Rc/53/1993 Of Comne.income Tax A.p.i Hyd v. Trustees Heh Nizams Education And Learning

* HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTAANDHON’BLE SRI JUSTICE K.C. BHANU+R.C.No.53 of 1993 %Date:27-09-2013 Between: Commissioner of Income Tax, AP-I, Hyderabad ……….. Applicant And $ Trustees of HEH the Nizam’s Mukarramjah Trust for Education &Learnings, Hyderabad. ….. Respondent ! Counsel for the Applicant: S.R. Ashok, Standing Counsel ^ Counsel for the Respondent: Sri S. Ravi < Gist : > Head Note: ? Cases Referred: 1.[1984] 150 ITR 508 (Andhra Pradesh)2.[1987] 166 ITR 580 (Madhya Pradesh)3.[1987] 163 ITR 129 (Madras) HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTAANDHON’BLE SRI JUSTICE K.C. BHANUR.C.No.53 of 1993Date:27-09-2013 Between: Commissioner of Income Tax, AP-I, Hyderabad ……….. Applicant And Trustees of HEH the Nizam’s Mukarramjah Trust for Education &Learnings, Hyderabad. ….. Respondent HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTAANDHON’BLE SRI JUSTICE K.C. BHANUR.C.No.53 of 1993 ORDER:(Per Hon’ble the Chief Justice Sri Kalyan Jyoti Sengupta) This case has been referred under Section 256 of the IncomeTax Act, 1961 (hereinafter referred to as ‘said Act’) by the learnedIncome Tax Appellate Tribunal, Hyderabad, on the application madeby the Revenue by order dated 06-01-1993 for the opinion of this Court on the following questions: 1. Whether, on the facts and in the circumstances of the case, the ITAT is justified in setting aside the orderspassed by the CIT, AP-I, under Section 263 of the saidAct, consequently restoring the original assessmentorders, thereby rejecting the stand of the department toassess the capital gains chargeable to tax arising out ofthe compensation amount of Rs.30,19,257/- awarded bythe State Government on 04-02-1983 for the compulsoryacquisition of the property known as Kothi Asafia on 23-09-1981? 2. Whether, on the facts and in the circumstances ofthe case, the ITAT should not have interpreted that thesettler of the Trust also being the accountable person ofthe late Nizam had enured the benefit of reduction inEstate Duty liability of late Nizam to the extent of thecompensation amount awarded, consequently attractingthe provisions of Section 13(1)(c) read with Section 13(3)of the said Act? 2. While reading the above two questions, we are of the viewthat the second question is absolutely redundant and no opinion iscalled for in the event the first question is answered by expressingopinion. 3. The fact leading to filing of this case is as follows: The assessee-Trust acquired property known as KothiAsafia by an oral gift from the settler Prince Mukarram Jah Bahaduron 29-12-1972. The settler got this property by inheritance on thedeath of his grandfather Nizam Osman Ali Khan with the liability ofpayment of estate duty of his grandfather. Thus it was subjected tofirst charge under Section 74(1) of the Estate Duty Act. TheGovernment of Andhra Pradesh acquired this property under theprovisions of Land Acquisition Act, 1894 and while doing so, hadtaken possession on 23-09-1981. However, the compensation ofRs.30.19 lakhs was awarded by notice dated 04-02-1983. The entire compensation amount was appropriated towards estateduty arrears by virtue of the first charge created on the property underSection 74(1) of the Estate Duty Act. In the assessment proceedingsfor the assessment years 1982-83 and 1983-84, the assessee-Trustclaimed that it had not violated the provisions of Section 13(1)(c) andtherefore, it was eligible for exemption under Section 11 of the saidAct. The Inspecting Assistant Commissioner, under the provisions ofSection 144A of the said Act, held that the Trust had not violated theprovisions of Section 13(1)(c) read with Section 13(3) of the said Actand can be treated as a Charitable Trust provided that no otherconditions requisite were violated. The Assessing Officer,accordingly, extended the benefit of Section 11 of the said Act to theTrust. 4. Thereafter, the Commissioner of Income Tax, inexercise of his power under Section 263 of the said Act, formedopinion that both the Inspecting Assistant Commissioner and theAssessing Officer were in error and the assessments wereprejudicial to the interests of Revenue. He held that theappropriation of this amount of compensation tantamounts toapplication of the property of the Trust directly or indirectly for the benefit of the settler and consequently the provisions of Section 13(1)(c) read with Section 13(3) of the said Act were attracted. He,therefore, set aside the assessment orders for both the years anddirected the Assessing Officer to re-assess the same by applying theprovisions of Section 13(1)(c) read with Section 13(3) and also tobring to chargeability of tax on the heading capital gain arising fromthe transaction worked out at Rs.19,60,693/- in the total income forthe assessment year 1982-83 or 1983-84. The said orders of theCommissioner of Income Tax passed under Section 263 of the saidAct were taken to the appellate forum being the Tribunal. Thelearned Tribunal, after hearing, held that the assessee-Trust cannotbe said to have made the payment of estate duty on behalf of thesettler. It was also held by the Tribunal that the Commissioner ofIncome Tax had not held that the Inspecting Assistant Commissionerwas wrong to conclude that the Trust had not violated the provisionsof Section 13(1)(c) read with Section 13(3) of the said Act andconsequently the Assessing Officer should not have extended thebenefit of Section 11 of the said Act to the Trust in pursuance of thedirections given by the Inspecting Assistant Commissioner underSection 144A of the said Act. The assessment of capital gains isentirely different question which had to be answered consideringwhether the assessee-Trust was the absolute owner. At the time oftransfer, the property was subjected to charge and the assessee-Trust did not acquire any title overcoming Section 74 of the EstateDuty Act. The Tribunal held that the Inspecting AssistantCommissioner has taken decision after duly examining all the factsand legal position and the points involved. 5. Mr. S.R. Ashok, learned counsel for the Revenue,relying on the decision of the Division Bench of this Court in the case [1]of COMMISSIONER OF INCOME-TAX v. BILQUIS JAHAN BEGUM,submits that the recovery of estate duty from the compensation amount cannot be said to be costs and expenses of acquisition of thesaid property, moreover the payment of estate duty does not alsoconstitute a valid deduction under Section 48 of the said Act. Hesubmits, pointing out the aforesaid decision, that payment of estateduty is really payment on behalf of the settler and such payment ismade for the benefit of the settler to discharge its statutory duty.Hence, the entire amount of compensation received should havebeen brought to tax under the head of capital gains. 6. Mr. S. Ravi, learned counsel for assessee-Trust, on the otherhand submits that the duty paid under Section 74 of the Estate DutyAct constitute a statutory charge over the property and this propertywas taken with this liability and the amount of compensation did notcome really to the hands of the assessee-Trust. Despite due protest,the estate duty amount was realised from the source and thispayment was not made by the assessee-Trust voluntarily. Undisputedly the assessee is a charitable Trust. Therefore, theaforesaid payment is allowable deduction under Section 11 of thesaid Act and the provisions of Section 13(1)(c) read with 13(3) arenot attracted in this case as factually payment was not made by theassessee-Trust and the aforesaid recovery of estate duty cannot besaid to be a payment made for the benefit of the settler. Factually thesettler was Prince Mukarram Jah Bahadur who inherited the propertyfrom his grandfather late Nizam Osman Ali Khan and this estate dutywas paid in relation to the death of the said Nizam Osman Ali Khan,but not in relation to the settler. Next he contends, citing a decision of Madhya Pradesh HighCourt in the case of COMMISSIONER OF INCOME TAX v. GOVINDRAM SEKSARIYA CHARITY TRUST[[2]], that if the income taxofficials below, after considering the factual and legal position,passed an order, the same cannot be revised under Section 263 ofthe said Act by the Commissioner of Income Tax, and this is not within the purview of the aforesaid Section. In support of hiscontention, he has also relied on a decision of Madras High Court inthe case of VENKATAKRISHNA RICE COMPANY v. COMMISSIONER[3]OF INCOME TAX. 7. We have heard both the learned counsel and considered thefactual aspect. 8. In order to give answer to the aforesaid question, the issueinvolved in this case is whether the recovery of estate duty from thecompensation amount can be said to be an expenditure incurred forthe benefit of the settler of the Trust to attract the provisions ofSection 13(1)(c) read with Section 13(3) of the said Act andconsequently the entire compensation amount is chargeable to taxunder the head of capital gains. 9. It appears from the decision of this Court in the case ofBilquis Jahan Begum (supra) that it is settled that the estate dutycorresponding to the property inherited does not constituteexpenditure referable to the property as such by the assessee. Theprovisions of Section 74(1) of the Estate Duty Act are merelyintended to safeguard the interests of the Revenue by creating a firstcharge against the property and do not support the proposition thatbecause of such charge, the payment of estate duty is directlyconnected with the asset inherited. Even the estate duty paid doesnot qualify itself to be treated either as cost of acquisition of the assetor cost of improvements to the asset. Under these circumstances,the estate duty does not also constitute a valid deduction underSection 48 of the said Act. It appears from the fact that theassessee-Trust acquired the property from Prince Mukarram JahBahadur who, before creation of the said Trust, did not pay the estateduty payable on account of the death of his grandfather NizamOsman Ali Khan. Thus this property was transferred by way of a giftfor the charitable purposes along with the aforesaid liability of making payment of estate duty. It appears, on careful reading of thefactual and legal position, that the assessee-Trust did not get anyincome on account of compensation paid and almost entirecompensation amount was eaten up on account of payment of estateduty. 10. Charitable Trust is disentitled to get benefit under Section11 of the said Act if any part of any income or any property of theTrust or institution is, during the prevision year, used or applieddirectly or indirectly for the benefit of any persons amongst others ofthe author of the Trust or the founder of the institution or any personwho has made substantial contribution to the Trust or institutionunder making payment of estate duty. It appears, on careful reading of thefactual and legal position, that the assessee-Trust did not get anyincome on account of compensation paid and almost entirecompensation amount was eaten up on account of payment of estateduty. 10. Charitable Trust is disentitled to get benefit under Section11 of the said Act if any part of any income or any property of theTrust or institution is, during the prevision year, used or applieddirectly or indirectly for the benefit of any persons amongst others ofthe author of the Trust or the founder of the institution or any personwho has made substantial contribution to the Trust or institutionunder sub-sections (1)(c)(ii) and (3) of Section 13 of the said Act. Herefirstly the property cannot be said to have been acquired absolutelyfree from encumbrance until and unless the payment of estate duty ismade. The amount of estate duty recovered cannot be said to be aproperty which has been acquired by the assessee-Trust. What hasbeen acquired by the Trust in respect of the property is the right, titleand interest in the property excluding the liability of charge. In other words, charge for payment of estate duty cannot be said tobe a property of the Trust. The compensation amount is receivedwith liability. Admittedly here no part of the compensation amount,after deducting the amount of estate duty, was utilised or spent by theassessee-Trust. Hence, we think that, in the facts and circumstancesof this case, the mischief of Section 13 sub-section (1) clause (c)(ii) read with Section 13 sub-section (3) of the said Act is not attracted. Thus the benefit under Section 11 of the said Act will be applicable.Consequently, the property acquired by the assessee-Trust andaward of compensation amount cannot be taxable. Moreover, wehave gone through the judgment of the Tribunal and we think it hasbeen rightly concluded by the Tribunal that the revisional authority did not have any material worth that the Inspecting AssistantCommissioner is wrong to conclude that the Trust had not violatedthe provisions of Section 13(1)(c)(ii) read with Section 13(3) andconsequently, the Assessing Officer should not have extended thebenefit of Section 11 of the said Act. 11. It has been rightly contended by Mr. Ravi, learned Seniorcounsel for the assessee-Trust, and we find support from thedecision of Madhya Pradesh High Court in the case of GovindramSeksariya Charity Trust (supra), that when the Income Tax officer,after considering the relevant facts and provisions of law, has passedan order, it was not within the purview of Section 263 of the said Actto reopen the issue in the name of alleged prejudicial to the interestsof the Revenue. In the said judgment of the Madhya Pradesh HighCourt, it was held on the proposition of law that since the income taxofficer was alive to the relevant facts and provisions of law beforeproceeding to frame the assessment, the Tribunal was right inholding that it was not open for the Commissioner of Income Tax tointerfere under Section 263 of the said Act. We find that similar viewwas taken by the Madras High Court in the case of VenkatakrishnaRice Company (supra). We quote the relevant portion of thejudgment as follows: “The scope of interference under Section 263 is not to setaside merely unfavourable orders and bring to tax some moremoney to the treasury nor is the section meant to get at sheerescapement of revenue which is taken care of by otherprovisions in the Act. The prejudice that is contemplated underSec. 263 is prejudice to the income tax administration as awhole. Section 263 is to be invoked not as a jurisdictionalcorrective or as a review of a subordinate’s order in exercise ofthe supervisory power but it is to be invoked and employed onlyfor the purpose of setting right distortions and prejudices to theRevenue which is a unique conception which has to beunderstood in the context of and in the interest of revenueadministration. Such a power cannot, in any manner, be equatedto, or regarded as approaching in any way the appellatejurisdiction of even the ordinary revisional jurisdiction conferred on the Commissioner under Section 264.” 12. In view of the discussion as above, we are of the view thatthe learned Tribunal is justified in setting aside the orders of theCommissioner of Income Tax passed under Section 263 of the saidAct on the facts and circumstances of this case. Consequently, weanswer the only question in affirmative and against the Revenue. 13. This Reference Case is, accordingly, disposed of. ________________ K. J. SENGUPTA, CJ ________________ K.C. BHANU, J Date: 27-09-2013 YCR NOTE: L.R. COPY TO BE MARKED: YES [1] [1984] 150 ITR 508 (Andhra Pradesh) [2] [1987] 166 ITR 580 (Madhya Pradesh) [3][1987] 163 ITR 129 (Madras)[1987] 163 ITR 129 (Madras)