Whether donation would become part of corpus where Resolution of donor company stated that shares would be transferred to trust and gift would be towards its corpus - YES: HC

THE issue before the Bench is - Whether donation would become a part of the corpus where the resolution of the donor company stated that the shares would be transferred to the assessee trust and the gift would be towards corpus of the trust. And the verdict favours the assessee.

Facts of the case

Assessee Foundation was founded with the object to establish, develop, maintain and operate hospitals, medical schools, medical colleges, nursing institutions, dispensaries, maternity homes and child welfare centres etc. It was granted registration under Section 12AA and approval under Section 80G was also accorded. Assessee filed return declaring nil income for the assessment year 2006-07. Later assessee filed a revised return declaring income. During the course of the assessment proceedings the assessee claimed that the revised return be ignored and the first return should be treated as the correct and true return. Revised computation was filed. The Assessing Officer did not agree and held that in terms of the decision of the Supreme Court in Goetze (India) Limited vs. CIT 2006-TIOL-198-SC-IT, the assessee could not have filed the revised computation and said claim could have been only made by way of a re-revised return. Further, the time period for filing of a revised or re-revised return under Section 139(5) had come to an end. Thus, the revised return could only be taken into consideration. The Assessing Officer held that the market value of the shares of N received by way of gift/donation from P Trust on 03.08.2005 was taxable in terms of Section 2(24)(iia) of the Act and accordingly addition was made. In respect of the shares sold by assessee, Assessing Officer held that there was a distinction between donation and gift and being a donation the short term capital gains was computed.

In the first appeal, the Commissioner of Income Tax (Appeals) came to the conclusion that the assessee could not have filed the revised computation and decision of Goetze (India) Limited case was applicable. However, he deleted addition made on account of capital gains. With regard to addition on account of market value of shares, he upheld the order of the Assessing Officer.

In second appeal, Tribunal held that the revised computation filed by the assessee during the course of the assessment proceedings and their submission that they were withdrawing the revised return should have been accepted in view of decisions in NTPC vs. CIT 2002-TIOL-279-SC-IT-LB, Jute Corporation of India Ltd. vs. CIT 2002-TIOL-1027-SC-IT-LB, CIT vs. Jai Parabolic Springs Ltd. 2008-TIOL-218-HC-DEL-IT, CIT vs. Pruthvi Brokers & Shareholders 2012-TIOL-489-HC-MUM-IT, Balmukund Acharya vs. DCIT 2009-TIOL-05-HC-MUM-IT and some decisions of the Tribunal. It was further held that in the present case the shares which were transferred or gifted to the assessee were to form part and parcel of the corpus of the trust and therefore Section 11(1)(d) was applicable. Further proviso (iia) to Section 13(1)(d) would protect the assessee in respect of the assessment year in question. Thus, addition in respect of the market value of the shares was deleted.

Having heard the parties, the Court held that,

++ we do not think that in the facts and circumstances of the present case, the decision of Goetze (India) Limited case would be applicable, as the assessee during the course of the assessment proceedings, before the Assessing Officer had stated that they had proceeded on wrong legal advice and would like to withdraw the revised return filed on 10.01.2007 and would rely upon the original return dated 30.10.2006. The Assessing Officer in fact has gone into the merits and examined the assertions, made in the original return;

++ in the case of NTPC case , the Supreme Court had clarified that the legal issue, which does not involve disputed facts, can be entertained even at the appellate stage. Similar view has been expressed in the case of Jute Corporation of India case , in which Supreme Court observed that

"6…. The declaration of law is clear that the power of the Appellate Assistant Commissioner is co-terminus with that of the Income Tax Officer, if that be so, there appears to be no reason as to why the appellate authority cannot modify the assessment order on an additional ground even if not raised before the Income Tax Officer. No exception could be taken to this view as the Act does not place any restriction or limitation on the exercise of appellate power. Even otherwise an Appellate Authority while hearing appeal against the order of a subordinate authority has all the powers which the original authority may have in deciding the question before it subject to the restrictions or limitations if any prescribed by the statutory provisions. In the absence of any statutory provision the Appellate Authority is vested with all the plenary powers which the subordinate authority may have in the matter. There appears to be no good reason and none was placed before us to justify curtailment of the power of the Appellate Assistant Commissioner in entertaining an additional ground raised by the assessee in seeking modification of the order of assessment passed by the Income Tax Officer"

++ in Jai Parabolic, a division bench of this court, after referring to judgment of Supreme Court in Jute Corporation and some other judgments observed that there is no prohibition on the powers of the Tribunal to entertain an additional ground which according to the Tribunal arises in the matter and for the just decision of the case;

++ in Pruthvi Brokers, a division Bench of Bombay High Court, referred to the judgments of Supreme Court in Jute corporation, NTPC and Goetze (India) Limited and observed as under : -

"23. It is clear to us that the Supreme Court did not hold anything contrary to what was held in the previous judgments to the effect that even if a claim is not made before the assessing officer, it can be made before the appellate authorities. The jurisdiction of the appellate authorities to entertain such a claim has not been negated by the Supreme Court in this judgment. In fact, the Supreme Court made it clear that the issue in the case was limited to the power of the assessing authority and that the judgment does not impinge on the power of the Tribunal under section 254."

++ there cannot be any doubt or debate, that the claim and submission could have been raised by the assessee before the appellate authorities. In either way, the issue has been rightly decided in favour of the respondent-assessee.

++ resolution states that 16,50,000/ shares of Rs. 2/- each of N should be transferred to the assessee trust and the persons, mentioned therein, were severally authorized to do all such acts, deeds, matters and things as were necessary to effectuate the above transfer.

++ letter in categorical terms states that the gift would be towards corpus of the respondent assessee trust. The Tribunal after referring to the resolution and the letter, concluded and rightly observed that both have to be read together and there was a specific direction that 16,50,000 shares would form part of the corpus and should not be treated as voluntary contribution. We do not see any reason to interfere with the said finding.

++ Section 11(1)(d) of the Act would be applicable and the donation made, would become a part of the corpus and would not be income earned.

++ even when the return of income was filed on 30.10.06, the stand of the assessee was that 16,50,000 shares of N Limited were gifted towards and to form part of the corpus of the trust. It was further claimed that the assessee trust had sold 4 lac shares in terms of Section 49(1)(ii). The period of holding of the donor had been taken into consideration and the costs of acquisition was taken as 'Nil' but the gain from transfer of the shares were exempt under Section 10(38) of the Act. In view of the above discussion, this aspect requires no interference.

++ the shares in question were acquired by the assessee on 03.08.05. As per Clause (iia) to the proviso, Section 13(1)(d), would be applicable, post period of one year from the end of the previous year in which the shares were acquired. That means, there would be no violation of Section 13(1)(d) on the part of the respondent assessee till 31.03.07.

++ the assessee had rightly claimed that they had not violated Section 13(1)(d) in the assessment year in question. Appropriate, would be to refer to Director of Income Tax versus Shree Radha Krishan Charitable Trust 2011-TIOL-315-HC-DEL-IT. In this case, the assessee had not disinvested the shares upto 31.03.93 and the assessment year involved was 1992-93. The High Court held that the embargo resulting in disqualification would be only applicable after 01.04.93 and therefore would be an issue to be examined in the assessment year 1993-94 and not an issue in the assessment year 1992-93, though this fact was known even when the assessment order was passed for the assessment year 1992-93.