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TMI Blog2012 (11) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose enabling the Assessee to claim exemption u/s.11(1). In the present case there is no question of application for accumulation of income for being spent for charitable purpose in future because such application is already deemed to have been made in the previous year itself. Admittedly, even as per the order of assessment there was application for charitable purpose, even after disallowance of depreciation made by the AO, of a sum of Rs.1,60,23458 over and above the receipts of the Assessee during the previous year. The capital gain considered as not utilized for charitable purposes u/s.11(1A) is only a sum of Rs.1,21,61,909.33 Ps. The surplus utilization of Rs.1,60,23,458 should be sufficient to set off the capital gain not utilized for charitable purpose u/s.11(1A). Thus the net deficit in this AY to be carried forward for set off in the later years would be Rs.1,60,23,458 - Rs.1,21,61,909.33 Ps. Viz., Rs.38,61,909.67 Ps. Thus it can be fairly concluded that though the order of the AO was erroneous, the same was not prejudicial to the interest of the revenue as no part of the capital gain became taxable because of loss of exemption u/s.11(1A). Since the order sought to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set to be held as corpus of the trust. For claiming exemption u/s 11(1A) of the Act, the whole of net consideration has to be invested in capital assets whereas the assessee has invested part of the sale proceeds i.e. Rs. 2,78,38,080/- and thus not entitled for exemption u/s 11(1A) of the Income-tax Act, 1961 for the entire capital gains. So, the capital gains of Rs.1,03,53,927/- (Rs.1,48,77,358 x Rs.2,78,38,080/ Rs.4,00,00,000) only is exempt and the balance of Rs.45,23,430/- is taxable as worked out under." 4. The DIT(E) in exercise of powers u/s 263 of the IT Act, 1961 was of the view that the aforesaid computation of capital gains done by the AO in the assessment proceedings in the order passed u/s 147 of the Act dated 30- 12-2008 was erroneous and prejudicial to the interest of revenue. Accordingly, the DIT(E) issued a show cause notice dated 21-02-2011 proposing to recompute the capital gains. According to the DIT(E) when a charitable trust derives capital gain on sale of its capital asset then the provisions of sec.11(1A) will be applicable. From the perusal of the capital gains which we have set out above, it can be seen that the transfer is claimed by the assessee to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it is seen that the AO has determined the capital gain by considering indexed cost of acquisition amounting to Rs.2,51,22,641/- investment in capital assets from 2001-2002, 2002-03, 2003-04 & 2005-06 amounting to Rs.2,78,38,080/- and exemption of capital gains due to investment in new assets of Rs.1,03,53,927/-. 5(a), Section 11 of the Act, grants exemption in respect of income derived from properties held under trust for charitable or religious purposes, subject to the conditions set out therein. One of the condition is that the income is applied for charitable or religious purposes. Income derived from sale of capital assets is also income in the hands of charitable institutions falling under section 11 of the Act. With a view to enable the trusts to get the benefit of exemption in respect of capital gains, section 11(1A) was inserted by the Finance (No.2) Act, 1971. 5(b) It is clear from sub-section (1A) of section 11 of the Act that in a case where the assessee derives any capital gain from transfer of a capital asset held by it under trust for charitable or religious purposes, the capital gain arising from the transfer of such capital asset shall be deemed to have been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the AO is erroneous and prejudicial to the interest of the revenue. Therefore, the assessment order passed u/s 143(3) r.w.s.147 of the Income-tax Act, 1961 on 30-12-2008 is set aside with a direction to the AO to re-compute the capital gains after affording necessary opportunity of being heard to the assessee." 7. Aggrieved by the order of the DIT(E), the assessee has preferred the present appeal before the Tribunal. 8. The learned counsel for the Assessee submitted that jurisdiction u/s.263 of the Act can be invoked only when the order which is sought to be revised in proceedings u/s.263 of the Act is (i) erroneous and (ii) prejudicial to the interest of the revenue. It was submitted that the existence of both the aforesaid conditions are necessary for exercising jurisdiction u/s.263 of the Act. It was further elaborated that the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs. CIT 243 ITR 83 (SC) = (2002-TIOL-491-SC-IT) on the scope of powers u/s.263 of the Act has held that where two views are possible on an issue and the AO has taken one of such possible view, the order of the AO cannot be said to be erroneous. It was further submitted that the CIT i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t resulting in capital gain the provisions of Sec.11(1A) alone will be applicable. Accordingly the net consideration received on transfer has to be invested in another capital asset to consider the same as application of income u/s.11 (1A) of the Act. 13. We have considered the rival submissions. For a proper appreciation of the rival contentions, the provisions of Sec.11(1A) of the Act and the reasons why those provisions were introduced need to be first set out. They are as follows: Income from property held for charitable or religious purposes. 11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- ……….. (1A) For the purposes of sub-section (1),- (a) where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Sec.11(1A)(a) that the present case has to be decided. The above provisions of Sec.11(1A) were introduced by the Finance (No.2) Act, 1971 w.r.e.f. 1-4-1962. The CBDT in Circular No.72 dated 6.1.1972 has explained the purpose behind introduction of the above provisions (in so far as it relates to Sec.11(1A)(a) of the Act which is applicable in the present case) as follows: "Capital gains derived by Charitable and religious trusts: 73. Under section 11, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As "income" includes "capital gains", a charitable or religious trust would forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the stipulated period. In some cases, charitable or religious trusts are required to sell, in the interest of the trust, capital assets forming part of the corpus of the trust property solely with a view to acquiring other capital assets to be held as part of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trative instructions were issued to the effect that where a charitable or religious trust transferred a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilised the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital gains so utilised should be regarded as having been applied to the charitable or religious purposes of the trust. These instructions have recently been reiterated. 76. With a view to placing the aforesaid administrative instructions on a legal footing and removing the disadvantage to charitable and religious trusts for the past as also the future, section 11 has been amended, by section 5 of the Finance (No. 2) Act, 1971 by way of insertion of a new sub-section (1A). Under the new sub-section, it has been provided that in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer (i.e., full value of the consideration as reduced by the expenditure incurred wholly and exclusively in connection with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antum of capital gain which will be deemed to be application of income for charitable purpose and become eligible to get exemption u/s.11 (1) of the Act, the provisions of Sec.11(1A) of the Act have to be applied. 16.1 In the light of the legal position as explained above let us see as to whether the Assessee can claim the benefit of provisions of Sec.11(1A)(a) of the Act and to what extent. The provisions applicable in the present case was Sec.11(1A)(a)(ii) of the Act because the entire net consideration was not utilized in acquiring another capital asset to be held under trust wholly for charitable or religious purposes. The net sale consideration received on transfer in the present case was Rs.4,00,00,000/-. The cost of acquisition of the property without the benefit of indexation was Rs.1,33,01,892/-. As we have already held capital gain on transfer of capital asset has to be made in accordance with the provisions of Sec.45 to 55A of the Act. Such computation would be as follows: CAPITAL GAINS Sale proceeds Rs.4,00,00,000 Less: Indexed cost of acquisition Rs.2,51,22,642 Long term capital gain Rs.1,48,77,358.33 17. The Assessee has entered into agreement for sale of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that the order of the AO was erroneous. The argument of the learned counsel for the Assessee that two views were possible on the interpretation of the provisions of Sec.11(1A) of the Act and that the AO has adopted a possible view and therefore in exercise of powers u/s.263 of the Act, the CIT cannot substitute his views with that of the AO, cannot be accepted. The rationale behind the provisions of Sec.11(1A) of the Act as explained in the CBDT Circular referred to earlier and the provisions themselves are very clear. However, even the CIT, in exercise of his powers u/s.263 of the Act has overlooked the correct interpretation of the provisions of Sec.11(1A)(a)(ii) of the Act and therefore to this extent his order is modified as stated above. 19. The capital gain to the extent not utilized for acquiring new asset, will be considered as income of the trust and all consequences like accumulation etc., should be allowed. Having held that the order of the O was erroneous let us examine as to whether the same was prejudicial to the interest of revenue. 20. The learned counsel for the Assessee submitted before us that for invoking power u/s.263 of the Act, the order sought to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Corporation Ltd. 29-12-1981 7,50,000 Fixed deposit with Bharat Petroleum Corporation Ltd. 29-12-1981 5,00,000 Fixed deposit with Bharat Heavy Electricals Ltd. 30-12-1981 5,88,149 48.130 units of the Unit Trust of India . 30,88,149 . In 1982 : . . 13-1-1982 4,00,000 Fixed deposit with Bharat Petroleum Corporation Ltd. 8-2-1982 3,00,000 Fixed deposit with Bharat Heavy Electricals Ltd. . 7,00,000 . Out of the above, a sum of Rs. 7,00,000 was invested after 31st Dec., 1981, and an option was exercised under the Explanation to s. 11(1) requesting the ITO to treat the above sum as deemed application during the year ended on 31st Dec., 1981. It was urged that the capital gains of Rs. 23,79,538 was, therefore, exempt from tax under s. 11(1) of the IT Act, 1961. On the above facts one of the question before the Hon'ble Calcutta High Court was as to whether despite the acquisition of the fresh capital asset not being within the accounting year relevant to the asst. yr. 1982-83, the exemption under s. 11(1A) shall relate back to the asst. yr. 1982-83 by reason of the fact that the assessee exercised an option under the Explanation to s. 11(1) requesting the ITO to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me (such option to be exercised in writing before the expiry of the time allowed under subs. (1) or sub-s. (2) of s. 139, whether fixed originally or on extension 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-cl. (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-cl. (ii), during the previous year immediately following the previous year in which the income was derived." 18. In our view, by reason of the option exercised under the Explanation to s. 11(1), the assessee is entitled to the benefit under s. 11(1A) inasmuch as the definition of income as contained in s. 2(24) of the Act includes capital gains as one of the species of income. That being so, the option as exercisable with regard to income should also avail to capital gains provided such option is exercised in writing before the expiry of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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