TMI Blog1993 (7) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances of the case and also in view of the finding by the Tribunal, that 'the Commissioner of Income-tax considered that the order of the Income-tax Officer allowing exemption under section 11 erroneous on the sole ground that by the delayed withdrawal of profits the assessee contravened the provisions of section 13(1)(c)(ii)', the Tribunal is right in not considering the issue under section 13(1)(c)(ii) of the Income-tax Act, 1961 ? At the instance of the assessee (assessment year 1976-77): 3. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee has forfeited the exemption from tax on its entire income on contravention of section 13(1)(c)(ii) and section 13(2)(h) read with section 13(3) for the assessment year 1976-77 ? 4. Whether the Tribunal is right in holding that, in the instant case, due to the contribution of capital by the trust, the funds of the trust was invested in a concern and that such investment exceeded five per cent. of the capital of that concern and that the income arose to the trust or such investment so as to attract section 13(3) and (4) ?" In Income-tax Reference No. 482 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 263 of the Act. The Commissioner took the view that the delayed withdrawal of the share of profits due for the accounting year 1974-75 ending on March 31, 1975, on July 26, and August 29, 1975, amounted to investment of the funds of the trust in the firm, Beena Enterprises, in which persons referred to in sub-section (3) of section 13 had a substantial interest. The trust thus violated the provisions of section 13(1)(c)(ii) of the Act and its income was not entitled to exemption under section 11. The order of assessment was, therefore, set aside and the Income-tax Officer was directed to dispose of the matter afresh. The assessee challenged this order in appeal before the Tribunal. A view similar to that taken by the Commissioner in annexure B was taken by the Income-tax Officer, while completing the assessment for the year 1976-77 and he denied the trust the benefit of the exemption under section 11. But the assessment was set aside in appeal by the Commissioner of Income-tax (Appeals) who upheld the assessee's contention that mere retention of the profits due in Beena Enterprises would not amount to investment. The Revenue went up in appeal to the Income-tax Appellat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rust in question is one wholly for charitable purposes.Section 13 enumerates certain contingencies when section 11 will not apply. We are concerned with sub-clause (ii) of clause (c) of sub-section(1) of the section which provides that nothing contained in section 11 shall operate to exempt the income of a trust for religious or charitable purposes, if any part of the income or any property of the trust is, during the previous year, used or applied directly or indirectly for the benefit of any person referred to in sub-section (3). Sub-section (3) refers to various persons the benefit derived by whom precludes the trust from claiming the benefit of exemption under section 11. There is no dispute that the other two partners of Beena Enterprises are those referred to in sub-section(3). Sub-section (2) of section 13 mentions certain circumstances in which the income or the property of the trust will be deemed to have been used or applied for the benefit of a person referred to in sub-section (3). It contains eight clauses (a) to (h) of which we are concerned with clause (h) only. It provides that the income or the property of a trust shall be deemed to have been used or applied for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich have to be satisfied before the deeming provision in sub-section (2) could be attracted, and the assessee held to have used or applied the income of the trust for the benefit of a person referred to in sub-section (3). The assessee cannot, therefore, be deprived of the exemption under section 11 relying on clause (h) above quoted for the years 1975-76 and 1976-77, merely because the share of profits was withdrawn from the firm only after the end of the previous year. Standing counsel for the Department, however, pleaded that the share of profits due to a partner accrued from day to day, and the assessee-trust should periodically withdraw its share of profits without waiting for the end of the accounting period or for audit or settlement of accounts. This argument need not detain us long because, in our view, the crucial ingredient for clause (h) of sub-section (2) of section 13 to apply, is an investment of the funds of the trust in a concern of the nature mentioned. If mere delay in withdrawal of profits by the trust does not ipso facto constitute "investment" of the funds of the trust, the question of profits accruing de die in diem, stressed by standing counsel loses its re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It would be only reasonable to determine the profit or loss as the case may be at the end of every year, The court then went on to observe (at page 49): "In the case of a partnership, where by a covenant binding between the partners the accounts are to be made at stated intervals, the right of a partner to demand his share of the profits does not arise until the contingency which by operation of law or under a covenant of the partnership deed gives rise to that right has arisen." In Dulichand Laxminarayan v. CIT [1956] 29 ITR 535 (SC), the court held that it cannot be inferred that whenever a partnership receives gross receipts in respect of a business transaction in which is embedded some profit or loss, that profit or loss results immediately on the gross receipts reaching the partnership to the individual partners in their aliquot shares. Normally, for profits to accrue or arise, there should be a right either under the statute or under a contract between the taxpayer and others which entitles the former to make a demand for those profits. It cannot, therefore, be laid down as an absolute proposition that the right of a partner to receive his shape of profits arises from d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds of the trust are or continue to remain, invested in any concern of the nature mentioned therein. So the question is, what is "investment" ? An investment popularly means every application of money which is intended to fetch a return by way of interest, income or profit. This only employed as capital in a business is money invested in business. (Vide Edwards J., in Tax Commissioner v. Australian Mutual Provident Fund Society [1902] 22 NZLR 445, as extracted in Law Lexicon by Venkataramaiya). The High Court of Madras had occasion to consider the meaning of the term "investment" in CIT v. Nachimuthu Industrial Association [1982] 138 ITR 585. The facts of that case are apposite. The assessee, a private limited company Incorporated for promoting charitable objects, was a partner in several firms. The assessee retired from those firms, but the firms did not have adequate cash resources to pay the amounts due to the assessee on the settlement of accounts by way of contribution to capital and share of profits. The amounts due were, therefore, transferred to current accounts in the name of the assessee in the respective firms. The exemption under section 11 having been denied, the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee constituted "investment". The Tribunal held that the Department was not entitled to support the Commissioner's order in revision under section 263, on any other ground, a view for which they drew support from the decision of the Punjab and Haryana High Court in CIT v. Jagadhri Electric Supply and Industrial Co. [1983] 140 ITR 490. That was a case where the order of the Income-tax Officer allowing continuation of the registration of a firm was cancelled by the Commissioner of Income-tax in exercise of his powers under section 263 on the ground that the firm was not entitled even to registration, because the share allocation actually adopted in the books was different from that mentioned in the deed of partnership and that the constitution of the firm had changed and, therefore, the firm could not be granted renewal of registration. The Appellate Tribunal found these premises to be erroneous and allowed the assessee's appeal. But the Tribunal observed that the Income-tax Officer's order was erroneous for another reason, mentioned by it. The question arose whether it was competent for the Tribunal to sustain the order of the Commissioner under section 263 on grounds other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment raised on behalf of the Revenue, that, in appeal, the Tribunal may uphold the order appealed against on grounds other than those taken by the Commissioner in his order, is not tenable. Under section 263 of the Act, it is only the Commissioner who has been authorised to proceed in the matter and, therefore, it is his satisfaction according to which he may pass necessary orders thereunder in accordance with law. If the grounds which were available to him at the time of the passing of the order do not find a mention in his order, appealed against, then it will be deemed that he rejected those grounds for the purpose of any action under section 263(1) of the Act. In this situation, the Tribunal, while hearing an appeal filed by the assessee, cannot substitute the grounds which the Commissioner himself did not think proper to form the basis of his order." We are in agreement with this view. In entertaining an appeal from the Commissioner's order what the Tribunal does is to examine whether the said order is sustainable in law and whether it is within the powers conferred by section 263. Therefore, when the Commissioner has chosen to set aside the order of the Income-tax Officer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kunhali Varma (Kaethikamal Kumari Varma) [1989] 179 ITR 543, to emphasise that a firm is not a legal person, distinct from its partners, but a plurality of persons, and, therefore, there can be no dealings between a partner and the firm as such. The business of the firm is the business of the partners, and its profits their profits. The assessee contends on the strength of these decisions that the contribution of capital to a firm in which it is a partner is not hit by section 13(2)(h). We have already referred to the meaning of the term "investment" as the laying out of money with a view to fetch a return. Contribution of capital to a firm is made ordinarily with the expectation of deriving a profit from the venture. It is not laid out for any other purposes. It cannot, therefore, be termed as anything other than an investment. In fact, in common parlance, the expenditure of money for the purpose of a business is always referred to as investment in the business. We are unable to agree with counsel for the assessee that contribution of share capital to a firm is not an "investment" made by the partner. Before dealing with the other points raised, we shall refer to subsidiary co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, as laid down in certain decisions relied on by either side, will arise only if there is any ambiguity which requires to be resolved. None such exists here. What section 13(1)(c)(ii) does is to fetter the exemption provided by section 11 and to deny it to the assessees who have used or applied their income for the benefit of any person referred to in sub-section (3). Subsection (2) of section 13 creates a fiction as to when the income of the trust can be stated to be used or applied for the benefit of such a person. This fiction has to be given its full effect. Clause (h) itself is clear and specific in its terms and so far as we could see, without ambiguity in it. Therefore, we hold that "any concern" in clause (h) refers also to a concern in which the trust is a partner, provided it is one in which any person referred to in sub-section (3) has a substantial interest and the funds of the trust are, or continue to remain, invested in that concern during any period of the previous year. It may be true as pointed out by counsel for the assessee, that a trust may be prevented from venturing into profitable activities by entering into partnership with persons in whom it has confi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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