Case BriefsSupreme Court

Supreme Court of India: Noting the donations being made to the Trust to be ‘bogus donations’ Bench of Uday Umesh Lalit and Ajay Rastogi, JJ., cancelled the registration of the Trust under Section 12AA and 80G of the Income Tax Act, 1963.

What transpired the present matter?

Present appeal challenged the decision of Calcutta High Court setting aside the order passed by Commissioner of Income Tax (Exemption) cancelling the registration of respondent Trust under Section 12AA of the Income Tax Act, 1961 and another order passed by the Income Tax Appellate Tribunal dismissing appeals therefrom.

Background

Trust was registered under Section 12AA of the Act and was also accorded approval under Section 80G (vi) of the Act.

It was stated that in a survey conducted on an entity named School of Human Genetics and Population Health, Kolkata under Section 133A of the Act, it was prima facie observed that the Trust was not carrying out its activities in accordance with the objects of the Trust. Hence a show-cause notice was issued by the CIT.

Hence CIT invoked the provisions of Section 12AA(3) of the Income Tax Act and cancelled the registration under Section 12AA of the Act. This resulted in cancellation of the approval granted to the Trust under Section 80G of the Act.

When the matter reached High Court, Trust submitted that it had received donations from various donors and the Trust was under no obligation to verify the source of the funds of the donor or whether those funds were acquired by performance of any unlawful activity.

Further, it was also added that the funds were applied for the purposes of trust and that there was no evidence to suggest that those funds were applied for any illegal or immoral purposes or that the Trust was a namesake.

High Court had allowed the appeal and set aside the order of cancellation of the registration of the Trust while directing for the restoration of its registration.

Analysis, Law and Decision

Bench noted that as per the answers to the questionnaire put forward to the Managing Trustee, it depicted the extent of misuse of the status enjoyed by the Trust by virtue of registration under Section 12AA of the Act.

The answers also showed that the donations were received by way of cheques out of which substantial money was ploughed back or returned to the donors in cash. As per the facts, the said donations were ‘bogus’ donations and that the registration conferred upon the Trust under Section 12AA and 80G of the Act was completely being misused by the Trust.

Hence, the authorities were right in cancelling the registration under Section 12AA and 80G of the Act.

Opinion on High Court’s decision

Supreme Court held that High Court erred in entertaining the appeal and it did not even attempt to deal with the answers to the questions and whether the conclusions drawn by the CIT and the Tribunal were in any way incorrect or invalid.

Conclusion

While setting aside the decision under challenge, Court allowed the present appeal and restored the order passed by the CIT and the Tribunal. [Commissioner of Income Tax (Exemptions) v. Batanagar Education and Research Trust, 2021 SCC OnLine SC 529, decided on 2-08-2021]


Advocates before the Court:

Pet. Advocate(s)   ANIL KATIYAR
Resp. Advocate(s)   ABHIJIT SENGUPTA[caveat]
Case BriefsSupreme Court

Supreme Court: In an important ruling on taxation law, the bench of Sanjay Kishan Kaul and Hrishikesh Roy*, JJ has held that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments.

Issue

Whether Section 14A of the Income Tax Act, 1961, enables the Department to make disallowance on expenditure incurred for earning tax free income in cases where assessees like the present appellant, do not maintain separate accounts for the investments and other expenditures incurred for earning the tax-free income?

What does Section 14A state?

In Section 14, the various incomes are classified under Salaries, Income from house property, Profit & Gains of business or profession, Capital Gains & Income from other sources.

The Section 14A relates to expenditure incurred in relation to income which are not includable in Total Income and which are exempted from tax. No taxes are therefore levied on such exempted income. The Section 14A had been incorporated in the Income Tax Act to ensure that expenditure incurred in generating such tax exempted income is not allowed as a deduction while calculating total income for the concerned assessee.

Legislative history

Section 14A was introduced to the Income Tax Act by the Finance Act, 2001 with retrospective effect from 01.04.1962, in aftermath of judgment in the case of Rajasthan State Warehousing Corporation Vs. CIT, (2000) 3 SCC 126. The said Section provided for disallowance of expenditure incurred by the assessee in relation to income, which does not form part of their total income.

“As such if the assessee incurs any expenditure for earning tax free income such as interest paid for funds borrowed, for investment in any business which earns tax free income, the assessee is disentitled to deduction of such interest or other expenditure.”

Although the provision was introduced retrospectively from 01.04.1962, the retrospective effect was neutralized by a proviso later introduced by the Finance Act, 2002 with effect from 11.05.2001 whereunder, re-assessment, rectification of assessment was prohibited for any assessment year, up-to the assessment year 2000-2001, when the proviso was introduced, without making any disallowance under Section 14A. The earlier assessments were therefore permitted to attain finality. As such the disallowance under Section 14A was intended to cover pending assessments and for the assessment years commencing from 2001-2002.

Facts

  • In the case at hand, the Court was concerned with disallowances made under Section 14A for assessment years commencing from 2001-2002 onwards or for pending assessments.
  • The assessees are scheduled banks and in course of their banking business, they also engage in the business of investments in bonds, securities and shares which earn the assessees, interests from such securities and bonds as also dividend income on investments in shares of companies and from units of UTI etc. which are tax free.
  • None of the assessee banks amongst the appellants, maintained separate accounts for the investments made in bonds, securities and shares wherefrom the tax-free income is earned so that disallowances could be limited to the actual expenditure incurred by the assessee.
  • In absence of separate accounts for investment which earned tax free income, the Assessing Officer made proportionate disallowance of interest attributable to the funds invested to earn tax free income by referring to the average cost of deposit for the relevant year.
  • The CIT (A) had concurred with the view taken by the Assessing Officer.
  • The ITAT in Assessee’s appeal against CIT(A) considered the absence of separate identifiable funds utilized by assessee for making investments in tax free bonds and shares but found that assessee bank is having indivisible business and considering their nature of business, the investments made in tax free bonds and in shares would therefore be in nature of stock in trade. The ITAT then noticed that assessee bank is having surplus funds and reserves from which investments can be made. Accordingly, it accepted the assessee’s case that investments were not made out of interest or cost bearing funds alone and held that disallowance under Section 14A is not warranted, in absence of clear identity of funds.
  • The decision of the ITAT was reversed by the High Court.

Analysis

The Supreme Court took note of the fact that the CIT(A) and the High Court had based their decision on the fact that the assessee had not kept their interest free funds in separate account and as such had purchased the bonds/shares from mixed account. This is how a proportionate amount of the interest paid on the borrowings/deposits, was considered to have been incurred to earn the tax-free income on bonds/shares and such proportionate amount was disallowed applying Section 14A of the Act.

It, however, explained that

“In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure.”

The Court, hence, held that if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax- free securities then in such cases, disallowance under Section 14A cannot be made.

[South Indian Bank v. CIT,  2021 SCC OnLine SC 692, decided on 09.09.2021]


*Judgment by: Justice Hrishikesh Roy

Know Thy Judge | Justice Hrishikesh Roy

Appearances before the Court by:

For Appellants: Senior Advocates S. Ganesh, S.K. Bagaria, Jehangir Mistri and Joseph Markose,

For Respondent/Revenue: ASG Vikramjit Banerjee and Senior Advocate Arijit Prasad

Case BriefsHigh Courts

Kerala High Court: N. Nagaresh, J. disposed of the writ petition seeking to consider and dispose of appeals by the appellant prior to coercive action by the Income Tax authorities.

In the present case, the petitioner-Bank, being a Service Co-operative Bank registered under the Kerala Co-operative Societies Act, 1969 were issued with income tax assessment orders for the years 2009-2010, 2010-11, 2016-17 and 2015-16. The petitioner bank had filed an appeal being aggrieved by the assessment orders. During the pendency of the appeals, the Income-tax Officer had issued notices under Section 221(1) of the Income Tax Act, 1961 seeking recovery of the amount.

Sri O.D. Sivadas counsel representing the petitioner-Bank, by placing reliance on the judgments passed by the present High Court, submitted that the appellate authority should consider the appeals preferred by the Banks on a priority basis and until the final disposition of the case, any coercive action shall be avoided. The counsel relied on Mavilayi Service Co-operative bank Ltd. v. Income Tax Officer, 2013 SCC OnLine Ker 838 wherein it directed that the Commissioner of Income Tax (Appeals) consider and dispose of statutory appeals filed by the appellant therein at the earliest.

High Court upon hearing the pleadings of the petitioner decided on disposing of the present case in a similar manner. Hence, the court directed that the further steps of coercive action shall not be resorted to against the petitioner.[Annamanada Service Co-operative Bank Ltd. v CIT, 2019 SCC OnLine Ker 3011 , decided on 17-09-2019]

Case BriefsHigh Courts

Punjab and Haryana High Court: This order disposed of five appeals filed by revenue under Section 260-A of Income Tax Act, 1961 before a Division Bench of Ajay Kumar Mittal and Avneesh Jhingan, JJ., against the order passed by Income Tax Appellate Tribunal where the Tribunal had quashed the order of the Commissioner of Income Tax (CIT), canceling the registration of assessee-Trust.

Facts of the case are that the assessee i.e. Improvement Trust, was a Trust constituted under the Punjab Town Improvement Act, 1922 and was granted registration under Section 12-AA of the Act. The definition of ‘charitable purpose’ under Section 2(15) of the Act was amended by Finance Act, 2008 after which a show cause notice was issued to the assessee-Trust to show cause as to why registration should not be cancelled. CIT had held that the activities of the assessee were not for charitable purpose within the amended provision of Section 2(15) of the Act and thus its registration was cancelled. Hence, the appeal was filed before the Tribunal but the same was dismissed.

Assessee contended that though they were earning some profits the same were used for public utilities. Whereas Revenue submitted that assessee’s activities do not fall under charitable purposes but of a developer and builder.

High Court was of the view that CIT was not correct in canceling the registration under Section 12-AA of the Act as the funds were used for charitable purpose. It was found that the selling of the plots was merely an ancillary activity carried out for the improvement of the area and the same cannot be equated with carrying of the business of colonizer or developer. Further, there was no provision that the activities of charitable purposes have to be undertaken only by donations or by financial aid of the government. The Court favoured the assessee-Trust and stated the activities of Trust to be of charitable purposes. Therefore, the appeals were dismissed. [CIT v. Improvement Trust, 2018 SCC OnLine P&H 3861, dated 01-08-2018]