PER R.P. TOLANI, JM This is an appeal filed by the assessee against the order of the ld. CIT(A)-1, Jaipur dated 09-01-2012 for the assessment year 2008-09.

2.0 The ground nos. 1, 5 and 6 of the assessee are general in nature which needs no adjudication by us.

3.0 The remaining grounds raised by the assessee as Ground Nos. 2, 3 and 4 are as under:- 2. The ld. CIT(A) grossly erred in dismissing the appeal of the appellant despite the fact that as per law laid down by the Honble Apex Court there is no violation in terms of the provisions of Section 13(1)(d) r/w Section 111(2) and 11(5) of the I.T. Act, 1961. 2 (3) (a) The ld. CIT(A) erred in holding that the investment made by the appellant out of 15% income of the financial year 2007-08 into the right issue of Tisco Shares is in violation of the provisions of Section 13(1)(d). (b) The ld. CIT(A) failed to appreciate that conditions stipulate4d in Section 11(5) with regard to accumulated income are only in respect of income of the trust falling within the statutory limit of 85% of such income and not in respect of the balance 15% of the income when such trus4t has applied 85% of its income in attaining the objects of the trust. Consequently, she erred in confirming the denial of the exemption to the appellant.

4. (a) The ld. CIT(A) grossly erred in holding that the original Tisco shares held by the appellant received as donations was also an investment of funds belonging to the appellant falling within the mischief of Section 13(1)(d) r/w Section 11(2) and 11(5). (b) The ld. CIT(A) failed to appreciate that the funds of the appellant were never invested in the original holding of Tisco shares and that such shares were received as corpus donations and consequently failed to appreciate that there was no violation of the provisions of Section 13(1)(d) r/w 1(2) and 11(5) of the I.T. Act, 1961. The ld. CIT(A) failed to appreciate that acceptance of offer of rights shares which was received because of shares held from earlier years received as corpus donation is not investment of its funds by the appellant.

3.1 Brief facts are - the assessee is a charitable trust founded in 1958, registered u/s 12A and 80 G of the IT Act which continues to remain valid. It was established for the charitable purposes including relief for the poor by providing medical aid. In furtherance of its objects it runs Santokba 3 Durlabhji Memorial Hospital cum Research Institute. On 25-5-1982 trust received a corpus donation of 11,909 TISCO shares having face value of Rs. 100/- each from late Maharani Geetadevi Gaekwad of Baroda. These shares amounting to face value of Rs. 11,90,900/- were credit to corpus fund of the trust on 25-05-1982. Volume of these TISCO shares went on increasing in corpus fund due to accrual by issue of bonus shares received in various years. Thus facts indicate that no trust fund was utilized for acquisition of these TISCO shares. It is well known that TISCO shares are valuable as apart from increase in their market value, they keep on getting bonus shares as well as right shares from time to time. In impugned year a preferential rights issue was declared on TISCO shares, the assessee trust paid a sum of Rs. 93,06,900/- on 15-12-07 for availing the allotment of preferential rights issue from its Union Bank saving a/c. Till A.Y. 2007-08 exemption u/s 11 & 12 of I. T. Act,1961 claimed by the assessee was allowed in all the assessments. In the year in question i.e. AY 2008-09 also surplus out of various activities of trust came to Rs. 39,41,15,829/- qua which the assessee applied income over the various activities of Trust and SDMH amounting to Rs. 42,15,91,602/- resulting in excess utilization of surplus by Rs. 2,74,75,773/-. Assessee , consequently filed its return of income for the year in question i.e. AY 2008-09 at NIL in terms of section 11. During the course 4 of assessment proceedings ld. AO observed that TISCO shares held by the assessee in the corpus of the trust were non specified investment and were hit by amendment brought in by Finance Act 1983 in sec 13(1)(d). Accordingly they ought to have been converted into specified securities by 31-3-1993 as per the amendment brought in by Finance Act 1983 in sec 13(1)(d). Assessee filed a detailed reply supported by case laws contending that there was no violation of such provisions. Besides in terms of Sec. 164 entire benefits u/s 11 & 12 cannot be denied; in the worst scenario the income earned on unspecified investment i.e. TISCO shares may be denied exemption and subjected to maximum marginal rate of tax as per other provisions of I T Act. Rejecting assesses explanation in this behalf, ld. AO was of the view that even if there is a small violation of provisions of sec. 13(1)9d) it leads to denial of entire benefits of sec 11 and 12. This resulted in assessment of trust at RS. 6,23,44,980/-and further subjected it to tax at maximum marginal rate. It may be pertinent to mention here that parallelly ld. A.O. also initiated reassessment proceedings for A.Y. 2004-05 to A.Y. 2007-08 by issuing notices u/s 148 of I. T. Act, 1961. The department has been adopting an ambivalent approach by allowing exemption u/s 11 & 12 in some years and denying the same in some other years. The status of proceedings for different years is summarized as under: 5 i. For A.Y. 2004-05 benefits of exemption u/s 11are denied. ii. For A.Y. 2005-06 it is held that Trust is entitled to benefits of exemption u/s 11. iii. Proceedings for reassessment for A.Y. 2006-07 are dropped holding that trust is entitled for exemption u/s 11. iv. Proceedings for reassessment for A.Y. 2007-08 are pending before A.O. v. A.Y. 2009-10 is completed by A.O. u/s 143 (3) denying claimed exemption u/s 11. vi. Assessments for A.Y.s 2010-11 & 2011-12 are completed by A.O. u/s 143 (3) holding that assessee trust as eligible to exemption u/s 11 thereby accepting declared income at NIL. However concerned CIT is understood to have initiated proceedings u/s 263 of I. T. Act, 1961 for A.Y. 2005-06, 2010- 11 & 2011-12 which are pending. vii. Thus the department has been consciously adopting a vacillating approach in granting exemption u/s 11 & 12 for different assessment years.

3.2 Aggrieved, assessee preferred first appeal where detailed submissions were made and a catena of judgment was cited to support the claim of the assessee for its eligibility to exemption. The relevant observations and conclusion of ld. CIT(A) are reproduced as under:- The AO observed that the Trust held some shares in TISCO Ltd. at the beginning of the year worth Rs.51,45,915/- and this investment increased to Rs.l,44,52,815/-during the year. This investment was in shares in a non 6 public sector company and in violation of the provisions of section 13(l)(d)(iii) as the reply of the assessee was discussed by the AO in his order from pages 2 to 5 and then rejected after a detailed discussion. On page 7 of his order he observed that the assessee had violated the provisions of section 13(l)(d) in clear terms by: i) Continuing investment of its funds in the shape of shares in a company other than what is provided in section 13(l)(d)(iii) r.w.s. 11(5). ii) Invested its funds of Rs.93,06,900/- in non public-sector company during the year under consideration. The AO rejected the submissions of the assessee that investment in TISCO shares came under the definition of accretion on the following grounds: a) First of all the assessee ignored the fact that accretion of shares in a nonpublic sector company was available only in a case when such shares were with the Trust as part of corpus on 1 st June, 1973. In the case of the assessee these shares in TISCO were the assets of the Trust from 25.5.1982. b) The assessee was under an obligation to dispose off or convert these shares in non-government companies into permissible investments by 31 st March 1993, which it failed to do and thereby contravened S. 13(l)(d) r/w proviso(iia). c) The shares, which were with the Trust as part of its corpus as on 1.6.1973 and increased by way of bonus shares, then section 13(l)(d)(iii) shall not apply. Apparently it was not the case of the assessee during this A.Y. d) It was claimed that these shares were purchased out 7 of the sale proceeds of old shares. This plea was also rejected as there was no sale of shares during the year under consideration. And if it was in earlier years then it further established that the Trust had invested money out of the funds available with it. e) The assessee has further claimed that had the Trust not opted to subscribe for rights issue it would have resulted in a big loss to the Trust. The trustees are in a fiduciary position and had to act for the benefit of the Trust. One case law was been cited in this context contemplating a situation when court may interfere if directors of a company do not exercise their powers for thebenefit of the company. The AO observed that the assessee was trying to compare a case of a company with that of the Trust. The functions of a Trust are altogether different from the functions of a company. The Trust gets tax benefit under the Act only if it satisfies certain conditions laid down in sections 11,12 & 13 and it is not meant for profit motive. On the contrary, in the case of a company profit is the most powerful driving force in its functions. f) In the case of the Trust shares forming part of corpus were received by it after 1 st June,1973 and even then the accretion was not necessarily by way of bonus shares. The assessee had grossly ignored the phrase "by way of bonus" while stressing on the definition of word "accretion". The statute has allowed accretion only by way of bonus shares and that too in cases when such shares were with the trust on 1 st June, 1973. When the shares are forming part of corpus after 1 st June, 1973, question of accretion does not even arise. Clearly the investment in right-issue cannot, by any stretch of imagination, be equated with the phrase accretion by way of bonus shares. On the basis of these facts of the case and law as applicable to the facts, it was held by the AO that there should be withdrawal of benefit of section 11 & 12 for violation of section 13(l)(d). 8 In the first appeal, the assessee made following submissions. i) For the assessment year 2008-09 the appellant filed its return of income declaring Nil income on 30.9.2008 as the appellant applied more than 85% of its income for charitable purposes. ii) Out of the balance, constituting less than 15% of its income, the appellant subscribed to TISCO shares offered to it as rights issue (being an existing shareholder) for a sum of Rs.93,06,900/- during the financial year 2007-08. The original holding of TISCO shares was received as a donation by the assessee on 25.5.82. The value of original shares along with bonus shares received subsequently was reflected in the balance sheet at the beginning of the year at a value of Rs.51,45,915/-. iii) It was submitted that the AO disallowed the claim for application of income in medical equipment for a sum of Rs.3,44,07,618/- and in diagnostic clinic equipment of the value of Rs.15,600/- without any reason. In spite of such disallowance of application of income, the AO arrived at taxable income of Rs.6,23,44,980/- which is less than 15% of its gross income. iv) Since the sum constitutes only 14.78% of the gross income of appellant being Rs.42,15,91,602/-, it can be seen that the appellant had applied more than 85% of its gross income on charitable purposes. It was contended that the AO should have treated the income of the appellant as exempt in terms of section 11(l)(a) of IT Act, 1961. The AO had not only charged this amount to tax but had also held that the investment in rights issue of TISCO shares had violated the provisions of section 13(l)(d) of IT Act, 1961. v) It was admitted that the appellant had subscribed to the right issue of TISCO shares out of the income of the appellant earned during the FY 2007-08. However, provisions of section 13(l)(d) would be attracted only when the investment was made otherwise than in any one or more of the forms or modes specified in section 11(5) of IT Act, 1961. The provisions of section 11(5) are applicable only for investment or deposit of money referred to in clause (b) of sub-section (2) of section 11. 9 Section 11(2) is attracted only where 85% of income u/s 11(l)(a) or (b) is not applied for charitable purposes. Since the appellant did not apply more than 85% of its income referred to in section 11(l)(a) for charitable purposes exemption u/s 11(1) has to be granted to the appellant on this preliminary ground itself, raised as an additional ground l(a) and ground No.4 in the main ground. vi) It was further reiterated that since the appellant had fulfilled the basic condition of applying more than 85% of its income as per section 11(2) he did not fall within the mischief of section 13(l)(d). When some amount was invested out of the balance income of less than 15% over which no conditions were imposed in the statute for accumulation in any form. The only condition to be fulfilled was that no amount can be utilized for the benefit of any of the trustees or founder, manager etc. Since there is no such allegation against the appellant, relief was sought. vii) Reliance was placed on the following case laws:- a) Addl. CIT vs. ALN Rao Charitable Trust (1995) 216 ITR 697 (SC) b) S.RM.M.CT.M. Tiruppani Trust vs. CIT vs. CIT (1998) 230 ITR 636 (SC). It was submitted that on the basis of the above orders when there was violation of section 11(2) then there is no chance of falling under the mischief of section 13(1)(d). viii) It was also submitted that original investment was received as a donation and no income of the appellant was deposited for the same. Secondly, there was no requirement for divesting of those shares since sub clause (i) and (ii) of section 13(l)(d) lay emphasis on the fact of investment of the funds of the trust in shares. Since the appellants funds were never invested in 1982, the other condition of divesting or changing that investment does not arise. (ix) It was submitted that there was no violation of Section 13(2)(e) since the purchase of shares were a direct allotment by way of rights issue at a price approved by SEBI. 10 x) It was submitted that there was the original lot of TISCO shares held by the appellant which was not an investment but received as a donation prior to 1.3.1983 and further augmented by receipt of bonus shares thereon, no violation of section 13(l)(d) was ever committed in respect of the original holding of TISCO shares also. xi) It was submitted that even if violation u/s 13(l)(d) is admitted in respect of subscription to right shares of TISCO, in terms of clause (iia) of the proviso to section 13(l)(d), the AO could have denied exemption in respect of such investment only after the expiry of one year from the end of the previous year 2007-

08. In other words, such disallowance could be contemplated only for the AY 2009-10 and not for the current AY 2008-09, in respect of the right shares. xii) With regard to the ground No.3, it was submitted that the AO did not discuss anywhere in the impugned assessment order the reason for non-consideration of purchase of assets (medical equipment) amounting to Rs.3,44,07,618/- and diagnostic equipment of Rs. 15,600/-. Once these amounts are also treated as application of income then the total application of income works out to Rs.39,41,15,839/- and consequently the claim for exemption u/s 11(l)(a) is of the order of 93.48% of income applied for charitable purposes. Thus, the investment in right issue constituting about 2.5% of total income cannot be called a "huge investment" and the funds coming out of the balance income of about 6.52% cannot be denied exemption. Reliance was also placed on the following case laws:- (a) Calcutta H.C. in the case of Birla Charitable Trust (1988) 170 ITR 150 ; (b) Gujarat H.C. in the case of CIT vs. Insaniyat Trust (1988) 173 ITR 248 and (c) Bombay H.C. in Trustees of Mangaldas N. Varma Charitable Trust vs. CIT 207 ITR 332 wherein the court held that section 13(2)(h) did not apply to assets received as a donation since no funds were invested. It has been submitted that these decisions were in the context of section 13(2)(h) logically. (d) Madras H.C. in the case of Auditor Dasaradha 11 Rama Reddy Charites vs. CIT (1989) 177 ITR 249; (e) CIT vs. Pitti Charitable Trust 207 ITR 1053 ; (f) VIT vs. Shri Radha Krishna Temple Trust 227 ITR 159 (Allahabad H.C.); (g) CIT vs. Madras H.C. in the case of CIT vs. Kumudam Endowments (2000) 242 ITR 159; (h) CIT vs. Agrim Charan Foundation 253 ITR 593 (Del); (i) DIT (Exemption) vs. Sheth Mafatlal Gagalbhai Foundation Trust (2001) 249 ITR 533 (Bom.) The Finance Act, 1983 amended the provision of Section 13(10(d) w.e.f. 01-04-1983 and laid down a uniform pattern for investment in the income accumulated u/s 11(2) and (emphasis provided) the funds referred to in Section 13(1)(d). Section 13(1)(d) is applicable not only to income accumulated u/s 11(2) but to any income for any period during the previous year of the trust. Thus Section 13(1)(d) is not limited to by the provision of Section 11(2) as submitted by the A.R. As clause 13(1)(d) stands at present, the rigorous of the Section regarding investment are applied to:- (i) Investments or deposits made after 28.2.1983; (ia) bonus shares where the original shares formed part of the corpus of the trust or the Institution as on 1.6.1973; (ii) investments or deposits made before 1.3.1983 but continued after 30.1.1983. (iia) assets, not confirming to the pattern of specified investments but converted into specified investments by 31.3.93; (iii) investment in shares of companies other than Government companies and corporations other than those in a public sector continued after 30.11.83. Provisions of section 13(l)(d), excludes rigours of the clause in relation to 12 (i) original assets forming part of the corpus as on 1.6.1973; (ii) debenture held by the trust or Institution as on

28.2.1983 and ; (iii) profits and gains of the business assessable in AY 1984-85 and subsequently. From the facts of the case of the assessee, it is clear that rigours of clause 13(l)(d) are clearly applicable to the case of the assessee since it purchased preferential rights issue of TISCO (a company) not covered u/s 11(5) from its income deposited in its savings bank account of Rs.93,06,900/- on

15.12.2007. Nor can it be said that this was accretion of shares to the original donation. General meaning to the term/accretion to the shares" in this case is not required to be sought when the meaning has been specified in the proviso (iv) to Section 13(1)(d). As per this definition the purchase of shares of TISCO by the appellant cannot be termed as accretion to shares as per the proviso (ia) to Section 13(1)(d). It was an act of commission on part of the appellant to divert this income in purchase of these preferential rights issue. Therefore, the submissions of the A.R. that the provisions of Section 13(1)(d) would be attracted only when investment or deposit of money referred to in Section 11(2)(a) or (b) was involved as rejected as being contrary to law. The AO erred in charging to tax the entire surplus without waiting for a period of one year as required vide proviso (iia) to Section 13(1)(d). This submission of the AR is also not supported by the facts of the case of the assessee. From the details of particulars of shares received/purchased or sold of TISCO by the appellant (annexure A to the order), it is seen that the appellant purchased 3102 preferential right issue on 15/12/2007 which came in its D-MAT account on 22/1/2008. As per its own submission the total number of shares of TISCO were 185614 till 17/2/2011. Thus, as per details filed by the 13 appellant, it is seen that it did not adhere to the provision (iia) of Section 13(1)(d) in so far that these shares were held by it even after the expiry of one year from the end of the previous year i.e. 31/3/2008 in which they were acquired. As per this proviso they should have been sold by 31/3/2009 which was not done. Therefore, the appellant is not entitled to relief under the proviso (iia) of Section 13(1)(d).

3.3 Aggrieved, assessee is before us.

3.4 Ld counsel for the assessee Shri G G Mundra reiterated the facts and contends that Section 13 lays down situations when provisions of u/s 11 will not to apply, sec. 13 (1) (d) provides that exemption to a charitable or religious trust/institution will be denied if any funds of the trust/institution are invested or deposited after February 28, 1983 (extended upto 28-2-1993) otherwise than in any one or more of the forms or modes specified therein. Sec 13(2) of the Act, without prejudice to the generality of the provisions of section 13 (1) (c) and section 13 (1) (d), provides that the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of persons referred to in section 13 (3), in situations listed under clauses (a) to (h) thereof. Thus, the provisions of section 13 (2) are the extension of the provisions of section 13 (1) (c) / 13 (1) (d) of the Act. Sec. 13 is reproduced as under: 14

13. Section 11 not to apply in certain cases. (1) 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 - (d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year . (i) any funds of the trust or institution are invested or deposited after the 28 th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or (ii) any funds of the trust or institution invested or deposited before the 1 st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30 th day of November, 1983; or (iii) any shares in a company, other than - (A) shares in a public sector company ; (B) 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:

In this context, the provisions of section 164 (2) are also relevant and applicable, which are as under :-

164. Charge of tax where share of beneficiaries unknown. (2) In the case of relevant income which is derived from property held under trust wholly for charitable or religious purposes, or which is of the nature referred to in sub- 15 clause (iia) of clause (24), of section 2 or which is of the nature referred to in sub-section (4A) of section 11, tax shall be charged on so much of the relevant income as is not exempt under section 11 or section 12, as if the relevant income not so exempt were the income of an association of persons. . Provided that in a case where the whole or any part of the relevant income is not exempt under section 11 or section 12 by virtue of the provisions contained in clause (c) or clause (d) of sub-section (1) of section 13, tax shall be charged on the relevant income or part of relevant income at the maximum marginal rate.

3.5 It is pleaded that both the ld. Authorities have failed to apply these provisions in a correct manner and have held the entire income of the trust to be chargeable to tax at maximum marginal rate. While doing so they have failed to appreciate the correct and plain reading of provisions of section 164(2) which clearly lay down that in the case of such default, tax shall be charged as an AOP at maximum rate, only to that part of income which is not exempt under section 11 or 12 due to such default. The provisions unambiguously postulate that in eventuality of any technical default only non exempt part may be brought to tax, as the income of an AOP. At the same time it clearly lays down that the balance income of the charitable trust/institution to which no default is attributed will remain exempt in terms of secs. 11 & 12. Sec 13 is to be read together with proviso to section 164 (2), which provides that - where the whole or any part of the relevant income 16 is not exempt under section 11 or section 12, by virtue of the provisions of section 13 (1) (c) or section 13 (1) (d), tax shall be charged on the relevant income or part of relevant income, at the maximum marginal rate. In view of this proviso to section 164 (2), various courts have held that in case of violation of the conditions under section 13 (1) (c) or 13 (1) (d) of the Act, only the relevant income or part of such relevant income is liable to be taxed at maximum marginal rate. It is also held that the violation of section 13 (1) (c) or 13 (1) (d) does not result in denial of exemption under section 11, in respect of the total income of the assessee. In other words assuming everything against assessee , only the income derived from TISCO share investments would be taxable and the remaining income of the charitable trust will be eligible for exemption under the provisions of section 11 of the Act. Our attention is invited to paragraph 28 of Circular No. 387, dated July 6, 1984, issued by the Central Board of Direct Taxes, under the heading

Levy of income tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemption

which is reproduced as follows :-

28.6 It may be noted that new sub-section (1A) inserted in section 161 of the Income-tax Act, which provides for taxation of the entire income received by trusts at the maximum marginal rates is applicable only in the case of private trusts having profits and gains of business. So far as public charitable 17 and religious trusts are concerned, their business profits are not exempt from tax, except in the cases falling under clause (a) or clause (b) of section 11 (4A) of the Income tax Act. As the maximum marginal rate of tax under the new proviso to section 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 Income-tax Act in regard to investment pattern or use of the trust property for the benefit of the settler, etc., contained in section 13 (1) (c) and (d) of that Act, the said rate 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 section 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.

3.6 It is vehemently argued that CBDT Circular itself lays down that- where such a trust contravenes the provisions of section 13 (1) (c) or 13 (1) (d) of the Act, the maximum marginal rate of income-tax will apply only to that part of income, which has forfeited exemption under the said provisions. Both the ld. Authorities below failed to apply this binding circular of the Board. It is pleaded that assesses case is supported by catena of legal precedents supporting this legal proposition, including the following judgments of the Karnataka and the Bombay High Courts. which held as under: -

1. CIT v. Fr. Mullers Charitable Institutions [2014] 363 ITR 230 (Karn). 18 In this case, the assessee, a charitable trust, for the assessment years 2000-01 and 2001-02 claimed exemption under section 11. The Assessing Officer noticed that the assessee had advanced a sum of Rs. 30 lakhs during the assessment year 2000-01 and a sum of Rs. 50 lakhs during the assessment year 2001-02, respectively, to a company which was running a Kannada daily. According to the Assessing Officer, advancing of such a huge amount was in violation of section 11 (5). Further, as per section 13 (1) (d), the trust shall not be entitled for exemption under section 11 and 12 of the Act. Accordingly, the Assessing Officer assessed the aforesaid advances to tax. However, the Commissioner of Income-tax was of the opinion that in view of violation of section 11(5), the entire income of the trust ought to have been assessed, as the trust was not entitled to any exemption under sections 11 and 12 of the Act and the Commissioner of Income-tax revised the order passed by the Assessing Officer. On appeal, the Tribunal after considering the matter in detail and on examining sections 11, 12, 13 (1) (d) and section 164 (2) of the Act, inter alia, held that the order passed by the Commissioner of Income-tax was contrary to section 164 (2) of the Act and the entire income of the assessee could not be assessed. On appeal by the Revenue before the High Court, one of the substantial question of law admitted was whether the Tribunal was correct in holding that when a part of income is held to be violative of the provisions of section 13 (1) (d), only to the said extent, maximum marginal rate of tax is to be levied and not for the whole income, more particularly when there was violation of the provisions of section 11 (5) of the Act. It was held by the High Court that a reading of section 13 (1) (d) of the Act, makes it clear that it is only the income from such investment or deposit which has been made in violation of section 11(5) of the Act, that is liable to be taxed and that the violation of section 13 (1) (d) was not tantamount to denial of exemption under section 11 to the total income of the assessee. Accordingly, the appeals of the IT Department were dismissed. 19 It is emphasized that while deciding this case, the Honble Karnataka High Court has placed reliance on various other judgments available on the issue like-

1. Honble Delhi High Court, in the case of DIT (E) V. Agrim Charan Foundation [2002] 253 ITR 593 (Delhi). In this context, the following observations of the Honourable High Court, on page 238 of the Report are very relevant :

We are in respectful agreement that the views expressed by the Bombay High Court as well as Delhi High Court for violation section 11(5) of the Act and the entire income of the Respondent trust cannot be assessed for the tax.

Thus, it is very clear that where the whole or part of the relevant income is not exempted under section 11, by virtue of violation of section 13 (1) (d) of the Act, tax shall be levied on the relevant income or part of the relevant income, at the maximum marginal rate. However, violation of section 13 (1) (d) does not result in the denial of exemption under section 11, to the total income of the assessee.

2. DIT(E) v. Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533 (Bom). In this case, according to the Assessing Officer, on account of violation of section 11(5) of the Act, the assessee forfeited exemption under section 11, in respect of its entire income, viz. dividend income plus interest income, whereas according to the assessee, they were entitled to claim exemption and they were entitled to continuance of exemption in respect of interest income, though they had forfeited the right to claim exemption vis-- vis the dividend income, as the assessee continued to hold the shares in a non-Government company even after March 31, 1993. On appeal, the Commissioner of Income-tax (Appeals) came to the conclusion that the assessee was not entitled to the benefit of exemption under section 11, in respect of the entire income. 20 On further appeal, the Tribunal came to the conclusion that in view of section 164 (1), the income receivable by the trust was the relevant income. That a portion of such relevant income only would suffer tax because of the violation of the condition of investment prescribed under section 11(5). The Tribunal found that non-fulfilment of such condition could not deprive the trust of the exemption of its other income, which had been granted to it in the earlier years. Hence, the Tribunal allowed the appeal of the assessee. Against the aforesaid judgment of the Tribunal, an appeal was filed by the Department before the High Court. The following question was raised before the honourable High Court :

Whether violation of section 11(5), read with section 13 (1) (d), by the assessee trust attracts maximum marginal rate of the tax on the entire income of the trust

Before the High Court the counsel of the IT Department contended that in view of section 164 (2), the forfeiture of exemption for breach of section 11(5) would result in imposition of tax on the maximum marginal rate, as if the assessee was an association of persons (AOP). He further contended that the entire income of the trust was liable to be charged to tax under maximum marginal rate, on the basis of such income accruing to an association of persons. On the other hand, the counsel for the assessee contended that the requirement of investment for specified securities under section 11(5) results in an income to the trust which is receivable by the trustees and it is called relevant income under section 164(1). He further contended that a portion of such relevant income in the present case would suffer tax because the condition of investment as prescribed under section 11(5) had not been fulfilled. But non-fulfilment of such condition could not deprive the trust of the exemption of its other income, which had been granted in earlier years. He further contended that in this connection, the proviso to section 164(2) is very important. According to him, the Legislature has clearly contemplated that in a case where the whole or part of the relevant income is not exempt under section 11, by virtue of violation of section 13 (1) (d), tax shall be 21 charged on the relevant income or part of the relevant income at the maximum marginal rate. In this connection, he also relied upon Circular No. 387, dated July 6, 1984, issued by the Central Board of Direct Taxes [152 ITR (St.) 1]. It was held by the High Court that section 164 (2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of the association of persons. Therefore, a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt under section 11 or section 12, because of the contravention of section 13 (1) (d), then tax shall be charged on such income or part thereof, as the case may be, at the maximum marginal rate. In other words, only non-exempt income portion would fall in the net of tax, as if it was the income of an association of persons. It was further held by the High Court that as per proviso to section 164 (2), it is, inter alia, laid down that in cases where the whole or part of the relevant income is not exempt by virtue of section 13 (1) (d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase relevant income or part of relevant income is required to be read in contradistinction to the phrase whole income under section 161 (1A). This is only by way of comparison. Under section 161 (1A) which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, then tax shall be charged on the whole of the income, in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the aforesaid two phrases show that the Legislature has clearly indicated its mind in the proviso to section 164 (2), when it categorically refers to forfeiture of exemption for breach of section 13 (1) (d), resulting in levy of maximum marginal rate of tax only to that part of income, which has forfeited exemption. It does not refer to the entire income being subjected to maximum marginal rate of tax. This 22 interpretation is also supported by Circular No. 387 dated July 6, 1984 [152 ITR (St.) 1]. It was also held that in law, there is a vital difference between eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. In the circumstances, it was held that there was merit in the contention of the assessee that in the present case, the maximum marginal rate of tax would apply only to the dividend income from shares in Mafatlal Industries Ltd. And not to the entire income. Accordingly, the aforesaid question was answered in the negative, that is, in favour of the assessee and against the Department. It is, therefore, clearly established that the Bombay High Court approved the judgment of the Tribunal to the effect that non-fulfilment of condition of investment prescribed under section 11(5) of the Act, could not deprive the trust of the exemption of its other income, which had been granted to it in the earlier years. In other words, it is clearly established that violation of section 13 (1) (d) was not tantamount in denial of exemption under section 11 to the total income of the assessee.

3. Jamestji Tata Trust v. Joint DIT (E) [2014] 101 DTR (Trib) 305 (Mum) It was, inter alia, held in this case that violation of section 13 (1) (d) and section 13 (2) (h) deprives exemption only to the income from investments not permitted under section 11(5) and not to the entire income of the trust, if the other income of the trust, otherwise fulfils the condition for exemption. Therefore, the exemption under section 11 is available to the assessee only in respect of income, to the extent the same is derived in conformity to section 11 and applied during the year for the purposes of the trust. While reaching the aforesaid conclusion, the Hon. Tribunal had followed the judgment of the Bombay High Court, in the case of DIT (E) v. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom) . It is submitted here that in the aforesaid judgment, the Tribunal has also followed the earlier judgment of Mumbai Bench of the Tribunal, in the 23 case of Gurdayal Berlia Charitable Trust v. Fifth ITO [1990] 34 ITD 489 (Bom). It was held in this judgment that non-fulfilment of the condition of investment under section 11(5) cannot deprive the trust of exemption of its other income, which has already been granted to it in the earlier years. The non-fulfilment of the condition under section 11 (5) would only make a portion of the relevant income as specified under section 164 (1), liable to tax. It was further held that in such a case, the provisions of section 164 (2), along with the proviso thereto, would come into operation and only such income would be brought to tax at the maximum marginal rate, which cannot be treated as exempt by virtue of non-fulfilment of the condition of investment under section 11(5) of the Act. In a recent case CIT Vs. Working Womens Forum (2014) 365 ITR 353 (Mad.) the Honble Madras High Court following the Bombay High Court judgement in DIT Vs. Sheth Mafart Lal Gangal Bhai Foundation Trust (Supra) held that denial of exemption u/s 11 and 12 of I. T. Act should only be to the extent of income which was violation of Section 13 (1) (d) and not the total denial of exemption u/s 11 of I. T. Act, 61.It is thus submitted that even if it is taken that holding of shares of TISCO is in violation of provisions of Section 13 (1) (d) then only the relevant income of assessee trust for the said shares is not entitled to exemption u/s 11 & 12 of I. T. Act, 1961 and said income from shares could only be charged to tax at maximum marginal rate of tax under section 164 (2) and not the entire income of the assessee Trust subject to provisions of Section 10 of I. T. Act, 1961. The assessee trust from the said shares of TISCO received only the dividend income of Rs. 24,02,298/- which do not form part of total income u/s 10 (34) of I. T. Act, 1961 and thus exempt under the Act. In case of Jamsetji Tata Trust vs. Joint DIT (E) the Mumbai ITAT Bench in (2014) 161 TTJ (Mumb) 742/ [2014] 101 DTR (Trib) 305 (Mum.) in para 9.6 to 9.8 of appeal order relying on decisions of CIT vs. Divine Light Mission (2005) 196 CTR (SC) 135 : (2005) 278 ITR 659 (Del) and His Holiness Silasri Kasivasi Muthukumara Swami Thambiran & Ors. Vs. Agrl. ITO & Ors. 1978 CTR (Mad) 217 : (1978) 113 ITR 889 (Mad) . held that the exemption under s. 10 is income specific irrespective of the status / class of person. The exemption under s. 11 is person specific though on the income derived from the property held under the trust. Further the exemption under s. 11 is subject to the application of income and modes or form of deposit and investment. The exemption under s. 11 is available on the income of the public charitable/religious trust or institution which is otherwise taxable in the hands of other persons. Thus the income which is exempt under s. 10 cannot be brought to tax by virtue of s. 11 and 13 because no such pre-condition is provided either under ss. 10 or 11 to 13. 24 Therefore. Ss. 11 to 13 would not operate as overriding effect to s. 10. The language of these provisions does not suggest that either s. 10 is subject to the provisions of ss. 11 to 13 or ss. 11 to 13 has any overriding effect over s.

10. Therefore, the benefit of s. 10 cannot be denied by invoking the provisions of ss. 11 to 13. Once the conditions of s. 10 are satisfied then no other condition can be fastened for denying the claim under s. 10. In view of the above submissions the dividend income on shares and mutual funds and long term capital gain on sale of shares are exempt under s. 10 (34), 10 (35) and 10 (38) respectively and cannot be brought to tax by applying s. 11 and

13. The above judgement of Mumbai ITAT in case of Jamsetji Tata Trust has been taken note by the legislature and to nullify the effect of this part of Judgement section 11(6) and 11 (7) in the I. T. Act, 1961 has been inserted w.e.f. 1-4-2015 (A.Y. 2015 16) The substance of the provision was explained in Finance bill (No. 2) 2014 as Sections 11, 12 and 13 are special provisions governing institutions which are being given benefit of tax exemption, it is therefore imperative that once a person voluntarily opts for the special dispensation it should be governed by these specific provisions and should not be allowed flexibility of being governed by other general provisions or specific provisions at will. Allowing such flexibility has undesirable effects on the objects of the regulations and leads to litigations. Similar analogy exists in the context of section 10(23C) which provides for exemption to funds, institution, hospitals, etc. which have been granted approval by the prescribed authority. The provision of section 10(23C) also have similar conditions of accumulation and application of income, investment of funds in prescribed modes etc. Therefore, it is proposed to amend the Act to provide specifically that where a trust or an institution has been granted registration for purposes of availing exemption under section 11, and the registration is in force for a previous year, then such trust or institution cannot claim any exemption under any provision of section 10 [other than that relating to exemption of agricultural income and income exempt under section 10(23C)]. Similarly, entities which have been approved or notified for claiming benefit of exemption under section 10(23C) would not be entitled to claim any benefit of exemption under other provisions of section 10 (except the exemption in respect of agricultural income).With the above prospective amendment w.e.f. 1-4-2015 in the Income Tax Act, 1961 it is now settled in law that earlier to that date of 1-4- 2015 (A.Y. 2015-16) the income which are exempt u/s 10 of I. T. Act, 1961 cannot be subjected to tax even if whole or part of income of any trust or institution is not entitled to exemption u/s 11 & 12 of I. T. Act, 1961. Thus for the year under consideration even the dividend income of assessee trust 25 derived from holding of said TISCO shares is not taxable as per rates prescribed in Section 164 (2) even if that part of income is not entitled to exemption u/s 11 & 12 of I. T. Act, 61. A further amendment to tackle the effect of remaining part of judgement the provisions of Section 12AA were amended by inserting clause (4) to Section 12AA by Finance Act No. (2), 2014 w.e.f. 1-4-2015 enabling the Commissioner to cancel registration u/s 12AA on coming into operation of Section 13(1) in case of a Trust which will result in that provision of Section 11 & 12 shall not apply to Trust by which exemption of whole of income of trust will not be available u/s 11 & 12 of I. T. Act, 61. The provision of Section 12AA (4) will also come into force w.e.f. 1-4-2015 (A.Y. 2015-16). This also supports the above legal position that on operation of provisions of Section 13(1) denial of exemption of whole of income of Trust could not be made prior to A.Y. 2015-16.

3.8 It is pleaded that there is no ambiguity in this behalf in view of the combined reading of the CBDT circular(supra) Honble Bombay & Karnataka High court judgments and various other judicial precedents cited above. Honble Supreme Court recently in the case of CIT v. DAWOODI BOHRA JAMAT case 364 ITR 31 has held that if the activities of the trust are composite i.e. partly charitable and partly not held to be so; the entire benefits of sec 11 & 12 cannot be denied to the trust, what is to be excluded from benefits is the activity which is not held to be in accordance with provisions of Secs. 11,12 and 13. The view adopted by ld. AO and ld. CIT(A) leads to unintended and harsh results besides they make the conjoint provisions of sec. 164 otios and nugatory which cannot be the intention of the legislature. TISCO is one of the Tata group blue chip company, its holding is immensely beneficial to the trust in terms of dividend and 26 appreciation. There is no doubt that it is a precious property of the trust and is to be liquidated with great care and caution. Merely because it could not be converted into specified security cannot have propensity to disentitle the trust from entire exemption. The only logical interpretation which emerges out of conjoint reading of secs 11,12,13 and 164; CBDT circulars, above cited case laws corroborates the contentions canvassed by the assessee .In view of above submissions the it is pleaded that whole income of assessee trust is not liable for disentitlement of benefits u/s 11 & 12 and only part of dividend income from shares of TISCO held by it though not entitled to exemption u/s 11 & 12 of I. T. Act, 1961. What may be held as ineligible is income earned out of TISCO shares i.e. dividend earned therefrom which is to be taxed subject to other provisions of the Act at maximum marginal rate. In case of dividend income the same by provisions of Section 10 (34) of I. T. Act, 1961 is expressly exempt. Thus applying the regular provisions of IT Act i.e. 10(34) the dividend income of assessee trust is also not liable to tax. The orders of Ld. AO & CIT (A) forfeiting exemption u/s 11 and u/s 12 on entire income of tax, holding the trust as A.O.P. and applying maximum marginal rate is erroneous and contrary to the provisions of law, judicial precedents and CBDT circular. The orders of lower authorities may be reversed on this issue 27

4.1 The ground No. (2) of appeal is not pressed. Grounds no. 3 and 4 are pleaded to be alternative in nature on which no submissions are made.

4.2 Ld. CIT (DR) contends that i. Assessee consciously violated the statutory provision by continuing with the investment of shares in a non public sector company. In this eventuality law will take its course as per plain meaning once the assesse trust violates a specific provision of sec. 13(1)(d); it leads to denial of benefits of sec 11 & 12 to entire trust income. ii. The assessee was under an obligation to dispose off or convert TISCo shares in to permissible investments by 31 st March 1993, which it failed to do and thereby contravened S. 13(l)(d) iii. It was claimed that these shares were purchased out of the sale proceeds of old shares. This plea was also rejected as there was no sale of shares during the year under consideration. And if it was in earlier years then it is further established that the Trust had invested money out of its own funds. iv. The assessee has further claimed that had the Trust not opted to subscribe for rights issue it would have resulted in a big loss to the Trust. The trustees are in a fiduciary position and had to act for the benefit of the Trust. v. The AO observed that the assessee was trying to compare a case of a company with that of the Trust. The functions of a Trust are altogether different from the functions of a company. The Trust gets tax benefit under the Act only if it satisfies certain conditions laid down in sections 11,12 & 13 and it is not meant for profit motive. On the contrary, in 28 the case of a company profit is the most powerful driving force in its functions. vi. The shares forming part of corpus were received by it after 1 st June,1973 and even then the accretion was not necessarily by way of bonus shares. The assessee had grossly ignored the phrase "by way of bonus" while stressing on the definition of word "accretion". The statute has allowed accretion only by way of bonus shares and that too in cases when such shares were with the trust on 1 st June, 1973. When the shares are forming part of corpus after 1 st June, 1973, question of accretion does not even arise. Clearly the investment in right-issue cannot, by any stretch of imagination, be equated with the phrase accretion by way of bonus shares. Ld. DR in order to buttress his arguments relied on following judgments:- i. CIT v. Kumudam Endowments 242 ITR 159 (Madras) ii. DIT(E) v. M. Ct. Muthiah Chettiar family trust. iii. DIT(E) v. Shardaben Bhagubhai Mafatlal Public Trust No. 8 and ors 164 CTR (Bom) 97. These case laws are relied for the proposition that in case the investments held earlier are not converted into specified investments the entire benefits u/s 11 & 12 can be denied on this violation of sec 13(1)(d) provisions. Further reliance is placed on: i. Tulsiram Gilda Public charitable Trust v. ACIT 44 ITD 341 (Hyd) ii. ITO v. Gurjar Pushkarana Vidyotejak Mandal 30 TTJ (Ahd) 610; 29 For the proposition that even if the proviso to sec. 164(2) inserted from 1-4-85 is considered, it implies that clauses c or d of sec. 13(1) are attracted, in that case trust income is to be taxed at maximum marginal rates.

4.3 The Orders of lower authorities are relied on.

4.4 We have heard the rival contentions and case laws and carefully perused the material available on the record. The controversy in question be dealt with by framing following question: i. Whether the trust was obliged to convert its TISCO share holding into specified securities by the due date or thereafter In our considered view there cannot be dispute on this issue that the trust should had converted the TISCO share into investment of permissible securities in this behalf. ii. Whether the nonconversion of TISCO corpus shares into permissible securities will disentitle the assessee from the benefits of secs. 11 and 12 from the entire income. OR Conjointly reading sec. 164(2), it will disentitle the benefits on the portion of the income attributable to impermissible securities to be taxed at maximum marginal rates after applying other provisions of the Act 30

4.5 In our considered view the provisions of secs. 11, 12, 13 and 16(2) are to be conjointly read and the CBDT circular referred to above being a beneficial circular is to be also applied. A combined reading leads to a harmonious construction, proviso to section 164(2) is very important, Legislature has clearly contemplated that in a case where the whole or part of the relevant income is not exempt under section 11, by virtue of violation of section 13 (1) (d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. CBDT Circular No. 387, dated July 6, 1984, issued by the Central Board of Direct Taxes [152 ITR (St.) 1] also supports this proposition. Section 164 (2) refers to the relevant income which is derived from property held under trust wholly for charitable or religious purposes. If such income consists of severable portions, exempt as well as taxable, the portion which is exempt is to be left out and the portion which is not exempt is charged to tax as if it is the income of the association of persons. This is subject to application of other provisions of Act like exemptions, deduction etc. Therefore, a proviso was inserted by the Finance Act, 1984, with effect from April 1, 1985, under which in cases where the whole or any part of the relevant income is not exempt under section 11 or section 12, because of the contravention of section 13 (1) (d), then tax shall be charged on such income or part thereof, as the case may be, 31 at the maximum marginal rate. In other words, only non-exempt income portion would fall in the net of tax, as if it was the income of an association of persons.

4.6 In the case of Maftlal Gagalbhai Foundation (supra) also it was held by the High Court that as per proviso to section 164 (2), it is, inter alia, laid down that in cases where the whole or part of the relevant income is not exempt by virtue of section 13 (1) (d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase relevant income or part of relevant income is required to be read in contradistinction to the phrase whole income under section 161 (1A). This is only by way of comparison. Under section 161 (1A) which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of profits of business, then tax shall be charged on the whole of the income, in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the aforesaid two phrases show that the Legislature has clearly indicated its mind in the proviso to section 164 (2), when it categorically refers to forfeiture of exemption for breach of section 13 (1) (d), resulting in levy of maximum marginal rate of tax only to that part of income, which has forfeited exemption. It does not refer to the entire income being subjected to 32 maximum marginal rate of tax. This interpretation is also supported by Circular No. 387 dated July 6, 1984 [152 ITR (St.) 1]. It was also held that in law, there is a vital difference between eligibility for exemption and withdrawal of exemption/forfeiture of exemption for contravention of the provisions of law. These two concepts are different. They have different consequences. In the circumstances, it was held that there was merit in the contention of the assessee that in the present case, the maximum marginal rate of tax would apply only to the dividend income from shares in Mafatlal Industries Ltd. and not to the entire income. Accordingly, the aforesaid question was answered in the negative, that is, in favour of the assessee and against the Department.

4.7 We find merit in the contention of ld. Counsel for the assesse that the proposition of apportionment of income eligible for benefits u/s 11 and 12 between exempted or non exempted income is upheld by Honble Supreme Court in Dawoodi Bohra Trust (supra). Thus Honble Supreme court has rationally dealt with this situation and instead of denying the entire benefits of sec 11 and 12 even for a technical, venial or smaller breach a sound and reasonable proposition has been laid down. In view of the foregoings we have no hesitation to hold that the entire benefits of sec. 11 and 12 cannot be forfeited from the trust and the corresponding dividend 33 income from TISCO shares will not be eligible for Benefits of sec. 11 and 12.

5.1 Now we advert to the assessees contention that income not eligible for benefits of sec 11 and 12 is to be subjected to other provisions of the IT Act and thereafter the taxable income is to be subjected to maximum marginal rate. We find force in this argument. As per the scheme of the Act, first the trust income is to be worked out, thereafter, benefits of provision of secs. 11 and 12 are to be applied. Remainder income is than to be treated with regular provisions of the Act and resultant income i.e. taxable income is to be subjected to maximum marginal rates. Applying this scheme of the I T Act to assessee case the non-beneficial income is in the form of dividend income from TISCO shares. There is no dispute between the parties about the nature of income being dividend and quantum thereof. In the backdrop of these facts the dividend income being exempt from income by express provisions of sec 10(34), the dividend income is exempt from Income Tax. This being so, in the result there remains no tax liability on the trust. Consequently we hold accordingly and delete the additions in this behalf. Our judgment is fortified by the judgments cited by the assessees counsel (supra) which deal with the issue before us with precision and which we respectfully follow. Apropos the case laws cited by ld DR They have been 34 considered by above judicial precedents to arrive at the above conclusion, which we are respectfully following. We may hasten to add that even department has not been taking any particular stand and allowing the benefits of sec 11 and 12 in some of the years, then rethinking and refusing the benefits by reopening the assessments. Thus even the department has its own share of interpretations, leading to repetitive proceedings. In consideration of all the foregoing, we allow the appeal filed by the assessee.

6.0 In the result, the appeal of the assessee is allowed. The order is pronounced in the open Court on 05 -11-2014 Sd/- Sd/- (T.R. MEENA) (R.P. TOLANI) ACCOUNTANT MEMBER JUDICIAL MEMBER Jaipur Dated: 5 th Nov. 2014 *Mishra Copy forwarded to:-

1. M/s. Santokba Durlabhji Trust Fund, Jaipur

2. The ITO , Ward- 2(2), Jaipur

3. The ld. CIT(A) By Order

4. The ld. CIT 5.The ld. DR 6.The Guard File (IT No. 169/JP/2012) AR ITAT, Jaipur