Karnataka High Court
The Pr Commissoner Of Income Tax ... vs M/S St. Joseph'S Monastery on 23 November, 2021
Bench: S.Sujatha, Hanchate Sanjeevkumar
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 23RD DAY OF NOVEMBER, 2021
PRESENT
THE HON'BLE MRS.JUSTICE S.SUJATHA
AND
THE HON'BLE MR. JUSTICE HANCHATE SANJEEVKUMAR
I.T.A.No.840/2018
BETWEEN :
1. THE PR COMMISSIONER OF
INCOME TAX (EXEMPTIONS)
UNITY BUILDING ANNEXE
MISSION ROAD, BANGALORE-560 027
2. DEPUTY COMMISSIONER OF
INCOME-TAX (EXEMPTION)
CIRCLE-1, BANGALORE-560027 ...APPELLANTS
(BY SRI E.I.SANMATHI, ADV.)
AND :
M/s ST. JOSEPH'S MONASTERY
NO.39, ST. JOSEPH'S
MONASTERY HOUSE
GUNJUR CARMELARAM ROAD
BANGALORE-560 035 ...RESPONDENT
(BY SRI A.SHANKAR, SENIOR ADV. A/W
SRI S.ANNAMALAI, ADV. APPOINTED AS AMICUS CURIE;
Ms. LAKSHMI MENON, ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION
260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER
DATED 27.06.2018 PASSED IN ITA NO.2893/BANG/2017, FOR
THE ASSESSMENT YEAR 2013-2014 PRAYING TO (A) DECIDE
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THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER
QUESTIONS OF LAW AS MAY BE FORMULATED BY THE
HON'BLE COURT AS DEEMED FIT. (B) SET ASIDE THE
APPELLATE ORDER DATED 27.06.2018 PASSED BY THE
INCOME TAX APPELLATE TRIBUNAL, 'C' BENCH, BENGALURU
IN APPEAL PROCEEDINGS ITA NO.2893/BANG/2017 FOR
ASSESSMENT YEAR 2013-2014.
THIS APPEAL COMING ON FOR HEARING, THIS DAY,
S. SUJATHA, J., DELIVERED THE FOLLOWING:
JUDGMENT
This appeal is filed by the Revenue under Section 260A of the Income Tax Act, 1961 ('Act' for short) assailing the order of the Income Tax Appellate Tribunal, Bangalore Bench "C", Bengaluru, ('Tribunal' for short) dated 27.06.2018 passed in ITA No.2893/Bang/2017 relating to the Assessment Year 2013-14.
2. This appeal was admitted by this Court to consider the following substantial questions of law:-
"1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the donation made to another -3- trust is to be allowed as application in the light of the proviso to Section 11(1A) of the Act where a charitable or religious trust transferring a capital asset solely with a view to acquiring another capital asset for the use and benefit of the trust and utilized the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital so utilized should be regarded as having been applied to the charitable or religious purpose of the trust?
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the conclusion drawn by assessing officer is not correct when the proviso of Section 11(1A) specifically provided for the condition under which such income are exempt from taxation. The proviso of Section 11(1A) commences with the words "for the purpose of sub section (1)" thereby leaving no room for Section 11(1) to operate in the absence of the conditions stipulated under Section 11(1)(a) not being fulfilled?
3. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that inter-trust donation out of sale proceeds of lands is application of income of the -4- trust, not appreciating that the asset sold could represent corpus fund or accumulation under Section 11(a) or (b) of the Act and the inter-trust donation is prohibited under explanation to Section 11(2) of the Act.?"
3. The assessee is a religious and charitable Trust and society registered under Section 12A of the Act and has filed its return of income for the assessment year under consideration declaring 'nil' income after claiming exemption under Section 11 of the Act. The case was taken up for consideration and the assessment was concluded under Section 143(3) of the Act, wherein the taxable income was determined at Rs.27,66,73,445/- denying exemption under Section 11 of the Act claimed by the assessee. Being aggrieved, the assessee has preferred an appeal before the Commissioner of Income Tax (Appeals) and the same came to be allowed in part giving partial relief to the assessee. Being aggrieved, the Revenue has preferred -5- an appeal before the Tribunal, which came to be dismissed. Hence, this appeal by the Revenue.
4. Learned counsel appearing for the Revenue submitted that in terms of Section 11(1A) of the Act, where a charitable or religious trust transferring a capital asset solely with a view to acquiring another capital asset for the use and benefit of the trust and utilized the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital so utilized should be regarded as having been applied for the religious and charitable purpose of the Trust. Having regard to this provision, the assessing officer has rightly held that the assessee is not entitled to exemption under Section 11 of the Act.
5. It was further submitted that the language employed in Section 11(1A) has to be interpreted harmoniously with Section 11(1) of the Act. On a conjoint reading of these provisions, the view of the -6- assessing officer cannot be held to be unjustifiable. However, the first appellate authority proceeded to allow the appeal in part and the Tribunal has grossly erred in dismissing the appeal filed by the Revenue ignoring this material aspect, inasmuch as application of Section 11(1A) of the Act to the facts of the case on hand.
6. Learned counsel appearing for the Revenue further submitted that the Tribunal has merely followed the order passed by the Coordinate Bench of the Tribunal in the case of Al Ameen Educational Society v. The Director of Income Tax (Exemptions), reported in (2012) 26 Taxman 25, which was challenged by the Revenue before this Court in ITA.No.78/2013 and the same came to be dismissed relying on the Circular issued by the CBDT. Learned counsel thus argued that Explanation to Section 11(2) do prohibit inter-trust donations out of the sale proceeds of the immovable property of the charitable -7- trust. This aspect having not been properly appreciated by the Tribunal, the substantial questions of law raised herein require to be answered in favour of the Revenue and against the assessee.
7. Learned Senior Counsel Sri A.Shankar, who is appointed by this Court as an Amicus Curiae has justified the order of the Tribunal. Referring to the Circular Instructions of CBDT in Circular No.52, dated 30.12.1970, Circular No.72, dated 06.11.1972 with explanatory notes to the Finance Act, 1971, Circular No.8/2002 dated 27.08.2002 with the explanatory notes to the Finance Act, 2002. Leaned Senior Counsel submitted that the legislature has given statutory force to the circular instructions.
8. It was submitted that in order to give effect to Section 11(1A), inasmuch as investing the sale proceeds of a charitable institution to acquire another capital asset, a legal fiction has been created by Section -8- 11(1A) to bring it on par with the provisions of Section 11(1)(a) for application of the charitable purposes. As specified in Section 11(1)(a) of the Act, income derived from the property held under the trust for charitable or religious purposes, to the extent to which such income is applied to such purposes in India and where such income is accumulated or set apart is not in excess of 15% income on such income from such property. Thus, in the light of this provision, application of income derived from the property, i.e., the sale proceeds of the property, is nothing but a capital gain and this income if applied to the object and purpose of the Trusts in India, Section 11(1A) benefit cannot be denied to the assessee. Further inviting attention of this Court to the Explanation thereof, learned Senior Counsel submitted that in the present case the sale proceeds of the property of the charitable trust was invested in acquiring a capital asset for the same assessment year and as such, there is no prohibition as contended by -9- the Revenue for the inter trust transfer and the same cannot be a ground for the department to deny benefit of Section 11(1A) of the Act. Our attention was drawn to the relevant paragraphs of Circular No.8/2002 and the notes of clauses of Finance Act, 2002.
9. Learned Counsel Smt Lakshmi Menon appearing for the assessee supporting the impugned orders placed reliance on the same Circulars referred to by the learned Senior Counsel. Learned counsel submitted that the said Circulars would clarify that, considering the application of 11(1A) vis-à-vis the investment of sale proceeds made by the charitable trust for acquiring another capital asset, Section 11(1A) has been inserted by Finance (No.2) Act, 1971 with retrospective effect from 01.04.1962. Learned counsel has drawn the attention of this Court to the Explanatory Notes of Finance (No.2) Act, 1971, wherein it has been stated that with a view to placing the administrative
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instructions on a legal footing and removing the disadvantage to charitable and religious trust for the past as also the future, Section 11 has been amended by Section 5 of Finance (No.2) Act, 1971, by way of insertion of a new sub-section (1A). Learned counsel submitted that inter-se transfer of the sale proceeds made by the assessee - charitable trust to another charitable trust, cannot be construed as inadmissible under Section 11(2) read with Explanation thereof. In this regard, learned counsel submitted that exemptions claimed by the assessee is relating to the donations made from the income of the current year, wherein the capital asset was sold and such capital gain would certainly attract Section 2(24)(vi) of the Act to constitute 'income' for the purposes of the Income Tax Act. These aspects having been considered by the Tribunal in the judgment of Al Ameen Educational Society, supra, the Tribunal has rightly decided the issue in favour of the assessee and dismissal of the appeal filed against the
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said order for want of monetary limits could not be considered as an opportunity for the department to pursue the issue against the assessee herein, more particularly, when the substantial question of law is not at all applicable to the facts of the present case. Thus, the learned counsel submitted that substantial question of law No.3 has no relevance to the facts of the present case and no adjudication on the said substantial question of law is required by this Hon'ble Court.
10. We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record.
Section 11(1) (a) and (b) reads thus;
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--
(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in
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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 fifteen per cent of the income from such property;
(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied 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 the income so set apart is not in excess of fifteen per cent of the income from such property."
Section 11(1A) which was inserted by Finance (No.2) Act, 1971 with retrospective effect from 1.4.1962 reads thus;
"(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 whole or
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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 shall be deemed to have been applied to charitable or religious 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 for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset." Section 11(2) xxx x Provided that x x x x Explanation.--Any amount credited or paid, out of income referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under
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section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub- clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.
11. A comprehensive reading of Section 11(1) with Section 11(1A) would make it clear that Section 11(1A) has been inserted for the purpose of sub-section (1). Interpretation given by the assessing officer on the phrase "for the purpose of sub-section (1)" is wholly unsustainable for the reason that Section 11(1)(a) contemplates that the income derived from the property held under trust wholly for charitable or religious purpose to the extent to which such income is applied to such purposes in India, which is the first limb of Section 11(1)(a) and is relevant for deciding the issue on
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hand, would necessarily indicate that such income which has been derived from the sale proceeds of the property held by the Trust wholly for charitable and religious purpose, if applied to such purpose in India, it shall not be included in the total income of the previous year of the trust in respect of such income. What is material is that such income should be applied for religious or charitable purposes in India to attract Section 11(1)(a) of the Act.
12. The relevant paragraph of the Circular No.52 dated 30.12.1970 is quoted hereunder for ready reference;
"Under Section 11(1), a religious or charitable trust which accumulates its income in excess of 25 per cent of its total income of Rs.10,000, whichever is higher, is liable to pay tax on the income accumulated by it in excess of the said limit. In other words, such a trust has to apply at least 75 per cent of its total income, including any capital gains forming part of it during the relevant previous year, in order to be
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entitled to exemption on the entire amount of its income. In this connection, a question was raised during the third meeting on the Direct Taxes Advisory Committee whether the capital gains arising to a trust from the sale of a capital asset belonging to it would be regarded as having been applied for the purposes of the trust, if the trust invested the amount received from the sale of the capital asset, including the capital gains realized, in acquiring another capital asset for the trust. This point has been considered and it has been decided that where a religious or charitable trust transfers 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 utilizes the capital gains arising from the transaction in acquiring the new capital asset, the amount of capital gain so utilized should be regarded as having been applied for the religious or charitable purposes of the trust within the meaning of Section 11(1)."
Similarly, relevant paragraph of Annex - Circular dated 15.05.1963, reads as under;
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"Under Section 11(1), a religious or charitable trust which accumulates its income in excess of 25 per cent of its total income or Rs.10,000, whichever is higher, is liable to pay tax on the income accumulated by it in excess of the said limit. In other words, such a trust has to apply at least 75 per cent of its total income, including any capital gains forming part of it during the relevant previous year, in order to be entitled to exemption on the entire amount of its income. In this connection, a question was raised during the third meeting on the Direct Taxes Advisory Committee whether the capital gains arising to a trust from the sale of a capital asset belonging to it would be regarded as having been applied for the purposes of the trust, if the trust invested the amount received from the sale of the capital asset, including the capital gains realized, in acquiring another capital asset for the trust. This point has been considered and it has been decided that where a religious or charitable trust transfers a capital asset forming part of the corpus of its
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property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilizes the capital gains arising from the transaction in acquiring the new capital asset, the amount of capital gain so utilized should be regarded as having been applied for the religious or charitable purposes of the trust within the meaning of section 11(1)."
13. Paragraph 76 of Circular No.52 indicates that with a view to placing the aforesaid administrative instructions on a legal footing and removing the disadvantage to charitable and religious trusts for the past as also the future, section 11 has been amended, by section 5 of Finance (No.2) Act, 1971, by way of insertion of a new sub-section (1A).
14. Further, in paragraph 21.1 of Circular No.8/2002 dated 27.08.2002, it is clarified about the restriction on the application of the accumulated income of the charitable and religious trusts it is
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categorically stated that through the Finance Act, 2002, an Explanation has been inserted below sub-section (2) of Section 11 so as to provide that any amount paid or credited out of income from property held under trust referred to in clause (a) or clause (b) of sub section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other education institution or any hospital or other medical institution referred to in sub clause (iv) or sub clause (v) or sub clause (vi) or sub clause (via) of clause (23C) of section 10, either during the period of accumulation or thereafter, shall not be treated as application of income for charitable or religious purposes. Thus, payment to other trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out
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of the accumulated income shall not be treated as application of income and will be taxed accordingly.
15. Thus, the notes on clauses of Finance Act, 2002, further clarifies that payment to other trusts or institutions out of the income from property held under trust in the year of receipt, continued to be treated as application of income, however any such payment out of the accumulated income shall not be treated as application of income and will be taxed accordingly.
16. From the aforesaid, it cannot be disputed that Section 11(1A) of the Act was inserted by Finance (No.2) Act, 1971 with retrospective effect from 01.04.1962 to crystallize the law with reference to capital asset held under trust wholly for charitable or religious purpose gets transferred, the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held. Keeping this aspect in mind, it appears the legislature intended the capital gain arising
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from such transfer i.e., transfer of capital asset by the charitable trust and the sale proceeds utizlied for acquiring another capital asset shall be deemed to have been applied to charitable and religious purposes to the extent specified thereunder. A legal fiction has been created by Section 11(1A) to consider such transfer of capital asset and the investment of sale proceeds for acquiring another capital asset to be so held by the Trust as applied to charitable or religious purposes under Section 11(1)(a). At any stretch of imagination, this legal fiction created under Section 11(1A) cannot be considered as a proviso to carve out an exception to the main provision. It is in the background of the circular instructions, referred to supra, in order to give statutory force, this provision has been inserted. Thus, we are of the considered view that capital asset transferred by the charitable trust and utilized for acquiring another capital asset would alone cannot be the criteria for granting exemption under Section 11(1A) or in other words, no
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denial could be made if the sale proceeds are transferred to another charitable trust. Such inter-se transfer between two charitable trusts being not disputed by the department, cannot be a ground to deny the benefit under Section 11(1A) of the Act. The sale proceeds need not always be invested in another capital asset to be held in the name of the charitable trust. There may be circumstances where a charitable trust is not applying for charitable or religious purposes to the extent to which such income has to be applied to such purpose in India directly and intends to invest in another capital asset to be so held by such charitable institutions. Certainly, it is not a circumstance involved herein. No doubt, the sale proceeds are transferred to another charitable and religious purpose, the same would necessarily come within the ambit of Section 11(1A). Hence, the finding of the Tribunal placing reliance on the judgment of Al Ameen Educational Society, supra, though has not reached finality on the merits of the case for want of monetary reliefs, the same
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cannot be held to be invalid or illegal in view of the provisions of the Act as discussed above.
17. The Calcutta High Court in the case of Commissioner of Income Tax v. East India Charitable Trust, reported in 206 ITR 152 (Cal), has held as under;
"18. In our view, by reason of the option exercised under the Explanation to Section 11 (1), the assessee is entitled to the benefit under Section 11 (1a) inasmuch as the definition of income as contained in Section 2 (24) of the Act includes capital gains as one of the species of income. That being so, the option 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-section (1) of Section 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
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allowed exemption under the said provision for the assessment year 1982-83."
18. It is also significant to note that the Coordinate Bench of this Court in the case of Commissioner of Income Tax v. Maria Social Service Society, reported in (2018) 408 ITR 0462 (Karn) had considered the question relating to the return of income filed by the assessee and some foreign benefits received by the charitable trust and made over such remittance to another charitable trust which was newly constituted held to be not in contravention of the provisions of Section 11 of the Act as long as the subject matter of application of money is for the purpose of objects of the trust as envisaged under Section 11 and as such the said transfer could not be a ground for cancellation or rejection under Section 12AA of the Act.
19. This ruling of the Coordinate Bench, [one of us, SSJ was one of the member], would be applicable to
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the facts of the case insofar as substantial questions of law No.3 raised by the revenue is concerned. In the facts and circumstances of the case, we are conscious that the said issue was neither dealt with by the assessing officer nor the appellate authority and further by the Tribunal. This question is raised for the first time before this Court, indeed it is not applicable to the facts of the case. Hence, the said substantial question of law No.3 does not arise for our consideration.
20. For the reasons aforementioned, we answer the substantial questions of law Nos.1 and 2 in favour of the assessee and against the Revenue.
In the result, the appeal stands dismissed.
SD/-
JUDGE SD/-
JUDGE nd