9911796707
TMI Blog1982 (4) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Rs. 30,000, the share of the assessee is Rs. 5,000. The trust is entitled to 30 per cent of the profits of the firm. The other partners, holding substantial interest in the firm, are the relatives of the authors of the trust. 4. The main source of income of the trust is the share of profits received from the firm. The previous year of the assessee is the year ending 31st March. The income of the trust was exempted under section 11 of the Act in the assessments up to the assessment year 1974-75. The share of the profits of the trust in the firm for the assessment year 1975-76 as finally determined after audit was Rs. 1,49,782.70. This was intimated by the firm to the trust on 20-7-1975 and the amount was debited to the current account of the firm on 31-3-1975 and brought forward in the account of the subsequent year. The trust received this amount in two instalments of Rs. 35,000 on 26-7-1975 and the balance of Rs. 1,14,782.70 on 29-8-1975. The ITO completed the assessment in respect of the assessment year 1975-76 on 26-11-1977 giving the assessee the exemption under section 11. 5. The Commissioner considered the assessment order passed by the ITO on 26-11-1977, allowing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He held that the trust forfeited the exemption from tax under section 11 in respect of the entire income, including donations, without being entitled to the immunity provided in section 13(4). Accordingly, by the assessment order dated 28-7-79, the ITO assessed the entire income of the assessee, denying the exemption for the assessment year 1976-77. 8. The assessee appealed against the assessment. The Commissioner (Appeals) upheld the claim of the assessee for exemption under section 11 and allowed the appeal. The Commissioner (Appeals) referred to the order of the Commissioner, dated 22-12-1970, in the case of Chandrika Educational Trust, to the effect that the contribution of the share capital in the firm, by the trust, will not be an investment for the purposes of section 13. He concluded, therefrom, that the concept of "investment" envisaged under section 13 was different from the word as used in the ordinary parlance and that, merely because certain funds had been suffered to be retained in a partnership or other concern, it would not follow that there was investment. The Commissioner (Appeals), on an independent scrutiny, also found that the contribution of capital or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) of sub-section (1), the income or property of the trust shall, for purposes of that clause, be deemed to have been so used or applied in the circumstances enumerated in clauses (a) to (h). Clause (h) reads thus: "(h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the first day of January, 1971) in any concern in which any person referred to in sub-section (3) has a substantial interest." Section 13(4) further provides that in case the investment does not exceed 5 per cent of the capital of the concern, the exemption can be denied only in respect of the income arising to the trust from such investment. 11. The question which is common for the two assessment years 1975-76 and 1976-77 is whether the non-withdrawal of the profits by the assessee from the firm before the end of the previous year, is a circumstance falling under clause (h) of sub-section (2) of section 13. According to the revenue, share income that accrued to the assessee for the previous year remained invested in the firm for some time during the previous year and such income is deemed to have been "used" or "appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of the making up of the accounts of the firm and regard being had to the usual course of the events and the time consumed in the various stages. Thus, it can be seen that during the intervening period between the close of the accounting year, in which the share of profits arose, and the date on which the entire share of profit was paid off to the trust by the firm, there had been no conscious, deliberate act or volition on the part of the assessee but only a bare, passive retention of funds. Thus, profits had not been laid out with a view to obtaining a revenue. The term "invest" in the context means laying out of money for interest or profit. Mere deposit of money will not be investment. We do not, therefore, consider that the assessee, on receiving the share income for the periods ending 31-3-1975 and 31-3-1976 after the end of the previous year, caused the funds of the trust to be invested in the firm during the relevant previous year so as to disentitle the assessee to the exemption under section 11. Accordingly, we hold that there had been no forfeiture of the exemption on account of the delayed withdrawal of profits in the assessment years 1975-76 and 1976-77. The Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot persuaded to accept the contentions of the assessee. The whole concept of a partnership is to embark upon a joint venture and, for that purpose, to bring in as capital money or even property. The trust deed in the case of this assessee empowers the trustees to join partnership ventures to augment the income of the trust. The contribution of capital by the trust in the firm is, thus, a positive act by which money is laid out in business for the purpose of obtaining income or profit. Clause (h) of sub-section (2) of section 13 is an illustration of how the income or property of a charitable trust is used or applied for the benefit of interested persons for the purpose of section 13(1)(c)(ii). The term "invest", occurring in the clause, in the context, ought to be understood in the ordinary popular sense in which it is used by a businessman, meaning, laying out of money with a view to earn income regularly. In clarifying what shall be substantial interest in a concern for purposes of sub-section (3) of section 13, Explanation 3 refers to shares in the case of a company and profits in other cases. It is, therefore, clear that the expression "invested in a concern" in clause (h) mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1970 shares in a company in which it as an author or other connected persons are substantially interested, regardless of whether the shares form part of the original corpus of the trust or were subsequently acquired by it. The same consideration will apply to investment towards the capital of any concern other than a company. In other words, if the trust which has invested its funds in any concern in which its author, etc., are substantially interested, does not divest itself of such investment, it will forfeit the exemption from tax on its entire income if the investment in such concern exceeds 5 per cent of the capital of the concern. 19. It may be said that the capital contribution as a partner by the trust in the firm at the time of the constitution of the firm ceased to be the exclusive property of the trust on the principles stated by the Supreme Court in Addanki Narayanappa v. Bhaskara Krishnappa. The Supreme Court held that whatever may be the character of the property which was brought in by the partner when the partnership was formed, it becomes the property of the firm, the capital would be the trading asset of the partnership and it would cease to be the exclusive pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied to the entire income including that arising from such investment. We, therefore, find that the assessee has forfeited the exemption from tax on its entire income in contravention of section 13(1)(c)(ii) and section 13(2)(h) read with section 13(3) for the assessment year 1976-77. The order of the Commissioner (Appeals) allowing such claim is modified. 21. The Commissioner (Appeals) by his order has directed the ITO to recompute the income. In doing so, he has not considered the claim of the assessee that the voluntary contribution received during the accounting period is not the income of the assessee and that it is only a capital receipt. We, therefore, direct the ITO to consider this question also in recomputing the income of the assessee, subject to the directions of the Commissioner (Appeals) other than the one for allowing exemption under section 11. 22. In the result, the appeal filed by the assessee for the assessment year 1975-76 is allowed. The order of the Commissioner is set aside and that of the ITO is restored. For the assessment year 1976-77 the appeal filed by the revenue is partly allowed and the ITO is directed to recompute the income as stated above. - ..... X X X X Extracts X X X X X X X X Extracts X X X X
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