INCOME TAX

Circular No. 51

Dated 23/12/1970

Whether provisions of section 13(2)(h), providing for forfeiture of exemption, apply with reference to shares in company initially settled on trust or donated to it subsequently

1. Reference is invited to paragraph 21 of the Boards Circular No. 45, dated 2-9-1970 which explains the scope and ambit of section 13 as substituted by the Finance Act, 1970.

2. A question has been raised whether the provision in section 13(2)(h), which provides for the forfeiture of exemption from tax in a case where the trust funds are invested in a concern in which the author of the trust or other persons specified in section 13(3) have a substantial interest, would apply with reference to shares in a company initially settled on the trust or donated to it subsequently. The Board have been advised that the expression funds of the trust, as used in section 13(2)(h), is wide enough to cover not only invested cash but also shares, stocks, Government securities, etc., and, in fact, property of every kind belonging to the trust. Now, the provisions of section 13(2)(h) apply not only in a case where the funds of the trust are invested, during the relevant previous year, in any concern in which the author or other persons referred to in section 13(3) have a substantial interest but also in a case where such funds, having been invested in such a concern before the beginning of the relevant previous year, continue to remain so invested for any period during that previous year. It, therefore, follows that a trust will forfeit exemption from tax if it continues to hold, after December 31, 1970; shares in a company in which its author, or other connected persons, are substantially interested, regardless of whether the shares form part of the original corpus of the trust or were subsequently acquired by it. The same considerations will apply in regard to investment towards capital of any concern other than a company. In other words, if a trust, which has invested its funds, in any concern in which the author, etc., are substantially interested, does not divest itself of such investment before January 1, 1971, it will forfeit the exemption from tax on its entire income if the investment in such concern exceeds 5 per cent of the capital of the concern. Where the investment does not exceed 5 per cent of the capital of the concern, the exemption from tax will be forfeited only in relation to the income from such investment and not in relation to the remainder of its income.

Circular : No. 51 [F. No. 152/(49)70-TPL], dated 23-12-1970.