TaxTMI 
TaxTMI 
2024 (10) TMI 918
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....olated 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 to furnish the details of assessee's holding in Tata Sons Ltd., against w....
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....ists 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 of AO's order) is factually incorrect and that the details does not pertain to the....
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....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 (being debentures issued by, or on behalf of, any company or corporation) acquired by the trust or institution before the 1st day of March, 1983; (iia) any asset, not being an investment or deposit in ....
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....res 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 and on that count also section 13(1)(d) is not applicable. The ld AR also argued that the shares were received at the time of formation of the Trust which goes to prove that it forms part of the corpus of the assessee Trust. The ld AR also made a without prejudice submission that even if the dividend income is held to be taxable for violation of section 11(5), it is oth....
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.... 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 the trust, these investments can not be held to be permissible investments under section 13(1)(d), and it is Assessing Officer's not looking into this aspect of the matter that rendered the subject assessment order erroneous and prejudicial to the interests of the revenue. 32. There is no dispute with the proposition that in terms of the provisions of Section 11(1)(d)(iii) the assess....
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....tion 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, and it was only thereafter, on 10th May 1993, notification was issued by the Government of India notifying the assessee trust under section 10(23C). These facts, which are set out on page 17 of the second compilation filed before us, do show that the assessee trust was accepted to be holding these shares as part of the corpus by the CBDT itself. When an issue has been decided in a certain way by the ....
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....r 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 profits of business, the tax shall be charged on the whole of the income in respect of which such person is so liable at the maximum marginal rate. Therefore, reading the above two phrases shows that the Legislature has clearly indicated its mind in the proviso to section 164(2) when it categorically refers to forfeiture of exemption for breach of section 13(1)(d), resulting in levy of maximum marginal rate of tax onl....
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....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 section 10 or dealt with is not to be taken into consideration or omitted from the purview of section 11 38. **** 39. These reasons are, however, not the only reasons as to why the stand of the Commissioner, in invoking section 263, is wholly unsustainable in law. Even on merits, for the reasons we will set out now, it is clear that the investments in questions were held as the corpus, and, as such, the provisions of Section 13(1)....
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.... 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 principles enunciated in various cases when applied to the present case, leave no room for debate that the intention of the donor-trust as well as donee-trust was to treat the money as capital to be spent for Ladnu Water Supply Scheme. It is of no consequence whether the amount had since been paid to the State Government or kept in the account of the above-referred scheme by the assessee-trust. From whatever angle it may be seen, the deposited amount cannot be said to be income in the hands of the recipient-trust. Therefore, what....
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....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 violated the provisions of section 13(2)(h) of the Act which reads as under - (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),- (a) to (g) **** (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the prev....
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....n 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. AR submitted that there is no violation of section 13(2)(h) on that count also. 16. The ld. DR on the other hand relied on the order of the lower authorities. 17. We heard the parties and perused the material on record. The AO has denied the benefit of section 11 for the reason that besides violating the provisions of section 13(1)(d), the assessee has also violated the provisions of section 13(2)(h). The reason for holding so is that the Mr.Ratan Tata, is considered as a person having substantial interest as per section 13(3) since he is a shareholder and a Chairman of Tata Sons Ltd ....
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....rtly 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 violative of section 13(2)(h) if any of its trustees [or any other person referred to in sub- section (3)] held shares in the four companies carrying more than 20% voting power. In the course of the proceedings, the Annual Reports of all four companies for the F.Y. 2011-12 were submitted. Reference was made to the schedule containing disclosure of the shareholders holding more than 5% equity shares of the company and it was pointed out that neither Mr. Ratan N. Tata, nor any other persons referred to in sub-section (3) held more than 5% equity/voting power in any of the four companies. Therefore, the question of holding shares carrying more than 20% ....
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.... 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 record, as it states that "As far as the violation of clause (h) of section 13(2) is concerned we find that the author of the assessee trust and its relative definitely have a substantial interest in the Tata Sons Ltd, therefore, the investment in the shares of Tata Sons Ltd is a clear violation of clause (h) of section 13(2)". No basis of this observation, or relevance of the same to the present fact situation, is evident from the material on record. We see no relevance of this observation in the present context. We are thus unable to find anything in support of the contention that any direct or indirect benefit under section 13(1)(c) read with section 13(2)....
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....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 CIT(A) upheld the order of the AO. 24. With regard to applicability of section 13(1)(d) and section 13(2)(h), we have while adjudicating the appeal for AY 2014-15 already held that these sections are not applicable to assessee Trust and that the benefit of section 11 cannot be denied. The facts for AY 2018-19 are identical and the AO/CIT(A) for this year have given similar reasons for denying the benefit of section 11 to the assessee Trust. Therefore we are of the view that our decision in AY 2014-15 are mutatis mutandis applicable for AY 2018-19 also. Accordingly we hold that the assessee has not violated the provisions of section 13(1)(d) and 13(2)(h) and that benefi....
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....ationale 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 provisions of section 13(1)(c) are attracted in this case on account of inconsistent and unsubstantiated payments made by TSL to the persons specified u/s 13(3) of the act. The provisions of section 13(1)(c) are as under: 13. (1) Nothing contained in section 11/or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof- (a)....... (b)[***] (c) in the case of a trust for charitable or religious purposes or a charitable or Religious institution, any income thereof (i) if such trust or institution has been created or established after the Commencement of this Act and under the terms of the trust or the rules governing the institution, any par....
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....eason 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 reading of the provisions of section13(1)(c), it is clear that the section gets attracted when the Trust applies/uses its income directly or indirectly for the benefit of persons as mention in sub-section 3 of section 13. In assessee's case we are unable to appreciate how the AO applied the said provisions for the reason certain payment received by the Trustee. The payments are received for the past services rendered by the Trustees from Tata Sons Ltd, and there is no application/use of the income of the assessee. Therefore on the plain facts itself we are of the view that the AO is not correct in invoking the provisions of section 13(1)(c) of the Act. We also notice that the coordinate bench in assessee's own case (supra) while adjudicating the appeal against the re....
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.... 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 holding of shares and cannot be dissected from the shares themselves. The ld AR also submitted that even assuming the assessee Trust has control over Tata Sons Ltd., it does not follow that the Trust is engaged in carrying on of any activity in the nature of trade, commerce or business that is in violation of section 2(15) of the Act. The ld AR argued that the rights of the assessee trust by being shareholder bring with it a degree of control, but the same does not mean the Trust ceases to be a charitable institution or loses its charitable objects or the company (Tata Sons) becomes the "property" of the Trust or the business of the company becomes the "business" of the Trust. The ld AR further argued that dividend yielded from shareholding is taxed as 'income from other sources'....
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....sabling 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 section 11(5) read with Section 13(1)(d) of the Act- an aspect which has been found to be in order in the light of the detailed analysis earlier in this order. No legal embargo on the voting rights of the assessee trust or legal restrictions in the rights of the assessee trust to invest in the companies in which investments have been made have been shown to us. Quite clearly, therefore, the assessee trust validly holds these shares in Tata Sons Ltd, there is no legal embargo on the voting rights of the assessee trust or the manner in which these rights are exercised, and there are no legal restrictions to the rights that the assessee trust can have like any other shareholder in the company in which investments are made. There is no question of the assessee trust not exercising its rights as a shareholder in any m....
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.... 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 the Tribunal has not directly held that the assessee has not violated the provisions of section 2(15) as argued by the ld DR, the Tribunal has clearly held that whatever rights the assessee Trusts is having with respect to Tata Sons Ltd., is whatever any majority shareholders would have had in Tata Sons Ltd., anyway and that section 11 benefits cannot be denied for that reason. Therefore the assessee Trust cannot be held to be engaged an activity in the nature business merely for the fact that it has certain rights conferred by virtue of being the shareholder in Tata Sons. The ld AR brought to our attention that the right to nominate 1/3rd of Board of Directors in Tata Sons Ltd., is to protect the shareholding interest of the assessee Trust and the Directors thus nominated constitute a minority (1/3rd) and cannot/do n....