TaxTMI 
TaxTMI 
2024 (10) TMI 918
X X X X Extracts X X X X
X X X X Extracts X X X X
....- AY 2014-15 & AY 2018-19 (ii) The assessee has violated the provisions of section 13(2)(h) - AY 2014-15 & AY 2018-19 (iii) The assessee has violated the provisions of section 13(1)(c) - AY 2018-19 (iv) The assessee has violated the provisions of section 2(15) - AY 2018-19 ITA No. 4154/Mum/2023 - AY 2014-15 3. The assessee is a Public Charitable Trust registered under Bombay Public Trust Act and under section 12A of the Income Tax Act, 1961 (the Act). The assessee was established in 1919. The assessee filed the return of income for AY 2014-15 on 29.09.2014 with the total income at a deficit of Rs. 55,36,69,321/- During the year under consideration, the assessee earned dividend income from shares amounting to Rs. 77,48,34,662/- and the same is claimed as exempt under section 10(34) of the Act. The assessee has applied Rs. 78,19,29,451/- which is more than 85% of its income for charitable purposes as per the objects of the assessee and accordingly claimed exemption under section 11 of the Act. The assessee's case was selected for scrutiny and the statutory notices were duly served on the assessee. The Assessing Officer (AO) called on the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R further submitted that the equity shares held by the assessee as on 31.03.2014 consists of corpus donations which was received in the year 1919 along with the acquisition till 01.06.1973 and that the accretion to the corpus donations are all in the form of bonus shares to which section 13(1)(d) is not applicable. Accordingly, the ld. AR submitted that the equity holding of the assessee in Tata Trust is from the inception which it goes to prove that the holding is in the nature of corpus and therefore, covered by the exceptions carved out by the proviso to section 13(1)(d) of the Act. With regard to reliance placed by the AO in the decision of the Co-ordinate Bench in the case of Jamsetji Tata Trust (supra) the ld AR submitted that the facts in the said case are distinguishable from assessee's case for the reason that Jamsetji Tata Trust was formed only in the year 1974 and received shares after that and therefore the Tribunal held that exceptions under section 13(1)(d) are not applicable to the said Trust. The ld. AR submitted that the AO's observation that the assessee has invested a total sum of Rs. 21,96,667/- in the ordinary shares of Tata Sons (refer para 4.3 pg. 5 o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the trust or institution are invested or deposited after the 28th day of February, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11; or (ii) any funds of the trust or institution invested or deposited before the 1st day of March, 1983 otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11 continue to remain so invested or deposited after the 30th day of November, 1983; or (iii) any shares in a company, other than- (A) shares in a public sector company; (B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11, are held by the trust or institution after the 30th day of November, 1983: Provided that nothing in this clause shall apply in relation to- (i) any assets held by the trust or institution where such assets form part of the corpus of the trust or institution as on the 1st day of June, 1973; (ia) any accretion to the shares, forming part of the corpus mentioned in clause (i), by way of bonus shares allotted to the trust or institution; (ii) any assets (b....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Tata Trust (625) 7,965 1979 (+) Bonus Shares 1:3 2,654 10,619 1979 (+) Purchase of Shares 4 10,623 1989-90 Shares Gifted to SarvajikSeva Trust (44) 10,579 1992-93 Bonus Shares received 1:1 10,579 21,158 1994-95 Bonus Shares received 1:1 21,158 42,316 1997-98 Bonus Shares received 1:2 21,158 63,474 1999-2000 Bonus Shares received 1:2 31,737 95,211 2000-2001 to 2018-19 No Variations - 95,211 As on 31.03.2014 Total - 95,211 10. From the above table it is clear that holding of the assessee Trust as of 31.03.2014 mainly consists of bonus shares and that the acquisitions prior to 01.03.1983 are not continued to be held (refer Sale & Gifts above). Therefore in our considered view there is merit in the submission that the provisions of section 13(1)(d)(ii) is not applicable to assessee's case and that the holdings in Tata Sons Ltd., are covered by the exception as provided in section 13(1)(d). 11. One more argument of the ld AR is that the shares of Tata Sons Ltd., are not acquired as "investments" using the fund of the assessee Trust but received as corpus donations....
X X X X Extracts X X X X
X X X X Extracts X X X X
....allotment of bonus shares thereafter, were in 9 pages- and copies of these details were also furnished before us at pages 216- 223 of the paper book filed before us. All these details were also furnished in the yearend financial statements, which were duly filed with the Assessing Officer. The Assessing Officer categorically notes this and observes that "the assessee has to follow the accumulation provisions of Section 11(2), specific modes of investment/ deposits under section 11(5) and other related provisions of Section 13". Satisfied with the details filed by the assessee, the Assessing Officer had no issues with respect to section 11 and 15, and he noted that the income derived from property held under trust, which included these investments, is covered by the exemption under section 11 and, accordingly, he disallowed exemption of dividend under section 10(34). Learned Commissioner does not dispute these facts but adds that the Assessing Officer did not examine the fundamental question as to whether these shareholdings, as on 1st June 1973, were part of the corpus or not. Unless, according to the learned Commissioner, these shareholdings were held to be part of the corpus of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s- particularly when there is no occasion or trigger to re-examine that aspect of the matter in this particular year and when there is no change in legal or factual position in this particular year. It may also be noted that, as pointed out to us by the learned counsel, the assessee trust was notified as an institution established for charitable purposes under section 10(23C)(iv), and this notification has been renewed from time to time. The conditions precedent for grant of notification under section 10(23C) were similar to section 13(1)(d) inasmuch as it was provided that if the funds were invested in modes other than those specified under section 11(5), the benefit of 10(23C) would not be available but an exception was made if such assets were to form part of the corpus as on 1st June 1973. On these facts, while granting the exemption under section 10(23C), Under Secretary in the Central Board of Direct Taxes, Govt of India, vide letter no 197/126/91-ITA-I dated 31st July 1992, had written a letter to the assessee trust seeking clarification whether all the shares form part of the corpus. The assessee trust, vide letter dated 21st August 1992, had clarified the said position, an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n. Now, under section 164(2), it is, inter alia, laid down that in the case of relevant income which is derived from property held under trust for charitable purposes, which is of the nature referred to in section 11(4A), tax shall be charged on so much of the relevant income as is not exempt under section 11. Section 164(2) was reintroduced by the Direct Tax Laws (Amendment) Act, 1989 with effect from 1-4-1989. Earlier it was omitted by the Direct Tax Laws (Amendment) Act, 1987. However, the Legislature inserted a proviso by the Finance Act, 1984 with effect from 1-4-1985. By the said proviso, it is, inter alia, laid down that where whole or part of the relevant income is not exempt by virtue of section 13(1)(d), tax shall be charged on the relevant income or part of the relevant income at the maximum marginal rate. The phrase 'relevant income or part of the relevant income' is required to be read in contradistinction to the phrase 'whole income' under section 161(1A). This is only by way of comparison. Under section 161(1A), which begins with a non obstante clause, it is provided that where any income in respect of which a person is liable as a representative assessee consists of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eives or derives income from property held under trust wholly for charitable or religious purposes. Thus, the income which is not to be included in computation of the total income is a matter dealt with by section 10 and by section 11 the case of an assessee who has received income derived from property held under trust only for charitable or religious purposes to the extent to which such income is applied to such property in India and that any such income is accumulated or set apart for application for such purposes in India to the extent of which the income so accumulated or set apart in computing 15% of the income of such property, is dealt with. Therefore, it is a particular assessee and who is in receipt of such income as is falling under clause (a) of subsection (1) of section 11 who would be claiming the exemption or benefit. That is a income derived by a person from property. It is that which is dealt with and if the property is held in trust for the specified purpose, the income derived therefrom is exempt and to the extent indicated in section 11(1)(a) of the Income Tax Act, 1961. There is nothing in the language of sections 10 or 11 which says that what is provided by se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o give that money to a trust which they will keep it in trust account in deposit and the income from the same is utilised for carrying on a particular activity, it satisfies the definition part, of the corpus. The assessee would be entitled to the benefit of exemptions from payment of tax levied. 14. In fact the Bombay High Court in the case of Trustees of Kilachand Devchand Foundation v. CIT [1988] 172 ITR 382/[1987] 32 Taxman 393 dealing with the said voluntary contribution made for a charitable purpose, held that for being eligible for exemption, the donations must be voluntary and of a capital nature. That cannot be applied to charitable or religious purposes if the income thereof they must be so applied. The contribution made expressly to the capital or corpus of trust fall within the purview of sub-section (2) of Section 12. Therefore, such contributions cannot be be deemed to be the income derived from the property for the purpose of Section 11 of the said Act and provisions of Section 11 will not apply. 15. The Rajasthan High Court in the case of Sukhdeo Charity Estate v. ITO [1991] 192 ITR 615 (Raj.) dealing with such contributions held that, the principl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... fact of these investments being part of the corpus of the trust. 42. In view of the foregoing discussions, as also bearing in mind the entirety of the case, learned Commissioner was clearly in error in invoking powers under section 263 on the ground that the Assessing Officer failed to examine the investments of the trust complying with the provisions of Section 11(5) and Section 13(1)(d) of the Act. We disapprove his action on this point as well. 12. From the perusal of the above findings, we notice that the coordinate bench while quashing the revision order has given categorical findings with regard to the merits of the issue on the applicability of section 13(1)(d) of the Act to assessee Trust. Therefore considering the facts presented in the earlier part of this order and respectfully following the ratio of above decision of the coordinate bench, we hold that the AO is not correct in denying the benefit of section 11 to the assessee on the ground that section 13(1)(d) is applicable in assessee's case. Violation of section 13(2)(h) of the Act 13. Another ground on which the exemption under section 11 was denied to the assessee is that the assessee has viol....
X X X X Extracts X X X X
X X X X Extracts X X X X
....such person. Since in the given case Mr.Ratan Tata is holding only 0.83% of the shares, the ld AR argued that he does not have substantial interest in Tata Sons Ltd., and accordingly there is no violation of section 13(2)(h). With regard to whether Mr.Ratan Tata holding the position of Chairman the ld. AR relied on the decision of the Co- ordinate Bench in the case of JRD Tata Trust vs. ITO (ITA No. 3082/Mum/2018 for AY 2012-13) where under similar facts the Tribunal has held that being a Chairman in a company would not amount to holding substantial interest as per Explanation 3 to section 13. Therefore on that count also there would be no violation of section 13(2)(h) of the Act. Without prejudice to the above submissions, the ld. AR submitted that as per section 13(2)(h) the benefit of provisions of section 11 is not available, if the funds of the Trust are "invested" or remain invested in any previous year in any concern in which person referred to in section 13(3) of the Act has substantial interest. The ld. AR submitted that the assessee has received the equity shares in Tata Sons Ltd. as corpus donation and the assessee has not invested in the equity shares. Therefore, the ld....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stantial interest' is not an expression of general import. Its meaning has been set out in section 13 itself. Explanation 3 to section 13 Provides: "Explanation 3.--For the purposes of this section. a person shall he deemed to have a substantial interest in a concern, -- (i) in a case where the concern is a company, if its shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than twenty per cent of the voting power are, at any time during the previous year, owned beneficially by such person or partly by such person and partly by one or more of the other persons referred to in sub-section (3); (ii) in the case of any other concern, if such person is entitled, or such person and one or more of the other persons referred to in sub-section (3) are entitled in the aggregate, at any time during the previous year, to not less than twenty per cent. of the profits of such concern." 13. Applying the aforesaid definition to the facts of the present case, the assessee's shareholding in the four companies even if held prior to 1st June, 1973 would have been v....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ecord, or in the knowledge of the Assessing Officer, which indicates to the contrary. The fact that the assessee trust itself had over 20% equity investments in Tata Sons Limited does not suggest or imply that the trustees must also be having 'substantial interest' in Tata Sons Limited. It is not even the case of the revenue, even today, nor is there any material even prima facie indicating that any of the persons specified under section 13(3) has substantial holdings in Tata Sons Ltd. It cannot, therefore, be open to the Commissioner to hold the order erroneous and prejudicial to the interests of the revenue that this aspect of the matter, regarding indirect or associated holding as emerging out of the scheme of section 13(3), has not been thoroughly investigated. In any event, there was nothing to trigger or justify such a thorough probe. The decision of the coordinate bench in Jamshedji Tata Trust (supra) is in the case of some other assessee, not this assessee, and there is nothing to justify the application of section 13(2)(h) in this case. The relevant observation made in the said decision is anyway a sweeping observation based on conviction, rather than material on r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... CIT, stating that the AO vide order dated 17.07.2018 under section 154 has rectified the deduction given towards application of funds to the extent of 85% while computing the assessed income (refer page 57 of CIT order). The ld. AR in this regard submitted that the said finding is factually incorrect and there is no such order under section 154 of the Act. The ld. DR did not rebut the submissions of the AR. 22. We have already held that the benefit under section 11 cannot be denied to the assessee on the ground on violation of section 13(1)(d) & 13(2)(h). Therefore, the deduction allowed towards application of funds on the ground that assessee is not entitled for exemption under section 11 is not sustainable. Accordingly the AO is directed to allow the deduction claimed by the assessee towards application of funds. It is ordered accordingly. ITA No. 4156/Mum/2023- AY 2018-19 23. For AY 2018-19 the assessee filed the return of income on 30.10.2018 admitting total income of Nil. The AO held that the assessee has violated the provisions of section 13(1)(c), 13(1)(d) and 13(2)(h) and accordingly assessed the income of the Trust at Rs. 254,60,58,091/-. On further appeal the CI....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... exemption under section 11 since there is a violation of section 13(1)(c). The relevant observations of the AO in this regard are extracted below: "5.7 It is evident from the facts regarding the payments made by TSL to the persons mentioned above that, there are variations and inconsistencies in the payments made to persons having similar profile. TSL has chosen to not provide any basis or justification for making said payments. It is hard to believe that a listed company like TSL would not be having a stated policy and procedure for making payments of remuneration and perquisites to the persons holding senior positions in the organisation. TSL was specifically asked to provide substantiation and the rationale for making the said payments. In absence of any explanation, the undersigned have no option but to draw conclusions on the basis of the bare facts before me. As per the facts of the payments, as enumerated earlier, there are inconsistencies and variations in the payments made to similarity positioned persons. It is also not known whether the payments were commensurate to the services provided. In such circumstances, the undersigned is compelled to conclude that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r attention to the fact that in the case of Tata Sons Ltd. the impugned payments have been allowed as a deduction. The ld. AR further brought to our attention that in assessee's own case against the order passed under section 263 the Tribunal has held that there is no violation of section 13(1)(c) of the Act. 28. The ld. DR on the other hand submitted that when payments received by the Trustees from Tata Sons Ltd. is not properly substantiated when the AO has correctly made the addition for the reason that the Trustees are taken benefit from Tata Sons Ltd. Accordingly, the ld. DR supported the order of the lower authorities. 29. We heard the parties and perused the material on record. The AO in the present case invoked the provisions of section 13(1)(c) for the reason that the Trustees of assessee Trust have received certain payments towards there past services from Tata Sons Ltd whose shares are held as corpus in assessee's Trust. The contention of the AO is that the Tata Sons Ltd, made the payment which is not commensurate with the services for the reason that the assessee Trust is holding the shares of Tata Sons Ltd and therefore section 13(1)(c). From the plain re....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... AO held that the assessee has violated the provisions of section 2(15) of the Act for the reason that the assessee engaged in business by having control over the business of Tata Sons Ltd. The AO drew this conclusion from the fact that the assessee Trust is holding 23.56% of the shareholding in Tata Sons Ltd., and that one of the ex-Directors of Tata Sons Ltd., Mr.Cyrus Mistry had submitted certain documents in support of the allegation that the business of Tata Sons Ltd., is controlled by the Trustees of the assessee Trust. The AO relied on the documents and the email communications submitted by Mr.Cyrus Mistry before NCLT in this regard. The CIT(A) confirmed the order of AO. 32. The ld AR submitted that the assessee Trust has voting rights by virtue of the shareholding in Tata Sons Ltd., and there is no restriction to exercise the said rights by the assessee. The ld AR further submitted that the assessee being a shareholder has the right to nominate directors as per the Articles of Association of Tata Sons Ltd., and as held by the Hon'ble Supreme Court in the case of Vodafone International Holdings BV v. Uol ((2012) 6 SCC @ 637- 638) control and management is a facet of h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eing the shareholder of Tata Sons Ltd., is engaged an activity in the nature of business by exercising control the business of the said company and by having the right to appoint or remove 1/3rd of the board of directors. In this regard it is relevant to take note of the following observations of the coordinate bench is assessee's own case (supra) - 56. A lot of emphasis is placed by the learned Commissioner on the stand that since the assessee trust controls Tata Sons Ltd, the assessee trust is not entitled to the benefit of sections 11 and 12. 57. The concept of control over a company in which investment is made by the assessee trust is completely alien to the scheme of the Income-tax Act, 1961, so far as taxation of charitable institutions is concerned. Unless there is a specific disabling clause to that effect, merely because the assessee trust has control over the investee company, the benefits envisaged for the charitable institutions, which meet other statutory requirements, cannot be declined. Once it is found that the assessee trusts hold shares in a certain company, all that is required to be seen is whether these shares are held validly under sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Undoubtedly, by virtue of article 104 B of the articles of association, the Tata Trusts can collectively nominate one-third of the prevailing number of directors, but these directors on their own cannot pass the resolutions, they can at best stall the resolution in the exercise of their powers. Nothing much turns on these rights under the article of association, on which so much emphasis has been placed by the learned Commissioner because, given the fact that Tata Trusts collectively hold the majority, these provisions are really infructuous. These provisions would have been of practical relevance only when the collective shareholdings of Tata Trusts were to be less than the majority but more than 40% of shareholdings. Whatever rights Tata Trusts have with respect to Tata Sons is whatever any majority shareholders would have had in Tata Sons anyway. As long as the investments in Tata Sons meets the tests of what is permissible in law, an issue that we have decided in favour of the assessee for the detailed reasons set out earlier in this order, no objection can be taken to the powers that flow from such shareholdings or any powers within the limits of those powers. 35. Though th....