ORDER
S. Grover, Judicial Member
1. We have the assessee and the revenue in cross-appeals against the order dated 30-11-1984 passed by the Commissioner of Income-tax (Appeals)-I, New Delhi in relation to assessment framed under Section 143(3) in respect of assessment year 1981-82 on 30-1-1984. The accounting year was the financial year ending 31-3-1981.
2. The return was filed on 31-8-1981 declaring nil income. The statement of income and expenditure projected dividends of Us. 3,62,098. From the details furnished the Income-tax Officer noticed that dividends of Rs. 10,792.50 and Rs. 24,670 were received from Goetze India Ltd. and Sharpedge Ltd. hereinafter referred as the companies, respectively. It is an accepted position that Escorts Ltd. was one of the authors of the trust and substantially interested in both the “said companies and had further given substantial contributions to the funds of the assessee-foundation. Escorts Limited and the said companies were accordingly covered under Section 13(2)(h) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’)- The Income-tax Officer stated that though investments were made by the assessee in the said two companies in contravention of Section 13(2)(h) of the Act but these being less than 5 per cent of the capital only dividends received were taxable in terms of Section 13(4) of the Act.
3. In the year before us the assessee-trust sold shares for Rs. 59,07,398 but claimed that since total sale consideration was utilised for acquiring another capital asset being units of Unit Trust of India, the capital gain totalling Rs. 46,57,599 was to be considered as application under Section 11(1A) of the Act. The Income-tax Officer however, denied the claim. We consider it convenient and expedient to notice paras 4, 5 and portion of para 6 as also para 8 of the assessment order because it shall project picture of the basis of the assessment:
4. However, a perusal of the records shows that shares were sold up to 31-3-81, but the units were not purchased up to 31-3-81. The assessment proceedings for each assessment year are independent and since there is no provision under Section 11(1A) that the consideration on account of sale of an asset can be utilised for purchase of another asset in the subsequent year or any other year, the benefit of Section 11(1A), would not be available to the assessee-foundation. The assessee-foundation claimed that since they had applied under Explanation 2 to Section 11(1), therefore, the units acquired in the next year should be considered as application for this year. In my view Explanation 2 to Section 11(1) does not extend the time under Section 11(1A), because under Section 11(1A) the amount utilised for purchase of another asset has been only ‘deemed as an application of income’ and is, in fact, not an ‘application of income’ as required under Section 11(1).
5. In view of the above, I am of the opinion that capital gain amounting to Rs. 46,67,599 would be considered as a part of income of the assessee-foundation and will not qualify under Section 11(1A). Apart from it, out of the total capital gain of Rs. 46,67,599 capital gain to the extent of Rs. 89,292 and Rs. 2,57,306 is on account of sale of shares of Goetze (India) Ltd. and Sharpedge Ltd., respectively, the two companies which are prohibited in terms of Section 13(3). The income received either by way of dividend or as capital gain on account of investments in these two companies would be taxable in terms of Section 13(4) as the word used in Section 13(4) talks of ‘any income’ and not of income from dividends only. The capital gain from these two companies works out to Rs. 3,46,598.
6. The above discussion leads to the conclusion that the sum of Rs. 35,462 being dividend from Sharpedge Ltd. and Goetze (India) Ltd. and Rs. 3,46,598, the capital gain from the sale of shares of these two companies would be taxable under Section 13(4) and would not be considered for application of income under Section 11(1). The remaining income is computed as under :
Rs. Rs. Gross Dividend 3,62,098 Less dividend from Sharpedge Ltd. & Goetze Ltd. 35,462 3,26,636 Dispensary receipt 1,31,436 Misc. receipt 1,937 Interest on P.D. 1,20,542 Profit on sale of shares 46,67,599 Less profit on sale of shares of Goetze India & Sharpedge Ltd. 3,46,598 43,21,001
8. Since the capital gain in respect of shares of Goetze (India) Ltd. and Sharpedge Ltd. do not qualify for consideration under Section II (1)(a), therefore, it will have to be considered whether the capital gain has arisen on account of holding of long-term capital assets or otherwise. A perusal of the records of the assessee-foundation shows that only 540 shares of Goetze (India) Ltd. and 1,542 shares of Sharpedge Ltd. were held by the assessee-foundation in assessment year 1978-79 and these shares have been sold on 25-3-1981, therefore, these shares were held as long-term assets. The capital gain of Rs. 2,57,305 is on account of 2,467 shares of Sharpedge Ltd. and on proportionate basis, the long-term capital gain on sale of 1,542 shares would be Rs. 1,60,815. Similarly the capital gain on sale of 10,625 shares of Goetze (India) Ltd. is Rs. 77,380 and on proportionate basis the long-term capital gain on sale of 540 shares would be Rs. 3,980. Thus out of total capital gain of Rs. 3,46,598 long-term capital gain is Rs. 1,64,795. The deduction under Section 80T on this long-term capital gain works out to Rs. 68,918. Therefore, the long-term capital gain assessable to tax would be Rs. 95,877 and short-term capital gain on these shares would be Rs. 1,81,803. Similarly the dividend received from these two companies has not been considered under Section 11(1)(a). Therefore, benefit under Section 80L would be available. The deduction allowable under Section 80L in this year was Rs. 3,000 at the maximum and, therefore, the dividend income from these two companies includible in the assessable income would be Rs. 32,462 only.
4. Before the Commissioner of Income-tax (Appeals) the first contention raised was that limited companies cannot be treated as authors of trust, in view of the provision of Section 13, relevant portions of which, for this order, are being reproduced below to be kept in view:
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) ** ** **
(ii) if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied,
** ** **
(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 (c) ** ** **
(d) if the services of the trust or institution are made available to any person referred to in Sub-section (3) during the previous year without adequate remuneration or other compensation ;
** ** **
(3) The persons 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 previous year exceeds twenty-five thousand rupees ;
(c) where such author, founder or person is a Hindu undivided family, a member of the family ;
(cc) any trustee of the trust or manager (by whatever name called) of the institution ;
(d) any relative of any such author, founder, person, member, trustee or manager as aforesaid ;
(e) any concern in which any of the persons referred to in Clauses (a), (6), (c) (cc) and (d) has a substantial interest.
(4) Notwithstanding anything contained in Clause (c) of Sub-section (1) but without prejudice to the provisions contained in Clause (d) of that sub-section, in a case where the aggregate of the funds of the trust or institution invested in a concern in which any person referred to in Sub-section (3) has a substantial interest, does not exceed five per cent of the capital of that concern, the exemption under Section 11 or Section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment, by reason only that the funds of the trust or the institution have been invested in a concern in which such person has a substantial interest.
The argument was that the use of the words “relative of any such author, founder or person” in Clause (d) of Section 13(3) automatically limits the author to an individual, i.e., a living being and as a limited company cannot be considered as such, the terminology used in Clause (a) rules out a limited company from the purview of Section 13(3). The Commissioner of Income-tax (Appeals) rejected such contention as without having any force and we are in complete agreement with such approach. The reason being that clauses of Sub-section (3) of Section 13 have to be read independently. Merely because Clause (d) refers to any relative of any such author, etc., does not mean that the same restricts the meaning of the term “the author of the trust” or “the founder of the institution” used in Clause (a). Clause (d) on the contrary brings within its ambit the relatives of any such author only where such an author is a human being or a living being. As in the case of Clause (d) the use of the words “Hindu undivided family” in Clause (c) does not restrict the meaning of the expression “author or founder of a trust” in Clause (a). Under the Trust Act and in other Acts of the Indian Civil Code even a company or a corporate body or an artificial juridical person can be an author or a founder of a trust or an institution. It would be wholly wrong to read in Sub-section (3) a different meaning.
5. Alternatively, it was submitted that purchase of shares of a company does not amount to investment in the company. Such submission was also rejected and rightly so because the only possible way of investing in a company is to buy its shares. In this connection, we may refer with advantage to the judgment of the Hon’ble Delhi High Court in the case of CIT v. Eternal Science of Man’s Society [1981] 128 ITR 456 and particularly the observations at page 466 as follows :
On a reading of Clause (a) of Sub-section (2) of Section 13 and Clause (h) of the same sub-section, it would appear to us that a distinction has been made by the statute between loans and other investments. Clause (a) of Sub-section (2) and Section 13 appears to provide for a situation where income or property of the trust is lent to a person specified in Sub-section (3) of Section 13 without adequate security or adequate interest or both. Clause (h) of Sub-section (2) of Section 13, however, appears to deal with a situation where funds of the trust are or continue to remain invested in a concern in which a person specified in Sub-section (3) has a substantial interest. The two provisions have to be construed in a harmonious manner. If investments are held to include loans, as urged by the counsel for the revenue, it would render Clause (a) of Sub-section (2) of Section 13 otiose. Since a specific provision for loans has been made in Clause (a) of Sub-section (2) of Section 13, we feel that these should not be included in the generic term as investment in Clause (ft) of Sub-section (2) of Section 13. It would thus appear that if the funds of the trust are invested in debentures or loans then Clause (a) of Sub-section (2) of Section 13 would be applicable ; whereas if the funds are invested in equity capital, i.e., shares, etc., then, Clause (ft) of Sub-section (2) of Section 13 would be attracted. This distinction also accords with reason, as in the former case there is no participation in profits and no fluctuation of the investment but only a fixed interest return ; whereas in the latter there is a participation in profits and the value of the investment fluctuates.
6. The Income-tax Officer in terms recorded that like the two companies Escorts Limited also came within the prohibitory category under Section 13(2)(ft) and under Section 13(4) of the Act and there has been no denial in that regard.
7. The assessing officer denied claimed exemption in relation to the entire capital gains of Rs. 46,67,599, though on the preliminary ground that since the gains were not utilized in the acquisition of new capital asset within the accounting year the deeming fiction of “application of income” was not available.
8. The Income-tax Officer without prejudice to his above action held that in any case capital gains to the extent of Rs. 89,292 and Rs. 2,57,306 in relation to the sales of shares of the two companies were taxable in view of the provisions of Section 13(4) as the words used in the said sub-section was “any income” and not income from dividends only.
9. However from perusal of the details of sales of shares filed before us, which were before the Income-tax Officer and the Commissioner (Appeals), we noticed that these included sale of 1,37,050 shares of Escorts Limited between 25th March and, 27th March 198.1 for consideration of Rs. 48,53,322.50 which formed part of total sales of Rs. 59,07,398. There was another sale of 51 shares of Escorts Ltd. on 30-3-1981. The Commissioner of Income-tax (Appeals) has not touched this aspect apparently because he accepted the contention that if the provisions of Section 11(1A) of the Act could be said to be available the prohibitions and constraints of Section 13(4) were not available to the revenue to deny exemption.
10. Before the Commissioner of Income-tax (Appeals) the assessee arguing in the same sequence as the assessment was framed firstly contended that the Income-tax Officer had wrongly given different treatment in respect of sales of shares of the two companies which formed a very small “proportion of the total sales, and then submitted that since the assessee had exercised option and was not in a position to acquire new capital asset out of the sale proceeds, considering the time factor and in fact had purchased units of Unit Trust of India within a short time after the close of the accounting year, the basis of assessment with regard to assessability of capital gain was not correct.
11. Paras 6 and 7 of the order of the learned Commissioner of Income-tax (Appeals) we like to notice here :
6. Ground No. 4: The appellant has contended that the IAC (Asstt.) erred in holding that the excess of income! over application and accumulation allowable under Section 11(1)(a) was Rs. 33,32,435. It is also contended that the IAC erred in holding that the said amount of Rs. 33,32,435 was taxable in the hands of the appellant. Briefly stated the facts are that during the assessment year under appeal the assessee-trust sold the shares held by it. The total sale consideration in respect of these shares was shown at Rs. 59,07,398. After adjusting the cost of acquisition of the said shares the appellant arrived at the net capital gain of Rs. 46,87,599. The appellant claimed exemption under Section 11(1A)(a) on the ground that the sale proceeds of the said capital asset was invested in the purchase of another capital asset in units and as such the amount earned by the trust on sale of such shares was exempt from tax as per provisions contained under Sub-section (1A) of Section 11 where a capital asset being property held under the trust wholly for charitable or religious purpose is transferred and if the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held other than the capital gain arising from the transfer is deemed to have been applied for charitable or religious purposes. The IAC, however, rejected the contention of the appellant on the ground that though the sales of the shares was effected by 31st March, 1981 but the investment in the new asset was made beyond the close of the accounting period, i.e., beyond 31st March, 1981. The investment in the purchase of new capital asset namely units, was made sometime in April 1981, i.e., in the following accounting period. The IAC accordingly held that since the investment in the new capital asset was not made within the accounting period in which the old capital asset was transferred and net consideration received the appellant did not fulfil the condition laid down in the relevant sub-section and as such the net receipts on sale of capital asset cannot be deemed to have been applied for religious or charitable purposes. During the assessment proceedings the appellant further contended that as per Explanation 2 to Section 11(1) if the income cannot be applied for charitable or religious purposes up to the statutory time limit laid down during the relevant accounting period the assessee can exercise the option for applying the same in the next following accounting period. The option is to be exercised in writing before the time for filing of the return under Section 139(2) expires. The relevant provision of Explanation 2 to Section 11(1) also states that the option can be exercised for application of the balance amount in the following accounting period for the reason that whole or any part of the income has not been received during that year or for any other reason. The appellant accordingly contended while exercising the option in writing before filing of the return for the relevant asstt. year that on account of the reason that there was not enough time to apply the funds inasmuch as there was no enough time for investing in the new capital asset the appellant may be allowed the option to apply the said capital gains in the purchase of new capital asset in the following accounting period. The IAC, however, rejected the contention of the appellant on the ground that Explanation 2 to Section 11(1) does not extend time allowed under Section 11(1A). He accordingly held that only that net consideration which is actually utilised for investment in new capital asset within the accounting period itself will be deemed as application of the income and not any investment in the following accounting period. The IAC after allowing deduction in respect of actual application of income for charitable purpose during the relevant period and deduction of the capital gain on sale of shares of two companies, Goetze (India) Ltd. and Sharpedge Ltd., which are dealt with separately and discussed above vide ground Nos. 2 and 3 and arrived at the balance taxable amount of Rs. 33,32,435 after taking into account the deduction to the extent of 25% of the gross amount.
7. During the appellate proceedings it was contended that the IAC was not justified in rejecting the contention of the appellant that Explanation 2 to Section 11(1) is equally applicable to the case where the net consideration is received on transfer of the capital assets as laid down under Section 11(1A). The contention was that merely because the Explanation 2 is interposed between Sub-section (1) and Sub-section (1A) does not mean that the Explanation is not to be extended in the case where the Legislature allows the concession regarding the net sale consideration of transfer of capital asset to be deemed as applied for charitable religious purposes, in case the net consideration is invested in the purchase of another capital asset. It was also stated that the deemed provision as laid down in Sub-section (1A) should be extended to its logical extent. Where the law deems the net consideration to be applied for charitable purpose on the ground that the net consideration was invested in the purchase of alternative assets the same should also be extended to the option which the Explanation allows to an assessee in certain circumstances for application of the shortfall in income of the trust beyond the statutory limit. As per Section 11(1) where a trust for any reason is not able to apply 75% of the income during the relevant accounting period the trust is entitled to exercise of option to apply the shortfall in the following accounting period after exercising the option. The option can be exercised : (i) before the time for filing of return under Section 139(2) expires, (ii) there should be a reason for exercising the option. One reason has been specifically enumerated in the Explanation itself namely where for the reason that the trust have not yet received the consideration or received the income and obviously the trust is prevented from applying the said amount during the relevant accounting period and second for any other reason. Though the term any other reason is not specified obviously the reason even in the second category or second circumstances will have to be by the similar or of the same species as enumerated in the first item. In the first item the reason for which the law allows an option to the trust to apply the income in the following accounting year is that the income itself or the amount itself has not reached the killing of the trust and as such the trust is prevented from applying the said income for charitable purposes. In the second category also there has to be specific reason or circumstances which constrain the trust from applying the income for charitable purpose during the relevant accounting period. The reason obviously is not to be merely the will or the wish or the discretion of the trustees but the reason has to be of the kind that there are circumstances for which the trust is prevented from applying the income for charitable or religious purposes. The contention of the appellant was that from the perusal of the details filed regarding the sale of the shares held by the trust in various companies it will be seen that the shares were sold during the last week of the closing month of the relevant accounting period. The sale proceeds of the shares were received from the purchasers/brokers as late as on 30th March, 1981 or even 31st March, 1981. The sale proceed which was received in the form of cheques was credited to the trust bank account either in the last week of the accounting period or during the month of April 1981 after clearance. It was, therefore, stated that the circumstances for which the assessee-trust could not invest the net sale proceeds in the purchase of new capital asset was that the funds had not yet reached its pocket and the circumstances are in the nature of the specific reason enumerated in the Explanation, namely that the income has not been received by the trust during the relevant accounting period. The contention of the appellant was that the case of the appellant either specifically falls in the first category itself or even in the second category, i.e., for any other reason the reason being similar to the species of reason mentioned in category one. It was also contended that the IAC was not justified in arriving at the conclusion that the Explanation 2 to Section 11(1) is not applicable to Section 11(1A). It was contended that the IAC has arrived at the said conclusion merely on the ground that Sub-section (1A) follows Explanation 2 to Section 11(1). It was pointed out that the IAC has not appreciated the language used in Section 11(1A). It was stated that from the perusal of the opening words of Sub-section (1A) it will be seen that it states “For the purposes of Sub-section (1)”. It was, therefore, contended that automatically the entire provision in Sub-section (1) has to be read with the provision contained in Sub-section (1A). As such Explanation 2 which covers the main sub-clause of Sub-section (1) is equally applicable to Sub-section (1A). Even otherwise it was stated that the deeming provision as per Sub-section (1A) has to be taken to its logical extent and that the law provides that it is deemed to be applied if it is invested in purchase of alternative capital asset. There is no reason why the meaning of the term application used in Sub-section (1) read with Explanation 2 should not be read with the provision contained in Sub-section (1A). The appellant also relied on the Board’s circular issued explaining the provision contained in Sub-section (1A) when the same was inserted by the Finance (No. 2) Act, 1971. The Board’s instructions are contained in department circular No. 1972 dated 6-1-1972. The relevant portion of the circular reads “Under Section 11 of the IT Act as the income derived from property held under trust for charitable or religious purpose is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As income includes capital gain chargeable or item would fulfil exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purpose of the trust during the stipulated period…..”In these circumstances it was contended that the IAC has not properly appreciated the provision contained in Sub-section (1A) and has not followed even the Board’s clarification/ instruction issued as above. The contention of the appellant is legally correct. The appellant is entitled to the exemption in respect of capital gain received on transfer of assets for the reason that the appellant within a period of one month, i.e., during the month of April itself invested the net sale proceeds in the new capital assets, i.e., units and had duly exercised the option as per Explanation 2 before the time for filing the return under Section 139 for the relevant asst. year expired. The IAC is accordingly directed to allow the exemption as provided under Section 11(1A) by treating the same as deemed application of the income.
12. Most of paras 6 and 7 record contentions and the decision and inference is only in the last three sentences. The Commissioner of Income-tax (Appeals) accepted that the provisions of Section 11(1A) saved the assessee and that when these are available Section 13(4) would not come into operation.
13. We, however, view the abovesaid provisions differently. The heading of Section 13 reads :
Section 11 not to apply in certain cases” and the opening words are “nothing contained in Section 11 or Section 12 shall operate so as to exclude from the total income of the previous year”, etc., etc. The other relevant provisions of the section we have already reproduced. The section was substituted by the Finance Act, 1970 with effect from 1-4-1971 and “or Section 12” was inserted by the Finance Act, 1972 w.e.f. 1-4-1973. Sub-section (1A) to Section 11 was brought on the statute book by the Finance (No. 2) Act of 1971 and it does not state that notwithstanding anything contained to the contrary in this Act. On the other hand it is only for the purpose of Sub-section (1) of Section 11 of the Act. Therefore, we entertain absolutely no doubt that once prohibition of Section 13 operated, exemption under Section 11 was not available except to the extent provided in the section. Therefore, prohibition/restrictions were applicable in respect of capital gain/dividend/income in relation to companies coming under the prohibitive categories of Section 13 and benefits of Section 11(1A) were not available as these are meant for transaction falling outside the abovesaid category.
14. In view of the above discussion, we reject ground Nos. 1,2 and 3 of the assessee’s appeal in which the grievance projected is :(i) that provisions of Section 13(3) have been wrongly held to be applicable, the author of the trust being a company ; (ii) that it has been wrongly held that the purchase of shares of any company amounts to investment contemplated by Section 13(2)(h) of the Act ; and (iii) that dividends received from the two companies (Goetze and Sharpedge) were assessable to tax under Section 13(1) (c) read with Section 13(2)(h) and 13(3) of the Act. The assessee fails in respect of ground No. 4 also against the Commissioner of Income-tax (Appeals)’s decision that depreciation and amounts written off could not be treated as application of income and for this, we make the CIT (Appeals)’s order as the basis.
15. The revenue’s appeal is allowed though we leave the computation of assessable income to the assessing officer in view of our decision above.
16. In the result whereas the assessee’s appeal is rejected on all grounds the revenue’s appeal is allowed as indicated above.