1996 (7) TMI 184 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of exemption under section 11 of the Income-tax Act by invoking the provisions of section 13(1)(bb).
2. Applicability of the rate of tax.
3. Exemption of interest income earned on fixed deposits.
4. Applicability of the maximum marginal rate of tax.

Detailed Analysis:

1. Disallowance of Exemption under Section 11 by Invoking Section 13(1)(bb):

The assessee filed various returns of income, ultimately claiming exemption under section 11 of the Income-tax Act. The Assessing Officer (AO) issued a notice under section 143(2) and observed that the trust was created by a Trust Deed dated 23-11-1982, based on a will dated 18-5-1976. The AO noted that the trust's main object was charitable, but the trust was running a business named "Taxation," generating substantial income. The AO questioned how the trust's activities were charitable under section 13(1)(bb) and held that the trust's main object was running the business of "Taxation," not achieving charitable aims. Consequently, the AO denied the exemption under section 11.

On appeal, the CIT(A) agreed with the AO, emphasizing that the trust's main object was running the business of "Taxation" and not charitable purposes. The CIT(A) also noted that the trust deed executed on 23-11-1982 was not by the original settlor but by the trustees, and no new material was presented to counter the AO's findings.

The Tribunal, however, considered the assessee's arguments, including references to several judicial decisions (e.g., CIT v. Thanthi Trust [1982] 137 ITR 735 (Mad.), Thanthi Trust v. Asstt. CIT [1995] 213 ITR 626 (Mad.)) which established that a business held under trust for charitable purposes should not be denied exemption under section 11. The Tribunal concluded that the provisions of section 13(1)(bb) do not apply to the assessee since the business itself was held under trust and was necessary for the trust's survival and charitable activities. Therefore, the Tribunal allowed the exemption under section 11.

2. Applicability of the Rate of Tax:

The Tribunal noted that the CIT(A) had directed the AO to apply the normal rate of taxation applicable to an Association of Persons (AOP) for the assessment years 1988-89 and 1989-90. The Tribunal upheld this direction, rejecting the application of the maximum marginal rate of tax.

3. Exemption of Interest Income Earned on Fixed Deposits:

The CIT(A) had denied the exemption on interest income earned on fixed deposits due to the rejection of the main exemption claim under section 11. However, given the Tribunal's decision to allow the exemption under section 11, it directed the AO to reconsider the claim for exemption of interest income under the provisions of section 11 in accordance with the law.

4. Applicability of the Maximum Marginal Rate of Tax:

The CIT(A) had restored this matter to the AO with directions to provide a fresh finding after allowing the assessee due opportunity. The Tribunal saw no reason to interfere with the CIT(A)'s order and thus rejected this ground.

Conclusion:

The appeal was allowed in part, with the Tribunal granting the exemption under section 11, directing the AO to reconsider the interest income exemption, and upholding the CIT(A)'s directions regarding the rate of tax and the maximum marginal rate of tax.