Violation of conditions u/s 13(1)(c) & denial of exemption – Supreme Court directs High Court to admit appeal
In a recent judgment, Hon’ble Supreme Court has directed Hon’ble Bombay High Court to admit appeal on the substantial question of law as to whether violation of conditions under Section 13(1)(c) would result in denial of exemption u/s 11 of Income Tax Act, 1961.
ABCAUS Case Law Citation:
4341 (2024) (12) abcaus.in SC
In the instant case, the petition was filed by the Income Tax Department challenging the legality and validity of the order passed by the High Court by which the High Court declined to record any findings as regards the second substantial question of law formulated in the Memo of the Appeal.
Before the Hon’ble High Court, the Revenue had appealed the order of the ITAT and the following two substantial questions of law were formulated for the consideration of the Hon’ble High Court:
(i) Whether on the facts and in the circumstances of the case, the Hon’ble ITAT was right in deleting the addition made on account of cash donation collected outside the books of accounts, ignoring the presumption cast against the assessee under Section 292C read with Section 132(4A) to explain plethora of evidence seized during the search from residence of Principal Trustee of assessee society?
(ii) whether on the facts and in the circumstances of the case and in law, the Hon’ble ITAT was right holding that violation of conditions under Section 13(l)(c) would not result in denial of exemption on the whole income and denial be restricted to the income in violation of provisions of Section 13(l)(c) relying on the decision of Bombay High Court in the case of Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom.) whereas in that case Hon’ble High Court had held that income in violation of Section 13(l)(d) shall be subjected to maximum marginal rate and remainder income shall be chargeable at normal rate of taxes. As such, interpretation of Mafatlal decision is in direct contravention of the earlier decisions of Bombay High Court in the case of Shardaben Bhagubai Mafatlal Public Charitable Trust (247 ITR 1) and also of the Hon’ble Apex Court in the case of Director of Income Tax Vs. Bharat Diamond Bourse, 2002?
The Hon’ble Supreme Court observed that the High Court seemed to have declined to admit the appeal on the second substantial question of law as proposed by the Revenue, on the premise that the same is covered by Finance Act, 1984, Circular No.387 dated 6-7-1984 issued by the Income Tax Department wherein the following was stated,
“It may be noted that new sub-section (1A) inserted in section 161 of the Income-tax Act, which provides for taxation of the entire income received by trusts at the maximum marginal rate is applicable only in the case of private trusts having profits and gains of business. So far as the public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11(4A) of the Income-tax Act. As the maximum marginal rate of tax under the new proviso to section 164(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the Income-tax Act in regard to investment pattern or use of the trust property for the benefit of the settlor, etc., contained in section 13(1)(c) and (d) of that Act, the said rate will not apply to the business profits of such trusts which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of section 13(1)(c) or (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 provisions.”
The High Court relying on the said Circular observed that where such a trust contravenes the provisions of Section 13(1)(c) or (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 provisions.
The case of the Revenue was that the High Court was not correct in saying that the second question of law as proposed is covered by Finance Act, 1984 CBDT Circular No. 387 dated 6.7.1984.
The Hon’ble High Court opined that as the Income Tax Appeal had already been admitted on one substantial question of law, it will be in fitness of things if the High Court also looks into the second question of law as proposed by the Revenue, more particularly when Revenue vociferously contends that Circular No. 387 dated 6.7.1984 is not applicable.
Accordingly, the Hon’ble Supreme Court directed that the High Court to formulate the second question of law as proposed by the Revenue as one of the substantial questions of law and answer the same in accordance with law along with the question of law on which the income tax appeal has already been admitted. It will be for the High Court to take the final call as regards the merits of the said substantial questions of law.
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