1987 (1) TMI 175 - AT - Income Tax

Issues Involved:

1. Applicability of Section 13(3) of the Income-tax Act, 1961.
2. Interpretation of "investment" under Section 13(2)(h) of the Act.
3. Taxability of dividends under Section 13(1)(c) read with Sections 13(2)(h) and 13(3).
4. Eligibility for exemption under Section 11(1A) of the Act.
5. Treatment of depreciation and amounts written off as application of income.

Issue-wise Detailed Analysis:

1. Applicability of Section 13(3) of the Income-tax Act, 1961:

The primary contention was whether a limited company could be considered an "author of the trust" under Section 13(3). The argument was that the term "relative" in clause (d) of Section 13(3) implies that an author must be an individual. This argument was rejected, with the judgment clarifying that clauses of Section 13(3) must be read independently. The term "author of the trust" or "founder of the institution" in clause (a) does not restrict to individuals; even a company can be an author or founder under the Trust Act and other Indian Civil Code Acts. Therefore, the provisions of Section 13(3) were applicable to the company in question.

2. Interpretation of "investment" under Section 13(2)(h) of the Act:

The assessee argued that purchasing shares of a company does not amount to an investment in the company. This was rejected based on the judgment of the Hon'ble Delhi High Court in CIT v. Eternal Science of Man's Society, which distinguished between loans and investments. Investments in equity capital, such as shares, fall under Section 13(2)(h), unlike loans, which are covered under Section 13(2)(a). Thus, purchasing shares was deemed an investment under Section 13(2)(h).

3. Taxability of dividends under Section 13(1)(c) read with Sections 13(2)(h) and 13(3):

The Income-tax Officer held that dividends received from Goetze Indian Ltd. and Sharpedge Ltd. were taxable under Section 13(4) as these companies fell under the prohibitory category of Section 13(3). The assessee contended that the dividends should not be taxable. However, the judgment upheld the Income-tax Officer's view, stating that the term "any income" in Section 13(4) includes dividends, thus making them taxable.

4. Eligibility for exemption under Section 11(1A) of the Act:

The assessee claimed exemption for capital gains under Section 11(1A), arguing that the sale proceeds were used to acquire units of Unit Trust of India shortly after the accounting year ended. The Income-tax Officer denied this claim, stating that the investment was made in the subsequent year, not within the accounting year. The Commissioner of Income-tax (Appeals) sided with the assessee, allowing the exemption under Section 11(1A) by treating the investment as a deemed application of income. However, the judgment disagreed, emphasizing that Section 13's prohibitions override Section 11's exemptions. Thus, the capital gains related to companies under the prohibitory category were not eligible for exemption under Section 11(1A).

5. Treatment of depreciation and amounts written off as application of income:

The assessee's appeal included a ground that depreciation and amounts written off should be treated as application of income. This was rejected, with the judgment affirming the Commissioner of Income-tax (Appeals)'s decision that these amounts could not be considered as application of income.

Conclusion:

The judgment ultimately rejected the assessee's appeal on all grounds and allowed the revenue's appeal. The assessing officer was directed to compute the assessable income based on the judgment's findings.

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