1992 (10) TMI 125 - AT - Income Tax

Summary

Issues Involved:
1. Legality and justifiability of the revisionary action taken by the Commissioner under section 263 of the Income-tax Act, 1961.
2. Applicability of section 161(1A) and section 164(2) to the business income of Charitable Trusts.
3. Interpretation of section 13(1)(d) and its impact on the exemption under section 11 or section 12.
4. Applicability of Board's Circular No. 387 dated 6-7-1984.

Detailed Analysis:

1. Legality and Justifiability of the Revisionary Action under Section 263:
The main question in all appeals was whether the revisionary action taken by the Commissioner under section 263 was legally supportable or justifiable. The Commissioner felt that due to the assessee's contravention of section 13(1)(d), the income of the trust was not exempt under section 11 or section 12 for the relevant assessment years. Consequently, he issued a show-cause notice under section 263, contending that the Income-tax Officer's assessment orders were erroneous and prejudicial to the interests of the revenue.

2. Applicability of Section 161(1A) and Section 164(2):
The assessee contended that the provisions of section 161(1A) were not applicable and that the income of the Trust should be taxed at ordinary rates, not at the maximum marginal rates. The Commissioner, however, argued that the business income derived by a charitable trust, chargeable under section 11(4A), should be taxed as income of an A.O.P. at the maximum marginal rate, especially when sections 13(1)(c) and 13(1)(d) are infringed.

3. Interpretation of Section 13(1)(d) and its Impact on Exemption:
The Commissioner held that the income which is to be taxed under section 164(2) due to contravention of sections 11(5) and 13(1)(d) should be taxed at the maximum marginal rate. The assessee argued that section 13(1)(d) does not control the main provision of section 164(2) and that the business income should be taxed at ordinary rates. The Tribunal found that the funds representing the profits and gains of business for assessment years commencing on 1-4-84 or subsequent years need not be invested in the specified modes under section 11(5). Therefore, the Tribunal concluded that there was no contravention of section 13(1)(d) by the assessee, and hence, the proviso to section 164(2) did not apply.

4. Applicability of Board's Circular No. 387:
The Commissioner argued that the Board's Circular No. 387 applied only to private trusts and not to public charitable trusts. The Tribunal, however, found that the interpretation of section 13(1)(d) and section 164(2) did not support the Commissioner's view. The business income of a charitable trust is not chargeable at the maximum marginal rate unless the income forfeits exemption due to contravention of section 13(1)(d).

Conclusion:
The Tribunal held that the action of the Income-tax Officer in applying ordinary rates applicable to AOP for the business income earned by the assessees was justified. The orders of the Commissioner under section 263 were set aside, and the orders of the Income-tax Officer were restored. The appeals of the assessee were allowed.