Substantial interest test under Section 13(2)(e) bars aggregating distinct persons' holdings, so exemption under Sections 11 and 12 restored.

The note clarifies that Section 13(2)(e) read with Section 13(3) requires the statutory 'substantial interest' threshold to be met by the specific person referred to in Section 13(3), and that separate juristic identity prevents automatic attribution of shareholdings among distinct persons or entities. Aggregation of holdings of independent persons, an HUF and a corporate without satisfying the statutory tests cannot trigger disqualification of charitable exemption; accordingly denial of exemption under Sections 11 and 12 based on such aggregation is unsustainable.

---

---

Issues: Whether the provisions of Section 13(2)(e) read with Section 13(3) of the Income-tax Act, 1961 apply to deny exemption under Sections 11 and 12 by treating the investment in shares as disqualifying application of income, where the impugned shareholding was attributed by aggregating holdings of the assessee and separate persons/entities.

Analysis: Section 13(2)(e) operates where any share, security or other property is purchased by or on behalf of the trust from a person referred to in Section 13(3) for a consideration which is more than adequate; Explanation 3 defines 'substantial interest' in a concern as ownership of not less than twenty percent of the voting power beneficially by such person or by such person together with other persons referred to in Section 13(3). The legal principle of separate juristic identity means that shareholding of an independent person, a HUF, or a corporate entity cannot be automatically attributed to another person unless statutory criteria are satisfied. The factual matrix showed the assessee held 14.18% directly, another individual held 11.66% as karta of his HUF, and a corporate entity connected to an office-bearer held further shares; none of the office-bearers individually held or directly controlled twenty percent or more of voting power, nor did the material establish that the purchases were made from a person falling squarely within Section 13(3) so as to trigger Section 13(2)(e). Reliance on aggregated shareholdings of distinct legal persons and on conjectural control was not justified on the recorded material. Precedential authority supports that mere titular positions or directorships and separate shareholdings cannot be conflated to infer substantial interest for purposes of Section 13 unless statutory tests are met.

Conclusion: Section 13(2)(e) read with Section 13(3) of the Income-tax Act, 1961 does not apply on the facts; invocation of Section 13(2)(e) by aggregating distinct persons' or entities' shareholdings was unsustainable and the denial of exemption under Sections 11 and 12 is set aside in favour of the assessee.

Ratio Decidendi: For application of Section 13(2)(e) read with Explanation 3 to Section 13, the statutory threshold of substantial interest must be satisfied by the person referred to in Section 13(3) in accordance with their separate legal identity; aggregation of shareholdings of distinct legal persons or entities without satisfying the statutory criteria cannot be used to invoke Section 13(2)(e).

---