By TIOL News Service

CHENNAI, JUNE 13, 2013: THE issues before the Bench are - Whether the assessee-trust loses entitlement to exemption u/s 11 merely because it placed some funds with chit funds and Whether such participation by the assessee can be construed as investments or utilisation of surplus funds. And the verdict goes in favour of the Trust.

Facts of the case

The assessee, a Trust registered u/s 12AA, runs educational institutions. It claimed exemption u/s 11. The AO noted that the assessee had placed Rs. 2,08,456/- and Rs. 96,230/- with chit funds during the relevant previous year but they were not approved investments u/s 11(5). Hence it resulted in violation of the nature specified in Section 13(1)(d). The AO held that assessee was not eligible for exemption u/s 11 and the excess of income over expenditure was accordingly assessed to tax. The CIT(A) confirmed the view taken by the A.O. that whole of the income of the assessee had to be taxed at maximum marginal rate.

On Appeal before the Tribunal the AR submitted that lower authorities completely mistook the subscriptions paid by the assessee to the two chit companies to be investments. According to him, neither were such subscriptions investments nor they were deposits. The A.R. further submitted that the amount placed by the assessee with the chit funds could not be considered as deposit also. The DR submitted that assessee had made investment in two chit companies. Though the amounts could be small when compared to the total earnings of the assessee, there was clear violation of Section 11(5).

Having heard the parties, the Tribunal held that,

++ it is clear that the intention of the Legislature is to regulate the manner of investment of the money left with an assessee-Trust after utilization for charitable purpose. Subscription to chit funds itself will be utilization of the funds of the assessee since right of the assessee is only to prize a chit or participate in a draw of lots. It is not an investment or deposit of a money which is available as surplus with assessee;

++ the lower authorities fell in error in concluding that such subscriptions were investments which violated the modes specified under Section 11(5). The question of denial of exemption u/s 11 would arise only if investments were there. The assessee could not have been denied exemption claimed by it u/s 11, for a reason that it had subscribed to the chit funds. There is no case for the Revenue that any of the Trustees, Managers, contributors of relatives of such persons were having interest in the two chit companies.

(See 2013-TIOL-495-ITAT-MAD)