2007 (10) TMI 288 - HC - Income Tax

Court rules bonus shares not funds invested by trust. Specific entity shares impact substantial interest calculation. Trust not exempt under Income-tax Act.

Commissioner of Income-tax Versus Narinder Mohan Foundation

The court ruled in favor of the assessee-trust regarding the issue of bonus shares not being considered as funds invested by the trust. However, the court ... Charitable trust – exclusion from exemption - prohibited category of persons mentioned in section 13(3) have substantial interest in MMBL in which the funds of the assessee were invested and, therefore, the provisions of section 13(2)(h) were applicable – assessee-trust was not entitled to exemption on dividend income as stipulated under sections 11 and 12 - Tribunal was right in law in holding that shares being bonus shares of MMBL received by the assessee did not represent funds of the trust invested in the said concern for purposes of section 13(4) Issues Involved:1. Whether bonus shares received by the assessee-trust represent funds of the trust invested in the concerned company for the purposes of section 13(4) of the Income-tax Act.2. Whether the prohibited category of persons mentioned in section 13(3) had substantial interest in the concerned company in which the funds of the assessee-trust were invested, thereby attracting the provisions of section 13(2)(h).3. Whether the assessee-trust was entitled to exemption as stipulated under sections 11 and 12 of the Income-tax Act.Issue-wise Detailed Analysis:1. Bonus Shares and Section 13(4):The court examined whether the bonus shares received by the assessee-trust represented funds invested by the trust in the concerned company for the purposes of section 13(4) of the Income-tax Act. It was noted that the decisions in CIT v. Sir Shri Ram Foundation and CIT v. Sir Sobha Singh Public Charitable Trust established that bonus shares received by a trust cannot be considered as funds invested by the trust. Consequently, the court answered this issue in the affirmative, favoring the assessee and against the Revenue for both assessment years 1976-77 and 1977-78.2. Substantial Interest and Section 13(2)(h):The court had to determine if the prohibited category of persons mentioned in section 13(3) had substantial interest in the concerned company (MMBL) in which the funds of the assessee-trust were invested, thus invoking section 13(2)(h). The relevant provisions of the Income-tax Act were examined, particularly the definitions and implications of substantial interest.For the assessment year 1976-77, the Tribunal concurred with the Commissioner of Income-tax (Appeals) that the bonus shares and shares received by way of donation should be excluded for the purposes of section 13(4). It was also agreed that the shares held by six HUFs and five trusts should be excluded when calculating substantial interest. The Tribunal concluded that the prohibited categories of persons did not possess substantial interest in MMBL, thereby not invoking section 13(2)(h).However, the court disagreed with the Tribunal's findings regarding the exclusion of shares held by HUFs and trusts. It was argued that the HUFs, being separate taxable entities, should not be considered as falling within the prohibited categories of persons. The court found this reasoning flawed and held that the shares held by HUFs should indeed be considered. Additionally, the court referenced CIT v. Brig. Kapil Mohan to argue that even if the beneficiaries of the trusts were unborn, the shares held by the trustees were still for the benefit of specific individuals, thus falling within the purview of section 13(2)(h).The court concluded that the shares held by the trusts and the shares held by Bakshi Sampuran Singh and his sons should be included in the calculation. This brought the total shareholding of prohibited persons to over 20% of MMBL's total paid-up capital, thus invoking section 13(2)(h).3. Entitlement to Exemption under Sections 11 and 12:Given the findings on the substantial interest issue, the court concluded that the dividend income of the assessee-trust could not be exempted from tax under sections 11 and 12 of the Act for the assessment year 1976-77. The court answered questions (2) and (3) in the negative, favoring the Revenue and against the assessee.For the assessment year 1977-78, the court followed a similar reasoning, answering question (i) in the affirmative (favoring the assessee) and question (2) in the negative (favoring the Revenue).Conclusion:The court disposed of the two references accordingly, with no order as to costs.