Trust – forfeiture of exemption for breach of section 13(1)(d) – proviso to section 164(2) – 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 – SLP Dismissed

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 Act. Aggrieved by this, the assessee went on appeal before the CIT(A) , who followed the decision of the Tribunal and decision of CIT vs. Tuluva Vellala Association in 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 Tribunal. The Tribunal rejected the Revenue’s appeals.

The Hon’ble 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. 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. The High court followed the decision of Bombay High Court in DIT (Exemptions) vs. Sheth Mafatlal Gagalbhai Foundation Trust : [2001] 249 ITR 533 (Bom.) and confirmed the order of the Tribunal, thereby rejected the Revenue’s appeals.

The Revenue filed SLP before Supreme Court which was dismissed.