2023 (2) TMI 1078 - HC - Income Tax

Exemption u/s 11 - loss incurred out of corpus fund - taxability of real income - disallowing the claim of the appellant on the loss of Investment when the redemption of the Investment was made solely for the purpose of protecting the funds of the trust - Whether investments were made out of corpus fund when interest is earned thereon or the capital gain accrues on such transfer, are to be treated as income for purposes of computation Section 11? - AO disallowed the deduction claimed by the assessee and concluded that the investment was made out of the corpus fund and therefore any loss incurred out of corpus fund cannot be claimed as deduction inasmuch as corpus itself is exempted from tax - assessee s contention is that transactions were delivery based and redemption was undertaken to protect the interest of the assessee-Trust and not for trading on commercial line - HELD THAT - Undisputed facts of the case are, assessee had made investments in mutual funds permitted under Section 11(5) of the Act. The unit of mutual funds in which investments was made was sold in the previous year relevant to A.Y. Due to sale, assessee suffered loss this amount has been claimed as deduction. ITAT has recorded in para 21 of its Order that the facts of this case are similar to the one in Hindustan Welfare Trust Vs. Director of Income Tax 1991 (9) TMI 16 - CALCUTTA HIGH COURT It has extracted the views taken by the AO and CIT(A) and agreed with the view taken by the AO. The view taken by the AO s is, the investments were made out of corpus donations and such donations are not regarded as income under Section 11 of the Act. Therefore, the loss on sale of such investment will also not be relevant while determining the income of the Trust. Admittedly, the assessee foundation has invested in units of mutual funds which are permissible under Section 11(5) of the Act. On redemption it has suffered a capital loss. AO has disallowed the deduction on premise that the corpus fund was exempted from tax. It is not in dispute that the assessee-foundation has suffered loss. It is settled that tax can be imposed on real profits and it cannot be done without deducting the losses. What is taxable is the real income. If the AO s view is to be accepted, it would lead to incongruous results. We say so because in the event, the assessee had earned profit in the instant transaction, the Revenue would have imposed tax on assessee. There cannot be different standards of examining facts when the assessee earns profit and when it suffers loss. Therefore, the AO s order confirmed by ITAT is perverse and unsustainable in law.Therefore, the AO s order confirmed by ITAT is perverse and unsustainable in law. Decided in favour of assessee.

Summary

Issues:
1. Disallowance of claim on loss of investment for protecting trust funds.
2. Treatment of income from investments under Section 11 of the Act.
3. Reliance on Calcutta High Court decision in disallowing the claim.

Issue 1: Disallowance of claim on loss of investment for protecting trust funds:
The appeal raised questions regarding the disallowance of the appellant's claim on the loss of investment, contending that the redemption was solely for protecting the trust funds. The Assessing Officer disallowed the deduction, stating that the investment was made out of corpus fund, which cannot be claimed as a deduction since corpus itself is tax-exempt. The Commissioner of Income Tax (Appeal) allowed the loss, emphasizing that even if investments were made from corpus fund, any interest earned or capital gains accrued should be treated as income. The Income Tax Appellate Tribunal (ITAT) reversed the CIT(A)'s order, leading to the current appeal.

Issue 2: Treatment of income from investments under Section 11 of the Act:
The appellant argued that the investments in mutual funds were approved under Section 11(5) of the Act and were not speculative transactions. The investments were made to protect the trust's corpus, not for commercial trading. The Revenue contended that since the investments were made from corpus funds, any losses cannot be claimed as deductions. The ITAT upheld the AO's decision, stating that corpus donations are not regarded as income under Section 11, hence the loss on investment cannot be considered while determining the trust's income.

Issue 3: Reliance on Calcutta High Court decision in disallowing the claim:
The ITAT compared the present case to a Calcutta High Court decision and agreed with the AO's view that investments from corpus donations are not income under Section 11. However, the High Court emphasized the principle of determining real income based on commercial accountancy principles. It cited a Supreme Court case highlighting the distinction between real profits and statutory profits, asserting that tax should be imposed on real income. The Court found the AO's decision unsustainable, as it would lead to inconsistent tax treatment based on profits or losses, ultimately allowing the appeal and setting aside the ITAT's order.

In conclusion, the High Court allowed the appeal, setting aside the ITAT's decision and restoring the CIT(A)'s order in favor of the assessee. The substantial questions of law were answered in favor of the assessee, emphasizing the importance of determining real income based on commercial principles and rejecting the inconsistent tax treatment based on profits or losses.