TMI Blog2010 (9) TMI 902X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on long term capital gains which arose on acquisition of assessee s some lands by the Surat Municipal Corporation (SMC) more so when book value of those lands was negligible (being Rs. 29,700) as compared to total gross assets Rs. 47.5 crores (Rs. 2.79 crores for Nandini Veterinary Hospital and Rs. 44.76 crores for head office). (3)Without prejudice, on the facts and in the circumstances of the case, the departmental authorities erred in holding that the assessee was not entitled to the benefit of exemption under section 11(1A) in respect of the aforesaid long term capital gains. (4)Without prejudice, on the facts and in the circumstances of the case, the quantum of the aforesaid long term capital gains determined by the departmental authorities is erroneous being not in accordance with the letter and spirit of law. (5)The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal. 2. In addition to this, an additional ground has been raised as under :- (1)Without prejudice to the assessee s claim of Exemption under section 11(1A) and in alternate elaborating ground No. 4 ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LTCG is Nil . (3) S.M.C. has released only 80 per cent of the consideration, retaining 20 per cent for the legal compliance and declaration of award under the Land Acquisition Act. (4) Out of the 80 per cent consideration TDS under section 194-I.A- Rs. 2,06,83,577 was deducted and paid by S.M.C. on 31-3-2006. TDS certificate issued by SMC for assessment year 2006-07. However, the trust reserve right to claim it refund in assessment year 2007-08 since the legal compliances as to the Land Acquisition is completed in the year 2006-07 ( i.e., assessment year 2007-08). (5) Even if the transfer is considered to have taken place in assessment year 2006-07, even then 20 per cent of the consideration is not received and hence it cannot be applied. The same may be considered in the next following year as per Explanation 2 ( i ) and 2( a ) of section 11(1) of the Act. (6) In order to avail the Exemption of Long Term Capital Gains......" 4. On the basis of this note Assessing Officer carried out enquiries and found that following lands were compulsorily acquired by Surat Municipal Corporation (SMC) : Land at Vadod Sl. No. Old Survey No. New Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2006. As per assessee net consideration was utilized in acquiring another asset i.e., F.D. in the bank. Thus entire gains was exempt under section 11(1A). The Assessing Officer did not agree with the assessee and denied exemption on the capital gains for the following reasons : "Property in question was not held or used for charitable purposes. According to the Assessing Officer the property should not only be held under the trust but should be held for charitable purposes at the same time. Mere passive possession or ownership of the trust shall not make the property "held for charitable or religious purposes" automatically. Only possession or ownership cannot be held to suffice the condition put forth by words "held under trust wholly for charitable or religious purposes." Thus according to the Assessing Officer if the property is not used for the purpose of trust it will not be entitled to avail the benefit in relation to that property. According to the Assessing Officer there are several evidences to prove that property was never held for charitable purposes. They are as under - (1)The said lands were lying in possession of the trust without any specific purpose. (2)Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The lands so acquired were barren and fallow and were of no use to any one. (2)The brochure issued by the trust and spot enquiries also suggested that lands in question were never used for any purpose and they were just lying barren and fallow. (3)The acquisition was never contested by the assessee. The managing trustee could not rebut the finding and observation of Assessing Officer. Finally the ld. CIT(A) held as under while confirming the order of the Assessing Officer:- "7.8 Summing up, it must be understood and appreciated that a trust is set up for a specific purpose, usually for the benefit of a particular individual or individuals, or the public in general. The trust receives donations or gifts or endowments for carrying out its task and activity for creating the stated benefit and reaching the same to the individual or the public, for whom the trust is set up. Any asset which does not fulfil the stated objectives or purposes of the trust, and does not aid or support the activity that the trust is engaged in for the benefit of the individual or the public, cannot be said to be held under trust. There necessarily has to be a direct link and nexus between the asset r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 74. This difficulty has been accentuated as a result of certain amendments made in the scheme of tax exemption of charitable and religious trusts through the Finance Act, 1970. 75. The question of eliminating the disadvantage 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 ........... 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 trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer ( i.e., full value of the consideration as reduced by the expenditure incurred wholly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd proceed to determine what income is derived from such property. He referred to the following portion from the above judgment as under : "When exemption is claimed under section 11(1) of the Income-tax Act, 1961, a question may arise before the tax authority, whether the property from which income is derived is a property held under trust wholly for charitable or religious purposes. Therefore, the Assessing Officer may call upon the person claiming such exemption to produce evidence in support of his claim that the property in question was held under trust. Such inquiry is not an inquiry for adjudicating upon the title to the property, but only an inquiry aimed at ascertaining whether the exemption claimed under section 11 is warranted. During such inquiry, which is undertaken in the process of making of the assessment order, the nature of evidence adduced or gathered may be in the form of documents of title or grants, entries from the trust register showing whether the trust is registered as a public trust, and as to whether the properties in question are registered as the properties of the trust and other adjudications, having bearing on the title to the property, made by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Instruction No. 883, dated 24-9-1975 for the proposition that where net consideration on transfer of property held under trust is invested in Fixed Deposit for a period of six months or above then it would be regarded as utilization of the net consideration for acquiring another capital asset. Relevant portion of Instruction No. 883, dated 24-9-1975 reads as under : "Section 11(1A) of the Income-tax Act, 1961 - Another capital asset - Scope of the expression, - section 11(1A) of the Income-tax Act, 1961, provides that 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 is utilized for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified therein. 2. The Board had occasion to examine whether investment of the net consideration in fixed deposit with a bank would be regarded as utilization 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 11(1A). Even though lengthy arguments have taken place on both the side. The revenue supported its stand with various evidences to show that land was not at all used for either cultivation or for any charitable work and claim that, it is used for eating grass was not supported by any evidence. Thus according to the Revenue it was a simple unused land and therefore, cannot be said to be wholly used for charitable purposes. The word "wholly" according to the Revenue means that asset of the trust should always be and continued to be utilized for charitable work and it must have evidence to show that at no point of time asset was kept idle or passive. If the asset is held idle or passive and not used for any charitable work it ceases to be the property held under trust and therefore, loses exemption or application of provisions of section 11(1A). On the other hand, ld. AR for the assessee has made strenuous arguments to impress upon us that land was in fact being used by animals/birds, grass was grown, it catered the need of stray animals as well and, therefore it can be said that it was not used for charitable work. However, we are not impressed with the arguments regarding u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in Madhya Pradesh Madhyam v. CIT [2002] 256 ITR 277 held that once an institution is registered as charitable the Assessing Officer cannot go behind registration in assessment proceedings. They are prima facie bound by such a registration. Hon ble Supreme Court in Asstt. CIT v. Surat City Gymkhana [2008] 300 ITR 214 held that once a trust is registered under section 12A it is fait accompli and the Assessing Officer cannot thereafter make further probe into the objects of the trust. The decision of Hon ble Gujarat High Court in Hiralal Bhagwati v. CIT [2000] 246 ITR 188 attained finality on this point that once registration is granted under section 12A then Assessing Officer cannot thereafter make further probe into the objects of the trust. Hon ble Gujarat High Court in Special Civil Application No. 2464 of 2010 in Ahmedabad Urban Development Authority v. Dy. DIT (Exemption) pronounced on 22-2-2010 held that once certificate of registration is granted under section 12A, Assessing Officer cannot take stand that the trust is not fulfilling conditions for applicability of sections 11 and 12. In this regard we refer to paras 9 and 10 from that judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down in r.4 of Part A of the Fourth Schedule to the Act even during the relevant assessment years. In that situation we do not think that it was open to the taxing authorities to question the recognition in any of the relevant years on the ground that the assessee s provident fund did not satisfy any particular condition mentioned in r. 4. It would be conducive to judicial discipline and the maintaining of certainty and uniformity in administering the law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under r.4 of Part A of the Fourth Schedule to the Act and not sit in judgment over it ." 12. Once it is undisputed that trust is existing for charitable purposes and is registered under section 12A then benefit of exemption under sections 11 12 cannot be denied to the assessee trust subject to conditions laid down under section 13. In the present case the assessing authority and ld. CIT(A) have not pointed out any violation of any provision of section 13, therefore, rejecting the exemption on account of provisions of section 13 here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any improvement thereto within the meaning assigned to that expression in sub-clause ( b ) of clause (1) of section 55; ( iii ) Net consideration means the full value of 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. Thus the above provision provides exemption from capital gains on transfer of the capital asset by the trust. In addition to sub-section (1A) which deals with capital asset, sub-section (1) deals with income derived from property held under the trust. The relevant provisions are as under:- "11. Income from property held for charitable or religious purposes - (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- ( 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income] be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause ( i ) during the previous year in which the income is received or during the previous year immediately following as the case may be and in the case referred to in sub-clause ( ii ) during the previous year immediately following the previous year in which the income was derived." A joint reading of sub-sections (1) and (1A) clearly reveals that sub-section (1) is applicable for providing exemption to income derived from property held for charitable or religious purposes subject to sections 60 to 63. Whereas section 11(1A) deals with gain arising from transfer of capital asset held by a charitable trus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the investment does not exceed 5 per cent the exemption is lost only in respect of the income from such investment, the other income continuing to enjoy tax exemption. In order to enable charitable and religious trusts to change their investments suitably, without forfeiting exemption from tax, a specific provision was also made in the Income-tax Act to the effect that the aforesaid provisions would not apply in a case where the investment of the trust funds in the prohibited concerns does not continue after 31-12-1970. In order to avail of the benefit of this relaxation, many charitable or religious trusts divested themselves of investments in prohibited concerns before 1-1-1971. If the provisions of the law were construed strictly, such trusts would have forfeited exemption from tax in respect of their income by way of capital gains arising from the transfer of such investments unless they applied such income to charitable or religious purposes during the relevant accounting year or within three months immediately following. 75. The question of eliminating the disadvantage to charitable or religious trusts in being obliged to spend away the capital gains arising from the transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r religious purposes. Thus where the whole of the net consideration received as a result of the transfer is utilized in acquiring the new capital asset, the whole of the "appropriate fraction " of the capital gain will be regarded as having been applied to charitable or religious purposes, while in a case where only a pan of the net consideration is utilized for acquiring the new capital asset, so much of the "appropriate fraction" of the capital gain as is equal to the amount, if any by which the "appropriate fraction" of the amount utilized for acquiring the new asset exceeds the "appropriate fraction" of the cost of the transferred asset will be regarded as having been applied to such purposes. The "appropriate fraction" in this context means the fraction obtained by dividing the amount of the income which, under the terms of the trust, is applicable to charitable or religious purposes, by the whole of the income derived from property held under trust in part only for such purposes. 78. The insertion of new sub-section (1A) in section 11 takes effect retrospectively from 1-4-1962 the date of commencement of the Income-tax Act, 1961, and therefore, places the concession already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect to this intention sub-section (5) was inserted in section 11 thereby if net consideration is invested in specified categories as enumerated in sub-section (5) then to that extent trust would continue to avail exemption to the capital gains. (5)Where if net consideration on transfer of property in the corpus of the trust is invested in F.D. in a bank for a period of six months or above then it would be regarded as utilization of consideration for acquiring another capital asset within the meaning of section 11(1). The department has not disputed the investment of net consideration on transfer of land to SMC. (6)Investment of sale proceeds of the asset held by the trust in F.D. is permissible as also held by Hon ble Calcutta High Court in Hindusthan Welfare Trust ( supra ) as under: "Investment of sale proceeds of shares in fixed deposits is permissible -Investment in fixed deposit made in previous year relevant to the assessment year 1981-82 out of sale proceeds of shares of companies, amounted to acquiring of another capital assets in terms of section 11(1A). Reinvestment in fixed deposits of any duration is permissible - CBDT Circular dated 24-9-1975, declaring th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 11(5) of the Act and was not entitled to any exemption. The CIT(A) and the Tribunal however, held that the assessee was entitled to exemption. On further appeal: Held , dismissing the appeal, that the Tribunal was right and the assessee was entitled to the exemption. No substantial question of law arose from its order. CIT (Addl.) v. A.L.N. Rao Charitable Trust [1995] 216 ITR 697 (SC)." Even otherwise we are informed that the trust has invested a sum of Rs. 16.63 crores in IDBI Bank on 31-5-2006 and reinvested in F.D. with State Bank of India on 30-8-2006. Therefore, the conditions laid down in section 11(5) are satisfied. However, for the sake of convenience we enumerate various investment portfolios as per section 11(5) so as to highlight that bank deposits are one of such safe avenue for investment for availing exemption from capital. They are as under :- Modes of Investment specified in section 11(5) 1.Investment in Government savings certificates/other securities/certificates issued by Central Government under Small Savings Schemes; 2.Deposit in any account with the Post Office Savings Bank; 3.Deposit in any account with a scheduled/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation of the term "held under trust wholly for charitable or religious purposes". Meaning and explanation of word "held" The term "held" embraces two items, one is actual possession of some subject or property in which legal title is invested, or right to hold or claim such possession. Such possession could be actual or constructive. The term "held" also connotes ownership as well as possession. The word "held" cannot be interpreted only to mean in the sense of possession but would also mean an owner who is not in actual possession. In some cases it has been held that word "held" connotes the existence of a right or a title in the holder. In the present case the land acquired by SMC was under legal ownership of the trust and was possessed by the trustees on behalf of the trust in their fiduciary capacity. The term "held" has also been explained as to mean factual management. Thus when an asset forms part of the property it is held by the trustees for the benefit of the beneficiaries and it is not material as to whether it is held by the trustees in their names or in the name of another. Thus the lands in question were held under the trust and there is no dispute that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for any non-charitable purpose would be sufficient compliance of provisions of section 11(1A). The Circular No. 72 of the Board further supports this proposition. The assigner partly assigns the property for charitable work and partly for non-charitable work or the property after assigning or acquisition is partly assigned to charitable work and partly to non-charitable work then on transfer of such asset, proportionate exemption to the extent asset is assigned for charitable work would be available and no exemption to capital gain in respect of that portion thereof which arises from that part of the property which is assigned for or held for non-charitable purposes would be available. It is not the case that passive holding of the land or non-use of the land would mean that it is assigned or held for non-charitable purposes. Non-use of the land or passiveness of the land is not equivalent to its holding for non-charitable purposes which alone can forfeit the exemption as per sub-section (1A) of section 11 and Circular No. 72, dated 6-1-1972. 15. Thus the argument of the department that land should be put to use for getting exemption from capital gains is not correct. As we hav ..... X X X X Extracts X X X X X X X X Extracts X X X X
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