1999 (7) TMI 50 - HC - Income Tax

Donated shares to charitable trust in donor-controlled company: treated as no 'investment', so s.13(2)(h) bar denied

Where a charitable trust received shares by way of donation in a company in which the donor had substantial interest, the issue was whether the trust's ... Charitable Trust - charitable trust receiving shares as a donation - Exemption - CBDT Circulars - Whether, having regard to the fact that the assessee had income from the shares of a company in which the donor of the said shares had substantial interest within the meaning of section 13(2)(h) read with section 13(1)(c) of the Income-tax Act, 1961, the Tribunal was correct in law in holding the provisions of section 13(2) of the said Act were not attracted ? - HELD THAT:- When the shares are received there was no investment on the part of the assessee. The Tribunal is justified in holding that the assessee's income from shares is not hit by the provisions of section 13(2)(h) read with section 13(1)(c). In the case of CIT v. Birla Charity Trust [1987 (8) TMI 60 - CALCUTTA HIGH COURT], this court held that the assessee received the shares of the company by way of donation. The assessee did not deal with or commit or lay out any part of its existing assets to acquire the said shares. In such a case, there was for investment of the fund of the assessee within the meaning of section 13(2)(h) of the Act. It is true that the view has been taken by various High Courts including this court in the cases referred to above that in the case of a charitable trust income should be computed and arrived at in the commercial manner but nowhere in the Act it prohibits to calculate or compute the income as per the provisions of the Act. Section 11(1) refers to income and not total income defined in section 2(45) but income itself has been defined in the Act in section 2(24) why the meaning of income given in section 2(24) should not be taken for income referred in section 11(1) of the Act. Therefore the decision referred to also requires reconsideration. But in the case in hand the assessment year involved is 1983-84, even if we differ from the view taken by this court it will take another five years to conclude. The tax effect is only Rs. 7,000 Therefore, no purpose will be served to differ on this issue with the view taken by this court in Jayashree Charity Trust's case [1984 (12) TMI 30 - CALCUTTA HIGH COURT] and we leave the issue open to consider this issue in the appropriate case in future. In the result, in view of these facts, we answer both the questions in the affirmative, i.e., in favour of the assessee and against the Revenue. Issues involved: 1. Interpretation of provisions of section 13(2)(h) and section 13(1)(c) of the Income-tax Act, 1961 regarding income from shares with substantial interest of donor.2. Determination of depreciation claimed by a charitable trust under section 11(1) of the Income-tax Act, 1961.Interpretation of provisions of section 13(2)(h) and section 13(1)(c): The case involved a charitable trust receiving shares as a donation, leading to a dispute on whether the provisions of section 13(2)(h) and section 13(1)(c) are applicable. The Income-tax Officer initially taxed the dividend income derived from the donated shares due to substantial interest of the donors in the company. However, the Commissioner of Income-tax (Appeals) and subsequently the Tribunal held that the provisions were not attracted as the donation did not amount to an investment by the trust. The Tribunal rightly concluded that the income from shares was not subject to section 13(2)(h) read with section 13(1)(c) based on precedents like CIT v. Birla Charity Trust [1988] 170 ITR 150 and CWT v. Bharat Charity Trust [1993] 199 ITR 420.Determination of depreciation claimed by a charitable trust: Regarding the depreciation claimed by the trust under section 11(1) of the Income-tax Act, the Assessing Officer disallowed the claim as there was no business activity. However, the Tribunal allowed the claim, citing precedents like CIT v. Society of the Sisters of St. Anne [1984] 146 ITR 28, which emphasized computing income on a commercial basis for charitable trusts. The counsel for the assessee argued that income should be computed based on commercial principles as shown in the books of account, supported by various High Court decisions. Despite differing views on the interpretation of income for charitable trusts, the Court decided to leave the issue open for future consideration due to the assessment year being 1983-84 and the minimal tax effect.Conclusion: The High Court answered both questions in favor of the assessee and against the Revenue, affirming that the provisions of section 13(2)(h) and section 13(1)(c) were not applicable to tax the dividend income from donated shares. The Court also acknowledged the Tribunal's decision on allowing the depreciation claimed by the trust, leaving the issue open for future consideration given the minimal tax effect and the assessment year involved.