BALIA,j. - (1.) HEARD learned counsel for the parties.
(2.) THIS is a reference made at the instance of the revenue in connection with proceedings u/s. 154 of the Income Tax Act, 1961 (for short `the Act of 1961') for rectifying assessment order for the assessment year 1974-75. The respondent-assessee is a Public Religious and Charitable Trust and was claiming exemptions in respect of its income u/s. 11 and 12 of the Act of 1961. The original assessment order in respect of assessment year 1974-75 was completed on 27. 09. 1976 by Income Tax Officer on a total income of Rs. 13,125/ -. It was found by the ItO that the part of income was not applied to the charitable purposes in view of the applicability of Section 13 (3) The reasons for this rejection of claim to exemption and subjection of aforesaid sum to tax was that the assessee had carried forward a sum of Rs. 3. 50 lacs advanced to M/s. Lake Palace Hotels and Motels (P) Ltd. , Udaipur at an interest of 5% per annum and had further advanced a sum of Rs. 1. 50 lacs during the previous year on interest at 10% p. a. with effect from 1. 1. 74 the rate of interest on the advance of Rs. 3,50,000/- was also enhan- ced to 10% p. a. In the said Company Maharana Bhagwat Singh was having substantial interest and he also happened to be the Managing Trustee of the assessee Trust. In view of these facts the ITO was of the view that the amount of Rs. 3,50,000/- lent by the Trust was to a person referred to in sub-section (3) of Section 13 and the interest being inadequate the market rate of interest was applied at 10% and the difference of the estimated income, which was considered to be applied for benefit of such Trustee, was accordingly taxed. However, the claim of the assessee for exemption u/ss. 11 and 12 in respect of other income was accepted. Denial of exemption in respect of certain income because of investment made in M/s. Lake Palace Hotels and Motels (P) Ltd. Udaipur was subjected to appeal before the Assistant Appellate Commissioner who by his order dt. 15. 1. 77 agreed with the finding of the ITO so far as inadequacy of interest charged for the period of nine months on advance of Rs. 3,50,000/- to M/s. Lake Palace Hotels and Motels (P) Ltd. in the period upto 31. 12. 73 was concerned. Deposit with the Company at the rate of 5% was held to be inadequate and to that extent income only was held to be taxable in view of the provisions of Section 13. The appeal in respect of other additions on account of Jagir compensation amount was allowed by the A. A. C.
(3.) IT can be noticed here that the factual matrix on the basis of which additions have been made by the ITO was the assessee- Trust had advanced a sum of Rs. 3. 50 lacs to the M/s. Lake Palace Hotels and Motels (P) Ltd. , Udaipur. At the beginning of the year the pending balance was Rs. 3. 50 lacs which was lent at the interest rate of 5% per annum. During the year under reference the assessee gave further loan of Rs. 1,50,000/ -. This loan was advanced at interest rate of 10% per annum. Subsequently w. e. f. 1. 1. 1974 the interest rate was increased to 10% on existing loan of Rs. 3,50,000/- advanced to M/s. Lake Palace Hotels & Motels Pvt. Ltd. , Udaipur. Thus in nine months the interest of Rs. 3. 50 lacs has been charged at the rate of 5% and further remaining three months interest at the rate of 10%. Thereafter, the ITO invoked power under Section 154 of the Act of 1961 for rectifying assessment for the year 1974-75 in respect of the alleged mistake apparent from the record in disallowing exemption in respect of income referable to investment made in M/s. Lake Palace Hotels and Motels (P) Ltd. only and subjected to tax only the part of interest to the extent benefit has been deemed to have been transferred to Company in which the Managing Trustee of the Trust has substantial interest in terms of Section 13 (3), in order to disallow all other incomes received by way of donations in different funds which was held to be exempted u/ss. 11 & 12 of the Act. The plea of the assessee against the said action that the issue of exigibility of the entire income to tax was highly debatable, and mistake, if any, was not rectifiable and secondly because the order of ITO dt. 27. 9. 76 in respect of assessment of income arising to the Trust on account of investment made in Company in which Maharana Bhagwat Singh has substantial interest having been subjected to appeal and affirmed by the Appellate Authority, the order of ITO on the subject matter merged with the order of AAC, thereafter the ITO was left with no jurisdiction to initiate proceedings u/s. 154, were not accepted by the ITO. An order of rectification was passed on 17. 7. 80 bringing the alleged income of the Trust, from donation stated to be as per the original assessment, subject to charge of tax. However comparative reading of the two orders do not support this statement. It appears that only the income from donation was subjected to tax and such income was earlier not at all included in the total income. How the amount of income from donations have been computed is neither discernible from the original assessment order nor from the rectification order, both of which have been made part of statement of case as separate annexures. ;