Exemption otherwise available to charitable trust u/s 11 can be denied to extent of its diverted income as per Sec 13 and not entire income:Bombay HC

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Exemption otherwise available to charitable trust u/s 11 can be denied

Question before the High court was

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.

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,

++ 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;

++ 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.

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