1985 (9) TMI 131 - AT - Income Tax

Issues Involved:
1. Applicability of Section 11(1A) of the Income-tax Act, 1961.
2. Interpretation of the term "capital asset to be so held."
3. Treatment of capital gains for charitable trusts.
4. Cost of acquisition and its impact on subsequent transactions.
5. Eligibility for exemption under Section 11(1A) and Section 80T.

Detailed Analysis:

1. Applicability of Section 11(1A) of the Income-tax Act, 1961:
The primary issue revolves around whether the capital gains of Rs. 96,606 arising from the sale of 7,000 shares of Orissa Cement Ltd. should be treated as having been applied to charitable purposes under Section 11(1A). The assessee argued that the capital gains should be considered as applied for charitable purposes since the net consideration was used to acquire new shares. The ITO, however, disagreed, stating that the new shares were not held as capital assets for the required period.

2. Interpretation of the term "capital asset to be so held":
The ITO interpreted the term "capital asset to be so held" to mean that the new capital asset must be held as part of the trust's corpus for a significant period. Since the newly acquired shares were sold within a short period, the ITO denied the benefit under Section 11(1A). The AAC, on the other hand, found that there was no time limit for holding the capital assets and accepted the assessee's contention that the requirements of Section 11(1A) were fulfilled.

3. Treatment of capital gains for charitable trusts:
The AAC agreed with the assessee that the capital gains of Rs. 96,607 should be treated as applied for charitable purposes. However, he also referred to the book "Taxation of Charity" by Shri M.P. Agrawal, which suggested that if the asset was acquired out of the funds of the trust, the entire proceeds should be considered as capital gains. This led to a complex interpretation where the AAC concluded that the original cost of acquisition should be reduced by the capital gains already exempted.

4. Cost of acquisition and its impact on subsequent transactions:
The AAC's interpretation led to a re-evaluation of the cost of acquisition for the second set of transactions. He concluded that the cost of acquisition should be Rs. 81,193, excluding the exempted capital gains of Rs. 96,607. The Tribunal disagreed with this view, stating that the cost of acquisition should be based on the actual consideration paid for the shares and that the AAC's interpretation was not supported by the provisions of the Act.

5. Eligibility for exemption under Section 11(1A) and Section 80T:
The Tribunal noted that the exemption under Section 11(1A) applies if the net consideration from the sale of a capital asset is utilized to acquire another capital asset held as part of the trust's corpus. The Tribunal also considered the alternative submission that if any capital gains were to be assessed, the benefit under Section 80T should be allowed. The Tribunal directed the ITO to ascertain the details of the investments made from the sale proceeds and determine if they could be considered capital assets.

Conclusion:
The Tribunal restored the matter to the file of the ITO to ascertain the details of the investments acquired from the sale proceeds of Orissa Cement Ltd.'s shares. The ITO was directed to determine whether the assets held at the end of the year could be considered capital assets. If so, the assessee's claim regarding the treatment of the capital gains of Rs. 96,607 would have to be accepted. The appeal was allowed for statistical purposes, pending further investigation by the ITO.

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