MUMBAI, : THE ISSUE is -
Whether exemption benefit available to a charitable trust u/s 11 can be
denied only to the extent of quantum of diversion of income, but not
entire income of such trust. YES IS THE VERDICT.
Facts of the case
The
assessee is a trust registered u/s 12AA and engaged in the activity of
running educational institution. For the relevant A.Y, the assessee had
filed its return declaring Nil income. During the
course of assessment,
the AO noted that the asssessee had purchased one Skoda car valued at
Rs.11.38 lakhs in the name of one of its Trustee Mr. Sandeep Pachpande
i.e. person specified u/s 13(3). Accordingly, the AO passed an order u/s
143(3) denying the benefit of exemption to the entire income u/s 11,
thus bringing to tax its entire income of Rs.5.14 Crores in view of
Section 13(2)(b) r/w/s 13(3).
The matter went before
Tribunal, where there was a difference of opinion amongst two members
constituting the bench, and inter alia, it was referred to the third
member, who held that denial of exemption u/s 11 should be limited to
the amount which had been diverted to purchase the car in the name of
prohibited person u/s 13. In view of the same, the Regular Bench of the
Tribunal denied the benefit of Section 11 only to the extent the income
was diverted/ used to purchase a car in the name of trustee.
High Court held that,
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is is found that the the Tribunal has placed reliance upon the decision
of the Karnataka High Court in Fr. Mullers Charitable Institutions,
after having noted that the decision of Supreme Court in Bharat Diamond
Bourse does not very clearly specify whether it is only the income
diverted as loans to a person specified u/s 13, which was denied the
benefit of Section 11 or the entire income was denied the benefit of
exemption u/s 11. A close reading of the decision of Apex Court in
Bharat Diamond Bourse, does not extend the benefit of Section 11 to the
Trust. However, it is not clear whether it is only to the extent of
income diverted or the entire income. This, for the reason that the
dispute between the parties therein was not as arising in this case. The
basic dispute in the present case was whether the objects of the Trust
were charitable and whether the person to whom the loan was given was a
person covered by Section 13. The decision of the Karnartaka High Court
in Fr. Mullers Charitable Institutions, dealt with the very issue herein
viz. the denial of exemption of entire income u/s 11 or is the denial
restricted only to the quantum of diverted funds. This, as it is hit by
Section 13. The Court held that the benefit of Section 11 will not be
available only in respect of the diverted income;
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moreover, on a plain reading of Sections 11 and 13, it is clear that
the legislature did not contemplate the denial the benefit of Section 11
to the entire income of the Trust. If the interpretation sought to be
advanced by the Revenue is accepted, it would lead to grave injustice as
any mistake minor and/or misdemnour involving a small amount takes
place by the Trust, the consequence would be denial of the benefit of
exemption to the entire income otherwise admittedly used for charitable
purposes. It is pointed out that the decision of Karnataka High Court in
Fr. Mullers Charitable Institutions, was carried by the Revenue to the
Supreme Court and its SLP was dismissed. In the said view, the view
taken by the Tribunal is in accord with the view of Karnataka High Court
in Fr. Mullers Charitable Institutions, Delhi High Court in Agrim
Charan Foundation and this Court in Sheth Mafatlal Gagalbahai Foundation
Trust. Hence, the proposed question does not give rise to any
substantial question of law.