ORDER
T. V. RAJAGOPALA RAO, J.M. :
In the first two appeals, Tulsiram Gilda Public Charitable Trust, Hyderabad is the assessee. In the subsequent 3 appeals, the assessee is a different trust and is known as Tulsiram Harikishan Gilda Public Charitable Trust, Hyderabad.
2. The main common question which arises in all these appeals is whether the revisionary action taken by the Commissioner under S. 263 of the IT Act, 1961 is legally supportable or justifiable on facts and circumstances of these cases. Since common questions are involved they can be taken up together and disposed of by a common order for the sake of convenience.
3. Now let us trace the facts with regard to M/s. Tulsiram Gilda Public Charitable Trust relating to asst. yrs. 1985-86 and 1986-87. The assessee is a Public Charitable Trust. It had filed its income-tax returns on 25th July, 1985 for asst. yr. 1985-86 and on 29th July, 1986 for asst. yr. 1986-87. For asst. yr. 1985-86 the assessment was completed under S. 143(1) on 24th Jan., 1987 accepting the returned income. For asst. yr. 1986-87 also, assessment order was passed under S. 143(1) on 24th Sept., 1987 accepting the returned income. Demand notices were sent on 30th Sept., 1987 charging tax at the maximum marginal rate. Then the assessee filed applications under S. 143(2)(a) on 27th Oct., 1987 in Form No. 16A contending that the provisions of S. 161(1A) are not applicable and further contending that the income of the trust has to be taxed only at ordinary rates and not at maximum marginal rates. It would appear that the contentions put forward on behalf of the assessee in its applications filed under S. 143(2)(a) dt. 27th Oct., 1987 were accepted by the ITO and he ordered firstly that the assessee is a charitable trust and that its beneficiaries are public at large and, therefore, the provisions of S. 160(1)(iv) are not applicable. He ordered that ordinary AOP rates should be applied. Thus, he ordered that the sum of Rs. 23,870 determined for asst. yr. 1985-86 and a sum of Rs. 30,613 for asst. yr. 1986-87 should be assessed at ordinary rates. Thus the ITO passed separate assessment orders dt. 28th March, 1988 for asst. yrs. 1985-86 and 1986-87 under S. 143 r/w S. 143(2)(a) of the IT Act. After going through the assessments, the learned CIT felt that because of the assessees contravention of provisions of S. 13(1)(d) the income of the trust is not exempt under S. 11 or S. 12 both for asst. yrs. 1985-86 and 1986-87 and in those circumstances, part of the relevant income is liable to be assessed as income belonging to the AOP and maximum marginal rate should have been applied under the proviso to S. 164(2). Instead the ITO completed the assessments for these two years by ordinary rates applicable to the AOP which resulted in under-assessments which are both erroneous as well as prejudicial to the interests of the Revenue. Therefore, a show-cause notice under S. 263 was issued to the assessee on 14th March, 1990 in answer to which the assessee filed written arguments on 13th March, 1990 before the CIT. In the arguments advanced on behalf of the assessee, the following are found :
(i) The investment made by the assessee trust in M/s. Karnataka Stone Supplying Co., Salem was in the capacity of partner and the income derived from the partnership business nor doubt comes under business income. If any business income is derived by charitable trust under S. 11(4A) it should be taxed under S. 164(2) as AOP and ordinary rate should only be applied to that AOP.
(ii) The proviso under sub-s. (2) of S. 164 which applies only when there was a contravention of S. 13(1)(c). Sec. 13(1)(d) does not control the main provision of S. 164(2) and as such the proviso applicable only in respect of income other than business income.
(iii) If the proviso is made to apply to the business income then what is given by way of concessional rate of tax under S. 164(2) will stand cancelled by the proviso because the investment is not made in the specified assets. As such the investment made in the business will stand by itself and will not be hit by the provisions of S. 11(5) as otherwise there would be on need for having a provision like 164(2).
(iv) If the interpretation suggested by the Commissioner is adopted, then charitable trust cannot carry on any business undertaking, except at the peril of being assessed at maximum marginal rate, which in fact is not the intention of the legislature. Support was sought to be obtained for the assessees argument from the Boards Circular No. 387 dt. 6th July, 1984 which stated that a new sub-s. (1A) in S. 161 was inserted to cover only the private trusts having profits and gains of business and maximum marginal rate does not apply to business profits of a charitable trust which are otherwise chargeable to tax. Hence, a stand was taken that the business profits of a charitable trust are not chargeable at the maximum marginal rate and the proviso under sub-s. (2) to S. 164 applies only to any income not being the income from business of a charitable trust. The assessee trust requested the learned Commissioner to drop the proceedings initiated under S. 263 of the IT Act. The objection raised and the request for dropping the revisionary proceedings initiated by him under S. 263 were all rejected by the Commissioner.
4. While rejecting the objection and request of the assessee for dropping the revisionary proceedings, the CIT in his impugned order dt. 30th March, 1990 disposing of the point in each of the asst. yrs. 1985-86 and 1986-87, held the following :
(i) When a proviso has been inserted under the main section, it is only an adjunct to the main provision and it does not have the effect of an independent provision. Therefore, the proviso under S. 164(2) must be r/w S. 164(2) and not independently. If so done, it would be clear that the business profits derived by a charitable trust which are chargeable under S. 11(4A) is taxable as income of AOP. However, when once Ss. 13(1)(c) and 13(1)(d) are infringed, the income which is to be taxed under S. 164(2) has to be taxed at the maximum marginal rate.
(ii) A clear reading of S. 164(2) and the proviso thereunder would not indicate any distinction between the business income and non-business income. There was no need to import terms which are not there in the section. One has to look merely to what is merely stated. There is no room for any intendment. Nothing is to be read and nothing is to be implied and one can only look fairly at the language used. Even according to the assessee, the income earned by it was business income. There is contravention of provisions of Ss. 11(5) and 13(1)(d) and as such income derived by the trust has to be taxed at the maximum marginal rate as exemption under S. 11 is not available by virtue of the provisions of Ss. 11(5) and 13(1)(d).
(iii) Boards Circular No. 387 dt. 6th July, 1984 applies only to private trusts having profits and gains of business. The last sentence in para 28.6 of the circular that where such a trust (charitable trust) contravenes the provisions of S. 13(1)(c) or 13(1)(d) of the IT Act maximum marginal rate of income-tax will apply only to that part of the income which has forfeited exemption under the said provisions. In other words business income of a private trust is chargeable to tax at the maximum marginal rate while business income of a charitable trust is not chargeable at the maximum marginal rate, unless the income incurred forfeiture of exemption by virtue of the provisions of S. 13(1)(d) of the Act. The circular of the Board will not be of any avail to the assessee. The CIT ultimately held the following :
The income of the trust is business income and it has to be assessed to tax as income of the AOP as there was contravention of provisions of S. 11(5) as well as provisions of S. 13(1)(d) and, therefore, it should be assessed at the maximum marginal rate. Thus, he set aside the assessment orders passed by the ITO under S. 143(3) r/w S. 143(2)(a) both for asst. yrs. 1985-86 and 1986-87 and directed him to redo the same in accordance with law.
Now in the case of the second trust, which is the assessee in the later three appeals of this series, let us examine the facts relating to asst. yrs. 1986-87, 1987-88 and 1988-89. In this case also, the assessee is a Public Charitable Trust and the assessment years involved are 1986-87, 1987-88 and 1988-89. The IT returns were filed for these years on 29th July, 1986, 7th July, 1987 and 20th July, 1988 respectively. Assessments were completed under S. 143(1). While completing the assessment for 1986-87, the ITO charged income-tax at maximum marginal rate. The trustees filed objection petition in Form No. 6A objecting to the levy of tax at the maximum marginal rate. The ITO accepted the objection of the assessee and passed assessment orders under S. 143(3) r/w S. 143(2)(a) for asst. yr. 1986-87. The said assessment order was passed on 28th March, 1988. In the said assessment order, the ITO levied tax at ordinary AOP rate on the business income of Rs. 29,654 fixed for asst. yr. 1986-87. For asst. yr. 1987-88 assessment order was passed on 15th Sept., 1987 under S. 143(1) determining the business income at Rs. 27,971 and the ITO directed that ordinary rate leviable on AOP should be collected from the assessee. So also for asst. yr. 1988-89, the ITO passed an assessment order under S. 143(1) levying ordinary rates applicable to AOP on business income determined for asst. yr. 1988-89. For the same reasons which were mentioned while initiating revisionary proceedings in the case of the trust which was the assessee in the first two appeals, in the case of the second trust also, in levying maximum marginal rate after determining the business income of the assessee for asst. yrs. 1986-87, 1987-88 and 1988-89 the orders were found erroneous and prejudicial to the interests of the Revenue. Therefore, according to the learned CIT there was under assessment made by the ITO and they are liable to be revised. The same objections which the assessee filed in the case of the first named trust were raised in the case of the second trust also and the proposed revisionary action of the Commissioner is objected to and requested to be dropped. For similar reasons which are assigned in the case of the first named trust, the learned Commissioner rejected all the contentions of the assessee by his common orders dt. 30th March, 1990 and held that the assessee trust earned business income, that it contravened the provisions of S. 11(5) as well as 13(1)(d) and, therefore, the business income earned by the assessee trust for these three assessment years should be taxed at maximum marginal rate under the proviso to S. 164(2). Since he felt that there were under assessments he set aside the assessment orders for these three years and directed the ITO to reframe the assessments according to law. Aggrieved against the revisionary orders of the CIT dt. 30th March, 1990 both these assessee came up in second appeals before this Tribunal and thus the matters stand for our consideration.
6. We have heard Shri K. L. Rathi, learned advocate for the assessee and Shri S. C. Jaini, the learned Departmental Representative. Shri K. L. Rathi contended the following, proviso to S. 164(2) does not cover business income. Sec. 13(1)(d) proviso (iii) says that every business fund need not be kept invested in approved securities under S. 11(5). To show the real intention of a proviso in an enactment, our attention is drawn by Shri K. L. Rathi to the Supreme Courts decision in CIT vs. Madurai Mills Co. Ltd. (1973) 89 ITR 45 (SC) in which the intention of an enactment as per the headnote obtaining at page 46 of the reported decision is given as follows :
“It is well settled that considerations stemming from legislative history must not be allowed to override the plain words of a statute.
A proviso cannot be construed as enlarging the scope of an enactment when it can be fairly and properly construed without attributing to it that effect. Further, if the language of the enacting part of the statute is plain and unambiguous and does not contain the provisions which are said to occur in it, one cannot derive those provisions by implication from a proviso.”
In order to highlight his argument that proviso to S. 164(2) does not apply to business income and unless it is so construed the reading of S. 164(2) would lead to absurd results, Shri K. L. Rathi brought to our notice, the Supreme Courts judgment in the case of K. P. Varghese vs. ITO & Anr. (1981) 131 ITR 597 (SC) wherein the rule of interpretation in a case where literal construction would lead to absurd results is stated to be as follows :
“A statutory provision must be so construed, if possible that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even do some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction.”
In support of the proposition that where two interpretations are available the interpretation which is favourable to the assessee should be adopted the learned counsel for the assessee brought to our notice the decision of the Supreme Court in CIT vs. J. K. Hosiery Factory (1986) 159 ITR 85 (SC). In the facts of that case before the Honble Supreme Court, there was unabsorbed depreciation of an unregistered firm of Rs. 43,963. It was sought to be carried forward for asst. yr. 1950-51 in which the firm was granted registration. The question is whether such carry forward is possible and in that connection, the Supreme Court inter alia held the following at page 85 as part of its headnote :
“In case of doubt, the assessee is entitled to an interpretation which is favourable for him.”
7. On the other hand, the learned Departmental Representative relied upon the orders of the learned CIT passed under S. 263 and contended that the business income earned by the assessee trusts are liable to be assessed at maximum marginal rate under the provisions of S. 164(2) of the IT Act and, therefore, the two sets of impugned orders passed by the learned CIT under S. 263 are not liable to be disturbed and, on the other hand, they are entitled to be confirmed.
8. After having heard the arguments on both sides, we are of the opinion that one of the crucial argument advanced by Shri K. L. Rathi should be accepted as correct and on that ground it should be held that the provisions of S. 13(1)(d) were not in fact contravened by the assessee firm for not either depositing the business income or funds of the assessee trusts in approved securities under S. 11(5). Immediately we may refer to the provisions of S. 13(1)(d), proviso (iii) which is as follows :
“13(1). Nothing contained in S. 11 or S. 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof –
(d) in the case of a trust for charitable or religious institution any income thereof, if for any period during the previous year –
Proviso (iii) – any funds representing the profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year.”
Under the said provision any fund of the trust or institution invested or deposited before 1st March, 1983 otherwise than in one or more of the forms or modes specified in sub-s. (5) of S. 11 continue to remain so invested or deposited after 30th day of Nov., 1983. Therefore, the funds of the trust or institution which were previously invested or deposited before 1st March, 1983 should also remain so invested in the forms or modes prescribed under sub-s. (5) of S. 11 even after 30th day of Nov., 1983. The funds of the trusts or institutions should not be invested or deposited after 28th Feb., 1983 otherwise than in any one or more forms or modes specified in sub-s. (5) of S. 11. However, there are certain exceptions recognised by the proviso in which case funds of the trust or institutions need not be kept in one or more of the forms or modes specified in sub-s. (5) of S. 11. One of the exceptions is found under proviso (iii) mentioned in S. 13(1)(c). The said part of the proviso as well as Explanation thereunder are the following :
“Provided that nothing in this clause shall apply in relation to –
(iii) any funds representing the profits and gains of business being profits and gains of any pervious year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year.”
“Explanation : Where the trust or institution has any other income in addition to profits and gains of business, the provisions of cl. (iii) of this proviso shall not apply unless trust or institution maintains separate books of account in respect of such business.”
Now in this case each of these assessees were holding 25% share in a partnership firm M/s. Karnataka Stone Supplying Co., Salem. Except share income which is considered as business income, the assessee did not derive any other type of income and, therefore, the Explanation quoted above does not apply to either of these assessees. Now according to proviso (iii), if the funds representing the profits and gains of business and if they relate to any previous year relevant to assessment year commencing on 1st April, 1984 or subsequent assessment year they need not be business profits deposited in forms or modes specified in sub-s. (5) of S. 11. Therefore, the finding of the learned CIT that because the business income was not invested either in one of the forms or modes specified in sub-s. (5) of S. 11 and for that reason the provisions of S. 13(1)(d) are contravened by the assessee appears to be not correct under law. On the other hand, having regard to the correct interpretation of proviso (iii) to S. 13(1)(d), it would appear that business profit or gain which was derived in the assessment year commencing on 1st April, 1984 or for subsequent assessment year were not invested in the specified modes of investment under S. (5) of S. 11. For that reason, it cannot be said that there was a contravention of S. 13(1)(d). That means even if the business funds or profits and gains derived from business were not deposited in any of the specified modes prescribed under sub-s. (5) of S. 11 there cannot be contravention of S. 13(1)(d) and thus the main ground on which the learned CIT felt that the case of the assessee falls under proviso to S. 164(2) does not appear to be correct. On the other hand, even in the absence of the assessee trusts in these cases before us failing to deposit their business funds as well as profits and gains derived by them in their business in one or more of the modes specified in sub-s. (5) of S. 11 it should be taken that there was no contravention of S. 13(1)(d) and for that reason the assessee did not get exemption under S. 11 then, in our considered opinion, the proviso to S. 164(2) does not apply. Contravention of the provisos to S. 13(1)(c) or 13(1)(d) is only one of the modes which would earn disqualification for an assessee for getting exemption under Ss. 11 and 12. This contravention of S. 13(1)(c) and (d) is not exhaustive for being disqualified for exemption under Ss. 11 and 12. For instance if an assessee trust does not spend 75% of the income earned by it in a particular assessment year, the short-fall of expenditure from 75% may be taxable unless and until the accumulation is sought for and obtained on filing Form No. 10A. Even for such short-fall in income exemption under S. 11 is not available. Thus, there may be several modes by which the exemption under S. 11 may not be available to a particular assessee. But when such exemption under S. 11 is specifically not available to the assessee for the reason that there is contravention of the provisions of cls. (c) and (d) of S. 13(1), then only the proviso under S. 164(2) applies and it does not apply in other cases or circumstances. That means business income derived by the assessee trusts which are public charitable trusts are ordinarily assessable to tax under S. 164(2) and only ordinary rates applicable to AOP has to be applied to such income. But if such business income renders itself ineligible for exemption under S. 11 for the additional reason that it contravened the provisions of S. 13(1)(c) or (d) then the business income is assessable at maximum marginal rate. This, in our opinion is the correct interpretation of the provisions of S. 164(2) as well vis-a-vis the proviso thereunder. The contention of the assessee that S. 164(2) applies to business income and proviso thereunder applies to non-business income, according to us, is an argument which deserves to be rejected outright and it has no legal force.
8. The learned Commissioner held that the business funds invested by the first assessee for asst. yr. 1985-86 as well as 1986-87 and the business income derived by it were not withdrawn and the particulars of the same are as under :
Asst. yr.
Previous year ended on
Extent of funds invested
1985-86
24th Oct., 1984
1,33,870
1986-87
12th Nov., 1985
1,46,807
Asst. yr.
Income derived
Income withdrawn
1985-86
Rs. 23,870
Nil
1986-87
Rs. 30,464
Rs. 17,488
In the case of the second assessee, the following particulars are furnished :
Asst. yr.
Previous year
Extent of funds invested
Income derived
Income withdrawn
1986-87
12th Nov., 1985
Rs. 1,63,804
Rs. 31,133
Rs. 15,010
1987-88
1st Nov., 1986
Rs. 1,82,079
Rs. 29,443
Rs. 11,168
1988-89
22nd Oct., 1987
Rs. 2,03,337
Rs. 32,703
Rs. 11,445
As can be seen from the above tables, either business funds or the profits and gains from business which were alleged not to have been deposited in the specified modes prescribed under sub-s. (5) of S. 11 were all derived in the assessment year commencing from 1st April, 1984 or subsequent assessment years. Therefore, the proviso (iii) to S. 13(1)(d) clearly applies to all the funds which were stated to have been not deposited in forms or modes specified under sub-s. (5) of S. 11. For all the above reasons we have to hold that these cases of two assessees were not governed by the proviso to S. 164(2) but they were governed by S. 164(2) only, i.e., by the main sub-section itself and not of the proviso. Therefore, we are of the opinion that the action of the ITO in applying ordinary rates applicable to AOP for the business income earned by these assessee for the assessment years under consideration before us is perfectly justified and such action of the ITO is neither erroneous nor prejudicial to the interest of the Revenue and the two sets of orders of the learned Commissioner do not appear to be correct under law and, therefore, they are hereby set aside and the orders of the ITO for these years are restored.
9. In the result, the appeals of the assessee are allowed.