2004 (10) TMI 71 - HC - Income Tax

Trust - investment of the value thereof received by the trust by way of donation - 1. Whether Tribunal was justified in holding that an investment of the value thereof received by a trust by way of donation cannot be treated as an investment within the meaning of section 13 of the Income-tax Act, 1961? Held that the words funds and investment have different - The value of the investment received by the trust by way of donation cannot be treated as investment within the meaning of section 13(2)(h). In the present case, the respondent-trust had received shares of M/s. J.K. Synthetics Ltd. by way of donation, therefore, it cannot be treated that the trust has made investment of its funds in respect of the aforesaid donation - In view of the conclusion arrived at that the provisions of section 13(1)(c) and 13(2)(h) of the Income-tax Act are not applicable, the Tribunal was justified in granting the exemption under the Wealth-tax Act also. Tribunal was justified in allowing exemption under section 11 of the Income-tax Act, 1961, to the trust

Issues Involved:
1. Whether the investment received by a trust by way of donation can be treated as an investment under section 13 of the Income-tax Act, 1961.
2. Whether the Income-tax Officer was wrong in invoking the provisions of section 13(1)(c) and 13(2)(h) of the Income-tax Act, 1961, in this case.
3. Whether the trust is justified in claiming exemption under section 11 of the Income-tax Act, 1961.
4. Whether the trust's activities and investments are subject to wealth tax under section 21A of the Wealth-tax Act, 1957.

Detailed Analysis:

Issue 1: Treatment of Investment Received by Donation
The court examined whether the investment received by the trust by way of donation could be treated as an investment within the meaning of section 13(2)(h) of the Income-tax Act. The trust received shares of J.K. Synthetics Ltd. as a donation and did not invest its own funds in the said company. The court noted that the term "investment" implies a positive act of laying out funds to earn a profit or financial return. Since the shares were received as a donation, they could not be considered an investment made by the trust. The court cited several precedents, including CIT v. J.K. Charitable Trust [1992] 196 ITR 31 (All) and CIT v. Lalbhai Dalpatbhai Charity Trust [1994] 209 ITR 865 (Guj), which supported this interpretation.

Issue 2: Invocation of Provisions of Section 13(1)(c) and 13(2)(h)
The court evaluated whether the Income-tax Officer was wrong in invoking the provisions of section 13(1)(c) and 13(2)(h). These sections disallow exemptions if the trust's income or property is used for the benefit of certain persons or if the trust funds are invested in concerns where such persons have a substantial interest. The court found that since the shares were received as a donation and not an investment by the trust, the provisions of section 13(1)(c) and 13(2)(h) were not applicable. The court referred to CIT v. Sir Shri Ram Foundation [2001] 250 ITR 55 (Delhi), which clarified that the term "funds" refers to money or cash that can be invested, not assets received by donation.

Issue 3: Exemption under Section 11
The court considered whether the trust was justified in claiming exemption under section 11 of the Income-tax Act. Section 11 provides exemptions for income derived from property held under trust for charitable or religious purposes. Since the court concluded that the shares received as a donation did not constitute an investment under section 13(2)(h), the trust was eligible for exemption under section 11. The court noted that the Revenue's reliance on CIT v. Jamnalal Bajaj Sewa Trust [1988] 171 ITR 568 (Bom) and Director of Income-tax v. Bharat Diamond Bourse [2003] 259 ITR 280 (SC) was misplaced as these cases dealt with different issues.

Issue 4: Applicability of Wealth-tax under Section 21A
The court also addressed whether the trust's activities and investments were subject to wealth tax under section 21A of the Wealth-tax Act. The Wealth-tax Officer had refused the exemption, arguing that the trust's funds remained invested in a concern where persons specified in section 13(3) had substantial interest. However, the court found that since the shares were received as a donation, the provisions of section 21A were not applicable. The court upheld the Tribunal's decision to grant exemption under the Wealth-tax Act, aligning with its findings on the Income-tax Act.

Conclusion:
The court answered all the questions in favor of the assessee and against the Revenue. The investment received by the trust by way of donation could not be treated as an investment under section 13(2)(h) of the Income-tax Act. Consequently, the trust was eligible for exemption under section 11 of the Income-tax Act and section 21A of the Wealth-tax Act. The Tribunal's decisions were upheld, and the provisions of sections 13(1)(c) and 13(2)(h) were deemed not applicable in this case.

← Previous Next →