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TMI Blog2016 (3) TMI 1349X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act, in the case of Al Ameen Educational Society vs DIT [ 2012 (11) TMI 346 - ITAT BANGALORE] wherein, the entire consideration was used to acquired new asset, therefore, there was no difficulty as nothing will be taxable u/s 11(1A)(a)(i) of the Act. The decision and the ratio laid down in CIT vs East India Charitable Trust [ 1992 (1) TMI 21 - CALCUTTA HIGH COURT] further supports the case of the assessee, if the capital gain is applied for charitable purposes of the assessee, not by acquiring a new asset, but for other charitable purposes, then there is no reason why its not be considered as application of income for charitable purposes. - Decided in favour of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... ed u/s 143(1) of the Income Tax Act, 1961 (the Act). 3. Later on the AO issued a notice u/s 148 of the Act on 30-11-2007 for the reason that the net consideration received on sale of the property had not been invested in capital assets by the assessee and therefore, computation of capital gain by the assessee had to be determined afresh. In the re-assessment proceedings, the AO worked out the LTCG as follows; " The assessee has sold land for ₹ 4,00,00,000/-and has invested ₹ 2,78,38,080/- in acquiring new capital asset and thus, declared a sum of ₹ 3,41,169/- being taxable long term capital gain. The assessee has claimed exemption u/s11(1A) of the Income-tax Act for investing the proceeds in the capital asset 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.₹ 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 ₹ 1,03,53,927/-(₹ 1,48,77,358 x ₹ 2,78,38,080/ ₹ 4,00,00,000) only is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso submitted that the order of the AO accepting the claim of the assessee cannot be said to be erroneous and prejudicial to the interest of revenue. 6. The DIT(E) however, did not accept the plea of the assessee and he held as follows; "In the return of income filed for the assessment year 2006-07, the assessee has determined the 'capital gains' at ₹ 3,41,169/-. The computation of capital gain as per the assessment order in question is as under; xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx From the above computation, it is seen that the AO has determined the capital gain by considering indexed cost of acquisition amounting to ₹ 2,51,22,641/- investment in capital assets from 2001-2002, 2002-03, 2003-04 & 2005-06 amounting to ₹ 2,78,38,080/- and exemption of capital gains due to investment in new assets of ₹ 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of ₹ 1,33,01,892/- 5(f) According to the provisions of section 11(1A), the computation of capital gain would be as under; XXXXXXXXXXXXXXXXXXXXXXX In the circumstances, I hold that the order 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) on the scope of powers u/s.263 of the Act has held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew was possible on the issue. 12. The learned DR on the above submission of the learned counsel for the Assessee submitted that in the case of a charitable trust when capitalasset are transferred by a charitable trust 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the capital asset is property held under trust wholly for charitable or religious purposes. Sec.11(1A)(b) applies only when the property held under trust in part only for such purposes, is transferred. It is in the light of the provisions of 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 peri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvantage to charitable or religious trusts in being obliged to spend away the capital gains arising from the transfer of assets constituting the corpus of the trust instead of adding to the corpus, was considered by Government in 1963 and administrative 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computation of capital gain has not been defined for the purpose of Sec.11(1A) of the Act and therefore the normal expression capital gain and the computation of such capital gain as laid down in the provisions of Sec.45 to 55A of the Act will apply. For determining the quantum 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 ₹ 4,00,00,000/-. The cost of acquisition of the property without the benefit of indexation was ₹ 1,33,01,892/-. As we have already held capital gain on transfer of capital asset has to be made in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 be revised should be (i) erroneous and (ii) prejudicial to the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 treat the above sum as deemed application during the year ended on 31st Dec., 1981 . 22. The Hon'ble Calcutta High Court held as follows: "Sec. 11(1) reads as follows : "(1) Subject to the provisions of ss. 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- (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property; (b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 time allowed under sub-s. (1) of s. 139 for furnishing the return. Therefore, the amount of ₹ 7 lakhs utilised in acquiring fixed deposits with the Bharat Petroleum Corporation Ltd. and the Bharat Electronics Ltd. should also be allowed exemption under the said provision for the asst. yr. 1982-83." (emphasis supplied) 21. It is clear from the aforesaid decision of the Ho'ble Calcutta High Court that capital gain is also income of the trust and Sec.11(1A) of the Act is not the only way in which capital gain has to be applied for charitable purposes. It is one of the way of applying capital gain for charitable purpose. If capital gain is applied for charitable purpose of the Assessee not by acquiring a new asset but for other charitable purpose, then there is no reason why it should not be considered as application of income for charitable purpose enabling the Assessee to claim exemption u/s.11(1) of the Act. In the present case there is no question of application for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee duly filed the annual account disclosing the amount under consideration. The Assessing Officer issued notice u/s 148 dated 24/03/2011 asking the assessee as the amount should not be treated to be escaped taxation as the receipts were nothing but sale consideration and the capital gains arising on transfer of capital asset was not utilized for acquiring another capital asset as per the provision section 11 (1A) (a) of the Act. The impugned amount was added to the total income of the assessee. 2.3. On appeal, before the ld. Commissioner of Income Tax (Appeals), the impugned addition was deleted. The relevant portion of the same is reproduced hereunder for ready reference:- "I have carefully considered the submissions of the appellant, the assessment order and the facts of the case. I finds that the appellant received premium from tenants amounting to ₹ 1,69,65,500/-. The appellant transferred a portion of the property and received the above premium. I also find that the appellant has applied ₹ 4,72,02,440/- towards the object of the trust. Even if ₹ 1,69,65,500/- is treated as income of the appellant trust, the same is found to have been applied towards ..... X X X X Extracts X X X X X X X X Extracts X X X X
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