IT Appeal No. 7006 (Mum.) of 2013
[ASSESSMENT YEAR 2010-11]

VIJAY PAL RAO, JUDICIAL MEMBER AND NARENDRA KUMAR BILLAIYA, ACCOUNTANT MEMBER

S.E. Dastoor for the Appellant.
S.D. Srivastava for the Respondent.

ORDER

Vijay Pal Rao, Judicial Member - This appeal by the assessee is directed against the order dated 7.11.2013 of CIT(A) for the A.Y. 2010-11. The assessee has raised following grounds in this appeal:—

2. Ground No. 1 is regarding denial of exemption u/s 11 of the Income-tax Act.
2.1 The assessee is a charitable trust. During the Financial year relevant to Assessment year under consideration, the assessee has earned the following income:—

2.2 The dividend income on shares and units as well as long term capital gain on sale of shares claimed by the assessee as exempt u/s 10(34), 10(35) and 10(38) of the Income-tax Act. The rest of the income was claimed as exempt under section 11 of the income-tax Act. During the assessment proceedings the AO noted that the assessee sold 10,000,000 shares of TCS for Rs. 537,10,53,576/- and reinvested by way of acquisition of 8% cumulative redeemable preference shares of Tata Sons Ltd. of the value of Rs. 545,00,00,000/-. The assesseee has also deposited in short term deposit with bank of Rs. 63,60,000,00/-. AO noted that on 14.06.2001 the assessee received Corpus donation from Tata Sons Ltd of Rs. 1,52„50,000/- in the shape of 15,25,000 shares of Orchid Print India Ltd. (later known as TCS) of Rs. 10 each, total amounting to Rs. 1,52,50,000/-. In the assessment year 2003-04 to 2005-06, face value of shares were converted from Rs. 10 to Rs. 1 and assessee further got bonus shares as well. Thus the AO found that the assessee is in receipt of profit on sale of shares of TCS of Rs. 536,90,53,755/- which was shown directly in the balance sheet without routing through the income and expenditure account. The assessee has also received Rs. 5,48,62,380/- as dividend income on TCS shares and Rs. 142,51,36,643/- as dividend income on shares of Tata Sons Ltd apart from the dividend of Rs. 7,53,160/- from the units. The AO found that the sale proceeds of shares of TCS has been reinvested in the Tata Sons Ltd which is not public sector company and, therefore, the investment of accumulated fund is not in conformity of section 11(5) of the Act. Thus the AO observed that the assessee is hit by the provisions of section 13(1)(d)(i) as well as section 13(2)(h) in terms of its investment in shares of Tata Sons Ltd and by provisions of section 13(1)(d)(iii) in terms of shares of TCS and Tata Sons Ltd held by the assessee. Accordingly a notice u/s 142(1) was issue to the assessee. The assessee responded to the notice by its reply and explanation. After considering the reply the AO held that benefit of section 11(1A) is not available to assessee because investment in shares of Tata sons Ltd as per section 11(1) and further the investment in shares of Tata Sons Ltd is not held as Corpus fund. The AO was also of the view that as per the proviso to section 13(1)(d) exempt assets from disqualification must be held by the trust as its Corpus as on 1.06.1973. Shares of TCS are held by assessee only from the A.Y. 2001-02, hence the assesseee does not fulfil the conditions of holding of TCS shares in terms of the proviso to section 13(1)(d). Accordingly the AO held that the assessee is hit by the provisions of section 13(1)(d)(i) in terms of investment in shares of Tata Sons Ltd and by provisions of section 13(1)(d)(iii) in terms of shares of TCS and Tata Sons Ltd held by it and exemption u/s 11 and 12 will not be allowable in respect of any income of the assessee's trust.

3. On appeal, CIT(A) appeal concurred with the view taken by the AO.

4. before us, Shri S.E. Dastoor, the ld. Senior Counsel of the assessee, has submitted that during the year the assesseee applied its income for charitable purpose to the extent of Rs. 160.93 crore out of Rs. 270.51 crore excluding the income exempt u/s 10(34), 10(35) and 10(38) of income-tax Act. He has further submitted that the assessee has also exercised the option allowed as per clause 2 of Explanation to section 11(1)(a) of Income-tax Act and requested the AO to treat such amount as may be determined as income deemed to have been applied to the objects and purpose of this trust. Ld. Senior Counsel referred the Explanation to section 11(1) and submitted that the shortfall in 85% of the income applied for the objects and purpose is made in the subsequent financial year and, therefore, there is no violation of section 11(1) so far as the application of income is concerned.

4.1 As regards the disqualification u/s 13(1)(d), the ld. Senior Counsel has submitted that only short term capital gain on sale of bonus shares of TCS has to be tested under the provisions of section 13(1)(d) because the long term capital gain and dividend on the shares of TCS and mutual funds are exempt u/s 10 of the Income-tax Act. Ld. Senior Counsel referred the proviso to clause (iii) of section 13(1)(d) and submitted that the short term capital gain arising from the bonus share of TCS falls under the exclusion clause (iia) of the said proviso and, therefore, it is not hit by the mischief of section 13(1)(d) of the Income-tax Act. The bonus shares were issued on 19.06.2009 were not held by the assessee beyond expiry of one year from the end of the previous year in which they were acquired. Thus the ld. Senior Counsel submitted that none of the income is taxable by virtue of section 13(1)(d) of the Income-tax Act as there is no breach so far as capital gain on bonus shares held by the assessee and as regard the long term capital gains and dividend income the same is exempt u/s 10 of Income-tax Act.

4.2 As regards the violation of section 13(2)(h) of the Act, the ld. Senior Counsel reiterated the contention of the assessee raised before the authorities below and submitted that shares of Tata Sons Ltd which it has acquired does not have any voting right and is much below 5% of the capital of the company, hence it is not hit by the provisions of section 13(2)(h) in view of Explanation 3 to section 13(2)(h). Alternatively the ld. Senior Counsel has submitted that the if it is held that the investment with Tata Sons Ltd., is hit by the provisions of section 13(2)(h) then only the income arising from such investment is disqualified from the exemption u/s 11 of the Act and not the entire income of the assessee. In support of his contention he has relied upon the decision of Hon'ble Supreme Court in the case of AddL CIT. v. Surat Art Siik Cioth Manufacturers Association [1979] 2 Taxman 501. The ld. Counsel has also referred the decision of this Tribunal in the case of Tata Education Trust and Tata Social Welfare Trust dated 26-02-2008 and submitted the Tribunal has held that the entire income of the assessee would not attract the disqualification for the purpose of section 11 but only the income derived from the investment falling under the prohibited category would be chargeable to tax. He has pointed out that the Tribunal while deciding the issue has followed the earlier decision of the Tribunal in the case of Gurudayal Berlia Charitable Trust v. Fifth ITO [1990] 34 ITD 489 (Bom.). Hence the ld. Senior Counsel has submitted that the only income from the non-permitted asset would be subjected to tax.

5. On the other hand, ld. DR has submitted that the assessee has not complied with the conditions enumerated u/s 11(5) of the Income-tax Act for application of income so far as investment made in the preferential shares of Tata Sons Ltd. Further Holding of shares of TCS is also in violation of section 13(1)(d) of the Income-tax Act, therefore, the assessee is not entitled for deduction u/s 11 of the Income-tax Act on the entire income. The ld. DR has further submitted that the benefit of the proviso to section 13(1)(d) is not available to the bonus shares of the TCS as claimed by the assessee because clause (iia) does not talk about the bonus shares whereas the clause (ii) of the said provisions mentions bonus shares. Thus the ld. DR has submitted that the situation of the bonus shares has been specifically covered under clause II of the proviso and, therefore, clause (iia) has no scope of bouns shares. The ld. DR has stressed the point that there is no acquisition of bonus shares and, therefore, it would be deemed to have acquired on the date of original shares for the purpose of proviso to section 13(1)(d). Even otherwise, clause (iia) of the proviso to section 13(1)(d) deals with the asset held up to 31.03.1993 and not thereafter. He has referred the circular No. 596 dated 15.03.1991 reported in (181 ITR statutes 115) as well as the Circular No.621 dated 19.12.1991 reported in (195 ITR Statutes 154) and submitted that the proviso was inserted to remove the mischief arose due to amendment in section 13(1)(d) by the Finance Act 1983. Therefore, the clause (iia) to the proviso was inserted retrospectively w.e.f 1.4.1983 so that the charitable/religious trust or institution could disinvest such investment contrary to section 11(5) of the Income-tax Act on or before 31.3.1992 which was extended by Finance Act 1992 upto 31st March 1993. Hence the ld. DR has emphasized that the relaxation was given to the existing investment in contravention of section 11(5) of the Income-tax Act, up to 31st March, 1993 and not subsequent to that. Even otherwise, the assessee after disposal of the bonus shares again reinvested in the shares of Tata Sons Ltd which is in contravention of section 11(5), therefore, the benefit of the proviso is not available to the assessee. The ld. DR has argued that the interpretation of provisions should not conflict with the intent of the legislature and the object of the provisions as a whole. In support of his contentions he has relied upon the decision of Hon'ble Supreme Court in the case of K.P. Varghese. v. ITO [1981] 131 ITR 597/7 Taxman 13. He has also relied upon the orders of authorities below.

6. We have considered the rival submissions as well as relevant material on record. The income of the charitable/religious trust or institution is exempt u/s 11 of the Income-tax Act subject to the fulfilment of conditions stipulated u/ss 11 and 13 of the Act. There are two testes to be qualified by the trust or institution to avail the exemption u/s 11 of the Act. These two tests are broadly categorized as application of income and source of income the conditions and manner of application of income as enumerated u/s 11 (5) of the Act. Whereas the condition of source of income are provided under section 13 and particularly under sub-sections 1 and 2 of section 13 of Income-tax Act. We are concerned only with the conditions prescribed in clause (d) of sub-section (1) and clause (h) of sub-section (2) of section 13. Both these tests are to be qualified for exemption u/s 11. First we will deal with the issue of application of income in conformity with the provisions of section 11 of the Act. For ready reference we quote section 11(1) as under:—

Section 11(1)

"(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income—

Explanation. — For the purpose of clause (a) and (b)—

(1) In computing the fifteen per cent of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income;

(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of eighty-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount —

then —

may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived."

6.1 As per section 11(1), the income derived from property held under trust wholly for charitable or religious purposes shall not be included in the total income of the trust/institution to extent such income is applied for charitable/religious purpose in India, and in case such income is accumulated or set apart for application to such purpose in India to the extent such accumulation is not in excess of 15% of the total income from such property. Thus if the income derived from the property held under trust is applied to the extent of 85% for charitable/religious purpose in India, such income is exempt. This condition of application of 85% of income is relaxed to the extent that if the same is applied in the immediate subsequent year and the assessee's trust exercise such option in writing before the expiry of time allowed u/s 139(1) of Income-tax Act for furnishing the return of income then it would be deemed to be income applied to such purpose during the previous year in which the income was derived. Sub-section 2 of section 11 further relaxes the condition of application or deemed application of 85% of income during the relevant previous year if such income is accumulated or set apart either in whole or in part for application to such purpose in India subject to the condition provided under this sub section 2 which reads as under:—

"(2) Where eighty-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with the Explanation to that sub-section is not applied, or is not deemed to have been applied, 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 in India, such income so accumulated or set apart shall not be included in the total income of the previous year of the person in receipt of the income, provided the following conditions are complied with, namely:—

Provided that in computing the period of ten years referred to in clause (a), the period during which the income could not be applied for the purpose for which it is so accumulated or set apart, due to an order or injunction of any court, shall be excluded:

Provided further that in respect of any income accumulated or set apart on or after the 1st day of April, 2001, the provisions of this sub-section shall have effect as if for the words "ten years' at both the places where they occur, the words five years" had been substituted.

Explanation. — Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) orsulr clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.'

6.2 Thus the trust would not lose exemption even 85% of the income applied or deemed applied during the year if the whole or part of such income is accumulated or set apart for application of such purpose in India by giving notice in writing to the AO and the money so accumulated or set apart is invested or deposited in the form or mode specified in sub section (5) of section 11. The mode of investment and deposit under sub section (5) as under:—

Section 11(5)
"(5) If The forms and modes of investing or depositing the money referred to in clause (b) of sub- section (2) shall be the following, namely—

6.3 The assessee before us undisputedly has not complied with the condition of application of 85% of the income during the year as well as the investment/deposit of accumulation of the shortfall in terms of sub section (2) and (5) of section 11. This fact is apparent from the details of the income and application claimed as under:—

6.3.1 For the purpose of application of income in terms of sections 11 (1) and (2), the entire income of the trust has to be considered including the dividend and long term capital gain claimed as exempt u/s 10. It is pertinent to mention that for availing the exemption u/s 11, the income derived from the property held under trust has to be considered irrespective of the fact that some of the income so derived is also exempt u/s 10, therefore, 85% of the entire income without exclusion of dividend and long term capital gain on shares has to be applied for such purpose in India for availing deduction u/s 11. As it is clear from the details given above that out of total income of Rs. 714.42 crores, the assessee trust has applied during the year only Rs 164.59 crores. The balance has been invested in the shares of Tata Sons Ltd which is not in conformity with section 11(5) of the Income-tax Act. The Ld. Senior Counsel submitted that the assessee had exercised option under clause 2 of the Explanation and the income applied for such purpose in next year shall be deemed to have applied in previous year. He has referred the letter dated 13.09.2010 whereby the assessee exercised its option under clause 2 of the Explanation to section 11 (1)(a) of the Income-tax Act. It is pertinent to note that while computing the application of the income the assessee has excluded dividend and long term capital gain as well as short term capital gain and shown the income at Rs. 25.78 crore. Whereas the total income of the assessee including capital gain and dividend income is Rs. 714.42 crore. To meet the requirement of 85% of the income of Rs. 714.42 crore, the assessee was required to apply or deemed to have been applied the income to the extent of Rs. 607.43 crore. As per the details, the assessee has applied Rs. 164.93 crore during the year and nothing has been brought before us to show that the shortfall of more than 446 crore has been applied in the immediate following year. Therefore, apparently the assessee trust has not applied the shortfall of more than 446 crore in the immediate next year in terms of the Explanation to section 11(1) of the Act. Because the assessee has already applied the entire balance amount in the shares of Tata Sons Ltd., therefore, the question of application of shortfall in the immediate next year does not arise.

7. Now we turn to the issue of condition of source of income in terms of section 13 of the Income-tax Act. The AO has disallowed the exemption on two violations viz. violation of section 13(1)(d)(iii) and section 13(2)(h). So far as the conditions required to be fulfilled u/s 13(1)(d)(iii) are concerned any income from the shares in a company other than public sector company or shares prescribed or form of investment under clause (xii) of sub section 5 of section 11 is not exempt u/s 11 of the Act. Section 13(1)(d) reads as under:—

"13(1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof—

(d) If in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year—

7.1 In the case of the assessee the dividend income, long term capital gain and short term capital again derived from the shares of TCS held by the assessee in contravention of section 13(1)(d)(iii). The shares of TCS were received by the assessee in the year 2001-02 and there is no dispute that holding of these shares by assessee is beyond the permitted limit of time period prescribed u/s 13(1)(d). The Ld. Senior Counsel however has argued that the bonus shares received by the assessee on 19.06.2009 are not held by the assessee beyond the limit permitted by the proviso to section 13(1)(d) of the Act. This contention of the Ld. Senior Counsel is not acceptable simply on the reason that the time period permitted under proviso to section 13(1)(d) is to exit from non permissible investment/holding of shares and convert the same into permissible investment. Clause (iia) of proviso has been inserted by the Finance Act 1991 to secure that mere accretion of the existing holding of shares by way of bonus shares or acceptance of donation in kind or any asset not conforming to the provisions of section 11(5) will not make the fund or trust or institution lose tax exemption if the trust/institution covert the asset not conforming to section 11(5) into permissible investment within one year from the end of the Financial Year in which such bonus shares or other assets are received or on 31.3.1992 whichever is later. The explanatory note on the provision as issued by the CBDT vide Circular no. 621 dated 19.12.1991 reported in 195 ITR (st) 154 is relevant on this point. Para 15.2 of the said Circular reads as under:—

"Further a new clause (iia) has been inserted in the proviso in clause (d) of sub section (1) of section 13 to secure that mere accretion to the existing holding of shares by way of bonus shares or acceptance of donations in kind or any asset not conforming to the provision of section 11(5) will not make the fund or trust or institution lose tax exemption. The trusts or institutions will, however, be' required to dispose or convert the assets not conforming to the requirement of section 11(5) into permissible investment within one year from the end of the financial year in which such bonus shares or other assets are received or 31-3-1992, whichever is later."

7.2 Thus it is clear that clause (iia) of the proviso to section 13(1)(d) was inserted with a view that holding of the asset not conforming to the provisions of section 11(5) would not make the trust or institution lose tax exemption is such assets were disposed off or converted into permissible investment within one year from the end of the Financial year in which such assets were received. Due to certain anomalies and hardship arising out of the requirement of the proviso to section 13(1)(d) clause (iia) was further amended vide Finance Act 1992 whereby the period of disinvestment allowed upto 31st March 1993 or within one year form the end of the Financial Year in which the such assets were received whichever is later.

7.3 In the case in hand, though the assessee held the bonus shares of TCS for the duration which is within the time limit prescribed under clause (iia) of the proviso to section 13(1)(d) the assessee converted the assets being bonus shares of TCS into the preferential share of Tata sons Ltd. which is not a conversion into the asset/investment permissible u/s 11(5) of the Act. Therefore, clause (iia) of proviso to section 13(1)(d) would not rescue the assessee from the mischief of section 13(1)(d) (iii) of the Income-tax Act. The intent behind the insertion of clause (iia) of the proviso is to exit form non permissible investment, and to convert into permissible investment and not to just change one non permissible investment to another non permissible investment. If it is permitted it will defeat the very purpose of object of the said clause of the proviso.

8. The next question arises is, violation of provisions of section 13(2)(h) which reads as under:—

"(h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub- section (3) has a substantial interest."

8.1 The AO held that investment in shares of Tata Sons Ltd is in contravention of clause (h) of sub section 2 of section 13 because Tata Sons Ltd., is a concern in which the person referred in sub section 3 has substantial interest. Ld. Senior Counsel though reiterated the assessee's stand taken before the authorities below however he has contended that violation of section 13(2)(h) would not render the entire income of the trust lose exemption u/s 11. In support of his contention he has relied upon the decision of the Tribunal in the case of Tata Education Trust and Tata Social Welfare Trust (supra). As far as the violation of clause (h) of section 13(2) is concerned we find that the author of the assessee trust and its relative definitely have a substantial interest in the Tata Sons Ltd, therefore, the investment in the shares of Tata Sons Ltd is clear violation of clause (h) of section 13(2). We have given our serious thought on the issue and are of the view that violation of section 13(1)(d) and section 13(2)(h) would disqualify exemption of income from the investment in non conforming of section 11(5) but not the entire income of trust if the other income of the trust otherwise fulfil the condition for exemption. The Coordinate bench of this Tribunal in the case of Tata Education Trust and Tata Social Welfare Trust (supra) has decided a similar issue in para 13 as under:—

"13 We have heard the parties. The assessee is a public charitable trust. During the previous year relevant to the assessment year under appeal, the assessee derived its income from interest and dividend. Since the assessee continued to hold the shares of Tata Sons Ltd. beyond the permitted date prescribed for disinvestment u/s 13(1)(d), the exemption wad denied by the AO and the entire income of the assessee was brought to tax except the dividend income received on shares of Tata Sons Ltd. On appeal, the ld. CIT(A) has held, following his appellate order dated 20.06.2000 for AY 1996-97, that the entire income of the assessee would not attract disqualification for the purpose of section 11 but only the income derived form the investments falling in prohibited category would be chargeable to tax. In his appellate order for A. Y. 1996-97, the ld. CIT(A) has followed the decision of this Tribunal in Guru Dayal Berlia Charitable Trust, 34 ITD 489 in which it has been held that only the relevant income derived from impermissible investment would be subjected to tax and the non-fulfilment of the condition stipulated in section 13(1)(d)(iii) would not deprive a trust of its exemption from tax in respect of other income which has already been granted to it in earlier years. The order of the ld. CIT(A) is in conformity with the order of this Tribunal referred to by him in his appellate order for AY 1996-97. In this view of the matter, his order is confirmed. Appeal filed by the Department is dismissed."

8.2 We further note that while deciding the similar issue the Tribunal in the case of Gurdayal Berlia Charitable Trust (supra) has reproduced the relevant part of the explanatory note on the Finance Act 1984 vide Circular no. 387 in para 6 of the said order which reads as under:—

"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 IT authorities and strongly urged that they should have accepted the assessee's contention that it would lose exemption under S. 11 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 S. 11 (5) of the Act, the assessee would lose exemption under S. 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 S. 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 ca se the assessee was not in a position to dispose of the shares of National Rayon Corporation Ltd., it should not lose exemption contemplated under S. 11 of the Act in respect of other income earned by it. In this connection it 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-s. (1A) inserted in s. 161 of the IT 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 cl. (a) or cl. (b) of s. 11(4A) of the IT Act. As the maximum marginal rate of tax under the new proviso to s. 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 IT Act in regard to investment pattern or use of the trust property for the benefit of the settlor, etc., contained in s. 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 s. 13(1)(c) or (d) of the Act, the' maximum marginal rate of income tax will apply only to that art of the income which has_forfeited_exemption under the said provisions".

8.3 After considering the explanatory note the Tribunal decided the issue by holding that the provision of section 164(2) along with the proviso thereto would come into operation and only such income would be brought to tax at the maximum marginal rate which could not be treated as exemption by virtue of non fulfilment of conditions of investment in specified securities as prescribed u/s 11(5). The Hon'ble Jurisdictional High Court in the case of DIT (Exemption) v. Sheth Mafatlal Gagalbhai foundation Trust [2001] 249 ITR 533/114 Taxman 19 (Bom.) as held in para 6 as under: —
'Section 164 of the Income-tax Act does not create a charge on the income of a discretionary trust. 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 the association of persons. Therefore, a proviso was inserted by the Finance Act of 1984 with effect from April 1,1985, 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, only the non-exempt income portion would fall in the net of tax as if it was the income of the association of persons. On the other hand, 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 proviso (iia) it has been laid down that any asset which does 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 March 31, 1993, whichever is later. In the present case, the assessee was required to dispose of the shares under the said proviso by March 31, 1995 (see the judgment of this court in I.T.A. No. 81 of 1999, decided on September 14, 2000 - Director of Income-tax (Exemptions) v. Shardaben Bhaqubhai Mafatlal Public Charitable Trust [2001] 247 ITR 1). 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 reintroduced by the Direct Tax Laws (Amendment) Act, 1989, with effect from April 1, 1989. Earlier it was omitted by the Direct Tax Laws (Amendment) Act, 1987. However, the Legislature inserted a proviso by the Finance Act, 1984, with effect from April 1,1985. By the said proviso, it is, inter alia, laid down that where the 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 16 1(1 A). 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 phrases 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 July 6, 1984 (see [1985] 152 ITR (St.) 1). 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 the Direct Tax Laws (Amendment) Act, 1987, which provision was reintroduced by the Direct Tax Laws (Amendment) Act, 1989, the Legislature did not touch the proviso to Section 164(2) which has been on the statute book right from April 1, 1985. The said proviso was inserted by the 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 the normal rate of taxation under the Act.'

8.4 Following the above decision we hold that the breach of section 13(1)(d) and 13(2)(h) would lead to forfeiture of exemption of income derived from such investment and not the entire income would be subjected to the maximum marginal rate of tax u/s 164(2). Thus the exemption u/s 11 is available to the assessee only on the income to the extent the same is derived in conformity of section 11 and applied during the year for such purpose of charitable trust.

9. Ground No.2 is regarding denial of exemption u/s 10(34), 10(35) and 10(38).
9.1 The assessee claimed that dividend income on shares and unit and long term capital gain on sale of shares are exempt u/s 10(34), 10(35) and 10(38) respectively. The AO denied the exemption on the ground that the income derived from the property held by the trust and not any other person, section 11 exclusively deals with the income derived from the property held under trust and not section u/s 10(34), 10(35) and 10(38). Hence the AO held that there is a violation u/s 13 and as a result of the same exemption u/s 11 is denied. The assessee cannot claim the alternative claim for exemption u/s 10(34), 10(35) and 10(38) because these sections do not deal with income derived from the property held under the trust. If the income of the trust which is not held exempt u/ss 11, 12 and 13 is allowed to exempt under other sub-sections of section 10 it will lead to open ground for trust to exercise long term securities income and dividend income and claimed exemption of the same under other sub-sections of section 10 of Income-tax Act.

9.2 On appeal, CIT(A) concur with the view of AO.
9.3 Before us, the ld. Senior Counsel has submitted that any income by way of dividend referred to in section 115O of the Income-tax Act is exempt from tax u/s 10(34) of the Income-tax Act. Since the dividend is already subjected to tax at the hand of the distributing company u/s 115O and, therefore, it cannot be taxed twice. Once the income is exempt u/s 10 it would not required to be qualified u/s 11 of the Act. In support of his contention he has relied upon the decision of Hon'ble Delhi High Court in the case of CIT v. Divine Light Mission [2005] 278 ITR 659/146 Taxman 653 and submitted that the Hon'ble High Court dealt with an identical issue regarding agricultural income exempt u/s 10(5) of the Income-tax Act held that this income is not required to be considered at all even for the purpose of section 11 of the Income-tax Act. Thus the ld. Senior Counsel has submitted that if exemption is available u/s 10 then section 11 is irrelevant. He has relied upon the following decisions:—

9.4 The ld. Senior Counsel referred the observations of these decisions and submitted that once the income is exempt u/ss 10, same cannot be said to be taxed u/s 11 to 13. He has further contended that if the exemption is available to the assessee under two provisions of the Act, then the assessee is entitled to exemption under the provision which is more beneficial.

9.5 On the other hand, ld. DR has submitted that as per section 11 of the Act, the income from the property held under trust is covered under this section and not u/s 10 of the Income-tax Act. He has contended that both these sections are part of chapter III and, therefore, section 11 being specific provision for exemption of income from the property held under trust would override general provisions. He has emphasized that the provisions under same chapter should be considered harmoniously while dealing with special mischief. Sections 11, 12 and 13 are strings of provisions and if the case is covered by these special provisions then general law would not apply. He has put forth the logic that section 13 dehors the applicability of section 11 and in the same manner it would also dehors the applicability of section 10 if there is a violation of section 13 of the Act.

9.6 We have considered the rival submissions as well as relevant provisions of law. The exemption u/s 10 is income specific irrespective of the status/class of person. Whereas the exemption under section 11 is person specific though on the income derived from the property held under the trust. Further the exemption u/s 11 is subject to the application of income and modes or form of deposit and investment. The Hon'ble High Court in the case of Divine Light Mission (supra) while dealing with an identical issue has held in para 9 as under:—

"So far as question No.4 of paragraph No. 3 with regard to agricultural income is concerned, section 10(5) of the Act specifically points out that agricultural income shall not be included in computing the total income of a previous year and hence the question is required to be answered in favour of the assessee and against the Revenue. This income is not required to be considered at all even for the purpose of section 11 of the Act."

9.7 While deciding the question that the agricultural income was income from the property held under the trust can be denied exemption u/s 11 of the Income-tax Act. the Hon'ble High Court has held that the agricultural income shall not be included in the computation of total income of previous year in view of section 10(5) of the Act. Therefore, this income is not required to be considered for the purpose of section 11 of the Act. In the case of his holiness Silasri Kasivasi Muthukumaraswami Thambiran v. Agricultural ITO [1978] 113 ITR 889 (Mad.) the Hon'ble High Court of Madra has held that the agricultural income derived by charitable or religious trust is exempt u/s 10 could not be said to be brought to tax u/ss 11 to 13. Similar view has been taken in the series of decisions as relied upon by the ld. Senior Counsel when the question involved was the allowability of exemption u/s 10, (22), (23) Vs. sections 11 and 13. In our view the exemption u/s 11 is available on the income of the public charitable /religious trust or institution which is otherwise taxable in the hands of other persons. Thus the income which is exempt u/s 10 cannot be brought to tax by virtue of sections 11 and 13 of the Act because no such pre condition is provided either u/s 10 or 11 to 13 of Income-tax Act. Therefore, section 11 to 13 would not operate as overriding affect to the section 10 of the Act. The language of these provisions does not suggest that either section 10 is subjected to the provisions of sections 11 to 13 or sections 11 to 13 has any overriding affect over section 10. Therefore, the benefit of section 10 cannot be denied by invoking the provisions of sections 11 to 13 of the Act. Once the conditions of section 10 are satisfied then no other condition can be fastened for denying the claim under section 10 of the Act.

9.8 In view of the above discussion and following the various decisions (supra) we hold that the dividend income on shares and mutual funds and long term capital gain on sale of shares an exempt u/s 10(34) 10(35) and 10(38) respectively and cannot be brought to tax by applying sections 11 and 13 of the Act.

10. Ground No. 3 is regarding education grant given to Indian students for studying abroad.

10.1 The assessee has given grants to various Indian students/persons to pursue their education/higher education in various universities abroad. The AO noted that the grant is released by the assessee only after obtaining the first semester results of their education outside India from each scholar. The AO was of the view that the application of income as well as charitable purpose, both should be in India and execution of charitable purpose may be inside or outside India. The AO relied upon the decision of Hon'ble Delhi High Court in the case of DIT (Exemption) v. National Association of Software and Services Companies [2012] 345 ITR 362/208 Taxman 178/21 taxmann.com 213 (Delhi) and held that the amount of Rs. 1,53,50,000/- spent by the assessee for education grant to the students is not application of its income for charitable purpose in India and accordingly disallowed the exemption u/s 11.

10.2 On appeal CIT(A) confirmed the action of the AO.
10.3 Before us, the ld. Senior Counsel has submitted that it is sufficient if the income is applied within India and to that extent the income will be exempt u/s 11(1)(a). The ld. Senior Counsel has submitted that the decision relied upon by the AO in the case of National Association of Software and Services Companies (supra) is not applicable in the facts of the present case as in the case of the assessee the grant was given to the Indian students and in Indian Rupees, though the students have used the said grant for higher education abroad. The assessee has applied the money for charitable purpose in Indian and the final execution of the purpose may be outside India but the same will not affect the conditions satisfied by the assessee. the ld. Senior Counsel has relied upon the decision the Chennai Bench of this Tribunal in the case of Bharata Kalanali v. ITO [1989] 30 ITD 161 (Mad.). He has also relied upon the decision of this Tribunal in the case of CEO Clubs India v. DIT (Exemption) [2012] 53 SOT 488/25 taxmann.com 217 (Mum).

10.4 On the other hand, the ld. DR has submitted that the activity of the assessee does not end with the selection of candidates for assistance and disbursing amount to him but necessarily involves monitoring of the progress of the scholar's education outside Indian and completion of education outside India subject to the performance of the students, the financial assistance is granted and continued. Even only those students were selected who have already started their education outside India. Therefore, the trust is not merely handing over the grant for education of the scholars but is actively monitoring the education of scholars abroad. The assessee has not applied its income for charitable purpose in India. Merely making payment in India is not sufficient but the charitable purpose should also happen within Indian territory. He has relied upon the decision of Hon'ble Delhi High Court in the case of National Association of Software & Services Companies (supra).

10.5 We have considered the rival submissions and perused the relevant material. The assessee has given grant to 97 scholars studying in various institutions and universities outside Indian and the total amount of grant is Rs. 1,53,50,000/-. The assessee paid the grant in India and for the purpose of education of Indian students/persons, thus the charitable purpose of the grant is education of Indian persons. The application of income of the assessee completes at the point when the assessee released the grant which took place in India. The decision relied upon by the revenue is not applicable in the facts of the present case as the application of income took place in India and for the purpose of education of Indian students/persons. Therefore, for taking education by beneficiary from abroad would not amount to application of income of the assessee outside India. In the case of Bharata Kalanji (supra) the Chennai Bench of this Tribunal while deciding a question arising from the payment of Rs. 1.55 lakh made to a travel corporation of Indian for sending a troop on tour. The AO treated the expenditure as application of income of the trust for charitable purpose. However CIT revised the assessment and was of the opinion that this expenditure was prohibited and was not applied for purpose of trust in India and, therefore, not eligible for exemption u/s 11. The main object of the trust was to advance, propagate, increase and promotion of Indian classical and Folk arts and Indian music etc. The trust was invited by the Government of Nigeria to give certain dance performance abroad. Accordingly the trust send a troop and paid a sum of Rs. 1.55 lakh being the passage money to the Travel Corporation of India. The Tribunal held in para 6 as under:—

"6. The crucial question is only whether the conditions in section 11 are complied with. That section states that the income derived from property held under trust wholly for charitable purposes shall not be included in the total income to the extent to which such income is applied to such purposes in India. The question is whether this section requires the application of money in India or the carrying out of the purposes in India or both. The contention of the revenue is that apart from the money being spent in India even the purpose must be carried out in India. The section itself contradicts this contention. Section 11(1)(c)( ii) provides that income applied to such purposes outside India is exempt in the case of trust created before 1-4-1952 subject to the approval of the Board. This underlines the principle that Governments do not forego their revenue in favour of charges paid outside their countries and hence the relevant consideration is whether the situs of the application of the money and not the place in which the objects of the trust may become effective. It may be pertinent to refer to section 1 of 16 which exempts scholarships granted to meet the cost of education where also the CBDT itself does not consider scholarship granted for education abroad as money spent outside India. Similarly in the present case of such a wide object of propagation of art it would be difficult to confine it to the shores of the land. We are of the considered opinion that the expression "applied to such purposes in India" refers only to the situs of the expenditure and not" to the place 'where the "purposes" are carried out. The fact that the troupe gave the performance abroad is therefore no disqualification for treating he amount actually spent in India as application of the amount for charitable purposes. The Commissioner also referred to collections made for performances given as an activity for profit. We find that such performances do not constitute activities for profit as the collections are in the nature of donations received for the purposes of the trust. Hence this objection also cannot be sustained, It follows that the exemption granted by the Income-tax Officer was not erroneous and did not require to be reviewed by the Commissioner. Hence his order u/s 263 is cancelled. The appeal is allowed."

10.6 Similarly in the case of CEO Clubs India (supra), coordinate bench of this Tribunal has held in para 11 as under:—

"The other objection of the DIT was that the activities of the Assessee were not confined to India and therefore registration cannot be granted. The basis for these observations is that conferences were to be held outside India. We are of the view that holding of conferences abroad would not make the activities of the Assessee being carried out outside India. The benefits of such conference will ultimate go to Assessee and its members. It cannot be said that the activities of the Assessee were carried on outside India."

10.7 Following the above decisions of Tribunal, we hold that the education grant given to the Indian students in India for education/higher education abroad fulfills the conditions of application of money for such purpose in India.

11. Ground No. 4 is regarding denial of deduction of income applied to the objects of the trust in India and administrative expenses.

11.1 We have heard the ld. AR as well as ld. DR and considered the relevant material on record. The CIT(A) has decided this issue in para 7 as under:—

"Ground No. 5 of appeal becomes infructuous In the context of ground No. l, 2, 3 & 4 of appeal being dismissed because the claims of the appellant are in relation to 'computation of application of income' in the context of section 11 of the LT. Act, on which having failed for exemption u/s 11 of the LT. Act, the A. O. has computed the income in commercial manner. There is no disallowance made by the A.O. In computation of income In the" assessment order under the head 'administrative expenses' of Rs.3,65,81,515/- as taken in ground No. 5 of appeal. Therefore, ground No. 5 of appeal is also dismissed"

11.2 As it is clear that the AO denied the exemption u/s 11 and computed the income in commercial manner. CIT(A) has recorded that the AO has not made any disallowance on account of administrative expenses. However we note that the AO has computed the total income by taking the income from various sources and has not allowed any deduction. In view of our finding on the question of exemption u/s 11, this issue is set aside to the AO to reconsider the claim in the light of our finding on other issues.

12. Ground No. 5 is regarding TDS credit.

12.1 We have heard the ld. AR as well as ld. DR and considered the relevant material on record. At the outset we note that the CIT(A) has considered this issue in para 8 as under: —

"The A.O. is directed to verify and allow claim of TDS if any, u/s. 154 of the I. T. Act as an alternative remedy available with the appellant. Therefore, to that extent ground No. 6 survives for direction as given, but treated as dimissed for statistical purposes"

12.2 As it is evident from the finding of CIT(A) that the AO was directed to verify and allow the claim of TDS, therefore, no grievance arises from the impugned order of CIT(A). However the AO is directed to consider and decide the claim of TDS credit.

13. Ground No. 6 is regarding maximum marginal rate of tax applied to the entire income.

13.1 While denying the exemption u/s 11, the AO has applied the maximum marginal rate of tax on the entire income as per section 164(2).
13.2 On appeal, CIT(A) has confirmed the action of AO.

13.3 Before us, the Ld. Senior Counsel has submitted that the rate of tax on the short term capital gain arising from sale of shares shall be the rate prescribed under the Act u/s IMA and not the maximum marginal rate.

13.4 On the other hand, the Ld DR has relied upon the orders of authorities below and submitted that in the case of the assessee the provisions of section 164(2) are applicable and, therefore, the maximum marginal rate will be applied on the taxable income of the assessee and not separate rate on separate nature of income.

13.5 Having considered the rival submissions as well as relevant material on record. We note that the rate of tax on short term capital gain arising from sale of equity shares is provided u/s IMA as 15%. However relevant income which is derived from the property held under trust wholly for charitable or religious purpose is charged to tax as per the provisions of section 164(2) which reads as under:—

"(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 2,1 for which is of the nature referred to in sub-section (4A) of section 11,1 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."

13.6 Section 164(2) does not prescribe the rate of tax but it mandates the maximum marginal rate as prescribed under the provision of Act. Section 111A is a special provision for rate of tax chargeable on such income which reads as under:—

'111A Tax on short-term capital gains in certain cases.— (1) Where the total income of an assessee includes any income chargeable under the head "Capital gains", arising from the transfer of a short term capital asset, being an equity share in a company or a unit of any equity oriented fund and—

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income tax, then, such income as so reduced falls short of the maximum amount which is not chargeable income tax and the tax on the balance of such short term capital gains shall be computed at the rage of fifteen per cent.

2. Where the gross total income of an assessee includes any short-term capital gains referred to in sub-section (1), the deduction under Chapter Vl-A shall be allowed from the gross total income as reduced by such capital gains.

3. Where the total income of an assessee includes any short-term capital gains referred to in sub-section(1), the rebate under section 88 shall be allowed from the income tax on the total income as reduced by such capital gains.

Explanation — for the purpose of this section, the expression "equity oriented fund" shall have the meaning assigned to it in the Explanation to clause (38) of section 10.'

13.7 When the short term capital gain arising from the sale of shares subjected to STT is chargeable to tax at 15% then the maximum marginal rate on such income cannot exceed the maximum rate of tax provided under the Act. Accordingly, we are of the view that the short term capital gain on sale of shares already subjected to STT, is chargeable to tax at maximum marginal rate which cannot exceed the rate provided u/s IMA of the income Tax Act. Accordingly this issue is decided in favour of the assessee.