Al-Ameen Educational Society, Bangalore V. DIT, Bangalore

ITA 575/BANG/2011

• Counselvise Citation: 57521114 RSA 2011
• Duration Of Justice: 1 year(s) 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 16-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIII
• Assessee Lawyers: K K CHAITANYA
• Keywords: Capital asset; Depreciation; Charitable institution; Opportunity of being heard; Cost of acquisition; Benefit of exemption; Revenue expenditure; Capital expenditure
• Section: 143(3); 147; 148; 263; 11; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE C BENCH, BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V.VASUDEVAN, JUDICIAL MEMBER I.T.A.NO.575 (B)/2011 (ASSESSMENT YEAR : 2006-07) AL AMEEN EDUCATIONAL SOCIETY, NO.38, NEW COLLEGE BUILDING, HOSUR ROAD, NEAR LALBAGH MAIN GATE, BANGALORE-560 024 PAN NO.AAATA 1387N APPELLANT VS THE DIRECTOR OF INCOME-TAX, (E), CENTRAL REVENUES BUILDINGS, NO.1, QUEENS ROAD, BANGALORE. RESPONDENT ASSESSEE BY : SHRI K.K.CHAITANYA, ADVOCATE REVENUE BY : SHRI ETWA MUNDA, CIT-III DATE OF HEARING : 14 -09-2012 DATE OF PRONOUNCEMENT : -09-2012 O R D E R PER SHRI N.V.VASUDEVAN, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER D ATED 21-03- 2011 OF DIT(E), BANGALORE PASSED U/S 263 O THE IT ACT, 1961. 2. THE ASSESSEE IS A CHARITABLE TRUST CARRYING ON THE CH ARITABLE ACTIVITY OF PROVIDING EDUCATION. FOR ASSESSMENT YEAR 2006-07, THE A SSESSEE FILED RETURN OF INCOME DECLARING A NET DEFICIT OF RS.3,61,77,979/-. D URING THE PREVIOUS YEAR, THE ASSESSEE SOLD LAND BELONGING TO IT. IN THE RETURN THE ASSESSEE HAD GIVEN THE COMPUTATION OF CAPITAL GAINS ON S ALE 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 PROCEEDS IN C APITAL ASSET TO BE HELD AS CORPUS OF TRUST ITA NO.575(B)/2011 2 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.3,41,169.33 -------------------- THE ASSESSEE DECLARED TAXABLE LONG TERM CAPITAL GAINS ON SALE OF ONE OF ITS PROPERTY FOR RS.3,41,169/-. THE RETURN WAS PROCESSED U/ S 143(1) OF THE INCOME TAX ACT, 1961 (THE ACT). 3. LATER ON THE AO ISSUED A NOTICE U/S 148 OF THE ACT 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 ASSESSEE HAD TO BE D ETERMINED AFRESH. IN THE RE-ASSESSMENT PROCEEDINGS, THE AO WORKED OUT THE LTCG A S FOLLOWS; THE ASSESSEE HAS SOLD LAND FOR RS.4,00,00,000/-AND HAS I NVESTED RS.2,78,38,080/- IN ACQUIRING NEW CAPITAL ASSET AND THUS, DEC LARED A SUM OF RS.3,41,169/- BEING TAXABLE LONG TERM CAPITAL GAIN . THE ASSESSEE HAS CLAIMED EXEMPTION U/S11(1A) OF THE INCOME-TA X 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.2,7 8,38,080/- AND THUS NOT ENTITLED FOR EXEMPTION U/S 11(1A) OF THE INCO ME-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 T HE VIEW THAT THE AFORESAID COMPUTATION OF CAPITAL GAINS DONE B Y 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 O F REVENUE. ITA NO.575(B)/2011 3 ACCORDINGLY, THE DIT(E) ISSUED A SHOW CAUSE NOTICE DATED 21-02-2011 PROPOSING TO RECOMPUTE THE CAPITAL GAINS. ACCORDING TO T HE DIT(E) WHEN A CHARITABLE TRUST DERIVES CAPITAL GAIN ON SALE OF ITS CAPITAL ASSET THEN THE PROVISIONS OF SEC.11(1A) WILL BE APPLICABLE. FROM THE PERUSAL OF T HE CAPITAL GAINS WHICH WE HAVE SET OUT ABOVE, IT CAN BE SEEN THAT THE TRANSFER IS CLAIMED BY THE ASSESSEE TO HAVE TAKEN PLACE DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2006-07. THE ASSESSEE H AS BEEN RECEIVING ADVANCE FOR THE SALE OF THE PROPERTY RIGHT FROM THE PREV IOUS YEAR RELEVANT TO ASSESSMENT YEAR 2002-03. EVEN PRIOR TO THE ASSESSMENT Y EAR 2006-07, THE ASSESSEE HAD INVESTED SALE CONSIDERATION RECEIVED ON TRANSFER OF THE CAPITAL ASSET IN NEW ASSETS. ACCORDING TO THE DIT(E), THE IN VESTMENT IN PURCHASE OF CAPITAL ASSET CLAIMED BY THE ASSESSEE FOR THE ASSESSMENT YEARS 2002-03 TO 2004-05 OUGHT NOT TO HAVE BEEN CON SIDERED AS INVESTMENT IN NEW ASSET BY THE AO, AS THESE INVESTMENTS HAD BEEN MADE IN THE PREVIOUS YEAR PRIOR TO PREVIOUS YEAR IN WHICH THE TRANSFER OF THE CAPITAL ASSET TOOK PLACE. THE ACTION OF THE AO IN ACCE PTING THE CLAIM OF THE ASSESSEE IN THIS REGARD WAS ERRONEOUS AND HAS RES ULTED IN PREJUDICE TO THE INTEREST OF THE REVENUE. THIS WAS THE BASIS ON WHICH THE DIT(E) ISSUED A SHOW CAUSE NOTICE TO THE ASSESSEE. 5. IN REPLY TO THE AFORESAID SHOW CAUSE NOTICE, THE ASS ESSEE SUBMITTED THAT IT HAD ENTERED INTO AN AGREEMENT FOR THE SALE OF TH E PROPERTY AS EARLY AS 12-07-2001 AND A TRANSFER HAD TAKEN PLACE DURING TH E 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 RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07. THE ASSESEEE FURTHER SUBMITTED THAT THE COM PUTATION OF LTCG HAS TO BE DONE IN ACCORDANCE WITH THE PROVISIONS OF SEC.4 5 TO 55A OF THE ACT AND THE ASSESSEE SHOULD BE ENTITLED TO THE BENEFIT O F INDEXATION OF THE COST OF ACQUISITION OF THE CAPITAL ASSET. THE ASSESSEE A LSO SUBMITTED THAT THE ORDER OF THE AO ACCEPTING THE CLAIM OF THE ASSESSEE CANNOT BE SAID TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE. 6. THE DIT(E) HOWEVER, DID NOT ACCEPT THE PLEA OF THE ASSESSEE AND HE H ELD AS FOLLOWS; IN THE RETURN OF INCOME FILED FOR THE ASSESSMENT YEAR 20 06-07, THE ASSESSEE HAS DETERMINED THE CAPITAL GAINS AT RS.3,41,169 /-. THE COMPUTATION OF CAPITAL GAIN AS PER THE ASSESSMENT ORDER IN QUESTION IS AS UNDER; ITA NO.575(B)/2011 4 1 SALE PROCEEDS RS.4,00,00,000 2 LESS: INDEXED COST OF ACQUISITION 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 INVEST MENT 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 RELIG IOUS PURPOSES. INCOME DERIVED FROM SALE OF CAPITAL ASSETS IS ALS O 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 T HE FINANCE (NO.2) ACT, 1971. 5(B) IT IS CLEAR FROM SUB-SECTION (1A) OF SECTION 11 OF THE AC T THAT IN A CASE WHERE THE ASSESSEE DERIVES ANY CAPITAL GAIN FROM TR ANSFER OF A CAPITAL ASSET HELD BY IT UNDER TRUST FOR CHARITABLE OR RELIG IOUS PURPOSES, THE CAPITAL GAIN ARISING FROM THE TRANSFER OF SUCH CAPITAL ASSET SHALL BE DEEMED TO HAVE BEEN APPLIED FOR CHARITABLE OR RELIGIOUS PURPOSES TO THE EXTENT SPECIFIED THEREIN, IF THE WH OLE OR ANY PART OF THE SALE CONSIDERATION IS UTILIZED FOR ACQUIRING ANOTHER CAPITAL ASSET TO BE SO HELD. AS PER THE PROVISIONS OF SECTION 1 1(1A) THE INVESTMENT IN NEW CAPITAL ASSETS FOR COMPUTING THE CAPITAL GAINS HAS TO BE MADE DURING THE YEAR IN WHICH CAPITAL GAIN IS TAXABLE . THE INVESTMENT IN NEW ASSETS MADE IN EARLIER YEARS CANNOT BE CONSIDERED DURING THIS YEAR IN WHICH CAPITAL GAIN IS OFFERED T O TAX DURING THE YEAR, THE ASSESSEE HAS UTILIZED ONLY RS.67,26,8 75/- OF THE SALES CONSIDERATION FOR ACQUIRING NEW CAPITAL ASSET WHIC H IS TO BE CONSIDERED AS PER THE PROVISIONS OF SEC.11(1A)(A)(II). 5(C) FURTHER, THE AO HAS DETERMINED THE CAPITAL GAIN BY C ONSIDERING INDEXED COST OF ACQUISITION AMOUNTING TO RS.2,51,22,641/- FOR WHICH THE ASSESSEE IS NOT ELIGIBLE SINCE THE INCOME OF CHARITABLE IN STITUTION IS TO BE COMPUTED ON COMMERCIAL PRINCIPLES AND SEC.11(1A) ITS ELF REFERS TO NET CONSIDERATION. THEREFORE, WHAT IS REQUIR ED TO BE REINVESTED IS THE ENTIRE NET CONSIDERATION, AFTER DEDUCTION RELATING TO TRANSFER. IT IS SUCH AMOUNT, WHICH IS REQUIRED TO BE INVEST ED. THE QUESTION OF CALCULATION OF CAPITAL GAINS WITH INDEXED COST AN D OTHER REQUIREMENTS OF SEC.48 COULD HAVE NO APPLICATION FOR THIS PU RPOSE IN THE CASE OF CHARITABLE ENTITIES. ITA NO.575(B)/2011 5 5(D) WITH REGARD TO ASSESSEES CONTENTION THAT THE TRA NSFER OF THE ASSET IN QUESTION TOOK PLACE IN THE FY: 2001-02 AND NO C APITAL GAIN IS TAXABLE IN THE CURRENT YEAR IS NOT ACCEPTABLE, AS THE ASSESSEE ITS ELF HAS CHOSEN TO OFFER THE CAPITAL GAIN TO TAX IN THE CURREN T YEAR. RAISING THE ISSUE AT THIS STAGE IS NOT 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 ASSET 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 COMPUT ATION OF CAPITAL GAIN WOULD BE AS UNDER; 1 NET CONSIDERATION RS.4,00,00,000 2 COST OF ACQUISITION 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 INCO ME-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 H AS 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) ERRONEOU S AND (II) PREJUDICIAL TO THE INTEREST OF THE REVENUE. IT WAS SUBM ITTED THAT THE EXISTENCE OF BOTH THE AFORESAID CONDITIONS ARE NECESSARY FOR EXERCISING JURISDICTION U/S.263 OF THE ACT. IT WAS FURTHER ELABORATE D THAT THE HONBLE SUPREME COURT IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. V S. CIT 243 ITR 83 (SC) ON THE SCOPE OF POWERS U/S.263 OF THE ACT HAS HE LD THAT WHERE TWO VIEWS ARE POSSIBLE ON AN ISSUE AND THE AO HAS TAKEN ONE OF SUCH POSSIBLE VIEW, THE ORDER OF THE AO CANNOT BE SAID TO BE ERRONEO US. IT WAS FURTHER SUBMITTED THAT THE CIT IN EXERCISE OF POWERS U/S.263 OF T HE ACT CANNOT SEEK TO SUBSTITUTE 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: ITA NO.575(B)/2011 6 (I) THAT WHEN CAPITAL ASSETS ARE TRANSFERRED BY A CHARITA BLE TRUST, THE CAPITAL GAIN ON SUCH SALE HAS TO BE DETERMINED IN ACC ORDANCE WITH THE PROVISIONS OF SEC.11(1A) OF THE ACT AND NOT UNDER THE NORMAL PROVISIONS OF THE ACT VIZ., SECTION 45 TO 55A OF THE ACT. (II) THE INVESTMENT OF THE CAPITAL GAIN IN ACQUIRING ANOTHER C APITAL ASSET BY THE ASSESSEE WAS IN THE EARLIER YEARS AND SUC H INVESTMENT CANNOT BE SAID TO BE APPLICATION OF INCOME FOR CHARITABLE TR USTS. IT WAS ONLY INVESTMENTS MADE DURING PERIOD AFTER TRANSFER O F THE CAPITAL ASSET THAT CAN BE CONSIDERED AS APPLICATION OF INCO ME 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 ITAT IN THE CASE OF AK HARA GHAMANDA DASS VS. ACIT (2001) 114 TAXMAN 27 (ASR.)(MAG.) 68 TTJ (ASR.) 2 44, WHEREIN THE AMRITSAR BENCH HELD THAT EVEN IN THE CASE O F TRUSTS CAPITAL GAIN HAS TO BE TAXED AND CALCULATED IN ACCORDANCE WITH T HE PROVISIONS OF SEC.45 TO 55A OF THE ACT AND THAT ALL EXEMPTIONS, EXCEPT IONS, DEDUCTIONS AND BENEFITS SPECIFIED IN THOSE PROVISIONS WILL BE AVAILABLE E VEN TO A CHARITABLE TRUST. 10. ON POINT (II) ABOVE, THE LEARNED COUNSEL FOR THE ASSESSE E RELIED ON THE DECISION OF THE MUMBAI BENCH OF ITAT IN THE CASE OF TRUSTE ES OF SHRI RAMANAGAR TRUST 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 PLA CE, IF INVESTED IN PURCHASE OF CAPITAL ASSET SHOULD BE CONSIDERED AS APPLICAT ION OF CAPITAL GAIN FOR CHARITABLE PURPOSE. 11. THUS IT WAS ARGUED THAT THE VIEW TAKEN BY THE AO WHILE ACCEPTING THE CLAIM OF THE ASSESSEE IN THE ORDER OF ASSESSMENT WAS A P OSSIBLE 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 OF THE ACT JUST BEC AUSE ACCORDING HIM ANOTHER VIEW WAS POSSIBLE ON THE ISSUE. 12. THE LEARNED DR ON THE ABOVE SUBMISSION OF THE LEARNE D COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE CASE OF A CHARITABLE TRUST WHEN CAPITAL ITA NO.575(B)/2011 7 ASSET ARE TRANSFERRED BY A CHARITABLE TRUST RESULTING IN CAPITAL GAIN THE PROVISIONS OF SEC.11(1A) ALONE WILL BE APPLICABLE. ACCORDINGLY TH E 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 PRO PER APPRECIATION OF THE RIVAL CONTENTIONS, THE PROVISIONS OF SEC.11(1A) OF THE ACT AND THE REASONS WHY THOSE PROVISIONS WERE INTRODUCED NEED TO B E 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 THE INCOME .. (1A) FOR THE PURPOSES OF SUB-SECTION (1), (A) WHERE A CAPITAL ASSET, BEING PROPERTY HELD UNDER TRUST WHOLLY FOR CHARITABLE OR RELIGIOUS PURPOSES, IS TRANSFERRED AND THE W HOLE OR ANY PART OF THE NET CONSIDERATION IS UTILISED FOR ACQUIRING ANO THER CAPITAL ASSET TO BE SO HELD, THEN, THE CAPITAL GAIN ARISING FROM THE TRANSFER SHALL BE DEEMED TO HAVE BEEN APPLIED TO CHARITABLE OR RELIG IOUS PURPOSES TO THE EXTENT SPECIFIED HEREUNDER, NAMELY: (I) WHERE THE WHOLE OF THE NET CONSIDERATION IS UTILISED IN ACQUIRING THE NEW CAPITAL ASSET, THE WHOLE OF SUCH CAPITAL GAIN; (II) WHERE ONLY A PART OF THE NET CONSIDERATION IS UTILISED FO R ACQUIRING THE NEW CAPITAL ASSET, SO MUCH OF SUCH CAPITAL G AIN AS IS EQUAL TO THE AMOUNT, IF ANY, BY WHICH THE AMOUNT SO UTILISED EXCEEDS THE COST OF THE TRANSFERRED ASSET; (B) WHERE A CAPITAL ASSET, BEING PROPERTY HELD UNDER TRUST IN PART ONLY FOR SUCH PURPOSES, IS TRANSFERRED AND THE WHOLE OR ANY PART OF THE NET CONSIDERATION IS UTILISED FOR ACQUIRING ANOTHER CAPIT AL ASSET TO BE SO HELD, THEN, THE APPROPRIATE FRACTION OF THE CAPITA L GAIN ARISING FROM THE TRANSFER SHALL BE DEEMED TO HAVE BEEN AP PLIED TO CHARITABLE OR RELIGIOUS PURPOSES TO THE EXTENT SPECIFIED HE REUNDER, NAMELY: (I) WHERE THE WHOLE OF THE NET CONSIDERATION IS UTILISED IN ACQUIRING THE NEW CAPITAL ASSET, THE WHOLE OF THE APPROPRIA TE FRACTION OF SUCH CAPITAL GAIN; (II) IN ANY OTHER CASE, 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 UTILISED FOR ACQUIRING THE NEW ASSET EXCEEDS THE APPROPRIATE FRACTION OF THE C OST OF THE TRANSFERRED ASSET. EXPLANATION.IN THIS SUB-SECTION, (I) 'APPROPRIATE FRACTION' MEANS THE FRACTION WHICH REPRESE NTS THE EXTENT TO WHICH THE INCOME DERIVED FROM THE CAPITAL ASSE T TRANSFERRED WAS IMMEDIATELY BEFORE SUCH TRANSFER APPLICABLE TO CHARITABLE OR RELIGIOUS PURPOSES; ITA NO.575(B)/2011 8 (II) 'COST OF THE TRANSFERRED ASSET' MEANS THE AGGREGATE OF THE COST OF ACQUISITION (AS ASCERTAINED FOR THE PURPOSES OF SECTIONS 48 AND 49) OF THE CAPITAL ASSET WHICH IS THE SUBJECT OF THE TRANSFER AND THE COST 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 CONSIDERAT ION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CA PITAL ASSET AS REDUCED BY ANY EXPENDITURE INCURRED WHOLLY AND EXCLUSIVE LY IN CONNECTION WITH SUCH TRANSFER. 14. THE CIT HAS PROCEEDED TO APPLY THE PROVISIONS OF S EC.11(1A)(A)(II) OF THE ACT. THUS IT IS CLEAR THAT THE CAPITAL ASSET IS PROPE RTY HELD UNDER TRUST WHOLLY FOR CHARITABLE OR RELIGIOUS PURPOSES. SEC.11(1A)(B) APPLIES ONL Y WHEN THE PROPERTY HELD UNDER TRUST IN PART ONLY FOR SU CH 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 O F 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 BE HIND 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 U NDER TRUST FOR CHARITABLE OR RELIGIOUS PURPOSES IS EXEMPT FROM IN COME-TAX TO THE EXTENT SUCH INCOME IS ACTUALLY APPLIED TO SUCH PU RPOSES DURING THE PREVIOUS YEAR ITSELF OR WITHIN THREE MONTHS NEX T FOLLOWING. AS INCOME INCLUDES CAPITAL GAINS, A CHARITABLE O R RELIGIOUS TRUST WOULD FORFEIT EXEMPTION FROM INCOME-TAX IN RES PECT OF ITS INCOME BY WAY OF CAPITAL GAINS UNLESS SUCH INCOME IS ALSO APPLIED TO THE PURPOSES OF THE TRUST DURING THE STIPULAT ED PERIOD. IN SOME CASES, CHARITABLE OR RELIGIOUS TRUSTS ARE REQUIRED TO SELL, IN THE INTEREST OF THE TRUST, CAPITAL ASSETS FORMING PART OF THE CORPUS OF THE TRUST PROPERTY SOLELY WITH A VIEW TO ACQUIRING OTHER CAP ITAL ASSETS TO BE HELD AS PART OF THE CORPUS OF TRUST. THE REQUIREMEN T THAT THE CAPITAL GAINS ARISING FROM SUCH TRANSACTIONS SHOULD BE UTILISE D FOR CHARITABLE OR RELIGIOUS PURPOSES, DURING THE ACCOUNTING YEA R ITSELF OR WITHIN THREE MONTHS IMMEDIATELY FOLLOWING, 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 RESULT OF CER TAIN AMENDMENTS MADE IN THE SCHEME OF TAX EXEMPTION OF CHARIT ABLE AND RELIGIOUS TRUSTS THROUGH THE FINANCE ACT, 1970. UNDER ONE OF THESE AMENDMENTS, A CHARITABLE OR RELIGIOUS TRUST WOULD FORFEIT EXE MPTION FROM TAX ON ITS INCOME IF THE TRUST FUNDS, CONSTITUTING ITS C ORPUS OR INCOME, ARE INVESTED IN A CONCERN IN WHICH THE AUTHOR OR FOUNDER OF THE TRUST OR ANY SUBSTANTIAL CONTRIBUTOR TO IT OR ANY R ELATIVE OF SUCH AUTHOR, FOUNDER OR CONTRIBUTOR IS SUBSTANTIALLY INTERESTED . WHERE THE ITA NO.575(B)/2011 9 INVESTMENT OF THE TRUST FUNDS IN SUCH CONCERN EXCEEDS 5 PER CENT OF THE CAPITAL OF THE CONCERN, EXEMPTION IS FORFEITED IN RESPEC T OF THE WHOLE OF THE INCOME OF THE TRUST, WHILE IN A CASE WHERE THE INVESTMENT DOES NOT EXCEED 5 PER CENT, THE EXEMPTION IS LOST ONLY IN RESPECT OF THE INCOME FROM SUCH INVESTMENT, THE OTHER IN COME CONTINUING TO ENJOY TAX EXEMPTION. IN ORDER TO ENABLE CH ARITABLE AND RELIGIOUS TRUSTS TO CHANGE THEIR INVESTMENTS SUITABLY, WITH OUT FORFEITING EXEMPTION FROM TAX, A SPECIFIC PROVISION WAS ALSO MAD E IN THE INCOME-TAX ACT TO THE EFFECT THAT THE AFORESAID PRO VISIONS 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 RELIG IOUS TRUSTS DIVESTED THEMSELVES OF INVESTMENTS IN PROHIBITED CO NCERNS BEFORE 1-1-1971. IF THE PROVISIONS OF THE LAW WERE CONSTRU ED STRICTLY, SUCH TRUSTS WOULD HAVE FORFEITED EXEMPTION FROM TAX IN RES PECT OF THEIR INCOME BY WAY OF CAPITAL GAINS ARISING FROM THE TRANSFE R OF SUCH INVESTMENTS UNLESS THEY APPLIED SUCH INCOMES TO CHA RITABLE OR RELIGIOUS PURPOSES DURING THE RELEVANT ACCOUNTING YEAR OR WITHIN THREE MONTHS IMMEDIATELY FOLLOWING. 75. THE QUESTION OF ELIMINATING THE DISADVANTAGE TO CHARITA BLE OR RELIGIOUS TRUSTS IN BEING OBLIGED TO SPEND AWAY THE CAPITAL GAINS ARISING FROM THE TRANSFER OF ASSETS CONSTITUTING THE CORPU S OF THE TRUST INSTEAD OF ADDING TO THE CORPUS, WAS CONSIDERED BY GOVERNMENT IN 1963 AND ADMINISTRATIVE INSTRUCTIONS WERE IS SUED TO THE EFFECT THAT WHERE A CHARITABLE OR RELIGIOUS TRUST TRAN SFERRED 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 TRANS ACTION IN ACQUIRING A NEW CAPITAL ASSET, THE AMOUNT OF CAPITAL GAINS SO UTILISED SHOULD BE REGARDED AS HAVING BEEN APPLIED TO THE CHARITA BLE OR RELIGIOUS PURPOSES OF THE TRUST. THESE INSTRUCTIONS HAVE R ECENTLY BEEN REITERATED. 76. WITH A VIEW TO PLACING THE AFORESAID ADMINISTRATIVE INSTRU CTIONS ON A LEGAL FOOTING AND REMOVING THE DISADVANTAGE TO CHARIT ABLE AND RELIGIOUS TRUSTS FOR THE PAST AS ALSO THE FUTURE, SECTION 1 1 HAS BEEN AMENDED, BY SECTION 5 OF THE FINANCE (NO. 2) ACT, 1971 BY W AY OF INSERTION OF A NEW SUB-SECTION (1A). UNDER THE NEW SUB-SEC TION, IT HAS BEEN PROVIDED THAT IN A CASE WHERE A CAPITAL ASSET BEING PROPERTY HELD UNDER TRUST FOR CHARITABLE OR RELIGIOUS PURP OSES IS TRANSFERRED AND THE WHOLE OR ANY PART OF THE NET CONSID ERATION FOR THE TRANSFER (I.E., FULL VALUE OF THE CONSIDERATION AS REDUCED BY THE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE TRANSFER) IS UTILISED FOR ACQUIRING ANOTHER CAPITAL ASSET TO BE HELD AS PART OF THE CORPUS OF THE TRUST, THE CAPITAL GAIN ARISING FR OM THE TRANSFER WILL BE REGARDED AS HAVING BEEN APPLIED TO CHARITA BLE OR RELIGIOUS PURPOSES. WHERE THE WHOLE OF SUCH NET CONSIDER ATION IS UTILISED IN ACQUIRING THE NEW CAPITAL ASSET, THE ENTIRE AMOUN T OF THE CAPITAL GAIN WILL BE REGARDED AS HAVING BEEN APPLIED TO CHAR ITABLE OR RELIGIOUS PURPOSES, WHILE IN A CASE WHERE ONLY A PART OF TH E NET CONSIDERATION IS UTILISED FOR ACQUIRING THE NEW CAPITAL ASSET, AN AMOUNT, IF ANY, BY WHICH THE COST OF ACQUISITION OF THE NEW A SSET EXCEEDS THE AGGREGATE OF THE COST OF ACQUISITION OF THE C APITAL ASSET ITA NO.575(B)/2011 10 TRANSFERRED AND THE COST OF ANY IMPROVEMENTS MADE TO S UCH ASSET, WILL BE REGARDED AS HAVING BEEN APPLIED TO SUCH PURPOSES. 15. THE ABOVE PROVISIONS CAN BE EXPLAINED IN THE FORM OF THE FOLLOWING EXAMPLE. IF THE ENTIRE NET CONSIDERATION IS USED TO ACQU IRE NEW ASSET THEN THERE IS NO DIFFICULTY AS NOTHING WILL BE TAXABLE (SEC.11(1A)(A)(I) OF T HE ACT). WHEN COST OF ACQUISITION AND IMPROVEMENT OF THE ASSET TRA NSFERRED IS SAY RS.10 LAKHS, THE NET CONSIDERATION IS SAY RS.20 LAKHS AND T HE COST OF THE NEW ASSET IS RS.11 LAKHS THEN RS.1 LAKH WILL BE DEEMED AS IN COME APPLIED FOR CHARITABLE PURPOSES U/S.11(1A) OF THE ACT (SECTION 11(1A)(A )(II)). IF THE COST OF ACQUISITION OF THE NEW ASSET IS ONLY RS.10 LAKHS OR LESS THAN THE BENEFIT OF EXEMPTION 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 THE NORMAL PROVISIONS OF T HE ACT. THIS IS CLEAR FROM THE EXPRESSION USED IN SEC.11(1A)(A) OF THE ACT WHICH REFERS TO WHERE A CAPITAL ASSET, BEING PROPERTY HELD UNDER TR UST WHOLLY FOR CHARITABLE OR RELIGIOUS PURPOSES, IS TRANSFERRED AND THE WH OLE OR ANY PART OF THE NET CONSIDERATION IS UTILISED FOR ACQUIRING ANOTHER CA PITAL 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 O F 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 C ONSIDERATION WAS NOT UTILIZED IN ACQUIRING ANOTHER CAPITAL ASSET TO BE H ELD UNDER TRUST WHOLLY FOR CHARITABLE OR RELIGIOUS PURPOSES. THE NET SALE CONSIDERAT ION ITA NO.575(B)/2011 11 RECEIVED ON TRANSFER IN THE PRESENT CASE WAS RS.4,00,00,000/-. TH E COST OF ACQUISITION OF THE PROPERTY WITHOUT THE BENEFIT OF INDEXAT ION WAS RS.1,33,01,892/-. AS WE HAVE ALREADY HELD CAPITAL GAIN ON TR ANSFER OF CAPITAL ASSET HAS TO BE MADE IN ACCORDANCE WITH THE PR OVISIONS OF SEC.45 TO 55A OF THE ACT. SUCH COMPUTATION WOULD BE 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 17. THE ASSESSEE HAS ENTERED INTO AGREEMENT FOR SALE O F THE PROPERTY ON 12.7.2001. THE AMOUNT RECEIVED BY THE ASSESSEE TOWARDS SALE CONSIDERATION OVER A PERIOD OF TIME AND UTILIZATION OF THE SA ME FOR ACQUIRING NEW CAPITAL ASSET WERE AS FOLLOWS: 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 -------------------------------------------------- --------------------------- 17.1 IN THE CASE OF TRUSTEES OF SHRI RAMANAGAR TRUST VS. THIRDITO13 ITD 426 (MUM) IT HAS BEEN HELD THAT ADVANCES RECE IVED BY A TRUST IN THE PERIOD EARLIER TO THE PREVIOUS YEAR IN WHICH TRANS FER OF A CAPITAL ASSET BY A TRUST TAKES PLACE, IF INVESTED IN PURCHAS E OF CAPITAL ASSET IN THE PERIOD EARLIER TO THE PREVIOUS YEAR IN WHICH TRANS FER OF THE CAPITAL ASSET TAKES PLACE SUCH PURCHASE SHOULD ALSO BE CONSID ERED AS APPLICATION OF CAPITAL GAIN FOR CHARITABLE PURPOSE. IF THAT DECISION IS APPLIED THEN THE DIFFERENCE BETWEEN THE SUM OF RS.2,7 8,38,080/- WHICH IS THE INVESTMENT OUT OF NET SALE CONSIDERAT ION RECEIVED ON TRANSFER OF CAPITAL ASSET MADE BY THE ASSESSEE AND TH E COST OF THE TRANSFERRED ASSET WOULD BE DEEMED TO HAVE BEEN APPLIED TO CHARITABLE OR RELIGIOUS PURPOSES. THE EXPRESSION COST OF THE TRANS FERRED ASSET IS ITA NO.575(B)/2011 12 DEFINED IN EXPLN. (II) TO SEC.11(1A) OF THE ACT, AND IT LAYS DOWN THAT COST OF THE TRANSFERRED ASSET MEANS THE AGGREGATE OF THE C OST OF ACQUISITION (AS ASCERTAINED FOR THE PURPOSES OF SEC.48 AND 49) OF THE CAP ITAL ASSET WHICH IS THE SUBJECT OF THE TRANSFER AND THE COST OF ANY IMPRO VEMENT THERETO WITHIN MEANING ASSIGNED TO THAT EXPRESSION IN SUB-CLAUSE (B ) OF CLAUSE (1) OF SECTION 55. THUS THE DIFFERENCE BETWEEN THE CAPITAL GA IN 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 B E CONSIDERED AS APPLICATION OF CAPITAL GAIN FOR CHARITABLE PURP OSE 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.27,1 5,449 WHICH IS ELIGIBLE FOR EXEMPTION AS APPLICATION OF CAPITAL GAIN FOR CHARITA BLE 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 ORD ER OF THE AO WAS ERRONEOUS. THE ARGUMENT OF THE LEARNED COU NSEL FOR THE ASSESSEE THAT TWO VIEWS WERE POSSIBLE ON THE INTERPRET ATION OF THE PROVISIONS OF SEC.11(1A) OF THE ACT AND THAT THE AO HAS AD OPTED A POSSIBLE VIEW AND THEREFORE IN EXERCISE OF POWERS U/S.263 OF THE AC T, 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 E XPLAINED IN THE CBDT CIRCULAR REFERRED TO EARLIER AND THE PROVISIONS THEMS ELVES ARE VERY CLEAR. HOWEVER, EVEN THE CIT, IN EXERCISE OF HIS POWERS U/ S.263 OF THE ACT HAS OVERLOOKED THE CORRECT INTERPRETATION OF THE PROVISIO NS OF SEC.11(1A)(A)(II) OF THE ACT AND THEREFORE TO THIS EXTENT HIS OR DER IS MODIFIED AS STATED ABOVE. 19. THE CAPITAL GAIN TO THE EXTENT NOT UTILIZED FOR ACQUIR ING NEW ASSET, WILL BE CONSIDERED AS INCOME OF THE TRUST AND ALL CONSEQUENCE S LIKE ACCUMULATION ETC., SHOULD BE ALLOWED. HAVING HELD THAT THE O RDER OF THE O WAS ERRONEOUS LET US EXAMINE AS TO WHETHER THE SAME W AS PREJUDICIAL TO THE INTEREST OF REVENUE. ITA NO.575(B)/2011 13 20. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFOR E US THAT FOR INVOKING POWER U/S.263 OF THE ACT, THE ORDER SOUGHT TO BE REVISED SHOULD BE (I) ERRONEOUS AND (II) PREJUDICIAL TO THE INTEREST OF THE RE VENUE. ACCORDING TO HIM THE ORDER OF THE AO WHICH WAS REVISED B Y THE CIT U/S.263 OF THE ACT, EVEN ASSUMING THAT THE SAME WAS ERR ONEOUS, WAS NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE. IN THIS REGAR D IT WAS SUBMITTED THAT CAPITAL GAIN IS ALSO INCOME 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 GAIN WHICH IS NO T USED TO ACQUIRE NEW ASSET IS APPLIED FOR 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 ASSESSME NT U/S.143(3) READ WITH SEC.148 OF THE ACT DATED 30.12.2008 WHICH WAS REVISE D IN THE IMPUGNED ORDER PASSED U/S.263 OF THE ACT, THE AO HAS CO MPUTED TOTAL INCOME OF THE ASSESSEE AS FOLLOWS: TOTAL INCOME AS PER INCOME & EXPENDITURE STATEMENT RS.8,77,27,132 LESS: SURPLUS ON SALE OF CAPITAL ASSET (RS.4,00,00,000 - RS.1,33,01,892) RS.2,66,98,108 -------------------- GROSS INCOME RS.6,10,29,024 LESS: APPLICATION TOWARDS THE OBJECTS OF THE TRUST REVENUE EXPENDITURE RS.4,94,30,071 CAPITAL EXPENDITURE AS PER DEPRECIATION CHART RS.3,86,22,578 RS.8,80,52,649 RS.2,70,23,625 LESS: DEPRECIATION AS DISCUSSED ABOVE RS.1,10,00,167 NET DEFICIT RS.1,60,23458 ------------------ 21. IT WAS ARGUED THAT THE ABOVE APPLICATION OVER AND ABOVE THE INCOME SHOULD BE CONSIDERED AS APPLICATION OF CAPITAL GAIN FOR CHARIT ABLE PURPOSES AND THEREFORE CAPITAL GAIN CANNOT BE BROUGHT TO TAX. I N THIS REGARD, RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN ITA NO.575(B)/2011 14 THE CASE OF CIT VS. EAST INDIA CHARITABLE TRUST 206 ITR 152 (CAL). THE ASSESSEE IN THE CASE BEFORE THE HONBLE CALCUTTA HIGH CO URT IN THE AFORESAID DECISION WAS A TRUST. THE ASSESSMENT YEAR INVO LVED 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 CAPIT AL GAINS SHOWN AMOUNTED TO RS. 23,79,538. THE ASSESSEE CLAIMED THA T THE NET CONSIDERATION OF THE SALE WAS UTILISED FOR ACQUIRING NEW CAPIT AL 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 48.130 UNITS OF THE UNIT TRUST OF INDIA . 30,88,149 . IN 1982 : . . 13-1-1982 4,00,000 FIXED DEPOSIT WITH BHARAT PETROLEUM CORPORATION LTD. 8-2-1982 3,00,000 FIXED DEPOSIT WITH BHARAT HEAVY ELECTRICALS LTD. . 7,00,000 . OUT OF THE ABOVE, A SUM OF RS. 7,00,000 WAS INVESTED 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 ENDED ON 31ST DEC., 1981. IT WAS URGED THAT T HE CAPITAL GAINS OF RS. 23,79,538 WAS, THEREFORE, EXEMPT FROM TAX UNDER S. 11(1 ) OF THE IT ACT, 1961. ON THE ABOVE FACTS ONE OF THE QUESTION BEFORE TH E HONBLE CALCUTTA HIGH COURT WAS AS TO WHETHER DESPITE THE ACQUISITION OF THE FRESH CAPITAL ASSET NOT BEING WITHIN THE ACCOUNTING YEAR RELEVANT TO T HE ASST. YR. 1982- ITA NO.575(B)/2011 15 83, THE EXEMPTION UNDER S. 11(1A) SHALL RELATE BACK TO THE ASST. YR. 1982- 83 BY REASON OF THE FACT THAT THE ASSESSEE EXERCISED A N OPTION UNDER THE EXPLANATION TO S. 11(1) REQUESTING THE ITO TO TREAT THE A BOVE SUM AS DEEMED APPLICATION DURING THE YEAR ENDED ON 31ST DEC., 1981. 22. THE HONBLE CALCUTTA HIGH COURT HELD AS FOLLOWS: SEC. 11(1) READS AS FOLLOWS : '(1) SUBJECT TO THE PROVISIONS OF SS. 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 W HOLLY 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 INCOME SO ACCUMULATED OR SET APART IS NOT IN EXCESS OF TWENTY-FIVE PER CENT OF THE INCOME FROM SUCH PROPER TY; (B) INCOME DERIVED FROM PROPERTY HELD UNDER TRUST I N PART ONLY FOR SUCH PURPOSES, THE TRUST HAVING BEEN CREATED BEFORE THE COMMENCEMENT OF THIS ACT, TO THE EXTENT TO WHICH SUCH INCOME IS APP LIED TO SUCH PURPOSES IN INDIA; AND, WHERE ANY SUCH INCOME IS FINALLY SET APART FOR APPLICATION TO SUCH PURPOSES IN INDIA, TO THE EXTENT TO WHICH T HE INCOME SO SET APART IS NOT IN EXCESS OF TWENTY-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 CONTRI BUTIONS 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 C ENT OF THE INCOME DERIVED DURING THAT YEAR FROM PROPERTY HELD UNDER T RUST, 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 TH E 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 MUC H 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, ITA NO.575(B)/2011 16 MAY, AT THE OPTION OF THE PERSON IN RECEIPT OF THE INCOME (SUCH OPTION TO BE EXERCISED IN WRITING BEFORE THE EXPIRY OF THE TI ME ALLOWED UNDER SUB- S. (1) OR SUB-S. (2) OF S. 139, WHETHER FIXED ORIGI NALLY OR ON EXTENSION FOR FURNISHING THE RETURN OF INCOME) BE DEEMED TO B E INCOME APPLIED TO SUCH PURPOSES, DURING THE PREVIOUS YEAR IN WHICH TH E INCOME WAS DERIVED; AND THE INCOME SO DEEMED TO HAVE BEEN APPL IED SHALL NOT BE TAKEN INTO ACCOUNT IN CALCULATING THE AMOUNT OF INC OME 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 DURING THE PREVI OUS YEAR IMMEDIATELY FOLLOWING, AS THE CASE MAY BE, AND, IN THE CASE REF ERRED TO IN SUB-CL. (II), DURING THE PREVIOUS YEAR IMMEDIATELY FOLLOWING THE PREVIOUS YEAR IN WHICH THE INCOME WAS DERIVED.' 18. IN OUR VIEW, BY REASON OF THE OPTION EXERCISED UNDE R THE EXPLANATION TO S. 11(1), THE ASSESSEE IS ENTITLED TO THE BENEFIT UNDE R S. 11(1A) INASMUCH AS THE DEFINITION OF INCOME AS CONTAINED IN S. 2(24) OF TH E ACT INCLUDES CAPITAL GAINS AS ONE OF THE SPECIES OF INCOME. THAT BEING SO, THE OP TION AS EXERCISABLE WITH REGARD TO INCOME SHOULD ALSO AVAIL TO CAPITAL GAINS PROVIDED SUCH OPTION IS EXERCISED 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 DEPOSITS 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 SU PPLIED) 21. IT IS CLEAR FROM THE AFORESAID DECISION OF THE HOBLE CA LCUTTA HIGH COURT THAT CAPITAL GAIN IS ALSO INCOME OF THE TRUST AND SE C.11(1A) OF THE ACT IS NOT THE ONLY WAY IN WHICH CAPITAL GAIN HAS TO BE A PPLIED FOR CHARITABLE PURPOSES. IT IS ONE OF THE WAY OF APPLYING CAP ITAL GAIN FOR CHARITABLE PURPOSE. IF CAPITAL GAIN IS APPLIED FOR CHARITABLE PURPOSE OF THE ASSESSEE NOT BY ACQUIRING A NEW ASSET BUT FOR OTHER CH ARITABLE PURPOSE, THEN THERE IS NO REASON WHY IT SHOULD NOT BE CONSIDERED AS APPLICATION OF INCOME FOR CHARITABLE PURPOSE ENABLING THE ASSESSEE TO CLA IM EXEMPTION U/S.11(1) OF THE ACT. IN THE PRESENT CASE THERE IS NO QU ESTION OF APPLICATION FOR ACCUMULATION OF INCOME FOR BEING SPENT FOR CHA RITABLE PURPOSE IN FUTURE BECAUSE SUCH APPLICATION IS ALREADY DEEM ED TO HAVE BEEN MADE IN THE PREVIOUS YEAR ITSELF. 22. ADMITTEDLY, EVEN AS PER THE ORDER OF ASSESSMENT T HERE WAS APPLICATION FOR CHARITABLE PURPOSE, EVEN AFTER DISALLOWANCE OF DEPRECIATIO N MADE BY THE AO, OF A SUM OF RS.1,60,23458 OVER AND ABOVE THE REC EIPTS OF THE ASSESSEE DURING THE PREVIOUS YEAR. THE CAPITAL GAIN CONS IDERED AS NOT UTILIZED FOR CHARITABLE PURPOSES U/S.11(1A) OF THE ACT IS ONL Y A SUM OF RS.1,21,61,909.33 PS. THE SURPLUS UTILIZATION OF RS.1,60,23,45 8 SHOULD BE SUFFICIENT TO SET OFF THE CAPITAL GAIN NOT UTILIZED FOR CHARIT ABLE PURPOSE U/S.11(1A) OF THE ACT. THUS THE NET DEFICIT IN THIS AY TO BE CARRIED FORWARD ITA NO.575(B)/2011 17 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 IN TEREST OF THE REVENUE AS NO PART OF THE CAPITAL GAIN BECAME TAXABLE BE CAUSE OF LOSS OF EXEMPTION U/S.11(1A) OF THE ACT. SINCE THE ORDER SOUGHT T O 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 THE ABOVE DIRECTIONS AND COMPUTATION. 24. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON TH DAY OF SEPT., 2012. (N. BARATHVAJA SANKAR) (N. V.VASUDEVAN) VICE PRESIDENT JUDICIAL MEMBER PLACE: BANGALORE DATED: AM* COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. CIT(A) 4. CIT 5. DR 6. GF(BLORE) BY ORDER SR. PRIVATE SECRETARY, ITAT, BANGALORE