TaxTMI 
TaxTMI 
2007 (10) TMI 288
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....he Act ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the prohibited category of persons mentioned in section 13(3) did not have substantial interest in MMBL in which the funds of the assessee were invested and, therefore, the provisions of section 13(2)(h) were not applicable ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the trust was entitled to exemption as stipulated under sections 11 and 12 of the Act ?" 2. Relevant to the assessment year 1977-78, the following questions of law have been referred for our opinion in ITA No. 2305/Del/1982 : "1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that 8,86,076 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) of the Act ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the prohibited category of persons mentioned in section 13(3) did not have substantial interest in MMBL in whi....
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....f the Act. This view was accepted by the Assessing Officer. 6. The appeal filed by the assessee-trust was allowed by the Commissioner of Income-tax (Appeals) ("he CIT(A)"). It was held by the Commissioner of Income-tax (Appeals) that the bonus shares and shares received by way of donation had to be excluded for computing the percentage of share-holding of the assessee-trust in MMBL. Consequently, the Commissioner of Income-tax (Appeals) held that the assessee-trust was entitled to the benefit of section 13(4) of the Act. As regards the shares held by the "prohibited category" of persons and close relatives, the Commissioner of Income-tax (Appeals) accepted the contention of the assessee-trust that this did not exceed 20 per cent. of the total shareholding in MMBL and that, therefore, the assessee-trust was entitled to exemption in terms of sections 11 and 12 of the Act. 7. In the further appeal by the Revenue, the Tribunal concurred with the Commissioner of Income-tax (Appeals) that for the purposes of section 13(4), the bonus shares and shares received by way of donation had to be excluded. It also concurred with the Commissioner of Income-tax (....
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.... this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or . . . directly or indirectly for the benefit of any person referred to in sub-section (3) : . . . (2) Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),-. . . (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1^st day of January, 1971), in any concern in which any person referred to in sub-section (3) has a substantial interest. (3) The person referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely :- (a) the author of the trust or the founder of the institution ; (b) any person who has made a substantial contribution to the trust or institution, that is to say, any person whose total contribution up to the end of the relevant pre....
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....; Section 13 sets out the conditions under which income earned by the trust would not qualify for exemption under section 11 or 12. If the income of the trust during the previous year is applied directly or indirectly for the benefit of a person referred to in sub-section (3) then the income would not be so exempt. For this purpose, section 13(2) sets out the kinds of income which would be deemed to have been used or applied for the benefit of a person referred to in sub-section (3). Under section 13(2)(h), one such deemed income would be an investment by the trust in any concern in which the person referred to in sub-section (3) has a substantial interest. Explanation 3 is a deeming provision as regards substantial interest. Explanation 3(ii) states that a person shall be deemed to have substantial interest if such person and one or more persons referred to in sub-section (3) of section 13 are "entitled in the aggregate" "to not less than 20 per cent. of the profits of such concern" which in this case is MMBL. In other words, a shareholding in excess of twenty per cent. of the paid-up share capital would in terms of Explanation 3 connote substantial interest. 11. As far as the ....
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....n section 13(3) have a substantial interest in MMBL. 13. The next lot of shares which require to be considered is 3 lakhs shares held by the various trusts. Ms. Prem Lata Bansal places reliance upon the judgment of this court in CIT v. Brig. Kapil Mohan [2001] 252 ITR 830 to contend that even if the beneficiaries of the trusts which hold shares in MMBL were unknown, it cannot be said that the trusts did not hold the shares beneficially for any person. On the other hand, Mr. Monga, learned counsel for the assessee submits that the categories mentioned under section 13(3) does not include a trust in itself and, therefore, it would be stretching the language of the section impermissibly to bring the share-holding of the trust within the mischief of section 13(2)(h) read with section 13(3) of the Act. 14. The Tribunal itself has observed in paragraph 18 of its order dated October 21, 1989, that a trust cannot be a legal owner of the shares in terms of section 153 of the Companies Act, 1956. It is the trustees who are the legal owners who hold the shares beneficially for certain persons specified in the trust deeds. The Tribunal has also observed that copies of three trust deeds h....
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....e at hand the entire interest in the property goes to the benefit of the child to be born to Shri Rakesh Mohan. As the facts go to show, in fact a child was born in August, 1977. What would have happened if Rakesh Mohan did not get a male child is also spelt out in the trust deed." 16. In the light of the above observation, it is clear that even if the property of the trust was being held for the benefit of yet to be born persons it cannot be said that the requirement of section 13(2)(h) read with section 13(3) is not met. It cannot, therefore, be said that the shares held by the trustees were not for the benefit of anyone. It is clear from the trust deeds themselves that the beneficiary could be an unborn child but that does not by itself take it outside the purview of section 13(2)(h) read with section 13(3) of the Act. 17. Accordingly, it is held that the three lakhs shares held by the trust were held by prohibited categories of persons in terms of section 13(3) of the Act. 18. The last tranche is of 1,53,530 shares held by Shri Bakshi Sampuran Singh and his three sons. There is no dispute that Shri Bakshi Sampuran Singh, being the husband of the sister of Smt. Ram Rakh....