2012 (10) TMI 542 - AT - Income Tax

Corpus donation - misapplication of corpus fund - Exemption of divided income and the interest income u/s 10(34) and 10(15)denied - assessee trust is registered u/s 12A r.w.s 12AA - Held that - A conjoint reading of provisions of Indian Trust Act, 1882 leads to inescapable conclusion that the primary object of the trustees is to protect the interest of the trust. In order to discharge this responsibility, the trustees are entitled to take appropriate decisions in the interest of trust. If the revenue s contention is to be accepted then it would imply that since a charitable trust is bound to keep its investments in the securities specified u/s 11(5) then it should not have accepted the shares. In our opinion, too much deliberation is not required to reject this contention of the revenue. Therefore, this objection is devoid of any merit because there is no restriction on accepting shares by a charitable institution. The only restriction is to be found in section 13(1)(d) as per which the assessee charitable trust is required to hold its investments in the modes as prescribed u/s 11(5). The proviso (iia) to section 13(1)(d)(iii) entitles an assessee trust to hold the shares for a maximum period of one year before which it has to be converted into the modes of investment as prescribed in section 11(5). There is no dispute that income of the corpus fund could be utilized towards the objects of the trust. The only objection is that corpus could not be depleted. This objection of department cannot be sustained particularly because the conditions contemplated u/s 11(1)(d) stand satisfied when a voluntary donation is received with a specific direction that they shall form part of the corpus of the trust. No further condition is prescribed in the Act on utilization of corpus fund. Considering provision of Sec.11, 12 & 13 the revenue s contention cannot be accepted that assessee had adopted a colourable device by first accepting the shares and then selling these shares. The assessee s conduct was well within statutory provisions and, therefore, cannot be branded as colourable device. The trustee is bound to conduct himself in the best interest of trust. Therefore, both the conducts viz receiving the shares as a gift from the private trust towards its corpus and its liquidation in terms proviso (iia) to sub-section 13(1)(d)(iii) was fully justified. Revenue s submission that by selling the shares, the assessee has violated section 11(1)(d) suffers from the basic fallacy in not recognizing that by selling the shares, the assessee merely converted one form of investment into another viz. money only. The assessee only realized the market value of shares and, therefore, we fail to appreciate how there was any violation of section 11(1)(d) particularly when the donor, while gifting the shares as corpus donation, never imposed any condition that the shares could not be sold. Only the form of asset was changed from share to cash but the original corpus donation remained as it is in the hands of trust - in favour of assessee.

Issues Involved:
1. Whether the assessee violated Section 11(1)(d) read with Section 13(1)(d)(iii).
2. Whether the sale proceeds of shares received as corpus donation, when further given as donation to other charitable trusts towards corpus donation, violated the provisions of Section 11(1)(d).
3. Whether the assessee was entitled to exemption under Section 11 in AY 2006-07 and AY 2007-08.
4. Whether the assessee was eligible for exemption of dividend income and interest income under Sections 10(34) and 10(15).

Detailed Analysis:

1. Violation of Section 11(1)(d) read with Section 13(1)(d)(iii):
The primary issue was whether the assessee violated the provisions of Section 11(1)(d) by receiving shares as corpus donations and subsequently selling them. The Assessing Officer (AO) argued that the sale of shares violated Section 11(1)(d), making the corpus donation taxable as general donation under Section 2(24)(iia). The AO also contended that the assessee adopted a colorable device to avoid tax and failed to obtain permission from the Director of Income Tax (Exemption) [DIT(E)] for the sale of shares, as required by the registration conditions under Section 12A.

The Tribunal held that the assessee's conduct was within statutory provisions. The shares were accepted as corpus donations and subsequently sold in compliance with the proviso (iia) to Section 13(1)(d)(iii), which mandates conversion of such assets into prescribed investment modes within one year. The Tribunal rejected the contention that the assessee adopted a colorable device, emphasizing that the conversion from shares to cash did not violate Section 11(1)(d) as the original corpus remained intact.

2. Utilization of Corpus Donation for Further Donations:
The AO argued that the assessee could not utilize corpus donations for giving further donations to other charitable trusts, claiming that the corpus should remain intact. The Tribunal examined the nature of corpus donations and concluded that there is no statutory restriction on utilizing corpus funds for charitable purposes, including donations to other charitable trusts. The Tribunal relied on the decision in Dharma Pratisthanam v. ITO, which held that corpus donations could be used for running expenses without losing tax exemption.

3. Entitlement to Exemption under Section 11 in AY 2006-07 and AY 2007-08:
The Tribunal held that the assessee was entitled to exemption under Section 11 for AY 2006-07 and AY 2007-08. The assessee's actions of receiving shares as corpus donations and subsequently selling them were in compliance with statutory provisions. The Tribunal emphasized that each assessment year should be considered separately, and the AO's reliance on the assessee's conduct in subsequent years was not relevant for determining the exemption for AY 2006-07 and AY 2007-08.

4. Exemption of Dividend and Interest Income under Sections 10(34) and 10(15):
The AO denied exemption for dividend income and interest on UTI Tax-Free Bonds, arguing that the assessee failed to substantiate its claim. The Tribunal upheld the CIT(A)'s decision to allow the exemption, stating that the income from dividends and tax-free bonds is specifically exempt under Sections 10(34) and 10(15). The Tribunal found no reason to interfere with the CIT(A)'s order, as the assessee was eligible for exemption under Section 11 and the specific exemptions provided under Sections 10(34) and 10(15).

Conclusion:
The Tribunal allowed the assessee's appeals for AY 2006-07 and AY 2007-08, holding that there was no violation of Section 11(1)(d) and the assessee was entitled to exemption under Section 11. The Tribunal also dismissed the department's appeal, affirming the exemption of dividend and interest income under Sections 10(34) and 10(15).

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