2003 (12) TMI 49 - HC - Income Tax

Whether the Tribunal was right in holding that the assessee-trust is exempt from wealth-tax under section 5(1) of the Wealth-tax Act without considering the provisions of section 21A(iii) which was brought into effect from April 1 1985? - It is no doubt true that section 21A(iii) of the Wealth-tax Act which came into force on April 1 1985 provides that if any funds of the trust are invested or deposited or any shares in a company are held by the trust in contravention of the provisions of clause (d) of sub-section (1) of section 13 of the Income-tax Act the properties of such trust would be subject to wealth-tax - Tribunal was in error in holding that the contravention of section 13(1)(d) of the Income-tax Act was not relevant for the purpose of considering the assessee s claim for exemption from wealth-tax.

Issues:
Denial of exemption from wealth-tax to a charitable trust for assessment years 1987-88 and 1988-89 due to investment contrary to section 13(1)(d) of the Income-tax Act, 1961. Interpretation of section 21A(iii) of the Wealth-tax Act introduced on April 1, 1985, regarding investments made by the trust. Reversal of Assessing Officer's decision by the Commissioner and Tribunal. Consideration of the relevance of contravention of section 13(1)(d) of the Income-tax Act for exemption from wealth-tax. Extension of time for disinvesting from non-compliant investments and making investments in accordance with section 13 of the Income-tax Act until March 31, 1993.

Analysis:
The High Court of Madras addressed the denial of exemption from wealth-tax to a charitable trust for the assessment years 1987-88 and 1988-89 due to investments made contrary to section 13(1)(d) of the Income-tax Act, 1961. Initially, the Assessing Officer denied the exemption, but the Commissioner overturned this decision, a reversal that was upheld by the Tribunal. The issue at hand was whether the trust was exempt from wealth-tax under section 5(1) of the Wealth-tax Act without considering the impact of section 21A(iii) introduced on April 1, 1985. This section stipulates that if a trust invests funds or holds shares in contravention of section 13(1)(d) of the Income-tax Act, its properties would be subject to wealth-tax.

The Tribunal erred in its judgment by not considering the contravention of section 13(1)(d) of the Income-tax Act as relevant for assessing the trust's claim for exemption from wealth-tax. However, the court highlighted that even though the investments made by the trust did not align with section 13(1)(d) of the Income-tax Act during the relevant years, this non-compliance did not automatically disqualify the trust from claiming exemption under either the Income-tax Act or the Wealth-tax Act. The court pointed out that the time for disinvesting from non-compliant investments and making investments in accordance with the Income-tax Act had been extended until March 31, 1993, by the Finance (No. 2) Act, 1991, with retrospective effect from April 1, 1983.

In a related case under the Income-tax Act, the court referred to these provisions and upheld a claim for exemption of a trust, emphasizing the importance of the extended time frame for compliance. Ultimately, the court ruled in favor of the Revenue regarding the specific question referred to them, but clarified that the trust was indeed entitled to exemption for the assessment years in question, considering the provisions discussed in the preceding paragraphs.

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