1981 (10) TMI 80 - AT - Income Tax

Issues Involved:
1. Applicability of Section 13(2)(h), 13(3), and Explanations 1 and 3 of the Income-tax Act, 1961.
2. Consideration of shares received as donations and bonus shares for investment purposes under Section 13(4).
3. Inclusion of shares held by HUFs, trusts for unborn children, and future spouses in the calculation of investment.
4. Definition and scope of the term "relative" under Section 13(3).
5. Determination of beneficial ownership of shares pledged with banks.

Issue-Wise Detailed Analysis:

1. Applicability of Section 13(2)(h), 13(3), and Explanations 1 and 3 of the Income-tax Act, 1961:
The Income Tax Officer (ITO) examined whether the shareholding of the author of the trust and his relatives in Mohan Meakin Breweries Ltd. was 20% or more, which would invoke the provisions of Section 13(2)(h), 13(3), and Explanations 1 and 3. The ITO concluded that all disqualifying conditions were satisfied, and thus, the income of the trust was not exempt under Section 11. However, the Commissioner (Appeals) disagreed, holding that the investment of the trust in Mohan Meakin Breweries Ltd. was less than 5% of the total shares, and thus, the trust was entitled to the benefit of Section 13(4).

2. Consideration of Shares Received as Donations and Bonus Shares for Investment Purposes under Section 13(4):
The trust argued that 10,17,337 shares received as donations and bonus shares should be excluded from the 11,25,418 shares held by the trust, leaving an investment of 1,08,081 shares, which is less than 5% of the total shares issued by Mohan Meakin Breweries Ltd. The Commissioner (Appeals) accepted this argument, supported by previous tribunal orders, and concluded that these shares did not represent an investment of the trust funds.

3. Inclusion of Shares Held by HUFs, Trusts for Unborn Children, and Future Spouses in the Calculation of Investment:
The Commissioner (Appeals) excluded 7,30,849 shares held by six HUFs and 3,00,000 shares held by trusts for unborn children and future spouses from consideration under Section 13(2)(h). The rationale was that HUFs are separate entities and cannot be considered relatives of an individual, and the beneficiaries of the trusts were unknown, so the shares could not be considered beneficially owned by any person mentioned under Section 13(3).

4. Definition and Scope of the Term "Relative" under Section 13(3):
The Commissioner (Appeals) held that after the death of late Shri N.N. Mohan, Smt. Ram Rakhi Mohan ceased to be the spouse, and thus, the shareholdings of Bakshi Sampuran Singh and his three sons were not to be considered for purposes of Section 13(2)(h). This interpretation was based on the judgments in CIT v. Mani Lal Dhanji and CIT v. Keshav Lal Lallubhai Patel, which supported a strict construction of the term "spouse."

5. Determination of Beneficial Ownership of Shares Pledged with Banks:
The Commissioner (Appeals) included 3,88,431 shares pledged with banks in the calculation under Section 13(2)(h), as the beneficial ownership of these shares remained with the individuals who pledged them, and they received the dividend income from these shares.

Conclusion:
The appeal by the revenue was dismissed. The final determination was that the prohibited category of persons mentioned in Section 13(3) did not have substantial interest in Mohan Meakin Breweries Ltd., as the shares held by them constituted only 18.5% of the total shares, which is less than the 20% threshold. Therefore, the trust could not be denied exemption under Sections 11 or 12 of the Income-tax Act, 1961.

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