Entire income of trust can’t be taxed for violation of 12A exemption conditions-SC dismisses SLP

Entire income of trust cannot be taxed for violation of Section 12A exemption conditions. Supreme Court dismisses SLP of Department. Denial of exemption u/s 11 should be limited only to amount diverted

ABCAUS Case Law Citation
ABCAUS 3527 (2021) (07) SC

Important case law relied referred:
CIT vs. Fr. Mullers Charitable Institution
IT(E) vs. Audyogik Shikshan Mandal

In the instant case, the assessee was a charitable trust registered u/s 12A of the Income Tax Act, 1961 (the Act).

The assessee filed its return of income (ITR) declaring total income at Rs. NIL in the status of Association of Persons (Trust). The return was processed under Section 143(1) of the Act.

Thereafter, the case was selected for scrutiny by issuing   the notice under Section 143(2) of the Act. The assessment was completed u/s 143(3) of the Act by accepting the return of income as the assessed income.

However, the case was reopened under Section 147 of the Act by issuing a notice under Section 148 of the Act. The   reassessment proceedings were completed determining the total income at Rs. NIL after making a disallowance on account of the expenditure made for the purpose of a passenger car in the name of the trustee.

Later, CIT(Exemption) invoked his revisional powers under Section 263 of the Act.

The CIT(E) was of the view that in accordance with the provisions of Section 13(1)(c)(ii) read with Section 13(2) of the Act if any part of the income or any property of the Trust or Institution is directly or indirectly used or applied for the benefit of any specified person referred to in sub-section (3) of Section13 of the Act, then the entire income of the assessee would not be eligible for exemption under Section 11 of the Act 1961.

The CIT(E) noted that the Assessing Officer had disallowed the expenditure on account of the accumulation under Section 11(1)(a) of the Act only in respect of the said car.

Therefore, he held that the assessment had been made without application of mind and the assessment order was erroneous and prejudicial to the interest of the Revenue.

As a result, the CIT(E) directed the Assessing Officer to invoke the provision of Section 13(1)(c) and disallow the entire   accumulation made by the trust.

However, the Tribunal following the Hon’ble High Court’s judgment held that for violating Section 11(5) of the Act, the entire income of the Trust cannot be assessed for the tax. It was held that for violation of Section 13(2)(b) read with Section 13(3) denial of exemption u/s 11 should   be   limited   only   to   amount   which was diverted.

The order of the Tribunal was contested by the Revenue in Hon’ble High Court but without any success. The Hon’ble High Court upheld the order of the Tribunal.

Lastly the Department challenged the order of the Hon’ble High Court before the Hon’ble Supreme Court by filing a Petition for Special Leave to Appeal (SLP). However, the Hon’ble Supreme Court decline to interfere   with the order of the High Court and dismissed the SLP.

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