1. Since a common point is involved in these appeals, they are disposed of together for the sake of convenience.
2. The assessee is a public charitable trust, which came into existence under a Deed of Trust executed sometime in December, 1972. The assessment years are 1984-85 and 1985-86 and the relevant previous years ended on 31-3-1984 and 31-3-1985 respectively.
3. The common point involved pertains to the assessee's claim for exemption under Section 11 of the Act in respect of the income other than dividend income. It may be mentioned that during the relevant previous years the assessee was holding 12,000 preference shares of National Rayon Corporation Ltd. Apart from income by way of bank interest, donations, the assessee had also earned dividend income on the said Preference Shares. By virtue of the provisions of Section 11(5) of the Act, which came into effect from assessment year 1984-85, the assessee lost exemption under Section 11 of the Act in respect of dividend income. However, relying on the provisions of Section 164(2) of the Act, the assessee contended before the ITO that only the dividend income was liable to tax, while the other income would still be exempt under Section 11 of the Act. In the assessment framed under Section 143(3) of the Act in respect of the assessment year 1984-85, the ITO rejected the assessee's claim in the following manner: During the course of hearing the assessee's representative was informed that since the investments of the assessee's funds in 12,000 preference shares of National Rayon Corporation Ltd., contravene the provisions of Section 11 (5) which came to effect from the assessment year 1984-85, the assessee would lose the exemption Under Section 11 and the entire income would be taxed without allowing deduction for object expenses. The shares were purchased by the assessee somewhere in May 1978. Later dated 27-11-1986 on assessee's behalf is discussed as follows: The assessee claim is that the relevant income from the investments which contravene the provision of Section 12(1) (d) and Under Section 13(1) (d) clearly spells out that (i) any income of the Trust for charitable purposes of charitable or religious institutions would lose exemption Under Section 11 or for any period during the previous year any funds of theirs are invested or deposited after 28-2-1983 otherwise than in any forms or modes specified in Section 11(5)or(ii) any funds of theirs invested or deposited before 1-3-1983 otherwise than in any of the modes/specified in Section 11(5)/continued to remain so invested and deposited after 30-11-1983. Regarding the claim on assessee's behalf that only the relevant income (in the case the dividend income) should be taxed as per the provisions of Section 164(2). It is brought to the notice of the assessee that these provisions, only to tax the relevant income have come into effect from the Asst. year 1985-86 by way of insertion of a proviso to the Section 164(2). From the above observations, it is clear that the assessee having continued to hold the investments in concerns which are not included in Section 11(5), they lose exemption Under Section 11.
4. Similarly, for the assessment year 1985-86, the ITO did not accept the assessee's claim for exemption in respect of the entire income as under: For the same reasons as mentioned by me in assessment order for the A.Y. 1984-85, the assessee is losing exemption Under Section 11 of the IT Act, 1961 as the assessee holds investments contravening to provisions of Section 11(5) of the IT Act. The assessee's case is also covered by the provisions of Section 13(1)(d) of the said Act.
It is seen from the accounts that the assessee has received as income from the investments which contravene provisions of Section 11(5) of the IT Act, 1961.
5. Being aggrieved by the orders of the ITO, the assessee went up in appeal before the Commissioner of Income-tax (Appeals) and once again strongly urged that its entire income would not stand disqualified for exemption Under Section 11 of the Act, but the dividend income received by it would be liable to tax at normal rate in the first year and at maximum marginal rate in the second year under consideration. In his detailed order for the assessment year 1984-85, The CIT( A) upheld the action of the ITO as under:- 3. I have considered the submissions of the appellant. The facts of contravention of the provisions of Section 11(5) are admitted. The appellant's only prayer is that the denial of exemption should be limited to only dividend arising out of preference shares which are held by the appellant in contravention of Section 11(5)of the IT Act. According to the appellant, this is the only relevant income which stands disqualified for the exemption Under Section l1. He has relied on the provisions of Section 164 in support of his contention that it is only the relevant income and not the entire income which should be denied exemption Under Section 11(4). I am unable to agree with the contention of the appellant. Sub-section (2) of Section 164 concerns the relevant income which is derived from property held under trust fully for charitable or religious purposes for and from asst. year 1973-74, also the income of the trust from certain voluntary contributions referred to in Section 2(24); and for and from the asst. year 1984-85 also the income of the trust from business referred to in Section 11(4)(a). If such income consists of several portion, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt falls in the net of tax as if it were the income of the Association of Persons. Similar distinction between exempt and non-exempt income as provided in Section 164(2) is not available while determining exemption Under Section 11/12/13. As per Section 13(1)(b), if any fund of the trust or institution are invested otherwise than in any or more of the forms in Sub-section 5 of Section 11, any income of the trust loses exemption Under Section l1. There is no provision in Section 13(1)(d) which distinguishes between the relevant and non-relevant income for the purpose of allowing denying exemption corresponding to the provisions Under Section 164(2). The entire income of the trust stands disqualified for exemption if there is a contravention of Section 11(5) by virtue of the provisions of Section 13(1)(d). In view of this position, I agree with the conclusion of the ITO that exemption Under Section 11 is not available at all in this case.
Following his aforesaid order, the CIT(A) upheld the action of the ITO in respect of the assessment year 1985-86 also.
6. Being aggrieved by the orders of the CIT(A), the assessee has come up in appeal before the Tribunal. The learned counsel for the assessee reiterated the submissions, which were made before the I.T. authorities and strongly urged that they should have accepted the assessee's contention that it would lose exemption Under Section l1 of the Act in respect of the dividend income only. He was fair enough to state that it is not in dispute that by virtue of the provisions of Section 11(5) of the Act, the assessee would lose exemption Under Section 11 of the Act, as it is holding 12,000 preference shares of the National Rayon Corporation Ltd. However, he hastened to state that the assessee would lose exemption Under Section 11 of the Act in respect of the dividend income received on the said shares and not in respect of other income earned by it. In other words, the learned counsel for the assessee wanted to impress upon us that just cause the assessee was not in a position to dispose of the shares of National Rayon Corporation Ltd., it should not lose exemption contemplated Under Section 11 of the Act in respect of other income earned by it. In this connection, he also invited our attention to Circular No. 387 containing explanatory notes on the Finance Act, 1984, more particularly paragraph 28.6 which reads as under:- 28.6 It may be noted that new Sub-section (1 A) inserted in Section 161 of the Income-tax Act, which provides for taxation of the entire income received by trusts at the maximum marginal rate is applicable only in the case of private trusts having profits and gains of business. So far as the public charitable and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under Clause (a) or Clause (b) of Section 11 (4A) of the Income-tax Act. As the maximum marginal rate of tax under the new proviso to Section 164(2) applies to the whole or a part of the relevant income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the Income-tax Act in regard to investment pattern or use of the trust property for the benefit of the settlor, etc., contained in Section 13(1)(c) and (d) of that Act, the said rate will not apply to the business profits of such trust which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of Section 13(1)(c) or (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 provisions.
28.7 The amendments take effect from 1st April, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years." and urged that the dividend income earned by the assessee would be taxed at normal rate in respect of the first assessment year and at the maximum marginal rate in respect of the second assessment year under appeal. In this connection, he also filed before us copies of the assessment orders for the assessment years 1981-82 to 1983-84, wherein before the insertion of Sub-section (5) of Section 11 of the Act (by the Finance Act, 1983 with effect from 1-4-1983), the ITO himself had granted exemption to the assessee Under Section 11 of the Act in respect of the income earned by the assessee including the income earned by way of dividend on the aforesaid shares. He, therefore, urged that the ITO should be directed to grant exemption to the assessee in respect of income other than dividend income earned by the assessee and modify the assessment accordingly. The learned representative for the department, on the other hand, strongly relied on the orders of the Income-tax authorities and justified their action. According to him, once the provisions of Section 11(5) of the Act are attracted in the instant case, the assessee would lose exemption in its entirety and, therefore, there is no question of referring to the provisions of Section 164 of the Act. In other words, he wanted to stress the point that the assessee has unnecessarily laboured to complicate the issue when the issue is so simple and unambiguous. He, therefore, urged that we should uphold the action of the I.T. authorities.
7. We have carefully considered the rival submissions of the parties and the material already brought on record and find force in the stand taken on behalf of the assessee. It is not in dispute that his is a trust which has been granted exemption Under Section 11 of the Act in respect of the income earned by it on its funds. Sub-section (2) of Section 11, which was introduced with effect from 1-4-1971, requires that where 75% of the income of the trust is not applied, or is not deemed to have been applied, to charitable or religious purposes, such income, which is accumulated, will not be included in the total income if certain conditions are satisfied. One of the conditions prescribed is that money so accumulated is set apart for investment in the forms or modes specified in Sub-section (5). This condition is to be found in Clause (b) of Sub-section (2) which as it stands today, was introduced by the Finance Act, 1983, which became effective from 1-4-1983. The same Finance Act introduced Sub-section (5) which prescribes the forms and modes of investing and depositing moneys accumulated by the trust which are referred to in Clause (b) of Sub-section (2). Now, the requirement of investment of accumulated funds in specified securities, which has been introduced in the form of Sub-section (5), is likely to create difficulties for old trusts which have been granted exemption under Section 11 [as it stood before the introduction of Sub-section (5)], but which are not in a position to invest in specified securities, its accumulated funds for some reason or the other. In the instant case it is a known fact that during the relevant previous year it was not possible to dispose of the shares in question, as there was hardly any buyer. Now, the income of the trust, which is receivable by the trustees, is called 'relevant income' under Section 164(1) of the Act. A portion of such relevant income in the present case would suffer tax mainly because the condition of investment in specified securities as prescribed under Section 11(5) has not been fulfilled. But, non-fulfilment of such condition cannot be said to deprive the trust of the exemption of its other income which has already been granted to it in the earlier years. Therefore, in a case of this type, the provisions of Sub-section (2) of Section 164 along with the proviso thereto would come income operation and only such income would be brought to tax at the maximum marginal rate which cannot be treated as exempt by virtue of non-fulfilment of condition of investment in specified securities as prescribed by Section 11 (5). According to us, the line of argument/ reasoning advanced by the learned Counsel for the assessee is fully fortified by the aforesaid circular No. 387 issued by the CBDT. There is nothing in Section 11(5) which can be interpreted to mean that if a portion of the accumulated income of the Trust is not invested in specified securities, the exemption Under Section 11 of the Act which has already been granted to the trust in earlier years would be withdrawn. In this view of the matter, we are of the opinion that the trust cannot be denied exemption Under Section 11 and only its income from dividend oh 12,000 shares should be brought to tax at prescribed rate because such income is not from specified securities. We would, therefore, direct the ITO to accept the assessee's contention in this regard and modify the assessments accordingly.