COMMISSIONER OF INCOME TAX vs. SWETAMBER MURTI PUJAK TAP GACHH SANGH

Facts

The Revenue has filed several Tax Appeals challenging the orders of the Income Tax Appellate Tribunal (ITAT) for various Assessment Years (1995-96 to 1998-99). The assessee, S.P. Mehta Memorial Trust, had declared NIL income. The Assessing Officer disallowed the trust's claim for exemption under Section 11 of the Income Tax Act, 1961, by adding the entire income to the total income, on the grounds that investments made in Gujarat Lease Finance Ltd. (GLFL) were not specified investments as per Section 11(5). The Commissioner of Income Tax (Appeals) deleted these additions. The ITAT upheld the CIT(A)'s order, leading to the present appeals by the Revenue.

Held

The High Court held that the Tribunal was justified in upholding the order of the CIT(A). The Court agreed with the reasoning of the CIT(A) and the Tribunal that Section 11(1)(a) provides that income derived from property held under trust shall not be included in total income to the extent it is applied for charitable or religious purposes or accumulated for future application, subject to restrictions under Section 11(5). The Court further relied on the Karnataka High Court's decision in Fr. Mullers Charitable Institutions (supra), which clarified that Section 13(1)(d) makes only the income from investments made in violation of Section 11(5) liable to tax. Violation under Section 13(1)(d) does not result in denial of exemption under Section 11 to the total income of the assessee. Tax is levied on the relevant income or part thereof at the maximum marginal rate. Therefore, the Court found no reason to interfere with the impugned orders. The substantial question of law was answered in favour of the assessee and against the revenue.

Key Issues

1. Whether, on the facts and in the circumstances of the case, the ITAT is right in holding that the corpus fund cannot be treated as the income of the trust for violation of Section 11(5) of the Act, and only that income which is earned in violation of Section 11(5) of the Act could lose exemption? (Question of law) Assessee's Contention: The assessee, through its counsel, supported the impugned order of the Tribunal. It relied on the Bombay High Court's decision in Director of Income-tax (Exemption) vs. Sheth Mafatlal Gagalbhai Foundation Trust (249 ITR 533), the Delhi High Court's decision in Director of Income Tax vs. Agrim Charan Foundation (253 ITR 593), and the Karnataka High Court's decision in Commissioner of Income Tax and Another vs. Fr. Mullers Charitable Institutions (363 ITR 230). These decisions held that violation of Section 13(1)(d) attracts tax only on the income that has forfeited exemption, not the entire trust income. Revenue's Contention: The Revenue contended that the authorities below erred in concluding there was a bonafide belief on the part of the assessee. It argued that the Tribunal erred in law by holding that interest income earned from investments would not qualify for exemption under Section 11 of the Act.