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Income Tax Appellate Tribunal, DELHI BENCH “A”, NEW DELHI
Before: SH. PRAMOD KUMAR & SH. SUDHANSHU SRIVASTAVA
PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER:
This appeal has been preferred by the department against order dated 22/12/2014 passed by the Ld. CIT (A)-40, New Delhi for assessment year 2010-11.
The brief facts of the case are that the assessee is a charitable institution in terms of section 25 of the Companies Act, 1956 and is also registered u/s 12AA(1) of the Income Tax Act, 1961 (hereinafter
(The Times Centre for Media and Management Studies) referred to as ‘the Act’) with effect from 11.11.1991. The assessee is promoted by the Bennett Coleman & Company Ltd. of Times of India Group. The assessee is involved in providing Journalism, Marketing and Management courses as per the objects contained in the Memorandum. The return of income was filed declaring income at Rs. Nil. The assessee’s case was selected for scrutiny and during the course of assessment proceedings it was noticed by the AO that the assessee had received a donation of 50,000/- shares worth Rs. 2,00,000/- from Angelo Rhodes Ltd. (United Kingdom) way back in 1996 and had received a dividend income of Rs. 2,36,000/- during the year under consideration. The AO proceeded to deny the benefit of exemption u/s 11(1) of the Act for violation of provision of section 13(1)(d) read with section 11(5) of the Act pertaining to the mode of investment.
2.1 Aggrieved, the assessee approach the Ld. CIT (A) and contended that the benefit of exemption for the entire income could not have been denied and at best the AO could have denied exemption to the extent of dividend income earned. The Ld. CIT (A) accepted the contentions of the assessee and granted the assessee
(The Times Centre for Media and Management Studies) the benefit of exemption on all other income except the impugned amount of Rs. 2,36,000/-.
2.2 Now, the department is before the ITAT and has challenged this adjudication by the Ld. CIT (A).
The Ld. Sr. Departmental Representative vehemently supported the findings of the AO and argued that the Ld. CIT (A) had erred in allowing the benefit of exemption to the assessee because the assessee had violated the mandate of section 13(1) read with section 11(5) of the Income Tax Act, 1961.
In response, the Ld. Authorised Representative submitted that these shares had been received by the assessee as a donation and the assessee had never purchased these shares. It was further submitted that the assessee is not engaged in any activity or transaction in relation to the equity shares of Angelo Rhodes Ltd. during the year under consideration except receiving the dividend income of Rs. 2,36,000/-. It was further submitted that it is settled law that only income from investments or deposits made in violation of section 11(5) of the Act are liable to be taxed and violation of section 13(1)(d) of the Act does not result in denial of exemption u/s (The Times Centre for Media and Management Studies) 11 to the total income of the assessee. The Ld. Authorised Representative placed reliance on numerous case laws in support of his contention.
We have heard the rival submissions and have also perused the material on record. The facts of the case remain undisputed and the only question requiring adjudication is whether the assessee can be denied the benefit of exemption u/s 11 on the ground that the assessee was holder of shares in violation of provisions of section 13(1)(d) of the Act. It issue is no more res integra. It is well settled that where investments or deposits have been made by a charitable trust which are in violation of section 11(5) of the Act, the benefit of exemption u/s 11 of the Act would not be denied on the entire income of the assessee and only the investments / deposits made in violation of provisions of section 11(5) of the Act would attract maximum marginal rate of tax. The Hon’ble Karnataka High Court in the case of CIT vs. FR Mullers Charitable Institutions reported in 363 ITR 230 (Karnataka) while dealing with an identical issue has held as under :-
With regard to the second and the third substantial questions of law are concerned, reading of section 13(1)(d) of (The Times Centre for Media and Management Studies) 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 under section 13(1)(d) does not tantamount to denial of exemption under section 11 on the total income of the assessee. An identical question came before the Bombay High Court in the case reported in DIT (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom). The question before the Bombay High Court is "Whether violation of section 11(5) read with section 13(1)(d) by the assessee-trust attracts the maximum marginal rate of tax on the entire income of the trust ?" The Bombay High Court held that in case of contravention of section 13(1)(d), the maximum marginal rate of tax under section 164(2), proviso is applicable only to that part of income of the trust which has forfeited exemption and not the entire income. The relevant paragraph reads as under: "Section 164(2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as tax able, 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 an association of persons. Therefore, a proviso was inserted by the Finance Act, 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), the 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 fali in the net of (The Times Centre for Media and Management Studies) tax as if it was the income of an association of persons . . . The phrase 'relevant income or part of the relevant income' in the proviso is required to be read in contradistinction to the phrase 'whole income' under section 161(1A). This is only by way of comparison. Under section 161(1 A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, the 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 above two phrases shows 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 maxi mum marginal rate of tax only to that part of the income which has forfeited exemption. It does not refer to the entire income being subjected to the maximum marginal rate of tax. This interpretation is also supported by Circular No. 387, dated 6th July, 1984 ([1985] 152 ITR (St.) 1). Vide the said Circular, it has been laid down in paragraph 28.6 that whore a trust contravenes section 13(1)(d), 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. 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, there (The Times Centre for Media and Management Studies) is 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 held in contravention of section 13(1) (a) and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act." A similar view has been taken by the Delhi High Court in a judgment reported in DIT (Exemption) v. Agrim Charan Foundation [2002] 253 ITR 593 (Delhi). Reading of the proviso to section 142 is very clear that the Legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under section 11 by virtue of violation of section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. The said analogy is applicable to the facts of the present case.
We are in respectful agreement with the views expressed by the Bombay High Court as well as the Delhi High Court for violating section 11(5) of the Act and the entire income of the respondent- trust cannot be assessed for the tax. ”
5.1 This judgment of the Hon’ble Karnataka High Court has also been relied upon by ITAT Delhi Bench in the case of Puran Chand Dharmarth Trust vs. ITO in wherein, vide order dated 4th May 2018, Delhi Bench of the ITAT has held that where the whole or part of the relevant income is not held to be exempt u/s 11, by virtue of violation of section 13(1)(d) of the Act,
(The Times Centre for Media and Management Studies) tax is to be levied on the relevant income or the part of the relevant income at the maximum marginal rate but violation of section 13(1)(d) of the Act does not result in denial of exemption u/s 11 to the total income of the assessee. Thus, as per provisions of section 13(1)(d), 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 violation u/s 13(1)(d) does not result in the denial of exemption u/s 11 to the total income of the assessee trust.
Accordingly, in view of the settled judicial precedent we find no reason to interfere with the action of the Ld. CIT (A) in restricting the addition made by the AO to the extent of dividend income earned. We dismiss the grounds raised by the department.
In the final result appeal of the department stands dismissed.
(Order pronounced in the open court on 31st May, 2018).