Income Tax Appellate Tribunal - Madras
C.M. Kothari Charitable Trust vs Income-Tax Officer on 8 June, 1989
Equivalent citations: [1989]31ITD46(MAD)
ORDER
R. Parthasarathy, Accountant Member
1. This is an assessee's appeal and it has been directed against the appellate order dated 22-6-1987 in ITA No. 28/86-87 of the Commissioner of Income-tax (Appeals)-I, Madras.
2. As could be seen from its name, the assessee is a public charitable trust. The assessment year involved in this appeal is 1983-84, the relevant previous year for the same being 1-4-1982 to 31-3-1983. In its assessments for the assessment years earlier to the assessment year 1983-84, the income of the assessee-Trust was held to be exempt under Section 11 of the Income-tax Act, 1961. In the financial year 1982-83 relevant to the assessment year under consideration, the assessee had net income of Rs. 2,93,016, out of which Rs. 47,404 being the tax deducted at source on dividends and interest had not actually been received with the result that the income available for spending on charitable purposes was only Rs. 2,45,612 and the same had been spent towards charitable purposes. In view of the above, the assessee claimed exemption under Section 11 of the Act as in earlier years. But the Income-tax Officer denied exemption under Section 11 of the Act because the funds of the assessee-Trust invested or deposited before 1st March, 1983 otherwise than in any one or more of the forms or modes specified in Sub-section (5) of Section 11 continued to remain so invested or deposited after 30th day of November, 1983 and, therefore, as per Section 13(1)(d) of the Act as substituted by the Finance Act, 1983 with effect from 1-4-1983, the assessee-Trust forfeited the exemption under Section 11, which was otherwise admissible to it. According to the Income-tax Officer, the Finance Act, 1983 had amended the provisions of Section 13(1)(d) and the amended provision came into force with effect from 1-4-1983 and was applicable to the assessment year 1983-84 and the investments, which were not in order as on 28-2-1983, should not be continued in the same mode of investment after 30-11-1983 in case the assessee was not to forfeit the exemption under Section 11. But, in the case of the assessee, the investment of part of funds as on 28-2-1983 continued to remain so invested even after 30-11-1983 and the assessee had not resorted to change the investment within the time allowed by statute viz. 30-11-1983. Therefore the Income-tax Officer was of the opinion that exemption under Section 11 was not available to the income of the assessee-Trust even though the entire income of the trust had been applied to charitable purposes and brought to assessment the entire income of the trust. According to the Income-tax Officer the offending investments as on 31-3-1983 were as under :-
Shares Face Value
Rs.
Amrutanjan Limited 600 3,000
Balanoor Tea & Rubber Products 100 1,100
Investment Trust of India Ltd. 7800 78,000
Investment Trust of India Ltd. 11700 1,17,000
Kothari (Mds.) Ltd. 26367 2,63,670
Kunal Bngg. Co. Ltd. 12200 1,22,000
Fixed Deposit with Kothari (Mds.) Ltd. 1,25,000
Fixed deposit with Investment Trust of
India Ltd. 25,000
3. In the appeal against the aforesaid assessment, it was contended before the Commissioner (Appeals) that the Income-tax Officer overlooked that the assesses had satisfied all the conditions of Section 11 and therefore exemption could not be denied. It was also contended that the ITO failed to note that the provisions of Section 13(1)(d) of the Act as amended by the Finance Act, 1983 came into effect only from 1-4-1984, that is to say, 1984-85 assessment year. It was the case of the assessee that having regard to the fact that time was given by the statute till 30-11-1983 (for changing the investments to the prescribed pattern), the ITO ought to have held that the provisions of Section 13(1)(d) were effective only from 1-4-1984. Without prejudice to the aforesaid contention that the assessee should not have been denied exemption under Section 11 on the ground that part of funds of the assessee had not been invested or deposited in one or more forms or modes specified in Section 11(6) even after 30-11-1983, it was also contended that even assuming that the provisions of Section 13(1)(d) were effective from 1-4-1983, the ITO should have brought to assessment only the income referable to the offending investments and not the entire income of the trust. But the Commissioner (A) agreed with the ITO that the amended provisions of Section 13(1)(d) were applicable from 1-4-1983 and the assessee had not complied with the provisions by investing the funds of the trust in the forms and modes specified in Section 11(5) by 30-11-1983 and therefore the exemption under Section 11 cannot be granted to the assessee.
4. In further appeal before us, it was vehemently contended that Commissioner (A) erred in not adverting to all the contentions of the assessee. It was vehemently argued by the learned representative of the assessee that the amended provisions of Section 13(1)(d) took effect only from the assessment year 1984-85 and therefore the assessee should not have been denied the exemption under Section 11 (for the assessment year under consideration viz. 1983-84). In this connection, it was stressed that there could not have been a contravention of Section 13(1)(d) by the assessee in so far as the assessment year under consideration viz. assessment year 1983-84 was concerned because the relevant previous year for the same ended on 31-3-1983 and Section 13(1)(d) allowed time to the assessee up to 30-11-1983 to change over to the prescribed pattern of investment. Without prejudice to the above, it was submitted that even on the view that the amended provisions of Section 13(1)(d) were applicable to assessment year 1983-84, forfeiture of exemption could only be limited to the income derived from the offending investments and not to the entire income of the assessee. Even in that regard, the assessee's representative pointed out that part of the investments considered by the ITO as not conforming to the investment pattern laid down in Section 11(5) of the Act came under the exception specified in the proviso to Section 13(1)(d) itself and furnished certain details. At this stage itself, it may be made clear that a detailed reference in this order to such details would not be necessary in view of the ultimate decision taken. In support of his contentions, the learned representative of the assessee also placed reliance on the decision of the ITAT, Madras 'B' Bench dated 29-4-1988 in the case of Tuluva Vellala Association v. ITO for the assessment year 1984-85.
5. On his part, the learned Departmental Representative argued that the amended provisions of Section 13(1)(d) had come into force with effect from assessment year 1983-84 and were punitive in nature and therefore unless the assessee complied with the said provisions, it had to forfeit the exemption altogether for the assessment year 1983-84. As regards the alternative contention of the assessee that part of the funds considered by the ITO as not being in conformity with the investment pattern laid down in Section 11(5) represented the corpus of the trust as on 1-6-1973 and therefore came under the exceptions specified under the proviso to Section 13(1)(d) of the Act, the Departmental representative argued that the matter should be sent back to the ITO for verification of the details furnished by the assessee and then deciding the issue on the basis of the results of his finding.
6. We have carefully considered the rival submissions and we are of the opinion that the assessee should succeed on the basis of its main contention before us.
7. At the outset, for an immediate and ready appreciation of the issue involved, it would be useful to reproduce below to the extent relevant and necessary for our purpose Section 13(1)(d) as it stood on 1-4-1983 :
Section 11 not to apply in certain cases 13(1) Nothing contained in Section 11...shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-
(a) ...
(b) ...
(c) ...
(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the previous year-
(i) any funds of the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in Sub-section (5) of Section 11 ; or
(ii) any funds of the trust or institution invested or deposited before the 1st day of March. 1983 otherwise than in any one or more of the forms or modes specified in Sub-section (5) of Section 11 continue to remain so invested or deposited after the 30th day of November, 1983 ; or
(iii) any shares in a company [not being a Govt. company as defined in Section 617 of the Companies Act, 1256 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act] are held by the trust or institution after the 30th day of November, 1983 :
Provided that nothing in this clause shall apply in relation to-
(i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973 and such assets were not purchased by the trust or institution or acquired by it by conversion of, or in exchange for, any other asset ;
(ii) any assets (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March, 1983 ;
(iii) any funds representing the profits and gains of business, being profits and gains of any previous year relevant to the assessment year commencing on the 1st day of April, 1984 or any subsequent assessment year.
Explanation : For the purposes of Sub-clause (ii) of Clause (c), in determining whether any part of the income or any property of any trust or institution is during the previous year used or applied, directly or indirectly, for the benefit of any person referred to in Sub-section (3), in so far as such use or application relates to any period before the 1st day of July, 1972, no regard shall be had to the amendments made to this Section 7 (other than Sub-clause (ii) of Clause (a) thereof) of the Finance Act, 1972.
It may be necessary to give a brief history of Section 13(1)(d). The Taxation Laws (Amendment) Act, 1975 had laid down an investment pattern for trust funds and by further insertion of the original clause 13(1)(d) with effect from 1-4-1977, it also laid down that a trust, which failed to comply with the investment pattern from accounting years commencing after 31st March, 1978, were liable to forfeit tax exemption. Thus, though the original Section 13(1)(d) came into force with effect from 1-4-1977, it was applicable only in relation to the assessment year 1979-80 and subsequent years. This was made clear by the last sentence of paragraph 7.1 of circular No. 204 dt. 24-7-1976 of CBDT. However, having regard to the practical difficulties involved and also to ensure a more orderly change-over, the aforesaid date viz. 31-3-1978 was extended by three years to 31-3-1981 by Finance (No. 2) Act, 1977. According to that, if any funds of a trust or institution were invested or deposited or continued to remain invested or deposited in any mode or form other than the one specified in Section 13(5) at any time during the previous year commencing on or after 1-4-1981, the trust or institution would not be entitled to exemption under Section 11 for the assessment year 1982-83 and subsequent years. But, even afterwards, as the whole gamut of the provisions relating to charitable and religious trusts was under consideration by the Economic Administration Reforms Commission, the date for the commencement of the new pattern of investment was again extended by a further period of one year by the Finance Act, 1982. Consequently, if any funds of a trust or institution were invested or deposited or continued to be invested or deposited in any mode or form other than the one specified in Section 13(5) at any time during any previous year commencing on or after 1-4-1982, the trust or institution would not be entitled to exemption under Section 11 for the assessment year 1983-84 and subsequent years. But then, by Finance Act, 1983, yet another amendment was made to Section 13(1)(d) by introducing a cut-off date for changing the investment in line with the pattern laid down in Section 11(5) of the Act and that cut-off date was 30-11-1983. In other words, in order not to forfeit the exemption under Section 11 of the Act, the investments, which on 28-2-1983 were not in conformity with the pattern of investment laid down in Section 11(5) of the Act, should be converted into the investments specified in Section 11(5) of the Act on or before 30-11-1983. In this connection, it would be advantageous to extract the following portion of the Budget Speech of the Finance Minister reported in 140 ITR 25 (Statutes), at page 33 :
I have since considered the matter carefully. I see no justification for permitting investment of trust funds in business concerns, including shares of companies in the private sector. I accordingly propose to provide that all trust funds should be invested in specified modes, such as, Government securities, units of Unit Trust of India, deposits with scheduled banks, approved financial corporations etc. Investment in immovable properties will, however, continue to be allowed. I am giving notice to all charitable and religious trusts to divest their shareholdings and other investment in business concerns by 30th November, 1983. However, trusts will be allowed to keep shares in companies, which formed part of the original corpus as on June 1, 1973, and bonus shares received up to that date....
8. The aforesaid history of Section 13(1)(d) of the Act would clearly show that Section 13(1)(d) was only prospective and not retrospective. This will be confirmed by the fact that initially when the Taxation Laws (Amendment) Act, 1975 laid down an investment pattern for trust funds, it was applicable in respect of accounting years commencing after 31-3-1978 and that was how even though the amendment introduced by the Taxation Laws (Amendment) Act, 1975 took effect from 1-4-1977, it became applicable only in relation to the assessment year 1979-80 and subsequent years as explained by Circular No. 204 dated 24-7-1976, to which reference had been made earlier in paragraph 7 of this order. Now considering the provisions of Section 13(1)(d) as had ultimately emerged after the amendment made by the Finance Act, 1983, it could be seen from the words "if for any period during the previous year" occurring at the beginning of Section 13(1)(d) that before disentitling any trust from exemption under Section 11, it should be verified whether, at any time during the previous year relevant to the assessment year under consideration, the funds of the trust had not been invested in conformity with the prescribed pattern. While doing so, Sub-clauses (ii) and (iii) of Section 13(1)(d), according to which the investments of a trust, which were not in conformity with the prescribed pattern as on 28-2-1983, should be changed over to the prescribed pattern on or before 30-11-1983 to avoid disentitlement of the exemption under Section 11, should be noted very carefully. If the first part of Section 13(1)(d) or more precisely the words "if for any period during the previous year" occurring in the beginning of Section 13(1)(d) and the cut-off date laid down in Section 13(1)(d)(ii) and (iii) are to be harmoniously reconciled, it would be clear that Section 13(1)(d)(ii) and (iii) could apply for the first time only to an assessment year, in the relevant previous year of which the cutoff date actually falls. It would be next to impossibility to change the investments, which were not in conformity with the prescribed pattern of investment as on 28-2-1983, to the prescribed pattern of investment before 30-11-1983, when the accounting year itself had ended earlier to 30-11-1983 and applicability of Section 13(1)(d) had to be considered with reference to the position obtained during the relevant previous year. Therefore, having regard to the words "if for any period during the previous year" occurring at the beginning of Section 13(1)(d), Section 13(1)(d)(ii) and (iii) can never apply to the assessment year 1983-84 in the case of any trust because the previous year relevant to that year would have ended on any date falling in the financial year 1982-83 and 30-11-1983 was after 31-3-1983. Even for the assessment year 1984-85, they would become applicable for the first time only in the case of those trusts, if the corresponding previous year ended at any time between 1-12-1983 and 31-3-1984. The assessment year under consideration in this appeal is 1983-84 and the cut-off date fell beyond that previous year. Therefore the provisions of Section 13(1)(d), as it ultimately stood after the amendment introduced by the Finance Act, 1983, would not be applicable to the case of the assessee-trust for the assessment year 1983-84 even though the amended provision came into effect from 1-4-1983.
9. As a matter of fact, the same conclusion was reached by ITAT, Madras Bench 'C' in its order dated 29-4-1988 in the case of Tuluva Vellala Association (supra) for assessment year 1984-85 relied upon by the assessee in this case. In that case, the assessment year involved was assessment year 1984-85, for which the previous year ended on 30-6-1983. The assessee in that case was denied exemption under Section 11 on the ground that the investments as on 28-2-1983, which were not in conformity with the prescribed pattern, had not been changed over to the prescribed pattern even by the extended date 30-11-1983. Before the Tribunal, the assessee contended that there could not have been a contravention of Section 13(1)(d) in that year because that section allowed the assessee to conform to the pattern of investment up to 30-11-1983, whereas the previous year ended for the assessee in June 1983. The Tribunal accepted the contention of the assessee that any denial of exemption for the previous year which ended on 30-6-1983 would be premature as the assessee had still time to change the pattern of investment because the Finance Minister himself had (in his Budget Speech for 1983) given notice that time would be given upto Nov. '83 for changing the pattern of investment and hence it could not be the intention of Parliament to deny the exemption when there was still time to conform to the new pattern of investment. In the present order, the above had been brought out a little more explicitly.
10. In view of the foregoing, we are of the opinion that the ITO and the Commissioner (A) were not correct in holding that the assessee was not entitled to exemption under Section 11 of the Act because the provisions of Section 13(1)(d) as amended by the Finance Act, 1983 came into effect from 1-4-1983 and the assessee had not changed its investment as on 28-2-1983 to the prescribed pattern by 30-11-1983. To reiterate, the assessee could not have changed its investment as on 28-2-1983 to the prescribed pattern as per Section 13(1)(d) during the previous year 1-4-1982 to 31-3-1983 relevant to the assessment year under consideration, when the Government had given time up to 30-11-1983 to fall in line with the change-over. Therefore, on the score that the assessee had not changed its investments as on 28-2-1983 to the prescribed pattern by 30-11-1983, exemption under Section 11 of the Act cannot be denied to it for the assessment year 1983-84 particularly when the cut-off date viz. 30-11-1983 fell beyond the previous year and the entire income of the assessee had already been applied towards charitable purposes as mentioned in the beginning of this order. Accordingly, we set aside the orders of the lower authorities and direct the ITO to allow the exemption under Section 11 for the assessment year under consideration.
11. Having regard to the ultimate decision reached in this order, it is not necessary to consider the alternative plea of the assessee's representative that even if the exemption under Section 11 was to be denied it should be confined only to the income from the offending investments had not to the entire income.
12. In the result, the appeal is allowed.