TMI Blog2012 (11) TMI 346X X X X Extracts X X X X X X X X Extracts X X X X ..... estion of application for accumulation of income for being spent for charitable purpose in future because such application is already deemed to have been made in the previous year itself. Admittedly, even as per the order of assessment there was application for charitable purpose, even after disallowance of depreciation made by the AO, of a sum of Rs.1,60,23458 over and above the receipts of the Assessee during the previous year. The capital gain considered as not utilized for charitable purposes u/s.11(1A) is only a sum of Rs.1,21,61,909.33 Ps. The surplus utilization of Rs.1,60,23,458 should be sufficient to set off the capital gain not utilized for charitable purpose u/s.11(1A). Thus the net deficit in this AY to be carried forward for set off in the later years would be Rs.1,60,23,458 - Rs.1,21,61,909.33 Ps. Viz., Rs.38,61,909.67 Ps. Thus it can be fairly concluded that though the order of the AO was erroneous, the same was not prejudicial to the interest of the revenue as no part of the capital gain became taxable because of loss of exemption u/s.11(1A). Since the order sought to revised u/s.263 was erroneous but not prejudicial to the interest of the revenue, jurisdiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital asset and thus, declared a sum of Rs.3,41,169/- being taxable long term capital gain. The assessee has claimed exemption u/s 11(1A) of the Income-tax Act for investing the proceeds in the capital asset to be held as corpus of the trust. For claiming exemption u/s 11(1A) of the Act, the whole of net consideration has to be invested in capital assets whereas the assessee has invested part of the sale proceeds i.e. Rs. 2,78,38,080/- and thus not entitled for exemption u/s 11(1A) of the Income-tax Act, 1961 for the entire capital gains. So, the capital gains of Rs.1,03,53,927/- (Rs.1,48,77,358 x Rs.2,78,38,080/ Rs.4,00,00,000) only is exempt and the balance of Rs.45,23,430/- is taxable as worked out under. 4. The DIT(E) in exercise of powers u/s 263 of the IT Act, 1961 was of the view that the aforesaid computation of capital gains done by the AO in the assessment proceedings in the order passed u/s 147 of the Act dated 30- 12-2008 was erroneous and prejudicial to the interest of revenue. Accordingly, the DIT(E) issued a show cause notice dated 21-02-2011 proposing to recompute the capital gains. According to the DIT(E) when a charitable trust derives capital gain on sale of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.2,51,22,642 3 Long term capital gain Rs.1,48,77,358 4 Cost of new asset Rs.2,78,38,080 5 Exemption of capital gain due to investment in new asset Rs.1,03,53,927 6 Taxable capital gain Rs.45,23,430 From the above computation, it is seen that the AO has determined the capital gain by considering indexed cost of acquisition amounting to Rs.2,51,22,641/- investment in capital assets from 2001-2002, 2002-03, 2003-04 2005-06 amounting to Rs.2,78,38,080/- and exemption of capital gains due to investment in new assets of Rs.1,03,53,927/-. 5(a), Section 11 of the Act, grants exemption in respect of income derived from properties held under trust for charitable or religious purposes, subject to the conditions set out therein. One of the condition is that the income is applied for charitable or religious purposes. Income derived from sale of capital assets is also income in the hands of charitable institutions falling under section 11 of the Act. With a view to enable the trusts to get the benefit of exemption in respect of capital gains, section 11(1A) was inserted by the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n as per return of income Rs.1,33,01,892 3 Amount utilized for acquisition of new capital asset during the year under consideration Rs. 67,26,785 4 Capital gain exempt u/s11(1A)(a)(ii) (Amount utilized for acquisition of new capital asset does not exceed cost of transferred asset) Nil 5 Capital gain 1(-)2(-) 4 Rs.2,66,98,108 In the circumstances, I hold that the order of the AO is erroneous and prejudicial to the interest of the revenue. Therefore, the assessment order passed u/s 143(3) r.w.s.147 of the Income-tax Act, 1961 on 30-12-2008 is set aside with a direction to the AO to re-compute the capital gains after affording necessary opportunity of being heard to the assessee. 7. Aggrieved by the order of the DIT(E), the assessee has preferred the present appeal before the Tribunal. 8. The learned counsel for the Assessee submitted that jurisdiction u/s.263 of the Act can be invoked only when the order which is sought to be revised in proceedings u/s.263 of the Act is (i) erroneous and (ii) prejudicial to the interest of the revenue. It was submitted that the existence of both the aforesaid condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible view as the same was in consonance with the view expressed by the Tribunal in the cases referred to above. The CIT in exercise of powers u/s.263 of the Act cannot exercise powers u/s.263 of the Act just because according him another view was possible on the issue. 12. The learned DR on the above submission of the learned counsel for the Assessee submitted that in the case of a charitable trust when capital asset are transferred by a charitable trust resulting in capital gain the provisions of Sec.11(1A) alone will be applicable. Accordingly the net consideration received on transfer has to be invested in another capital asset to consider the same as application of income u/s.11 (1A) of the Act. 13. We have considered the rival submissions. For a proper appreciation of the rival contentions, the provisions of Sec.11(1A) of the Act and the reasons why those provisions were introduced need to be first set out. They are as follows: Income from property held for charitable or religious purposes. 11. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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. 14. The CIT has proceeded to apply the provisions of Sec.11(1A)(a)(ii) of the Act. Thus it is clear that the capital asset is property held under trust wholly for charitable or religious purposes. Sec.11(1A)(b) applies only when the property held under trust in part only for such purposes, is transferred. It is in the light of the provisions of Sec.11(1A)(a) that the present case has to be decided. The above provisions of Sec.11(1A) were introduced by the Finance (No.2) Act, 1971 w.r.e.f. 1-4-1962. The CBDT in Circular No.72 dated 6.1.1972 has explained the purpose behind introduction of the above provisions (in so far as it relates to Sec.11(1A)(a) of the Act which is applicable in the present case) as follows: Capital gains derived by Charitable and religious trusts: 73. Under section 11, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of their income by way of capital gains arising from the transfer of such investments unless they applied such incomes 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 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 to the effect that where a charitable or religious trust transferred a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilised the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital gains so utilised should be regarded as having been applied to the charitable or religious purposes of the trust. 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 charitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer . So also Sec.11(1A)(a) (ii) of the Act which uses the expression so much of such capital gain . The expression capital gain or the mode of computation of capital gain has not been defined for the purpose of Sec.11(1A) of the Act and therefore the normal expression capital gain and the computation of such capital gain as laid down in the provisions of Sec.45 to 55A of the Act will apply. For determining the quantum of capital gain which will be deemed to be application of income for charitable purpose and become eligible to get exemption u/s.11 (1) of the Act, the provisions of Sec.11(1A) of the Act have to be applied. 16.1 In the light of the legal position as explained above let us see as to whether the Assessee can claim the benefit of provisions of Sec.11(1A)(a) of the Act and to what extent. The provisions applicable in the present case was Sec.11(1A)(a)(ii) of the Act because the entire net consideration was not utilized in acquiring another capital asset to be held under trust wholly for charitable or religious purposes. The net sale consideration received on tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal gain utilized in acquisition of new assets viz., Rs.2,78, 38,080 and the indexed cost of acquisition viz., Rs.2,51,22,641/- viz., Rs.27,15,449/- should be considered as application of capital gain for charitable purpose which would be entitled to exemption income u/s.11(1) of the Act. The remaining sum of Rs.1,21,61,909.33 Ps. (Rs.1,48.77.358.33 Ps. being capital gain as per normal provisions of the Act and Rs.27,15,449 which is eligible for exemption as application of capital gain for charitable purpose u/s.11(1A)(a)(ii) of the Act), should be considered as not applied for charitable purposes and not eligible for deduction u/s.11(1) of the Act. 18. In the light of the above discussion, we are of the view that the order of the AO was erroneous. The argument of the learned counsel for the Assessee that two views were possible on the interpretation of the provisions of Sec.11(1A) of the Act and that the AO has adopted a possible view and therefore in exercise of powers u/s.263 of the Act, the CIT cannot substitute his views with that of the AO, cannot be accepted. The rationale behind the provisions of Sec.11(1A) of the Act as explained in the CBDT Circular referred to earlier ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gain for charitable purposes and therefore capital gain cannot be brought to tax. In this regard, reliance was placed on the decision of the Hon ble Calcutta High Court in the case of CIT Vs. East India Charitable Trust 206 ITR 152 (Cal). The Assessee in the case before the Hon ble Calcutta High Court in the aforesaid decision was a trust. The assessment year involved was 1982- 83 for which the previous year ended on 31st Dec., 1981. During the relevant previous year, the assessee-trust sold shares of various companies which formed the corpus of the trust fund for a net consideration of Rs. 37,78,640. On this transaction, the capital gains shown amounted to Rs. 23,79,538. The assessee claimed that the net consideration of the sale was utilised for acquiring new capital assets as under : Date of utilisation in 1981 Amount Rs. Particulars 29-12-1981 12,50,000 Fixed deposit with Hindusthan Petroleum Corporation Ltd. 29-12-1981 7,50,000 Fixed deposit with Bharat Petroleum Corporation Ltd. 29-12-1981 5,00,000 Fixed deposit with Bharat Heavy Electricals Ltd. 30-12-1981 5,88,149 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1) 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 s. 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-cl. (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-cl. (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 recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of assessment there was application for charitable purpose, even after disallowance of depreciation made by the AO, of a sum of Rs.1,60,23458 over and above the receipts of the Assessee during the previous year. The capital gain considered as not utilized for charitable purposes u/s.11(1A) of the Act is only a sum of Rs.1,21,61,909.33 Ps. The surplus utilization of Rs.1,60,23,458 should be sufficient to set off the capital gain not utilized for charitable purpose u/s.11(1A) of the Act. Thus the net deficit in this AY to be carried forward for set off in the later years would be Rs.1,60,23,458 - Rs.1,21,61,909.33 Ps. Viz., Rs.38,61,909.67 Ps. 23. From the aforesaid discussion it is clear that though the order of the AO was erroneous, the same was not prejudicial to the interest of the revenue as no part of the capital gain became taxable because of loss of exemption u/s.11(1A) of the Act. Since the order sought to be revised u/s.263 of the Act was erroneous but not prejudicial to the interest of the revenue, jurisdiction u/s.263 could not have been invoked by the CIT. We hold accordingly and quash the order u/s.263 of the Act. The appeal of the Assessee is allowed with t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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