2017 (1) TMI 954 - AT - Income Tax

Exemption under section 11 - shares held by assessee - rightful owner of shares - denial of claim for the alleged violation of section 13 (1) (d) (iia) - addition to the corpus donations - Held that - We find that assessee has received shares of Delhi Guesthouse Pvt. Ltd., from the settler of the trust and could not be disposed off immediately due to the conflict that arose amongst the legal hairs of the settler in respect of the partition of the assets which included the impugned shares of Delhi Guesthouse Private Limited. The legal heirs approached Hon ble Delhi High Court by way of a civil suit in which Hon ble court had passed an order restraining the parties from de-alienating from any of the assets held by them. In our considered opinion, under such circumstances assessee could not be considered to be a legal owner of the shares during the period F.Y 2000-04 As the word used in the section 13(1)(d)(iii) is held , it implies ownership of the assessee to the exclusion of all others which is not the case here. In a considered view, the assessee was not physically in rightful possession of the shares so as to enable it to comply with the provisions of section 11 (5) of the Act. The assessee was not in a position to dispose of these shares due to lis pendence before Hon ble Delhi High Court though the shares were bequeathed to assessee by way of a Will in the F. Y. 2004-05. - Decided against revenue Payment made for non charitable activities - Held that - As for conversion of property from lease hold to free hold, the appellant trust being a shareholder, has contributed towards share of such charges. It is further noticed that Executor of estate Dr. Bhai Mohan Singh granted temporary loan of ₹ 3,33,57,000/- to the appellant trust, which was paid by the appellant trust towards conversion charges which cannot be said as payment has been made for non-charitable activities and for commercial consideration. - Decided in favour of assessee

Summary

Issues Involved:
1. Exemption under Section 11 and violation of Sections 11(5) and 13(1)(d) of the Income Tax Act.
2. Restraining order from the Delhi High Court affecting the disposal of shares.
3. Advance payment to Delhi Guest House Pvt. Ltd. for charitable purposes.

Detailed Analysis:

Issue 1: Exemption under Section 11 and Violation of Sections 11(5) and 13(1)(d)
The revenue contended that the assessee violated the provisions of Section 11(5) read with Section 13(1)(d) by holding investments in shares of a private limited company, which is not an approved form of investment. The assessee acquired shares in Delhi Guesthouse Pvt. Ltd. in the assessment year 2004-05 and was required to convert these investments by 31st March 2006, but the conversion occurred only in 2012. The Assessing Officer denied the exemption under Section 11 and added ?19,21,84,249/- to the corpus donations. The CIT (A) allowed the assessee's appeal, stating that there was no violation of Sections 11 and 12 as the assessee demonstrated compliance.

Issue 2: Restraining Order from Delhi High Court
The assessee argued that it was unable to dispose of the shares within the stipulated time due to a restraining order from the Delhi High Court amidst a family dispute over the partition of assets, including the shares in Delhi Guesthouse Pvt. Ltd. The court's interim order on 29.09.2004 restrained the alienation of shares until further orders. The shares were eventually sold on 16.07.2012 after the court lifted the restraining order on 27.04.2012. The CIT (A) agreed with the assessee, noting that the assessee could not be considered the legal owner of the shares during the disputed period, and thus, there was no violation of Section 13(1)(d).

Issue 3: Advance Payment to Delhi Guest House Pvt. Ltd. for Charitable Purposes
The revenue argued that the advance of ?3,33,57,000/- to Delhi Guesthouse Pvt. Ltd. was not for charitable purposes, as the responsibility for property conversion lay with Delhi Guesthouse Pvt. Ltd. The assessee countered that the payment was part of a government scheme to convert leasehold property to freehold, enhancing the value of the property and, consequently, the shares held by the assessee. The CIT (A) found that the payment was made towards conversion charges, benefiting the assessee as a major shareholder, and thus, it was for charitable purposes.

Judgment:
The tribunal upheld the CIT (A)'s findings, dismissing the revenue's appeal. It was concluded that:
1. The assessee did not violate Sections 11(5) and 13(1)(d) as it was restrained by a court order from disposing of the shares.
2. The advance payment towards property conversion was for charitable purposes, benefiting the assessee.

The appeal filed by the revenue was dismissed, and the order was pronounced in the open court on 11th January 2017.