1. This is an appeal by the assessee relating to assessment year 1986-87 directed against the order of the Dy. Commissioner of Income-tax (Appeals), Vijayawada dated 22-1-1990.
2. The assessee is a charitable institution. It was registered under the Societies Registration Act, on 15-7-1983. It was also a Trust recognised by the Commissioner of Income-tax, Visakhapatnam who granted registration under Section 12A of the Income-tax Act, 1961 on a petition filed on 11-4-1988. The Commissioner of Income-tax granted registration under Section 12A by his order dated 23-10-1989. Copies of orders of the Registrar of Societies and the Commissioner of Income-tax, Visakhapatnam are placed in a paper compilation. The Memorandum of Association of the society is placed as part of the paper book filed before us. The assessee society was formed for purely charitable and educational purposes which include imparting of moral instructions and diffusion of useful knowledge to the public at large.
Other objects of the Society as found in the Memorandum are the following: (i) To impart and promote responsible behaviour towards Society among the abandoned and to make them better citizens; (ii) To establish institutions such as schools, training centres for promoting formal, non-formal and experimental education, adult education and social education; (iii) To reform the abandoned children and youth through counselling and persuasion to bring them into the mainstream of social life; (iv) To bring about the reformation of ex-criminals and their families; (v) To help and promote peaceful, non-violent and constructive activities for social change; (vi) To produce, print and publish literature to inculcate rational approach and civic consciousness.
3. For assessment year 1986-87 for which the previous year ended on 31-3-1986, the assessee received an amount of Rs. 43,608. The assessee spent an amount of Rs. 26,651 towards purchase of land. After the purchase of the land, the assessee had given it to the Government to distribute the same among the Scheduled Caste and backward class people. This expenditure was recognised as having been spent for charitable purposes. However, 75% of the gross income was not spent for charitable purpose and the unspent amount was found at Rs. 16,957. The unspent amount was found out by deleting the amount of Rs. 26,651 from Rs. 43,608 and this amount was brought to tax at maximum marginal rate.
The Income-tax Officer passed his assessment order dated 25-10-1989 under Section 143(3) read with Section 143(2)(a). Aggrieved against this order, the assessee went in appeal before the Dy. Commissioner (Appeals), Vijayawada. It was contended before him on behalf of the assessee Trust that the taxable income had been wrongly calculated by the Income-tax Officer. It was contended that 25% of the gross income is permitted to be accumulated under Section 11(1) of the Income-tax Act and this permitted accumulation should be allowed as deduction while computing the taxable income. The Dy. Commissioner (Appeals) held that the assessee failed to apply in writing for permission for accumulation under Section 11 (2) and no notice in form No. 10 was given to the Income-tax Officer and permission for accumulation was obtained thereon. Therefore, in principle the Income-tax Officer is correct when he subjected the unspent balance to tax. However, the Dy.
Commissioner (Appeals) at the same time held that the assessee is permitted accumulation of 25% of gross receipts. He held that the provisions of Section 11(1)(a) and 11(2) are independent and not alternative. He held that the exemption of 25% of gross receipts should be allowed as exemption under Section 11(1)(a) even if the conditions of Section 11 (2) for accumulation of 75% of income are not complied with. Therefore, he determined the taxable income at Rs. 6,055 which is the returned figure as per the income-tax return of the assessee and partly allowed the appeal. Thus it is seen that whereas the Income-tax Officer had determined the taxable income at Rs. 16,957, the Deputy Commissioner (Appeals) fixed the total income at Rs. 6,055.
4. Now the second appeal is against the order of the Dy. Commissioner (Appeals) on two grounds. The first ground is that maximum rate of tax should not be applied since it is a public charitable institution.
Since the assessee Trust was registered to be a charitable Trust under Section 12A of the IT Act it should be taxed only when its income exceeds the maximum income not liable to tax for assessment year 1986-87. The assessee has no objection to treat the assessee Trust as AOP. Its only objection is with regard to application of maximum marginal rate. According to Finance Act as applicable to assessment year 1986-87 published at page 61 of (1986) 26 Taxman, the maximum income earned by the AOP which is not liable to tax is Rs. 18,000 whereas the taxable income ultimately found out by the Dy. Commissioner (Appeals) in this case is Rs. 6,055. Therefore, we hold that even assuming that the amount of Rs. 6,055 should be computed as taxable income of the assessee since it is less than Rs. 18,000 which is the maximum not liable to tax in that assessment year, the tax effect will be nil and hence no tax can be levied against the assessee. We are also satisfied that the contention that maximum marginal rate under Section 164(2) cannot be made applicable to the assessee Trust. Section 164(2) and the proviso thereunder are the following: 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.
So ordinarily, if any part of the relevant income is not exempt under Section 11 or Section 12 it should be assessed as income of an Association of Persons at ordinary rate but if any part of the relevant income is not exempt under Section 11 or Section 12 by virtue of the contravention of Clause (c) or Clause (d) of Sub-section (1) of Section 13 relevant income or part of relevant income is liable to tax at maximum marginal rate, that means proviso to Section 164(2) would apply to such a case. Section 13(1)(c) applies if any part of the income of Trust created for charitable or religious purposes is used directly or indirectly for the benefit of any person referred to in Sub-section (3) which include author of the Trust any relative of the author, founder and any concern in which the author, founder and any person of the joint family etc. has a substantial interest. Section 13 (1) (d) applies to incomes earned during the previous year which were found deposited otherwise than in one or more of the forms or modes specified in Sub-section (5) of Section 11 etc. However, in the case before us, the assessee Trust had a Savings Bank account with Indian Overseas Bank, Vijayawada and it was holding account No. 523 therein and it had always kept the income of the Trust in its Savings Bank account in Indian Overseas Bank. Thus it had fulfilled all the requirements of Section 11 (5)(a)(iii) which says that deposit in any account with a scheduled bank of a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank is one of the forms and modes of investing or depositing the money. Scheduled bank means the State Bank of India or a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959, a corresponding new bank constituted under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, or under Section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act, 1934. Thus we are satisfied that the assessee had substantially complied with the requirements of Section 11(5) (iii) of the Income-tax Act by depositing the income derived by the Trust in the Savings Bank account No. 523 in Indian Overseas Bank, Ring Road, Vijayawada. Therefore, it is clear that the relevant income became taxable and become non-exempt from Section 11 not because of contravention of the provisions of Section 13(1)(c) or 13(1)(d). The only ground on which a part of the income is found taxable is because whereas under law the assessee is obliged to spend 75% of the income for charitable purposes for which the institution was established. The assessee trust did not apply 75% of the income for such purposes and there is a shortfall. The shortfall from out of 75% of its income was Rs. 6,055. The assessee did not apply for permission to accumulate by filing form No. 10 before the Income-tax Officer or before the Commissioner. No order for accumulation was also obtained. Under the circumstances the shortfall out of 75% being Rs. 6,055, it became liable to tax in this assessment year by virtue of Section 164(2) and if the relevant income became taxable under Section 164(2) ordinarily the ordinary rate applicable to AOP is to be applied to such relevant income if such relevant income is found to be over and above taxable limits. In this case, the relevant income is found to be below the taxable limits which is Rs. 18,000 per year and, therefore, on that ground itself it is not taxable since it falls below the taxable limit.
Further we hold that the proviso to Section 164(2) does not apply since the assessee had substantially complied with the provisions of Section 13(1)(d) and Section 11 (5)(iii) of the IT Act and part of the relevant income became taxable and became in excess under Section 11 or Section 12 not because the provisions of Clause 13(1)(c) or (d) were contravened in which case only, the maximum marginal rate can be applied. In all other cases only ordinary rates could be applied.
Therefore, since the claim for exemption under Section 11 or Section 12 is not by virtue of the fact that the provisions of Section 13(1)(c) or (d) are contravened, the maximum marginal rate cannot be applied. We, therefore, fully allow the appeal and hold that there is no taxable income earned by the assessee in this year.