Madras H.C : The Tribunal was right in dismissing the appeal of the Revenue, when the assessee-trust made the investment in MIOT Hospitals Ltd. consciously and thereby contravened the provisions of section 11(5)/ 13(1)(d)

High Court Of Madras

CIT vs. Working Women’s Forum

Section : 13, 11

Assessment Years : 2001-02 To 2003-04

Mrs. Chitra Venkataraman And T.S. Sivagnanam, JJ.

TC (Appeal) Nos. 100 To 201 Of 2009

February 3, 2014

JUDGMENT

Mrs. Chitra Venkataraman, J. – “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the denial of exemption should only be to the extent of the income which is violative of section 13(1)(d) and not the total denial of exemption under section 11 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in dismissing the appeal of the Revenue, when the assessee-trust made the investment in MIOT Hospitals Ltd. consciously and thereby contravened the provisions of section 11(5)/ 13(1)(d) of the Act ?”

are the only questions of law raised in these tax case appeals preferred by the Revenue relating to the assessment years 2001-02, 2002-03 and 2003-04 considering the common order of the Tribunal.

2. The assessee is a trust registered under section 12AA of the Income-tax Act, 1961, and is providing employment to poor women, assisting weaker sections of the society for personal development, maintaining destitute homes, rehabilitation of victim of national calamities, etc. Evidently, the assessee had invested a sum of Rs. 20,000 in the share of MIOT Hospitals Ltd. Since section 13(1)(d) recognises investment only in specified assets. Failure to invest in such specified business would disentitle the assessee for exemption. Consequently, the Assessing Officer passed an order denying the exemption under sections 11 and 12 of the Income-tax Act. Aggrieved by this, the assessee went on appeal before the Commissioner of Income-tax (Appeals), who followed the decision of the Tribunal and this court in the case of CIT v. Tuluva Vellala Association [T. C. No. 477 of 1989], dated March 16, 1999, that only such part of the income which was violative of section 13(1)(d) could be brought to tax at the maximum marginal rate. Thus, the first appellate authority allowed the assessee’s appeals that the entirety of the income of the assessee could not be denied of exemption. Aggrieved by this, the Revenue went on appeal before the Income-tax Appellate Tribunal. Referring to the decision of the Bombay High Court in DIT (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533/114 Taxman 19 (Bom.), the Tribunal rejected the Revenue’s appeals. Hence, the present appeals by the Revenue.

3. Learned counsel appearing for the Revenue submitted that when the assessee had violated the provisions of section 13(1)(d), the question of granting exemption under section 11 did not arise. According to the Revenue, the Tribunal committed a serious error in not considering the fact that the investment by the assessee in MIOT Hospitals Ltd. was conscious and, hence, violated under section 11(5)/13(1)(d) of the Act ought to have been considered for confirming the assessment.

4. We do not agree with the said submission of the learned counsel for the Revenue. We may at the outset point out herein that the decision relied on by the Commissioner of Income-tax (Appeals) in the case of Tuluva Vellala Association (supra), is relatable to the decision of this court in T. C. No. 477 of 1989 and has no relevance of the issue on hand. Leaving that aside, as far as the decision of the Bombay High Court in Sheth Mafatlal Gagalbhai Foundation Trust (supra) is concerned, it is a similar line, which was applied by the Tribunal. The assessee therein was brought under section 164 to be assessed at the maximum marginal rate of tax on account of contravention of section 13(1)(d). The Bombay High Court held that violation of section 11(5), read with section 13(1)(d) by the assessee would result in the maximum marginal rate of tax only on the dividend income on shares, which was not the recognised mode of investment and that the assessee would not be vested with marginal rate of tax on the entire income. Therefore, the income other than dividend income has to be taxed only to the extent to which the violation was found by the Assessing Officer. In so considering, the Bombay High Court held as follows (page 537) :

“Under section 161(1A), which begins with a non-obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, then tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases show that the Legislature has clearly indicated its mind in the proviso to section 164(2) when it categorically refers to forfeiture of exemption for breach of section 13(1)(d), resulting in levy of maximum marginal rate of tax only to that part of the income which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This interpretation of ours is also supported by Circular No. 387, dated July 6, 1984 (see [1985] 152 ITR (St.) 1). Vide the said circular, it has been laid down in para. 28.6 that, where a trust contravenes section 13(1)(d) of the Act, the maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provision and not to the entire income. We may also add that in law, there is a vital difference between eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. It is interesting to note that although the Legislature withdrew section 164(2) by the Direct Tax Laws (Amendment) Act, 1987, which provision was reintroduced by the Direct Tax Laws (Amendment) Act, 1989, the Legislature did not touch the proviso to section 164(2) which has been on the statute book right from April 1, 1985. The said proviso was inserted by the Finance Act, 1984. The proviso specifically refers to violation of section 13(1)(d) and its consequences.”

5. We are in entire agreement with the statement of law by the Bombay High Court in the decision referred to above. Respectfully following the said decision, we confirm the order of the Tribunal, thereby reject the Revenue’s appeals.

[Citation : 365 ITR 353]