ORDER
T.V. Rajagopala Rao, President
1. This is an appeal filed by the assessee-trust against the order dt. 22nd February, 1996, passed by the Dy. CIT(A), B-Range, Mumbai, dismissing the appeal and ratifying the order of the AO to deny the benefit of exemption to the assessee-trust under s. 11 for the contravention said to have been committed by the assessee under s. 11(5) r/w s. 13(1)(d) of the IT Act.
2. The assessee is a trust created under the terms of trust deed dt. 15th April, 1965. It is the assessee’s case that exemption under s. 11 was granted to the assessee-trust from its inception to asst. yr. 1987-88. The appeal before me relates to asst. yr. 1988-89. Let me survey the facts of the case relating to that assessment year.
3. Return of income dt. 17th April, 1990, disclosing ‘nil’ taxable income was filed by the assessee-trust for this assessment year. In the month of March, 1991, the assessee’s CA appeared in pursuance of notice under s. 143 issued to the assessee-trust. It was asked to file vouchers and bills for expenses. However, they were not produced in spite of the fact that notices on several dates were issued under s. 143(2)/142(1). Finally, notice under s. 143(2)/142(1) was issued on 17th February, 1992, fixing the hearing on 27th February, 1992. However, nobody appeared on behalf of the assessee-trust and no details called for were either available on record or furnished to the AO on behalf of the assessee-trust. The AO in his assessment order says that from the details submitted along with the return it is seen that the assessee-trust received major source of income by way of dividend and interest on debentures. It is not clarified by the assessee-trust as to the dates on which these investments were acquired by the assessee-trust. Then, the AO comes to the conclusion saying that apparently these are prohibited investments as per the provisions of s. 11(5) r/w s. 13(1)(d) of the Act. He further continued in his inference that these investments were not dis-invested in the accounting year relevant to the asst. yr. 1988-89 also and no clarification was made by the assessee-trust in this regard and, therefore, the AO further came to the conclusion that the provisions of s. 13 were attracted and benefit under s.11 should not be allowed to the assessee-trust. As per the income statement, a sum of Rs. 1,14,299 was shown as receipts and a sum of Rs. 17,132 was shown as administrative expenses. After deducting the administrative expenses, the total income of the assessee-trust was determined at Rs. 97,167 and maximum marginal rate was applied to it. Thus, the AO [Asstt. Director of Income-tax (Exem.) Range-I(1), Mumbai] passed the assessment order dt. 12th March, 1992.
4. Aggrieved against the said assessment order, the assessee filed appeal before the Dy. CIT(A), B-Range, Mumbai. It was submitted on behalf of the assessee-trust before the lower appellate authority that the assessee-trust held shares and debentures, some of which were settled by the settlor herself and some of which were invested subsequently but which have been disinvested prior to the specified date under the provisions of s. 13(1)(d) of the IT Act even before 31st March, 1993. It was further submitted that out of all the investments held by the assessee-trust, only 150 debentures of Tata Oil Mills Ltd., 100 debentures of Nirlon Synthetics Ltd. and 500 debentures of Union Carbide (India) Ltd. continued to be held by the assessee-trust even after 31st March, 1993. The disinvestment of the said debentures could not be effected for the reasons and circumstances beyond the control of the assessee-trust. There was no intention on the part of the assessee-trust to hold the debentures of the three companies mentioned above beyond the prescribed period but it was only due to circumstances beyond its control that it was not able to dis-invest within 31st March, 1993. Under the circumstances, the denial of exemption under s. 11 was quite unwarranted and the said order of the AO in that regard should be set aside. An alternative contention was also specifically taken in the appeal that, in any event, the interest income arising to the assessee-trust from debentures in the abovesaid three companies can only be considered as income which is not exempt but taxable and so much of dividend income only should be taxed at maximum marginal rate.
5. The learned counsel for the assessee who appeared before me in the second appeal stated the particulars of the debentures held in the abovesaid three companies as follows :
(a) Union Carbide Ltd. 60 debentures
Total value Rs. 6,000
(b) Nirlon Synthetics Ltd. 100 debentures
Total value Rs. 10,000
(c) Tata Oil Mills Ltd. 30 debentures
Total value Rs. 3,000
The total debentures interest received on the above debentures from the three companies in the accounting period relevant to asst. yr. 1988-89 was stated to be Rs. 6,287. The learned counsel, continuing his alternative contention, submitted before me that only income of Rs. 6,287 may, at the most, be considered as taxable income by holding that the investment in the above debentures does not entitle the assessee-trust for the exemption under s. 11(5)(vi) which is as follows :
“(5) The forms and modes of investing or depositing the money referred to in cl. (b) of sub-s. (2) shall be the following, namely :
(vi) investment in debentures issued by, or on behalf of, any company or corporation both the principal whereof and the interest whereon are fully and unconditionally guaranteed by the Central Government or by a State government.”
Since no such guarantee was forthcoming with regard to debentures (either State or Central) with reference to the debentures of the above three companies it may be stated that they are not entitled for exemption under s. 11; but simply because an amount of Rs. 6,287 was thus found to be income taxable in the hands of the assessee-trust, it may not dissentitle the assessee-trust from the grant of exemption under s. 11 for the whole of the income earned in the relevant accounting period. It is contended that almost all the trust funds comprised of the shares held by the author of the trust in several companies and also the shares purchased from the trust funds from several companies within 31st March, 1983. All of them constituted the corpus of the trust itself. In any event, without looking into what constituted the corpus of the trust and how much of income was saved under the proviso to s. 13(1)(d) and without looking into the dates of the purchases of shares held by the assessee-trust from 19th April, 1965, onwards and without looking into the documents filed before him, the lower appellate authority’s finding that the assessee-trust is not entitled to exemption under s. 11 is not valid under law. Further, it is contended that the only reason given for justifying the denial of exemption under s. 11 by the lower appellate authority appears to be the following finding at the close of para 2 of the impugned order :
“I am not inclined to agree with the arguments of the appellant’s authorised representative, since the Act is very clear regarding the disinvestment of prohibited investments to be completed on or before 31st March, 1993. In the instant case, since these investments were held subsequent to the specified date also, the appellant trust could not be entitled for the benefits of exemption under s. 11 of the Act and, therefore, the action of the AO in denying this exemption to the appellant is hereby upheld.”
This finding is assailed by the learned counsel for the assessee as not in accordance with law as found to have been explained by the Madras High Court in Auditor Dasaradha Rami Reddy Charities vs. CIT & Anr.
6. In the appeal, I have heard Shri D. M. Dadia, learned counsel for the assessee, and Shri V. G. Gore, learned Departmental Representative. Paper-book containing 37 pages was filed before me and it is stated on the index of the paper book that all the papers compiled in the said paper-book were filed before the Dy. CIT(A). The learned Departmental Representative, who appeared before me, did not question the correctness of the said certification on the paper-book. Pages 1 to 25 of the paper-book is the copy of the registered trust deed dt. 15th April, 1965. According to the terms of the trust deed, Smt. Dayambai Adamji, widow of Abdulhusein Mohamadally Rangwala of Bombay, was the settlor. Abbasbhai Carrimjee, Taher Abbasbhai Carrimjee and Amina Akber Vahanvaty were the trustees. The word “Trustees” was taken to mean in the trust deed for including the continuing or surviving trustees or trustee for the time being acting under and by virtue of this trust deed and shall include any trustee or trustees appointed by the Court. “Trust Fund” is said to be consisting of shares and securities mentioned in the First Schedule. The term “Trust Fund” is defined to mean funds, stocks, shares, securities, actionable claims and cash belongings or appertaining to or held upon trust for the trust and proceeds thereof and of any immovable property belonging to be held upon trust for the trust and funds, stocks, shares, securities and actionable claims acquired from such proceeds or by variation or exchange from time to time of any such funds, stocks, shares, securities and actionable claims and all additions and accretions thereto and shall include donations and subscriptions of any description of property and the unexpended income arising from the said funds, stocks, shares, securities, actionable claims and cash and donations and subscriptions from time to time belonging to or held upon trust for the trust funds, etc. The list of shares and other investments, which were made corpus of the trust, was mentioned in the First Schedule, which is now found at pp. 12 to 15 of the paper-book filed. It constitutes part of the trust deed which is provided at pp. 1 to 25 of the paper-book. At p. 26, the particulars of shares and investments held by the assessee-trust as on 31st March, 1988, relevant to asst. yr. 1988-89 were furnished. There are 26 items in the said page. It is stated as part of the note given under the said page that all the shares are received by the trustees as per the settlement deed dt. 15th April, 1965 as corpus of the trust. The number of shares at Sr. Nos. 1 to 21 have increased in number due to the following :
(i) receipt of bonus shares.
(ii) conversion of face value of Rs. 100 into Rs. 10.
It is also certified that no new shares were purchased by the trustees in the accounting year in question. At p. 27, the balance sheet of the assessee-trust as on 31st March, 1971 was provided. In Schedule, the particulars of investments filed by the assessee-trust as on 31st March, 1981 was furnished. At p. 29, the details of redemption of debentures issued on Tata Oil Mills and Union Carbide was provided. At p. 30, the particulars of the debentures held by the assessee-trust as on 31st March, 1988 was furnished. There are 11 items in the said list. As against each company, the number of debentures held and the interest that is received from those debentures were noted. Item No. 11 is the amount lying in Savings Bank Account. Out of the remaining 10 items, the interest derived from the Indian Telephone Industries was shown as items 1 and 6. It is stated that the assessee-trust was holding 75 shares in Indian Telephone Industries and a sum of Rs. 5,250 as against item No. 1 as well as item No. 6 was said to have been received and it was claimed to be not hit by the provisions of s. 11(5)(vi). In the same list, item 2, 3, 4, 5, 7, 8, 9 and 10 represent the number of debentures held by the assessee-trust issued by Nirlon Synthetics, Union Carbide and Tata Oil Mills. The total of the interest derived from the debentures obtained from the above three companies was shown to be at Rs. 6,487.83. This amount, according to the assessee-trust, is at the most to be considered as income of the assessee-trust and is liable to be taxed at the maximum marginal rate and this is the alternative contention put forward by the assessee-trust which is canvassed unsuccessfully before the first appellate authority. Apart from addressing oral arguments, the learned counsel for the assessee also filed copy of the written submissions made by him before the first appellate authority which is found at pp. 31 to 37 of the paper-book. I have fully gone through the said arguments. It is not necessary for the purpose of disposal of this appeal to go deeply into any of those arguments. Prima facie, the order of the lower appellate authority appears to be not correct under law. Firstly, even though the whole of the paper-book containing 37 pages was already placed before him which includes copy of the trust deed itself, the lower appellate authority did not take cognizance of whatsoever of either the trust deed or the contents therein. He did not even mention in his whole order about filing of the trust deed. He did not discuss whether out of the trust fund what are the shares held by the assessee-trust prior to 1st April, 1983. He also did not discuss whether the shares themselves constituted the corpus of the trust fund or not. If so, whether the income derived from such shares would still enjoy the exemption under s. 11 by virtue of the proviso to s. 13(1)(d). Under the proviso to s. 13(1)(d), even though the funds of the trust which were invested or deposited before 1st March, 1983, otherwise than in any of the modes specified in s. 11(5) continue to remain invested or deposited after 30th November, 1982, the income of the trust is not exempt under s. 11; but the following exceptions are there to the general rule :
(i) All assets held by the trust/institution which form a part of the corpus as on the 1st June, 1973.
(ii) Any accretion to shares, forming part of the corpus as above, by way of bonus shares allotted to the trust/institution.
(iii) Assets being debentures of any company or corporation acquired before 1st March, 1983.
(iv) Any asset not being an investment or deposit in any of the forms or modes specified in s. 11(5), if such assets is not held in any of the non-specified forms as on 31st March, 1993 or after the expiry of one year from the end of the previous year in which it was acquired, whichever is later.
My attention is drawn to the decision of the Tribunal reported in (1979) 1 Taxman p. 70, wherein it was held that shares donated to corpus of the trust will not be considered as investment by the trustees of the trusts funds and, therefore, exemption will not be lost under s. 13(2)(h). It is argued that the ratio of the decision will continue to hold good even after the stipulated dates which was prescribed under s. 11(5). My attention is also drawn to the Calcutta High Court decision in CIT vs. Birla Charity Trust (1988) 170 ITR 150 (Cal) and the Gujarat High Court decision in CIT vs. Insaniyat Trust (1988) 173 ITR 248 (Guj), which have taken the view that the term ‘funds’ means money or cash and the term ‘investment’ connotes a positive act on the part of the trust whereby the funds of the trust are laid out or invested in any particular property or business or transaction with the object of earning profit or financial advantage or return. It is submitted that though the decisions were rendered in the context of s. 13(2)(h), the ratio of those decisions applies equally well to understand the correct position under s. 13(1)(d). According to learned counsel for the assessee-trust, if the funds are not invested in the first place, they cannot be said to have continued to remain invested. This position, argued by the learned counsel is quite acceptable. In view of the fact that the same position in law argued before the Madras High Court was accepted by their Lordships. In the said decision, the following ratio was laid down as can be seen from the headnote of the decision at pp. 124-5 :
“Held
The construction to be put upon the expressions “funds” and ‘invested or deposited’ occurring in s. 13(1)(d)(i) has to be determined in the context of the section, which is designed to deny to a trust, the benefit of exclusion from the total income of the previous year, the income received by a trust for charitable or religious purpose or a charitable or religious institution, on funds belonging to the trust or institution, invested or deposited after 28th February, 1983 in a mode not specified under s. 11(5) of the Act.”
Therefore, following the above ratio of the Madras High Court, simply because the assessee-trust was found to have contravened the provisions of s. 11(5) by continuously holding debentures from the above three companies and continues to derive income from the said debentures, only such income derived on such debentures in contravention of s. 11(5) cannot be considered to be exempted income under s. 11. It does not entitle the AO or the appellate authority to deny exemption in a wholesale manner under s. 11 of the IT Act under which the whole income of the assessee is held taxable. This interpretation of the lower authorities is wrong under law in view of the categorical decision of the Madras High Court as to the intendment of s. 13(1)(d)(i). Therefore, I set aside the order of the lower appellate authority. I allow the appeal and I direct that the matter should go back to the file of the lower appellate authority who should decide as to which portion of the income earned by the assessee-trust is liable to be exempt under s. 11 and which portion of the income is liable to be taxed at maximum marginal rate in view of several documents and submissions made on behalf of the assessee-trust afresh and according to law.
7. In the result, the appeal is allowed for statistical purposes.