Rajasthan H.C : The tax at margin rate as per the provisions of Section 164(2) is to be levied on the income earned from non-exempt asset

High Court Of Rajasthan

CIT & Ors. vs. Santokba Durlabhji Trust Fund & Ors.

Section 164(2), 13(1)(d)(iii)

K. S. Jhaveri & Vijay Kumar Vyas, JJ.

D.B. Income Tax Appeal No. 60/2015, 130/2015, 140/2015, 16/2016, 19/2016, 275/2016

12th September, 2017

Counsel Appeared:

Sameer Jain for the Petitioner.: Gunjan Pathak for the Respondent

ORDER

Since these appeals arise out of the same order, they are being decided by this common order.

By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee.

This court while admitting the Income Tax Appeal No.60/2015 on 06.08.2015, framed the following substantial questions of law:

I) Whether on the facts and in the circumstances of the case the learned ITAT was correct in holding that the tax at margin rate as per the provisions of Section 164(2) is to be levied on the income earned from non-exempt asset?

II) Whether on the facts and circumstances of the case more holding of ineligible assets is sufficient to attract the provisions of Section 13(1)(d)(iii) of the Act and it is immaterial whether funds of the trust were used or not?”

This court while admitting the Income Tax Appeals No.130/2015 & 140/2015 on 24.07.2017, framed the following substantial question of law:

“Whether on the facts and circumstances of the case and in law, the assessee is eligible to claim under Section 11 even though provisions of Section 13(1)(d)(iii) are attracted.”

This court while admitting the Income Tax Appeal No.16/2016 on 14.09.2016, framed the following substantial questions of law:

“1.Whether, on the facts and circumstances of the case and in law, the Ld. ITAT was correct in quashing the revision order passed u/s 263 by holding it as neither erroneous nor prejudicial to the interests of revenue?

Whether, on the facts and in the circumstances of the case and in law, the Ld. ITAT was correct in holding that the issue of applicability of Section 13(1)(d)(iii) was settled in favour of respondent assessee vide its own order, notwithstanding that the said order has already been challenged before this Hon’ble Court and the appeal is pending adjudication as on date?

Whether on the facts and in the circumstances of the case the Hon’ble ITAT was correct in holding that the denial of exemption u/s 13(1)(d)(iii) is to be restricted to only the income earned from shares to be taxed at marginal rate u/s 164(2), and not the entire income of respondent assessee merely by following its own order for another Assessment Year notwithstanding that the issue has not attend finality and the same is pending adjudication before this Hon’ble Court?”

This court while admitting the Income Tax Appeal No.19/2016 on 18.10.2016, framed the following substantial questions of law:

“1.Whether, on the facts and circumstances of the case and in law, the Ld. ITAT was correct in quashing the revision order passed u/s 263 by holding it as neither erroneous nor prejudicial to the interests of revenue?

Whether, on the facts and in the circumstances of the case and in law, the Ld. ITAT was correct in holding that the issue of applicability of Section 13(1)(d)(iii) was settled in favour of respondent assessee vide its own order, notwithstanding that the said order has already been challenged before this Hon’ble Court and the appeal is pending adjudication as on date?

Whether on the facts and in the circumstances of the case the Hon’ble ITAT was correct in holding that the denial of exemption u/s 13(1)(d)(iii) is to be restricted to only the income earned from shares to be taxed at marginal rate u/s 164(2), and not the entire income of respondent assessee merely by following its own order for another Assessment Year notwithstanding that the issue has not attend finality and the same is pending adjudication before this Hon’ble Court?”

This court while admitting the Income Tax Appeal No.275/2016 on 19.11.2016, framed the following substantial questions of law:

“1. Whether, on the facts and circumstances of the case and in law, the ld. ITAT was correct in quashing the revision order passed u/s 263 by holding it as neither erroneous nor prejudicial to the interests of revenue?

Whether, on the facts and in the circumstances of the case and in law, the ld. ITAT was correct in holding that the issue of applicability of Section 13(1)(d)(iii) was settled in favour of respondent-assessee vide its own order, notwithstanding that the said order has already been challenged before this Hon’ble Court and the appeal is pending adjudication as on date?

Whether on the facts and in the circumstances of the case the Hon’ble ITAT was correct in holding that the denial of exemption u/s 13(1)(d)(iii) is to be restricted to only the income earned from shares to be taxed at marginal rate u/s 164(2), and not the entire income of respondent assessee merely by following its own order for another Assessment Year notwithstanding that the issue not attend finality and the same is pending adjudication before this Hon’ble Court?”

The facts of the case are that the assessee filed its return of income on 30.9.2008 declaring Nil income. The assessee is a Trust and runs a hospital namely Santokba Durlabhji Memorial Hospital cum Research Institute. The case of the assessee was picked up for scrutiny and an order u/s 143(3) was passed on 27.12.2010 determining the total income of the assessee as Rs.6,23,44,980/-. Respondent is a trust where they received gift of TISCO Ltd. shares which were subsequently written off.

The Tribunal while considering the matter in para

4.2 observed as under:

I. Assessee Consciously violated the statutory provision of continuing with the investment of shares in a non public sector company, In this eventuality law will take its course as per plain meaning once the assessee trust violates a specific provision of sec. 13(1)(d); it leads to denial of benefits of sec 11 & 12 to entire trust come.

ii. The assessee was under an obligation to dispose off or convert TISCO shares in to permissible investments by 31st March, 1993 which it failed to do and thereby contravened S. 13(1)(d)

iii. It was claimed that these shares were purchased out of the sale proceeds of old shares. This plea was also rejected as there was no sale of shares during the year under consideration. And if it was in earlier years then it is further established that the Trust had invested money out of its own funds.

iv. The assessee has further claimed that had the Trust not opted to subscribe for rights issue it would have resulted in a big loss to the Trust. The Trustees are in a fiduciary position and had to act for the benefit of the Trust.

v. The AO observed that the assessee was trying to compare a case of a company with that of the Trust. The functions of a Trust are altogether different from the functions of a company. The Trust gets tax benefit under the Act only if it satisfies certain conditions laid down in Section 11,12 & 13 and it is not meant for profit motive. On the contrary, in the case of a company profit is the most powerful driving force in its functions.

vi. The shares forming part of corpus were received by it after 1st June, 1973 and even then the accretion was not necessarily by way of bonus shares. The assessee had grossly ignored the phrase “by way of bonus” while st4ressing on the definition of word “accretion” the statute has allowed accretion oly by way of bonus shares and that too in caes when such shares were with the trust on 1st July, 1973. When the shares are forming part of corpus after 1st June, 1973, question of accretion does not even arise. Clearly the investment in right-issue cannot, by any stretch of imagination, by equated with the phrase accretion by way of bonus shares.

I. CIT v. Kumudam Endownments 242 ITR 159 (Madras)

Ld. DR in order to buttress his arguments relied on following judgments:

ii. DIT (E) v. M. Ct. Muthiah Cheetiar Family trust.

iii. DIT(E0 v. Shardaben Bhagubhai Mafatlal Public Trust NO. 8 and ors. 164 CTR (Bom) 97.

These case laws are relied for the proposition that in case the investments held earlier are not converted into specified investments the entire benefits u/s 11 & 12 can be denied on this violation of sec13(1)(d) provisions. Further reliance is placed on:

I. Tulsiram Gilda Public Charitable Trust v. ACIT 44 ITD 341 (Hyd)

2. ITO v. Gurjar Pushkarana Vidyotejak Mandal 30 TTJ (Ahd) 610; For the proposition that even if the proviso to sec. 164(2) inserted from 1-4-85 is considered, it implies that clauses c or d of sec. 13(1) are attracted, in that case trust income is to be taxed at maximum marginal rates.

Counsel for the respondent supported the order of the Tribunal. We have heard both the parites. Taking into consideration the above facts, we are of the opinion that the view taken by the Tribunal is just and proper. In the peculiar facts of this case, We are confirming the view of the Tribunal only in this case and it will not be treated as precedent. The issues are answered in favour of assessee and against the department. The appeals stand dismissed.

[Citation : 406 ITR 457]

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