One deposit of ours breaks the s.11(5) modes. Will the department tax the trust's entire income?
No. Only the income from the investment or deposit made in violation of s.11(5) is taxed; a breach of s.13(1)(d) does not take the trust's total income out of s.11. On that footing the s.263 revision was held unsustainable.
Decided by the High Court (Karnataka High Court — Dilip B. Bhosale J and B. Manohar J (judgment by B. Manohar J)) on 2014-02-10, reported as (2014) 363 ITR 230 (Karn); (2015) 228 Taxman 319 (Karn); (2015) 275 CTR 558 (Karn); ITA Nos. 588 and 589 of 2007, AYs 2000-01 and 2001-02. It bears on section 11, section 11(5), section 13(1)(d), section 263 of the Income Tax Act 1961, in Charitable Trusts & Exemption and Revision & Rectification matters.
This meets the common revenue position that any non-conforming investment forfeits exemption on everything. It is also useful on revision: the Court held s.263 is not a power to correct every mistake of the Assessing Officer, and the order must be both erroneous and prejudicial to the revenue before the Commissioner can assume jurisdiction. Be aware that other High Courts have gone the other way, so expect the point to be contested.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The trust ran a group of institutions including Fr. Muller General Hospital, Fr. Muller Medical College, a homeopathy college, a pharmaceutical division, St. Johns Leprosy Hospital, a rehabilitation unit and a college of nursing, and had exemption under ss.11 and 12. It filed nil returns for assessment years 2000-01 and 2001-02. On a tax evasion petition an enquiry was made and notices issued under s.148. The Assessing Officer found that the trust had advanced Rs 30,00,000 in 2000-01 and Rs 50,00,000 in 2001-02 to M/s Janamadhyama Prakashana Ltd, which published the Kannada daily Janavahini; the trust said the money was for advertisement, printing and publicity of its programmes, but the balance sheet showed it under 'loans and advances'. By order of 29 May 2005 the Assessing Officer held the advance to infringe s.11(5) and taxed that amount. While the trust's appeal was pending before the Commissioner (Appeals), the Commissioner issued a notice under s.263 and by order of 27 December 2005 set aside the assessment with a direction to assess the entire income of the trust, the company having by then closed down. The Tribunal set the s.263 order aside and restored the Assessing Officer's order, and the Revenue appealed.
Both appeals were dismissed and all three substantial questions answered against the Revenue (para 13). On s.263, the Commissioner's jurisdiction depends on the order being both erroneous and prejudicial to the interests of the revenue; if one condition is absent, recourse to s.263 is not available, and the Commissioner cannot use the power to correct every kind of mistake made by the Assessing Officer. Where two views are possible and the Assessing Officer takes one, the Commissioner cannot set it aside (paras 9-10). On the merits, reading s.13(1)(d) makes it clear that only the income from the investment or deposit made in violation of s.11(5) is liable to be taxed, and a violation of s.13(1)(d) does not amount to denial of exemption under s.11 on the trust's total income (para 11). The Tribunal's order restoring the Assessing Officer's assessment was therefore upheld — so the Rs 80 lakh treated as offending by the Assessing Officer remained taxed, and it was only the Commissioner's attempt to tax the whole income that failed (para 13).
On the revisional power the Court adopted the reasoning of an earlier Division Bench of the same Court, drawing on Malabar Industrial Co. Ltd. v. CIT: prejudice to the revenue means that lawful revenue has not been or cannot be realised, and satisfaction of both conditions in s.263 is a sine qua non of jurisdiction (paras 9-10). On the substantive question, the Court adopted the Bombay High Court's construction in Sheth Mafatlal Gagalbhai Foundation Trust of the proviso to s.164(2): where relevant income consists of severable exempt and taxable portions, the exempt portion is left out, and the proviso inserted by the Finance Act 1984 charges the maximum marginal rate on 'the relevant income or part of the relevant income' that has forfeited exemption, in contrast to s.161(1A) which speaks of the whole income; there is a vital difference between eligibility for exemption and forfeiture of exemption for a contravention, and CBDT Circular No. 387 of 6 July 1984 supports the same reading. The Delhi High Court had taken a similar view in Agrim Charan Foundation. The Court expressed respectful agreement with both, and concluded that for a violation of s.11(5) the entire income of the trust cannot be assessed to tax (paras 11-12).
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 violation under Section 13(1)(d) does not tantamount to denial of exemption under Section 11 on the total income of the assessee.
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Handle my notice → Ask a CA on WhatsAppNo. Only the income from the investment or deposit made in violation of s.11(5) is taxed; a breach of s.13(1)(d) does not take the trust's total income out of s.11. On that footing the s.263 revision was held unsustainable. This was decided by the High Court (Karnataka High Court — Dilip B. Bhosale J and B. Manohar J (judgment by B. Manohar J)) and bears on section 11, section 11(5), section 13(1)(d), section 263 of the Income Tax Act 1961. It is reported as (2014) 363 ITR 230 (Karn); (2015) 228 Taxman 319 (Karn); (2015) 275 CTR 558 (Karn); ITA Nos. 588 and 589 of 2007, AYs 2000-01 and 2001-02. This meets the common revenue position that any non-conforming investment forfeits exemption on everything. It is also useful on revision: the Court held s.263 is not a power to correct every mistake of the Assessing Officer, and the order must be both erroneous and prejudicial to the revenue before the Commissioner can assume jurisdiction. Be aware that other High Courts have gone the other way, so expect the point to be contested. If it applies to you, the first step is this: Quantify the income attributable to the offending investment or deposit separately, so the tribunal has a figure to work with if partial denial is accepted.
The trust ran a group of institutions including Fr. Muller General Hospital, Fr. Muller Medical College, a homeopathy college, a pharmaceutical division, St. Johns Leprosy Hospital, a rehabilitation unit and a college of nursing, and had exemption under ss.11 and 12. It filed nil returns for assessment years 2000-01 and 2001-02. On a tax evasion petition an enquiry was made and notices issued under s.148. The Assessing Officer found that the trust had advanced Rs 30,00,000 in 2000-01 and Rs 50,00,000 in 2001-02 to M/s Janamadhyama Prakashana Ltd, which published the Kannada daily Janavahini; the trust said the money was for advertisement, printing and publicity of its programmes, but the balance sheet showed it under 'loans and advances'. By order of 29 May 2005 the Assessing Officer held the advance to infringe s.11(5) and taxed that amount. While the trust's appeal was pending before the Commissioner (Appeals), the Commissioner issued a notice under s.263 and by order of 27 December 2005 set aside the assessment with a direction to assess the entire income of the trust, the company having by then closed down. The Tribunal set the s.263 order aside and restored the Assessing Officer's order, and the Revenue appealed. The matter was decided on 2014-02-10 by the High Court (Karnataka High Court — Dilip B. Bhosale J and B. Manohar J (judgment by B. Manohar J)). On those facts the High Court held as follows. Both appeals were dismissed and all three substantial questions answered against the Revenue (para 13). On s.263, the Commissioner's jurisdiction depends on the order being both erroneous and prejudicial to the interests of the revenue; if one condition is absent, recourse to s.263 is not available, and the Commissioner cannot use the power to correct every kind of mistake made by the Assessing Officer. Where two views are possible and the Assessing Officer takes one, the Commissioner cannot set it aside (paras 9-10). On the merits, reading s.13(1)(d) makes it clear that only the income from the investment or deposit made in violation of s.11(5) is liable to be taxed, and a violation of s.13(1)(d) does not amount to denial of exemption under s.11 on the trust's total income (para 11). The Tribunal's order restoring the Assessing Officer's assessment was therefore upheld — so the Rs 80 lakh treated as offending by the Assessing Officer remained taxed, and it was only the Commissioner's attempt to tax the whole income that failed (para 13).
On the revisional power the Court adopted the reasoning of an earlier Division Bench of the same Court, drawing on Malabar Industrial Co. Ltd. v. CIT: prejudice to the revenue means that lawful revenue has not been or cannot be realised, and satisfaction of both conditions in s.263 is a sine qua non of jurisdiction (paras 9-10). On the substantive question, the Court adopted the Bombay High Court's construction in Sheth Mafatlal Gagalbhai Foundation Trust of the proviso to s.164(2): where relevant income consists of severable exempt and taxable portions, the exempt portion is left out, and the proviso inserted by the Finance Act 1984 charges the maximum marginal rate on 'the relevant income or part of the relevant income' that has forfeited exemption, in contrast to s.161(1A) which speaks of the whole income; there is a vital difference between eligibility for exemption and forfeiture of exemption for a contravention, and CBDT Circular No. 387 of 6 July 1984 supports the same reading. The Delhi High Court had taken a similar view in Agrim Charan Foundation. The Court expressed respectful agreement with both, and concluded that for a violation of s.11(5) the entire income of the trust cannot be assessed to tax (paras 11-12). In the words reproduced by the source cited on this page: "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 violation under Section 13(1)(d) does not tantamount to denial of exemption under Section 11 on the total income of the assessee." The decision followed or applied DIT (Exemptions) v. Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR 533 (Bom.) — followed and relied on (para 11); DIT (Exemption) v. Agrim Charan Foundation [2002] 253 ITR 593 (Delhi) — followed and relied on (para 11); CIT v. Digital Global Soft Ltd. [2013] 354 ITR 489 (Kar.) — followed and relied on; Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) — applied on s.263 (paras 9-10).
It was decided by the High Court on 2014-02-10 and is reported as (2014) 363 ITR 230 (Karn); (2015) 228 Taxman 319 (Karn); (2015) 275 CTR 558 (Karn); ITA Nos. 588 and 589 of 2007, AYs 2000-01 and 2001-02. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 11, section 11(5), section 13(1)(d), section 263, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Both appeals were dismissed and all three substantial questions answered against the Revenue (para 13). On s.263, the Commissioner's jurisdiction depends on the order being both erroneous and prejudicial to the interests of the revenue; if one condition is absent, recourse to s.263 is not available, and the Commissioner cannot use the power to correct every kind of mistake made by the Assessing Officer. Where two views are possible and the Assessing Officer takes one, the Commissioner cannot set it aside (paras 9-10). On the merits, reading s.13(1)(d) makes it clear that only the income from the investment or deposit made in violation of s.11(5) is liable to be taxed, and a violation of s.13(1)(d) does not amount to denial of exemption under s.11 on the trust's total income (para 11). The Tribunal's order restoring the Assessing Officer's assessment was therefore upheld — so the Rs 80 lakh treated as offending by the Assessing Officer remained taxed, and it was only the Commissioner's attempt to tax the whole income that failed (para 13). It arises in Charitable Trusts & Exemption and Revision & Rectification matters, on section 11, section 11(5), section 13(1)(d), section 263 of the Income Tax Act 1961, and was decided by Karnataka High Court — Dilip B. Bhosale J and B. Manohar J (judgment by B. Manohar J). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the exemption is withdrawn by a s.263 order, attack jurisdiction first by showing the assessment order is not both erroneous and prejudicial to the revenue. Cite the contrary Delhi and Kerala line in your own submission and distinguish it, rather than leaving the department to produce it. Check whether the alleged breach is under s.13(1)(d) at all; this case does not decide the position for a s.13(1)(c) benefit to an interested person.
Still good law. The Revenue's special leave petition against this judgment was dismissed: CIT, Mangalore v. Fr. Mullers Charitable Institutions [2014] 227 Taxman 369 (SC), SLP (C) No. 22223 of 2014, decided 19 September 2014 by Anil R. Dave and Uday Umesh Lalit JJ, with the single sentence that the Court found no reason to entertain the petition. That is a non-speaking dismissal and not an affirmance on the merits, but it leaves the decision standing. The decision has since been followed by a later Division Bench of the same Court in CIT (Exemptions) v. Krupanidhi Education Trust [2022] 441 ITR 154 (Kar), decided 20 September 2021, which set out this holding at para 13 and applied the same analogy to s.13(1)(c), holding that the entire income of a trust cannot be assessed even for a breach of that clause; the Revenue's petition against that decision was in turn dismissed by the Supreme Court on 3 March 2023 [2023] 150 taxmann.com 359 (SC). No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Read against the reported judgment. Karnataka High Court, Dilip B. Bhosale J and B. Manohar J, 10 February 2014, ITA Nos. 588 and 589 of 2007 for AYs 2000-01 and 2001-02. The offending item was Rs 80 lakhs advanced over two years to a company publishing a Kannada daily, shown in the balance sheet as loans and advances. Note what the decision does and does not do: the Assessing Officer's own addition of that amount survived, and what failed was the Commissioner's attempt under s.263 to tax the trust's entire income. The judgment also decides an independent s.263 point — the order must be both erroneous and prejudicial to the revenue, and the power is not one to correct every mistake. On status, the Revenue's SLP was dismissed without reasons on 19 September 2014, and a later Division Bench of the same Court in CIT (Exemptions) v Krupanidhi Education Trust [2022] 441 ITR 154 (Kar) followed this decision and carried the same analogy across to s.13(1)(c), which the earlier record listed as an open question. Outside Karnataka treat it as persuasive: a contrary line denying the whole exemption is reported, though Delhi's own decision in Agrim Charan Foundation, on which this judgment relies, is on the partial-denial side. The judgment turns on s.13(1)(d) read with s.11(5) and s.164(2); the extension to s.13(1)(c) comes from the later decision in Krupanidhi Education Trust rather than from this judgment. The report reproduces a passage referring to 'the proviso to Section 142' where s.164 is plainly meant. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were dismissed and all three substantial questions answered against the Revenue (para 13). On s.263, the Commissioner's jurisdiction depends on the order being both erroneous and prejudicial to the interests of the revenue; if one condition is absent, recourse to s.263 is not available, and the Commissioner cannot use the power to correct every kind of mistake made by the Assessing Officer. Where two views are possible and the Assessing Officer takes one, the Commissioner cannot set it aside (paras 9-10). On the merits, reading s.13(1)(d) makes it clear that only the income from the investment or deposit made in violation of s.11(5) is liable to be taxed, and a violation of s.13(1)(d) does not amount to denial of exemption under s.11 on the trust's total income (para 11). The Tribunal's order restoring the Assessing Officer's assessment was therefore upheld — so the Rs 80 lakh treated as offending by the Assessing Officer remained taxed, and it was only the Commissioner's attempt to tax the whole income that failed (para 13).
TaxSphere, “CIT v Fr. Mullers Charitable Institutions”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-fr-mullers-charitable-institutions/ (validity last checked 2026-08-19)
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Our audit report was not e-filed with the return and exemption was denied. Can the delay be condoned?
