Representative assessee's under s.13(1)(d) forfeited exemption limited to specific income; proviso to s.164(2) applies to dividend only

HC held that where a representative assessee (trust) breaches section 13(1)(d), the proviso to section 164(2) permits levy of the maximum marginal rate only on the specific income that has forfeited exemption (here, dividend income), not on the trust's entire income. Other income remains taxable at normal rates. The court relied on section 161(1A), the statutory history, and Circular No. 387/1984 to distinguish eligibility for exemption from forfeiture. The appeals were allowed in favour of the assessee and dismissed the Department's contention, with no order as to costs.

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Issues involved: Determination of 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.

Facts: The assessee-trust held equity shares of a company and received dividend and interest income during the assessment year. Dispute arose regarding the exemption under section 11 due to violation of section 13(1)(d). The Assessing Officer forfeited the exemption on the entire income, while the assessee claimed exemption on interest income. The matter went to the Commissioner of Income-tax and then to the Tribunal, which allowed the appeal partially, taxing only the dividend income at the maximum marginal rate.

Arguments: The Department argued that violation of section 11(5) results in forfeiture of exemption for the trust's entire income, while the trust contended that only the non-exempt portion should be taxed at the maximum marginal rate, citing the proviso to section 164(2) and a relevant circular.

Findings: Section 164(2) deals with relevant income derived from property held under trust for charitable purposes. The proviso introduced in 1984 specifies that if income is not exempt due to violation of section 13(1)(d), tax shall be charged at the maximum marginal rate only on the non-exempt portion. The court interpreted the provisions and circular to conclude that only the dividend income should be taxed at the maximum marginal rate, while the rest of the income should be taxed at the normal rate.

Conclusion: The court ruled in favor of the assessee, stating that the maximum marginal rate of tax applies only to the dividend income and not the entire income. The appeals were disposed of with no costs awarded.

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