Trust funds went to a trustee. Does the trust lose exemption on all its income or only that amount?
Only that amount. Denial of exemption under s.11 is confined to the sum actually diverted in breach of s.13; s.13 withdraws the benefit in respect of the offending income or property, not for the trust as a whole.
Decided by the High Court (Bombay High Court — Akil Kureshi and M.S. Sanklecha JJ.) on 2018-12-18, reported as [2019] 101 taxmann.com 247 (Bombay) / [2019] 261 Taxman 12 (Bombay); IT Appeal No. 764 of 2016. It bears on section 11, section 13, section 13(2)(b), section 13(3), section 12AA, section 260A of the Income Tax Act 1961, in Charitable Trusts & Exemption and Capital Gains Exemptions matters.
Officers commonly treat a single interested-person transaction — here cars bought with trust funds and registered in trustees' names — as forfeiting the entire year's exemption, which converts a small breach into a demand on the whole surplus. Parliament has since adopted the partial-denial view prospectively, amending s.13(1)(c) so that only the part applied in violation is included in total income and inserting s.115BBI to tax it at thirty per cent. For years before that the argument still has to be fought on case law.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee is a trust running an educational institution, registered under s.12AA. For assessment year 2004-05 it filed a return on 29 October 2004 declaring nil income. In the assessment the Assessing Officer found that on 29 March 2004 the trust had bought a Skoda car worth Rs. 11.38 lakhs in the name of one of its trustees, Mr. Sandeep Pachpande, a person specified in s.13(3). By order of 23 December 2006 under s.143(3) he denied exemption under s.11 to the whole of the trust's income and brought its entire income of Rs. 5.14 crores to tax, invoking s.13(2)(b) read with s.13(3). The Commissioner (Appeals) dismissed the trust's appeal on 28 September 2007. Before the Tribunal the two members differed, and the question — whether denial of the benefit of s.11 is confined to the amount deemed used for the trustees' benefit or extends to the whole income — went to a third member, who on 3 November 2014 held the denial confined to the diverted amount. The Revenue appealed to the High Court under s.260A against the Tribunal's order of 25 February 2015.
The Revenue's appeal was dismissed, but on the footing that its question did not give rise to any substantial question of law and was therefore not entertained (paras 8 and 9). The Court reasoned before reaching that conclusion: it held that on a plain reading of ss.11 and 13 the legislature did not contemplate denial of the benefit of s.11 to the entire income of a trust, so that where funds are diverted in breach of s.13 the denial is confined to the amount diverted (para 7). It found the Tribunal's view to be in accord with the Karnataka High Court in Fr. Mullers Charitable Institutions, the Delhi High Court in Agrim Charan Foundation and its own earlier decision in Sheth Mafatlal Gagalbahai Foundation Trust (para 8). Because the appeal was disposed of as raising no substantial question of law, this is a decision that declines to disturb a settled line rather than one that resolves a contested question; the Third Member order of the Pune Tribunal stands affirmed.
The Revenue's whole case rested on the Supreme Court's decision in Bharat Diamond Bourse (para 6). The Court read that decision closely and held that although it does not extend the benefit of s.11 to the trust before it, it is not clear whether the denial there was of the diverted income alone or of the entire income, because the dispute in that case was different — it was about whether the objects of the trust were charitable (para 7). The Karnataka High Court in Fr. Mullers Charitable Institutions had dealt with this very question and held that the benefit of s.11 is unavailable only in respect of the diverted income, and that decision had itself relied on the Bombay High Court in Sheth Mafatlal Gagalbahai Foundation Trust and the Delhi High Court in Agrim Charan Foundation; the Revenue's special leave petition against Fr. Mullers had been dismissed on 19 September 2014 (para 7). Beyond authority, the Court reasoned from the text and from consequence: on a plain reading of ss.11 and 13 the legislature did not contemplate denying the benefit of s.11 to the whole income, and the Revenue's construction would work grave injustice, since a minor mistake involving a small amount would cost the trust exemption on all of its income admittedly used for charitable purposes (para 7). Since the Tribunal's view accorded with three High Courts, no substantial question of law arose (para 8).
on a plain reading of Sections 11 and 13 of the Act, it is clear that the legislature did not contemplate the denial the benefit of Section 11 of the Act to the entire income of the Trust
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Handle my notice → Ask a CA on WhatsAppOnly that amount. Denial of exemption under s.11 is confined to the sum actually diverted in breach of s.13; s.13 withdraws the benefit in respect of the offending income or property, not for the trust as a whole. This was decided by the High Court (Bombay High Court — Akil Kureshi and M.S. Sanklecha JJ.) and bears on section 11, section 13, section 13(2)(b), section 13(3), section 12AA, section 260A of the Income Tax Act 1961. It is reported as [2019] 101 taxmann.com 247 (Bombay) / [2019] 261 Taxman 12 (Bombay); IT Appeal No. 764 of 2016. Officers commonly treat a single interested-person transaction — here cars bought with trust funds and registered in trustees' names — as forfeiting the entire year's exemption, which converts a small breach into a demand on the whole surplus. Parliament has since adopted the partial-denial view prospectively, amending s.13(1)(c) so that only the part applied in violation is included in total income and inserting s.115BBI to tax it at thirty per cent. For years before that the argument still has to be fought on case law. If it applies to you, the first step is this: Quantify the diverted amount precisely and offer it, so the dispute is about the balance rather than about whether there was a breach at all.
The assessee is a trust running an educational institution, registered under s.12AA. For assessment year 2004-05 it filed a return on 29 October 2004 declaring nil income. In the assessment the Assessing Officer found that on 29 March 2004 the trust had bought a Skoda car worth Rs. 11.38 lakhs in the name of one of its trustees, Mr. Sandeep Pachpande, a person specified in s.13(3). By order of 23 December 2006 under s.143(3) he denied exemption under s.11 to the whole of the trust's income and brought its entire income of Rs. 5.14 crores to tax, invoking s.13(2)(b) read with s.13(3). The Commissioner (Appeals) dismissed the trust's appeal on 28 September 2007. Before the Tribunal the two members differed, and the question — whether denial of the benefit of s.11 is confined to the amount deemed used for the trustees' benefit or extends to the whole income — went to a third member, who on 3 November 2014 held the denial confined to the diverted amount. The Revenue appealed to the High Court under s.260A against the Tribunal's order of 25 February 2015. The matter was decided on 2018-12-18 by the High Court (Bombay High Court — Akil Kureshi and M.S. Sanklecha JJ.). On those facts the High Court held as follows. The Revenue's appeal was dismissed, but on the footing that its question did not give rise to any substantial question of law and was therefore not entertained (paras 8 and 9). The Court reasoned before reaching that conclusion: it held that on a plain reading of ss.11 and 13 the legislature did not contemplate denial of the benefit of s.11 to the entire income of a trust, so that where funds are diverted in breach of s.13 the denial is confined to the amount diverted (para 7). It found the Tribunal's view to be in accord with the Karnataka High Court in Fr. Mullers Charitable Institutions, the Delhi High Court in Agrim Charan Foundation and its own earlier decision in Sheth Mafatlal Gagalbahai Foundation Trust (para 8). Because the appeal was disposed of as raising no substantial question of law, this is a decision that declines to disturb a settled line rather than one that resolves a contested question; the Third Member order of the Pune Tribunal stands affirmed.
The Revenue's whole case rested on the Supreme Court's decision in Bharat Diamond Bourse (para 6). The Court read that decision closely and held that although it does not extend the benefit of s.11 to the trust before it, it is not clear whether the denial there was of the diverted income alone or of the entire income, because the dispute in that case was different — it was about whether the objects of the trust were charitable (para 7). The Karnataka High Court in Fr. Mullers Charitable Institutions had dealt with this very question and held that the benefit of s.11 is unavailable only in respect of the diverted income, and that decision had itself relied on the Bombay High Court in Sheth Mafatlal Gagalbahai Foundation Trust and the Delhi High Court in Agrim Charan Foundation; the Revenue's special leave petition against Fr. Mullers had been dismissed on 19 September 2014 (para 7). Beyond authority, the Court reasoned from the text and from consequence: on a plain reading of ss.11 and 13 the legislature did not contemplate denying the benefit of s.11 to the whole income, and the Revenue's construction would work grave injustice, since a minor mistake involving a small amount would cost the trust exemption on all of its income admittedly used for charitable purposes (para 7). Since the Tribunal's view accorded with three High Courts, no substantial question of law arose (para 8). In the words reproduced by the source cited on this page: "on a plain reading of Sections 11 and 13 of the Act, it is clear that the legislature did not contemplate the denial the benefit of Section 11 of the Act to the entire income of the Trust" The decision followed or applied DIT (Exemption) v. Sheth Mafatlal Gagalbahai Foundation Trust [2001] 114 Taxman 19 / 249 ITR 533 (Bom.); IT (Exemption) v. Agrim Charan Foundation [2001] 119 Taxman 569 / [2002] 253 ITR 593 (Delhi); Affirmed: Audyogik Shikshan Mandal v. ITO [2015] 60 taxmann.com 456 / [2016] 156 ITD 1 (Pune - Trib.)(TM); Considered: CIT v. Fr. Mullers Charitable Institutions (Karn.), special leave petition dismissed 19 September 2014; Considered: DIT v. Bharat Diamond Bourse [2003] 259 ITR 280 / 126 Taxman 365 (SC).
It was decided by the High Court on 2018-12-18 and is reported as [2019] 101 taxmann.com 247 (Bombay) / [2019] 261 Taxman 12 (Bombay); IT Appeal No. 764 of 2016. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 11, section 13, section 13(2)(b), section 13(3), section 12AA, section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Revenue's appeal was dismissed, but on the footing that its question did not give rise to any substantial question of law and was therefore not entertained (paras 8 and 9). The Court reasoned before reaching that conclusion: it held that on a plain reading of ss.11 and 13 the legislature did not contemplate denial of the benefit of s.11 to the entire income of a trust, so that where funds are diverted in breach of s.13 the denial is confined to the amount diverted (para 7). It found the Tribunal's view to be in accord with the Karnataka High Court in Fr. Mullers Charitable Institutions, the Delhi High Court in Agrim Charan Foundation and its own earlier decision in Sheth Mafatlal Gagalbahai Foundation Trust (para 8). Because the appeal was disposed of as raising no substantial question of law, this is a decision that declines to disturb a settled line rather than one that resolves a contested question; the Third Member order of the Pune Tribunal stands affirmed. It arises in Charitable Trusts & Exemption and Capital Gains Exemptions matters, on section 11, section 13, section 13(2)(b), section 13(3), section 12AA, section 260A of the Income Tax Act 1961, and was decided by Bombay High Court — Akil Kureshi and M.S. Sanklecha JJ.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For AY 2023-24 onwards rely on the amended text of s.13(1)(c) itself and price in the s.115BBI charge at thirty per cent. For earlier years, build the reply on Fr. Mullers Charitable Institutions and Working Women's Forum, and be ready for the officer to cite the contrary line.
Still good law. Followed since. In Dy. CIT (Exemptions) v. Mukund Bhavan Trust [2025] 179 taxmann.com 634 (Pune - Trib.), decided 8 October 2025 for assessment years 2017-18 and 2018-19, the Tribunal followed this decision at para 9 and dismissed the Revenue's appeals; the same order records at para 8 that the Bombay High Court had dismissed the Revenue's appeal in ITA No. 683 of 2018 on the footing that no substantial question of law arose, the issue being covered by this judgment. Parliament has since adopted the same view prospectively: the Finance Act 2022 amended s.13(1)(c) so that only that part of the income applied in violation is to be included in total income, and inserted s.115BBI taxing such specified income at thirty per cent. For years before that the position remains contested, because the Supreme Court in DIT v. Bharat Diamond Bourse (2003) 259 ITR 280 and the Delhi and Kerala High Courts (Charanjiv Charitable Trust; Agappa Child Centre) denied the entire exemption — although this Court read Bharat Diamond Bourse as not deciding the point. That finding was checked against a published source, which is linked on this page, on 2026-08-25. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Know what this judgment is before you cite it. The Revenue's appeal was dismissed under s.260A on the ground that the proposed question gave rise to no substantial question of law, because the Tribunal's view accorded with the Karnataka, Delhi and Bombay High Courts. The Court did reason — it read ss.11 and 13 plainly, held that the legislature did not contemplate denying exemption on the whole income, and pointed out that the Revenue's construction would cost a trust its entire exemption for a small lapse — but the disposition is a refusal to entertain, not a resolution of the conflict. The facts are now settled: a Skoda car worth Rs. 11.38 lakhs bought on 29 March 2004 in the name of a trustee, Mr. Sandeep Pachpande, against which the Assessing Officer taxed the trust's whole income of Rs. 5.14 crores for assessment year 2004-05. The clause invoked was s.13(2)(b) read with s.13(3); s.13(1)(c) appears nowhere in the judgment, so the earlier uncertainty on that point is resolved. Cite [2019] 101 taxmann.com 247 / [2019] 261 Taxman 12 (Bombay), IT Appeal No. 764 of 2016, decided 18 December 2018 by Akil Kureshi and M.S. Sanklecha JJ. Two attributions in the earlier entry were wrong and have been removed: the Court did not follow a Karnataka High Court decision reported at 44 taxmann.com 275, and it does not mention CIT v. Working Women's Forum at all. Because the appeal was dismissed as raising no substantial question of law, the judgment does not resolve the conflict with the Delhi and Kerala decisions that deny exemption on the entire income; it reads Bharat Diamond Bourse as leaving the question open rather than deciding it against the trust. The judgment as printed contains a slip in the sentence quoted here, reading 'the denial the benefit' where a word is missing. The report carries no citator banner, so any special leave petition against this decision is unknown. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Revenue's appeal was dismissed, but on the footing that its question did not give rise to any substantial question of law and was therefore not entertained (paras 8 and 9). The Court reasoned before reaching that conclusion: it held that on a plain reading of ss.11 and 13 the legislature did not contemplate denial of the benefit of s.11 to the entire income of a trust, so that where funds are diverted in breach of s.13 the denial is confined to the amount diverted (para 7). It found the Tribunal's view to be in accord with the Karnataka High Court in Fr. Mullers Charitable Institutions, the Delhi High Court in Agrim Charan Foundation and its own earlier decision in Sheth Mafatlal Gagalbahai Foundation Trust (para 8). Because the appeal was disposed of as raising no substantial question of law, this is a decision that declines to disturb a settled line rather than one that resolves a contested question; the Third Member order of the Pune Tribunal stands affirmed.
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