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TMI Blog2012 (10) TMI 542X X X X Extracts X X X X X X X X Extracts X X X X ..... cribed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had sold 308500 equity shares of Mawana Sugar Ltd. and 9837 equity shares of Siel Ltd for which the trust had received a sum of Rs. 3,65,36,184/- and the amount so received was credited to balance sheet as corpus fund. The Assessing Officer issued following show cause notice dated 16.12.2008 :- "You have received shares from Mawana Sugar Ltd., Siel Ltd. as corpus donation. Please furnish the market value of shares on the date of donation received along with evidence to justify such value". As per section 2(24) of the Income Tax Act, 1961, any voluntary donation received by a Charitable or Religious Institution or Trust is an income. Please show cause why the market value of shares should not be treated as income in this year and assessed accordingly. You have claimed shares to have been received as corpus donation. In view of violation of section 11 13(1)(d), your income is not exempt. Under these circumstances, please explain why donation of shares should be treated as corpus donation under section 11(1)(d) of the Income Tax Act, 1961." 4. After considering the assessee's submission, the Assessing Officer observed as under :- "When the assessee received shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of Siel Limited and sales consideration had been transferred to the corpus fund. Remaining shares were sold during the next financial year and the consideration was credited to the corpus fund. It was further submitted that copy of the minute book of Enterprise Ltd. and Shera Foundation (assessee) were produced/submitted before the Assessing Officer as evidence to the effect that contributions received in the form of shares was towards to the corpus of the assessee foundation vide letters dated 05.11.2008 and 26.12.2008. It was further submitted that Assessing Officer had also relied on certain facts of subsequent years which could not be taken into consideration in order to determine the taxable income for the year under appeal. It was further stated that making of further donations to other charitable society is also in furtherance to the object of the assessee society and, therefore, it could not result in violation of any of the provisions of the Income Tax Act. 7. It was also brought to the notice of ld. CIT(A) that when proceedings for this assessment were going on before the Assessing Officer, proceedings were also going on before the Director of Income Tax (Exemption) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n making addition of Rs. 8,47,08,824/- and also denied the assessee's claim of accumulation of 15% of income observing that since the AO had denied the claim of registration u/s 12A of the Income Tax Act, the assessee's claim of section 11 does not stand. 11. Being aggrieved with the order of ld. CIT(A), the assessee is in appeal before us and has taken following grounds of appeal :- 1. That the CIT(A) erred in upholding the order of the Assessing Officer including amount of Rs. 8,47,08,824/- in the taxable income, being the value of shares received by the appellant as corpus donation on the ground that the appellant had violated provisions of Section 11 read with Section 13(1)(d) of the without appreciating the contentions of the appellant, particularly that observation of the Assessing Officer were vague and no specific violation was pointed out by him and the appellant had fully complied with the provisions of the Act and accordingly, it was entitled for exemption under section 11(1)(d) of the Act in respect of sale proceeds of shares received towards corpus. 2. That the CIT(A) erred in upholding the observation of the Assessing Officer that appellant had received shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) also erred in upholding initiation of penalty proceedings u/s 271(1)(c) of the Income Tax Act in the case of the Appellant stating the same is premature. 8. The appellant company craves leave to alter, amend, vary and/cr add any of the grounds of appeal at any time hereinafter. 12. Ld. Counsel for the assessee reiterated the submissions made before lower revenue authorities. Ld. Counsel referred to page 60 of paper book wherein the Minutes of Board of Trustees meeting of Enterprise Trust held on 13.04.2005, are contained, to demonstrate that equity shares held by the Enterprise trust as investments were gifted to Shriram Memorial Foundation (SMF), the assessee for its corpus as under :- Investment held in No. of shares %age of issued capital -Mawana Sugars Limited 11,47,110 2.7% -Siel Limited 2,01,500 1.1% 13. Ld. Counsel further referred to page 23 of paper book wherein the balance sheet of assessee's foundation, as on 31.03.2006, is contained, to demonstrate that the shares were taken at NIL value in the balance sheet and the part sale proceeds of shares amounting to Rs. 3,65,36,184/- had been credit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.2007 as per section 13(1)(d). (2) Sh. Dwarkadheesh Charitable Trust v. ITO, 98 ITR 557 (All.) Ld. Counsel relied on this decision for the proposition that corpus donation in form of shares could be received and also the proposition that when a donor trust which is itself a charitable and religious trust donates its income to another trust, the provisions of section 11(1)(a) can be said to have been met by such donor trust and the donor trust can be said to have applied its income for religious and charitable purposes with the fact that donation is subjected to any condition that the donee trust while treated the donations as its corpus and can only utilize the accumulative income from the donated corpus for religious and charitable purposes, and that the question with the gifted income is to be utilized by the donee trust fully for its charitable and religious purpose or donee trust had to keep a corpus of the donation and had to utilize only the income from its religious and charitable purpose, would not make the slightest difference so far as the entitlement of donor trust for exemption u/s 11(1) goes. 17. Ld. Counsel further referred to page 18A wherein instruction No 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislation but that is not to say that for the misbehaviour of the trustee, the trust loses exemption under the Act. This kind of inflexibility, as contended for by the revenue, is difficult to see or comprehend from the language of section 2(24)(iia) or section 12. The requirement of section 2(24)(iia) is that the voluntary contribution, when received, should contain a stipulation that it shall form part of corpus. The trustee cannot possibly influence the donor at that time, except that the trustee should act in accordance with the confidence reposed in him by the donor. Take an example, where A makes a voluntary contribution of Rs. 1 lakh to a trust created wholly for charitable or religious purposes and it has no other income. The object of the trust is to promote education or relief of poor. How can the trustee utilize this money without buying the books, if it is for the purpose of education, or necessary utensils or provisions, if it is for providing relief to the poor by way of providing food and if the money is spent out of the donation of Rs. 1 lakh for the purchase of books, utensils, etc. Would it mean that the sum of Rs. 1 lakh would become taxable as income of the trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fully paid up equity shares were gifted for its corpus. Being gifted for the corpus fund, the shares ought to be kept untouched. The donated shares to the corpus cannot be touched but only the accruing income there from can be utilized for the purposes of trust. By selling the shares, the assessee violated the provisions of Sec 11(1)(d). Sale of shares has made the contribution an ordinary voluntary contribution which is taxable as per sec. 2(24)(iia). In view of the violation of Sec 11(1)(d), the voluntary contribution received by the trust is income taxable as per section 2(24)(iia) under the Income Tax Act, 1961. Therefore, the A.O is justified in adding the corpus donation by treating the same as general donation in computation of income in page 4 of the order. 3. The assessee has sold shares fearing violation u/s 13(1)(d). But by selling the shares the assessee has violated sec. 11(1)(d) of the IT Act. In sec 13(1) the expression used is "Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof ..". Therefore, section 13 will operate separately from that of sec 11 or sec 12. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the appeal should be dismissed. JUDGEMENT The following judgment of the Court was delivered by Misra. J:-Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. (ii) CIT v. Durga Prasad Marg 82 ITR 540 (SC) (iii) Sumati Dayal v. CIT 214 ITR 804 (SC) 5. The assessee has further sold the shares without the permission of DIT(Exemption), thereby violating the conditions for registration. The condition for registration violated by the assessee as pointed out by the A.O in page 4 of the order is that no asset shall be transferred without the knowledge of the DIT(Exemption) to anyone, including to any trust/society/non profit company. The violation being in AY 2006-07, the A.O is justified in assessing the assessee as AOP in AY 2006-07. 6. Further the decision relied on by the assessee are not applicable in the instant case of the following reasons:_ (i) DIT v. Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ummed up as under :- (a) The sale of shares that were received with specific directions towards the corpus fund is a violation of section 11(1)(d). (b) The sale of shares had made the contribution an ordinary voluntary contribution which is taxable as per section 2(24)iia. (c) Sections 11, 12 and 13 operate independently and violation of any of the conditions of section 11 or 12 shall face the consequences provided in the said section. The consequences of violation of section 13 shall be n addition to the consequences of violation of section 11 12. (d) By selling the corpus donation whares and by making further donations out of it, the assessee had misused the same, foliated section 11(1)(d) and adopted colorable device to avoid tax. 23. We have considered the rival submissions and perused records of the case. The dispute in the present appeals is twin fold. Firstly, whether the assessee violated section 11(1)(d) read with section 13(1)(d)(iii) and secondly whether the sale proceeds of shares received as corpus donation, when further given as donation to other charitable trusts towards corpus donation, violated the provision of section 11(1)(d) inasmuch as the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trust-property for his life, or for in greater estate, no such change of investment shall be made without his consent in writing." 25. A conjoint reading of all these sections 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 mode ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year in which the income is received or during the previous year immediately following as does not exceed the said amount, and (b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1)[***] of section 139[***] for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.] 12. (1) Any voluntary contributions received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciate how the conduct of assessee trust was for the purpose of tax avoidance. Ld. DR has submitted that by selling the shares, the assessee has violated section 11(1)(d) of the Income Tax Act. In our opinion, this argument 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. 28. Ld. DR has further submitted that section 13 operates independently of section 11 or section 12. We are not inclined to accept this argument which goes against the very scheme of the Act itself. Chapter III of Income Tax Act deals with incomes which do not form part of total income. Section 11 exempts income from property held for charitable or religious purposes. This income is exempt subject to ful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee foundation sold the remaining shares i.e. 8,38,600 shares of Mawana Sugar Limited and 1,96,636 shares of SIEL Ltd. No other act was done. Therefore, for the reasons given in AY 2006-07, we hold that there was no violation of provisions of section 11(1)(d) of the Act. 32. As noted earlier, the Assessing Officer has primarily denied the benefit of section 11(1)(d) on the basis of assessee's conduct in AYs 2008-09 and 2009-10. We have already held that this was not relevant for AYs 2006-07 and 2007-08. However, since Assessing Officer has considered these acts for denying benefit of section 11(1)(d), we proceed to consider the effect of same on the applicability of section 11(1)(d). The Assessing Officer has observed in the assessment order that in AY 2008-09, the assessee had shown an expenditure for scholarship contribution amounting to Rs. 1,98,28,750/- out of this Rs. 1,50,36,000/- was paid out of corpus. The assessee had given contribution towards corpus to MIT USA and to Charat Ram Shera Scholarship Fund. It is not disputed that both were charitable institutions. The objection of department is that assessee could not utilize corpus donation for giving donations to othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the report of A.O, additional DIT(E) required the assessee foundation to explain why exemption should not be denied. The assessee filed its submissions vide letter dated 05.02.2009. 35. After considering all these aspects, Ld. DIT(E) granted registration u/s 80G. Therefore, the corpus donation could not be considered as general donation in AY 2006-07 and 2007-08, merely on the ground of its utilisation in AY 2008-09 for giving corpus donation to other charitable institutions. Further, as per instruction No. 1132/CBDT dated 05.01.1978, it has been clarified that the payment of a sum by one charitable trust to another for utilization by the donee trust towards its charitable objects is proper application of income for charitable purposes in the hands of the donor trust, and the donor trust will not loose exemption u/s 11. In view of above discussion, it is held that the corpus donation received in the form of shares in AY 2006-07 and AY 2007-08 could not be treated as general donations. 36. Now, we come to department's appeal vide ITA NO. 2697/Del/2012. Before Ld. CIT(A), the assessee had, inter alia, taken following grounds of appeal:- "Ground (c): That the Assessing Offi ..... 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