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TMI Blog1987 (1) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee-foundation. Escorts Limited and the said companies were accordingly covered under section 13(2)(h) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act'). The Income-tax Officer stated that though investment were made by the assessee in the said two companies in contravention of section 13(2)(h) of the Act but these being less than 5 per cent of the capital only dividends received were taxable in terms of section 13(4) of the Act. 3. In the year before us the assessee-trust sold shares for Rs. 59,07,398 but claimed that since total sale consideration was utilised for acquiring another capital asset being units of Unit Trust of India, the capital gain totaling Rs. 46,57,599 was to be considered as application under section 11(1A) of the Act, The Income-tax Officer however, denied the claim. We considered it convenient and expendient to notice paras 4, 5 and portion of para 6 as also para 8 of the assessment order because it shall project picture of the basis of the assessment: "4. However, a perusal of the records shows that shares were sold up to31-3-81but the units were not purchased up to31-3-81. The assessment proceedings for each assessment year are inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,937 Interest on F.D. 1,20,542 Profit on sale of shares 46,67,599 Less profit on sale of shares of Goetze Indian Sharpedge Ltd. 3,46,598 ---------- -------- 43,21,001." "8. Since the capital gain respect of shares of Goetze (India) Ltd. and Sharpedge Ltd. do not qualify for consideration under section 11(1)(a), therefore, it will have to be considered whether the capital gain has arisen on account of holding of long-term capital capital assets or otherwise. A perusal of the records of the assessee-foundation shows that only 540 shares of Goetze (India) Ltd. and 1,542 shares of Sharpedge Ltd. were held by the assessee-foundation in assessment year 1978-79 and these shares have been sold on25-3-1981, therefore these shares were held as long-term assets. The capital gain of Rs. 2,57,305 is on account of 2,467 shares of Sharpedge Ltd. and on proportionate basis the long-term capital gain on sale of 1,542 shares would be Rs. 1,60,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant previous year exceeds twenty-five thousand rupees; (c) Where such author, founder or person is a Hindu undivided family, a member of the family; (cc) any trustee of the trust or manager (by whatever name called) of the institution; (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid; (e) any concern in which any of the persons referred to in clause (a), (b), (c) (cc) and (d) has a substantial interest. (4) Notwithstanding anything contained in clause (c) of sub-section (1) but without prejudice to the provisions contained in clause (d) of that sub-section, in a case where the aggregate of the funds of the trust or institution invested in a concern in which any person referred to in sub-section (3) has a substantial interest, does not exceed five per cent of the capital of that concern, the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment, by reason only that the funds of the trust or the institutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or both. Clause (h) of sub-section (2) of section 13, however, appears to deal with a situation where funds of the trust are or continue to remain invested in a concern in which a person specified in sub-section (3) has substantial interest. The two provisions have to be construed in a harmonious manner. If investments are held to include loans, as urged by the counsel for the revenue, it would render clause (a) of sub-section (2) of section 13 otiose. Since a specific provision for loans has been made in clause (a) of sub-section (2) of section 13, we feel that these should not be included in the generic term as investment in clause (h) of sub-section (2) of section 13. It would thus appear that if the funds are invested on debentures or loans then clause (a) of sub-section (2) of section 13 would applicable; whereas if the funds are invested in equity capital, i.e., shares, etc., then, clause (h) of sub-section (2) of section 13 would be attracted. This distinction also accords with reason, as in the former case there is no participation in profits and no fluctuation of the investment but only a fixed interest return; whereas in the latter there is a participation in profits and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Commissioner of Income-tax (Appeals) we like to notice here: "6. Ground No. 4: The appellant has contended that the IAC (Asstt.) erred in holding that the excess of income over application and accumulation allowable under section 11(1) (a) was Rs. 33,32,435. It is also contended that the IAC erred in holding that the said amount of Rs. 33,32,435 was taxable in the hands of the appellant. Briefly stated the facts are that during the assessment year under appeal the assessee-trust sold the shares held by it. The total sale consideration in respect of these shares was shown at Rs. 59,07,398. After adjusting the cost of acquisition of the said shares the appellant arrived at the net capital gain of Rs. 46,87,599. The appellant claimed exemption under section 11(1A)(a) on the ground that the sale proceeds of the said capital asset was invested in the purchase of another capital asset in units and as such the amount earned by the trust on sale of such shares was exempt from tax as per provisions contained under sub-section (1A) of section 11 where a capital asset being property held under the trust wholly for charitable or religious purpose is transferred and if the whole or any par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only that net consideration which the accounting utilised for investment in new capital asset within the accounting period itself will be deemed as application of the income and not any investment in the following accounting period. The IAC after allowing deduction in respect of actual application of income for charitable purpose during the relevant period and deduction of the capital gain on sales of shares of two companies, Goetze (India) Ltd. and Sharpedge Ltd., which are dealt with separately and discussed above vide ground Nos. 2 and 3 and arrived at the balance taxable amount of Rs. 33,32,435 after taking into account the deduction to the extent of 25% of the gross amount. 7. During the appellate proceedings it was contended that the IAC was not justified in rejecting the contention of the appellant that Explanation 2 to section 11(1) is equally applicable to the case where the net consideration is received on transfer of the capital assets as laid down under section 11(1A). The contention was that merely because the Explanation 2 is interposed between sub-section (1) and sub-section (1A) does not mean that the Explanation is not to be extended in the case where the Legisla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r religious purposes. The contention of the appellant was that from the perusal of the details filed regarding the sale of the shares held by the trust in various companies it will be seen that the shares were sold during the last week of the closing month of the relevant accounting period. The sale proceeds of the shares were received from the purchasers/brokers as late as on30th March, 1981or even31st March, 1981. The sale proceed which was received in the form of cheques was credited to the trust bank account either in the last week of the accounting period or during the month of April 1981 after clearance. It was, therefore, stated that the circumstances for which the assessee-trust could not invest the net sale proceeds in the purchase of new capital asset was that the funds had not yet reached its pocket and the circumstances are in the nature of the specific reason enumerated in the Explanation, namely that the income has not been received by the trust during the relevant accounting period. The contention of the appellant was that the case of the appellant either specifically falls in the first category itself or even in the second category, i.e., for any other reason the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to the exemption in respect of capital gain received on transfer of assets for the reason that the appellant within a period of one month, i.e., during the month of April itself invested the net sale proceeds in the new capital assets, i.e., units and had duly exercised the option as per Explanation 2 before the time for filing the return under section 139 for the relevant asst. year expired. The IAC is accordingly directed to allow the exemption as provided under section 11(1A) by treating the same as deemed application of the income." 12. Most of paras 6 and 7 record contentions and the decision and inference is only in the last three sentences. The commissioner of Income-tax (appeals) accepted that the provisions of section 11(1A) saved the assessee and that when these are available section 13(4) would not come into operation. 13. We, however, view the abovesaid provisions differently. The heading of section 13 reads: "Section 11 not to apply in certain cases" and the opening words are "nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year", etc., etc. The other relevant provisions of the section we hav ..... X X X X Extracts X X X X X X X X Extracts X X X X
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