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TMI Blog1992 (1) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... s within the meaning of section 11(1A) of the Income-tax Act, 1961? (4) Whether the Income-tax Appellate Tribunal was justified in holding that the assessee-trust was entitled to exemption under section 11(1A) of the Income-tax Act, 1961, in respect of the capital gains of Rs. 23,79,538 on the sale of shares ?" R. A. No. 14 76/(Cal) of 1986 : "(1) Whether, on the facts and in the circumstances of the case the Income-tax Appellate Tribunal Was justified in law in holding that there was extinguishment of the right of the assessee in the debenture stock held by it in Messrs. Braithwaite and Co. (I.) Ltd., within the meaning of section 2(47) read with section 45 of the Income-tax Act, 1961, upon the receipt of the letter from the Commissioner of Payments that nothing could be paid to it for the stock so held by it ? (2) Whether the Tribunal was justified in law in holding that the assessee incurred capital loss of Rs. 1,30,000 (long-term) in respect of the debenture-stock held by it in Messrs. Braithwaite and Co. (I.) Ltd. ?" Shortly stated, the facts are that the assessee in this case is a trust and the assessment year involved is 1982-83 for which the previous year ended on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he found that the shares were not issued during the relevant year. The units were not marketable and the assessee did not become a registered holder of the units in the year under reference. He also found that the sum of Rs.5,69,151 was included by the assessee in "loans and advances" and had not been spent during the calendar year 1981. The Income-tax Officer observed that the assessee could not get the benefit of deemed application under section 11(1a) by utilising the net consideration in the subsequent year. The Income-tax Officer did not accept the assessee's contention that the net consideration for the sale of shares was utilised by it in acquiring new capital assets. He, therefore, did not allow exemption in respect of capital gains of Rs. 23,79,538 under section 11(1A) of the Income-tax Act. Being dissatisfied with the Income-tax Officer's order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals), after referring to the circulars of the Central Board of Direct Taxes being Nos. 2-P(LXX-5) of 1963 and No. 52 dated December 30, 1970, came to the conclusion that the creation of fixed deposits in the Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellate Tribunal did not accept the contention of the Revenue that the units were not acquired during the relevant year. In view of the above and after considering the provisions of section 13(5) of the Income-tax Act, the Tribunal held that the assessee was eligible for exemption in respect of capital gains. The Tribunal thus upheld the order of the Commissioner of Income-tax (Appeals) and dismissed the appeal filed by the Revenue. The assessee-trust was having 730 debenture-stock of Messrs. Braithwaite and Co. (I.) Ltd. Messrs. Braithwaite and Co. (I.) Ltd. was taken over by the Government and the assessee was intimated that it could not get any amount out of the debenture-stock. The assessee claimed capital loss (long-term) of Rs. 1,30,000 on writing off of 7 3/4 debenture-stock as stated above. This was not allowed by the Income-tax Officer. On appeal, the Commissioner of Income-tax (Appeals) upheld the Income-tax Officer's action. The assessee filed cross-objections and contended that the Incometax Officer had not correctly computed the capital gains. It was urged on behalf of the assessee that it could not get any amount out of the debenture-stock and, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew capital asset, the whole of such capital gain ; (ii) where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset ;" The two questions mentioned above need be dealt with conjointly as they are inseparable. In this case, the assessee claims that it sold the shares of various companies held by it as property under trust and with the net consideration received on such sale, it has acquired a new capital asset in the shape of fixed deposits with a number of public sector companies or Government companies. Thus, the assessee's contention is that the primary condition for exemption of the capital gains from taxation has been satisfied because with the proceeds of sale of the shares held as capital assets, a new capital asset being fixed deposits with the public sector companies have been acquired. The contention of the Revenue is that the fund arising as the consideration for sale of the old capital asset continues to remain the same fund lying in deposit with the depositee-company and there is no conversion of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the extent specified therein. 2. The Board had occasion to examine whether investment of the net consideration in fixed deposit with banks would be regarded as utilisation of the amount of the net consideration for acquiring another capital asset within the meaning of section 11(1A) of the Income-tax Act, 1961. The Board has been advised that investment of the net consideration in fixed deposit with a bank for a period of six months or above would be regarded as utilisation of the net consideration in acquiring another capital asset within the meaning of section 11(1A) of the Income-tax Act, 1961." We have to consider the issue against the backdrop of various Direct Taxes Acts, the Wealth-tax Act, 1957, in particular, as also in the perspective of sections 11 to 13 of the Income-tax Act. Sub-section (5) of section 11, in our view, is the keynote to the solution of the problem. The said section sets forth the various forms and modes in investing or depositing the fund of a trust for charitable or public religious purposes. The said sub-section (5) of section 11 reads as follows: "The forms and modes of investing or depositing the money referred to in clause (b) of sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (viii) of sub-section (1) of section 36 ; (x) investment in immovable property: Explanation.-'Immovable property' does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to, or permanently fastened to, anything attached to the earth ; (xi) deposits with the Industrial Development Bank of India established under the Industrial Development Bank of India Act, 1964 (18 of 1964). " It may be observed that the investment or deposit in any public sector company appears as one of the permitted forms or modes of investment or deposit. Now, the very expression "investment or deposit" can be very well argued to be a capital asset. The expression "capital asset" is defined in clause (14), of section 2 and the definition goes in the widest terms possible except for the specific exclusions. The said definition so far as is material is reproduced below: " ' capital asset' means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include (i) any stock-in-trade, consumable stores or raw materials held for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should likewise come under the definition of capital assets unless specifically excluded. The fixed deposit either with banks or with a public sector company is not an excluded asset under either of the two definitions, viz., the definition of "capital assets" under section 2(14) of the Income-tax Act, 1961, and "assets" under section 2(e) of the Wealth-tax Act, 1957. What reinforces the assessee's case is the special mention in sub section (5) of section 11 of deposits with public sector companies. This only shows that an investment or deposit in a public sector company is firstly an asset and secondly a capital asset and thirdly a permitted capital asset under the special law relating to the assessment of charitable or public religious trusts. Therefore, the contention of the Revenue that the investment by way of deposit in a public sector company cannot be treated as a new asset acquired with the net consideration in terms of section 11(1A) is not tenable. The third question has, however, one more facet. In the case as revealed in the statement of case, the two amounts of fixed deposits with such a public sector company as Bharat Petroleum Corporation Ltd., to the aggregate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in computing the twenty-five per cent. of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in section 12 shall be deemed to be part of the income ; (2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of seventy-five per cent. of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount (i) for the reason that the whole or any part of the income has not been received during that year, or (ii) for any other person, then, (a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee-trust should not have been allowed exemption in terms of section 11(1A). We, however, agree with the Tribunal in holding that, so long as the investments were actually made during the accounting period, the issue of the units after the expiry of the accounting year is immaterial. The same shall relate back to the date when the payments were made to the unit trust for the purchase of the units. There can be no cause for the Revenue to agitate that the utilisation in acquisition of fresh capital assets by way of units of the Unit Trust of India did not take place during the relevant previous year. The Revenue has not brought any evidence to prove that the money for the units had not been tendered on December 30, 1981. Nor is the finding of fact by the lower authorities on that aspect in any manner questioned. Therefore, we answer question No. 2 in the affirmative and in favour of the assessee. Question No. 4 is cumulatively consequential to the preceding three questions and shall have be necessarily answered in the affirmative and against the Revenue. This takes us to the questions arising from the assessee's cross objection, i.e., the questions in R. A, No. 1476 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishment of an asset cannot be treated as a loss under the head "Capital gains" inasmuch as no transfer is involved. The definition of "transfer" in clause (47) of section 2 includes extinguishment but that extinguishment refers not to the extinguishment of the asset itself but to the extinguishment of the holder's right to the assets. This, position is finally settled by the Supreme Court in its decision in Vania Silk Mills P. Ltd. v. CIT [1991] 191 ITR 647 (SC). In that case, a fire broke out in the mill's premises causing extensive damages to the mill including its machinery. The Revenue brought to tax the difference between the insurance amount received by the appellant and the original cost of the machinery as capital gains on the ground that extinguishment of the machinery by fire is also transfer within the definition of transfer in section 2(47) of the Income-tax Act, 1961. The action of the Revenue was upheld by the Gujarat High Court but the said decision of the Gujarat High Court was reversed by the Supreme Court, which held that the definition in section 2(47) necessarily implies the existence of the assets and of a transferee, according to the rule of noscitur a sociis. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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