2022 (2) TMI 45 - HC - Income Tax

Exemption u/s 11 - ITAT allowed the deduction and issues of application of income - Capital asset transferred by the charitable trust and utilized for acquiring another capital asset - HELD THAT - A legal fiction has been created by Section 11(1A) to consider such transfer of capital asset and the investment of sale proceeds for acquiring another capital asset to be so held by the Trust as applied to charitable or religious purposes under Section 11(1)(a). At any stretch of imagination, this legal fiction created under Section 11(1A) cannot be considered as a proviso to carve out an exception to the main provision. It is in the background of the circular instructions, referred to supra, in order to give statutory force, this provision has been inserted. Capital asset transferred by the charitable trust and utilized for acquiring another capital asset would alone cannot be the criteria for granting exemption under Section 11(1A) or in other words, no denial could be made if the sale proceeds are transferred to another charitable trust. Such inter-se transfer between two charitable trusts being not disputed by the department, cannot be a ground to deny the benefit under Section 11(1A) of the Act. The sale proceeds need not always be invested in another capital asset to be held in the name of the charitable trust. There may be circumstances where a charitable trust is not applying for charitable or religious purposes to the extent to which such income has to be applied to such purpose in India directly and intends to invest in another capital asset to be so held by such charitable institutions. Certainly, it is not a circumstance involved herein. No doubt, the sale proceeds are transferred to another charitable and religious purpose, the same would necessarily come within the ambit of Section 11(1A). Hence, the finding of the Tribunal placing reliance on the judgment of Al Ameen Educational Society, supra, though has not reached finality on the merits of the case for want of monetary reliefs, the same cannot be held to be invalid or illegal in view of the provisions of the Act as discussed above. As in the case of Commissioner of Income Tax v. Maria Social Service Society 2018 (11) TMI 1056 - KARNATAKA HIGH COURT had considered the question relating to the return of income filed by the assessee and some foreign benefits received by the charitable trust and made over such remittance to another charitable trust which was newly constituted held to be not in contravention of the provisions of Section 11 of the Act as long as the subject matter of application of money is for the purpose of objects of the trust as envisaged under Section 11 and as such the said transfer could not be a ground for cancellation or rejection under Section 12AA - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the donation made to another trust is to be allowed as application under Section 11(1A) of the Income Tax Act.
2. Whether the Tribunal's interpretation of Section 11(1A) and its proviso is correct in law.
3. Whether inter-trust donations out of sale proceeds of lands are considered an application of income under the Income Tax Act.

Detailed Analysis:

Issue 1: Donation to Another Trust as Application under Section 11(1A)
The primary issue revolves around whether the donation made by a charitable or religious trust to another trust qualifies as an application of income under Section 11(1A) of the Income Tax Act. The court considered the legislative intent and the provisions of Section 11(1A), which was inserted by Finance (No.2) Act, 1971 with retrospective effect from 01.04.1962. The court emphasized that the income derived from the sale of a capital asset, if applied to charitable purposes, should be considered as income applied for such purposes. The court referenced Circular No.52, which clarifies that capital gains used to acquire another capital asset should be regarded as applied for charitable purposes. Thus, the court concluded that the inter-trust transfer of sale proceeds qualifies as an application of income under Section 11(1A).

Issue 2: Tribunal's Interpretation of Section 11(1A) and Its Proviso
The court examined whether the Tribunal correctly interpreted Section 11(1A) in conjunction with Section 11(1). The Revenue argued that the proviso to Section 11(1A) should be read harmoniously with Section 11(1), suggesting that the conditions under Section 11(1)(a) must be met for the exemption to apply. However, the court found that the legal fiction created by Section 11(1A) is intended to align the treatment of capital gains with the provisions of Section 11(1)(a). The court held that the Tribunal's interpretation was correct, emphasizing that the income applied for charitable purposes in India, including inter-trust transfers, falls within the scope of Section 11(1)(a).

Issue 3: Inter-Trust Donations and Application of Income
The court addressed whether inter-trust donations from the sale proceeds of lands are considered an application of income under the Income Tax Act. The Revenue contended that such donations are prohibited under the explanation to Section 11(2). The court, however, referenced Circular No.8/2002 and the explanatory notes of Finance Act, 2002, which clarify that payments to other trusts from the income of the current year are treated as an application of income. The court further cited the judgment in Commissioner of Income Tax v. Maria Social Service Society, which held that remittances to another charitable trust for charitable purposes do not contravene Section 11. Consequently, the court concluded that inter-trust donations are permissible and should be regarded as an application of income.

Conclusion:
The court answered the substantial questions of law Nos. 1 and 2 in favor of the assessee and against the Revenue, affirming that donations to another trust qualify as an application of income under Section 11(1A) and that the Tribunal's interpretation of the relevant provisions was correct. The appeal was dismissed.