TaxTMI 
TaxTMI 
2010 (9) TMI 902
X X X X Extracts X X X X
X X X X Extracts X X X X
.... tax on long term capital gains which arose on acquisition of assessee's some lands by the Surat Municipal Corporation (SMC) more so when book value of those lands was negligible (being Rs. 29,700) as compared to total gross assets Rs. 47.5 crores (Rs. 2.79 crores for Nandini Veterinary Hospital and Rs. 44.76 crores for head office). (3)Without prejudice, on the facts and in the circumstances of the case, the departmental authorities erred in holding that the assessee was not entitled to the benefit of exemption under section 11(1A) in respect of the aforesaid long term capital gains. (4)Without prejudice, on the facts and in the circumstances of the case, the quantum of the aforesaid long term capital gains determined by the departmental authorities is erroneous being not in accordance with the letter and spirit of law. (5)The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal. 2. In addition to this, an additional ground has been raised as under :- (1)Without prejudice to the assessee's claim of Exemption under section 11(1A) and in alternate elaborating ground No. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he consideration, retaining 20 per cent for the legal compliance and declaration of award under the Land Acquisition Act. (4) Out of the 80 per cent consideration TDS under section 194-I.A- Rs. 2,06,83,577 was deducted and paid by S.M.C. on 31-3-2006. TDS certificate issued by SMC for assessment year 2006-07. However, the trust reserve right to claim it refund in assessment year 2007-08 since the legal compliances as to the Land Acquisition is completed in the year 2006-07 (i.e., assessment year 2007-08). (5) Even if the transfer is considered to have taken place in assessment year 2006-07, even then 20 per cent of the consideration is not received and hence it cannot be applied. The same may be considered in the next following year as per Explanation 2( i) and 2(a) of section 11(1) of the Act. (6) In order to avail the Exemption of Long Term Capital Gains......" 4. On the basis of this note Assessing Officer carried out enquiries and found that following lands were compulsorily acquired by Surat Municipal Corporation (SMC) :- Land at Vadod Sl. No. Old Survey No. New Survey No. Area (sq. mtrs.) 1. 187/199 91 30,900 2. 193 12 25,600....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ust but should be held for charitable purposes at the same time. Mere passive possession or ownership of the trust shall not make the property "held for charitable or religious purposes" automatically. Only possession or ownership cannot be held to suffice the condition put forth by words "held under trust wholly for charitable or religious purposes." Thus according to the Assessing Officer if the property is not used for the purpose of trust it will not be entitled to avail the benefit in relation to that property. According to the Assessing Officer there are several evidences to prove that property was never held for charitable purposes. They are as under - (1)The said lands were lying in possession of the trust without any specific purpose. (2)The information brochure supplied by the trust itself mentions that most of the lands were not used for the objects of the trust and the land is barren and not fit for cultivation. In fact the lands were lying unused as fallow which was confirmed through statement as well as inspectorial enquiry. The Assessing Officer rejected the assertion on oath by the managing trustee that lands were used for cultivation of fodder and the said br....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder while confirming the order of the Assessing Officer:- "7.8 Summing up, it must be understood and appreciated that a trust is set up for a specific purpose, usually for the benefit of a particular individual or individuals, or the public in general. The trust receives donations or gifts or endowments for carrying out its task and activity for creating the stated benefit and reaching the same to the individual or the public, for whom the trust is set up. Any asset which does not fulfil the stated objectives or purposes of the trust, and does not aid or support the activity that the trust is engaged in for the benefit of the individual or the public, cannot be said to be held under trust. There necessarily has to be a direct link and nexus between the asset received as gift or donation or endowment, and the stated objectives and purposes of the trust. In the case of the assessee, the facts which have been discussed above in considerable detail, clearly show that there was no such nexus between the lands received by the assessee as donation, and located at Bhestan and Vadod villages and i.e., looking after the welfare of animals and birds. Therefore, it is held that the Assessi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsidered by Government in 1963 and administrative instructions were issued ........... These instructions have recently been reiterated. 76. With a view to placing the aforesaid administrative instructions on a legal footing and removing the disadvantage to charitable and religious trusts for the past as also the future, section 11 has been amended, by section 5 of the Finance (No. 2) Act, 1971 by way of insertion of a new sub-section (1A). Under the new sub-section, it has been provided that in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer (i.e., full value of the consideration as reduced by the expenditure incurred wholly and exclusively in connection with the transfer) is utilized for acquiring another capital asset to be held as part of the corpus of the trust, the capital gain arising from the transfer will be regarded as having been applied to charitable or religious purposes." This sub-section (1) to section 11 relates to exemption of income arising from the property held under the trust whereas sub-section (1A) relates to exemption fro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....may call upon the person claiming such exemption to produce evidence in support of his claim that the property in question was held under trust. Such inquiry is not an inquiry for adjudicating upon the title to the property, but only an inquiry aimed at ascertaining whether the exemption claimed under section 11 is warranted. During such inquiry, which is undertaken in the process of making of the assessment order, the nature of evidence adduced or gathered may be in the form of documents of title or grants, entries from the trust register showing whether the trust is registered as a public trust, and as to whether the properties in question are registered as the properties of the trust and other adjudications, having bearing on the title to the property, made by any competent forum. Thus the scope of the inquiry under the Income-tax Act, is wholly different from the scope of the inquiry under the Bombay Public Trusts Act, 1950. When the evidence that may be adduced before the Assessing Officer or gathered by him during the assessment proceedings conclusively shows that the trust is a registered public trust, and that the property from which the income is derived, is property held ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....other capital asset' - Scope of the expression, - section 11(1A) of the Income-tax Act, 1961, provides that where a capital asset, being property held under trust wholly for charitable or religious purposes is transferred and the whole or any part of the net consideration is utilized for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified therein. 2. The Board had occasion to examine whether investment of the net consideration in fixed deposit with a bank would be regarded as utilization of the amount of the net consideration for acquiring 'another capital asset' within the meaning of section 11(1A) of the Income-tax Act, 1961. The Board has been advised that investment of the net consideration in fixed deposit with a bank for a period of six months or above would be regarded as utilization of the net consideration for acquiring 'another capital asset' within the meaning of section 11(1A) of the Income-tax Act, 1961. [Instruction No. 883, dated 24-9-1975 [1994] 206 ITR 138 , 147 (Cal.)]." In the alternative ld. AR submitted that in case ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oses. The word "wholly" according to the Revenue means that asset of the trust should always be and continued to be utilized for charitable work and it must have evidence to show that at no point of time asset was kept idle or passive. If the asset is held idle or passive and not used for any charitable work it ceases to be the property held under trust and therefore, loses exemption or application of provisions of section 11(1A). On the other hand, ld. AR for the assessee has made strenuous arguments to impress upon us that land was in fact being used by animals/birds, grass was grown, it catered the need of stray animals as well and, therefore it can be said that it was not used for charitable work. However, we are not impressed with the arguments regarding use or non-use of the land acquired by SMC as in our considered view actual user around the clock or around the year is not relevant for deciding the claim for exemption under section 11(1A). 11. It is not disputed that assessee is a trust of long standing, registered in 1896 and was granted registration under section 12A. Its objects are undisputedly charitable. The ld. CIT(A) has reported some of the objects as under in w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t thereafter make further probe into the objects of the trust. The decision of Hon'ble Gujarat High Court in Hiralal Bhagwati v. CIT [2000] 246 ITR 188 attained finality on this point that once registration is granted under section 12A then Assessing Officer cannot thereafter make further probe into the objects of the trust. Hon'ble Gujarat High Court in Special Civil Application No. 2464 of 2010 in Ahmedabad Urban Development Authority v. Dy. DIT (Exemption) pronounced on 22-2-2010 held that once certificate of registration is granted under section 12A, Assessing Officer cannot take stand that the trust is not fulfilling conditions for applicability of sections 11 and 12. In this regard we refer to paras 9 and 10 from that judgment as under :- "9. Section 12AA of the Act lays down the procedure for registration in relation to the conditions for applicability of sections 11 & 12 as provided in section 12A of the Act. Therefore, once the procedure is complete as provided in sub-section (1) of section 12AA of the Act and a certificate is issued granting registration to the trust or institution it is apparent that the same is a document evidencing satisfaction about (1) genuinen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... law that the taxing authorities should proceed on the basis that the recognition granted and available for any particular assessment year implies that the provident fund satisfies all the conditions under r.4 of Part A of the Fourth Schedule to the Act and not sit in judgment over it'." 12. Once it is undisputed that trust is existing for charitable purposes and is registered under section 12A then benefit of exemption under sections 11 & 12 cannot be denied to the assessee trust subject to conditions laid down under section 13. In the present case the assessing authority and ld. CIT(A) have not pointed out any violation of any provision of section 13, therefore, rejecting the exemption on account of provisions of section 13 here would not arise. 13. Now it has to be seen whether assessee trust after holding certificate of registration under section 12A can be denied exemption available to it under section 11(1A). For the sake of convenience we reproduce section 11(1A) as under :- 11(1A) For the purposes of sub-section (1)- (a )where a capital asset being properly held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rust. In addition to sub-section (1A) which deals with capital asset, sub-section (1) deals with income derived from property held under the trust. The relevant provisions are as under:- "11. Income from property held for charitable or religious purposes - (1) subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a )income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, and where any such income is accumulated or set apart for application to such purposes in India to the extent to which the income so accumulated or set apart is not in excess of fifteen per cent of the income from such property; (b )income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act to the extent to which such income is applied to such purposes in India and where any such income is finally set apart for application to such purposes in India to the extent to which the income so set apart is no....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i) during the previous year in which the income is received or during the previous year immediately following as the case may be and in the case referred to in sub-clause (ii) during the previous year immediately following the previous year in which the income was derived." A joint reading of sub-sections (1) and (1A) clearly reveals that sub-section (1) is applicable for providing exemption to income derived from property held for charitable or religious purposes subject to sections 60 to 63. Whereas section 11(1A) deals with gain arising from transfer of capital asset held by a charitable trust. It also provides exemption from capital gains if new capital asset is acquired and held for charitable purposes. Sub-section (5) of section 11 gives the list of capital asset which can be acquired out of net consideration received by the assessee on transfer of property held under the trust. Sub-section (1A) was inserted in section 11 by Finance (No. 2) Act of 1971 with retrospective effect from 1-4-1962 the object and provision of this insertion was explained in the following ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ncerns does not continue after 31-12-1970. In order to avail of the benefit of this relaxation, many charitable or religious trusts divested themselves of investments in prohibited concerns before 1-1-1971. If the provisions of the law were construed strictly, such trusts would have forfeited exemption from tax in respect of their income by way of capital gains arising from the transfer of such investments unless they applied such income to charitable or religious purposes during the relevant accounting year or within three months immediately following. 75. The question of eliminating the disadvantage to charitable or religious trusts in being obliged to spend away the capital gains arising from the transfer of assets constituting the corpus of the trust instead of adding to the corpus, was considered by Government in 1963 and administrative instructions were issued to the effect that where a charitable or religious trust transferred a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilized the capital gains arising from the transaction in acquiring a new capital asset, the a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... if any by which the "appropriate fraction" of the amount utilized for acquiring the new asset exceeds the "appropriate fraction" of the cost of the transferred asset will be regarded as having been applied to such purposes. The "appropriate fraction" in this context means the fraction obtained by dividing the amount of the income which, under the terms of the trust, is applicable to charitable or religious purposes, by the whole of the income derived from property held under trust in part only for such purposes. 78. The insertion of new sub-section (1A) in section 11 takes effect retrospectively from 1-4-1962 the date of commencement of the Income-tax Act, 1961, and therefore, places the concession already allowed under executive orders on a legal footing right from the date from which the requirement of application, by charitable or religious trusts, of at least 75 per cent of their income to charitable or religious purposes during the year of accrual of such income was introduced in the income-tax law." Further Instructions were issued by the Government in Instruction No. 883, dated 24-9-1975 as under :- "Section 11(1A) of the Income-tax Act, 1961 - 'Another capital ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ther capital asset within the meaning of section 11(1). The department has not disputed the investment of net consideration on transfer of land to SMC. (6)Investment of sale proceeds of the asset held by the trust in F.D. is permissible as also held by Hon'ble Calcutta High Court in Hindusthan Welfare Trust (supra) as under: "Investment of sale proceeds of shares in fixed deposits is permissible -Investment in fixed deposit made in previous year relevant to the assessment year 1981-82 out of sale proceeds of shares of companies, amounted to acquiring of another capital assets in terms of section 11(1A). Reinvestment in fixed deposits of any duration is permissible - CBDT Circular dated 24-9-1975, declaring that deposits for a period of six months or more could be considered as capital assets for the purpose of section 11(1A), is not in consonance with the general principles of law and it cannot hold the field. Once a deposit is accepted to be an asset, the larger or lesser duration of the term is an immaterial consideration." (7)In DIT (Exemption) v. D.L.F. Qutab Enclave Complex Medical Charitable Trust [2001] 248 ITR 41 Hon'ble Delhi High Court also supported this view....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a sum of Rs. 16.63 crores in IDBI Bank on 31-5-2006 and reinvested in F.D. with State Bank of India on 30-8-2006. Therefore, the conditions laid down in section 11(5) are satisfied. However, for the sake of convenience we enumerate various investment portfolios as per section 11(5) so as to highlight that bank deposits are one of such safe avenue for investment for availing exemption from capital. They are as under :- Modes of Investment specified in section 11(5) 1.Investment in Government savings certificates/other securities/certificates issued by Central Government under Small Savings Schemes; 2.Deposit in any account with the Post Office Savings Bank; 3.Deposit in any account with a scheduled/co-operative bank; 4.Investment in units of the Unit Trust of India; 5.Investment in any security of the Central/State Government; 6.Investment in debentures whose principal and interest are fully and unconditionally guaranteed by Central/State Government; 7.Investment or deposit in any public sector company (PSC); Shares of PSC may be retained for three years and other investments or deposits till its maturity once PSC ceases to be a PSC; 8.Deposits with or in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... sense of possession but would also mean an owner who is not in actual possession. In some cases it has been held that word "held" connotes the existence of a right or a title in the holder. In the present case the land acquired by SMC was under legal ownership of the trust and was possessed by the trustees on behalf of the trust in their fiduciary capacity. The term "held" has also been explained as to mean factual management. Thus when an asset forms part of the property it is held by the trustees for the benefit of the beneficiaries and it is not material as to whether it is held by the trustees in their names or in the name of another. Thus the lands in question were held under the trust and there is no dispute that objects of the trust were religious and charitable. Meaning of words "held under trust" The trust is a non-corporial body. It is run by persons called trustees for the benefit of persons or for the purposes or objects stated in trust deed. Therefore, a property owned by a non-corporial body like trust is held by trustees for the trust. Therefore, the phrase "held under trust" would only mean property in possession of the trustees but legally owned by the tr....