1997 (10) TMI 403 - AT - Income Tax

Summary

Issues Involved:

1. Denial of exemption under section 11 of the Income-tax Act.
2. Compliance with the provisions of section 11(5) and section 13(1)(d) of the Income-tax Act.
3. Determination of taxable income from prohibited investments.
4. Validity of the assessment and appellate orders.

Issue-wise Detailed Analysis:

1. Denial of exemption under section 11 of the Income-tax Act:

The assessee-trust filed an appeal against the order of the Dy. CIT (Appeals), which upheld the Assessing Officer's decision to deny the benefit of exemption under section 11. The Assessing Officer concluded that the trust's investments in debentures were prohibited under section 11(5), read with section 13(1)(d), and thus denied the exemption. The trust argued that these investments were disinvested before the specified date, except for certain debentures which could not be disinvested due to circumstances beyond their control. The lower appellate authority, however, maintained that the trust was not entitled to exemption because the investments were held beyond the specified date.

2. Compliance with the provisions of section 11(5) and section 13(1)(d) of the Income-tax Act:

The Assessing Officer determined that the trust's investments in debentures were not compliant with section 11(5) and section 13(1)(d). The trust contended that the investments were part of the corpus of the trust and were either settled by the settlor or acquired before 1-3-1983. The trust argued that the income from these investments should still be exempt under section 11, citing the proviso to section 13(1)(d) which allows certain exceptions for investments held as part of the corpus before the specified date.

3. Determination of taxable income from prohibited investments:

The trust's alternative contention was that only the income from the prohibited investments (i.e., the debentures) should be taxed, not the entire income of the trust. The trust provided details of the debentures held and the interest received, arguing that only this portion of the income should be subject to tax at the maximum marginal rate. The trust cited the Madras High Court decision in Auditor Dasaradha Rami Reddy Charities v. CIT, which supported the view that only the income from non-compliant investments should be taxed, not the entire income of the trust.

4. Validity of the assessment and appellate orders:

The Tribunal found that the lower appellate authority did not properly consider the trust deed and the documents submitted by the trust. The appellate authority failed to discuss whether the shares held by the trust constituted the corpus and whether the income derived from such shares should still enjoy exemption under section 11. The Tribunal noted that the lower appellate authority's interpretation of the law was incorrect, as it did not align with the Madras High Court's decision, which clarified that only the income from non-compliant investments should be taxed.

Conclusion:

The Tribunal set aside the order of the lower appellate authority and allowed the appeal for statistical purposes. It directed the lower appellate authority to re-examine the case, determine which portion of the income is exempt under section 11, and which portion is taxable at the maximum marginal rate, based on the documents and submissions provided by the trust. The Tribunal emphasized that the entire income of the trust should not be denied exemption solely because of the non-compliant investments.