ITO (OSD), CHENNAI V. M/s. KAS Foundation, Trichy

ITA 1892/CHNY/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61054 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-04-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 10-11-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SIBENDU MOHARANA
• Assessee Lawyers: MDS; T VASUDEVAN ITA NOS
• Keywords: Maximum Marginal Rate
• Section: 12AA; 12; 11; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NOS. 1892 & 1893/MDS/2010 (ASSESSMENT YEAR : 2007-08) THE I NCOME - TAX OFFICER [OSD] EXEMPTIONS CHENNAI 600 034. (APPELLANT) VS. M/S KAS FOUNDATION NO. 80, SALAI ROAD WORAIYUR TRICHY 620 003. PAN : AACCK 3860 H (RESPONDENT) C.O. NOS. 83 & 84/MDS/2011 (A/O I.T.A. NOS. 1892 & 1893/MDS/2010 ASSESSMENT YEAR : 2007-08) M/S KAS FOUNDATION VS. THE INCOM E-TAX OFFICER NO. 80, SALAI ROAD [OS D] EXEMPTIONS WORAIYUR CHENNAI 600 034. TRICHY 620 003. PAN : AACCK 3860 H (APPELLANT) (RESPONDENT) REVENUE BY : SHRI SIBENDU MOHARANA CIT, DR. ASSESSEE BY : SHRI T. VASUDEVAN, ADVOCATE 2 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 DATE OF HEARING : 23.04.2012 DATE OF PRONOUNCEMENT : 10.05.2012 O R D E R PER V. DURGA RAO, JM : THESE ARE APPEALS FILED BY THE REVENUE AND CROSS OB JECTIONS FILED BY DIFFERENT ASSESSEES AGAINST THE ORDER OF T HE LD. CIT(A)- XII CHENNAI DATED 31.08.2010 FOR ASSESSMENT YEAR 2007-0 8. FACTS BEING IDENTICAL, WE ARE DISPOSING OFF THESE APPEALS AND CROSS OBJECTIONS THROUGH THIS CONSOLIDATED ORDER FOR THE SAKE OF BREVITY AND CONVENIENCE. 2. FACTS, IN BRIEF, PERTAINING TO THE CASE OF KAS F OUNDATION ARE THAT THE ASSESSEE-FOUNDATION IS A COMPANY, REGISTER ED U/S 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 S HORT] WHICH WAS GRANTED BY THE CIT(EXEMPTIONS) ON 31.5.2004. THE A SSESSEE 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 R ETURN FILED BY 3 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 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 OFFI CER, THE A REPRESENTATIVE APPEARED BEFORE THE ASSESSING OFFICE R AND FILED DETAILS FROM TIME TO TIME. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE, A FOUNDATIO N, INVESTED 2 LAKH SHARES AT FACE VALUE OF RS. 10/- PER SHARE IN THE COMPANY JAGANNATHA FINANCIAL SERVICES LIMITED [JFSL]. T HE SHARES OF JFSL ARE NOT LISTED IN ANY RECOGNIZED STOCK EXCHANGE. D URING THE FINANCIAL YEAR2006-07, THE COMPANY HAD NOT COMMENCE D ITS BUSINESS. THE COMPANY WAS ISSUED CERTIFICATE OF RE GISTRATION TO COMMENCE ITS BUSINESS AS A NON-BANKING FINANCIAL CO MPANY [NBFC] ON 2.4.2007. THE ASSESSING OFFICER FURTHER OBSERVE D THAT THE ASSESSEE M/S KAS FOUNDATION INVESTED IN SHARES OF A COMPANY WHICH IS NOT A PUBLIC COMPANY AND HENCE IT IS NOT COVERED BY SECTION 11(5) OF THE ACT AND THE SAME WAS POINTED OUT TO THE REPR ESENTATIVE WHO APPEARED ON BEHALF OF THE ASSESSEE ON 24.8.2009 AND POINTED 4 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 OUT THAT THE ASSESSEE FOUNDATION HAS VIOLATED THE P ROVISIONS OF SECTION 13(1)(D) OF THE ACT AND NOT ELIGIBLE FOR E XEMPTION U/S 11 OF THE ACT. THEREAFTER, THE ASSESSEES REPRESENTATIVE , VIDE LETTER DATED 22.10.2009 SUBMITTED HIS REPLY WHICH IS AS UN DER: IN THIS RESPECT WE HEREBY BRING TO YOUR KIND NOTIC E THAT THERE IS A DECISION OF DELHI HIGH COURT IN C.I.T. VS. NARIND ER MOHAN FOUNDATION (2009) 311 ITR AND THE BOMBAY HIGH COURT DIT(E) VS. SETH MAFATLAL GAGALBHAI FOUNDATION (2001) 249 ITR 5 33(BOM.), WHERE IT IS CLEARLY DECIDED THAT ONLY THE INCOME FR OM IMPERMISSIBLE INVESTMENTS, COULD BE TAXED AND NOT A NY OTHER INCOME FOLLOWING THE BOARD CIRCULAR NO.387 DATED 06 .07.1984 (1985) 152 ITR (ST.) 1 AT PAGE 19. SINCE THIS THE A CCEPTED POSITION OF THE DEPARTMENT ITSELF AND THE DECISION OF THE COURT ON WHICH NO SPECIAL LEAVE HAS BEEN ASKED FOR, THERE COULD BE NO DENIAL OF TOTAL EXEMPTION AND HENCE WE HEREBY REQUE ST YOUR GOODSELF TO CONSIDER THE ABOVE DECISION AND BOARD C IRCULAR NO.387. FURTHER WE HEREBY INFORM YOUR GOODSELF THAT INVESTM ENT IN SHARES OF JAGANNATHA FINANCIAL SERVICES LTD. WAS DU E INADVERTENCE AND LACK OF AWARENESS OF THE LAW ON TH E SUBJECT ON THE PART OF THE COMPANY MANAGEMENT AND IT IS ON ACC OUNT OF 5 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 BONA FIDE ERROR. WE HEREBY INFORM YOUR GOODSELF TH AT WE HAVE ALREADY TAKEN FRUITFUL STEPS IN REALIZING THE INVES TMENT IN SHARES WITHOUT ANY LOSS TO THE TRUST. WE HAVE ENTERED INT O AGREEMENT FOR SALE OF SHARES. WE ALSO BRING TO YOUR KIND NOTI CE THE DELHI HIGH COURT IN THE DIT(E) VS. AGRIM CHARAN FOUNDATIO N (2002) 253 ITR 593 (DEL.), WHERE IT WAS HELD THAT A BONA FIDE ERROR COULD NOT BE TREATED AS VIOLATION, SO AS TO JUSTIFY WITHD RAWAL OF TOTAL EXEMPTION. A SIMILAR VIEW WAS ALSO TAKEN BY KARNAT AKA HIGH COURT IN M/S.SOCIETY OF BRIDGETTINE SISTERS, ITA NO .105/2004 DATED 21 ST JULY 2008, WHERE THE DECISION IN AGRIM CHARAN FOUNDATION CASE SUPRA WAS FOLLOWED IN A CASE WHERE THE ASSESSEE HAS INVESTED IN AS MANY AS 3 DIFFERENT COMPANIES WI THOUT REALIZING THAT SUCH INVESTMENTS WERE BARRED. HENCE WE HEREBY KINDLY REQUEST YOUR GOODSELF TO KINDLY CONSIDER THE ABOVE DECISIONS. FURTHER WE HEREBY BRING TO YOUR KIND NOTICE THAT KA S FOUNDATION, A MICRO FINANCE INSTITUTION IS PRIMARIL Y AND PREDOMINANTLY ENGAGED IN RURAL DEVELOPMENT IN REMOT E VILLAGE AREAS, TRIBAL AREAS FOR THE UPLIFTMENT OF RURAL POO R 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 E XEMPTION GRANTED TO US. 6 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 4. THE ASSESSING OFFICER, AFTER CONSIDERING THE AB OVE REPLY OF THE ASSESSEE, HAS OBSERVED THAT THE ASSESSEE WAS ALSO D IRECTOR 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 NOTIC E THAT INVESTMENT IN SHARES OF JAGANNATH FINANCIAL SERVICE S LTD. WAS DUE INADVERTENCE AND LACK OF AWARENESS OF THE LAW O N THE SUBJECT ON THE PART OF THE COMPANY MANAGEMENT AND I T IS ON ACCOUNT OF BONA FIDE ERROR. WE HEREBY INFORM YOUR G OODSELF THAT WE HAVE ALREADY TAKEN FRUITFUL STEPS IN REALIZING T HE INVESTMENT IN SHARES WITHOUT ANY LOSS TO THE TRUST. WE HAVE E NTERED INTO AGREEMENT FOR SALE OF SHARES ON KNOWING THAT IT IS NOT A PERMISSIBLE INVESTMENT. WE ALSO BRING TO YOUR KIND NOTICE THE DELHI HIGH CO URT IN THE DIT(E) VS. AGRIM CHARAN FOUNDATION (2002) 253 ITR 5 93 (DEL.), 7 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 WHERE IT WAS HELD THAT A BONA FIDE ERROR COULD NOT BE TREATED AS VIOLATION, SO AS TO JUSTIFY WITHDRAWAL OF TOTAL EXE MPTION. A SIMILAR VIEW WAS ALSO TAKEN BY KARNATAKA HIGH COURT IN M/S.SOCIETY OF BRIDGETTINE SISTERS, ITA NO.105/2004 DATED 21 ST JULY 2008, WHERE THE DECISION IN AGRIM CHARAN FOUND ATION CASE SUPRA WAS FOLLOWED IN A CASE WHERE THE ASSESSEE HAS INVESTED IN AS MANY AS 3 DIFFERENT COMPANIES WITHOUT REALIZING THAT SUCH INVESTMENTS WERE BARRED. HENCE WE HEREBY KINDLY REQ UEST YOUR GOODSELF TO KINDLY CONSIDER THE ABOVE DECISIONS AND NOT TO WITHDRAW THE EXEMPTION. WE FURTHER BRING TO YOUR KIND NOTICE THAT THAT DECI SION OF DELHI HIGH COURT IN C.I.T. VS. NARINDER MOHAN FOUNDATION (2009) 311 ITR AND THE BOMBAY HIGH COURT DIT(E) VS. SETH MAFAT LAL GAGALBHAI FOUNDATION (2001) 249 ITR 533(BOM.), WHER E IT IS CLEARLY DECIDED THAT ONLY THE INCOME FROM IMPERMISS IBLE INVESTMENTS, COULD BE TAXED AND NOT ANY OTHER INCOM E FOLLOWING THE BOARD CIRCULAR NO.387 DATED 06.07.1984 (1985) 1 52 ITR (ST.) 1 AT PAGE 19. WE HEREBY REQUEST YOUR GOODSELF TO KINDLY CONSIDER THE ABOVE DECISIONS AND OUR EXPLANATIONS AND WE REQUEST YOUR GOODSELF NOT TO WITHDRAW THE EXEMPTION. 8 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 5. THE ASSESSING OFFICER CONSIDERED THE ABOVE EXPLA NATION OF THE ASSESSEE AND CASE LAWS CITED BY THE REPRESENTATIVE WHO APPEARED ON BEHALF OF THE ASSESSEE OBSERVED THAT IN THE CASE OF DIT(E) VS. AGRIM CHARAN FOUNDATION [2002] 253 ITR 593 [DEL], THE TRU ST WAS MISLEADED BY THE COMPANY INTO INVESTING IN THEIR DE POSITS AND THEREFORE, THE ABOVE DECISION RELIED UPON BY THE LD . COUNSEL HAS NOT APPLICATION TO THE FACTS OF THE PRESENT CASE. IN T HE CASE OF CIT VS. NARENDER MOHAN FOUNDATION [2009] 311 ITR. THE ASSES SING OFFICER OBSERVED THAT THE ISSUE INVOLVED IN THIS APPEAL REL ATED TO BONUS SHARES AND THEREFORE, HAS NO APPLICATION TO THE FAC TS OF THE ASSESSEES CASE. IN THE CASE OF DIT VS. SETH MAFAT LAL GAGALBHAI FOUNDATION [2001] 249 ITR 533 [BOM], THE ASSESSING OFFICER HAS OBSERVED THAT AS PER SECTION 13(4) CLEARLY STATES T HAT WHEN INVESTMENT IN THE INTERESTED CONCERN EXCEEDS 5% OF THE CAPITAL, THE ENTIRE INCOME HAS TO BE BROUGHT TO TAX. WITH THE A BOVE OBSERVATION, THE ASSESSING OFFICER CAME TO THE CONC LUSION THAT THE CASE LAWS RELIED UPON BY THE LD. A.R. OF THE ASSESS EE HAS NO APPLICATION TO THE FACTS OF THE PRESENT CASE IN HAN D. 9 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 6. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE ASSESSEE HAS BORROWED LOAN FROM ICICI BANK @ 14% P.A. NO DIVIDEN D WAS RECEIVED FROM THE COMPANY ON WHICH THE ASSESSEE MADE INVESTM ENT OF RS. 20 LAKHS WHEREAS JFSL HAS RECEIVED A CAPITAL OF RS. 20 LAKHS WITHOUT ANY INTEREST OR DIVIDEND PAYMENT. THE ASSESSEE-FOU NDATION HAS PAID INTEREST @ 12% P.A. ON THE FUNDS BORROWED FROM THE FOUNDERS. THE ASSESSING OFFICER FURTHER EXAMINED THE ABOVE FA CTS 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-BAN KING FINANCIAL COMPANY WHOSE SHARES ARE UNLISTED AND ARE NOT COVER ED BY THE PROVISIONS OF RULE 17C AND ACCORDINGLY APPLIED SECT ION 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 ORDER THAT THE TRUSTEES OF M/S KAS FOUND ATION, M/S SARATHA KATHIRESAN AND K.T. ALAMELU ABIRAMI HELD 50 0 SHARES EACH OUT OF A TOTAL OF 1000 SHARES. SMT. SARATHA KATHIRE SAN AND HER FAMILY MEMBERS OWN 7,23,870 SHARES OUT OF THE TOTAL 20,21,620/- 10 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 SHARES IN M/S JFSL. DR. V. PRASANNA BHATT, DIRECTOR , KAS FOUNDATION ALSO HELD 20,000 SHARES OF JFSL. HENCE THE TOTAL I NVESTMENTS IN JFSL BY THE TRUSTEES AND THE MANAGEMENT OF KAS FOUN DATION IS 7,43,870/- SHARES OUT OF TOTAL SHARES OF 20,21,620/ -. THUS THE TRUSTEES, THEIR RELATIVES AND THE MANAGEMENT HOLD 3 7% [APROX] OF JFSL SHARES, THEREBY EXCEEDING 20% OF THE SHARE-HOL DING AND ARE DEEMED TO HAVE SUBSTANTIAL INTEREST IN THE COMPANY. THE FOUNDATION HAS INVESTED RS. 20 LAKHS IN JFSL WHOSE TOTAL PAID UP CAPITAL WAS RS. 2,02,16,200/-. HENCE THE INVESTMEN T IN THE TRUST AMOUNTS TO 10% [APROX] OF THE SUBSCRIBED AND PAID U P SHARE CAPITAL. WITH THE ABOVE OBSERVATION, THE ASSESSING OFFICER H ELD THAT THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 13( 1)(D)(III) AND 13(2)(H) AND SECTION 13(4) OF THE ACT AND ACCORDING LY, THE EXEMPTION CLAIM MADE BY THE ASSESSEE WAS REJECTED. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEA L BEFORE THE LD. CIT(A). 8. BEFORE THE LD. CIT(A), THE LD. A.R. REITERATED T HE SUBMISSIONS WHICH HE HAS MADE BEFORE THE ASSESSING OFFICER AND ALSO FILED 11 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 WRITTEN SUBMISSIONS. THE SAME WERE REPRODUCED BY T HE LD. CIT(A) AT PAGES 5 TO 7 OF HIS ORDER. THE LD. CIT(A), AFTE R CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HAS HELD AS UNDER: THE CRUX OF THE ISSUE IS THAT THE APPELLANT IS NOT DISPUTING THAT THE APPELLANT HAD INVESTED AN AMOUNT OF RS. 20 LAKHS IN M/S JFSL BUYING 2 LAKH SHARES AT RS. 10/- PER SHARE IN THE NAME OF DIFFERENT TRUSTEES. FOR THE REASONS STATED BY THE ASSESSING OFFICER, IT IS TRUE THAT THERE HAS BEEN A VIOLATION OF SECTION 11 AND SECTION 13 OF THE ACT WHEREIN DETAIL ED REASONS HAVE BEEN GIVEN BY THE ASSESSING OFFICER. HOWEVER, TWO MAIN ISSUES TO BE DECIDED BEFORE ME AR E WHETHER BECAUSE OF THESE VIOLATIONS AS MENTIONED BY THE ASSESSING OFFICER (A) WHETHER THE APPELLANT FORFEIT S THE ENTIRE EXEMPTION AVAILABLE TO IT OR (B) WHETHER THE DENIAL OF EXEMPTION SHOULD ONLY BE PROPORTIONATE TO THE DIVER SION OF THE FUNDS MADE BY THE APPELLANT. DURING THE COURSE OF APPELLATE HEARING, THE AR OF T HE APPELLANT QUOTED CBDT'S CIRCULAR NO.387 DT. 06.07.1 9841 THE RELEVANT PORTION OF THE CIRCULAR I.E. PARA 28.6 IS REPRODUCED AS UNDER: 12 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 28.6 : IT MAY BE NOTED THAT NEW SUB-SEC. (1.A) INSE RTED IN SEC. 161 OF THE IT ACT, WHICH PROVIDES FOR TAXATION OF THE ENTIRE INCOME RECEIVED BY TRUST AT THE MAXIMUM MARG INAL RATES IS APPLICABLE ONLY IN THE CASE OF PRIVATE TRU ST HAVING PROFITS AND GAINS OF BUSINESS. SO FAR AS PUBLIC CHA RITABLE AND RELIGIOUS TRUST ARE CONCERNED, THEIR BUSINESS P ROFITS ARE NOT EXEMPT FROM TAX, EXCEPT IN THE CASES FAILIN G UNDER CI. (A) OR CI. (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 UNDER THE SAID PROVISIONS'. 13 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 IN OTHER WORDS, WHERE SUCH A TRUST CONTRAVENES THE PROVISIONS OF SEC. 13(1)(C) OR (D) OF THE ACT, THE MAXIMUM 1 MARGINAL RATE OF INCOME TAX WILL APPLY ONLY TO THAT PART OF THE I NCOME WHICH HAS FORFEITED EXEMPTION UNDER THE SAID PROVIS IONS. A SIMILAR VIEW IS TAKEN BY THE HON'BLE BOMBAY HIGH COURT IN THE LIGHT OF THE ABOVE. REFERRED CIRCULAR IN THE I CASE OF DIRECTOR OF INCOME TAX (EXEMPTIONS) V SHETH MAFAT/A L GAGALBHAI FOUBDATION TRUST [2001] 249 ITR 533 (BOM) . IN THIS DECISION, IT WAS HELD THAT WHERE IT HAS BEEN HELD T HAT IN THE CASE OF CONTRAVENTION OF SECTION 13(1 )(D), 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. THUS, THE ACQUISITION OF SHARES AMOUNTS ONLY TO INVESTMENT. H ENCE, THE SALE FALLS WITHIN THE AMBIT OF SEC. 13(1)(D) AND NO T U/S 13(1)(C) OF THE ACT. RELIANCE PLACED BY THE APPELLA NT ON THE DECISIONS IN THE FOLLOWING CASE LAWS ARE WELL FOUND ED. CIT V POLISETTY SOMASUNDARAM CHARITIES [1990J183FTR 377 (AP) AND NAWN ESTATES (P) LTD. VS. CIT 1977 CTR (SC) 19: (1977) 1061TR 4~ (SC). FURTHER I FIND THAT SEC. 13(2)(H) CAN ONLY APPLY IN THE INSTA NT CASE IN THE CONTEXT OF SEC 13(1)(D) AND NOT 10 SEE 13(1)(C) AS 13(1)(C) IS NOT I NVOCABLE GIVEN THE DECISIONS CITED SUPRA WHERE 14 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 IT HAS BEEN HELD THAT THE ACQUISITION OF SHARES ONL Y AMOUNTS TO INVESTMENT. MOREOVER, SECTION 13(4) OF THE AT I S NOT APPLICABLE WHERE SECTION 13(4) BY THE ASSESSING OFF ICER IS NOT IN ORDER. THE CBDTS CIRCULAR, THUS CLARIFIES THE ABOVE TWO I SSUES RAISED BY ME I.E. (A) WHETHER THE APPELLANT FORFEIT S THE ENTIRE EXEMPTION AVAILABLE TO IT OR (B) WHETHER THE DENIAL OF EXEMPTION SHOULD ONLY BE PROPORTIONATE TO THE DIVER SION OF THE FUNDS MADE BY THE APPELLANT. HENCE, FOR THE ABOVE CITED REASONS, THE VIOLATION W HICH THE APPELLANT HAS COMMITTED U/S 13 OF THE ACT, I.E. THE AMOUNT OF RS. 20 LAKHS, INVESTED IN JFSL NEEDS TO BE BROUG HT TO TAX IN THE CASE OF THE APPELLANT. THE REMAINING PART OF T HE TOTAL INCOME WILL ENJOY EXEMPTIONS U/S 11 OF THE ACT. 9. AGGRIEVED BY THIS ORDER OF THE LD. CIT(A), THE R EVENUE HAS COME IN APPEAL BEFORE US. 10. THE LD. COUNSEL FOR THE DEPARTMENT HAS SUBMITTE D THAT THE ASSESSEE HAS VIOLATED SECTION 13(1)(D)(III) OF THE ACT AND ALSO INVESTED THE FUNDS BORROWED FROM ICICI BANK CONTRAR Y TO SECTION 15 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 11(5) OF THE ACT. THEREFORE, THE ASSESSEE IS NOT E LIGIBLE FOR EXEMPTION U/SS 11 AND 12 OF THE ACT. THE LD. D.R. FURTHER SUBMITTED THAT THE ASSESSEE HAS ALSO VIOLATED THE P ROVISIONS OF SECTION 13(2)(H) OF THE ACT AND THEREFORE, IS NOT E LIGIBLE 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 C ASE AND THEREFORE, THE ORDER PASSES BY THE LD. CIT(A) HAS TO BE REVERS ED. 11. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSE SSEE 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 CA SE OF SETH MAFATLAL GAGALBHAI FOUNDATION [SUPRA] WHEREIN IT HA S BEEN HELD THAT MAXIMUM MARGINAL RATE OF TAX UNDER THE PROVISO TO S ECTION 164(2) IS APPLICABLE ONLY TO THAT PART OF INCOME OF THE TRUST WHICH HAS FORFEITED EXEMPTION AND NOT TO THE ENTIRE INCOME. 16 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE-FOUNDATION IS A COMPANY REGISTERED UNDER T HE COMPANIES ACT AND ACCORDINGLY REGISTRATION U/S 12AA OF THE AC T WAS GRANTED ON 31.5.2004. THE MAIN ACTIVITY OF THE FOUNDATION OF THE ASSESSEE IS MICRO FINANCING TO THE PEOPLE RESIDING IN RURAL ARE AS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE FOUNDATION H AS BORROWED RS. 20 LAKHS FROM ICICI BANK, INTEREST PAYABLE @ 14% AN D THE SAME WAS INVESTED IN JFSL/. IT IS AN UNDISPUTED FACT THAT TH E FOUNDERS OF THE ASSESSEE FOUNDATION ARE HAVING SUBSTANTIAL SHARE IN JFSL WHICH IS NOT RECOGNIZED BY ANY STOCK EXCHANGE. IT IS SEEN F ROM THE FACTS AVAILABLE ON RECORD THAT THE ASSESSEE IS A FOUNDATI ON AND APPLIED FOR REGISTRATION U/S 12AA OF THE ACT WITH AN OBJECT TO FINANCE IN RURAL AREAS AND ACCORDINGLY, EXEMPTION WAS GRANTED U/S 12 AA OF THE ACT. THE ASSESSEE BORROWED MONEY AND INVESTED THE SAME I N A COMPANY WHERE THE FOUNDER OF THE ASSESSEE FOUNDATION WERE H AVING SUBSTANTIAL INTEREST WHICH IS CONTRARY TO THE OBJEC T FOR WHICH THE REGISTRATION WAS GRANTED TO THE FOUNDATION U/S 12AA OF THE ACT. THE ASSESSEE FOUNDATION, INSTEAD OF FINANCING IN RURAL AREAS, FINANCED 17 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 MONEY TO THE COMPANY WHERE THE FOUNDERS WERE HAVING SUBSTANTIAL INTEREST. APART FROM THE ABOVE, THE ASSESSEE IS PA YING 14% INTEREST ON MONEY BORROWED WITHOUT RECEIVING ANY BENEFIT FRO M THE JFSL. THEREFORE, IT APPEARS TO US THAT THE ASSESSEE FOUND ATION BORROWED MONEY FOR THE BENEFIT OF JFSL WHERE THE FOUNDERS AR E HAVING SUBSTANTIAL INTEREST NOT FOR THE PURPOSE OF CARRYIN G ON THE OBJECT OF THE ASSESSEE FOUNDATION. IN THE LIGHT OF THE ABOVE FACTS ITSELF, THE ASSESSEE IS NOT ELIGIBLE FOR THE CLAIM OF EXEMPTION U/SS 11 AND 12 OF THE ACT BECAUSE THE ASSESSEE CARRIED ON THE ACTIVIT Y OF INVESTMENT WHICH IS CONTRARY TO THE OBJECT OF THE ASSESSEE FOU NDATION, WHERE THERE IS NO PUBLIC UTILITY INVOLVED. WE WOULD LIKE TO FURTHER EXAMINE THE PROVISIONS OF LAW WHICH PROHIBITS EXEMP TION. THE ASSESSEE IS A FOUNDATION AND STARTED WITH AN INTENT ION TO PROMOTE SOME DEFINITE PURPOSE I.E. FINANCING IN RURAL AREAS . WITH THE ABOVE OBJECT, THE ASSESSEE GOT REGISTRATION U/S 12AA OF T HE ACT 13. THE ASSESSEE, CONTRARY TO THE ABOVE OBJECT OF T HE ASSESSEE FOUNDATION, INVESTED THE BORROWED FUNDS IN A COMPAN Y WHERE THE FOUNDERS ARE HAVING SUBSTANTIAL INTEREST. THEREFOR E, THE ASSESSEE 18 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 HAS VIOLATED THE PROVISIONS OF SECTION 13(1)(D)(III ) OF THE ACT. FOR THE SAKE OF CONVENIENCE, SECTION 13(1)(D)(III) OF T HE ACT IS EXTRACTED AS UNDER: NOTHING CONTAINED IN SECTION 11 [OR SECTION 12] SH ALL OPERATE SO AS TO EXCLUDE FROM THE TOTAL INCOME OF THE PREVI OUS YEAR OF THE PERSON IN RECEIPT THEREOF: (A) (B) (C) (D) IN THE CASE OF A TRUST FOR CHARITABLE AND RELIG IOUS PURPOSES OR CHARITABLE OR RELIGIOUS INSTITUTION, AN Y INCOME THEREOF, IF FOR ANY PERIOD DURING THE PREVIOUS YEAR : (I) (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 30 TH 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 I N 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 SECT OR COMPANY NOR AS 19 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 PROVIDED U/S 11(5) OF THE ACT. THEREFORE, IT IS CL EAR VIOLATION OF SECTION 13(1)(D)(III) OF THE ACT. ON THIS COUNT AL ONE, THE ASSESSEE IS NOT ELIGIBLE FOR EXEMPTION U/SS 11 AND 12 OF THE AC T. IN SO FAR AS SECTION 13(D)(H) IS CONCERNED, THE ASSESSING OFFICE R HAS ALREADY GIVEN A SPECIFIC FINDING THAT THE INVESTMENT MADE B Y THE ASSESSEE FOUNDATION AMOUNTING TO 10% [APPROX.] OF THE SUBSCR IBED AND PAID UP CAPITAL IN M/S JFSL. THEREFORE, IT HAS ALSO VIO LATED SECTION 13(2)(H) OF THE ACT. IN SO FAR AS THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IS CONCERNED, THE ASSESSING OFFICER HAS DISTINGUISHED THE CASE BY OBSERVING THAT THE FACTS ARE ENTIRELY ON A DIFFERENT FOOTING FROM THE CASE IN HAND. WE ARE IN FULL AGREEMENT WI TH THE OBSERVATION OF THE ASSESSING OFFICER ON THIS COUNT. APART FROM THAT, THE LD. CIT(A) SIMPLY FOLLOWED THE DECISION IN THE CASE OF SHETH MAFATLAL GAGALBHAI FOUNDATION TRUST [SUPRA] WITHOUT EXAMINING SECTION 13(1)(D)(III) OF THE ACT. SUB CLAUSE (III) WAS SUBSTITUTED VIDE FINANCE ACT, 2007 W.E.F 1.4.1999. THIS WAS NOT CON SIDERED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SHETH MAFA TLAL GAGALBHAI FOUNDATION TRUST [SUPRA]. THE LD. CIT(A), WITHOUT EXAMINING THE LEGAL PROVISIONS WHICH ARE RELEVANT TO DECIDE THE I SSUE SIMPLY BY 20 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 FOLLOWING THE DECISION OF THE HON'BLE BOMBAY HIGH C OURT AND CBDT CIRCULAR [SUPRA], ALLOWED THE EXEMPTION CLAIM OF TH E ASSESSEE. IN OUR CONSIDERED OPINION, THE LD. CIT(A) WAS NOT CORR ECT IN ALLOWING THE CLAIM FOR EXEMPTION OF THE ASSESSEE. IN VIEW O F THE ABOVE, THE APPEAL FILED BY THE REVENUE IS ALLOWED. 13. FACTS OF ITA NO. 1893/MDS/2010 BEING IDENTICAL TO THOSE IN ITA NO. 1982/MDS/2010, OUR ABOVE DECISION IN ITA NO. 18 92/MDS/2010 APPLIES TO ITA NO. 1893/MDS/2010 AND HENCE THIS APP EAL OF THE REVENUE IS ALLOWED. 14. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE ALLOWED. 15. BOTH THE CROSS-OBJECTIONS FILED BY THE ASSESSEE ARE IN SUPPORT OF THE ORDER OF THE LD. CIT(A). IN VIEW OF OUR ABO VE DISCUSSION AND ORDERS PASSED IN THE APPEALS OF THE REVENUE, NO SEP ARATE ADJUDICATION IS REQUIRED. IN VIEW OF THIS, THE CROS S OBJECTIONS ARE DISMISSED. 21 ITA NOS. 1892 & 1893/MDS/2010 CO NOS. 83 & 84/MDS/2011 16. IN THE RESULT, THE APPEALS OF THE REVENUE ARE A LLOWED WHEREAS THE CROSS OBJECTIONS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 10 TH MAY, 2012. SD/- SD/- (O.K. NARAYANAN) (V. DURGA R AO) VICE PRESIDENT JUDICIAL MEMB ER CHENNAI, DATED THE 19 TH MAY, 2012. VL COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A), CHENNAI (4) CIT, CHENNAI (5) D.R. (6) GUARD FILE