Income-tax Officer (Exemption), V. Progressive Education Society, Nashik

ITA 580/PUN/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6994 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-03-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HEMANT KUMAR C LUEVA
• Keywords: Charitable institution; Maximum Marginal Rate; Earning of tax free income; Benefit of exemption
• Section: 80G; 12A; 6; 12; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , , !'#'' $ , % & BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM / ITA NO. 580/PUN/2015 %' ( ')( / ASSESSMENT YEAR : 2010-11 INCOME TAX OFFICER (EXEMPTION), WARD 1, NASHIK ....... / APPELLANT ' /VS. PROGRESSIVE EDUCATION SOCIETY, OPP. TO NEW CURRENCY NOTE PRESS, JAIL ROAD, NASHIK ROAD, NASHIK - 422101 PAN : AAATP3809J / RESPONDENT ASSESSEE BY : SHRI C.H. NANIWADEKAR REVENUE BY : SHRI HEMANT KUMAR C. LUEVA / DATE OF HEARING : 08-03-2017 / DATE OF PRONOUNCEMENT : 10-03-2017 * / ORDER PER VIKAS AWASTHY, JM : THIS APPEAL BY THE DEPARTMENT IS DIRECTED AGAINST THE OR DER OF COMMISSIONER OF INCOME TAX (APPEALS)-3, NASHIK DATED 27-02 -2015 FOR THE ASSESSMENT YEAR 2010-11. 2. THE FACTS OF THE CASE AS EMANATING FROM RECORD ARE: T HE ASSESSEE IS A PUBLIC CHARITABLE TRUST. THE ASSESSEE IS ENGAGED IN PROVIDING 2 ITA NO. 580/PUN/2015, A.Y. 2010-11 EDUCATION. THE ASSESSEE IS ENJOYING THE BENEFIT OF REGISTR ATION U/S. 12A AND U/S. 80G OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFE RRED TO AS THE ACT). THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR ON 18-07-2011 DECLARING TOTAL INCOME AS NIL. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY UNDER CASS AN D ACCORDINGLY NOTICE U/S. 143(2) WAS ISSUED TO THE ASSESSEE ON 06-08-2 012. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS THE ASSE SSING OFFICER OBSERVED THAT THE ASSESSEE HAS MADE INVESTMENT IN VAR IOUS MUTUAL FUNDS. DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEA R UNDER APPEAL THE ASSESSEE MADE INVESTMENT IN JP MORGAN INDIA EQUITY FUND ` 5,00,000/- AND RELIANCE VISION FUND ` 4,00,000/-. BOTH THE ABOVE SAID FUNDS WERE NOT APPROVED U/S. 10(23D) OF THE ACT. THE ASSESSING OFFICER HELD THAT SINCE THE ASSESSEE HAS MADE INVESTMENT IN THE FUNDS IN VIOLATION OF THE PROVISIONS OF SECTION 11(5) OF THE ACT, THER EFORE, IN TERMS OF SECTION 13(1)(D) OF THE ACT, THE ASSESSEE SHALL NO T BE ELIGIBLE TO CLAIM THE BENEFIT OF SECTIONS 11 AND 12 IN THE ASSESSMENT YEAR UNDER APPEAL. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE ASSESSEE TRUST IS ACCEPTING DONATIONS FROM STUDENTS WHICH IS IN THE NATUR E OF CAPITATION FEES, THEREFORE, THE ASSESSEE TRUST CANNOT BE SAID TO BE EXISTING SOLELY FOR EDUCATION PURPOSES. THE ASSESSEE IS N OT ELIGIBLE FOR ACCUMULATION OF INCOME AND HENCE, NOT ELIGIBLE FOR DEDUCTION / EXEMPTION U/S. 11 OF THE ACT. THE ASSESSING OFFICER TREATE D THE ASSESSEE AS AOP AND MADE ADDITION OF THE ENTIRE SURPLUS I.E. ` 1,44,42,360/- AS INCOME OF THE ASSESSEE. AGGRIEVED BY THE ASSESSMENT ORDER DATED 25-03-2013, T HE ASSESSEE FILED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) PARTLY M ODIFIED THE ASSESSMENT ORDER BY RESTRICTING THE DISALLOWANCE U/S . 11 AND 12 ONLY TO THE EXTENT OF INVESTMENT MADE IN MUTUAL FUNDS O F JP MORGAN 3 ITA NO. 580/PUN/2015, A.Y. 2010-11 INDIA EQUITY FUND AND RELIANCE VISION FUND. THE COMMISSIONE R OF INCOME TAX (APPEALS) HELD THAT THE INVESTMENTS MADE IN TH E ABOVE SAID FUNDS ARE LIABLE TO BE TAXED AT THE MAXIMUM MARGINAL RATE OF TAX. IN SO FAR AS REMAINING AMOUNT, THE COMMISSIONER OF INCOME TAX (AP PEALS) ACCEPTED THE CONTENTIONS OF THE ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION. NOW, THE DEPARTMENT IS IN A PPEAL ASSAILING THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) D IRECTING THE ASSESSING OFFICER TO DELETE THE ADDITION ON ACCOUNT OF SURPLUS TAXED AS INCOME WHEN THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 11(5) OF THE ACT. 3. SHRI C.H. NANIWADEKAR APPEARING ON BEHALF OF THE ASSESS EE SUBMITTED AT THE OUTSET THAT THE COMMISSIONER OF INCOME TAX (APPEALS) IS FULLY JUSTIFIED IN RESTRICTING THE DISALLOWANCE TO THE EXTEN T OF INVESTMENT MADE IN MUTUAL FUNDS THAT IS NOT IN ACCORDANCE WITH THE PROVISIONS OF SECTION 11(5) OF THE ACT. THE LD. AR SUBMITTED THAT THE ASSESSING OFFICER HAS ERRED IN WITHDRAWING EXEMPTION U/S. 11 AND 12 O F THE ACT ON THE ENTIRE SURPLUS GENERATED BY THE ASSESS EE. THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE DECISION OF HONBLE KARNATAKA HIGH COURT RENDERED IN THE CASE OF COMMISSIONER OF INCOME TAX VS. FR. MULLERS CHAR ITABLE INSTITUTIONS REPORTED AS 363 ITR 230. THE LD. AR POINTED THAT ONE OF THE QUESTIONS OF LAW BEFORE THE HONBLE HIGH COURT FOR ADJ UDICATION WAS: (II) WHETHER THE TRIBUNAL IS CORRECT IN HOLDING TH AT WHEN A PART OF INCOME IS HELD TO BE VIOLATIVE OF THE PROVISIONS OF SECTIO N 13(1)(D) ONLY TO THE SAID EXTENT MAXIMUM MARGINAL RATE OF TAX IS TO BE LEVIED AND NOT FOR THE WHOLE INCOME MORE PARTICULARLY WHEN THERE IS VIOLATION OF THE PROVISIONS OF SECTION 11(5) OF THE ACT ? 4 ITA NO. 580/PUN/2015, A.Y. 2010-11 THE HONBLE HIGH COURT FOLLOWING THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF DIRECTOR OF INCO ME TAX (EXEMPTIONS) VS. SHETH MAFATLAL GAGALBHAI FOUNDATION TRUST RE PORTED AS 249 ITR 533 (BOM) ANSWERED THE QUESTION IN FAVOUR OF THE ASSESSEE. 4. ON THE OTHER HAND SHRI HEMANT KUMAR C. LUEVA REPRESENTING TH E DEPARTMENT VEHEMENTLY SUPPORTED THE ORDER OF ASSESSIN G OFFICER AND PRAYED FOR REVERSING THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS). THE LD. DR SUBMITTED THAT THE ASSESSEE HAS MAD E INVESTMENT IN MUTUAL FUNDS IN VIOLATION OF THE PROVISIONS OF SE CTION 11(5). THE ACTIVITIES CARRIED OUT BY THE ASSESSEE SHOW T HAT THE ASSESSEE IS NOT MERELY CARRYING CHARITABLE ACTIVITIES, THE ASSESSEE IS ALSO ENGAGED IN COMMERCIAL TRANSACTION, THEREFORE, THE BENEFIT OF EXEMPTIO N U/S. 11 AND 12 WAS RIGHTLY WITHDRAWN BY THE ASSESSING OFFICER. 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESEN TATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIE S BELOW. IT IS AN UNDISPUTED FACT THE ASSESSEE HAS MADE INVESTMENT TO THE TUNE OF ` 9,00,000/- IN MUTUAL FUNDS I.E. JP MORGAN INDIA EQUITY FUND ` 5,00,000/- AND RELIANCE VISION FUND ` 4,00,000/- IN VIOLATION OF THE PROVISIONS OF SECTION 11(5) OF THE ACT. THE ASSESSING OFFICER HAS DENIED THE BENEFIT OF EXEMPTION U/S. 11 AND 12 OF THE ACT ON THE ENTRE SURPLUS GENERATED BY THE ASSESSEE MERELY FOR THE REASON THAT THE ASSESSEE HAS MADE INVESTMENT IN FUNDS NOT APPROVED U/S. 10(23D) OF THE ACT. IT IS NO MORE RES INTEGRA THAT WHERE THE INVESTMENTS OR DEPOSITS AR E MADE BY CHARITABLE TRUST 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. IT IS ONLY THE INVESTMENTS OR DEPOSITS MADE IN VIOLATION 5 ITA NO. 580/PUN/2015, A.Y. 2010-11 OF PROVISIONS OF SECTION 11(5) OF THE ACT THAT WOULD ATTRACT MAXIMUM MARGINAL RATE OF TAX AS PER THE PROVISIONS OF LAW. 6. THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF COMM ISSIONER OF INCOME TAX VS. FR. MULLERS CHARITABLE INSTITUTIONS (SUPRA) WHILE DEALING WITH THE SIMILAR ISSUE HAS HELD : 11. WITH REGARD TO THE SECOND AND THE THIRD SUBSTA NTIAL QUESTIONS OF LAW ARE CONCERNED, READING OF SECTION 13(1)(D) OF THE A CT 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 LI ABLE TO BE TAXED AND THAT THE VIOLATION UNDER SECTION 13(1)(D) DOES NOT TANTA MOUNT TO DENIAL OF EXEMPTION UNDER SECTION 11 ON THE TOTAL INCOME OF T HE ASSESSEE . AN IDENTICAL QUESTION CAME BEFORE THE BOMBAY HIGH COUR T IN THE CASE REPORTED IN DIT (EXEMPTIONS) V. SHETH MAFATLAL GAGA LBHAI FOUNDATION TRUST [2001] 249 ITR 533 (BOM). THE QUESTION BEFORE THE BOMBAY HIGH COURT IS 'WHETHER VIOLATION OF SECTION 11(5) READ W ITH SECTION 13(1)(D) BY THE ASSESSEE-TRUST ATTRACTS THE MAXIMUM MARGINAL RA TE 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 MARG INAL 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 ENT IRE 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 PORT IONS, 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 A S IF IT IS THE INCOME OF AN ASSOCIATION OF PERSONS. THEREFORE, A P ROVISO 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 SHAL L 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 FALL IN THE NET OF TAX AS IF IT WAS THE INCOM E OF AN ASSOCIATION OF PERSONS . . . THE PHRASE 'RELEVANT I NCOME OR PART OF THE RELEVANT INCOME' IN THE PROVISO IS REQUIRED TO BE READ IN CONTRADISTINCTION TO THE PHRASE 'WHOLE INCOME' UNDE R SECTION 161(1A). THIS IS ONLY BY WAY OF COMPARISON. UNDER S ECTION 6 ITA NO. 580/PUN/2015, A.Y. 2010-11 161(1A), WHICH BEGINS WITH A NON OBSTANTE CLAUSE, I T IS PROVIDED THAT WHERE ANY INCOME IN RESPECT OF WHICH A PERSON IS LIABLE AS A REPRESENTATIVE ASSESSEE CONSISTS OF PROFITS OF BUSI NESS, THE TAX SHALL BE CHARGED ON THE WHOLE OF THE INCOME IN RESP ECT OF WHICH SUCH PERSON IS SO LIABLE AT THE MAXIMUM MARGINAL RA TE. THEREFORE, READING THE ABOVE TWO PHRASES SHOWS THAT THE LEGISL ATURE HAS CLEARLY INDICATED ITS MIND IN THE PROVISO TO SECTIO N 164(2) WHEN IT CATEGORICALLY REFERS TO FORFEITURE OF EXEMPTION FOR BREACH OF SECTION 13(1)(D), RESULTING IN LEVY OF MAXI MUM MARGINAL RA TE OF TAX ONLY TO THAT PART OF THE INCOME WHICH HAS FORFEITED EXEMPTI ON. IT DOES NOT REFER TO THE ENTIRE INCOME BEING SUBJECTED TO THE M AXIMUM MARGINAL RATE OF TAX. THIS INTERPRETATION IS ALSO S UPPORTED BY CIRCULAR NO. 387, DATED 6TH JULY, 1984 ([1985] 152 ITR (ST.) 1). VIDE THE SAID CIRCULAR, IT HAS BEEN LAID DOWN IN PA RAGRAPH 28.6 THAT WHERE A TRUST CONTRAVENES SECTION 13(1)(D), TH E 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 DIFF ERENCE BETWEEN ELIGIBILITY FOR EXEMPTION AND WITHDRAWAL OF EXEMPTI ON/FORFEITURE OF EXEMPTION FOR CONTRAVENTION OF THE PROVISIONS OF LA W. THESE TWO CONCEPTS ARE DIFFERENT. THEY HAVE DIFFERENT CONSEQU ENCES. IN THE CIRCUMSTANCES, THERE IS MERIT IN THE CONTENTION OF THE ASSESSEE THAT IN THE PRESENT CASE THE MAXIMUM MARGINAL RATE OF TA X WILL APPLY ONLY TO THE DIVIDEND INCOME FROM SHARES HELD IN CON TRAVENTION OF SECTION 13(1)(A) AND NOT TO THE ENTIRE INCOME. THER EFORE, 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 COU RT IN A JUDGMENT REPORTED IN DIT (EXEMPTION) V. AGRIM CHARA N FOUNDATION [2002] 253 ITR 593 (DELHI). READING OF THE PROVISO TO SECTION 142 IS VERY CLEAR THAT THE LEGISLATURE HAS CLEARLY CONT EMPLATED THAT IN A CASE, WHERE THE WHOLE OR PART OF THE RELEVANT INC OME 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 INC OME OR A PART OF THE RELEVANT INCOME AT THE MAXIMUM MARGINAL RATE. T HE SAID ANALOGY IS APPLICABLE TO THE FACTS OF THE PRESENT C ASE. 12. WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEWS E XPRESSED BY THE BOMBAY HIGH COURT AS WELL AS THE DELHI HIGH COURT F OR VIOLATING SECTION 11(5) OF THE ACT AND THE ENTIRE INCOME OF THE RESPO NDENT-TRUST CANNOT BE ASSESSED FOR THE TAX. [EMPHASIZED BY US] 7 ITA NO. 580/PUN/2015, A.Y. 2010-11 7. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (AP PEALS) HAS RIGHTLY FOLLOWED THE LAW LAID DOWN IN THE CASE OF COMMISSIONER OF INCOME TAX VS. FR. MULLERS CHARITABLE INSTITUTIONS (SUPRA). THE LD. DR COULD NEITHER REBUT THE FINDINGS OF FIRST APPELLATE AUTHORIT Y NOR ANY CONTRARY JUDGMENT WAS BROUGHT TO OUR NOTICE. THE IMP UGNED ORDER IS UPHELD AND THE APPEAL OF THE DEPARTMENT IS DISMISSED BEIN G DEVOID OF ANY MERIT. 8. IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 10 TH DAY OF MARCH, 2017. SD/- SD/- ( . . / R.K. PANDA) ( ! ' / VIKAS AWASTHY) #' / ACCOUNTANT MEMBER $ % #' / JUDICIAL MEMBER / PUNE; &# / DATED : 10 TH MARCH, 2017 RK *+,%-.#/#)- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ' () / THE CIT(A)-3, NASHIK 4. THE CIT (EXEMPTION), PUNE 5. !*+ %%,- , ,- , . ./0 , / DR, ITAT, B BENCH, PUNE. 6. + 1 23 / GUARD FILE. // ! % // TRUE COPY// #4 / BY ORDER, 5 6 / ASSISTANT REGISTRAR, ,- , / ITAT, PUNE