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TMI Blog1999 (2) TMI 94X X X X Extracts X X X X X X X X Extracts X X X X ..... AO has illegally denied the deduction under s. 11(1A)(a)(ii) of the Act regarding party of net consideration which was utilised in acquiring the new capital assets." 3. The appellant revised grounds of appeal vide application dt. 16th June, 1998:- "(1.) That the learned CIT(A) and the AO have violated the statutory provisions in computing the taxable income under the head 'Capital gains' in the following respects:- (a) that he has not regarded Rs. 20,70,603 as application of income for charitable purposes as provided for in s. 11(1)(a) of the Act. (b) That he has erred in not applying correct legal principles while determining the fair market value of the property as on 1st April, 1974 acquired subsequently by the Government. (c) That he has not allowed deductions in computation of 'capital gains' as provided under s. 48(2) of the Act. (d) That he has misinterpreted and misapplied the provisions of s. 11(1A) of the Act. (2.) That he has also wrongly calculated the amount of exemption available for accumulation of income under s. 11(1)(a) of the Act. (3.) That the learned AO has illegally levied interest under ss. 234A and 234B of the Act." 2. The appellant was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO has observed that the property is not in existence and therefore, the same cannot be referred to the Departmental Valuation Officer and the only alternative according to the AO is to adopt rent capitalisation method. The AO has tabulated the rent received for various assessment years and worked average rent at Rs. 35,926. The AO has worked rent for 340 sq. yds. and adopted the same yardstick for remaining 1,578 sq. yds. By this calculation, he has worked out the rent of the entire property at Rs. 201,689 by rent capitalisation method. He has valued the property at Rs. 21,42,950. The AO has made generalistic discussion and finally mentioned that he is estimating property at Rs. 32,00,000 as on 1st April, 1974, Regarding applicability of s. 11(1A), the AO has given following observations: "It is seen that in both the earlier assessment orders a number of deductions have been allowed which were not allowable and similarly a number of deductions were not allowed which were allowable to the assessee under the law. For example, a deduction for the purchase of land and building etc. was allowed which is not allowable. According to this section, exemption from the capital gain is to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne. I am also is agreement with the AO in taking the cost of acquisition as on 1st April, 1974 at Rs. 32 lacs. So far as the computation in respect of exemption is concerned, the stand taken by the learned counsel appears to be justified. The AO has allowed the exemption upto 25 per cent following thereby the decision that there are two limbs of s. 11(1) as per which the exemption is to be allowed in respect of unspent accumulated income of the previous year. The learned AO has applied the provisions of s. 11(1)(a) and which deals with the question of investment of the balance accumulated income which has still not earned exemption under sub-s. (1)(a) of the Act. The relevant portion from the headnote of this decision relating to this further exemption is reproduced hereunder: "Then follows sub-s. (2) which deals with the question of investment of the balance of accumulated income which has still not earned exemption under sub-s. (1)(a). So far as that balance of accumulated income is concerned that also can earn exemption from income-tax meaning thereby the ceiling or the limit of exemption of accumulated income from income-tax as imposed by sub-s. (1)(a) of s. 11 would get lift ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal is dismissed subject to the relief, if any, as per the directions given above." 7. Against the order passed by the learned CIT(A), the appellant is in appeal before us. The learned counsel of the appellant has pleaded that the AO has not given benefit of Rs. 20,70,609 as an application of income for religious and charitable purpose as provided under s. 11(1A)(a) of the IT Act. The learned counsel pleaded that the appellant purchased and constructed property of Rs. 20,70,609 during the assessment year under consideration. The learned counsel pleaded that this new asset was purchased out of funds received on account of acquisition of property by the Government for Rs. 50,66,300 during the year under consideration that is between 1st April, 1988 to 31st March, 1989. The learned counsel pleaded that both the learned CIT(A) and the AO has ignored this fact even though the AO has admitted that the taxability of capital gains is to be analysed under s. 11(1A) of the IT Act. The learned counsel pleaded that since the amount of Rs. 20,70,609 has been applied for the advancement of religious and charitable purposes under s. 11(1)(a), benefit of this amount has not been allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss: 25 per cent of above under s. 11(1)(a) 12,66,575 ------------ 37,99,725 Less: Cost price as on 1st April, 1974 Rs. 40 lac. Cost compensation received during the year 40,00,000 x 50,66,300 Total compensation 63,12,666 32,09,735 ------------ 5,89,990 Less: Income applied by incurring revenue expenditure under s. 11(1)(a) as accepted by AO 2,61,730 ------------ 3,28,260 Less: Income applied by incurring capital expenditure thereby acquiring a new capital asset of advancement of the religious or charitable purposes under s. 11(1)(a) 20,70,409 ------------ (-) 17,42,409 Negative figure Sec. 48(2) will not be applicable as it is a negative figure. " 10. The learned Departmental Representative relied on the orders passed by the authorities below. 11. The first controversy/that requires to be involved relates to the cost of acquisition to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the present AO valued the rental value of the property at Rs. 50,90,000 which was also based on purely estimate. The present maintainable rent is also based on estimate but of course with some base. 13. We are of the opinion that the rental value of 1,978 sq. yds. should be more than the rental value of the shop area. We, therefore, feel that reasonable maintainable rent for the property should be taken at Rs. 2,51,000 after allowing deduction at 15 per cent of rental value by rent capitalisation method which will come to Rs. 26,62,500 as against calculated by the AO at Rs. 21,42,950. The AO has estimated the value of other structures and articles at Rs. 10,57,050. This estimate is also based on purely estimate and guess work. We are of the opinion that value of these entire articles required to be estimated at Rs. 12 lakhs as compared to the value of Rs. 5 lacs, adopted by the AO. We, therefore, estimate the cost as on 1st April, 1974 at Rs. 26,62,500 + Rs. 12 lakhs + Rs. 38,62,500. 14. The second controversy to be resolved is that whether on the facts and in the circumstances of the case and in the case of the trust, capital gains is to be assessed under s. 11(1A)(a) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the learned CIT(A) has misled themselves by giving a finding that s. 11(1A) is meant for calculation of capital gains tax. In fact this section is to operate after capital gains are worked in accordance with Chapter-E of the IT Act. This gives an additional benefit to the appellant, if, he has to make a claim that income arising out of capital gains is to be exempted under s. 11(1) then he has to fulfil various conditions mentioned in s.(1A). 15. The CBDT has also issued Circular No. 52 : F. No. 152(55)/70-TPL, dt. 30th Dec, 1970, on the subject-matter, the relevant extract of the circular is reproduced as follows: Under s. 11(1) of the IT Act, 1961, as amended by the Finance Act, 1970, income derived from property held under trust for charitable or religious purposes is exempt from income-tax only 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 will forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purpose of the trust during the period referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enever an activity is carried on which yields profit, the inference must necessarily be drawn, in the absence of some indication to the contrary, that the activity for profit. We do not think the Court would be justified in drawing any such inference merely because the activity results in profit. It is in our opinion not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on on no profit no loss basis or that profit shall be prescribed. Even if there is no such expression, the nature of the charitable purpose, the manner in which the activity for advancing charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regarding to all the facts and circumstances of the case, the dominant objects of the activity is profit making or carrying out a charitable purpose. If it is the former, the purpose would not be a charitable purpose but, if it is the latter, the charitable character of the purpose would not be lost. If we apply this test in the present case, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be more appropriate to speak of the purpose of profit making being enwrapped or enveloped in the purpose of the advancement of an object of general public utility or, in the other kind of case, the purpose of profit making being interwoven into the purpose or the advancement of that object giving rise to a purpose possessing a dual nature or twin facets. Now, s. 2(15) clearly says that to constitute a "charitable purpose", the purpose of profit making must be excluded. In my opinion, the requirement is satisfied where there is either a total absence of the purpose of profit making or it is so insignificant compared to the purpose of advancement of the object of general public utility that the dominating role of the latter renders the former unworthy of account. In the profit making purpose holds a dominating role or even constitutes an equal component with the purpose of advancement of the object of general public utility, then clearly the definition in s. 2(15) is not satisfied. When applying s. 11, it is open to the tax authority in an appropriate case to pierce the veil of what is proclaimed on the surface by the document constituting the trust or establishing the instituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Gurudwara, constructed shop complex and Sarai and utilised entire receipts for the creation of another capital asset for the purpose of aims and objects of the trust. The Hon'ble Supreme Court has confirmed the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Ambalal Sarabhai Trust (1988) 71 CTR (Quj) 30 : (1988) 173 ITR 683 (Guj) whereby it has been observed that even if sale consideration is invested in different assets but the same assets are utilised for the aims and objects of the trust, it will be deemed that the such trust is entitled to exemption in respect of capital gains arising from sale as per provisions of s. 11(1A). The Hon'ble Gujarat High Court has given following observations: "If any doubt is left about the real nature of the transaction between the parties, it is set at rest by Expln. (iii) to s. 11(1A), which has been extracted earlier. Net consideration as per the said Explanation would mean full value for the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. Now, in the present case, even if 90 per cent can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntitled for exemption under s. 11(1A) of the IT Act. 19. The authorities below have relied on the decision of Hon'ble Madras High Court in the case of CIT vs. Rao Bahadur Calavala Cunnan Chetty Charities, (1982) 135 ITR 485 (Mad) and also on the decision of Bombay High Court in the case of Trustees of Shri Kot Hindu Stree Mandal vs. CIT (1994) 116 CTR (Bom) 22 : (1994) 209 ITR 396 (Bom). These cases were cited by the appellant before the AO. The case goes in favour of the appellant. The reason developed by the Hon'ble Madras High Court that the income is to be understood in proper perspective. The Hon'ble Madras High Court has held that income from the properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by s. 14. This shows that receipt from the sale transaction of the property to the appellant is to the tune of Rs. 50 lacs out of this appellant has spent Rs. 22 lacs. Rs. 2 lacs and odd for revenue expenditure and Rs. 20 lacs for acquiring new assets. In accordance with the decision and interpretation of the Hon'ble Madras High Court, the income of the appellant does not become taxable in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Supreme Court has held that if the business income is applied for charitable purpose, the income from such business will be exempt under s. 11(1)(a) of the IT Act. 21. The Hon'ble Supreme Court in the case of CIT vs. A.L.N. Rao Charitable Trust, has given finding of law that provisions of sub-s. (2) of s. 11 gets attracted if any income is left over after application of income for charitable and religious purpose as envisaged by s. 11(1)(a) of the IT Act. In the case of the appellant, as discussed earlier, in this order, there is no income left over which requires to be applied under s. 11(2) of the IT Act. The Hon'ble Supreme Court has observed that s. 11(1)(a) is a separate operative statute of the Act. The trust has to apply income earned during the year from the properties which includes business and has to actually spend for the charitable and religious purpose. It is only out of unspent accumulated income, the s. 11(1)(a) is attracted whereby 25 per cent of such property income is to be accumulated and invested in listed investments. 22. We are, therefore, of the opinion that the appellant has satisfied the condition laid under s. 11(1)(a) of the IT Act and ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s determined under sub-s. (1) of s. 143 or on regular assessment' shall, for the purpose of computing the interest payable under s. 140A, be deemed to be tax on total income as declared in the return." The Explanation takes it clear that interest is to be computed and calculated if there is any tax due under s. 140A. The interpretation of the Explanation is that interest is to be calculated on the tax which is due on the income returned by the appellant. In the case of the appellant, the income has been returned at 'Nil', therefore, no tax under s. 140A becomes payable, consequently, no interest under s. 234A becomes chargeable. 23.c. So far as interest under s. 234B is concerned, s. 234B relates to interest for default in payment of advance tax. The appellant has throughout been assessed at 'nil' income in the past and in the future. Therefore, whether appellant was liable to pay advance tax under s. 209 is a relevant point, for deciding the charging of interest under s. 234B of the IT Act. 23.d. We are of the opinion that during the year under consideration, the appellant was liable to pay advance tax under s. 208 and therefore, we are of the opinion that s. 234B is also no ..... 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