Bombay H.C : Whether, on the facts and in the circumstances of the case, the dividend income of Rs. 41,726 from the investments referred to in paragraph 11 above would be exempt from tax under s. 11 of the Act read with s. 13(1)(c)(ii) and s. 13(2)(h) of the Act ?

Counsel Appeared

G.S. Jetley with S.V. Naik & K.C. Sidhva, for the Revenue : S.J. Mehta with I.M. Munim, for the Assessee

T.D. SUGLA, J.:

The Tribunal has referred to this Court the following questions of law at the instance of the Department and the assessee :

At the instance of the Revenue :

“(1) Whether, on the facts and in the circumstances of the case, the dividend income of Rs. 41,726 from the investments referred to in paragraph 11 above would be exempt from tax under s. 11 of the Act read with s. 13(1)(c)(ii) and s. 13(2)(h) of the Act ?”

At the instance of the assessee :

“(2) Whether, on the facts and in the circumstances of the case, the application of the property of the trust for the benefit of specified persons can be said to be by way of compliance with the mandatory terms contained in cl. 18 of the trust deed ?

(3) Whether, on the facts and in the circumstances of the case, the provisions of sub-cl. (ii) of cl. (c) of s. 13(1) would apply in view of the first proviso thereto ?”

2. We propose to first deal with the question of law referred to us at the instance of the Revenue. The assessee-trust was created by a deed of trust dt. 25th Nov., 1946. The trust has all along been treated as a public charitable trust. The assessee filed a return showing “Nil” income for the asst. yr. 1971-72. The ITO found that the investment of the assessee-trust in shares of four companies was for the benefit of persons specified in s. 13(3) of the Act and, therefore, the income by way of dividend from these four companies was taxable. She rejected the assessee’s contention that such investments were made by the assessee according to the mandatory terms of the trust and the assessee’s case was covered by the first proviso to s. 13(1)(c)(ii). The gross dividend being Rs. 1,49,900, after allowing the expenses of Rs. 2,500 on estimate and Rs. 3,000 as deduction under s. 80L, she computed the total income at Rs. 1,44,400. The AAC agreed with the ITO that there was no obligation on the part of the assessee-trust to invest its income in the said four companies and that the first proviso to s. 13(1)(c)(ii) did not cover the investments. However, he accepted the other plea of the assessee, viz., that the application of the property of the trust for the benefit of specified persons pertained to the period before 1st June, 1970, and the case was covered by the second proviso to s. 13(1)(c)(ii) and, therefore, income was exempt. It was contended before the Tribunal that the AAC had failed to consider the impact of s. 13(2)(h) on s. 13(1)(c). The above-said two provisions read together, it was stated, the second proviso to s. 13(1)(c) would not cover the assessee’s case as the investments in the said four companies, though made before 1st June, 1970, remained invested in those very companies even after 1st Jan., 1971, and the assessee’s case would not, therefore, be covered by the second proviso. The Tribunal found on facts that the assessee had gifted shares of Walchand and Company Pvt. Ltd. on 28th Dec., 1970, and, therefore, the dividend received from that company would certainly qualify for exemption. As regards the dividend from the remaining three companies amounting to Rs. 41,726 also, the Tribunal did not accept the Department’s case that the provisions of s. 13(2)(h) created a further fiction so that even though the shares were invested before 1st June, 1970, the dividend income therefrom would forfeit exemption as these investments continued as such even after 1st Jan., 1971. Since the Tribunal was dismissing the Department’s appeal, it treated the assessee’s cross-appeal also as dismissed.

Shri Jetley, learned counsel for the Department, reiterated that the investment was admittedly made by the assessee-trust in the shares of the companies in which the settlors had substantial interest within the meaning of sub-s. (3) of s. 13. Such investments continued beyond 1st Jan., 1971, and, therefore, the income would forfeit exemption irrespective of the fact whether the same was applied by way of mandatory compliance with the provisions of the deed of trust or such an investment related to a period before 1st June, 1970. In support, he placed reliance on the Andhra Pradesh High Court decision in Talaprolu Bapanaiah Vidya Dharma Nidhi Trust vs. CIT (1987) 167 ITR 482 (AP) : TC23R.1541. The proposition laid down in this case, it was stated, is that if the investments made or continued by an assessee-trust in companies in which the settlors had substantial interest within the meaning of sub-s. (3) of s. 13 beyond 1st Jan., 1971, the income of the trust will have to be treated as taxable and not exempt under s. 11.

In order to appreciate the submissions made on behalf of the Department, it is desirable to refer to the provisions of ss. 13(1) and 13(2)(h) of the IT Act, 1961. The provisions at the material time read thus : “13.(1) Nothing contained in s. 11 or s. 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof—….. (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof—(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (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, directly or indirectly for the benefit of any person referred to in sub-s. (3) : Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-cl. (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-s. (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-cl. (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-s. (3) in so far as such use or application relates to any period before the 1st day of June, 1970.” “13.(2) Without prejudice to the generality of the provisions of cl. (c) of sub-s. (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-s. (3),—…. (h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub-s. (3) has a substantial interest.”

5. There appears to be no dispute that, factually, the provisions of the second proviso to cl. (c) of sub-s. (1) of s. 13 cover the assessee’s case and that ordinarily the assessee would continue to qualify for exemption. The Department’s case is that the case of the assessee also falls within, s. 13(2)(h) and that fact makes all the difference in the situation.

It may be mentioned as a statement of fact that a view contrary to what was taken by the Andhra Pradesh High Court in Talaprolu Bapanaiah vidya Dharma Nidhi Trust vs. CIT (supra), regarding the meaning of the word “fund” and the investments made or continued to have been made was taken by the Calcutta High Court in CIT vs. Birla Charity Trust (1988) 170 ITR 150 (Cal). However, for the present, we will assume that the assessee’s case falls under s. 13(2)(h). Let us now examine its impact on s. 13(1)(c). Sec. 13(2) along with its clauses including cl. (h) is a non obstante proviso to s. 13(1)(c) and thus broadens the net spread by s. 13(1)(c) for the purpose of forfeiting the exemption. The pertinent question would still remain when one of the two provisos to cl. (c) of sub-s. (1) of s. 13 (in this case the second proviso) is admittedly applicable, the effect of which is that the exemption cannot be forfeited, could one accept the Department’s case that the date mentioned in proviso (ii) has lost relevance so much so that the proviso has become otiose. We will certainly avoid such a construction unless compelled by the plain language of the provisions. Under the circumstances, having regard to the undisputed finding of the Tribunal that the case falls within the proviso (ii) to cl. (c) to sub-s. (1) of s. 13, it will, in our view, have to be held that the income is entitled to exemption and that the Tribunal was right in its conclusion.

6. Accordingly, the question of law referred to us at the instance of the Revenue is answered in the affirmative and in favour of the assessee.

7. Shri Jetley had contended that the Tribunal was not justified in referring the questions of law at the instance of the assessee when the assessee had not filed a separate reference application. This question has become academic as we have answered the question referred to us at the instance of the Revenue in favour of the assessee. Therefore, the questions of law referred to us by the Tribunal at the instance of the assessee do not survive and are not answered. No order as to costs.

[Citation :181 ITR 47]