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High Court Of Calcutta
Ajit Kumar Sengupta, Shyamal Kumar Sen
COMMISSIONER OF INCOME-TAX - Appellant
Versus
EAST INDIA CHARITABLE TRUST - Respondent
Income-Tax Reference 337 Of 1987
Decided On : 01/16/1992
INCOME TAX - CAPITAL ASSETS - INVESTMENT IN PUBLIC SECTOR UNDERTAKINGS - UNIT TRUST OF INDIA - EXEMPTION UNDER SECTION 11(1A) - EXTINGUISHMENT OF RIGHTS IN DEBENTURE-STOCK - CAPITAL LOSS.
Fact of the Case:
The assessee, a trust, sold shares of various companies and invested the net consideration in fixed deposits with public sector undertakings and units of the Unit Trust of India. The assessee claimed exemption under Section 11(1A) of the Income-tax Act, 1961, on the ground that the investments were in new capital assets. The Revenue denied the exemption, contending that the fixed deposits were not capital assets and that the units were not acquired during the relevant previous year. The assessee also claimed capital loss on extinguishment of its rights in debenture-stock of a company that was taken over by the Government.
Finding of the Court:
The Income-tax Appellate Tribunal held that the fixed deposits were capital assets and that the investment in the units of the Unit Trust of India was made during the relevant previous year. The Tribunal also held that the assessee suffered capital loss on extinguishment of its rights in the debenture-stock.
Issues: 1. Whether investment in public sector undertakings could constitute a capital asset? 2. Whether the exemption available under Sub-section (1A) of Section 11 with regard to capital gains arising from the transfer of any existing capital asset of a trust held wholly for charitable or religious purposes is available when the net consideration for the transfer is invested in a fixed deposit with a public sector company? 3. Whether the assessee was entitled to exemption under Section 11(1A) of the Income-tax Act, 1961, in respect of the capital gains on the sale of shares? 4. Whether the assessee incurred capital loss on extinguishment of its rights in the debenture-stock?
Ratio Decidendi: 1. The definition of "capital asset" in Section 2(14) of the Income-tax Act, 1961, includes property of any kind held by an assessee, except for the specific exclusions. Fixed deposits with public sector companies are not excluded from the definition of "capital assets". 2. The investment in fixed deposits with public sector companies is a permitted form of investment under Section 11(5) of the Income-tax Act, 1961, for charitable and religious trusts. 3. The assessee was entitled to exemption under Section 11(1A) of the Income-tax Act, 1961, in respect of the capital gains on the sale of shares, as the investments in fixed deposits with public sector companies and units of the Unit Trust of India were made during the relevant previous year. 4. The extinguishment of the assessee's rights in the debenture-stock did not result in a capital loss under the head "capital gains", as there was no transfer of the asset involved.
Final Decision: The court answered the first three questions in the affirmative and against the Revenue and the fourth question in the negative and against the assessee.
( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, for the assessment year 1982-83, the following questions of law have been referred to this court : r. A. No, 1475/ (Cal) of 1986 :" (1) Whether, on the facts and in the circumstances of the case, the Income-tax Officer was correct in law in holding that the investment in public sector undertakings was a capital asset within the meaning of Section 2 (14) of the Income-tax Act, 1961 ? (2) Whether the finding of the Tribunal that the assessee-trust had invested in the units of the Unit Trust of India during the relevant previous year was based on proper evidence and materials ? (3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was correct in law in holding that the entire sale proceeds from shares were invested in the acquisition of other capital assets within the meaning of Section 11 (1a) of the Income-tax Act, 1961? (4) Whether the Income-tax Appellate Tribunal was justified in holding that the assessee-trust was entitled to exemption under Section 11 (1a) of the Income-tax Act, 1961, in respect of the capital gains of Rs. 23,79,538 on the sale of shares. "r. A. No, 1476/ (Cal) of 1986 :" (1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that there was extinguishment of the right of the assessee in the debenture-stock held by it in Messrs. Braithwaite and Co. (I.) Ltd. , within the meaning of Section 2 (47) read with Section 45 of the Income-tax Act, 1961, upon the receipt of the letter from the Commissioner of Payments that nothing could be paid to it for the stock so held by it. (2) Whether the Tribunal was justified in law in holding that the assessee incurred capital loss of Rs. 1,30,000 (1ong-term) in respect of the debenture-stock held by it in Messrs. Braithwaite and Co. (I.) Ltd. "
( 2 ) SHORTLY stated, the facts are that the assessee in this case is a trust and the assessment year involved is 1982-83 for which the previous year ended on December 31, 1981. During the relevant previous year, the assessee-trust sold shares of various companies which formed the corpus of the trust fund for a net consideration of Rs. 37,78,640. On this transaction, the capital gains shown amounted to Rs. 23,79,538. The assessee claimed that the net consideration of the sale was utilised for acquiring new capital assets as under :
Date of utilisation Amount Rs. Particulars
In 1981: 29-12-1981 12,50,000 Fixed deposit with Hindusthan Petroleum Corporation Ltd.
29-12-1981 7,50,000 Fixed deposit with Bharat Petroleum Corporation Ltd.
29-12-1981 5,00,000 Fixed deposit with Bharat Heavy Electricals Ltd.
30-12-1981 5,88,149 30,88,149 48,130 units of the Unit Trust of India
In 1982:
13-1-1982 4,00,000 Fixed deposit with Bharat Petroleum Corporation Ltd.
8-2-1982 3,00,000 7,00,000 Fixed deposit with Bharat Heavy Electricals Ltd.
( 3 ) OUT of the above, a sum of Rs. 7,00,000 was invested after December 31, 1981, and an option was exercised under the Explanation to Section 11 (1) requesting the Income-tax Officer to treat the above sum as deemed application during the year ended on December 31, 1981. It was. urged that the capital gains of Rs. 23,79,538 was, therefore, exempt from tax under Section 11 (1) of the Income-tax Act, 1961.
( 4 ) THE Income-tax Officer found that the assessee made fixed deposits with Central Government undertakings and further purchased 48,130 units of the Unit Trust of India. As regards the deposit of Rs. 12,50,000 as mentioned above, no confirmation from the Hindusthan Petroleum Corporation Ltd. had been filed. The Income-tax Officer was of the view that the investment in public sector undertakings was nothing but loans floated by these companies under their schemes and did not amount to the acquisition of capital assets. As regards unit trust investment, he found that the shares we
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