1982 (4) TMI 131 - AT - Income Tax

Summary

Issues Involved:
1. Forfeiture of tax exemption under Section 13(1)(c)(ii) and Section 13(2)(h) read with Section 13(3) of the Income-tax Act, 1961.
2. Interpretation of "investment" in the context of Section 13(2)(h).
3. Applicability of Section 13(4) regarding the exemption limit of 5% of the capital of the concern.

Issue-wise Analysis:

1. Forfeiture of Tax Exemption:
The primary issue in both appeals concerns the forfeiture of tax exemption under Section 13(1)(c)(ii) and Section 13(2)(h) read with Section 13(3) of the Income-tax Act, 1961. The assessee, a public charitable trust, had its income exempted under Section 11 up to the assessment year 1974-75. However, the Commissioner deemed the assessment order for the year 1975-76 erroneous and prejudicial to the interest of the revenue, as the trust was a partner in a firm where relatives of the managing trustee had substantial interest. The Commissioner argued that the delayed withdrawal of profits amounted to the funds of the trust remaining invested in a concern with substantial interest by related persons, thereby violating Section 13(2)(h) and forfeiting the exemption under Section 11.

2. Interpretation of "Investment":
The assessee contended that the provisions of Section 13(1)(c)(ii) and Section 13(2)(h) were inapplicable, arguing that the delayed withdrawal of profits did not constitute an "investment." The Commissioner (Appeals) upheld this view, stating that the concept of "investment" under Section 13 differed from its ordinary meaning. The Commissioner (Appeals) concluded that the retention of funds in the partnership firm did not amount to an investment, supported by the Supreme Court's observations in Malabar Fisheries Co. v. CIT. The Tribunal agreed, stating that the non-withdrawal of profits did not amount to an investment for the purposes of Section 13(2)(h), as the profits accrued only on the last day of the previous year and remained embedded in the firm's transactions until finalization.

3. Applicability of Section 13(4):
For the assessment year 1976-77, the revenue argued that the trust's capital contribution in the firm exceeded 5% of the total capital, violating Section 13(1)(c)(ii) and Section 13(2)(h). The Tribunal held that the contribution of capital by the trust in the firm was a positive act of investment, thus falling under Section 13(2)(h). The Tribunal rejected the assessee's contention that the firm was not a "concern" and that the capital contribution was not an investment. It was determined that the trust's funds were invested in a concern where relatives of the authors had substantial interest, leading to the forfeiture of the exemption. The Tribunal also noted that the contribution exceeded 5% of the firm's capital, disqualifying the trust from the exemption under Section 13(4).

Conclusion:
For the assessment year 1975-76, the Tribunal allowed the assessee's appeal, setting aside the Commissioner's order and restoring the ITO's order, as the delayed withdrawal of profits did not constitute an investment under Section 13(2)(h). For the assessment year 1976-77, the Tribunal partly allowed the revenue's appeal, holding that the trust forfeited the exemption due to the capital contribution exceeding 5% of the firm's capital. The ITO was directed to recompute the income, considering the voluntary contributions received during the accounting period.