITR 584 (All.) (v) CIT. v. Bar Council of Maharashtra [1981] 130 ITR 28 (SC). 9.4 The ld. Senior Counsel referred the observations of these decisions and submitted that once the income is exempt u/ss 10, same c....
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....the Income-tax Act. the Hon'ble High Court has held that the agricultural income shall not be included in the computation of total income of previous year in view of section 10(5) of the Act. Therefore, this income is not required to be considered for the purpose of section 11 of the Act. In the case of his holiness Silasri Kasivasi Muthukumaraswami Thambiran v. Agricultural ITO [1978] 113 ITR 889 (Mad.) 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/ss 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. sections 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 sections 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....
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....essee the grant was given to the Indian students and in Indian Rupees, though the students have used the said grant for higher education abroad. The assessee has applied the money for charitable purpose in Indian and the final execution of the purpose may be outside India but the same will not affect the conditions satisfied by the assessee. the ld. Senior Counsel has relied upon the decision the Chennai Bench of this Tribunal in the case of Bharata Kalanali v. ITO [1989] 30 ITD 161 (Mad.). He has also relied upon the decision of this Tribunal in the case of CEO Clubs India v. DIT (Exemption) [2012] 53 SOT 488 (Mum). 10.4 On the other hand, the ld. DR has submitted that the activity of the assessee does not end with the selection of candidates for assistance and disbursing amount to him but necessarily involves monitoring of the progress of the scholar's education outside Indian and completion of education outside India subject to the performance of the students, the financial assistance is granted and continued. Even only those students were selected who have already started their education outside India. Therefore, the trust i....
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....on 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 the revenue is that apart from the money being spent in India even the purpose must be carried out in India. The section itself contradicts this contention. Section 11(1)(c)( ii) provides that income applied to such purposes outside India is exempt in the case of trust created before 1-4-1952 subject to the approval of the Board. This underlines the principle that Governments do not forego their revenue in favour of charges paid outside their countries and hence the relevant consideration is whether the situs of the application of the money and not the place in which the objects of the trust may become effective. It may be pertinent to refer to section 1 of 16 which exempts scholarships granted to meet the cost of education where also the CBDT itself does not consider scholarship granted for....
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....5 of appeal becomes infructuous In the context of ground No. l, 2, 3 & 4 of appeal being dismissed because the claims of the appellant are in relation to 'computation of application of income' in the context of section 11 of the LT. Act, on which having failed for exemption u/s 11 of the LT. Act, the A. O. has computed the income in commercial manner. There is no disallowance made by the A.O. In computation of income In the" assessment order under the head 'administrative expenses' of Rs.3,65,81,515/- as taken in ground No. 5 of appeal. Therefore, ground No. 5 of appeal is also dismissed" 11.2 As it is clear that the AO denied the exemption u/s 11 and computed the income in commercial manner. CIT(A) has recorded that the AO has not made any disallowance on account of administrative expenses. However we note that the AO has computed the total income by taking the income from various sources and has not allowed any deduction. In view of our finding on the question of exemption u/s 11, this issue is set aside to the AO to reconsider the claim in the light of our finding on other issues. 12. Ground No. 5 is regarding TDS credit. 12.1 We have heard the ld. AR as well ....
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....not exempt under section 11 or section 12, as if the relevant income not so exempt were the income of an association of persons: Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate." 13.6 Section 164(2) does not prescribe the rate of tax but it mandates the maximum marginal rate as prescribed under the provision of Act. Section 111A is a special provision for rate of tax chargeable on such income which reads as under:- "111A Tax on short-term capital gains in certain cases.- (1) Where the total income of an assessee includes any income chargeable under the head "Capital gains", arising from the transfer of a short term capital asset, being an equity share in a company or a unit of any equity oriented fund and- (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (NO.2) Act,....