1993 (3) TMI 71 - HC - Income Tax

Summary

Issues Involved:
1. Exemption of dividend income under section 13(4) of the Income-tax Act.
2. Application of section 13(1)(c)(ii) concerning the period before June 1, 1970.
3. Treatment of donated and bonus shares as funds of the trust.
4. Deduction of Rs. 1,175 spent for the objects of the trust.

Detailed Analysis:

1. Exemption of Dividend Income:
The primary issue was whether the Appellate Tribunal was correct in sustaining the Appellate Assistant Commissioner's direction to allow exemption for dividend income from shares held by the assessee on May 31, 1970. The Tribunal upheld the exemption without delving into whether it could be denied under section 13(4) of the Income-tax Act. The court concluded that the Revenue's contention lacked substance, emphasizing that section 11 excludes income derived from property held under trust for charitable or religious purposes from total income computation. This benefit is forfeited if the income or property is used for the benefit of specified persons under section 13(3). However, the proviso to section 13(1)(c) exempts income related to any period before June 1, 1970, from this forfeiture.

2. Application of Section 13(1)(c)(ii):
The Tribunal held that section 13(1)(c)(ii) did not apply to the use or application of income before June 1, 1970, due to the second proviso to section 13(1)(c). The court agreed, stating that the proviso applies if its conditions are met, regardless of the trust's use of income or property in a prohibited manner. The court noted that the trust was established before the Act's commencement, and most shares were received as donations or bonuses before December 31, 1970. Thus, the use or application related to a period before June 1, 1970, entitling the trust to exemption.

3. Treatment of Donated and Bonus Shares:
The Tribunal's decision that donated and bonus shares could not be considered as funds invested by the trust was upheld. The court referred to the deeming provision in section 13(2), which creates a fiction for determining when income or property is used for the benefit of specified persons. The court emphasized that the proviso to section 13(1)(c) still applies if its conditions are satisfied, even if the trust's funds are deemed to be used in a prohibited manner under section 13(2)(h).

4. Deduction of Rs. 1,175:
The Tribunal held that the assessee was entitled to a deduction of Rs. 1,175 spent for charitable purposes, as claimed, and not the larger amount granted by the Appellate Assistant Commissioner. The court noted that the Revenue's argument that the funds continued to be invested in concerns with substantial interest by specified persons did not affect the applicability of the proviso to section 13(1)(c). Consequently, the trust was entitled to the deduction.

Conclusion:
The court answered all questions in the affirmative, ruling against the Revenue and in favor of the assessee. The trust was entitled to the claimed exemptions and deductions, and the proviso to section 13(1)(c) applied, preserving the trust's tax benefits. No order as to costs was made.