TaxTMI 
TaxTMI 
2016 (4) TMI 1145
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.... provision to section 164(2) of the IT Act, 1961. He has further erred in not following the decision of Hon'ble Karnataka High Court in 363 ITR 230 and other decisions relief by the assessee. 2. Briefly the facts of the case are that the assessee is a public charitable trust with object to run and manage educational institutions, hospitals, water supply scheme, dharamshala for public good and do all other public welfare activities from time to time as decided by the trustees. The return of income declaring nil income after claiming exemption u/s 11 was filed on 29.09.2011. The AO in the course of assessment proceedings observed that assessee has advanced Rs. 20 lacs to M/s Rajkala Industries Pvt. Ltd. Smt. Madhu Adukia, the trustee in the assessee trust and w/o Sh. Ajit Kumar Adukia, the settlor of trust is the director of M/s Rajkala Industries Pvt. Ltd. Accordingly, the AO vide show cause notice dt. 27.02.2014 required the assessee to show cause as to why it should not be deemed that income of the trust has been applied for the benefit of prohibited category of persons referred u/s 13(3). In response to same, the assessee submitted its reply vide letter dt. 04.03.2014 along wi....
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....ce sheet of M/s Rajkala Industries Pvt. Ltd., the assessee's contention is an afterthought story just to give colour to the transaction and perusal of balance sheet of assessee trust for year ended 31.03.2012 reveals that the amount remained with the company for subsequent period also. Thus, by virtue of provisions contained in sec. 13(1)(c)/ 13(1)(d) r.w.s. 13(2) and 13(3), entire income of the trust is not exempt u/s 11 or 12 of the Act. Accordingly, income of Rs. 1,40,31,000/- as donation and amount of Rs. 16,00,000/- as corpus fund aggregating to Rs. 1,56,31,000/- was held to be assessee's total income chargeable to tax at maximum marginal rate. 2.2 The Ld. CIT(A) confirmed the action of the AO by giving the following findings:- "Advance of Rs. 20 lacs given by the trust to M/s Rajkala Industries Pvt. Ltd. is loan which is in violation of sec.13(1)(c) of the IT Act. Though the appellant has contended that such amount was advanced to M/s Rajkala Industries Pvt. Ltd. in connection with the business to build a permanent kitchen at appropriate location for supply of food for free meal distribution programme in and around Chirawa, however, as regards this transacti....
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....(1)(c)/13(1)(d). It was further submitted that sec.164 deals with the charge of the tax where the shares of the beneficiary is unknown. Sec. 164(2) deals with the charge of tax on the income of the trust which is derived by it from the property held wholly for charitable or religious purpose. The proviso to this section which is relevant for the present purpose reads as under:- "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". From the plain reading of this proviso, it is evident that where the whole or any part of the relevant income is not exempt u/s 11 or 12 because of the provisions of the section 13(1)(c) or 13(1)(d), tax is chargeable on the relevant income or part of the relevant income at the maximum marginal rate (MMR). Therefore, in case there is violation of sec.13, the entire income of the trust is not liable to tax at MMR but only the relevant part of the income which violates sec....
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....t respectively by rejecting the SLP filed against the said High Court decisions. The Hon'ble Madras High Court in case of Working Women's Forum (Supra) has held as under: "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 t....
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....ourt in case of Fr. Mullers Charitable Institutions (supra) has held as under: "11. With regard to second and third substantial questions of law are concerned, reading of Section 13(1)(d) of the Act makes it clear that it is only the income from such investment or deposit which has been made in violation of Section 11(5) of the Act that is liable to be taxed and that violation under Section 13(1)(d) does not tantamount to denial of exemption under Section 11 on the total income of the assessee. An identical question came before the Bombay High Court in the case reported in Sheth Mafatlal Gagalbhai Foundation Trust (supra). The question before the Bombay High Court is "Whether violation of Section 11(5) r/w Section 13(1)(d) by the assessee-Trust attracts maximum marginal rate of tax on the entire income of the Trust? The Bombay High Court held that in case of contravention of Section 13(1)(d), maximum marginal rate of tax under Section 164(2), proviso is applicable only to that part of income of the Trust which has forfeited exemption and not the entire income. Relevant paragraph reads as under: "Sec. 164(2) refers to the relevant income which is derived from....
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....ll apply only to the divided income from shares held in contravention of s.13(1)(a) and not to the entire income. Therefore, income other than dividend income shall be taxed at normal rate of taxation under the Act." A similar view has been taken by the Delhi High Court in a judgment reported in Agrim Charan Foundation (Supra). Reading of the proviso to Section 142 is very clear that the legislature has clearly contemplated that in a case, where the whole or part of the relevant income is not exempted under Section 11 by virtue of violation of Section 13(1)(d) of the Act, tax shall be levied on the relevant income or a part of the relevant income at the maximum marginal rate. The said analogy is applicable to the facts of the present case. 12. We are in respectful agreement with the views expressed by the Bombay High Court as well as Delhi High Court for violating Section 11(5) of the Act and the entire income of the respondent-Trust cannot be assessed for the tax." Respectfully following the above decisions, it is held that where there is violation of section 13, the entire income of the trust is not chargeable to tax at maximum marginal rate and it i....