Abraham P. George, Accountant Member - In this appeal filed by the assessee, its grievance is that it was denied exemption under Section 11 of Income-tax Act, 1961 (in short 'the Act') for a reason that it had violated Section 11(5) by subscribing to certain chits.

2. Facts apropos are that assessee, a Trust registered under Section 12AA of the Act, running educational institutions, had filed its return for impugned assessment year, inter alia, claiming exemption under Section 11 on its total income of Rs. 6,24,91,961/-. During the course of assessment proceedings, it was noted by the Assessing Officer that assessee had placed Rs. 2,08,456/- with one M/s Tern Credits & Chits Private Limited and Rs. 96,230/- with one M/s K.R. Palaniappan (Chit), during the relevant previous year. As per the A.O., these were not approved investments under Section 11(5) of the Act. Hence it resulted in violation of the nature specified in Section 13(1)(d) of the Act. Therefore, according to her, excess of income over expenditure of the Trust had to be taxed in the status of AOP. Though the assessee asserted before the A.O. that decisions of Hon'ble Bombay High Court in the case of DIT(E) v. Seth Mafatlal Gagalbhai Foundation [2001] 249 ITR 533/114 Taxman 19 and that of DIT(E) v. Shardaben Baghubai Mafatlal Public Charitable Trust [2001] 247 ITR 1/114 Taxman 666 (Bom.) were in its favour, A.O. was not impressed. According to her, these decisions on the other hand, clearly went to show that a Trust will forfeit its eligibility to claim exemption if there is a violation of the nature mentioned in Section 13(1)(d) of the Act. She therefore held that assessee was not eligible for exemption under Section 11 for the impugned assessment year and the excess of income over expenditure was accordingly assessed to tax.

3. In its appeal before CIT(Appeals), argument of the assessee was that the amounts placed with chit companies were insignificant. Such chit subscriptions totalled to Rs. 3,04,686/- only, whereas, income of the assessee on which exemption was claimed came to Rs. 2,65,15,237/-. As per the assessee, it had applied more than 85% of its total receipts for charitable purpose during the relevant previous year. Further argument was that the amount liable for tax, at the best, could be the sum of Rs. 3.05 lakhs, as specified in proviso to Section 164(2) of the Act. Further, according to assessee, Circular No.387 of 1984 of CBDT was misinterpreted by the Assessing Officer. In any case, according to it, if the Trust had contravened the provisions of Section 13(1)(c) or 13(1)(d) of the Act, tax could be levied at marginal tax rate only to that part of the income on which exemption was forfeited.

4. However, the CIT(Appeals) was not impressed by any of these arguments. According to him, Section 164(2) applied only on income derived by a charitable trust on business activities pursued by it and falling within Section 11 (4A) of the Act. But, for this amount, which was to be taxed at normal rate, the balance of the assessee had to be taxed at maximum marginal rate when there was a violation of Section 13(1)(c) or Section 13(1)(d) of the Act. Further, according to him, once it was proved that there were investments in violation of Section 13(1)(c) or Section 13(1)(d) of the Act, then tax had to be levied on the income of the assessee at maximum marginal rate. Reliance was placed on the decision of Hon'ble Apex Court in the case of DIT v. Bharat Diamond Bourse [2003] 259 ITR 280/126 Taxman 365, Rabindranath Educational Trust v. Union of India [2010] 191 Taxman 379 (Ori.), Priyadarshini Educational Academy v. DGIT [2011] 333 ITR 347/199 Taxman 385, Kanahya Lal Punj Charitable Trust v. DIT(Exemptions) [2008] 297 ITR 66/171 Taxman 134 (Delhi) and Mundakapadam Mandirams Society v. CIT [2002] 258 ITR 395/125 Taxman 515 (Ker.). He thus confirmed the view taken by the A.O. that whole of the income of the assessee had to be taxed at maximum marginal rate.

5. Now bef