ADIT (E) RG I, MUMBAI V. MEHTA CHARITY TRUST, MUMBAI

ITA 1069/MUM/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3734 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-03-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 08-01-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 07-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M SALMAN KHAN
• Keywords: Capital asset; Depreciation; Charitable institution; Opportunity of being heard; Cost of acquisition; Benefit of exemption
• Section: 143(3); 12A; 147; 148; 263; 11

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI , . . , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI B.R. BASKARAN, ACCOUNTANT MEMBER ITA NO.1069/MUM/2013 ASSESSMENT YEAR: 2004-05 THE DDIT(E)I(1), R. NO.504, PIRAMAL CHAMBERS, 5THFLOOR, PAREL, MUMBAI-400012 / VS. MEHTA CHARITY TRUST, TOP FLOOR, MEHTA MAHAL, 15 TH MATHEW ROAD, OPERA HOUSE, MUMBAI-400004 ( ' / REVENUE) ( #$% & /ASSESSEE) P.A. NO . AAATM5060A ' / REVENUE BY SHRI M. SALMAN KHAN & SHRI AKHILENDRA YADAV - DR #$% & / ASSESSEE BY SHRI VIJAY KOTHARI ' '( ) & * / DATE OF HEARING : 11/03/2016 ) & * / DATE OF ORDER: 11/03/2016 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DAT ED 23/11/2012 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI, HOLDING THAT THE APPLICATION OF RS.1,69,65,500/-, B EING MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 2 CAPITAL GAIN ARISING FROM SALE OF BUILDING, WAS ELI GIBLE FOR EXEMPTION U/S 11(1) OF THE INCOME TAX ACT, WITHOUT APPRECIATING THAT SAID SUM WAS UTILIZED OTHERWISE T HEN FOR ACQUIRING CAPITAL ASSETS IN CONTRAVENTION OF SECTIO N 11(1A), THUS, THE ASSESSEE WAS NOT ENTITLE TO EXEMPTION OF THE SAID AMOUNT. 2. DURING HEARING OF THIS APPEAL, THE LD. DR, SHRI AKHILENDRA YADAV, ADVANCED HIS ARGUMENTS, WHICH ARE IDENTICAL TO THE GROUND RAISED. ON THE OTHER HAND, SHRI VIJAY KOTHARI, LD. COUNSEL FOR THE ASSESSEE, DEFENDED THE CONCLUSION DRAWN IN THE IMPUGNED ORDER. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. 2.2. SO FAR AS, THE MERITS OF THE APPEAL IS CONCER NED, THE LD. COUNSEL RELIED UPON THE DECISION OF THE TRIBUNA L IN AL AMEEN EDUCATION SOCIETY VS DIT(EXEM.)139 ITD 245 (BANGALORE) BY CONTENDED THAT THE ASSESSEE HAD ALRE ADY APPLIED THE INCOME FOR THE PURPOSE OF EDUCATIONAL A ND MEDICAL ACTIVITIES. WE HAVE CONSIDERED THE RIVAL SU BMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BEFOR E COMING TO ANY CONCLUSION, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION OF THE AFORESAID ORDER OF THE TRIBUNAL (ITA NO.575/BAGALORE/2011); 139 ITD 245 FOR READY REFERE NCE:- 2. THE ASSESSEE IS A CHARITABLE TRUST CARRYING ON T HE CHARITABLE ACTIVITY OF PROVIDING EDUCATION. FOR ASS ESSMENT MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 3 YEAR 2006-07, THE ASSESSEE FILED RETURN OF INCOME D ECLARING A NET DEFICIT OF RS.3,61,77,979/-. DURING THE PREVI OUS YEAR, THE ASSESSEE SOLD LAND BELONGING TO IT. IN THE RETU RN THE ASSESSEE HAD GIVEN THE COMPUTATION OF CAPITAL GAINS ON SALE OF LAND AS FOLLOWS: CAPITAL GAINS SALE PROCEEDS RS.4,00,00,000 LESS: INDEXED COST OF ACQUISITION RS.2,51,22,642 -------------------- LONG TERM CAPITAL GAIN RS.1,48,77,358.33 LESS: EXEMPTION U/S.11(1A) FOR INVESTING THE PROCEE DS IN CAPITAL ASSET TO BE HELD AS CORPUS OF TRUST F.Y AMOUNT RECEIVED INVESTMENT IN CAPITAL ASSET 2001-02 RS.90,00,000 RS.1,05,50,322 2002-03 RS.1,20,00,000 RS.90,55,186 2003-04 RS.1,22,73,125 RS.15,05,697 2005-06 RS. 67,26,875 RS.67,26,875 TOTAL RS.4,00,00,000 RS.2,78,38,080 AMOUNT DEEMED TO HAVE BEEN UTILIZED FOR CHARITABLE PURPOSE (COST OF NEW ASSET COST OF ORIGINAL ASSET) (27838080 13301891) = RS.1,45,36,189 TAXABLE LONG TERM CAPITAL GAINS RS.3,41,169. THE ASSESSEE DECLARED TAXABLE LONG TERM CAPITAL GAINS ON SALE OF ONE OF ITS PROPERTY FOR RS.3,41,16 9/-. THE RETURN WAS PROCESSED U/S 143(1) OF THE INCOME TAX ACT, 1961 (THE ACT). MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 4 3. LATER ON THE AO ISSUED A NOTICE U/S 148 OF THE A CT ON 30-11-2007 FOR THE REASON THAT THE NET CONSIDERATION RECEIVED ON SALE OF THE PROPERTY HAD NOT BEEN INVESTED IN CAPITAL ASSETS BY THE ASSESSEE AND THEREFORE, COMPUTATION OF CAPITAL GAIN BY THE ASSES SEE HAD TO BE DETERMINED AFRESH. IN THE RE-ASSESSMENT PROCEEDINGS, THE AO WORKED OUT THE LTCG AS FOLLOWS; THE ASSESSEE HAS SOLD LAND FOR RS.4,00,00,000/-AN D HAS INVESTED RS.2,78,38,080/- IN ACQUIRING NEW CAPITAL ASSET AND THUS, DECLARED A SUM OF RS.3,41,169/- BEING TAXABLE LONG TERM CAPITAL GAIN. THE ASSESSEE HAS CLAIMED EXEMPTION U/ S11(1A) OF THE INCOME-TAX ACT FOR INVESTING THE PROCEEDS IN TH E CAPITAL ASSET TO BE HELD AS CORPUS OF THE TRUST. FOR CLAIMI NG EXEMPTION U/S 11(1A) OF THE ACT, THE WHOLE OF NET CONSIDERATI ON 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 IN TEREST OF REVENUE. ACCORDINGLY, THE DIT(E) ISSUED A SHOW C AUSE NOTICE DATED 21-02-2011 PROPOSING TO RECOMPUTE THE CAPITAL GAINS. ACCORDING TO THE DIT(E) WHEN A CHARI TABLE TRUST DERIVES CAPITAL GAIN ON SALE OF ITS CAPITAL A SSET THEN MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 5 THE PROVISIONS OF SEC.11(1A) WILL BE APPLICABLE. FR OM THE PERUSAL OF THE CAPITAL GAINS WHICH WE HAVE SET OUT ABOVE, IT CAN BE SEEN THAT THE TRANSFER IS CLAIMED BY THE ASS ESSEE TO HAVE TAKEN PLACE DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS BEEN RECE IVING ADVANCE FOR THE SALE OF THE PROPERTY RIGHT FROM THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2002-03. EVEN PRIO R TO THE ASSESSMENT YEAR 2006-07, THE ASSESSEE HAD INVES TED SALE CONSIDERATION RECEIVED ON TRANSFER OF THE CAPI TAL ASSET IN NEW ASSETS. ACCORDING TO THE DIT(E), THE INVESTM ENT IN PURCHASE OF CAPITAL ASSET CLAIMED BY THE ASSESSEE F OR THE ASSESSMENT YEARS 2002-03 TO 2004-05 OUGHT NOT TO HA VE BEEN CONSIDERED AS INVESTMENT IN NEW ASSET BY THE A O, AS THESE INVESTMENTS HAD BEEN MADE IN THE PREVIOUS YEA R PRIOR TO PREVIOUS YEAR IN WHICH THE TRANSFER OF THE CAPITAL ASSET TOOK PLACE. THE ACTION OF THE AO IN ACCEPTING THE CLAIM OF THE ASSESSEE IN THIS REGARD WAS ERRONEOUS AND HAS RESULTED IN PREJUDICE TO THE INTEREST OF THE REVENU E. THIS WAS THE BASIS ON WHICH THE DIT(E) ISSUED A SHOW CAU SE NOTICE TO THE ASSESSEE. 5. IN REPLY TO THE AFORESAID SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED THAT IT HAD ENTERED INTO AN AGREEMENT FOR THE SALE OF THE PROPERTY AS EARLY AS 12-07-2001 AND A TRANSF ER HAD TAKEN PLACE DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2002-03 AND THEREFORE, THE CAPITAL GAIN CANNOT BE BROUGHT TO TAX IN ASSESSMENT YEAR 2002-03 , THOUGH WRONGLY DECLARED BY HE ASSESSEE IN THE RETUR N OF INCOME FOR THE ASSESSMENT YEAR 2006-07. THE ASSESEE E MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 6 FURTHER SUBMITTED THAT THE COMPUTATION OF LTCG HAS TO BE DONE IN ACCORDANCE WITH THE PROVISIONS OF SEC.45 TO 55A OF THE ACT AND THE ASSESSEE SHOULD BE ENTITLED TO THE BENEFIT OF INDEXATION OF THE COST OF ACQUISITION OF THE CAPITA L ASSET. THE ASSESSEE ALSO SUBMITTED THAT THE ORDER OF THE A O ACCEPTING THE CLAIM OF THE ASSESSEE CANNOT BE SAID TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENU E. 6. THE DIT(E) HOWEVER, DID NOT ACCEPT THE PLEA OF T HE ASSESSEE AND HE HELD AS FOLLOWS; IN THE RETURN OF INCOME FILED FOR THE ASSESSMENT Y EAR 2006-07, THE ASSESSEE HAS DETERMINED THE CAPITAL G AINS AT RS.3,41,169/-. THE COMPUTATION OF CAPITAL GAIN AS P ER THE ASSESSMENT ORDER IN QUESTION IS AS UNDER; XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 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/- INVESTMEN T IN CAPITAL ASSETS FROM 2001-2002, 2002-03, 2003-04 & 2005-06 A MOUNTING 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 RE SPECT OF INCOME DERIVED FROM PROPERTIES HELD UNDER TRUST FOR CHARITABLE OR RELIGIOUS PURPOSES, SUBJECT TO THE CONDITIONS SE T 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 INSTITUTI ONS FALLING UNDER SECTION 11 OF THE ACT. WITH A VIEW TO ENABLE THE TRUSTS TO MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 7 GET THE BENEFIT OF EXEMPTION IN RESPECT OF CAPITAL GAINS, SECTION 11(1A) WAS INSERTED BY THE FINANCE (NO.2) ACT, 1971 . 5(B) IT IS CLEAR FROM SUB-SECTION (1A) OF SECTION 11 OF THE ACT THAT IN A CASE WHERE THE ASSESSEE DERIVES ANY CAPIT AL GAIN FROM TRANSFER OF A CAPITAL ASSET HELD BY IT UNDER TRUST FOR CHARITABLE OR RELIGIOUS PURPOSES, THE CAPITAL GAIN ARISING FROM T HE TRANSFER OF SUCH CAPITAL ASSET SHALL BE DEEMED TO HAVE BEEN APP LIED FOR CHARITABLE OR RELIGIOUS PURPOSES TO THE EXTENT SPEC IFIED THEREIN, IF THE WHOLE OR ANY PART OF THE SALE CONSIDERATION IS UTILIZED FOR ACQUIRING ANOTHER CAPITAL ASSET TO BE SO HELD. AS P ER THE PROVISIONS OF SECTION 11(1A) THE INVESTMENT IN NEW CAPITAL ASSETS FOR COMPUTING THE CAPITAL GAINS HAS TO BE MADE DURI NG THE YEAR IN WHICH CAPITAL GAIN IS TAXABLE. THE INVESTMENT IN NEW ASSETS MADE IN EARLIER YEARS CANNOT BE CONSIDERED DURING T HIS YEAR IN WHICH CAPITAL GAIN IS OFFERED TO TAX DURING THE YEA R, THE ASSESSEE HAS UTILIZED ONLY RS.67,26,875/- OF THE SALES CONSI DERATION FOR ACQUIRING NEW CAPITAL ASSET WHICH IS TO BE CONSIDER ED AS PER THE PROVISIONS OF SEC.11(1A)(A)(II). 5(C) FURTHER, THE AO HAS DETERMINED THE CAPITAL GAI N BY CONSIDERING INDEXED COST OF ACQUISITION AMOUNTING T O RS.2,51,22,641/- FOR WHICH THE ASSESSEE IS NOT ELIG IBLE SINCE THE INCOME OF CHARITABLE INSTITUTION IS TO BE COMPUTED ON COMMERCIAL PRINCIPLES AND SEC.11(1A) ITSELF REFERS TO NET CONSIDERATION. THEREFORE, WHAT IS REQUIRED TO BE R EINVESTED IS THE ENTIRE NET CONSIDERATION, AFTER DEDUCTION RELAT ING TO TRANSFER. IT IS SUCH AMOUNT, WHICH IS REQUIRED TO BE INVESTED . THE QUESTION OF CALCULATION OF CAPITAL GAINS WITH INDEXED COST A ND OTHER REQUIREMENTS OF SEC.48 COULD HAVE NO APPLICATION FO R THIS PURPOSE IN THE CASE OF CHARITABLE ENTITIES. 5(D) WITH REGARD TO ASSESSEES CONTENTION THAT THE TRANSFER OF THE ASSET IN QUESTION TOOK PLACE IN THE FY: 2001-02 AND NO CAPITAL MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 8 GAIN IS TAXABLE IN THE CURRENT YEAR IS NOT ACCEPTAB LE, AS THE ASSESSEE ITSELF HAS CHOSEN TO OFFER THE CAPITAL GAI N TO TAX IN THE CURRENT YEAR. RAISING THE ISSUE AT THIS STAGE IS NO T WARRANTED. 5(E) FURTHER, HE EXEMPTION U/S11(1A)(A)(II) IS NOT ALLOWABLE AS THE INVESTMENT OF RS.67,26,875/- IN NEW CAPITAL ASS ET DURING THE YEAR DOES NOT EXCEED THE COST OF ACQUISITION OF RS. 1,33,01,892/- 5(F) ACCORDING TO THE PROVISIONS OF SECTION 11(1A), THE COMPUTATION OF CAPITAL GAIN WOULD BE AS UNDER; XXXXXXXXXXXXXXXXXXXXXXX IN THE CIRCUMSTANCES, I HOLD THAT THE ORDER OF THE AO IS ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE REVENUE. THEREFO RE, 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 ASSES SEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT 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 CONDITIONS ARE NECESSARY FOR EXERCISI NG JURISDICTION U/S.263 OF THE ACT. IT WAS FURTHER ELA BORATED THAT THE HONBLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. VS. CIT 243 ITR 83 (SC) ON THE SCOPE OF POWERS U/S.263 OF THE ACT HAS HELD THAT WHERE TWO V IEWS ARE MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 9 POSSIBLE ON AN ISSUE AND THE AO HAS TAKEN ONE OF SU CH POSSIBLE VIEW, THE ORDER OF THE AO CANNOT BE SAID T O BE ERRONEOUS. IT WAS FURTHER SUBMITTED THAT THE CIT IN EXERCISE OF POWERS U/S.263 OF THE ACT CANNOT SEEK TO SUBSTIT UTE HIS/HER VIEW WITH THAT OF THE AO. IN THE LIGHT OF THE ABOVE LEGAL POSITION IT WAS SUBMITTED THAT THE VIEW OF THE CIT IN THE ORDER U/S.263 OF THE ACT WAS: (I) THAT WHEN CAPITAL ASSETS ARE TRANSFERRED BY A CHARITABLE TRUST, THE CAPITAL GAIN ON SUCH SALE HAS TO BE DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SEC.11(1A) OF THE ACT AND NO T UNDER THE NORMAL PROVISIONS OF THE ACT VIZ., SECTION 45 TO 55 A OF THE ACT. (II) THE INVESTMENT OF THE CAPITAL GAIN IN ACQUIRIN G ANOTHER CAPITAL ASSET BY THE ASSESSEE WAS IN THE EARLIER YEARS AND SUCH INVESTMENT CANNOT BE SAID TO BE APPLICATION OF INCOME FOR CHAR ITABLE TRUSTS. IT WAS ONLY INVESTMENTS MADE DURING PERIOD AFTER TRANS FER OF THE CAPITAL ASSET THAT CAN BE CONSIDERED AS APPLICATION OF INCOME FOR THE PURPOSE OF SEC.11(1A) OF THE ACT. 9. ON POINT (I) ABOVE, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE AMRITSAR BENCH OF ITA T IN THE CASE OF AKHARA GHAMANDA DASS VS. ACIT (2001) 114 TAXMAN 27 (ASR.)(MAG.) 68 TTJ (ASR.) 244, WHEREIN T HE AMRITSAR BENCH HELD THAT EVEN IN THE CASE OF TRUSTS CAPITAL GAIN HAS TO BE TAXED AND CALCULATED IN ACCORDANCE W ITH THE PROVISIONS OF SEC.45 TO 55A OF THE ACT AND THAT ALL EXEMPTIONS, EXCEPTIONS, DEDUCTIONS AND BENEFITS SPE CIFIED IN THOSE PROVISIONS WILL BE AVAILABLE EVEN TO A CHA RITABLE TRUST. MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 10 10. ON POINT (II) ABOVE, THE LEARNED COUNSEL FOR TH E ASSESSEE RELIED ON THE DECISION OF THE MUMBAI BENCH OF ITAT IN THE CASE OF TRUSTEES OF SHRI RAMANAGAR TRUS T VS. THIRD ITO 13 ITD 426 (MUM) WHEREIN IT WAS HELD THAT ADVANCES RECEIVED BY A TRUST IN THE PERIOD EARLIER TO THE PREVIOUS YEAR IN WHICH TRANSFER OF A CAPITAL ASSET BY A TRUST TAKES PLACE, IF INVESTED IN PURCHASE OF CAPITAL ASS ET SHOULD BE CONSIDERED AS APPLICATION OF CAPITAL GAIN FOR CH ARITABLE PURPOSE. 11. THUS IT WAS ARGUED THAT THE VIEW TAKEN BY THE A O WHILE ACCEPTING THE CLAIM OF THE ASSESSEE IN THE ORDER OF ASSESSMENT WAS A 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 POW ERS U/S.263 OF THE ACT CANNOT EXERCISE POWERS U/S.263 O F THE ACT JUST BECAUSE ACCORDING HIM ANOTHER VIEW WAS POS SIBLE ON THE ISSUE. 12. THE LEARNED DR ON THE ABOVE SUBMISSION OF THE L EARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE CASE OF A CHARITABLE TRUST WHEN CAPITALASSET ARE TRANSFERRED BY A CHARITABLE TRUST RESULTING IN CAPITAL GAIN THE PROV ISIONS OF SEC.11(1A) ALONE WILL BE APPLICABLE. ACCORDINGLY TH E NET CONSIDERATION RECEIVED ON TRANSFER HAS TO BE INVEST ED IN ANOTHER CAPITAL ASSET TO CONSIDER THE SAME AS APPLI CATION 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 P ROVISIONS MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 11 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 RELIGIO US PURPOSES. 11. (1) SUBJECT TO THE PROVISIONS OF SECT IONS 60 TO 63, THE FOLLOWING INCOME SHALL NOT BE INCLUDED IN T HE TOTAL INCOME OF THE PREVIOUS YEAR OF THE PERSON IN RECEIP T OF THE INCOME .. (1A) FOR THE PURPOSES OF SUB-SECTION (1), (A) WHER E A CAPITAL ASSET, BEING PROPERTY HELD UNDER TRUST WHOL LY FOR CHARITABLE OR RELIGIOUS PURPOSES, IS TRANSFERRED AN D THE WHOLE OR ANY PART OF THE NET CONSIDERATION IS UTILI SED FOR ACQUIRING ANOTHER CAPITAL ASSET TO BE SO HELD, THEN , THE CAPITAL GAIN ARISING FROM THE TRANSFER SHALL BE DEE MED TO HAVE BEEN APPLIED TO CHARITABLE OR RELIGIOUS PURPOS ES TO THE EXTENT SPECIFIED HEREUNDER, NAMELY: (I) WHERE THE WHOLE OF THE NET CONSIDERATION IS UTI LISED IN ACQUIRING THE NEW CAPITAL ASSET, THE WHOLE OF SUCH CAPITAL GAIN; (II) WHERE ONLY A PART OF THE NET CONSIDERATION IS UTILISED FOR ACQUIRING THE NEW CAPITAL ASSET, SO MUCH OF SUC H CAPITAL GAIN AS IS EQUAL TO THE AMOUNT, IF ANY, BY WHICH THE AMOUNT SO UTILISED EXCEEDS THE COST OF THE TRANSFER RED ASSET; MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 12 (B) WHERE A CAPITAL ASSET, BEING PROPERTY HELD UNDE R TRUST IN PART ONLY FOR SUCH PURPOSES, IS TRANSFERRED AND THE WHOLE OR ANY PART OF THE NET CONSIDERATION IS UTILI SED FOR ACQUIRING ANOTHER CAPITAL ASSET TO BE SO HELD, THEN , THE APPROPRIATE FRACTION OF THE CAPITAL GAIN ARISING FR OM THE TRANSFER SHALL BE DEEMED TO HAVE BEEN APPLIED TO CHARITABLE OR RELIGIOUS PURPOSES TO THE EXTENT SPEC IFIED HEREUNDER, NAMELY: (I) WHERE THE WHOLE OF THE NET CONSIDERATION IS UTI LISED IN ACQUIRING THE NEW CAPITAL ASSET, THE WHOLE OF THE APPROPRIATE FRACTION OF SUCH CAPITAL GAIN; (II) IN ANY OTHER CASE, SO MUCH OF THE APPROPRIATE FRACTION OF THE CA PITAL GAIN AS IS EQUAL TO THE AMOUNT, IF ANY, BY WHICH TH E APPROPRIATE FRACTION OF THE AMOUNT UTILISED FOR ACQ UIRING THE NEW ASSET EXCEEDS THE APPROPRIATE FRACTION OF T HE COST OF THE TRANSFERRED ASSET. EXPLANATION.IN THIS SUB-SECTION, (I) 'APPROPRIATE FRACTION' MEANS THE FRACTION WHICH REPRESENTS THE EXTENT TO WHICH THE INCOME DERIVED F ROM THE CAPITAL ASSET TRANSFERRED WAS IMMEDIATELY BEFORE SU CH TRANSFER APPLICABLE TO CHARITABLE OR RELIGIOUS PURP OSES; (II) 'COST OF THE TRANSFERRED ASSET' MEANS THE AGGR EGATE OF THE COST OF ACQUISITION (AS ASCERTAINED FOR THE PUR POSES OF SECTIONS 48 AND 49) OF THE CAPITAL ASSET WHICH IS T HE SUBJECT OF THE TRANSFER AND THE COST OF ANY IMPROVEMENT THE RETO WITHIN THE MEANING ASSIGNED TO THAT EXPRESSION IN S UB- MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 13 CLAUSE (B) OF CLAUSE (1) OF SECTION 55; (III) 'NET CONSIDERATION' MEANS THE FULL VALUE OF THE CONSIDER ATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET AS REDUCED BY ANY EXPENDITURE INCURRE D WHOLLY AND EXCLUSIVELY IN CONNECTION WITH SUCH TRAN SFER. 14. THE CIT HAS PROCEEDED TO APPLY THE PROVISIONS O F SEC.11(1A)(A)(II) OF THE ACT. THUS IT IS CLEAR THAT THE CAPITAL ASSET IS PROPERTY HELD UNDER TRUST WHOLLY FOR CHARI TABLE OR RELIGIOUS PURPOSES. SEC.11(1A)(B) APPLIES ONLY WHEN THE PROPERTY HELD UNDER TRUST IN PART ONLY FOR SUCH PUR POSES, IS TRANSFERRED. IT IS IN THE LIGHT OF THE PROVISIONS O F SEC.11(1A)(A) THAT THE PRESENT CASE HAS TO BE DECID ED. THE ABOVE PROVISIONS OF SEC.11(1A) WERE INTRODUCED BY T HE FINANCE (NO.2) ACT, 1971 W.R.E.F. 1-4-1962. THE CBD T IN CIRCULAR NO.72 DATED 6.1.1972 HAS EXPLAINED THE PUR POSE BEHIND INTRODUCTION OF THE ABOVE PROVISIONS (IN SO FAR AS IT RELATES TO SEC.11(1A)(A) OF THE ACT WHICH IS APPLIC ABLE 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 ACTUAL LY APPLIED TO SUCH PURPOSES DURING THE PREVIOUS YEAR I TSELF OR WITHIN THREE MONTHS NEXT FOLLOWING. AS INCOME INC LUDES CAPITAL GAINS, A CHARITABLE OR RELIGIOUS TRUST WO ULD FORFEIT EXEMPTION FROM INCOME-TAX IN RESPECT OF ITS INCOME BY WAY OF CAPITAL GAINS UNLESS SUCH INCOME IS ALSO APPLIED MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 14 TO THE PURPOSES OF THE TRUST DURING THE STIPULATED PERIOD. IN SOME CASES, CHARITABLE OR RELIGIOUS TRUSTS ARE REQU IRED TO SELL, IN THE INTEREST OF THE TRUST, CAPITAL ASSETS FORMING PART OF THE CORPUS OF THE TRUST PROPERTY SOLELY WITH A V IEW TO ACQUIRING OTHER CAPITAL ASSETS TO BE HELD AS PART O F THE CORPUS OF TRUST. THE REQUIREMENT THAT THE CAPITAL G AINS ARISING FROM SUCH TRANSACTIONS SHOULD BE UTILISED F OR CHARITABLE OR RELIGIOUS PURPOSES, DURING THE ACCOUN TING YEAR ITSELF OR WITHIN THREE MONTHS IMMEDIATELY FOLL OWING, HAS THE UNINTENDED EFFECT OF PROGRESSIVELY REDUCING THE CORPUS OF THE TRUST AND THE INCOME YIELDED BY IT. 74. THIS DIFFICULTY HAS BEEN ACCENTUATED AS A RESU LT OF CERTAIN AMENDMENTS MADE IN THE SCHEME OF TAX EXEMPT ION OF CHARITABLE AND RELIGIOUS TRUSTS THROUGH THE FINA NCE ACT, 1970. UNDER ONE OF THESE AMENDMENTS, A CHARITABLE O R RELIGIOUS TRUST WOULD FORFEIT EXEMPTION FROM TAX ON ITS INCOME IF THE TRUST FUNDS, CONSTITUTING ITS CORPUS OR INCOME, ARE INVESTED IN A CONCERN IN WHICH THE AUTHOR OR FO UNDER OF THE TRUST OR ANY SUBSTANTIAL CONTRIBUTOR TO IT OR A NY RELATIVE OF SUCH AUTHOR, FOUNDER OR CONTRIBUTOR IS SUBSTANTI ALLY INTERESTED. WHERE THE INVESTMENT OF THE TRUST FUNDS IN SUCH CONCERN EXCEEDS 5 PER CENT OF THE CAPITAL OF THE CO NCERN, EXEMPTION IS FORFEITED IN RESPECT OF THE WHOLE OF T HE INCOME OF THE TRUST, WHILE IN A CASE WHERE THE INVESTMENT DOES NOT EXCEED 5 PER CENT, THE EXEMPTION IS LOST ONLY IN RE SPECT OF THE INCOME FROM SUCH INVESTMENT, THE OTHER INCOME CONTINUING TO ENJOY TAX EXEMPTION. IN ORDER TO ENAB LE CHARITABLE AND RELIGIOUS TRUSTS TO CHANGE THEIR INV ESTMENTS MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 15 SUITABLY, WITHOUT FORFEITING EXEMPTION FROM TAX, A SPECIFIC PROVISION WAS ALSO MADE IN THE INCOME-TAX ACT TO TH E EFFECT THAT THE AFORESAID PROVISIONS WOULD NOT APPLY IN A CASE WHERE THE INVESTMENT OF THE TRUST FUNDS IN THE PROH IBITED CONCERNS DOES NOT CONTINUE AFTER 31-12-1970. IN ORD ER TO AVAIL OF THE BENEFIT OF THIS RELAXATION, MANY CHARI TABLE OR RELIGIOUS TRUSTS DIVESTED THEMSELVES OF INVESTMENTS IN PROHIBITED CONCERNS BEFORE 1-1-1971. IF THE PROVISI ONS OF THE LAW WERE CONSTRUED STRICTLY, SUCH TRUSTS WOULD HAVE FORFEITED EXEMPTION FROM TAX IN RESPECT OF THEIR IN COME BY WAY OF CAPITAL GAINS ARISING FROM THE TRANSFER OF S UCH INVESTMENTS UNLESS THEY APPLIED SUCH INCOMES TO CHA RITABLE OR RELIGIOUS PURPOSES DURING THE RELEVANT ACCOUNTIN G 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 ADD ING TO THE CORPUS, WAS CONSIDERED BY GOVERNMENT IN 1963 AND ADMINISTRATIVE INSTRUCTIONS WERE ISSUED TO THE EFFE CT THAT WHERE A CHARITABLE OR RELIGIOUS TRUST TRANSFERRED A CAPITAL ASSET FORMING PART OF THE CORPUS OF ITS PROPERTY SO LELY WITH A VIEW TO ACQUIRING ANOTHER CAPITAL ASSET FOR THE U SE AND BENEFIT OF THE TRUST AND UTILISED THE CAPITAL GAINS ARISING FROM THE TRANSACTION IN ACQUIRING A NEW CAPITAL ASS ET, THE AMOUNT OF CAPITAL GAINS SO UTILISED SHOULD BE REGAR DED AS HAVING BEEN APPLIED TO THE CHARITABLE OR RELIGIOUS PURPOSES MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 16 OF THE TRUST. THESE INSTRUCTIONS HAVE RECENTLY BEEN REITERATED. 76. WITH A VIEW TO PLACING THE AFORESAID ADMINISTRA TIVE 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 INSERT ION 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 RELIGIO US PURPOSES IS TRANSFERRED AND THE WHOLE OR ANY PART O F THE NET CONSIDERATION FOR THE TRANSFER (I.E., FULL VALU E OF THE CONSIDERATION AS REDUCED BY THE EXPENDITURE INCURRE D WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANS FER) IS UTILISED FOR ACQUIRING ANOTHER CAPITAL ASSET TO BE HELD AS PART OF THE CORPUS OF THE TRUST, THE CAPITAL GAIN A RISING FROM THE TRANSFER WILL BE REGARDED AS HAVING BEEN APPLIE D TO CHARITABLE OR RELIGIOUS PURPOSES. WHERE THE WHOLE O F SUCH NET CONSIDERATION IS UTILISED IN ACQUIRING THE NEW CAPITAL ASSET, THE ENTIRE AMOUNT OF THE CAPITAL GAIN WILL B E REGARDED AS HAVING BEEN APPLIED TO CHARITABLE OR RE LIGIOUS PURPOSES, WHILE IN A CASE WHERE ONLY A PART OF THE NET CONSIDERATION IS UTILISED FOR ACQUIRING THE NEW CAP ITAL ASSET, AN AMOUNT, IF ANY, BY WHICH THE COST OF ACQU ISITION OF THE NEW ASSET EXCEEDS THE AGGREGATE OF THE COST OF ACQUISITION OF THE CAPITAL ASSET TRANSFERRED AND TH E COST OF ANY IMPROVEMENTS MADE TO SUCH ASSET, WILL BE REGARD ED AS HAVING BEEN APPLIED TO SUCH PURPOSES. MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 17 15. THE ABOVE PROVISIONS CAN BE EXPLAINED IN THE FO RM OF THE FOLLOWING EXAMPLE. IF THE ENTIRE NET CONSIDERAT ION IS USED TO ACQUIRE NEW ASSET THEN THERE IS NO DIFFICUL TY AS NOTHING WILL BE TAXABLE (SEC.11(1A)(A)(I) OF THE AC T). WHEN COST OF ACQUISITION AND IMPROVEMENT OF THE ASSET TRANSFERRED IS SAY RS.10 LAKHS, THE NET CONSIDERATI ON IS SAY RS.20 LAKHS AND THE COST OF THE NEW ASSET IS RS.11 LAKHS THEN RS.1 LAKH WILL BE DEEMED AS INCOME APPLIED FOR CHARITABLE PURPOSES U/S.11(1A) OF THE ACT (SECTION 11(1A)(A)(II)). IF THE COST OF ACQUISITION OF THE N EW ASSET IS ONLY RS.10 LAKHS OR LESS THAN THE BENEFIT OF EXEMPT ION U/S.11(1A)(A) OF THE ACT CANNOT BE AVAILED OF. 16. THE PROVISIONS OF SEC.11(1A)(A)(II) OF THE ACT CONTEMPLATES A COMPUTATION OF CAPITAL GAIN UNDER TH E NORMAL PROVISIONS OF THE ACT. THIS IS CLEAR FROM TH E EXPRESSION USED IN SEC.11(1A)(A) OF THE ACT WHICH R EFERS TO WHERE A CAPITAL ASSET, BEING PROPERTY HELD UNDER T RUST WHOLLY FOR CHARITABLE OR RELIGIOUS PURPOSES, IS TRA NSFERRED AND THE WHOLE OR ANY PART OF THE NET CONSIDERATION IS UTILISED 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 EXPRES SION SO MUCH OF SUCH CAPITAL GAIN . THE EXPRESSION CAPITA L GAIN OR THE MODE OF COMPUTATION OF CAPITAL GAIN HAS NOT BEEN DEFINED FOR THE PURPOSE OF SEC.11(1A) OF THE ACT AN D THEREFORE THE NORMAL EXPRESSION CAPITAL GAIN AND TH E COMPUTATION OF SUCH CAPITAL GAIN AS LAID DOWN IN TH E PROVISIONS OF SEC.45 TO 55A OF THE ACT WILL APPLY. FOR MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 18 DETERMINING THE QUANTUM OF CAPITAL GAIN WHICH WILL BE DEEMED TO BE APPLICATION OF INCOME FOR CHARITABLE P URPOSE 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 EXPLAINE D ABOVE LET US SEE AS TO WHETHER THE ASSESSEE CAN CLAIM THE BEN EFIT 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 RECE IVED ON TRANSFER IN THE PRESENT CASE WAS RS.4,00,00,000/-. THE COST OF ACQUISITION OF THE PROPERTY WITHOUT THE BENEFIT OF INDEXATION WAS RS.1,33,01,892/-. AS WE HAVE ALREADY HELD CAPITAL GAIN ON TRANSFER OF CAPITAL ASSET HAS TO BE MADE IN ACCORDANCE WITH THE PROVISIONS OF SEC.45 TO 55A OF THE ACT. XXXXXXXXXXXXXX 17. THE ASSESSEE HAS ENTERED INTO AGREEMENT FOR SA LE OF THE PROPERTY ON 12.7.2001. THE AMOUNT RECEIVED BY T HE ASSESSEE TOWARDS SALE CONSIDERATION OVER A PERIOD O F TIME AND UTILIZATION OF THE SAME FOR ACQUIRING NEW CAPIT AL ASSET WERE AS FOLLOWS: XXXXXXXXXXXXXXXXXXX MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 19 17.1 IN THE CASE OF TRUSTEES OF SHRI RAMANAGAR TRUS T VS. THIRDITO13 ITD 426 (MUM) IT HAS BEEN HELD THAT ADVA NCES RECEIVED BY A TRUST IN THE PERIOD EARLIER TO THE PR EVIOUS YEAR IN WHICH TRANSFER OF A CAPITAL ASSET BY A TRUS T TAKES PLACE, IF INVESTED IN PURCHASE OF CAPITAL ASSET IN THE PERIOD EARLIER TO THE PREVIOUS YEAR IN WHICH TRANSFER OF T HE CAPITAL ASSET TAKES PLACE SUCH PURCHASE SHOULD ALSO BE CONS IDERED AS APPLICATION OF CAPITAL GAIN FOR CHARITABLE PURPO SE. IF THAT DECISION IS APPLIED THEN THE DIFFERENCE BETWEE N THE SUM OF RS.2,78,38,080/- WHICH IS THE INVESTMENT OUT OF NET SALE CONSIDERATION RECEIVED ON TRANSFER OF CAPITAL ASSET MADE BY THE ASSESSEE AND THE COST OF THE TRANSFERRE D ASSET WOULD BE DEEMED TO HAVE BEEN APPLIED TO CHARITABLE OR RELIGIOUS PURPOSES. THE EXPRESSION COST OF THE TRANSFERRED ASSET IS DEFINED IN EXPLN. (II) TO SEC .11(1A) OF THE ACT, AND IT LAYS DOWN THAT COST OF THE TRANSFE RRED ASSET MEANS THE AGGREGATE OF THE COST OF ACQUISITI ON (AS ASCERTAINED FOR THE PURPOSES OF SEC.48 AND 49) OF T HE CAPITAL ASSET WHICH IS THE SUBJECT OF THE TRANSFER AND THE COST OF ANY IMPROVEMENT THERETO WITHIN MEANING ASSI GNED TO THAT EXPRESSION IN SUB-CLAUSE (B) OF CLAUSE (1) OF SECTION 55. THUS THE DIFFERENCE BETWEEN THE CAPITAL GAIN UT ILIZED 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 NO RMAL MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 20 PROVISIONS OF THE ACT AND RS.27,15,449 WHICH IS ELI GIBLE FOR EXEMPTION AS APPLICATION OF CAPITAL GAIN FOR CHARIT ABLE PURPOSE U/S.11(1A)(A)(II) OF THE ACT), SHOULD BE CO NSIDERED AS NOT APPLIED FOR CHARITABLE PURPOSES AND NOT ELIG IBLE 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 ARGUMEN T 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 WIT H THAT OF THE AO, CANNOT BE ACCEPTED. THE RATIONALE BEHIND TH E PROVISIONS OF SEC.11(1A) OF THE ACT AS EXPLAINED IN THE CBDT CIRCULAR REFERRED TO EARLIER AND THE PROVISION S THEMSELVES ARE VERY CLEAR. HOWEVER, EVEN THE CIT, I N EXERCISE OF HIS POWERS U/S.263 OF THE ACT HAS OVERL OOKED THE CORRECT INTERPRETATION OF THE PROVISIONS OF SEC.11(1A)(A)(II) OF THE ACT AND THEREFORE TO THIS EXTENT HIS ORDER IS MODIFIED AS STATED ABOVE. 19. THE CAPITAL GAIN TO THE EXTENT NOT UTILIZED FOR ACQUIRING NEW ASSET, WILL BE CONSIDERED AS INCOME OF THE TRUS T AND ALL CONSEQUENCES LIKE ACCUMULATION ETC., SHOULD BE ALLO WED. HAVING HELD THAT THE ORDER OF THE O WAS ERRONEOUS L ET US EXAMINE AS TO WHETHER THE SAME WAS PREJUDICIAL TO T HE INTEREST OF REVENUE. MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 21 20. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT FOR INVOKING POWER U/S.263 OF THE ACT, THE ORDER SOUGHT TO BE REVISED SHOULD BE (I) ERRONEOUS AND (I I) PREJUDICIAL TO THE INTEREST OF THE REVENUE. ACCORDI NG TO HIM THE ORDER OF THE AO WHICH WAS REVISED BY THE CIT U/ S.263 OF THE ACT, EVEN ASSUMING THAT THE SAME WAS ERRONEO US, WAS NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE. IN THIS REGARD IT WAS SUBMITTED THAT CAPITAL GAIN IS ALSO I NCOME OF THE CHARITABLE TRUST AND TO THE EXTENT TO WHICH IS NOT APPLIED IN THE MANNER SET OUT IN SEC.11(1A) (A)(II) OF THE ACT, WILL BECOME TAXABLE. IF HOWEVER SUCH CAPITAL G AIN WHICH IS NOT USED TO ACQUIRE NEW ASSET IS APPLIED F OR CHARITABLE PURPOSES THEN IT CANNOT BE TAXED AS THE CONDITIONS MENTIONED IN SEC.11(1) ARE SATISFIED. IN THIS REGARD IT WAS POINTED OUT THAT IN THE ORDER OF ASSE SSMENT U/S.143(3) READ WITH SEC.148 OF THE ACT DATED 30.12 .2008 WHICH WAS REVISED IN THE IMPUGNED ORDER PASSED U/S. 263 OF THE ACT, THE AO HAS COMPUTED TOTAL INCOME OF THE AS SESSEE AS FOLLOWS: XXXXXXXXXXXXXXX 21. IT WAS ARGUED THAT THE ABOVE APPLICATION OVER A ND ABOVE THE INCOME SHOULD BE CONSIDERED AS APPLICATIO N OF CAPITAL GAIN FOR CHARITABLE PURPOSES AND THEREFORE CAPITAL GAIN CANNOT BE BROUGHT TO TAX. IN THIS REGARD, RELI ANCE WAS PLACED ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT INTHE CASE OF CIT VS. EAST INDIA CHARITABLE TRUST 2 06 ITR 152 (CAL). THE ASSESSEE IN THE CASE BEFORE THE HON BLE MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 22 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 SHA RES OF VARIOUS COMPANIES WHICH FORMED THE CORPUS OF THE TR UST FUND FOR A NET CONSIDERATION OF RS. 37,78,640. ON T HIS TRANSACTION, THE CAPITAL GAINS SHOWN AMOUNTED TO RS . 23,79,538. THE ASSESSEE CLAIMED THAT THE NET CONSID ERATION OF THE SALE WAS UTILISED FOR ACQUIRING NEW CAPITAL ASSETS AS UNDER : XXXXXXXXXXXXXXXXXXXXXXXX OUT OF THE ABOVE, A SUM OF RS. 7,00,000 WAS INVESTE D AFTER 31ST DEC., 1981, AND AN OPTION WAS EXERCISED UNDER THE EXPLANATION TO S. 11(1) REQUESTING THE ITO TO TREAT THE ABOVE SUM AS DEEMED APPLICATION DURING THE YEAR END ED ON 31ST DEC., 1981. IT WAS URGED THAT THE CAPITAL G AINS OF RS. 23,79,538 WAS, THEREFORE, EXEMPT FROM TAX UNDER S. 11(1) OF THE IT ACT, 1961. ON THE ABOVE FACTS ONE O F THE QUESTION BEFORE THE HONBLE CALCUTTA HIGH COURT WAS AS TO WHETHER DESPITE THE ACQUISITION OF THE FRESH CAPITA L ASSET NOT BEING WITHIN THE ACCOUNTING YEAR RELEVANT TO TH E ASST. YR. 1982-83, THE EXEMPTION UNDER S. 11(1A) SHALL RE LATE BACK TO THE ASST. YR. 1982- 83 BY REASON OF THE FAC T THAT THE ASSESSEE EXERCISED AN OPTION UNDER THE EXPLANATION TO S. 11(1) REQUESTING THE ITO TO TREAT THE ABOVE SUM AS DEEMED APPLICATION DURING THE YEAR ENDED ON 31ST DEC., 198 1 . 22. THE HONBLE CALCUTTA HIGH COURT HELD AS FOLLO WS: MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 23 SEC. 11(1) READS AS FOLLOWS : '(1) SUBJECT TO THE PROVISIONS OF SS. 60 TO 63, TH E FOLLOWING INCOME SHALL NOT BE INCLUDED IN THE TOTAL INCOME OF THE PREVIOUS YEAR OF THE PERSON IN RECEIPT OF THE INCOM E (A) INCOME DERIVED FROM PROPERTY HELD UNDER TRUST W HOLLY FOR CHARITABLE OR RELIGIOUS PURPOSES, TO THE EXTENT TO WHICH SUCH INCOME IS APPLIED TO SUCH PURPOSES IN INDIA; A ND, WHERE ANY SUCH INCOME IS ACCUMULATED OR SET APART F OR APPLICATION TO SUCH PURPOSES IN INDIA, TO THE EXTEN T TO WHICH THE INCOME SO ACCUMULATED OR SET APART IS NOT IN EXCESS OF TWENTY-FIVE PER CENT OF THE INCOME FROM S UCH PROPERTY; (B) INCOME DERIVED FROM PROPERTY HELD UNDER TRUST I N PART ONLY FOR SUCH PURPOSES, THE TRUST HAVING BEEN CREAT ED BEFORE THE COMMENCEMENT OF THIS ACT, TO THE EXTENT TO WHICH SUCH INCOME IS APPLIED TO SUCH PURPOSES IN IN DIA; AND, WHERE ANY SUCH INCOME IS FINALLY SET APART FOR APPLICATION TO SUCH PURPOSES IN INDIA, TO THE EXTEN T TO WHICH THE INCOME SO SET APART IS NOT IN EXCESS OF T WENTY- FIVE PER CENT. OF THE INCOME FROM SUCH PROPERTY;... . EXPLANATION.FOR THE PURPOSES OF CLS. (A) AND (B), (1) IN COMPUTING THE TWENTY-FIVE PER CENT. OF THE I NCOME 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; MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 24 (2) IF, IN THE PREVIOUS YEAR, THE INCOME APPLIED TO CHARITABLE OR RELIGIOUS PURPOSES IN INDIA FALLS SHO RT OF SEVENTY-FIVE PER CENT OF THE INCOME DERIVED DURING THAT YEAR FROM PROPERTY HELD UNDER TRUST, OR, AS THE CAS E MAY BE, HELD UNDER TRUST IN PART, BY ANY AMOUNT (I) FOR THE REASON THAT THE WHOLE OR ANY PART OF T HE 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 DU RING THE PREVIOUS YEAR IMMEDIATELY FOLLOWING AS DOES NOT EXCEED THE SAID AMOUNT; AND (B) IN THE CASE REFERRED TO IN SUB-CL. (II), SO MUC H OF THE INCOME APPLIED TO SUCH PURPOSES IN INDIA DURING THE PREVIOUS YEAR IMMEDIATELY FOLLOWING THE PREVIOUS YE AR 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 BEFO RE THE EXPIRY OF THE TIME ALLOWED UNDER SUBS. (1) OR SUB-S . (2) OF S. 139, WHETHER FIXED ORIGINALLY OR ON EXTENSION FOR FURNISHING THE RETURN OF INCOME) BE DEEMED TO BE IN COME APPLIED TO SUCH PURPOSES, DURING THE PREVIOUS YEAR IN WHICH THE INCOME WAS DERIVED; AND THE INCOME SO DEE MED MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 25 TO HAVE BEEN APPLIED SHALL NOT BE TAKEN INTO ACCOUN T IN CALCULATING THE AMOUNT OF INCOME APPLIED TO SUCH PURPOSES, IN THE CASE REFERRED TO IN SUB-CL. (I), D URING THE PREVIOUS YEAR IN WHICH THE INCOME IS RECEIVED OR DU RING THE PREVIOUS YEAR IMMEDIATELY FOLLOWING, AS THE CAS E MAY BE, AND, IN THE CASE REFERRED TO IN SUB-CL. (II), D URING THE PREVIOUS YEAR IMMEDIATELY FOLLOWING THE PREVIOUS YE AR IN WHICH THE INCOME WAS DERIVED.' 18. IN OUR VIEW, BY REASON OF THE OPTION EXERCISED UNDER THE EXPLANATION TO S. 11(1), THE ASSESSEE IS ENTITL ED TO THE BENEFIT UNDER S. 11(1A) INASMUCH AS THE DEFINITION OF INCOME AS CONTAINED IN S. 2(24) OF THE ACT INCLUDES CAPITAL GAINS AS ONE OF THE SPECIES OF INCOME. THAT BEING S O, THE OPTION AS EXERCISABLE WITH REGARD TO INCOME SHOULD ALSO AVAIL TO CAPITAL GAINS PROVIDED SUCH OPTION IS EXER CISED IN WRITING BEFORE THE EXPIRY OF THE TIME ALLOWED UNDER SUB-S. (1) OF S. 139 FOR FURNISHING THE RETURN. THEREFORE, THE AMOUNT OF RS. 7 LAKHS UTILISED IN ACQUIRING FIXED D EPOSITS WITH THE BHARAT PETROLEUM CORPORATION LTD. AND THE BHARAT ELECTRONICS LTD. SHOULD ALSO BE ALLOWED EXEM PTION UNDER THE SAID PROVISION FOR THE ASST. YR. 1982-83. (EMPHASIS SUPPLIED) 21. IT IS CLEAR FROM THE AFORESAID DECISION OF THE HOBLE CALCUTTA HIGH COURT THAT CAPITAL GAIN IS ALSO INCOM E OF THE TRUST AND SEC.11(1A) OF THE ACT IS NOT THE ONLY WAY IN WHICH CAPITAL GAIN HAS TO BE APPLIED FOR CHARITABLE PURPO SES. IT IS ONE OF THE WAY OF APPLYING CAPITAL GAIN FOR CHARITA BLE MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 26 PURPOSE. IF CAPITAL GAIN IS APPLIED FOR CHARITABLE PURPOSE OF THE ASSESSEE NOT BY ACQUIRING A NEW ASSET BUT FO R OTHER CHARITABLE PURPOSE, THEN THERE IS NO REASON WHY IT SHOULD NOT BE CONSIDERED AS APPLICATION OF INCOME FOR CHAR ITABLE PURPOSE ENABLING THE ASSESSEE TO CLAIM EXEMPTION U/S.11(1) OF THE ACT. IN THE PRESENT CASE THERE IS NO QUESTION OF APPLICATION FOR ACCUMULATION OF INCOME FOR BEING SPENT FOR CHARITABLE PURPOSE IN FUTURE BECAUS E SUCH APPLICATION IS ALREADY DEEMED TO HAVE BEEN MADE IN THE PREVIOUS YEAR ITSELF. 22. ADMITTEDLY, EVEN AS PER THE ORDER OF ASSESSMEN T THERE WAS APPLICATION FOR CHARITABLE PURPOSE, EVEN AFTER DISALLOWANCE OF DEPRECIATION MADE BY THE AO, OF A S UM OF RS.1,60,23458 OVER AND ABOVE THE RECEIPTS OF THE AS SESSEE DURING THE PREVIOUS YEAR. THE CAPITAL GAIN CONSIDER ED 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 UTI LIZATION OF RS.1,60,23,458 SHOULD BE SUFFICIENT TO SET OFF T HE CAPITAL GAIN NOT UTILIZED FOR CHARITABLE PURPOSE U/S.11(1A) OF THE ACT. THUS THE NET DEFICIT IN THIS AY TO BE CARRIED FORWARDFOR 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 PA RT OF THE CAPITAL GAIN BECAME TAXABLE BECAUSE OF LOSS OF EXEM PTION U/S.11(1A) OF THE ACT. SINCE THE ORDER SOUGHT TO BE REVISED MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 27 U/S.263 OF THE ACT WAS ERRONEOUS BUT NOT PREJUDICIA L TO THE INTEREST OF THE REVENUE, JURISDICTION U/S.263 COULD NOT HAVE BEEN INVOKED BY THE CIT. WE HOLD ACCORDINGLY AND QU ASH THE ORDER U/S.263 OF THE ACT. THE APPEAL OF THE ASS ESSEE IS ALLOWED WITH THE ABOVE DIRECTIONS AND COMPUTATION. 24. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED. THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS A REG ISTER UNDER BOMBAY PUBLIC TRUST ACT, 1950, AS AN EDUCATIONAL IN STITUTION AND ITS MAIN OBJECT IS ESTABLISHMENT AND/OR ACQUISI TION AND MAINTENANCE OR SUPPORT COLLEGES, VIDYAPITH AND OTHE R INSTITUTION IMPARTING EDUCATION AND TRAINING, ESTAB LISHMENT AND SUPPORT OF DISPENSARIES WITH OR WITHOUT MEDICAL SCHOOLS AND ANY OTHER INSTITUTION FOR TREATMENT OF PATIENT, DONATIONS TO HOSPITAL/DISPENSARIES AND MEDICAL HELP TO THE POOR/DESERVING PEOPLE. THE ASSESSEE IS REGISTERED U /S 12A OF THE ACT. DURING THE PREVIOUS YEAR RELEVANT TO THE P RESENT ASSESSMENT YEAR, THE ASSESSEE GRANTED TENANCY OF AB OUT 4835 SQ. FT. TO TWO TENANTS. THE ASSESSEE RECEIVED A PR EMIUM OF RS.1,69,65,500/- WHICH WAS CREDITED TO THE INCOME A ND EXPENDITURE ACCOUNT. AS PER THE ASSESSEE THE INCOM E WAS APPLIED FOR CHARITABLE PURPOSES/OBJECTS OF THE TRUS T. THE ASSESSEE DULY FILED THE ANNUAL ACCOUNT DISCLOSING T HE AMOUNT UNDER CONSIDERATION. THE ASSESSING OFFICER ISSUED N OTICE U/S 148 DATED 24/03/2011 ASKING THE ASSESSEE AS THE AMO UNT SHOULD NOT BE TREATED TO BE ESCAPED TAXATION AS THE RECEIPTS WERE NOTHING BUT SALE CONSIDERATION AND THE CAPITAL GAINS ARISING ON TRANSFER OF CAPITAL ASSET WAS NOT UTILIZ ED FOR MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 28 ACQUIRING ANOTHER CAPITAL ASSET AS PER THE PROVISIO N SECTION 11 (1A) (A) OF THE ACT. THE IMPUGNED AMOUNT WAS ADD ED TO THE TOTAL INCOME OF THE ASSESSEE. 2.3. ON APPEAL, BEFORE THE LD. COMMISSIONER OF INC OME TAX (APPEALS), THE IMPUGNED ADDITION WAS DELETED. T HE RELEVANT PORTION OF THE SAME IS REPRODUCED HEREUNDE R FOR READY REFERENCE:- I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANT, THE ASSESSMENT ORDER AND THE FACTS OF TH E CASE. I FINDS THAT THE APPELLANT RECEIVED PREMIUM F ROM TENANTS AMOUNTING TO RS.1,69,65,500/-. THE APPELLAN T TRANSFERRED A PORTION OF THE PROPERTY AND RECEIVED THE ABOVE PREMIUM. I ALSO FIND THAT THE APPELLANT HAS APPLIED RS.4,72,02,440/- TOWARDS THE OBJECT OF THE TRUST. EVEN IF RS.1,69,65,500/- IS TREATED AS INCOME OF TH E APPELLANT TRUST, THE SAME IS FOUND TO HAVE BEEN APP LIED TOWARDS THE OBJECTS OF THE TRUST. THE SAME CANNOT BE SEGREGATED INTO DIFFERENT HEADS TO DECIDE THE ISSUE OF ALLOWABILITY. AS PER THE PROVISION OF SECTION 1(1) , THE INCOME WHICH IS APPLIED TOWARDS THE OBJECTS OF THE TRUST CANNOT BE SUBJECT TO TAX. I, THEREFORE, DELETE THE ADDITION OF RS.1,69,65,500/- MADE BY THE ASSESSING OFFICER. GROUND NOS. 2 & 3 ARE ALLOWED. 2.4. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED TH AT THE CLAIM OF THE ASSESSEE ALSO GETS SUPPORT FROM THE FO LLOWING DECISIONS:- MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 29 A. GURUPRASHAD TRUST VS DCIT (2005) 93 TTJ (CHD.) 1103 B. DIT VS GIRDHARILAL SHEWNARAIN TANTIA TRUST (1993) 1 99 ITR 251 2.5. IF THE OBSERVATION MADE IN THE ASSESSMENT ORD ER, LEADING TO ADDITION MADE TO THE TOTAL INCOME, CONCL USION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL, IF K EPT IN JUXTAPOSITION AND ANALYZED, THERE IS NO DISPUTE TO THE FACT THAT THE IMPUGNED AMOUNT WAS DULY DISCLOSED IN THE INCOM E AND EXPENDITURE ACCOUNT AND THE EXPENDITURE IS EXCESS O VER THE INCOME. THE TOTAL INCOME CREDITED TO THE ACCOUNT WA S RS.3,29,91,999/- AND APPLICATION TOWARDS THE OBJECT OF THE TRUST WAS RS.4,72,02,440/-. WHEREAS, THE ASSESSING OFFICER RESTRICTED THE DEDUCTION OF INCOME APPLY TOWARDS TH E OBJECT OF THE TRUST WAS TO THE EXTENT OF RS.1,60,26,499/-. EV EN IF, WE ACCEPT THE CONTENTION OF THE LD. DR TO BE CORRECT THAT THE IMPUGNED AMOUNT IS INCOME OF THE ASSESSEE TRUST FAC T REMAINS THAT IT WAS APPLIED TOWARDS THE OBJECT OF THE TRUST . OUR VIEW FIND SUPPORTS FROM THE RATIO LAID DOWN , THOUGH ON INVOCATION OF REVISIONAL JURISDICTION U/S 263 OF THE ACT, IN T HE CASE OF AL AMEEN EDUCATIONAL SOCIETY VS DIT(SUPRA), WHEREIN, T HE ENTIRE CONSIDERATION WAS USED TO ACQUIRED NEW ASSET, THERE FORE, THERE WAS NO DIFFICULTY AS NOTHING WILL BE TAXABLE U/S 11 (1A)(A)(I) OF THE ACT. THE DECISION AND THE RATIO LAID DOWN IN CI T VS EAST INDIA CHARITABLE TRUST 206 ITR 152(CALCUTTA) FURTHE R SUPPORTS THE CASE OF THE ASSESSEE, IF THE CAPITAL GAIN IS AP PLIED FOR CHARITABLE PURPOSES OF THE ASSESSEE, NOT BY ACQUIRI NG A NEW ASSET, BUT FOR OTHER CHARITABLE PURPOSES, THEN THER E IS NO MEHTA CHARITY TRUST ITA NO.1069/MUM/2012 30 REASON WHY ITS NOT BE CONSIDERED AS APPLICATION OF INCOME FOR CHARITABLE PURPOSES. THUS, WE FIND NO MERIT IN THE APPEAL OF THE REVENUE. STAND OF THE LD. COMMISSIONER OF INCOM E TAX (APPEALS) IS AFFIRMED. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 11/03/2016. SD/ - (B.R.BASKARAN) SD/ - (JOGINDER SINGH) '# / ACCOUNTANT MEMBER $# / JUDICIAL MEMBER ' ( MUMBAI; + DATED : 11/03/2016 F{X~{T? P.S/. .. %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. ,-./ / THE APPELLANT 2. 01./ / THE RESPONDENT. 3. ' 2& ( ,- ) / THE CIT, MUMBAI. 4. ' 2& / CIT(A)- , MUMBAI 5. 4'5 0&# , ,-* ,# 6 , ' ( / DR, ITAT, MUMBAI 6. 7$ 8( / GUARD FILE. / BY ORDER, 14-& 0& //TRUE COPY// / (DY./ASSTT. REGISTRAR) , ' ( / ITAT, MUMBAI