Income Tax Appellate Tribunal - Jaipur
Deputy Commissioner Of Income Tax (E), ... vs Central Academy Jodhpur Education ... on 9 September, 2020
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IN THE INCOME TAX APPELLATE TRIBUNAL,
JAIPUR BENCHES,"B" JAIPUR
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BEFORE: SHRI RAMESH C SHARMA, AM & SHRI SANDEEP GOSAIN, JM
vk;dj vihy la-@ITA No.790, 793 & 794/JP/2019
fu/kZkj.k o"kZ@Assessment Years : 2013-14, 2014-15 & 2015-16
The DCIT (Exemptions) cuke Central Academy Jodhpur Education
Circle-Jaipur Vs. Society,585A, Vaidh Ji Ka Chouraha,
Jaipur Pratap Nagar, Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAATC 8759 J
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal, CA
jktLo dh vksj ls@ Revenue by: Shri B.K. Gupta , CIT -LD. DR and
Smt. Runi Paul, Addl. CIT-DR
lquokbZ dh rkjh[k@ Date of Hearing : 01/09/2020
mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 09/09/2020
vkns'k@ ORDER
PER SANDEEP GOSAIN, J.M.
These three appeals have been filed by the Revenue against three different orders of ld.CIT (A)-3, Jaipur dated 06-03-2019 for the Assessment Years 2013-14, 2014-15 & 2015-16 passed u/s 143(3) of the Income Tax Act, 1961 (in short the ''Act''). Due to prevailing COVID-19 pandemic condition, the hearing of these appeals are concluded through 1 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur video conference. The grounds of appeal raised by the Revenue in the respective appeals are common which are as under:-
ITA No. 790, 793 & 794/JP/2013 - A.Y.2013-14 to 2015-16
1. On the facts and circumstances of the case and in law the ld.
CIT(A) erred in allowing the benefit of exemption u/s 11 & 12 of the Act to the assessee without appreciating the fact that assessee trust has provided undue benefit in lieu of salary and allowances to the persons specified u/s 13(3) of the Act and thus provisions of section 13(1)(c)(ii) r.w.s. 13(2)(g) of the Act were clearly attracted in this case.
2. On the facts and circumstances of the case and in law the ld. CIT(A) erred in allowing exemption u/s 11 of the Act to the assessee without appreciating the fact that assessee trust has made interest free advances against the provision of section 11(5) and thus provisions of section 13(1)(d) r.w.s. 13(2)(g) of the Act were clearly attracted in this case.
3. On the facts and circumstances of the case and in law the ld. CIT(A) erred in not applying the provisions of section 164(2) of the Act notwithstanding the fact that the benefit of exemption of section 11 was disallowed by the AO on account of violation of provisions of section 13(1)(c) and 13(1)(d) r.w.s. 13(2) & 13(3) of the Act.
4. On the facts and circumstances of the case and in law the ld. CIT(A) erred in allowing travelling expenses, staff expenses, staff welfare expenses, social welfare expenses and student welfare expenses to the extent of 95% without appreciating the fact that no proper bills & vouchers were maintained by assessee. 2.1 First of all, we take up the appeal of the Revenue in ITA No.790/JP/2013 for the Assessment Year 2013-14 for adjudication. 2.2 Brief facts of the case are that the assessee society registered under Rajasthan Societies Registration Act, 1958 and is also registered u/s 2 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur 12AA of the Act. The assessee society filed its return of income declaring Nil income after claiming exemption u/s 11 of the Act. 2.3 However, during the course of assessment proceeding, the AO observed that the society has violated the provisions of Section 11A of the Act. Therefore, interest @ 12% was considered to be diversion of income of the society and accordingly exemption u/s 11 and 12 of the Act was denied and surplus as per income and expenditure account alongwith various additions made in the assessment order were assessed under the head Income from Business & Profession and charged to tax u/s 164(2) of the Act at Maximum Margin Rate (MMR).
2.4 Aggrieved by the order of the AO, assessee preferred appeal before the ld. CIT(A) who after considering the case of both the parties deleted the disallowance out of salary and allowances but confirmed the addition of Rs. 45.00 lacs in respect of notional interest on advance of Rs. 3.75 crores given against the purchase of immovable properties. The ld. CIT(A) also directed the AO to reduce this amount from the application of income and directed that where there is violation of Section 13(1)(c) or 13(1)(d) of the Act only the relevant part of income was not exempt u/s 11 and 12 of the Act, shall be charged to tax at MMR.
3 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur 2.5 Now aggrieved by the order of the ld. CIT(A), the Revenue filed present appeals before us on the grounds mentioned hereinabove. 2.6 The only issue taken by the Department through its grounds No. 1 to 3 are whether there is a violation of section 13(1)(c) or 13(1)(d) of the Act and whether exemption u/s 11 and 12 of the Act is to be denied in toto or only the relevant part of the income is to be charged to tax u/s 11 in view of Section 164(2) of the Act.
2.7 During the course of hearing, the ld. DR relied on the order passed by the AO and reiterated the same arguments, supporting the order of the AO and also relied on the judgments cited before us which are as under:-
1.Director of Income Tax vs Bharat Diamond Bourse (2013) 126 Taxman 365 (SC).
2.Director of Income Tax (Exemption) vs Charanjiv Charitable Trust 92014) 43 Taxmann.com 300 (Delhi High Cour)
3. CIT-II, Lucknow vs Audh Educational Society (2011) 13 Taxmann.com 235 (Allahabad High Court) 4. CIT vs Gurukul Ghatkeswar Trust (2011) 13 Taxmann.com 68 (Andhra Pradesh High Court)
5. Hyderabad Stock Exchange Ltd vs ADIT(Exemptions) (2011) 10 taxmann.com132 (ITAT Hyderabad Bench 'B') 4 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur
6. DDIT (Exemptions)-1, Chennai vs India Cements Educational Society (2016) 67 Taxmann.com 236 (ITAT Chennai Bench 'C')
7. Little Flower Educational Society vs ITO, Company Ward-1, Coimbatore (2016) 71 taxman.com 153, ITAT Chennai Bench'A'
8. Free Trade Union Multipurpose Project Trust vs ITO (Exemptions)-1(3), Mumbai (2018) 95 taxmann.com 297, ITAT Mumabi Bench 'F'
9. Little Tradition vs DDIT (Exemption), Trust Circle-
IV,New Delhi (2009) 119 ITD 127 (ITAT Delhi Bench 'B')
10. LD. CIT vs Fr. Mullers Charitable Institutions (2014) 44 Taxmann.com 275 [Kerala High Court - relied upon by ld. CIT(A)] 2.8 On the contrary, the ld.AR appearing on behalf of the assessee relied on the orders of the ld. CIT(A) and reiterated the same arguments as were raised by him before us and also relied on the written submissions submitted before us which is reproduced below.
''Facts:-
''1. The assessee society is registered under Rajasthan Societies Registration Act 1958 vide Registration No.840/Jaipur/2006-07dt. 09.03.2007. It is also registered u/s 12AA of the Income tax Act by CIT-I, Jaipur vide order dt. 20.11.2007. It is solely engaged in imparting education and running 4 schools namely Central Academy School at Shastri Nagar, Ratanada, Paota and CHB at Jodhpur. The assessee filed its return declaring nil income on 30.09.2013after claiming exemption u/s 11.
2. During the assessment proceedings AO observed that the society has paid salary and allowance to three persons covered u/s 13(3) of Rs.27,33,600/-
out of which he considered Rs.16,21,600/- as excessive and has given advance 5 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur of Rs.3.75 crores to various parties stated to be against purchase of immovable properties but has not given justification for the same and therefore, there is violation of section 11(5), hence, interest @ 12% on such advance, i.e. Rs.45 lacs is diversion of the income of society. Accordingly, exemption u/s 11 & 12 is denied and the surplus as per the Income & Expenditure A/c along with various additions made in the assessment order is assessed under the head income from business & profession and charged to tax u/s 164(2) at MMR.
3. The Ld. CIT(A) after considering the submission of assessee deleted the disallowance out of salary & allowance (Pg 5-16 of CIT(A) order) but confirmed the addition of Rs.45 lacs in respect of notional interest on advance of Rs.3.75 crores given against purchase of immovable properties but directed the AO to reduce this amount from the application of income (Pg 19-21 of CIT(A) order). He further held at Pg 3-10 of the assessment order that u/s 164(2) where there is violation of section 13(1)(c) or 13(1)(d), only the relevant part of income not exempt u/s 11 or 12 shall be charged to tax at MMR and therefore, directed the AO to compute the income after allowing exemption u/s 11.
4. Against the order of Ld. CIT(A) directing to allow exemption u/s 11, the department has filed the appeal by taking the 3 grounds stated above and therefore, since all the 3 grounds relate to one issue as to the applicability of section 164(2) vis-à-vis denial of exemption u/s 11, all these grounds are dealt together.
Submission:-
1. The only issue in the grounds taken by the department is where there is a violation of section 13(1)(c) or 13(1)(d), whether the exemption u/s 11 or 12 is to be denied in toto or whether the only relevant part of the income is charged to be tax u/s 11 of the Act in view of section 164(2) of the Act.
2. From the factsstated above it can be noted that the AO has denied the exemption u/s 11 of the Act on account of alleged unreasonable payments of salary and allowances to the persons covered u/s 13(3), thereby violating section 13(1)(c) and investment of funds in the mode other than that specified u/s 11(5), thereby violating section 13(1)(b). It may be noted that the salary/ allowance paid to the persons specified u/s 13(3) is reasonable as held by CIT(A) considering the qualification and the duties performed by these persons as discussed in Para 5.2 & 5.3 of the order.The disallowance so deleted by the Ld. CIT(A) as such has not been challenged by the department.
Thus, there is no violation of section 13(1)(c). In respect of advances given to the various parties, the same is against the purchase of immovable properties which is one of the mode specified u/s 11(5). However, Ld. CIT(A) at Para 7.2 & 7.3 of the order has held that the assessee has not filed any agreement for purchase of land in respect of these advances and therefore, directed that 6 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur notional disallowance of interest of Rs.45 lacs should be reduced out of application of income. This finding is not challenged by the department. Thus, the order of Ld. CIT(A) on these two issues have attained finality and therefore, there is no violation of section 13(1)(c) or 13(1)(d) of the Act and therefore, theLd. CIT(A) has rightly held that exemption u/s 11 and 12 denied by AO has is uncalled for.
3. Without prejudice to above, even if it is presumed that there is a violation under section 13, the entire surplus cannot be charged to tax but only that part of the income which is not exempt u/s 11 by virtue of section 13(1)(c) or 13(1)(d) shall be charged to tax at MMR. In this connection it is relevant to consider section 164 which deals with the charge of the tax where the shares of the beneficiary are unknown. Sec. 164(2) deals with the charge of tax on the income of the trust which is derived by it from the property held wholly for charitable or religious purpose. The proviso to this section which is relevant for the present purpose reads as under:-
"Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate".
From the plain reading of this proviso, it is evident that where the whole or any part of the relevant income is not exempt u/s 11 or 12 because of the provisions of the section 13(1)(c) or 13(1)(d), tax is chargeable on the relevant income or part of the relevant income at the maximum marginal rate (MMR). Therefore, in case there is violation of sec.13, the entire income of the trust is not liable to tax at MMR but only the relevant part of the income which violates sec.13 attracts the MMR. In the present case, even if it is held that there is violation of sec.13, then only the amount of benefit given to the persons specified u/s 13(3) out of the income of the trust is chargeable to tax at MMR. Hence, the action of AO in taxing the surplus at maximum marginal rate without considering the provisions of section 11 & 12 is bad in law. 2.9 The ld.AR of the assessee relied on the following decisions:-
1. DIT vs Working Women's Forum 235 Taxman 516 (SC).
2. CIT vs Fr. Mullers Charitable Institution 227 Taxman 369 (SC) 7 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur
3. DIT(E) vs Sheth Mafatlal Gagalbhjai Foundation Trust , 249 ITR 533 (Bombay High Court)
4. DCIT(E) vs Mahatma Gandhi Charitable Society for Education and Research (ITA No. 359/JP/2019 date of order 23-01-2020 ITAT Jaipur Bench)
5. Global Institute of Technology Society vs DCIT(E) (ITA No. 1066/JP/2018 date of order 5-11-2018 ITAT Jaipur Bench)
6. M/s. Rajkala Charitable Trust vs ACIT (ITA No.140/JP/2015 date of order 28-04-2016 ITAT Jaipur Bench)
7. CIT vs Rajasthan & Gujarat Foundation , 402 ITR 441 (SC) 2.10 We have heard the ld. counsels for both the parties and we have perused the materials available on record, deliberated and through every judgement cited by the parties as well as the orders passed by the Revenue authorities. From the facts of the present case, we noticed that the AO had denied exemption u/s 11 of the Act to the assessee on the ground of unreasonable payments of salary and allowances to the persons covered u/s 13(3) of the Act thereby violating section 13(1)© and investment of funds in the mode other hand that specified u/s 11(5), thereby violating section 13(1)(b) of the Act.
8 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur 2.11 According to the assessee , salary / allowances paid to the person specified u/s 13(3) of the Act are reasonable considering the qualification and duties performed by these persons as discussed by the ld. CIT(A) in para 5.2 and 5.3 of his order. As far as the advance given by the assessee to various parties, the same was against purchase of immovable property and it was held by the ld. CIT(A) in para 7.2 and 7.3 of his order that since the assessee has not filed any agreement for purchase of land in respect of these advances, therefore, he directed that notional disallowance of interest of Rs. 45.00 lacs should be reduced out of application of income. Now the question before us for consideration is that if there is a violation u/s 13 of the Act then the entire surplus is to be charged to tax or only a part of income which is not exempt u/s 11 by virtue of Section13(1)(c) or 13(1)(d) of the Act shall be charged to tax at MMR.
2.12 In order to decide this controversy, considering the facts of the present case, it is relevant to consider section 164 of the Act which deals with charge of tax and where the share of beneficiary is unknown. Section 164(2) of the Act deals with the charge of tax on the income of the trust which is derived by it from the property held wholly for charitable or 9 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur religious purposes. The proviso to this section which is relevant for deciding the present case reads as under:-
"Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate".
From the plain reading of this proviso, it is evident that where the whole or any part of the relevant income is not exempt u/s 11 or 12 because of the provisions of the section 13(1)(c) or 13(1)(d), tax is chargeable on the relevant income or part of the relevant income at the maximum marginal rate (MMR). Therefore, in case there is violation of sec.13 of the Act then the entire income of the trust is not liable to tax at MMR, but only the relevant part of the income which violates sec.13 attracts the MMR. In the present case, even if it is held that there is violation of sec.13, then only the amount of benefit given to the persons specified u/s 13(3) out of the income of the trust is chargeable to tax at MMR. Hence, the action of AO in taxing the surplus at maximum marginal rate without considering the provisions of section 11 & 12 is bad in law. For reaching the above conclusion, we also draw the strength from the following decisions. 10 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur (1) DCIT Vs. Working Women's Forum (2015) 235 Taxman 516 (SC) :-Assessee was a trust registered under section 12AA and was providing employment to poor women, assisting weaker sections of the society for personal development, maintaining destitute homes, rehabilitation of victim of national calamities, etc. It invested a sum of Rs. 20,000 in the share of MIOT Hospitals Ltd. AO denied the exemption u/s 11 and 12 on ground that since section 13(1)(d) recognizes investment only in specified assets, failure to invest in such specified business would disentitle the assessee for exemption. CIT(A) allowed the assessee's appeals that the entirety of the income of the assessee could not be denied of exemption. On appeal, referring to the decision of the Bombay High Court in DIT(Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust, the Tribunal rejected the Revenue's appeals. High Court held that in DIT (Exemptions) v. Sheth Mafatlal GagalbhaiFoundation Trust, it was held by Bombay High Court that violation of section 11(5),read with section 13(1)(d) by the assessee would result in the maximum marginal rate of tax only on the dividend income on shares, which was not the recognized mode of investment and that the assessee would not be vested with marginal rate of tax on the entire income. Therefore, the income other than dividend income had to be taxed only to the extent to which the violation was found by the AO. Respectfully following the said decision, High Court confirmed the order of the Tribunal and dismissed the revenue's appeal. Special leave petition filed against impugned order was dismissed.
(2) CIT vs. Fr. Mullers Charitable Institutions (2014) 227 Taxman 369 (SC) :-High Court by impugned order held that in case of charitable trust, it is only income from investment or deposit which had been made in violation of section 11(5) that was liable to be taxed and that violation u/s 13(1)(d) does not tantamount to denial of exemption u/s 11 on total income of assessee trust. Special leave petition filed against impugned order was to be dismissed.
(3) CIT V. Fr. Mullers Charitable Institutions (2014) 363 ITR 230 (Kar.) (HC) :- In this case the facts as narrated in para 8 of the order reads as under:-
"The records clearly disclose that the respondent- assessee is administering number of institutions and it had obtained exemption under section 11 and 12 of the Act. The assessee filed Nil return of income for the aforesaid assessment years. On the basis of the tax evasion petition, an enquiry was conducted and during the course of assessment proceedings, the Assessing Officer noticed that the respondent-trust advanced a sum of Rs. 30,00,000/- during the 11 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur assessment year 2000-01 and advanced another sum of Rs.50,00,000/-
during the assessment year 2001-02 to M/s.
JanamadhyamaPrakashana Limited, which was running a Kannada daily known as "Janavahini. In the balance sheet of the respondent- trust, the said amounts were mentioned under the head known as "loans and advances". The Charitable Institution, advancing loan amount to M/s JanamadhyamaPrakashana Limited and obtaining exemption in payment of income tax is in violation of Section 11(5) of the Act. As per Section 13(1)(a), income of the trust shall not be entitled for exemption under sections 11and 12 of the Act. Accordingly, the Assessing Officer assessed the advance made to M/s. JanamadhyamaPrakashana Limited for tax. Being aggrieved by the said assessment order, the respondent assessee preferred an appeal before the Commissioner of Income Tax. The Commissioner of Income Tax, after verification of the records of the Assessing Officer found that the order passed by the Assessing Officer is erroneous and prejudicial to the interest of the revenue. Accordingly, he initiated the proceedings under section 263 of the Act. The Commissioner was of the opinion that in view of violation of Section 11(5), the entire income of the respondent-trust ought to have been assessed and they are not entitled for any exemption under Sections 11 and 12 of the Act and revised the order passed by the Assessing Officer. The said order was questioned before the Tribunal. The Tribunal allowed the appeals and set aside the order passed by the Commissioner of Income Tax under section 263 of the Act. Being aggrieved by the said order, the revenue preferred these two appeals".
On these facts the Hon'ble High Court in para 11 held as under:-
"With regard to second and third substantial questions of law are concerned, reading of section 13(l)(d) of 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 violation under section 13(l)(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 (2001) 249 ITR 533 (Bom) (supra). The question before the Bombay High Court is "Whether violation of Section 11(5) r/w Section 13(l)(d) by the assessee-trust attracts 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(l)(d), 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. Relevant paragraph reads as under:12 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur Sec. 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 taxable, 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 AOP. Therefore, a proviso was inserted by the Finance Act, 1984 w.e.f 1st April 1985, under which in cases where the whole or any part of the relevant income is not exempt under s. 11 or s. 12 because of the contravention of s.13 (l)(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 fail in the net of tax as if it was the income of an AOP. 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 s.161(1A). This is only by way of comparison. Under s. 161(1A), 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 s. 164(2) when it categorically refers to forfeiture of exemption for breach of s,13(l)(d), resulting in levy of maximum marginal rate of tax only to that part of the income which has for forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This interpretation is also supported by Circular No.387, dt. 6th July, 1984. Vide the said Circular, it has been laid down in para 28,6 that where a trust contravenes s,13(l)(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 is merit in the contention of the assessee that in the present case the maximum marginal rate of tax will apply only to the divided income from shares held in contravention of s. 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 (2002) 253 ITR 593 (Supra).Reading of the proviso to Section 142 is very clear that the legislature has clearlycontemplated 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".13 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur
4. CIT Vs. Orpat Charitable Trust (2015) 230 Taxman 66 (Guj.) (HC) :-Assessee filed it return of income for different assessment years. AOs examined the case of assessee and denied exemption to assessee on respective amounts in connection with deposits made by it in contravention of sec.11(5) read with sec.13(1). CIT(A) directed AO to restrict disallowance of exemption u/s11 in respect of deposits in contravention of sec.11(5) r.w.s. 13(1)(d) as against denial of exemption on entire income by AO. ITAT upheld the order of CIT(A) and held that exemption could be denied only to extent of investment contravening provisions of sec. 11(5)and not entire amount. Held, CIT(A) very clearly observed that provisions of section 11(1)(a) are very clear and provide that income derived from property held under trust should not be included in income to extent it was applied for charitable or religious purposes(expenses incurred during the year) or accumulated/set apart to be applied for that purpose in future out of 75% to which restriction u/s. 11(5) applied. ITAThad relied upon its own decision on similar issue rendered in ITA No. 644 to646/Rjt/2003 dated 22.12.2003. High Court in complete agreement with reasoning adopted by CIT(A) as well as Tribunal. In case of Fr. Mullers Charitable Institutions, Karnataka High Court held that sec.13(1)(d) clears that it was only the income from such investment or deposit which had been made in violation of sec.11(5) that was liable to be taxed and violation u/s 13(1)(d) does not result in denial of exemption u/s 11 to total income of assessee. Where whole or part of relevant income was not exempted u/s 11 by virtue of violation of sec.13(1)(d),tax should be levied on relevant income or part of relevant income at maximum marginal rate. Revenue's appeal dismissed. (5) DIT(E) Vs. Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533 (Bom.) (HC) :-In this case at para 6 of the order it was held as under:-
"Sec. 164 does not create a charge on the income of a discretionary trust. The word 'charge' in s. 164 means 'levy'. Sec. 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 taxable, 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 AOP. Therefore, a proviso was inserted by the Finance Act, 1984 w.e.f. 1st April, 1985, under which in cases where the whole or any part of the relevant income is not exempt under s. 11 or s. 12 because of the contravention of s. 13(1)(d), then 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 fall in the net of tax as if it was the income of an AOP. Sec. 11(5) lays down various modes or forms in which a trust is required to deploy its funds. Sec. 13(1) lays down cases in which s. 11 shall not apply.14 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur Under s. 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 30th Nov., 1983, shall result in forfeiture of exemption. By virtue of the proviso (iia) it has been laid down that any asset which does not form part of permissible investment under s. 11(5) shall be disposed of within one year from the end of the previous year in which such asset is acquired or by 31st March, 1993, whichever is later. In the present case, the assessee was required to dispose of the shares under the said proviso by 31st March, 1993, see the judgment of this Court in IT Appeal No. 81 of 1999, dt, 14th Sept., 2000 [reported as Director of IT (Exemptions) vs. ShardabenBhagubhai Mafatlal Public Charitable Trust (2000) 164 CTR (Bom) 97]. The shares have not been disposed of even during the assessment year in question. Now, under s. 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 s. 11(4A), tax shall be charged on so much of the relevant income as is not exempt under s. 11. Sec. 164(2) was reintroduced by the Direct Tax Laws (Amendment) Act, 1989, w.e.f. 1st April, 1989. Earlier it was omitted by the Direct Tax Laws (Amendment) Act, 1987. However, the legislature inserted a proviso by the Finance Act, 1984, w.e.f. 1st April, 1985. By the said proviso, it is, inter alia, laid down that where whole or part of the relevant income is not exempt by virtue of s. 13(1)(d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase 'relevant income or part of the relevant income' is required to be read in contradistinction to the phrase 'whole income' under s. 161(1A). This is only by way of comparison. Under s. 161(1A), which begins which 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 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 s. 164(2) when it categorically refers to forfeiture of exemption for breach of s. 13(1)(d), resulting in levy of maximum 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 maximum marginal rate of tax. This interpretation of ours is also supported by Circular No. 387, dt. 6th July, 1984. Vide the said circular, it has been laid down in para 28.6 that where a trust contravenes s. 13(1)(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 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 15 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur to note that although the legislature withdrew s. 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 s. 164(2) which has been on the statute book right from 1st April 1985. The said proviso was inserted by the Finance Act, 1984. The proviso specifically refers to violation of s. 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 Ltd. and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act."
(6) DCIT Vs. Mahatma Gandhi Charitable Society for Education & Research ITA No.359/JP/19 dt. 23.01.2020 (Jaipur) (Trib.) :-Hon'ble ITAT in Para 3.4.1 held as under:-
"3.4.1 Similarly, we are also of the view that the even if it is held that assessee has violated the provisions of section 13 of the Act, even then the exemption u/s 11 or 12 of the Act cannot be denied nor the surplus as such can be charged to tax at Maximum Marginal Rate. Even otherwise, the provision of Section 164 specifically deals with the charge of tax where the shares of the beneficiary is unknown. Section 164(2) deals with charge of tax on the income of the trust which is derived by it from the property held wholly for charitable or religious purposes. From the plain reading of this proviso, it is evident that where the whole or any part of the relevant income is not exempt u/s 11 or 12 because of the provisions of the Section 13(1)(c) or 13(1)(d) then tax is chargeable on the relevant income or part of the relevant income at the maximum marginal rate (MMR). Thus in that eventuality, even in case there is violation of Sec 13, the entire income of the trust is not liable to be taxed at MMR but only the relevant part of the income which violates sec. 13 attracts the MMR. We also found support from the decision in the case of DCIT vs Working Women's Form (2015) 235 Taxman 516 and CIT vs Fr.Mullers Charitable Institutions (2014) 227 Taxman 369 (SC). No new facts or circumstances have been brought before us in order to controvert or rebut the findings so recorded by the ld. CIT(A). Therefore, we find no reason to interfere in the order of the Ld. CIT(A). Hence, the ground Nos. 1 and 2 of the Revenue are dismissed."
(7) Global Institute of Technology Society Vs. DCIT(E) ITA No. 1066/JP/2018order dt. 05.11.2018 (Jaipur) (Trib.) :-The Hon'ble ITAT held that even if any part of the income or property which is found to be used or applied for the benefit of the persons specified to in sub- section (3) of section 13 of the Act, the benefit of Sections 11 and 12 is not available only to that extent and the claim of the assessee cannot be denied in toto. Accordingly, it is held that the denial of exemption to the 16 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur assessee u/s 11 and 12 of the Act is not justified except to the extent where the specific part of the income or property is found to be used or applied for the benefit of specified persons.
(8) M/s Rajkala Charitable Trust Vs. ACIT ITA No.140/JP/15 dt. 28.04.2016 (Jaipur) (Trib.) :- In this case it was held that where there is violation of section 13, the entire income of the trust is not chargeable to tax at maximum marginal rate and it is only that income which has violated section 13 which shall suffer maximum marginal rate as per proviso to section 164(2) of the Act. Further, the appellant has submitted that the amount of Rs.20,00,000/- with interest of Rs.2,16,000/- i.e. Rs.22,16,000/- was received back by the trust and the interest income of Rs.2,16,000/- was offered in the return for AY 2012-13 and there is no income generated on amount of Rs. 20 lacs advanced to M/s Rajakala Industries Limited during the year. There is nothing on record to controvert the said submissions of the appellant. Thus, there is no income during the year which can be brought to tax at maximum marginal rate in the hands of the trust in a scenario where it is held that there is violation of provisions of section 13. In view of the same, we don't think it would be relevant to examine whether the appellant trust has violated the provisions of section 13 of the Act as the same has become infructious in the facts and circumstances of the present case. The AO is accordingly, directed to allow exemption to the appellant trust u/s 11 and the addition made by the AO and confirmed by CIT(A) is hereby deleted.'' The ld. DR also relied on the case laws mentioned herein above. However. After going through the contents and pari materia in those cases, we found that none of those cases are applicable to the facts of the present case as most of the cases are not dealing with the provisions of Section 164(2) of the Act. The case law mentioned at Serial No. 6 i.e. DDIT (Exemptions)-1, Chennai vs India Cements Educational Society (2016) 67 Taxmann.com 236 (ITAT Chennai Bench 'C') discusses the applicability of Section 164(2) of the Act where exemption u/s 11 is denied due to applicability of Section 13. In that case, although it 17 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur was held that where there is violation of Section 13(1)© of the Act, the assessee is not entitled to exemption u/s 11 and therefore, the income from capital gain on sale of land is to be assessed u/s 164(2) of the Act at MMR without allowing the benefit of Section 112 which provides for reduced rate of taxation as such income has become non-exempt consequent to contravention of Section 13(1)© or 13(1)(d ) of the Act. Thus the decision cited by the ld. DR also supports the case of the assessee where it was held that if there is a contravention of Section 13(1)© or 13(1)(d) of the Act, that part of income which is in violation of this Section attracts the tax at MMR and not that the entire surplus is charged to tax at MMR. The ld. DR also relied on the decision of Hon'ble Allahabad High in the case of CIT (Exemptions) vs Army Wives Welfare Association, Lucknow (2020) 116 Taxmann.com 215 (All.). However, in the said decision, the applicability of Section 164(2) has not been discussed but only reference has been made to this Section, whereas the provision of Section 164(2) lays down that where relevant income or part of the income is not exempt u/s 11 due to violation of Section 13(1)(c ) or 13(1)(d) of the Act, then in that eventuality tax shall be charged on the relevant income or part of the relevant income at MMR and not that entire income of the trust would be charged to tax at MMR. 18 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur Therefore, this decision in the case of CIT (Exemptions) vs Army Wives Welfare Association, Lucknow (supra) without considering the proviso to Section 164(2) is not applicable to the facts of the present case. The ld.AR had relied on various decisions of Hon'ble High Courts and Hon'ble Supreme Court which have already been discussed by us in the above paragraphs wherein it was unanimously held that once there is a violation of Section 13 of the Act then entire income of the trust is not chargeable to tax at MMR and its only that part of income which has violated Section 13 shall suffer MMR as per proviso to Section 164(2) of the Act.
2.13 No new facts and circumstances have been brought before us by the ld. DR in order to controvert or rebut the lawful findings recorded by the ld. CIT(A), Therefore, we see no reason to interfere or deviate from the findings so recorded by the ld. CIT(A). Thus Ground No. 1 to 3 of the Revenue are dismissed.
3.1 In Ground No. 4, the Department is aggrieved that the ld. CIT(A) has erred in allowing travelling expenses, staff expenses, staff welfare expenses, social welfare expenses and student welfare expenses to the extent of 95% without appreciating the fact that no proper bills & vouchers were maintained by assessee.
19ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur 3.2 Brief facts of the case are that the AO during the course of assessment proceedings observed that the assessee had incurred expenditure of Rs. 1,77,12,406/- under the above heads but they are not subject to verification as the kachha bills and vouchers are not complete. Therefore, the AO disallowed 20% of such expenses which comes to Rs. 35,42,481/- under the above heads.
3.3 In first appeal, the ld. CIT(A) had restricted the disallowance to Rs. 8,85,620/- i.e. 5% of the total expenses holding that the disallowance made by the AO is excessive and without basis.
3.4 Aggrieved by the order of the ld. CIT(A) the Department preferred an appeal before us and the ld. DR relied on the order of the AO and submitted that AO had rightly made the addition of Rs. 35,42,481/-. 3.5 On the contrary, the ld.AR appearing on behalf of the assessee relied on the order of the ld. CIT(A) and reiterated the same arguments as were raised by him before us and also relied on the written submissions submitted before us which is reproduced below.
''1. AO in the assessment order observed that assessee has incurred expenditure of Rs.1,77,12,406/- under the above heads but they are not subject to verification as the kaccha bills and vouchers are not complete, He accordingly disallowed 20% of these expenses, i.e. Rs.35,42,481/- (1,02,812 + 8,66,915 + 25,72,754).
20 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur
2. The Ld. CIT(A) restricted the disallowance to Rs.8,85,620/-, being 5% of the total expenses holding that disallowance made by AO is excessive and without basis. He further held that such disallowance is to be reduced from application of income.
3. It is submitted that during the assessment proceedings assessee had filed complete ledger account of these expenses along with bills and vouchers and the affidavit of temporary staff to whom salary has been paid but debited under the head social welfare ad student welfare expenses. In the vouchers complete details of the nature of expenses are mentioned. In social and staff welfare expenses the assessee has debited mainly the salary of the temporary employees in respect of which no PF is deducted. In support of the same affidavits of few employees were filed. They could not be produced as they were working in different schools of the society. The Ld. CIT(A) has therefore, considering the details mentioned in the vouchers and the facts and circumstances of the case has rightly restricted the disallowance out of these expenses at 5%. The same be upheld by dismissing the ground of department.'' 3.6 We have heard the ld. counsels for both the parties and we have also perused the materials available on record and the orders of the lower authorities. From the records, we noticed that during the course of assessment proceeding, the assessee had filed complete ledger account of these expenses alongwith bills and vouchers and the affidavit of temporary staff to whom salary has been paid but debited under the head social welfare and student welfare expenses. In the vouchers, complete details of the nature of expenses are mentioned. In social and staff welfare expenses the assessee had debited mainly the salary of the temporary employees in respect of which no PF was deducted. Since the assessee could not produce some of the documents of the employees as they were 21 ITA No.790/JP/2019 DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur working in different schools of the society. Therefore, the ld. CIT(A) considering the details mentioned in the vouchers and facts & circumstances of the had rightly restricted the disallowance out of these expenses at 5%. In this view of the matter, we see no reason to interfere with the order of the ld. CIT(A) which is confirmed. Thus Ground No. 4 of the Revenue is dismissed.
4.1 During the course of hearing, the Bench observed that the Department has raised the similar grounds in ITA No. 793 & 794/JP/2019 for the Assessment Year 2014-15 and 2015-16 as raised in ITA No. 790/JP/2019 for the Assessment Year 2013-14. We further noted that the facts and circumstances in respect of the departmental appeals for the Assessment Years 2014-15 & 2015-16 are same and it is not imperative to repeat the facts of the case. Since the departmental appeal in ITA No. 790/JP/2016 has been dismissed by us, therefore, the decision taken therein shall apply mutatis mutandis in the appeals of the Department for the Assessment Year 2014-15& 2015-16. Thus all the appeals of the Department are dismissed.
22 ITA No.790/JP/2019
DCIT (E), Circle - Jaipur vs Central Academy Jodhpur Education Society, Jaipur 5.0 In the result, the appeals of the Revenue are dismissed with no order as to cost.
Order pronounced in the open court on 09/09/2020.
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