1988 (4) TMI 38 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of section 11(1A) of the Income-tax Act, 1961, and exemption of capital gains from the sale of shares.
2. Legal correctness of the Appellate Tribunal's finding regarding the utilization of sale proceeds for acquiring another capital asset.
3. Legal determination of whether the assessee utilized the whole sale proceeds for acquiring another capital asset to exempt it from capital gains tax.

Issue-wise Detailed Analysis:

Issue 1: Applicability of section 11(1A) of the Income-tax Act, 1961, and exemption of capital gains from the sale of shares.
The court examined whether the provisions of section 11(1A) of the Income-tax Act, 1961, were applicable to the assessee trust, thereby exempting the capital gains resulting from the sale of shares. The assessee trust, a charitable trust, sold shares and claimed that the proceeds were utilized as fixed deposits, invoking section 11(1A). The Income-tax Officer initially denied this benefit, arguing that the majority of the sale consideration was treated as unpaid purchase price. However, the Commissioner (Appeals) and the Income-tax Appellate Tribunal held that section 11(1A) was applicable, as the sale proceeds were indeed invested in another capital asset. The court affirmed this view, stating that the capital gains arising from the transfer were deemed to have been applied to charitable purposes as per section 11(1A).

Issue 2: Legal correctness of the Appellate Tribunal's finding regarding the utilization of sale proceeds for acquiring another capital asset.
The court analyzed whether the Appellate Tribunal correctly found that the assessee utilized the sale proceeds for acquiring another capital asset. The assessee trust had sold shares and kept 90% of the sale consideration as fixed deposits with the purchasers, with the remaining 10% invested in a bank. The Revenue contended that the unpaid purchase price could not be considered as an investment in another capital asset. However, the court found overwhelming evidence indicating that the full consideration had passed from the purchaser to the seller, with 90% retained as fixed deposits. The court held that the Tribunal correctly found that the sale proceeds were utilized for acquiring another capital asset, thus satisfying the conditions of section 11(1A).

Issue 3: Legal determination of whether the assessee utilized the whole sale proceeds for acquiring another capital asset to exempt it from capital gains tax.
The court examined whether the assessee utilized the entire sale proceeds for acquiring another capital asset, thereby exempting it from capital gains tax. The court noted that the assessee trust had invested 10% of the sale consideration in a bank and the remaining 90% as fixed deposits with the purchasers. The court rejected the Revenue's argument that the 90% retained by the purchasers constituted unpaid purchase price. Instead, the court held that the full consideration had accrued to the seller and was invested as fixed deposits, meeting the requirements of section 11(1A). Consequently, the court affirmed that the assessee utilized the whole sale proceeds for acquiring another capital asset, exempting it from capital gains tax.

Conclusion:
The court answered all three questions in the affirmative, in favor of the assessee and against the Revenue. The provisions of section 11(1A) were deemed applicable, and the capital gains resulting from the sale of shares were exempt. The court concluded that the assessee trust had utilized the entire sale proceeds for acquiring another capital asset, thereby satisfying the legal requirements for exemption from capital gains tax. The reference was disposed of with no order as to costs.