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Issues:
Assessee's claim for exemption under section 11 of the Income-tax Act, 1961; Application of section 13(2)(h) to the trust's investments; Interpretation of Circular No. 45 dated 2-9-1970 issued by the CBDT; Whether the funds invested by the settlor and made over to the trust are subject to section 13(2)(h); Verification of lending conditions under section 13(2)(a). Analysis: The judgment pertains to three appeals by the assessee against the AAC's order for the assessment years 1975-76, 1976-77, and 1977-78, consolidating them due to a common issue. The assessee-trust sought exemption under section 11 of the Income-tax Act, but the ITO denied it under section 13(2)(h) due to investments benefiting the assessee indirectly through the wife's partnership in a firm. The AAC upheld this decision based on a previous Appellate Tribunal order for the years 1972-73 to 1974-75. The assessee appealed, arguing that section 13(2)(h) applies only to capital investments, citing Circular No. 45 and a Madras Bench decision. An alternative argument was made that section 13(2)(h) applies only to trustee investments, not settlor investments, supported by a Bombay Bench Special Tribunal decision. The Tribunal reviewed the Circular, emphasizing that section 13(2)(h) applies to investments in a concern where specified persons have substantial interest, not loans with adequate security and interest. The trust deed indicated the funds were lent to Jaya Textiles for interest, not invested as capital, excluding application of section 13(2)(h). Additionally, the Tribunal agreed that section 13(2)(h) applies to trustee investments, not settlor investments, as the trust was constituted after the lending to Jaya Textiles. The revenue did not argue section 13(2)(a) for inadequate security or interest, prompting a direction for verification of lending conditions for potential exemption under section 11. In conclusion, the Tribunal allowed the appeals, setting aside lower authorities' orders, and directed the ITO to grant exemption under section 11 if conditions under section 13(2)(a) were not met after verification, emphasizing the non-applicability of section 13(2)(h) to the case. The judgment clarified the interpretation of section 13(2)(h) and the distinction between trustee and settlor investments in trusts, ensuring compliance with the Income-tax Act provisions.
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