TaxTMI 
TaxTMI 
2014 (11) TMI 444
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.... Tisco Shares is in violation of the provisions of Section 13(1)(d). (b) The ld. CIT(A) failed to appreciate that conditions stipulate4d in Section 11(5) with regard to accumulated income are only in respect of income of the trust falling within the statutory limit of 85% of such income and not in respect of the balance 15% of the income when such trus4t has applied 85% of its income in attaining the objects of the trust. Consequently, she erred in confirming the denial of the exemption to the appellant. 4. (a) The ld. CIT(A) grossly erred in holding that the original Tisco shares held by the appellant received as donations was also an investment of funds belonging to the appellant falling within the mischief of Section 13(1)(d) r/w Section 11(2) and 11(5). (b) The ld. CIT(A) failed to appreciate that the funds of the appellant were never invested in the original holding of Tisco shares and that such shares were received as corpus donations and consequently failed to appreciate that there was no violation of the provisions of Section 13(1)(d) r/w 1(2) and 11(5) of the I.T. Act, 1961. (c) The ld. CIT(A) failed to appreciate that acceptance of offer of rights shares which....
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....tion of such provisions. Besides in terms of Sec. 164 entire benefits u/s 11 & 12 cannot be denied; in the worst scenario the income earned on unspecified investment i.e. TISCO shares may be denied exemption and subjected to maximum marginal rate of tax as per other provisions of I T Act. Rejecting assesses explanation in this behalf, ld. AO was of the view that even if there is a small violation of provisions of sec. 13(1)9d) it leads to denial of entire benefits of sec 11 and 12. This resulted in assessment of trust at RS. 6,23,44,980/-and further subjected it to tax at maximum marginal rate. It may be pertinent to mention here that parallelly ld. A.O. also initiated reassessment proceedings for A.Y. 2004-05 to A.Y. 2007-08 by issuing notices u/s 148 of I. T. Act, 1961. The department has been adopting an ambivalent approach by allowing exemption u/s 11 & 12 in some years and denying the same in some other years. The status of proceedings for different years is summarized as under: i. For A.Y. 2004-05 benefits of exemption u/s 11are denied. ii. For A.Y. 2005-06 it is held that Trust is entitled to benefits of exemption u/s 11. iii. Proceedings for reassessment for A.Y. 2....
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....1st March 1993, which it failed to do and thereby contravened S. 13(l)(d) r/w proviso(iia). c) The shares, which were with the Trust as part of its corpus as on 1.6.1973 and increased by way of bonus shares, then section 13(l)(d)(iii) shall not apply. Apparently it was not the case of the assessee during this A.Y. d) It was claimed that these shares were purchased out of the sale proceeds of old shares. This plea was also rejected as there was no sale of shares during the year under consideration. And if it was in earlier years then it further established that the Trust had invested money out of the funds available with it. e) The assessee has further claimed that had the Trust not opted to subscribe for rights issue it would have resulted in a big loss to the Trust. The trustees are in a fiduciary position and had to act for the benefit of the Trust. One case law was been cited in this context contemplating a situation when court may interfere if directors of a company do not exercise their powers for thebenefit of the company. The AO observed that the assessee was trying to compare a case of a company with that of the Trust. The functions of a Trust are altogether differ....
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.... can be seen that the appellant had applied more than 85% of its gross income on charitable purposes. It was contended that the AO should have treated the income of the appellant as exempt in terms of section 11(l)(a) of IT Act, 1961. The AO had not only charged this amount to tax but had also held that the investment in rights issue of TISCO shares had violated the provisions of section 13(l)(d) of IT Act, 1961. v) It was admitted that the appellant had subscribed to the right issue of TISCO shares out of the income of the appellant earned during the FY 2007-08. However, provisions of section 13(l)(d) would be attracted only when the investment was made otherwise than in any one or more of the forms or modes specified in section 11(5) of IT Act, 1961. The provisions of section 11(5) are applicable only for investment or deposit of money referred to in clause (b) of sub-section (2) of section 11. Section 11(2) is attracted only where 85% of income u/s 11(l)(a) or (b) is not applied for charitable purposes. Since the appellant did not apply more than 85% of its income referred to in section 11(l)(a) for charitable purposes exemption u/s 11(1) has to be granted to the appellant on....
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....wance could be contemplated only for the AY 2009-10 and not for the current AY 2008-09, in respect of the right shares. xii) With regard to the ground No.3, it was submitted that the AO did not discuss anywhere in the impugned assessment order the reason for non-consideration of purchase of assets (medical equipment) amounting to Rs. 3,44,07,618/- and diagnostic equipment of Rs. 15,600/-. Once these amounts are also treated as application of income then the total application of income works out to Rs. 39,41,15,839/- and consequently the claim for exemption u/s 11(l)(a) is of the order of 93.48% of income applied for charitable purposes. Thus, the investment in right issue constituting about 2.5% of total income cannot be called a "huge investment" and the funds coming out of the balance income of about 6.52% cannot be denied exemption. Reliance was also placed on the following case laws:- (a) Calcutta H.C. in the case of Birla Charitable Trust (1988) 170 ITR 150; (b) Gujarat H.C. in the case of CIT vs. Insaniyat Trust (1988) 173 ITR 248 and (c) Bombay H.C. in Trustees of Mangaldas N. Varma Charitable Trust vs. CIT 207 ITR 332 wherein the court held that section 13(2)(h)....
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..... 93,06,900/- on 15.12.2007. Nor can it be said that this was accretion of shares to the original donation. General meaning to the term/accretion to the shares" in this case is not required to be sought when the meaning has been specified in the proviso (iv) to Section 13(1)(d). As per this definition the purchase of shares of TISCO by the appellant cannot be termed as accretion to shares as per the proviso (ia) to Section 13(1)(d). It was an act of commission on part of the appellant to divert this income in purchase of these preferential rights issue. Therefore, the submissions of the A.R. that the provisions of Section 13(1)(d) would be attracted only when investment or deposit of money referred to in Section 11(2)(a) or (b) was involved as rejected as being contrary to law. The AO erred in charging to tax the entire surplus without waiting for a period of one year as required vide proviso (iia) to Section 13(1)(d). This submission of the AR is also not supported by the facts of the case of the assessee. From the details of particulars of shares received/purchased or sold of TISCO by the appellant (annexure A to the order), it is seen that the appellant purchased 3102 prefere....
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....ch, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or (iii) any shares in a company, other than - (A) shares in a public sector company ; (B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11, are held by the trust or institution after the 30th day of November, 1983:" In this context, the provisions of section 164 (2) are also relevant and applicable, which are as under :- "164. Charge of tax where share of beneficiaries unknown. (2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in sub- clause (iia) of clause (24), of section 2 or which is of the nature referred to in sub-section (4A) of section 11, tax shall be charged on so much of the relevant income as is 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 relev....
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....orfeit tax exemption" which is reproduced as follows :- "28.6 It may be noted that new sub-section (1A) inserted in section 161 of the Income-tax Act, which provides for taxation of the entire income received by trusts at the maximum marginal rates is applicable only in the case of private trusts having profits and gains of business. So far as public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11 (4A) of the Income - tax Act. As the maximum marginal rate of tax under the new proviso to section 164 (2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the Income-tax Act in regard to investment pattern or use of the trust property for the benefit of the settler, etc., contained in section 13 (1) (c) and (d) of that Act, the said rate will not apply to the business profits of such trusts which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of section 13 (1) (c) or (d) of the Act, the maximum marginal rate of income-tax wil....
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.... be levied and not for the whole income, more particularly when there was violation of the provisions of section 11 (5) of the Act. It was held by the High Court that a reading of section 13 (1) (d) of the Act, makes it clear that it is only the income from such investment or deposit which has been made in violation of section 11(5) of the Act, that is liable to be taxed and that the violation of section 13 (1) (d) was not tantamount to denial of exemption under section 11 to the total income of the assessee. Accordingly, the appeals of the IT Department were dismissed. It is emphasized that while deciding this case, the Hon'ble Karnataka High Court has placed reliance on various other judgments available on the issue like- 1. Hon'ble Delhi High Court, in the case of DIT (E) V. Agrim Charan Foundation [2002] 253 ITR 593 (Delhi). In this context, the following observations of the Honourable High Court, on page 238 of the Report are very relevant : "We are in respectful agreement that the views expressed by the Bombay High Court as well as Delhi High Court for violation section 11(5) of the Act and the entire income of the Respondent trust cannot be assessed for the ....
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....ciation of persons (AOP). He further contended that the entire income of the trust was liable to be charged to tax under maximum marginal rate, on the basis of such income accruing to an association of persons. On the other hand, the counsel for the assessee contended that the requirement of investment for specified securities under section 11(5) results in an income to the trust which is receivable by the trustees and it is called relevant income under section 164(1). He further contended that a portion of such relevant income in the present case would suffer tax because the condition of investment as prescribed under section 11(5) had not been fulfilled. But non-fulfilment of such condition could not deprive the trust of the exemption of its other income, which had been granted in earlier years. He further contended that in this connection, the proviso to section 164(2) is very important. According to him, the Legislature has clearly contemplated that in a case where the whole or part of the relevant income is not exempt under section 11, by virtue of violation of section 13 (1) (d), tax shall be charged on the relevant income or part of the relevant income at the maximum marg....
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....4 [152 ITR (St.) 1]. It was also held 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. In the circumstances, it was held that there was merit in the contention of the assessee that in the present case, the maximum marginal rate of tax would apply only to the dividend income from shares in Mafatlal Industries Ltd. And not to the entire income. Accordingly, the aforesaid question was answered in the negative, that is, in favour of the assessee and against the Department. It is, therefore, clearly established that the Bombay High Court approved the judgment of the Tribunal to the effect that non-fulfilment of condition of investment prescribed under section 11(5) of the Act, could not deprive the trust of the exemption of its other income, which had been granted to it in the earlier years. In other words, it is clearly established that violation of section 13 (1) (d) was not tantamount in denial of exemption under section 11 to the total income of the assessee. 3. Jamestji Tata Trust v. Joint....
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....come from shares could only be charged to tax at maximum marginal rate of tax under section 164 (2) and not the entire income of the assessee Trust subject to provisions of Section 10 of I. T. Act, 1961. The assessee trust from the said shares of TISCO received only the dividend income of Rs. 24,02,298/- which do not form part of total income u/s 10 (34) of I. T. Act, 1961 and thus exempt under the Act. In case of Jamsetji Tata Trust vs. Joint DIT (E) the Mumbai ITAT Bench in (2014) 161 TTJ (Mumb) 742/ [2014] 101 DTR (Trib) 305 (Mum.) in para 9.6 to 9.8 of appeal order relying on decisions of CIT vs. Divine Light Mission (2005) 196 CTR (SC) 135 : (2005) 278 ITR 659 (Del) and His Holiness Silasri Kasivasi Muthukumara Swami Thambiran & Ors. Vs. Agrl. ITO & Ors. 1978 CTR (Mad) 217 : (1978) 113 ITR 889 (Mad). held that the exemption under s. 10 is income specific irrespective of the status / class of person. The exemption under s. 11 is person specific though on the income derived from the property held under the trust. Further the exemption under s. 11 is subject to the application of income and modes or form of deposit and investment. The exemption under s. 11 is available on the inc....
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....ust or institution cannot claim any exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)]. Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 (except the exemption in respect of agricultural income).With the above prospective amendment w.e.f. 1-4-2015 in the Income Tax Act, 1961 it is now settled in law that earlier to that date of 1-4- 2015 (A.Y. 2015-16) the income which are exempt u/s 10 of I. T. Act, 1961 cannot be subjected to tax even if whole or part of income of any trust or institution is not entitled to exemption u/s 11 & 12 of I. T. Act, 1961. Thus for the year under consideration even the dividend income of assessee trust derived from holding of said TISCO shares is not taxable as per rates prescribed in Section 164 (2) even if that part of income is not entitled to exemption u/s 11 & 12 of I. T. Act, 61. A further amendment to tackle the effect of remaining part of judgement the provisions of Section 12AA were amended by inse....
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....hares i.e. dividend earned therefrom which is to be taxed subject to other provisions of the Act at maximum marginal rate. In case of dividend income the same by provisions of Section 10 (34) of I. T. Act, 1961 is expressly exempt. Thus applying the regular provisions of IT Act i.e. 10(34) the dividend income of assessee trust is also not liable to tax. The orders of Ld. AO & CIT (A) forfeiting exemption u/s 11 and u/s 12 on entire income of tax, holding the trust as A.O.P. and applying maximum marginal rate is erroneous and contrary to the provisions of law, judicial precedents and CBDT circular. The orders of lower authorities may be reversed on this issue. 4.1 The ground No. (2) of appeal is not pressed. Grounds no. 3 and 4 are pleaded to be alternative in nature on which no submissions are made. 4.2 Ld. CIT (DR) contends that i. Assessee consciously violated the statutory provision by continuing with the investment of shares in a non public sector company. In this eventuality law will take its course as per plain meaning once the assesse trust violates a specific provision of sec. 13(1)(d); it leads to denial of benefits of sec 11 & 12 to entire trust income. ....
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.... Public charitable Trust v. ACIT 44 ITD 341 (Hyd) ii. ITO v. Gurjar Pushkarana Vidyotejak Mandal 30 TTJ (Ahd) 610; For the proposition that even if the proviso to sec. 164(2) inserted from 1-4-85 is considered, it implies that clauses c or d of sec. 13(1) are attracted, in that case trust income is to be taxed at maximum marginal rates. 4.3 The Orders of lower authorities are relied on. 4.4 We have heard the rival contentions and case laws and carefully perused the material available on the record. The controversy in question be dealt with by framing following question: i. Whether the trust was obliged to convert its TISCO share holding into specified securities by the due date or thereafter? In our considered view there cannot be dispute on this issue that the trust should had converted the TISCO share into investment of permissible securities in this behalf. ii. Whether the nonconversion of TISCO corpus shares into permissible securities will disentitle the assessee from the benefits of secs. 11 and 12 from the entire income. OR Conjointly reading sec. 164(2), it will disentitle the benefits on the portion of the income attributable to impermissible sec....
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....d that where any income in respect of which a person is liable as a representative assessee consists of profits of business, then tax shall be charged on the whole of the income, in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the aforesaid two phrases show that the Legislature has clearly indicated its mind in the proviso to section 164 (2), when it categorically refers to forfeiture of exemption for breach of section 13 (1) (d), resulting in levy of maximum marginal rate of tax only to that part of income, which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This interpretation is also supported by Circular No. 387 dated July 6, 1984 [152 ITR (St.) 1]. It was also held 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. In the circumstances, it was held that there was merit in the contention of the assessee that in the present case, the maximum marginal rate of tax would apply only to t....