2024 (7) TMI 339 - AT - Income Tax

Assessment of trust - Exemption u/s 11 - Computation of Capital Gain - Application of Income / Utilization of Gain in Investment - AO noted assessee has computed the income under the head capital gain by applying provisions of Section 45 to 49 of the Act - HELD THAT - We find that Calcutta High Court in CIT Vs East India Charitable Trust 1992 (1) TMI 21 - CALCUTTA HIGH COURT held that investment or deposit in public sector company is first an asset and, secondly, a capital asset and thirdly a permitted capital asset under the special law relating to the assessment of charitable or public religious trust. Therefore, the contention of the revenue that the investment by way of deposit in the public sector company could not be treated as a new asset acquired with the net consideration in terms of section 11(1A) was not tenable. The investment or deposit in any public sector undertaking appears as one of the permitted forms or modes of investment or deposit. According to section 2(14), capital asset includes property of any kind held by an assessee. 'Deposits or investments' are a kind of property and do not fall in the exclusionary limb of the said section. By reason of the option exercised under the Explanation to section 11(1) the assessee was entitled to the benefit under section 11(1A) inasmuch as the definition of income as contained in section 2(24) includes capital gains as one of the species of income. As in view of the factual and legal position the assessee qualify of exemption u/s 11(1A). However, we find that the assessee for the first time before Tribunal disclosed that entire amount of capital again was utilized for purchasing other immovable property in FY 2022-23 and 2023-24, therefore, the jurisdictional AO is directed to verify said facts and allow relief to the assessee. With these directions the ground No. 1 of the appeal is allowed. Disallowance of application of interest income - deduction-exemption on account of deemed application of income under clause (2) of Explanation 1 to sub-section (1) of Section 11 in respect of accrued bank interest on FD while computing taxable income of the appellant trust - HELD THAT - We find that no separate disallowance of this income was made by Assessing Officer while passing the assessment order. Further, we find that while making such separate disallowance by ld CIT(A), no specific show cause notice was issued to the assessee. CIT(A) while passing impugned order directed the Assessing Officer to treat such income from interest under the head other sources . Before us, the ld AR for the assessee vehemently submitted that major income is from FDs and savings bank account. Entire interest incomes were kept in UCO bank savings account, copy of bank statement is placed on record. On verification we find that such interest income is duly reflected in audited balance sheet . Further, the investment in bank is one of the mode specified under Section 11(5) of the Act. Considering the submissions of ld AR of the assessee we find merit in his submissions that the assessee is eligible for deduction under Section 11(1) of the Act. In the result, ground No. 2 of the appeal is allowed.

Summary

Issues Involved:
1. Computation of Capital Gain under Section 11(1A) of the Income Tax Act.
2. Deduction-exemption on account of deemed application of income under clause (2) of Explanation 1 to sub-section (1) of Section 11 regarding accrued bank interest.

Issue-wise Detailed Analysis:

1. Computation of Capital Gain under Section 11(1A) of the Income Tax Act:

The assessee, a charitable trust, contested the computation of capital gain by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO added the entire income and expenditure of Rs. 1.54 crore to the total income of the assessee without allowing deductions for investments in fixed deposits (FDs) under Section 11(1A). The assessee argued that the correct gross income was Rs. 52,94,497/-, comprising Rs. 48,52,518/- as capital gain and Rs. 4,41,961/- as interest income, and provided evidence of investments in FDs amounting to Rs. 50,00,000/-.

The CIT(A) noted that the assessee is eligible for exemption under Section 11 if 85% of the receipts are applied towards the trust's objectives and the remaining 15% is accumulated as prescribed. The CIT(A) computed the capital gain without indexation and determined the total income to be Rs. 79,46,961/-, allowing part relief to the assessee.

The Tribunal found that the assessee had invested the entire sale consideration in FDs with UCO Bank, which were later converted into a capital gain account scheme. The Tribunal referred to CBDT Instruction No. 883 of 1975 and relevant case laws, which support that investments in FDs qualify as acquiring another capital asset under Section 11(1A). The Tribunal directed the jurisdictional AO to verify the assessee's claim that the entire capital gain was utilized for purchasing another immovable property in FY 2022-23 and 2023-24 and to allow the relief accordingly.

2. Deduction-exemption on account of deemed application of income under clause (2) of Explanation 1 to sub-section (1) of Section 11 regarding accrued bank interest:

The assessee claimed that the interest income of Rs. 4,41,961/- was invested in specified securities and should not be taxed. The CIT(A) directed the AO to treat this amount as income from "other sources" due to lack of detailed evidence of such investments.

The Tribunal found that the interest income was kept in the UCO Bank savings account and reflected in the audited balance sheet. The investment in the bank is a mode specified under Section 11(5), making the assessee eligible for deduction under Section 11(1). The Tribunal allowed the assessee's appeal on this ground, stating that no specific show cause notice was issued for this disallowance and the interest income was duly accounted for in the bank statements and balance sheet.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the AO to verify the utilization of capital gains for purchasing another property and granting the relevant exemptions under Section 11(1A). The Tribunal also allowed the deduction of interest income under Section 11(1), finding that the investments were made in specified securities and duly reflected in the financial records.