The benefit of exemption under section 11 cannot be denied to the entire income of the charitable trust but should be restricted only to the extent of income diverted in breach of Section 13 of the Act
In The Commissioner of Income Tax (Exemptions) vs. Audyogik Shikshan Mandal (2019) 101 taxmann.com 247 the Bombay High Court held that 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. If the interpretation sought to be advanced by the Revenue is accepted, it would lead to grave injustice as any mistake minor and/or misdemeanor 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.
The Court noted that the judgement of the Supreme Court in Director of Income Tax v/s. Bharat Diamond Bourse 259 ITR 280 does not make it clear whether the denial of exemption under section 11 of the Income-tax Act is only to the extent of income diverted or the entire income.
It was also noted that the Karnataka High Court in CIT v/s Fr. Mullers Charitable Institutions 366 ITR 378 had held that denial of exemption under Section 11 of the Act should be limited to the amount which had been diverted to purchase the car in the name of prohibited person under Section 13 of the Act. The ITAT had followed this and denied the benefit of Section 11 of the Act only to the extent the income is diverted/ used to purchase a car in the name of the trustee i.e. in view of Section 13(2)(b) read with Section 13(3) of the Act.
The decision of the Karnataka High Court in Fr. Mullers Charitable Institutions (supra) was carried by the Revenue to the Supreme Court and its SLP was dismissed on 19th September, 2014 (CIT v/s. Fr. Mullers Charitable Institutions  227 Taxman 369 (SC).
The law laid down in Audyogik Shikshan Mandal has been followed in Commissioner Of Income Tax- (Exemption) vs. Mukund Bhavan Trust (INCOME TAX APPEAL NO. 683 OF 2018) and it was held that the benefit of exemption cannot be denied to the entire income of the trust but should be restricted only to the extent of income diverted in breach of Section 13 of the Act.