Citation- A.P. State Civil Supplies Corporation Ltd. V. Income-tax Officer
High Court- Telangana
ITA No: 325,326, 327 and 328 OF 2007, 79, 80, 81, 82 and 83 of 2008
Assessment Year: 1994-95 to 2001-02
Date of Order- November 28, 2024
Brief Facts:
The assessee was a charitable institution, engaged in distributing essential commodities under a state government subsidy scheme.
During the relevant assessment years, the assessee invested its funds in the shares of joint venture companies.
The Assessing Officer (AO) denied exemption under Section 11, citing that the investment violated Section 13(1)(d) since it was not in prescribed forms under Section 11(5), consequently taxing the entire income of the assessee.
The Income Tax Appellate Tribunal (ITAT) upheld the denial of exemption under Section 11 and ruled that the assessee’s entire income was taxable.
The assessee challenged the Tribunal’s decision, arguing that only the income derived from the violative investment should be taxed, not its entire income.
Observations of the Court:
After examining the provisions of Sections 11 and 13 of the Income-tax Act, the High Court made the following key observations:
The court held that the investment in joint ventures beyond 30-11-1983 was indeed a violation of Section 13(1)(d), making the assessee ineligible for exemption under Section 11.
Referring to precedents (Sheth Mafatlal Gagalbahai Foundation Trust, Agrim Charan Foundation, and Fr. Mullers Charitable Institutions), the court ruled that the entire income of the assessee should not be taxed—only the income directly derived from the violative investment is taxable.
The High Court emphasized that Section 13(1)(d) does not override Section 11 entirely but restricts the exemption only to the extent of income from non-compliant investments.
The High Court partly allowed the appeal, modifying the Tribunal’s ruling. While confirming the violation of Section 13(1)(d), it clarified that only the income from such investments is taxable, not the entire income of the charitable institution. The case reinforces that breaches of investment rules affect taxability only in proportion to the specific violative income.
Editorial Note: With effect from assessment year 2023-24, it has been clarified that the disallowance will be restricted only to the extent of such violative investments. Therefore, the controversy on whether the charity loses exemption on entire income or only to the extent of income from investment is now put to rest
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