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2014 (2) TMI 1033 - HC - Income TaxPower of Commissioner u/s 263 of the Act Held that - The decision in MALABAR INDUSTRIAL CO. LIMITED v/s COMMISSIONER OF INCOME TAX 2000 (2) TMI 10 - SUPREME Court followed commissioner cannot exercise the power of revision solely on the ground that the order passed is erroneous - He gets jurisdiction only if such erroneous order is prejudicial to the interest of the Revenue - for attracting Section 263, the condition precedent has to be abide - if one of the requirements for satisfaction of taking action under Section 263 of the Act is absent, then recourse cannot be made to Section 263 of the Act - The Commissioner cannot invoke his revisional power to correct each and every type of mistakes committed by the Assessing Officer Decided against Revenue. Interpretation of section 13(1)(d) of the Act - Whether the Tribunal is correct in holding that when a part of income is held to be violative of the provisions of Section 13(1)(d) only to the said extent maximum marginal rate of tax is to be levied and not for the whole income more particularly when there is violation of provisions of Section 11(5) of the Act Held 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 the decision in Director Of Income-Tax (Exemptions) Versus Sheth Mafatlal Gagalbhai Foundation Trust 2000 (10) TMI 26 - BOMBAY High Court followed - 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 thus, the entire income of the respondent-Trust cannot be assessed for the tax Decided against Revenue.
Issues Involved:
1. Power of Commissioner under Section 263 of the Income Tax Act. 2. Taxation of income in violation of Section 11(5) of the Income Tax Act. 3. Applicability of proviso to Section 164(2) of the Income Tax Act. Detailed Analysis: Issue 1: Power of Commissioner under Section 263 of the Income Tax Act The primary contention was whether the Commissioner of Income Tax could invoke Section 263 to revise an assessment order that was allegedly erroneous and prejudicial to the interest of the revenue. The Tribunal had held that the Commissioner could not set aside the order of the Assessing Officer if two views were possible and the Assessing Officer had taken one of those views. The High Court upheld this view, agreeing with the Division Bench's interpretation that for Section 263 to be invoked, the order must be both erroneous and prejudicial to the revenue. The court cited the Supreme Court's rulings in Malabar Industrial Co. Ltd. v. CIT and Dawjee Dadabhoy & Co. v. S.P. Jain, emphasizing that the Commissioner cannot revise orders solely on the ground of error unless it is also prejudicial to the revenue. Therefore, the first substantial question of law was resolved against the revenue and in favor of the assessee. Issue 2: Taxation of income in violation of Section 11(5) of the Income Tax Act The second issue was whether the entire income of the Trust should be taxed if part of it violated Section 11(5). The Tribunal had held that only the income from the specific investment or deposit that violated Section 11(5) should be taxed, not the entire income of the Trust. The High Court supported this interpretation, referring to the Bombay High Court's decision in Director of Income Tax (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust and the Delhi High Court's decision in Director of Income Tax (Exemption) v. Agrim Charan Foundation. Both judgments clarified that only the non-exempt portion of the income should be taxed at the maximum marginal rate, not the entire income. The High Court agreed with this view, stating that the violation of Section 13(1)(d) does not lead to the denial of exemption under Section 11 for the entire income. Issue 3: Applicability of proviso to Section 164(2) of the Income Tax Act The third issue was whether the proviso to Section 164(2) applied when there was no "income derived from the property." The High Court interpreted Section 164(2) to mean that only the income from the property violating Section 11(5) should be taxed at the maximum marginal rate. The court reiterated that the legislature intended for only the non-exempt income portion to be taxed, not the entire income. This interpretation was consistent with the views of the Bombay and Delhi High Courts. Thus, the High Court held that the entire income of the Trust could not be taxed due to the violation of Section 11(5). Conclusion: The High Court dismissed the appeals, holding that the Commissioner could not invoke Section 263 merely because the Assessing Officer's order was erroneous unless it was also prejudicial to the revenue. Additionally, only the income violating Section 11(5) should be taxed at the maximum marginal rate, not the entire income of the Trust. The Tribunal's decision to restore the order of the Assessing Officer was upheld, and all substantial questions of law were resolved in favor of the assessee.
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