S.H Kapadia, J.:— The short question of law which arises for determination in the above group of Appeals is as follows:
“Whether violation of Section 11(5) read with Section 13(1)(d) by the assessee-trust attracts maximum marginal rate of tax on the entire income of the Trust?”
2. In these Appeals, we are essentially concerned with deciding the scope of Section 164(2) read with it's proviso as also, the effect of contravention of Section 11(5) and Section 13(1)(d)(iii).
FACTS:
3. The assessee-trust came into existence after June 1, 1973. The asssessee-trust was a holder of equity shares of Mafatlal Industries during the assessment year 1994–1995. They were the holders of the shares even after 31st March, 1993. In this group of Appeals, we are only concerned with the effect of the violation of Section 13(1)(d). There is no dispute about the contravention. The assessee, during the relevant assessment year, received dividend income from Mafatlal Industries of Rs. 15,103.00. The assessee also received interest income of Rs. 2095.00 These facts are taken from Income Tax Appeal No. 267 of 2000. The facts are common to all other Appeals. Hence by this judgment, the above group of Appeals are disposed of as the fact's are common in all the above matters. The point of law is also common. According to the A.O, on account of violation of Section 11(5) of the Act, the department took the stand that the assessee forfeited it's exemption under Section 11 in respect of its entire income viz. dividend income plus interest income, whereas according to the assessee, they were entitled to claim exemption and they were entitled to continuance of exemption in respect of interest income though they had forfeited their right to claim exemption vis-a-vis the divident income as the assessees continued to hold the shares of non-Government company even after 31st March, 1993. Being aggrieved, the assessee carried the matter in appeal to C.I.T which came to the conclusion that the assessee was not entitled to the benefit of exemption under Section 11 in respect of the entire income. Being aggrieved, the assessee carried the matter in appeal to the Tribunal. The Tribunal came to the conclusion that in view of Section 164(1), the income receivable by the Trust was the relevant income. That, a portion of such relevant income only would suffer tax because of the violation of the condition of investment prescribed by Section 11(5). The Tribunal found that non-fulfilment of such condition cannot deprive the Trust of the exemption of its other income which has been granted to it in the earlier years. Hence the Tribunal allowed the Appeal. It directed that only dividend income in the present case should be taxed at maximum marginal rate and the income, other than the dividend income, viz. interest income be taxed at normal rate of taxation as applicable under the law.
ARGUMENTS:
4. Mr. Desai, learned senior Counsel appearing on behalf of the department contended that Section 11(5) provides for various forms and modes of investing or depositing the money by the Trust. He contended that violation of Section 11(5) results in forfeiture of exemption given to the Trust. He contended that under Section 11(2) of the Act, it is provided that where 70% of the income referred to in clause (a) or clause (b) of Section 11(1) is not attracted to charitable or religious purposes in India during the previous year, but is accumulated or set apart either in whole or in part for application to such purposes, then such income so accumulated or set apart, shall not be included in the total income of the previous year provided certain conditions are satisfied. He contended that violation of section 11(5) results in consequences which are specifically mentioned in Section 164(2) which, inter alia, lays down that in the case of relevant income derived from property held under trust, tax shall be charged on so much of the relevant income as is not exempt under Section 11 as if the relevant income, not so exempt, was the income of A.O.P In other words, he contended that in view of Section 164(2), forfeiture of exemption for breach of Section 11(5) would result in imposition of tax at maximum marginal rate as if the assessee was an A.O.P He contended that by a deeming fiction, the Legislature has provided for an assessee-trust to be assessed as A.O.P consequent upon its violation of Section 11(5). He accordingly contended that the entire income of the trust was liable to be charged to tax under maximum marginal rate and on the basis of such income accruing to an A.O.P On the other hand, Mr. Andhyarujina, learned Counsel appearing on behalf of the Trust, contended that the requirement of investment in specified securities under Section 11(5) results in an income to the trust which is receivable by the Trustees and it is called as relevant income under Section 164(1). He contended that a portion of such relevant income, in the present case, would suffer tax because the condition of investment, as prescribed under Section 11(5), had not been fulfilled, but non-fulfilment of such condition cannot deprive the Trust of the exemption of its other income which had been granted in the earlier years. He contended that in this connection, the proviso to Section 164(2) is very important. He contended that under the said proviso, the Legislature has clearly contemplated that in a case where the whole or part of the relevant income is not exempt under Section 11 by virtue of violation of Section 13(1)(d), tax shall be charged on the relevant income or a part of the relevant income at the maximum marginal rate. In this connection, he relied upon the Circular issued by the Board bearing No. 387 dated 6th July, 1984 which supports his above contention.
FINDINGS:
5. For the purposes of this Appeal, it would be relevant to quote Section 164(2) read with its proviso:
“164(2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in sub-clause (iia) of clause (24) of section 2,] [or which is of the nature referred to in sub-section (4a) of section 11,] tax shall be charged on so much of the relevant income as is not exempt under section 11 [or section 12], as if the relevant income not so exempt were the income of an association of persons:
[Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.]”
6. Section 164 of the Income Tax Act does not create a charge on the income of a discretionary trust.
7. The word “charge” in section 164 means “levy”. Section 164(2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of A.O.P Therefore, a proviso was inserted by Finance Act of 1984 with effect from 1.4.1985 under which in cases where the whole or any part of the relevant income is not exempt under section 11 or section 12 because of the contravention of Section 13(1)(d) then tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, the-nonexempt income portion would fall in the net of tax as if it was the income, of A.O.P Section 11(5) lays down various modes or forms in which a trust is required to deploy its funds. Section 13(1) lays down cases in which Section 11 shall not apply. Under Section 13(1)(d)(iii), it has been laid down that any share in a company, not being a Government company, held by the trust after November, 30, 1983 shall result in forfeiture of exemption. By virtue of the proviso (iia) it has been laid down that any asset which dose not form part of permissible investment under Section 11(5) shall be disposed of within one year from the end of the previous year in which such asset is acquired or by 31st March, 1993 whichever, is later. In the present case, the assessee was required to dispose of the shares under the said proviso by 31st March, 1993 [See the judgment of this Court in ITA No. 81/1999, decided on 14th September, 2000]. The shares have not been disposed of even during the assessment year in question. Now, under Section 164(2) it is, inter alia, laid down that in the case of relevant income which is derived from property held under trust for charitable purposes, which is of the nature referred to in Section 11(4A), tax shall be charged on so much of the relevant income as is not exempt under Section 11. Section 164(2) was re-introduced by Direct Tax Law Amendment Act, 1989 with effect from 1.4.1989 Earlier it was omitted by Direct Tax Law Amendment Act, 1987. However, the Legislature inserted a proviso by Finance Act 1984 with effect from 1.4.1985 By the said proviso, it is, inter alia, laid down that where whole or part of the relevant income is not exempt by virtue of Section 13(1)(d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase “relevant income or part of the relevant income” is required to be read in contradistinction to the phrase “whole income” under Section 161(1A). This is only by way of comparison. 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 pharases 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 6th July, 1984. 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 Direct Tax Law Amendment Act, 1987 which provisions was reintroduced by Direct Tax Law Amendment Act, 1989, the legislature did not touch the proviso to Section 164(2) which has been on the statute book right from 1.4.1985 The said proviso was inserted by Finance Act, 1984. The proviso specifically refers to violation of Section 13(1)(d) and its consequences. In the circumstances, we find merit in the contention of the assessee that in the present case, the maximum marginal rate of tax will apply only to the dividend income from shares in Mafatlal Industries Limited and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act.
8. Accordingly, the above question is answered in the negative i.e in favour of the assessee and against the department, Q. No. 1 is answered in our judgment in ITA 81/99.
9. Accordingly, all the above Appeals are disposed of with no order as to costs.
10. Issuance of certified copy expedited.
Comments