TaxTMI 
TaxTMI 
2016 (2) TMI 1022
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....ough the income and expenditure account, that the investment of capital gain in the preference shares was violative of the provisions of section 13(1)(d) and 13(2)(h) of the Act, that the exemption u/s. 11 was denied to the assessee for the earlier AY. Following the order for AY. 2010-11, the AO held that provisions of sections 13(1)(d) and 13(2)(h) of the Act were applicable for the year under consideration also, that the dividend income earned by the assessee was not exempt u/s. 10(34) and 10(35) of the Act. During the assessment proceedings the AO also found that in the earlier year, the then AO had denied the exemption to the assessee on the grants given to the students in India for studies abroad. Following the order for AY.2011-12,the AO held that the amount spent by the assessee under the head education grant was not entitled for claiming exemption u/s.11 of the Act. 3. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). After considering the submission of the assessee, the assessment order and the order of the ITAT Mumbai for the AY 2010-11,he held that the assessee had committed breach of sec.13(1)(d) and 13(2)(....
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....tution 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 section 1 and 2 of section 13 of Income Tax Act. We are concerned only with the conditions prescribed in clause (d) of sub section (1) and clause (h) of subs section (2) of section 13. Both these tests are to be qualified for exemption u/s 11. First we will deal with the issue of application of income in conformity with the provisions of section 11 of the Act. For ready reference we quote section 11(1) as under:- XXXXXXXXX 6.1 As per section 11(1), the income derived from property held under trust wholly for charitable or religious purposes shall not be included in the total income of the trust/institution to extent such income is applied for charitable/religious purpose in India, and in case such income is accumulated or set apart for application to such purpose in India to the extent such accumulation is not in excess of 15% of the total income f....
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....xempt u/s 10, therefore, 85% of the entire income without exclusion of dividend and long term capital gain on shares has to be applied for such purpose in India for availing deduction u/s 11. As it is clear from the details given above that out of total income of Rs. 714.42 crores, the assessee trust has applied during the year only Rs. 164.59 crores. The balance has been invested in the shares of Tata Sons Ltd which is not in conformity with section 11(5) of the Income Tax Act. The Ld. Senior Counsel submitted that the assessee had exercised option under clause 2 of the Explanation and the income applied for such purpose in next year shall be deemed to 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 crores. Whereas the total income of the assessee including capital gain and dividend income is Rs. 714.42 crores. To meet the requirement....
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....sset 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 Circular reads as under:- "Further a new clause (iia) has been inserted in the proviso in clause (d) of sub section (1) of section 13 to secure that mere accretion to the existing holding of shares by way of bonus shares or acceptance of donations in kind or any asset not conforming to the provision of section 11(5) will not make the fund or trust or institution lose tax exemption. The trusts or institutions will, however, be' required to dispose or convert the assets not conforming to the requirement of section 11(5) into permissible investment within one year from the end of the financial year in which such bonus shares or other asset....
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....he 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 investment in the shares of Tata Sons Ltd is clear violation of clause (h) of section 13(2). We have given our serious thought on the issue and are of the view that violation of section 13(1)(d) and section 13(2)(h) would disqualify exemption of income from the investment in non conforming of section 11(5) but not the entire income of trust if the other income of the trust otherwise fulfill the condition for exemption. The Coordinate bench of this Tribunal in the case of Tata Education Trust and Tata Social Welfare Trust (supra) has decided a similar issue in para 13 as under:- "13 We have heard the parties. The assessee is a public charitable trust. During the previous y....
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....ssessee 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 case 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. 11 of the Act in respect of other income earned by it. In this connection h invited our attention to Circular No. 387 containing explanatory notes on the Finance Act, 1984, more particularly paragraph 28.6 which reads as under. 28.6 It may be noted that new sub-s. (1A) inserted in s. 161 of the IT Act, which provides for taxation of the entire income received by trusts at the maximum marginal rate is applicable only in the case of private trusts having profits and gains of business. So far as the public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under cl. (a) or cl. (b) of s. 11(4A) of the IT Act. As the maximum marginal rate of tax under the new proviso to s. 164(2) applies to the whole or a part of the rel....
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....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 within one year from the end of the previous year in which such asset is acquired or by March 31, 1993, whichever is later. In the present case, the assessee was required to dispose of the shares under the said proviso by March 31, 1995 (see the judgment of this court in I. T. A. No. 81 of 1999, decided on September 14, 2000--Director of Income-tax (Exemptions) v. Shardaben Bhagubhai Mafatlal Public Charitable Trust [2001] 247 ITR 1). The shares have not been disposed of even during the assessment year in question. Now, under Section 164(2) it is, inter alia, laid down that in the case of relevant income which is derived from property held under trust for charitable purposes, which is of the nature referred to in Section 11(4A), tax shall be charged on so much of the relevant income as is not exempt under Section 11. Section 164(2) was ....
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....e 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 shares in Mafatlal Industries Limited and not to the entire income. Therefore, income other than dividend income shall be taxed at the normal rate of taxation under the Act." 8.4 Following the above decision we hold that the breach of section 13(1)(d) and 13(2)(h) would lead to forfeiture of exemption of income derived from such investment and not the entire income would be subjected to the maximum marginal rate of tax u/s 164(2). Thus the exemption u/s 11 is available to the assessee only on the income to the extent the same is derived in conformity of section 11 and applied during the year for such purpose of charitable trust. 9. Ground No.2 is regarding denial of exemption u/s 10(34), 10(35) and 10(38). 9.1 The assessee claimed that dividend income on shares and unit and long term capital gain on sale ....
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....e-tax. v. Bar Council of Maharashtra. (130 ITR 28) 9.4 The Ld. Senior Counsel referred the observations of these decisions and submitted that once the income is exempt u/s 10, same cannot be said to be taxed u/s 11 to 13. He has further contended that if the exemption is available to the assessee under two provisions of the Act, then the assessee is entitled to exemption under the provision which is more beneficial. 9.5 On the other hand, Ld. DR has submitted that as per section 11 of the Act, the income from the property held under trust is covered under this section and not u/s 10 of the Income Tax Act. He has contended that both these sections are part of chapter III and, therefore, section 11 being specific provision for exemption of income from the property held under trust would override general provisions. He has emphasized that the provisions under same chapter should be considered harmoniously while dealing with special mischief. Sections 11, 12 and 13 are strings of provisions and if the case is covered by these special provisions then general law would not apply. He has put forth the logic that section 13 dehors the applicability of section 11 and in th....
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.... is provided either u/s 10 or 11 to 13 of Income Tax Act. Therefore, section 11 to 13 would not operate as overriding affect to the section 10 of the Act. The language of these provisions does not suggest that either section 10 is subjected to the provisions of section 11 to 13 or section 11 to 13 has any overriding affect over section 10. Therefore, the benefit of section 10 cannot be denied by invoking the provisions of section 11 to 13 of the Act. Once the conditions of section 10 are satisfied then no other condition can be fastened for denying the claim under section 10 of the Act. 9.8 In view of the above discussion and following the various decisions (supra) we hold that the dividend income on shares and mutual funds and long term capital gain on sale of shares an exempt u/s 10(34),10(35) and 10(38) respectively and cannot be brought to tax by applying section 11 and 13 of the Act. 10. Ground No. 3 is regarding education grant given to Indian students for studying abroad. 10.1 The assessee has given grants to various Indian students/persons to pursue their education/higher education in various universities abroad. The AO noted that the grant is rel....
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....formance abroad. Accordingly the trust send a troop and paid a sum of Rs. 1.55 lakh being the passage money to the Travel Corporation of India. The Tribunal held in para 6 as under:- "6. The crucial question is only whether the conditions in section 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....