Vildirect: IncomeTax-caselaws-1988-VIL-402-GUJ-DT

1988-VIL-402-GUJ-DT

Equivalent Citation: [1988] 173 ITR 683, 71 CTR 30, 40 TAXMANN 369

GUJARAT HIGH COURT

Date: 19.04.1988

COMMISSIONER OF INCOME-TAX

AMBALAL SARABHAI TRUST

BENCH

Judge(s) : R. C. MANKAD., S. B. MAJMUDAR

JUDGMENT

The judgment of the court was delivered by

S. B. MAJMUDAR J.-Three questions have been referred for our opinion in this reference. They read as under:

" 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal has been right in law in holding that the provisions of section 11 (1A) of the Income-tax Act, 1961, are applicable and consequently the capital gain resulting from sale of shares is exempt ?

2. Whether the finding of the Appellate Tribunal that since the assessee had invested part of the consideration on sale of shares in question in bank and the balance was kept with the purchaser in fixed deposit, the assessee could be said to have utilised the whole sale proceeds for acquiring another Capital asset is correct in law ?

3. Whether, on the facts and in the circumstances of the case, the assessee could be said to have in law utilised the whole sale proceeds for acquiring another capital asset so as to exempt it from the charge of capital gains tax resulting on sale of shares in question ? "

The reference has been made at the instance of the Revenue. In order to appreciate the contours of the controversy reflected by these questions, it would be necessary to note a few introductory facts at the outset. The assessee trust is a charitable trust. The year of assessment is 1974-75. During the relevant year, the assessee trust sold three shares of Karamchand Premchand Private Limited and 377 shares of Calico Mills and realised a net consideration of Rs. 1,75,807. Some of the above shares had been received by way of donation whereas some of the shares were received by bonus accretion to the above mentioned shares. The Income-tax Officer sought to compute the capital gains on the above sales of shares. The assessee trust claimed before him that the amounts received on account of the sale of the shares had been in fact kept as deposit-bearing interest with the result that the provisions of section 11(1A) were attracted. According to the assessee trust, the consideration received on the sale of shares was utilised for the acquisition of the fixed deposits so far as 90% of the sale consideration was concerned and 10% of the sale consideration was utilised by investing the same in a bank. So far as 90% of the sale consideration was concerned, the same was allowed to be kept with the purchaser as fixed deposit on interest. The Income-tax Officer took the view that this 90% of the sale consideration can be said to be the unpaid purchase price for the payment of which the purchasers were given instalments on interest and consequently it cannot be said that 90% of the sale consideration was utilised by the assessee trust for acquiring another capital asset. Hence, the benefit of section 11(1A), according to the Income-tax Officer, was not available to the trust.

On appeal, the Commissioner (Appeals) held to the contrary. He took the view that the provisions of section 11(1A) are applicable to the facts of the case and, therefore, capital gains tax was not attracted on the sale of the shares. The Revenue carried the matter in appeal before the Income-tax Appellate Tribunal. Having failed in the appeal to convince the Tribunal about the stand taken by the Revenue, the latter got the aforesaid three questions referred for our opinion.

Now, before we deal with the controversy centering round the referred questions, it will be necessary to note a few admitted facts at this stage. The assessee trust is a charitable trust registered under the provisions of the Bombay Public Trusts Act. During the relevant year, it sold three shares of Karamchand Premchand Private Limited to the estate of late Ambalal Sarabhai for Rs. 8,796 of which Rs. 880 only were received in cash and the balance of Rs. 7,916 was held as deposit with the purchaser to be repaid over a period. Likewise, 377 shares of Calico Mills were sold to Karamchand Premchand Private Limited for a sum of Rs. 1,67,011 against which only Rs. 16,701, was received in cash and the balance was kept with the purchaser as deposit. The actual money thus realised on the above transactions comes to Rs. 17,581. It was kept in fixed deposit with the Bank of India. So far as 90% of the sale price is concerned, the assessee passed a resolution with regard to the above investment which reads as under:

" Resolved that the sale of investments held by the trust in the following companies, viz. :

---------------------------------------------------------------------------------------------------------------------------------------------------

Name of the company No. of shares Rate Total Name of the purchaser

---------------------------------------------------------------------------------------------------------------------------------------------------

The A' bad Mfg. & Ord. 377 443 1,67,011 Karamchand Premchand

Calico Ptg. Co. Ltd. Pvt. Ltd.

Karamchand Ord. 3 2932 8,796 Estate of Ambalal

Premchand Pvt. Ltd. Sarabhai.

----------------

Total 1,75,807

----------------

Price In the case of Calico Mills shares, the rate of Rs. 443 per share is the closing rate on Saturday 23rd June, 1973 (24th being Sunday), and in the case of shares of other companies, the rate is fixed on the basis of the value computed as per the Wealth-tax Rules.

Mode of payment:

10% of the total price is received on delivery of share certificate on June 26, 1973. Balance will be kept by the purchasers as deposit carrying interest at 9 and half per cent per annum for the period as under:

1/9th, i. e., Rs. 17,881, for the period of one year ending on June 30, 1974.

2/9ths, i. e., Rs. 35,161, for the period of one year ending on June 30, 1975.

2/9ths, i. e., Rs. 35,161, for the period of one year ending on June 30, 1976.

2/9ths, i. c., Rs. 35,161, for the period of one year ending on June 30, 1977.

2/9ths, i. e., Rs. 35,161, for the period of one year ending on June 30, 1978.

Total Rs. 1,58,226.

Further resolved that the Secretary be and is hereby authorised to apply to the Charity Commissioner to get his approval required under section 35 of the Bombay Public Trusts Act, 1950 ".

In the books of the assessee, the sums of Rs. 1,67,011 and Rs. 8,796 were debited to the account of Karamchand Premchand Private Limited and the estate of Ambalal Sarabhai with the narration " being shares of above companies sold as per trust's resolution dated June 26, 1973, and the sale price to be received as per details as under debited to purchasing parties' accounts and credited to respective company's shares accounts ".

It is also not in dispute that the assessee applied to the Charity Commissioner under section 35 of the Bombay Public Trusts Act for permission to invest 90% of the balance amount as its funds in the aforesaid F. D. R. with the purchasers. The Charity Commissioner by his order dated December 31, 1973, granted permission to the trustees to invest the above amounts with Karamchand Premchand Pvt. Ltd. and the estate of Ambalal Sarabhai. The permission order also directed that the trustees were to take prior permission of the Charity Commissioner before making such investment and not to utilise the amount of fixed deposits when the same will mature without seeking the prior permission of the Charity Commissioner.

The purchasers of the shares, viz., Karamchand Premchand Pvt. Ltd. and Estate of Ambalal Sarabhai issued fixed deposit receipts to the assessee in respect of the outstanding amounts, the periods of the deposits being in the case of Karamchand Premchand Pvt. Ltd. 4 years 9 months, 4 years, 3 years and 2 years in respect of different deposits of Rs. 33,462 and one year in respect of a deposit of Rs. 16,701 and in the case of Ambalal Sarabhai, 4 fixed deposit receipts of Rs. 1,760 for 2 years, 3 years, 4 years and 4 years and 9 months period were issued, whereas one deposit receipt for Rs. 880 for one year was issued. It is also not in dispute that in the balance-sheet of the assessee, 90% of the purchase price which remained invested with the purchaser has been shown in the investment account and not as debts due from sundry debtors, viz., concerned purchasers. It is in the background of this factual matrix that the questions referred to us for our consideration will have to be examined and answered.

We may first turn to the statutory provisions. Section 11 (1) as applicable at the relevant time read as under :

" 11. ( 1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total Income of the previous year of the person in receipt of the income (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; and where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty five per cent. of the income from such property;.."

Section 11(1A) reads as under " (1A) For the purposes of sub-section (1), (a) Where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder : ... "

Explanation (iii) to this sub-section reads as under :

" `net consideration' means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer".

In the light of the aforesaid statutory provisions, Soparkar for the Revenue vehemently contended that before the provisions of sub-section (1A) of section 11 can be of any avail to the assessee, the following conditions must be satisfied (i) The concerned capital asset, which is subjected to transfer, must be held under trust wholly for charitable or religious purposes ;

(ii) On transfer, the whole or any part of the net consideration received must have been utilised for acquiring another capital asset to be so held.

So far as the first requirement is concerned, Soparkar submitted that there cannot be any dispute that the concerned shares were held by the assessee for charitable purposes and they were capital assets of the trust'. But his grievance centres round the second condition. He submitted that the facts of this case do not show that the disputed part of the net consideration, viz., 90%, was utilised for acquiring another capital asset to be held for charitable purposes. Soparkar submitted that by an agreement between the purchaser on the one hand and the seller on the other, 90% of the unpaid purchase price was to be paid by the purchaser by easy instalments and as the purchasers were not required to forthwith pay the consideration of 90%, they had to pay interest on these instalments. Thus, the seller remained an unpaid seller so far as 900 of the unpaid purchase price was concerned. Consequently, there arose no occasion for the unpaid seller to invest the sale consideration of 90% in acquiring another capital asset. It is not possible to agree with this contention of Soparkar for the obvious reason that by clear agreement between the seller on the one hand and the purchasers on the other, full consideration can be said to have passed in law from the purchaser to the seller, but that was made up of two parts. 10% was paid in cash while the remaining 90% which otherwise could have been paid in cash by the purchasers to the seller was allowed to be retained by the purchasers as a fixed deposit to the credit of the seller. There is overwhelming evidence on record which clearly indicates that full consideration had passed at the relevant time and 90% thereof was invested by the seller-trust in the shape of fixed deposits which were permitted to be kept by the purchaser as fixed deposits to the credit of the seller-trust.

Soparkar, for the Revenue, vehemently submitted that as only 10% of the consideration was received in cash by the seller-trust and 90% was not so received and remained in the hands of the purchaser, it must be held that this 90% remained the unpaid purchase price which was agreed to be paid up by the purchaser by easy instalments. Soparkar, however, fairly stated that if this 90% of the sale price was paid over to the seller and then immediately the seller had invested the same with the buyer, the Revenue would have no case. In our opinion, in the light of the salient features of the case which we have discussed earlier, it cannot be said that 90% of the price had remained unpaid. In fact, it had also been paid over to the seller by an agreement between the parties and 90% of the amount had continued to remain invested in fixed deposits with the purchaser and both sides had agreed to this position and consequently, it cannot be said that 90% of the purchase price had remained unpaid by the purchasers. The contention canvassed by the Revenue is too technical to be entertained, viz., that the sale price should have been first paid over in cash by the purchaser and then it could have been forthwith invested and given back to the purchaser. Instead of undergoing such formality, if the purchaser was permitted to retain 90% of the purchase price as fixed deposits, it cannot be said that the purchase price had really not changed hands from the purchaser to the seller. If any doubt is left about the real nature of the transaction between the parties, it is set at rest by Explanation (iii) to section 11(1A), which has been extracted earlier. Net consideration as per the said Explanation would mean full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer. Now, in the present case, even if 90% can be said not to have been received in cash by the seller, it cannot be gainsaid that it had really accrued to the seller, on account of the sale transaction in question. It is because this Explanation was not noticed by the Income-tax Officer, that he was prompted to take the view to the effect that share in accounts was not covered by the sweep of section 11(1A). His view was rightly upset by the higher authorities. As a result of the aforesaid discussion, it must be held, agreeing with the Tribunal, that the capital assets belonging to the assessee-trust which were held wholly for charitable purposes were transferred and the whole of the net consideration thereof was utilised by the assessee-trust for acquiring another capital asset, viz., 10% being invested in Bank of India and balance in fixed deposits with the erstwhile purchasers of the capital asset. The provisions of section 11(1A), were, therefore, fully satisfied on the facts of the present case. As a result of this discussion, therefore, the questions referred for our opinion are answered as under :

Question No. 1 : In the affirmative-in favour of the assessee and against the Revenue;

Question No. 2 : In the affirmative-in favour of the assessee and against the Revenue;

Question No. 3 : In the affirmative-in favour of the assessee and against the Revenue.

Reference is accordingly disposed of with no order as to costs.

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.