TaxTMI 
TaxTMI 
2024 (10) TMI 1837
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....of "J. Sikile School" at Narsapuram, [a Town at Andhra Pradesh] and another Secondary School affiliated to State Board under the name & style of "J. Sikile Academy" at the same location. The AO from perusal of the balance-sheet of the assessee under the schedule "current assets, loans and advances" noted that there was outstanding dues from M/s. Sands- India Pvt. Ltd. (hereinafter in short 'M/s. SIPL'), a concern, in which, the Trustee of assessee holds substantial interest as follows :- i) as on 31.03.2011 - Rs.95,15,470/- ii) as on 31.03.2010 - Rs.75,54,470/- 3. The AO asked the assessee to furnish the ledger extracts of M/s. SIPL; and noted from perusal of the ledger that the loan recoverable /outstanding as on 31.03.2011 was to the tune of Rs.95,15,469/- from M/s. SIPL. And the AO asked the assessee to explain the aforesaid transaction with M/s. SIPL, and simultaneously, show-caused `as to why' the exemption u/s.11 of the Act should not be denied since there was per-se violation of sec.13(1)(c) of the Act. And pursuant thereto, the assessee replied that M/s. SIPL was incorporated in the year 1982 as a Non-Banking Finance Co., registered with RBI....
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....nterest already issued 2,652 19,67,384 Tax payable 74,46,690 4. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who confirmed the action of the AO by holding as under: 2.3 I have gone through the submission of the assessee and perused the assessment order. As per the above facts, the appellant has alleged that AO has failed to appreciate the transactions between assessee and M/s Sands India Private Limited and he has overlooked the history of connection between the appellant and the said company. AO's action in applying the provisions of section 13(1)(c)/13(1)(d) are vitiated. Provision of Sec. 13(1)(c) were mechanically applied and without proper examination of facts and without appreciating that the running account of assessee with M/s. Sands India Private Limited was in operation for last 30 years. The submission put forth by the appellant cannot be accepted. The appellant is a public charitable trust and it has to observe provisions of Act relating to public charitable trusts, in order to be eligible for exemption u/s.11 and u/s.12. Appellant has violated two provisions in this regard. First is tha....
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....ection 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 will apply only to that part of the income which has forfeited exemption under the said provisions. 7. The Ld.AR also submitted that the Hon'ble Madras High Court in the case of CIT v. Working Women's Forum reported in 365 ITR 353 has referred to the aforesaid Circular while deciding similar question framed by it u/s.13(1)(d) of the Act, which is reproduced as under :- 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the denial of exemption should only be to the extent of the income which is violative of section 13(1)(d) and not the total denial of exemption under section 11? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in dismissing the appeal of the Revenue, when the assessee- trust made the investment in MIOT Hospitals Ltd. consciously and thereby contravened the provisions of s....
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....ax 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. 1995. The said proviso was inserted by the Finance Act, 1984. The proviso specifically refers to violation of section 13(1)(d) and its consequences." 5. We are in entire agreement with the statement of law by the Bombay High Court in the decision referred to above. Respectfully following the said decision, we confirm the order of the Tribunal, thereby reject the Revenue's appeals. (emphasized). 9. The Ld.AR also referred to the decision of the decision of the Co-ordinate Be....
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....e income of the Trust. This position is further strengthened by the decision of Hon'ble Jurisdictional High Court of Madras in the case of CIT v. Working Women's Forum (supra), where it was held that denial of exemption u/s.11 should be restricted to the extent of income, which is in violation of section 13(1)(c) & 13(1)(d) of the Act. The Hon'ble Supreme Court had dismissed the SLP filed by the Revenue and affirmed the findings of the Hon'ble Jurisdictional High Court of Madras. In this case, the AO has levied tax on total income of the Trust at maximum marginal rate, contrary to settled position of law. We, therefore, are of the considered view that the AO as well as the ld. CIT (A) were erred in rejecting exemption claimed u/s 11 to total income of the trust. 10. In the light of the aforesaid submissions, the Ld.AR submitted that even if the amount given by assessee as loan to M/s.SIPL was for the benefit of person referred to in sub-section (3) of section 13 of the Act, [in violation of section 13(1)(c)/(d)] the AO having added interest on the outstanding loan of Rs.95,15,469/- @12% i.e. Rs.11,41,856/-, should have restricted his addition to that extend; and ....
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....r, the only grievance of the assessee is that having made the addition of Rs.11,41,856/- (12% of Rs.95,15,469/-), the AO ought not have denied the benefit of exemption u/s.11 of the Act by taxing the whole income i.e. excess income over expenditure and for such a proposition has referred to the aforesaid decisions of the Hon'ble Madras High Court decision in the case of CIT v. Working Women's Forum reported in 365 ITR 353 (Madras) as well as the Hon'ble Bombay High Court in the case of Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533 (Bom). The Ld.AR also cited the CBDT Circular No.387 dated 06.07.1984 to contend that the AO ought to have taxed only to the extent to which the violation was found by the AO u/s.13(1)(c) & 13(1)(d) of the Act and not denied the exemption on the part of the income which didn't fall in the teeth of violations stated in section 13 of the Act. 14. We find force in the submissions of the Ld.AR, in the light of the decision of the Hon'ble Jurisdictional High Court in the case of Working Women's Forum (supra) as well as the Hon'ble Bombay High Court decision in Sheth Mafatlal Gagalbhai Foundation Trust (supra) and CBDT Cir....
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....rust or institution are invested or deposited in any one or more forms other than specified modes, then income to the extent of such deposits or investments, shall not be excluded from the total income of the trust or institution in receipt of such income. 16. And the Memorandum Explaining the Provisions in Finance Bill, 2022 [relevant portion only], which is extracted below: 5.2 Taxation of certain income of the trusts or institutions under both the regimes at special rate Following incomes of the trusts or institutions are chargeable to tax, under different provisions of the Act :- (a) The trusts or institutions under the first or second regime are required not to pass on any unreasonable benefit to the trustee or any other specified person. For the trusts or institutions under the second regime, clause (c) of sub-section (1) of section 13 of the Act provides that the entire exemption shall be denied to the trust irrespective of the amount of benefit passed on. For trusts or institutions under the first regime similar provisions is proposed by way of insertion of twentieth proviso to clause (23C) of section 10 of the Act. (b) It is mandatory....
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....he income applied in violation is taxed at special rate without deduction. Accordingly, in order to rationalise the provisions, the following amendments are proposed :- (a) It is proposed to amend clause (c) of sub-section (1) of section 13 of the Act to provide that only that part of income which has been applied in violation to the provisions of the said clause shall be liable to be included in total income. (b) It is also proposed to insert twenty first proviso in clause (23C) of section 10 to specifically provide that where the income of any trust under the first regime, or any part of the such income or property, has been applied directly or indirectly for the benefit of any person referred to in sub-section (3) of section 13, such income or part of income or property shall be deemed to be income of such person of the previous year in which it is so applied. The provisions of sub-section (2), (4) and (6) of section 13 of the Act shall also apply to it. (c) It is proposed to amend clause (d) of sub-section (1) of section 13 of the Act to provide that only the that part of income which has been invested in violation to the provisions of the said clause....
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....ction 11. These amendments will take effect from 1st April, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years. Please Note- Trust exemption regimes are as follows :- (1) Regime for any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10 (hereinafter referred to as trust or institution under first regime); and (1) Regime for the trusts registered under section 12AA/12AB (hereinafter referred to as trust or institution under the second regime). 17. Taking note of the amendment brought albeit through Finance Act, 2022 w.e.f. 01.04.2023; and the CBDT Circular No.387 dated 06.07.1984 (supra), which has been considered by the Hon'ble Madras High Court in Working Womens (supra) and from the aforesaid discussion, in the present case, we note that there is a violation of sec.13(1)(c) of the Act by giving loan to M/s. SIPL to the tune of Rs.95,15,469/- without levying adequate interest. The AO having found the viol....