The Commissioner Of Income Tax (Exemptions v. Mehta Charity Trust

IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J. INCOME TAX APPEAL NO. 173 OF 2017 The Commissioner of Income Tax (Exemptions)..Appellant Versus Mehta Charity Trust..Respondent ................... •Mr. N.C. Mohanty for the Appellant •Dr. K. Shivram, Sr. Counsel a/w Mr. Sashank Dundu i/by RahulHakani for the Respondent ................... CORAM : AKIL KURESHI & SARANG V. KOTWAL, JJ. DATE : MARCH 19, 2019. P.C.: 1.This appeal is filed by the Revenue to challenge thejudgment of the Income Tax Appellate Tribunal (“theTribunal” for short) raising following question for ourconsideration:- " Whether on the facts and in the circumstances of the caseand in law, the Tribunal is justified in allowing the capital gainof Rs. 1,69,65,500/- as exempt under Section 11(1) of the Act,even though the assessee trust has not fulfilled the conditionsprescribed under the provisions of Section 11(1A)(a) of theAct?" 2.Brief facts are as under:- 2.1 Respondent assessee is a Charitable Trust. Duringthe period relevant to assessment year 2004-05, the Trusthad granted tenancy rights in relation to two of itsimmovable properties. By way of premium, the Trust hadreceived sum of Rs. 1.69 crores (rounded off). Such incomewas applied by the Trust for the purpose of its charitableobjects. The Trust filed the return of income in which saidreceipt was not offered to tax. The Assessing OfÏcer passedthe order of assessment under Section 143(3) read withSection 147 of the Income Tax Act, 1961 (“the Act” for short)in which he held that the said receipt was in the nature ofcapital gain upon transfer of capital asset. He was of theopinion that the assessee had not invested such capital gainas provided in Section 11(1A) of the Act and therefore, suchreceipt was not exempt from tax. 3.In appeal, the CIT(A) noted that the assessee hadapplied a sum of Rs. 4.72 crores towards the objects of theTrust. This included the receipt of Rs. 1.69 crores received byway of premium. He, therefore, allowed the assessee’s appeal upon which the Revenue approached the Tribunal.The Tribunal confirmed the view of the CIT(A) observing thatthe total income credited to the account of the Trust was Rs.3.29 crores and the application towards objects of the Trustwas Rs. 4.72 crores. The Tribunal, therefore, hold that theassessee had applied the said sum of Rs. 1.69 crores for theobjects of the Trust. 4.Having heard the learned counsel for the parties, wenotice that Section 11 of the Act pertains to income fromproperty held for charitable or religious purposes. Undersub-section (1) of Section 11, subject to the provisions ofSections 62 to 63, the incomes specified in various clausescontained therein would not be included in the total incomeof the previous year of the person in receipt of the income.Sub-section (1A) was inserted in Section 11 by Finance Actof 1971 w.e.f. 1.4.1962. Clause (a) of sub-section (1A)provides that for the purposes of sub-section (1), where acapital asset, being a property held under trust wholly forcharitable or religious purposes is transferred and the wholeor any part of the net consideration is utilized for acquiring another capital asset, then the capital gain arising from thetransfer shall be deemed to have been applied for charitableor religious purpose to the extent provided in the saidprovision. Sub-section (1A) of Section 11 is thus enablingprovision by which a Trust who has has on transfer of capitalasset made a capital gain, upon investment of such amountin another capital asset, would avoid payment of tax under adeeming fiction that such sum would be deemed to havebeen applied to charitable or religious purposes. Sub-section(1A) of Section 11 in no way restricts the applicability of sub-section (1) of Section 11. another capital asset, then the capital gain arising from thetransfer shall be deemed to have been applied for charitableor religious purpose to the extent provided in the saidprovision. Sub-section (1A) of Section 11 is thus enablingprovision by which a Trust who has has on transfer of capitalasset made a capital gain, upon investment of such amountin another capital asset, would avoid payment of tax under adeeming fiction that such sum would be deemed to havebeen applied to charitable or religious purposes. Sub-section(1A) of Section 11 in no way restricts the applicability of sub-section (1) of Section 11. 5.This aspect clearly emerges from the explanatory notesto the provisions of Finance Act of 1971. Relevant portion ofthese notes explained in detail the reason for insertion ofsub-section (1A) of Section 11 and the object for which thesaid sub-section was inserted. Relevant portion of theseinstructions read as under:- "73.Capital gains derived by charitable and religious trusts. - Undersection 11, income derived from property held under trust forcharitable or religious purposes is exempt from income-tax to theextent such income is actually applied to such purposes during theprevious year itself or within three months next following. As "income" includes "capital gains", a charitable or religious trust would forfeitexemption from income-tax in respect of its income by way of capitalgains unless such income is also applied to the purposes of the trustduring the stipulated period. In some cases, charitable or religioustrusts are required to sell, in the interest of the trust, capital assetsforming part of the corpus of the trust property solely with a view toacquiring other capital assets to be held as part of the corpus of trust.The requirement that the capital gains arising from such transactionsshould be utilized for charitable or religious purposes, during theaccounting year itself or within three months immediately following,has the unintended effect of progressively reducing the corpus of thetrust and the income yielded by it. 74. This difficulty has been accentuated as a result of certainamendments made in the scheme of tax exemption of charitable andreligious trusts through the Finance Act, 1970. Under one of theseamendments, a charitable or religious trust would forfeit exemptionfrom tax on its income if the trust funds, constituting its corpus orincome, are invested in a concern in which the author or founder ofthe trust or any substantial contributor to it or any relative of suchauthor, founder or contributor is substantially interested. Where theinvestment of the trust funds in such concern exceeds 5 per cent ofthe capital of the concern, exemption is forfeited in respect of thewhole of the income of the trust, while in a case where theinvestment does not exceed 5 per cent, the exemption is lost only inrespect of the income from such investment, the other incomecontinuing to enjoy tax exemption. In order to enable charitable andreligious trusts to change their investments suitably, without forfeitingexemption from tax, a specific provision was also made in theIncome-tax Act to the effect that the aforesaid provisions would notapply in a case where the investment of the trust funds in theprohibited concerns does not continue after 31-12-1970. In order toavail of the benefit of this relaxation, many charitable or religioustrusts divested themselves of investments in prohibited concerns before 1-1-1971. If the provisions of the law were construed strictly,such trusts would have forfeited exemption from tax in respect of theirincome by way of capital gains arising from the transfer of suchinvestments unless they applied such incomes to charitable orreligious purposes during the relevant accounting year or within threemonths immediately following. before 1-1-1971. If the provisions of the law were construed strictly,such trusts would have forfeited exemption from tax in respect of theirincome by way of capital gains arising from the transfer of suchinvestments unless they applied such incomes to charitable orreligious purposes during the relevant accounting year or within threemonths immediately following. 75. The question of eliminating the disadvantage to charitable orreligious trusts in being obligated to spend away the capital gainsarising from the transfer of assets constituting the corpus of the trustinstead of adding to the corpus, was considered by Government in1963 and administrative instructions were issued to the effect thatwhere a charitable or religious trust transferred a capital assetforming part of the corpus of its property solely with a view toacquiring another capital asset for the use and benefit of the trustand utilized the capital gains arising from the transaction in acquiringa new capital asset, the amount of capital gains so utilized should beregarded as having been applied to the charitable or religiouspurposes of the trust. These instructions have recently beenreiterated. 76.With a view to placing the aforesaid administrative instructionson a legal footing and removing the disadvantage to charitable andreligious trusts for the past as also the future, section 11 has beenamended, by section 5 of the Finance (No. 2) Act, 1971 by way ofinsertion of a new sub-section (1A). Under the new sub-section, ithas been provided that in a case where a capital asset beingproperty held under trust for charitable or religious purposes istransferred and the whole or any part of the net consideration for thetransfer (i.e., full value of the consideration as reduced by theexpenditure incurred wholly and exclusively in connection with thetransfer) is utilized for acquiring another capital asset to be held aspart of the corpus of the trust, the capital gain arising from thetransfer will be regarded as having been applied to charitable orreligious purposes. Where the whole of such net consideration is utilized in acquiring the new capital asset, the entire amount of thecapital gain will be regarded as having been applied to charitable orreligious purposes, while in a case where only a part of the netconsideration is utilized for acquiring the new capital asset, anamount, if any, by which the cost of acquisition of the new assetexceeds the aggregate of the cost of acquisition of the capital assettransferred and the cost of any improvements made to such asset,will be regarded as having been applied to such purposes." 6.Under these circumstances, it can be seen that theRevenue cannot target the assessee’s capital gain with theaid of sub-section (1A) of Section 11 when in terms of sub-section (1) to Section 11 itself, in view of the assessee'sapplication of such gain for the objects of the Trust, therearose no tax liability. In the result, the Income Tax Appeal isdismissed. [ SARANG V. KOTWAL, J. ] [ AKIL KURESHI, J ]