Trust entitled to Section 11(1A) exemption for capital gains from public sector deposits per precedent

ITAT Surat held that a trust was entitled to exemption under Section 11(1A) for capital gains from investment in public sector company deposits, following Calcutta HC precedent in East India Charitable Trust case. The tribunal directed AO to verify assessee's claim that capital gains were utilized for purchasing immovable property in subsequent years. Additionally, ITAT allowed deduction under Section 11(1) for interest income from FDs and savings accounts, noting that bank investments are permitted modes under Section 11(5) and CIT(A) made disallowance without proper show cause notice. Both grounds of appeal were allowed.

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Issues Involved:
1. Computation of Capital Gain under Section 11(1A) of the Income Tax Act.
2. Deduction-exemption on account of deemed application of income under clause (2) of Explanation 1 to sub-section (1) of Section 11 regarding accrued bank interest.

Issue-wise Detailed Analysis:

1. Computation of Capital Gain under Section 11(1A) of the Income Tax Act:

The assessee, a charitable trust, contested the computation of capital gain by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO added the entire income and expenditure of Rs. 1.54 crore to the total income of the assessee without allowing deductions for investments in fixed deposits (FDs) under Section 11(1A). The assessee argued that the correct gross income was Rs. 52,94,497/-, comprising Rs. 48,52,518/- as capital gain and Rs. 4,41,961/- as interest income, and provided evidence of investments in FDs amounting to Rs. 50,00,000/-.

The CIT(A) noted that the assessee is eligible for exemption under Section 11 if 85% of the receipts are applied towards the trust's objectives and the remaining 15% is accumulated as prescribed. The CIT(A) computed the capital gain without indexation and determined the total income to be Rs. 79,46,961/-, allowing part relief to the assessee.

The Tribunal found that the assessee had invested the entire sale consideration in FDs with UCO Bank, which were later converted into a capital gain account scheme. The Tribunal referred to CBDT Instruction No. 883 of 1975 and relevant case laws, which support that investments in FDs qualify as acquiring another capital asset under Section 11(1A). The Tribunal directed the jurisdictional AO to verify the assessee's claim that the entire capital gain was utilized for purchasing another immovable property in FY 2022-23 and 2023-24 and to allow the relief accordingly.

2. Deduction-exemption on account of deemed application of income under clause (2) of Explanation 1 to sub-section (1) of Section 11 regarding accrued bank interest:

The assessee claimed that the interest income of Rs. 4,41,961/- was invested in specified securities and should not be taxed. The CIT(A) directed the AO to treat this amount as income from "other sources" due to lack of detailed evidence of such investments.

The Tribunal found that the interest income was kept in the UCO Bank savings account and reflected in the audited balance sheet. The investment in the bank is a mode specified under Section 11(5), making the assessee eligible for deduction under Section 11(1). The Tribunal allowed the assessee's appeal on this ground, stating that no specific show cause notice was issued for this disallowance and the interest income was duly accounted for in the bank statements and balance sheet.

Conclusion:

The Tribunal allowed the appeal of the assessee, directing the AO to verify the utilization of capital gains for purchasing another property and granting the relevant exemptions under Section 11(1A). The Tribunal also allowed the deduction of interest income under Section 11(1), finding that the investments were made in specified securities and duly reflected in the financial records.

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