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TMI Blog2024 (10) TMI 918X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee Trust but received as corpus donations and on that count also section 13(1)(d) is not applicable. AR also argued that the shares were received at the time of formation of the Trust which goes to prove that it forms part of the corpus of the assessee Trust - AR also made a without prejudice submission that even if the dividend income is held to be taxable for violation of section 11(5), it is otherwise exempt under section 10(34) which the AO has denied saying the Trust is not entitled to claim exemption u/s 10(34). Thus we hold that the AO is not correct in denying the benefit of section 11 to the assessee on the ground that section 13(1)(d) is applicable in assessee's case. Violation of section 13(2)(h) - founder trust of the assessee has invested in a concern in which he was the Chairman and that he is having substantial interest in Tata Sons Ltd. - Tata Sons Ltd. is an interested party in terms of section 13(3)(b) of the Act as it has contributed more than Rs. 50,000/- to the assessee - HELD THAT:- The facts for the year under consideration is that none of Trustees including Mr.Ratan Tata is holding more than 20% of the voting powers in Tata Sons Ltd and therefore as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor of Tata Sons Ltd., is to protect the interest of assessee Trust and the numerous beneficiaries who are benefitted by the activities of the Trust by utilizing the Dividend earned from Tata Sons Ltd., which is a major source of income for the assessee Trust. The fact that the income of the Trust consists of Dividend and other donations and does not include any income from business proves that the assessee is not engaged in any activity in the nature of business. Further the income of Tata Sons Ltd is taxed in its own hand and not in the hands of the assessee also supports the contention that the assessee Trust is not engaged in any business activity - we hold that the Trust is not hit by the proviso to section 2(15) of the Act and accordingly, exemption under section 11 of the Act cannot be denied to the assessee Trust. Assessee appeal allowed. - Ms Padmavathy S, AM And Shri Rahul Chaudhary, JM For the Appellant/Assessee : Shri P. J. Pardiwala a/w Shri Sukhsagar Syal, AR For the Revenue/Respondent : Shri Sanyogita Nagpal, CIT-DR ORDER PER PADMAVATHY S, AM: 1. These two appeals by the assessee are against the orders of the Commissioner of Income Tax (Appeals)/National Faceless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee for the reason that the Trust is not entitled for the said exemption. The AO also held that the Mr.Ratan Rata being a Trustee of the assessee is holding shares in Tata Sons Limited and therefore there is a violation of section 13(2)(h) and for that reason also the assessee is not entitled to claim exemption under section 11 of the Act. Accordingly, the AO assessed the income of the assessee at Rs. 10,49,40,140/-. On further appeal, the CIT(A) confirmed the additions made by the AO. The assessee is in appeal before the Tribunal against the order of the CIT(A). Violation of section 13(1)(d) of the Act 5. The AO held that any income of the arising out of the investments in shares other than Public Sector Company or in the modes specified in section 11(5) after 30.11.1983 is to be included in the taxable income of the assessee Trust. Accordingly the AO held that the exemption under section 11 is not available to the assessee for the reason that funds of the assessee trust remained invested in shares of Tata Sons Ltd during the current year which is in violation of section 13(1)(d).The AO placed reliance on the decision of the coordinate bench in the case of Jamsetji Tata Trust (IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 7. The ld. DR on the other hand submitted that the AO has denied the benefit of section 11 mainly for the reason that the assessee has not produced any documentary evidence that the said investment in Tata Sons is held as corpus on or before 01.06.1973 for the exceptions to apply. Accordingly, the ld. DR supported the orders of the lower authorities. 8. We heard the parties and perused the material on record. The assessee claimed the dividend income from its holdings in Tata Sons Ltd., as exempt under section 10(34) of the Act. The AO invoked the provisions of section 13(1)(d) to hold that the of the assessee trust has invested otherwise than in forms or modes specified under section 11(5) and continue to remain so invested after 30.11.1983. Accordingly the AO denied the benefit under section 11 to the assessee. The contention of the assessee is that in assessee's case the exceptions provided under section 13(1)(d) are applicable and therefore the income of the assessee cannot be brought to tax. Therefore before proceeding further we will look at the relevant provisions of section 13(1)(d) which reads as under Section 11 not to apply in certain cases. 13. (1) Nothing contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso shall not apply unless the trust or institution maintains separate books of account in respect of such business. (emphasis supplied) 9. The contention of the revenue is that funds of the assessee Trust that were invested before 01.03.1983 in Tata Sons Ltd which is not a modes specified in section 11(5) of the Act continue to remain so invested or deposited after the 30.11.1983. The assessee's argument is that shares of Tata Sons acquired till 01.06.1973 are held as Corpus and the accretions to the said shares were only out bonus which is also covered by the exceptions as highlighted above. In this regard it is relevant mention that the ld AR during the course of hearing drew our attention to order of the AO for AY 2018-19, where the details of shares of Tata Sons Ltd are tabulated as under Year of acquisition Particulars No. of Shares Cummulative no.of Shares 1919 Shares received as per Will of Sir Ratan Tata 690 690 1957 Purchase from Lady Sylla Petit Nusly D. Petit Dina Petit 35 725 1962 Purchase from Darab R.T. Tata 9 734 1967 Bonus Shares 1:1 734 1,468 1967 Subdivision of shares 6,606 6,606 1969 Less: Sold to Sterling Investment Company (900) 5,706 1973 (after 01.06.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has extensively examined the compliance with the requirements of Section 11(5) and Section13(1)(d) of the Act. Vide letter dated 2nd December 2016, the Assessing Officer specifically asked the assessee whether any investment of the trust for last three years is in contravention of Section 11(5) of the Income Tax Act, 1961. Also, whether any investment of the trust in the last three years is covered by the provisions of Section 13(1)(d), please specify the same . In reply to this requisition, the assessee had duly furnished all the details of the investments held by the assessee. It was also categorically confirmed that these investments did not violate the provisions of Section 11(5) and 13(1)(d). In Annexure 1 to the letter dated 9th December 2016, the assessee filed complete details of all the scrips, the bifurcation of shares held as on 1 st June 1973 and subsequent bonus shares allotted in connection with the holdings as on 1st June 1973, and it was thus made clear that no investments were made after 1st June 1973. The complete specific details about holdings in each of these shares as on 1st June 1973, and accretion in these holdings on account of allotment of bonus shares th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares being held to be part of the corpus, the provisions of Section 13(1)(c) will not come into play. 33. It is an admitted position that the shares becoming part of the investment, after 1st June 1973, were accretion to the original shareholdings as on 1st June 1973 and these were allotted as bonus shares only. So far as the question of the shares being part of corpus is concerned, the current financial period was over forty years after the cut-off date of 1st June 1973, and in none of those forty-plus years, the exemption was declined on the ground that these shares were not part of the corpus. There was no good reason to doubt these shares being part of the corpus. As we have noted earlier, an Assessing Officer can only be faulted for doing anything less than what an Assessing Officer, in the course of his performance of his duties as an Assessing Officer should, as a prudent, judicious or reasonable public servant, reasonably do bonafide in a real-life situation . Viewed thus, we cannot fault the conduct of the Assessing Officer in not disturbing, or even not probing, something being constantly accepted for over four decades- particularly when there is no occasion or trigger ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court, in the case of DIT Vs Sheth Mafatlal Gaganbhai Foundation Trust [(2001) 249 ITR 533 (Bom )]: In other words, only the non-exempt income portion would fall in the net of tax as if it was the income of an AOP. Section 11(5) lays down various modes or forms in which a trust is required to deploy its funds. Section 13(1) lays down cases in which section 11 shall not apply. Under section 13(1)(d)(iii), it has been laid down that any share in a company, not being a Government company, held by the trust after 30- 11-1983 shall result in forfeiture of exemption. By virtue of the proviso (iia) it has been laid down that any asset which does not form part of permissible investment under section 11(5) shall be disposed of within one year from the end of the previous year in which such asset is acquired or by 31-3-1993, whichever is later. In the present case, the assessee was required to dispose of the shares under the said proviso by 31-3-1993 [See the judgment of this Court in IT Appeal No. 81 of 1999 dated 14-9-2000]. The shares have not been disposed of even during the assessment year in question. Now, under section 164(2), it is, inter alia, laid down that in the case of rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34) only on the ground that the assessee was eligible for exemption under section 11 on this income. Therefore, even if the assessee is to be declined exemption under section 11 in respect of dividend income on these shares, he will be eligible for exemption under section 10(34). In the case of DIT Vs Jasubhai Foundation [(2016) 374 ITR 315 (Bom)], Hon ble jurisdictional High Court has also observed as follows: .The provisions, namely, sections 10 and 11 fall under a Chapter which is titled Incomes Which Do Not Form Part of Total Expenditure (Chapter III). Section 10 deals with incomes not included in total income whereas section 11 deals with income from property held for charitable or religious purposes. We have not found anything in the language of the two provisions nor was Mr. Malhotra able to point out as to how when certain income is not to be included in computing total income of a previous year of any person, then, that which is excluded from section 10 could be included in the total income of the previous year of the person/assessee. That may be a person who receives or derives income from property held under trust wholly for charitable or religious purposes. Thus, the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y or collection of laws; a material substance; something visible and tangible; as the subject of a right; something having legal position as distinguished from an incorporeal physical substance as distinguished from intellectual conception; the body of estate; or a capital of on estate. 13. The word Corpus is used in the context of Income Tax Act. We have to understand the same in the context of a capital, opposed to an expenditure. It is a capital of an assessee; a capital of an estate; capital of a trust; a capital of an institution. Therefore, if any voluntary contribution is made with a specific direction, then it shall be treated as the capital of the trust for carrying on its charitable or religious activities. Then such an income falls under Section 11(d) of the I.T. Act and is not liable to tax. Therefore, it is not necessary that a voluntary contribution should be made with a specific direction to treat it as corpus , If the intention of the donor is to give that money to a trust which they will keep it in trust account in deposit and the income from the same is utilised for carrying on a particular activity, it satisfies the definition part, of the corpus. The assessee wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, for which Section 11(i)(d) of the Act is attracted and the said income is not liable for tax tinder the Act. [Emphasis, by underlining, supplied by us] 41. What essentially follows is that it s not the declaration of an investment being a corpus investment but the fact of its being treated as capital and rather than using the investment for the purposes of the trust, using the income from investment for the purposes of the trust, which is determinative of its being in the nature of corpus investment. How the trust is treating the investment, i.e., in the capital field or not, is thus truly determinative of the investment being part of the corpus. Viewed thus, the mere fact of these investments being held as capital for at least more than four decades-as conclusively established by the material before the Assessing Officer, and only income from these investments being applied for the purposes of the trust, clearly establishes the fact of these investments being part of the corpus of the trust. 42. In view of the foregoing discussions, as also bearing in mind the entirety of the case, learned Commissioner was clearly in error in invoking powers under section 263 on the ground that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amsetji Tata, (iii) Mr. Ratanji Dadabhai Tata, (iv) Mr. Phiroz Cursetji Setna and (v) Mr. Burjorji Jamasji Padshaw. The ld. AR therefore submitted that the AO has erroneously invoke the provisions of section 13(2)(h) by holding that the assessee continue to hold the investments in a concern in which the person referred to in section 13(3) has substantial interest. The ld. AR further submitted though Mr.Ratan Tata during the year under consideration was one of the Trustees and he holds only 3,368 equity shares of Tata Sons Ltd which only 0.83% of the total capital of Tata Sons Ltd. The ld. AR brought to our attention that as per explanation 3 to section 13(3) a person is deemed to have substantial interest in the company/concern if its shares carrying not less than 20% of the voting power are, at any time during the previous year, owned beneficially by such person. Since in the given case Mr.Ratan Tata is holding only 0.83% of the shares, the ld AR argued that he does not have substantial interest in Tata Sons Ltd., and accordingly there is no violation of section 13(2)(h). With regard to whether Mr.Ratan Tata holding the position of Chairman the ld. AR relied on the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue and held that 12. The AO alleged that the assessee's shareholding in the four companies is also in violation of section 13(2)(h) of the Act. The AO observed that Mr. Ratan N. Tata, who is one of the Trustees of the assessee was also the chairman of Tata Sons Ltd in the relevant financial year. With this background, the AO concluded that being a chairman in Tata Sons Ltd. amounted to his holding a substantial interest' in that company. Accordingly, it was held the assessee was in violation of section 13(2)(h) of the Act as its funds were invested in a concern (Tata Sons Ltd.), in which a person referred to in sub- section (3) (Mr. Ratan N. Tata) had a substantial interest (by virtue of his chairmanship therein). The CIT(A) confirmed the findings of the AO. I am of the view that that 'substantial interest' is not an expression of general import. Its meaning has been set out in section 13 itself. Explanation 3 to section 13 Provides: Explanation 3.--For the purposes of this section. a person shall he deemed to have a substantial interest in a concern, -- (i) in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ification because in section 13(3), there are different clauses the application of which needs to be examined to find out whether the investment is with any connected person and that the assessee itself has more than 20% equity investment in Tata Sons Ltd. Learned Commissioner has also relied upon a decision of the Tribunal, in the case of Jamshedji Tata Trust v. JCIT [ITA No. 7006/Mum/2013; AY 2010-11], to justify the need for greater probe into the matter. These objections are, however, devoid of any legally sustainable merits. Once the assessee clarifies that none of the trustees have any substantial interest in Tata Sons Ltd, and Section 13(2)(h) is not applicable, that should be the end of the matter, unless, of course, there is anything on record, or in the knowledge of the Assessing Officer, which indicates to the contrary. The fact that the assessee trust itself had over 20% equity investments in Tata Sons Limited does not suggest or imply that the trustees must also be having 'substantial interest' in Tata Sons Limited. It is not even the case of the revenue, even today, nor is there any material even prima facie indicating that any of the persons specified under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of co-ordinate bench of ITAT Mumbai in the case of JRD Trust (supra) that being a chairman in a company would not amount to holding substantial interest therein as per explanation to section 13(3). It is also relevant to note that the contention of the revenue that Tata Sons Ltd. has contributed more than Rs. 50,000/- is not supported by any evidence and the revenue did not bring anything on record to substantiate the same. In view of these discussions and considering the above decisions of the Tribunal we hold that the provisions of section 13(2)(h) cannot be applied in assessee's case and the benefit of section 11 cannot be denied for that reason. 21. The ld. AR during the course of hearing drew our attention to the findings of the CIT, stating that the AO vide order dated 17.07.2018 under section 154 has rectified the deduction given towards application of funds to the extent of 85% while computing the assessed income (refer page 57 of CIT order). The ld. AR in this regard submitted that the said finding is factually incorrect and there is no such order under section 154 of the Act. The ld. DR did not rebut the submissions of the AR. 22. We have already held that the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of Board of Tata Sons Ltd. through nominee directors and that this creates opportunities for the Trustees to take benefit from the company which can constitute direct or indirect benefit as per provisions of section 13(1)(c) of the Act. The AO held that no proper justification is provided for payment of such huge sums to the Trustees which is in clear violation of section 13(1)(c). The assessee submitted before the AO that these payments were made as per the Board Resolution of Tata Sons Ltd. and that these were paid towards past services rendered by the Trustees. However, the AO did not accept the submissions of the assessee and held that the assessee is not entitled for exemption under section 11 since there is a violation of section 13(1)(c). The relevant observations of the AO in this regard are extracted below: 5.7 It is evident from the facts regarding the payments made by TSL to the persons mentioned above that, there are variations and inconsistencies in the payments made to persons having similar profile. TSL has chosen to not provide any basis or justification for making said payments. It is hard to believe that a listed company like TSL would not be having a stated pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustees are receiving the payment. The ld. AR further submitted that these payments are made by Tata Sons Ltd. as per the Board Resolution for the past services rendered by the Trustees and the only reason for invoking section 13(1)(c) is that the payments could not be substantiated. The ld. AR further submitted that since the payments are made towards past services the details pertaining to whether the payments are commensurate with the services rendered could not be substantiated by the assessee and this cannot be basis for denying benefit of section 11. The ld. AR also brought to our attention to the fact that in the case of Tata Sons Ltd. the impugned payments have been allowed as a deduction. The ld. AR further brought to our attention that in assessee's own case against the order passed under section 263 the Tribunal has held that there is no violation of section 13(1)(c) of the Act. 28. The ld. DR on the other hand submitted that when payments received by the Trustees from Tata Sons Ltd. is not properly substantiated when the AO has correctly made the addition for the reason that the Trustees are taken benefit from Tata Sons Ltd. Accordingly, the ld. DR supported the orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pension payments to Ratan N Tata and N A Soonawala, for example, have been held to be wholly and exclusively for the purposes of the business of Tata Sons Ltd. [ITA No. 4630/Mum/16], and, therefore, the stand that these payments amounted to benefit to the trustees is ex facie incorrect. 30. Considering the facts and the above decision of the Tribunal we hold that the AO is not correct in denying the benefit of section 11 for the reason that the assessee has violated the provisions of section 13(1)(c) of the Act. Violation of section 2(15) of the Act 31. The AO held that the assessee has violated the provisions of section 2(15) of the Act for the reason that the assessee engaged in business by having control over the business of Tata Sons Ltd. The AO drew this conclusion from the fact that the assessee Trust is holding 23.56% of the shareholding in Tata Sons Ltd., and that one of the ex-Directors of Tata Sons Ltd., Mr.Cyrus Mistry had submitted certain documents in support of the allegation that the business of Tata Sons Ltd., is controlled by the Trustees of the assessee Trust. The AO relied on the documents and the email communications submitted by Mr.Cyrus Mistry before NCLT in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see Trust along with Sir Dorabji Tata Trust has the right to appoint/remove 1/3rd of the Board of Directors. The AO held that the assessee Trust has violated the provisions of section 2(15) for the said reason i.e. assessee is carrying on the activity in the nature of business. The AO had also relied on the fact that ex-Director of Tata Sons Ltd, Mr.Cyrus Mistry has submitted certain documents before the NCLT alleging that the business of Tata Sons Ltd by the Trustees. So the issue that needs to be considered here is whether the assessee being the shareholder of Tata Sons Ltd., is engaged an activity in the nature of business by exercising control the business of the said company and by having the right to appoint or remove 1/3rd of the board of directors. In this regard it is relevant to take note of the following observations of the coordinate bench is assessee's own case (supra) 56. A lot of emphasis is placed by the learned Commissioner on the stand that since the assessee trust controls Tata Sons Ltd, the assessee trust is not entitled to the benefit of sections 11 and 12. 57. The concept of control over a company in which investment is made by the assessee trust is comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to this assessee alone. Therefore, these rights, even if material, are not relevant in so far as control by this assessee is concerned. The assessee trust cannot, therefore, be said to be having control over the affairs of Tata Sons. In any case, as held by Hon'ble Supreme Court in the case of Arcelor Mittal India (P.) Ltd. v. Satisk Kumar Gupta Ors. [2019] 2 SCC 1, the expression 'control' implies a 'positive and proactive' power and not 'merely a negative or reactive power'. Undoubtedly, by virtue of article 104 B of the articles of association, the Tata Trusts can collectively nominate one-third of the prevailing number of directors, but these directors on their own cannot pass the resolutions, they can at best stall the resolution in the exercise of their powers. Nothing much turns on these rights under the article of association, on which so much emphasis has been placed by the learned Commissioner because, given the fact that Tata Trusts collectively hold the majority, these provisions are really infructuous. These provisions would have been of practical relevance only when the collective shareholdings of Tata Trusts were to be less than the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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