JUDGMENT
M.B. Shah, J.
1. Before the Income-tax Appellate Tribunal, the assessee contended that for the assessment year 1973-74, the Appellate Assistant Commissioner has erred in forfeiting the exemption on the dividend income from the shares of the following companies received by the assessee during the assessment year 1973-74.
Name of the company Amount of dividend
Sercon Private Ltd. 7,946
Karamchand Premchand P. Ltd. 21,534
Ahmedabad Mfg. and Calico Ptg. Co. Ltd. 1,01,890
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1,31,370
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2. Before the Tribunal, it was not disputed that 779 shares of Sercon Private Limited and 222 shares of Karmachand Premchand Private Limited were received in donation. It was also not disputed that 2,827 shares of Calico Mills Ltd. were bonus shares, 2,696 shares were received in donation and 137 shares were purchased. The Tribunal negatived the contention of the assessee that the assessee and the persons referred to in sub-section (3) of section 13 had no voting power because the shares owned beneficially by them did not carry 20 per cent. of the voting power. However, the Tribunal held that the assessee should succeed on the alternative argument that 40,096 shares held by the charitable trust could not be said to have been held by the assessee or the persons referred to in sub-section (3) of section 13 of the Income-tax Act. The Tribunal deducted 40,096 shares from the shareholding of 1,25,796 shares and as balance of 85,673 was less than 20 per cent. of the total shares of Calico Mills Ltd., which were 4,44,672, the Tribunal, by its judgment and order dated December 15, 1979, allowed the appeal and directed the Income-tax Officer to give exemption on the dividend income amounting to Rs. 1,31,370 from the shares as mentioned above.
3. Against that order, the assessee as well as the Department filed reference applications before the Tribunal. The Tribunal referred the following questions for the opinion of this court under section 256(1) of the Act.
“At the instance of the assessee :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that it was not necessary to own shares carrying at least 20 per cent. of voting power for the purpose of invoking the provisions of section 13(3) read with Explanation 3 of the Act ?
At the instance of the Revenue :
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the condition precedent in section 13(2)(h) of the Income-tax Act, 1961, was not fulfilled with regard to the bonus shares and shares donated to the assessee and consequently its right to exemption in respect of the dividend was not forfeited ?
3. Whether the assessee was entitled to exemption of the dividend income amount of Rs. 1,31,370 ?”
4. At the time of hearing of this reference, the learned advocate for the applicant has submitted a statement, wherein it is, inter alia, stated that, in view of the decision of this court in the case of CIT v. Insaniyat Trust [1988] 173 ITR 248, if a trust received as donation some shares, then the provisions of section 13(2)(h) would not be applicable and the dividend received from the shares by the assessee was entitled to exemption. It is also stated that, in view of the aforesaid decision, the total dividend income of Rs. 1,28,094 cannot be taxed by applying the provisions of section 13(2)(h) of the Act. With regard to the dividend of 137 shares of Calico Mills Ltd., which are purchased by the assessee, the dividend amount comes to Rs. 2,466 at the rate of Rs. 18 per share. In view of the very small tax effect on the income of Rs. 2,466 involved in this reference, the assessee does not press the question whether the Calico Mills Ltd. will be a concern wherein the persons referred to in section 13(3) had substantial interest on the basis of Explanation 3 of section 13, i.e., 20 per cent. of voting power and the beneficial ownership. It is also submitted that, because of the aforesaid concession, question No. 2, which is referred at the instance of the Department, would also not survive. With regard to question No. 3, it is submitted that it should be divided into two parts – (i) the shares which are received in donation or as bonus (which attracts no tax in view of the decision of this court in Insaniyat Trust’s case [1988] 173 ITR 248 and (ii)) the dividend which is received on 137 shares of the Calico Mills Ltd., purchased by the assessee (which should be taxed in the hands of the assessee).
5. In the case of Insaniyat Trust [1988] 173 ITR 248 (Guj), the court considered the provisions of section 13(2)(h) of the Act and particularly the expression “fund” used therein. After considering various contentions, the court held that the expression “invest” in section 13(2)(h) connotes a positive act on the part of the trust whereby the funds of the trust are laid out or committed in any particular property or business or transaction with the object of earning profit or financial advantage or return. It has to be established that a trust having assets in the form of money or cash or a credit balance in the bank account or in any other form capable of being invested was, by a positive act and pursuant to a decision of the trust, laid out or committed in a concern of a nature specified, before it can be held that such an investment comes within the mischief of section 13(2)(h). The court further held that section 13(2)(h) will be attracted only in cases where funds, that is, moneys from actual or available money or cash resources of the trust itself are invested or continue to remain invested for any period during the previous year in any concern in which any person referred to in sub-section (3) of section 13 has substantial interest.
6. In view of the aforesaid law laid down by this court, in our view, in respect of the dividend received on the shares received by way of donation or by way of bonus, section 13(2)(h) is not applicable. It is conceded that, the dividend income with regard to 137 shares of the Calico Mills Ltd. purchased by the assessee may be taxed in the hands of the assessee.
7. In view of the aforesaid discussion, we hold that section 13(2)(h) is not applicable in the matter of dividend of Rs. 1,28,904, which is received by the applicant on the shares which were donated and/or received by way of bonus and, therefore, the Tribunal is right in holding that the assessee was entitled to exemption on dividend income. However, with regard to the dividend income on 137 shares purchased by the assessee, section 13(2)(h) would be applicable. In view of the aforesaid finding, question No. 1 is not pressed and, therefore, is not answered. Question No. 2 which is based on an alternative submission, would also not survive for our opinion. Question No. 3 is answered partly in the affirmative and partly in the negative, as stated above.
8. In the result, the reference is answered accordingly with no order as to costs.