TMI Blog2012 (8) TMI 422X X X X Extracts X X X X X X X X Extracts X X X X ..... 25 of the Companies Act, 1956. The assessee had also applied for registration u/s 12AA of the Income-tax Act, 1961 [the Act, in short] which was granted by the CIT(Exemptions) on 31.5.2004. The assessee had filed return of income admitting income at Rs. 3,39,03,877/- and claimed exemption u/ss 11 and 12 of the Act. The return filed by the assessee was processed initially u/s 143(1) of the Act and subsequently, a notice u/s 143(2) was issued to the assessee and in response to the notice issued by the Assessing Officer, the a representative appeared before the Assessing Officer and filed details from time to time. 3. During the course of assessment proceedings, the Assessing Officer has observed that the assessee, a foundation, invested 2 lakh shares at face value of Rs. 10/- per share in the company 'Jagannatha Financial Services Limited' [JFSL]'. The shares of JFSL are not listed in any recognized Stock Exchange. During the financial year2006-07, the company had not commenced its business. The company was issued certificate of registration to commence its business as a non-banking financial company [NBFC] on 2.4.2007. The Assessing Officer further observed that the assessee M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd notice that KAS foundation, a Micro finance institution is primarily and predominantly engaged in rural development in remote village areas, tribal areas for the upliftment of rural poor people in under developed states like Orissa, Chattisgarh. Hence, we hereby request your goodself to consider the above explanation and decisions and not to withdraw the exemption granted to us." 4. The Assessing Officer, after considering the above reply of the assessee, has observed that the assessee was also director of JFSL and had substantial interest in the company. Hence the investment was not only a violation u/s 13(1)(d) but also u/s 13(2)(h) r.w.s 13(4) of the Act. The Assessing Officer had asked the assessee to clarify in this aspect. In response to the above, the assessee, vide letter dated 10.12.2009 submitted a reply which is as under: "In this respect we hereby bring to your kind notice that investment in shares of Jagannath Financial Services Ltd. was due inadvertence and lack of awareness of the law on the subject on the part of the company management and it is on account of bona fide error. We hereby inform your goodself that we have already taken fruitful steps in real ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t when investment in the interested concern exceeds 5% of the capital, the entire income has to be brought to tax. With the above observation, the Assessing Officer came to the conclusion that the case laws relied upon by the ld. A.R. of the assessee has no application to the facts of the present case in hand. 6. The Assessing Officer further observed that the assessee has borrowed loan from ICICI Bank @ 14% p.a. No dividend was received from the company on which the assessee made investment of Rs. 20 lakhs whereas JFSL has received a capital of Rs. 20 lakhs without any interest or dividend payment. The assessee-foundation has paid interest @ 12% p.a. on the funds borrowed from the founders. The Assessing Officer further examined the above facts in the light of section 13(1)(d)(iii) of the Act and held that the investments of M/s KAS Foundation in the shares of JFSL, a non-banking financial company whose shares are unlisted and are not covered by the provisions of Rule 17C and accordingly applied section 13(1)(d) of the Act and also further observed that the assessee has violated section 11(5)of the Act. 7. The Assessing Officer further observed at page 7 of the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e. para 28.6 is reproduced as under: 28.6 : It may be noted that new sub-sec. (1.A) inserted in Sec. 161 of the IT Act, which provides for taxation of the entire income received by trust at the maximum marginal rates is applicable only In the case of private trust having profits and gains of business. So far as public charitable and religious trust are concerned, their business profits are not exempt from tax, except In the cases failing under Cl. (a) or Cl. (b) of Sec. 11(4A) of the IT Act. As the maximum marginal rate of tax under the new proviso to Sec. 164(2) applies to the whole or a part of the relevant Income of a charitable or religious trust which forfeits exemption by virtue of the provisions of the IT Act in regard to Investment pattern or use of the trust! property for the benefit of the settlor etc., contained in Sec. 13(1)(c) and (d) of that Act, the said rate V will not apply to the business profits of such trusts which are otherwise chargeable to tax. In other words, where such a trust contravenes the provisions of Sec. 13(1)(C) or (d) of the Act, the maximum marginal rate of income tax will apply only to that part of the income which has forfeited exemption und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to section 11(5) of the Act. Therefore, the assessee is not eligible for exemption u/ss 11 and 12 of the Act. The ld. D.R. further submitted that the assessee has also violated the provisions of section 13(2)(h) of the Act and therefore, is not eligible for exemption u/ss 11 and 12 of the Act. The ld. D.R. further argued that the ld. CIT(A), without considering the facts of the case, simply followed the CBDTs Circular No. 387 dated 6.7.1984 issued by the Board which is not at all relevant to the present case and therefore, the order passes by the ld. CIT(A) has to be reversed. 11. On the other hand, the ld. Counsel for the assessee has submitted that section 13(2)(h) has no application once the assessee borrowed money and invested it. Alternatively, he relied on the decision of the Hon'ble Mumbai High Court in the case of Sheth Mafatlal Gagalbhai Foundation Trust ( supra ) wherein it has been held that maximum marginal rate of tax under the proviso to section 164(2) is applicable only to that part of income of the trust which has forfeited exemption and not to the entire income. 12 . We have heard the rival submissions and perused the orders of the lower authorities and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sake of convenience, section 13(1)(d)(iii) of the Act is extracted as under: "Nothing contained in section 11 [or section 12] shall operate so as to exclude from the total income of the previous year of the person in receipt thereof: ( a ), ( b ) and ( c )** ** ** ( d ) In the case of a trust for charitable and religious purposes or charitable or religious institution, any income thereof, if for any period during the previous year": ( i ) and ( ii )** ** ** ( iii ) any shares in a company other than A. Shares in a public sector company B.** ** ** C. Shares prescribed as a form or mode of investment under clause (Xii) of sub-section (5) of section 11 are held by the trust or institution after the 30th day of November, 1983." As per the above provision of law, to get exemption u/ss 11 and 12 of the Act, the assessee has to invest the shares in a public sector company as per section 11(5) of the Act. It is an undisputed fact that the assessee neither invested in a public sector company nor as provided u/s 11(5) of the Act. Therefore, it is clear violation of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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