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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH, AHMEDABAD
Before: SHRI T.R. SENTHIL KUMAR & SHRI NARENDRA PRASAD SINHA
PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:
These cross appeals are filed by the Revenue and Assessee respectively, against the order of NFAC, Delhi (in short “the CIT(A)”), & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 2 of 24 dated 31.03.2025, for the Assessment Year (A.Y.) 2018-19 in the proceedings under Section 143(3) read with Section 147 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
The brief facts of the case are that the assessee had filed its return of income for the A.Y. 2018-19 on 26.10.2018 declaring income of Rs. Nil. The case was selected for complete scrutiny under CASS. The assessment was completed under Section 143(3) of the Act on 06.06.2022 at a total income of Rs.6,15,26,94,300/-. In the course of assessment, the Assessing Officer had made an addition of Rs.538.40 Crores under Section 68 of the Act in respect of sale consideration of shares of e-infochips Limited. Further, the Assessing Officer had also denied exemption under Section 11 and 12 of the Act as claimed by the assessee.
3. Aggrieved with the order of the Assessing Officer, the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was partly allowed.
4. Now, both the Revenue as well as the assessee are in appeal before us. We will first take up the appeal of the Revenue for adjudication.
The only ground taken by the Revenue in this appeal is as under: -
“1. Whether on the facts and in circumstances of the case, Ld. CIT is justified in deleting the addition u/s.68 of the I.T. Act, 1961 of Rs.5,38,40,00,000/- being sale consideration of E-Infochip Limited shares received from M/s. Arrow Electronics India Pvt. Ltd., Bangalore.”
& 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 3 of 24 Submission of Revenue
Shri Alpesh Parmar, Ld. CIT D.R. has taken us through the facts of the case in quite detail. Before we adjudicate the ground taken by the Revenue, it will be relevant to recapitulate the facts of the case as brought on record in the assessment order.
(i) The assessee is a public charitable trust in existence since 2001 and registered under Section 12AA of the Act. The assessee had received 80,00,000 numbers of equity shares of e-Infochips Limited as corpus donation from its trustee Shri Pratul Krishnakant Shroff on 12.12.2017. Thereafter, all the shares of e-Infochips Limited, including those held by the assessee, were acquired by Arrow Electronics India Pvt. Ltd. (hereinafter referred as “Arrow”). Arrow is Indian subsidiary of Arrow Electronics Inc - a Fortune 500 USA Company with 99.9% of shareholding. The shares e-Infochips Limited (now known as e-Infochips Private Limited) was acquired by Arrow from more than 500 shareholders, including the assessee trust at a consideration of Rs.673/- per share.
(ii) Arrow Electronics Inc is a large USA Corporation with approximately $ 29 billion in sales in the year 2020. It ranked at #109 in Fortune 500 Company list of 2020 countries. Globally, it has 302 sales locations and 42 Fulfilment & Value-added centers serving 180,000 customers worldwide. Arrow Electronics specializes in distribution of electronic components and computer products, and value-added services and solutions around them. Arrow was founded in 1935, and therefore is one of the oldest USA Corporations. As a distributor, Arrow works with largest semiconductor global Corporations such as Intel Qualcomm, Analog & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 4 of 24 Devices, etc as well as largest computer companies such as IBM, Microsoft, Amazon, etc.
(iii) Strategically, Arrow Electronics Inc, USA, has pursued aggressive growth with strategic acquisitions to bring a suite of valued added services for its clients for higher stickiness and a larger catchment of clients. As a part of this philosophy, Arrow Electronics Inc, USA has acquired around 40 companies around the world since 2009. Arrow Electronics Inc, USA acquired e-Infochips in 2018 as part of its long term strategy to move up the value chain. This acquisition was made through Arrow’s Indian Subsidiary Arrow Electronics India Private Limited
(iv) The assessee being one of the shareholders received sale consideration amounting to Rs.5,38,40,00,000/- i.e., Rs. 673/- for each of 80,00,000 number of shares and dividend of Rs.68.65.36,000/-. The assessee offered for tax the Capital Gain on transfer of these shares but simultaneously claimed exemption u/s.11(1A) in view of investment made as per one of the modes prescribed for availing exemption by investing net sale consideration into fixed deposits with a scheduled bank.
(v) The receipt of the corpus donation was shown in the audited Balance Sheet of the assessee. The gain on sale of said equity shares was also shown in the audited Income & Expenditure Account. Further, the investment in Fixed Deposits of banks was also reflected in the audited Balance Sheet.
Shri Alpesh Parmar, the Ld. CIT-DR submitted that in the course of assessment, the Assessing Officer had made enquiry in respect of sale & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 5 of 24 consideration of Rs.538.40 Crores received by the assessee on sale of shares of e-Infochips Limited. The Assessing Officer had found that there was no justification for sale of shares of e-Infochips Limited at a price of Rs.673/- per share against cost of Rs.7.18 per share only to the previous owner. Further, fair market value of these unquoted shares was Rs.96.46 per share only. In the course of assessment, the Assessing Officer had also made enquiry with Arrow by issuing notice under Section 133(6) of the Act and it transpired that the source of fund for purchase of shares was capital infusion from its shareholder Components Agent Asia Holding Limited, Mauritius. The Assessing Officer also noticed that Arrow had filed its audit report only after initiation of enquiry proceedings in the case of the assessee. Considering the fact that there was no justification for purchase of shares of e-Infochips Limited at exorbitant price of Rs.693/- per share as against fair market value of Rs.96.46 per share only, the Assessing Officer held that the share transaction was not a genuine transaction. Further that the creditworthiness of Arrow was also not established for acquisition of shares at such an exorbitant price. The Ld. CIT-DR submitted that in view of these facts, the Assessing Officer had rightly held that the transaction was arranged by the assessee to give a colour of authenticity to the transaction and to bring its own unaccounted money in the guise of exempted Long Term Capital Gain. He, therefore, justified action of the AO in treating the entire sale consideration of Rs.538.40 Crores as unexplained cash credit in the hands of the assessee and the addition made under Section 68 of the Act.
Submission of the Assessee
Per contra, Shri S.N. Soparkar, Ld. Sr. Counsel appearing for the assessee submitted that there was no case for making addition under & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 6 of 24 Section 68 of the Act in respect of proceeds received by the assessee on sale of shares. He explained that the capital gain arising on sale of shares was duly disclosed by the assessee in its return and deduction under Section 11(1A) of the Act was claimed, as eligible to the assessee. He submitted that this was not the case of any loan or share application money, the creditworthiness or genuineness of which was required to be established by the assessee. As regarding sale transaction of shares, the Ld. Sr. Counsel explained that Sh. Pratul Krishnakant Shroff, who had donated 80,00,000 shares to the Trust, was the founder and CEO of e- Infochips Limited. Arrow, vide letter dated 15th November, 2017 had approached him with an interest to acquire the shares of e-Infochips Limited and as per the agreement all the shares of e-Infochips Limited held by more than 500 shareholders (including Government of Gujarat related Company GVFL) was sold to Arrow. The Ld. Sr. Counsel submitted that the sale of shares of e-Infochips Limited to Arrow was a publicly acknowledged event and sale of 80 lakh shares held by the assessee was not an isolated transaction. As regarding sales consideration of Rs.538.40 Crores, the Ld. Sr. Counsel explained that the source of money utilised for purchase of equity shares of e-Infochips Limited was duly explained before the Assessing Officer as well as before the Ld. CIT(A). The Ld. Sr. Counsel strongly supported the order of the ld. CIT(A) on this issue, who had carefully examined the facts and the evidences brought on record and, thereafter, had allowed relief to the assessee.
Our Findings and Order
We have carefully considered the rival submissions. Prima facie, the invocation of provision of section u/s 68 of the Act in respect of proceeds & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 7 of 24 received by the assessee in respect of sale of shares is not found correct. There is no dispute to the fact that a sum of Rs.538.40 Crores was received by the assessee trust on account of sale of 80,00,000 shares of e-Infochips Limited to Arrow. The gift of shares of e-Infochips Limited to the assessee by the trustee Shri P K Shroff was never doubted by the AO. As regarding sale of shares, the acquisition of share of e-Infochips Limited by Arrow was a publicly acknowledged event and was widely reported in media, as is evident from the materials brought on record in the paper- book. A copy of de-mat account of the assessee was also brought on record and it is found that the purchase and sale of shares were duly reflected in the de-mat account. Thus, the genuineness of the sale of shares by the assessee was duly established. As regarding creditworthiness of the buyer, the assessee had explained the source of money utilised by Arrow for purchase equity shares of e-Infochips Limited and the Fund Flow Chart furnished in this regard is reproduced below:-
& 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 8 of 24
The assessee has also brought on record the evidence for each stage of fund flow, including copy of FIRC, as reflected in the above fund flow chart. The Ld. CIT(A) had carefully examined the evidences brought & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 9 of 24 on record and given his cogent finding in this regard which is reproduced hereunder: -
As apparent from the above flowchart, and FIRCs, it appears that the fund in question was brought in from the “Components Agent Asia Holdings Ltd.”, a Mauritius based holding company of Arrow Electronics Inc (USA), through three bank accounts in the name of Arrow Electronics India Pvt. Ltd in India namely: Bank of America, HSBC Bank & Standard Chartered Bank. All the funds have then been transferred to “Bank of America” account held in the name of “Arrow Electronics India Pvt. Ltd., from where it has been credited to “Axis Bank” account in the name of "Arrow Electronics India Pvt. Ltd. Escrow A/c”. And finally, from the said "Axis Bank Escrow A/c”, funds were disbursed to all the shareholders of “e-Infochips Ltd.” The appellant trust being one of the major shareholder, received the amount as sale consideration on transfer of 80,00,000 number of equity shares of “e-Infochips Ltd.”, from the said Axis Bank Escrow Account, in the following manner: (Bank statement attached underneath) Sl. No. Date Amount 1 09.01.2018 519,55,60,000/- 2 26.03.2018 18,84,40,000/- TOTAL 538,40,00,000 ………… - Without entering into the dispute regarding Book Value/Market Value of each share, it remains an undisputed fact that the appellant trust has received Rs.5,38,40,00,000/- only, as consideration for sale or in exchange of transfer of 80,00,000 number of equity shares of “e-Infochips Ltd.". The AO did not controvert that after the sale of 80,00,000 equity shares, the appellant trust continued to be the owner of those equity shares. The sale of 80,00,000 equity shares, during the year, of "e-Infochips Ltd." has not been deputed by the AO in any manner. - The appellant has discharged his primary onus regarding the above transaction; which could not be otherwise contradicted by the AO by bringing on record any document or evidence to conclude that the source of the fund, received as sale consideration, has not been explained. The irregularity with regard to compliances on the part of the M/s. Arrow Electronics India Pvt. Ltd. as pointed out by the AO do not prove that source of the fund is unexplained, and for that the appellant trust cannot be held responsible. In case of any failure with compliances as observed by the AO, penal action under IT Act, if necessary, is required to be taken or initiated against Arrow Electronics India Pvt. Ltd. only. - The Appellant contested that, the transaction of sale of shares which includes such a large number of sellers (more than 500) cannot be characterized as not genuine transaction, more so when a Government of Gujarat related company (GVFL) also sold its shareholding (around 5% stake) as publicly & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 10 of 24 acknowledged about making Substantial gains on sale of its investment in shares of e-Infochips Ltd. - Regarding the transaction, the appellant trust also contended that, the same price was offered to every seller (more than 500) which has not been disputed in any other case. In particular, in the case of Shri Pratul K. Shroff (PAN ACEPS6613J), the trustee of the appellant trust, who also transferred his personal holding of 1,20,26,804 number of equity shares of “e-Infochips Ltd.” and realized Rs.809,26,93,092/- (at the rate of 673 per share), and offered the same as "Long Term Capital Gain” of Rs.793,01,69,079/- (Rs.793.01 Crores) in his individual return. Short term Capital loss and b/f capital losses were also allowed to be set of from the quantum of LTCG disclosed in the return, to arrive at the total income for the year. In his case, Asstt. Order u/s. 143(3) dated 17-03-2021 was passed after accepting the value per share and amount offered under the head Capital Gains. There is no information before me that the said assessment in the case of Shin Pratul K. Shroff (PAN ACEPS6513J) for the Asstt Year 2018-19 has been held to be erroneous or prejudicial to the interest of revenue. Therefore, the department cannot have different stand for the same transactions for different assesses. The copy of the Asstt. Order as noted above is reproduced here under for the sake of clarity. ……… From the facts narrated above, it is evident that the appellant trust suo-moto has offered the value realised from the sale of 80,00,000 equity shares of “e-Infochips Ltd.” as income and claimed exemption u/s.11(1A) by investing net sale consideration into fixed deposits with a scheduled bank. Considering the facts and circumstances of the case, I am inclined to hold that the action of the AO, in making addition of Rs.538,40,00,000/- only, by invoking Section 68 of I.T. Act, 1961, is not sustainable….”
The Revenue has been unable to controvert the findings of Ld. CIT(A) regarding the source of funds utilised by Arrow for acquisition of shares of the assessee trust. The assessee had not only established the genuineness of the transactions but also brought on record evidences to establish the creditworthiness of the buyer. Merely because the fund was received from Mauritius based Company “Components Agent Asia Holdings Limited”, the transactions cannot be held as in-genuine. Hon’ble Supreme Court had held in the case of Vodafone International Holding BV v. Union of India [2012] 17 & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 11 of 24 taxmann.com 202/204 Taxman 408/341 ITR 1 that there was nothing wrong if the funds for making FDI by Mauritius companies/individuals had not originated from Mauritius but had come from investors of third countries. In view of this judgement, the Revenue's contention that funds for purchase of shares had come not from the assessee but from its holding company in Mauritius, so as to treat the creditworthiness and genuineness of the transaction as doubtful, has to be rejected. Further, it was not a case of solitary transfer of shares of e-Infochips Limited by the assessee trust but more than 500 shareholders of e-Infochips Limited had transferred their shares to Arrow on identical price of Rs.673/- per share. When the sale transactions made by Shri Pratul Krishnakant Shroff, the trustee, was held as genuine and accepted by the Department in the assessment order completed in his case, there was no reason to take a divergent view in the case of the assessee. We, therefore, do not find any rationale for the action of the Assessing Officer to treat the sale proceeds of Rs.538.40 Crores in the hands of the assessee trust as unexplained or in-genuine. The Ld. CIT(A) had correctly appreciated the facts of the case and rightly deleted the addition of Rs.538.40 crore on account of unexplained cash credit in respect of sale of shares. The order of the Ld. CIT(A) on this issue is, therefore, upheld and the appeal of the Revenue is dismissed.
The assessee has taken the following grounds in this appeal: -
“1. Ld. CIT (A) (NFAC) erred in law and on facts in holding that the appellant trust is not entitled to the exemption under Sec 11 & 12 as per the provisions of Sec.13(1)(c) rws 13(3) of the Act. 2. Ld. CIT (A) (NFAC) erred in law and on facts in holding that the appellant trust was used to derive benefit by the trustee for not paying tax on capital gains earned on transfer of 80,00,000 shares of e-infochips Ltd.
& 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 12 of 24 3. Ld. CIT (A) (NFAC) erred in law and on facts in directing AO to recompute the income and to compute tax with interest thereon on account of violation of Sec 13(1)(c) r w s 13(3) when no such addition has been made by AO.
4. Ld. CIT (A) (NFAC) erred in law and on facts not appreciating the fact that there is no advantage accruing to the donor from the property held by the appellant trust.
5. Ld. CIT (A) (NFAC) erred in law and on facts denying exemption u/s 11 & 12 to the appellant trust when registration u/s.12AA is still in force.
6. Initiation of penalty proceedings u/s.270A(9)(a) of the Act by AO is unjustified.” Facts of the case
Ground nos.1 to 5 pertain to denial of exemption under Section 11 & 12 of the Act by invoking provisions of Section 13(1)(c) of the Act read with Section 13(3) of the Act. The Assessing Officer had denied the exemption under Section 11 & 12 of the Act for the reason that according to the Assessing Officer, the assessee was not engaged in any charitable activity. The main object of the Trust was to provide better quality education to teachers and students in the Government Schools. According to the Assessing Officer, the term “education” denoted systematic instruction, schooling or training given to the young and preparation for the work of life and it also included primary education. The Assessing Officer found that the assessee Trust was not engaged in providing any systematic education and was neither running any educational college/school/institution or providing any degree/diploma etc. to the students. According to the Assessing Officer, the assessee was only training and providing assistance to certain teachers and students of Government Schools who were already taking education from Government Schools and such activities cannot be considered as part of education. The Assessing Officer held that since the assessee was not imparting any education, its activities cannot be considered within the & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 13 of 24 definition of ‘charitable purpose’ as per Section 2(15) of the Act. This apart, the Assessing Officer had given the following reasons for denying the exemption under Section 11 & 12 of the Act claimed by the assessee:
“1. In this case, the assessee has not shown donation of Rs.3,56,62,500/- in appropriate Column 4(ii) of Part B-TI of ITR, 2. The assessee has not shown donation of Rs.5,74,40,000/- on account of 80,00,000 shares of M/s. E-Infochips Limited claimed to be donated by the trustee of the trust, as corpus donation.
Further the assessee has included amount of Rs.68,65,36,000/- in column no. 4(i) of Part-BTI of ITR, in the amount of Rs.605,59,83,262/- shown as applied for charitable purpose, in place of correct column of ITR I.e. Column 4(vi) of Part B-TI of ITR, as this was an amount accumulated or set apart for application to charitable purpose to the extent it does not exceed 15 per cent of income, and was not an income applied for charitable purpose.
In this case, it has also been noted that all receipts shown by the assessee in the trust actually pertain to capital gain, dividend income, and interest income earned by the trust on the amount of capital gain and dividend, which were claimed on the sale of shares as discussed above, and finally claimed as exempt. Further, it is also noticed that maximum fund was accumulated by the assessee in the shape of FDRs etc. It was also noted that these funds are still with the assessee trust and in the control of trustee, and has not been utilised for any charitable activities. Further, interest etc. earned on these funds are also being accumulated by the assessee trust from year to year.”
The Ld. CIT(A), however, was of the opinion that the exemption under Section 11 & 12 of the Act cannot be denied on the basis of the facts and reasons as recorded by the Assessing Officer, when the registration under Section 12AA of the Act was still in force. However, the Ld. CIT(A) had upheld the denial of exemption under Section 11 & 12 of the Act for altogether different reason. According to the Ld. CIT(A), the trustee Shri Pratul K. Shroff of the assessee trust was covered in the definition of “Specified Person” as given in Section 13(3) of the Act. He noted that Shri Pratul K. Shroff, the trustee, was also a Director of e- Infochip Limited having controlling stake in the said company. Further, & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 14 of 24 Shri Pratul K. Shroff had transferred 80,00,000 equity shares of e- Infochips Limited to the assessee Trust as a corpus donation. The chronology of events pertaining to corpus donation of shares by the trustee and the sale of shares by the assessee was found to be as under:-
Events Date Receipt of Letter of Interest from Arrow Electronics Inc. 15.11.2017 (USA) for acquisition of e-Infochips Ltd., where Shri P.K. Shroff was having controlling stake Acceptance of Letter of Interest by Shri. P.K. Shroff 17.11.2017 Transfer of 80,00,000 number of equity shares of e- 12.12.2017 Infochips Ltd. in the form of corpus donation to the appellant trust Funds were transferred from Components Agent Asia 20.12.2017 & Holding Ltd., Mauritius to Arrow Electronics India Pvt Ltd. 22.12.2017 Transfer of 80.00.000 equity shares by the appellant trust to 09.01.2018 Arrow Electronics India Pvt Ltd, which is wholly owned subsidiary of Arrow Electronics Inc. (USA) Application of fund claimed for charitable purposes by Exemption claimed investing the net sales consideration (Rs.532,65,60,000/-) u/s.11(1A) of the I.T. in specified assets with a scheduled Bank within 6 months Act, in the return of income filed
From the above chronology, the Ld. CIT(A) held that the corpus donation of 80,00,000 shares of e-Infochips Limited to the assessee trust was made with an objective of avoiding payment of tax by the trustee on capital gain arising on transfer of 80,00,000 equality shares of e-Infochips Limited. Therefore, this transaction was covered in the mischief of provisions of Section 13(1)(c) r.w.s. 13(3) of the Act. According to the Ld. CIT(A), by executing the series of transactions, Shri Pratul K. Shroff had derived benefit by not paying tax on capital gains on transfer of 80,00,000 shares of e-Infochips Limited. The Ld. CIT(A), therefore, upheld the denial of exemption under Section 11 & 12 of the Act by invoking the provisions of Section 13(1)(c) read with Section 13(3) of the Act.
& 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 15 of 24 Submission of the Assessee
Shri S. N. Soparkar, Ld. Sr. Counsel submitted that the Assessing Officer had misdirected in holding that the activities of the assessee trust was not charitable in nature. He submitted that even if the assessee was not imparting a formalised education, the activity was squarely covered in “advancement of any other object of general public utility”. He explained that the assessee trust was scouting local youth talent, who may or may not have teaching qualifications, and deploying them in Government School close to their home where there was a requirement of additional teachers. Such KRSF teachers were mainly taking remedial classes in Gujarat and Math, bridge classes in English, Maths and life skill classes and were providing a background support to the individual students. In this regard, the Ld. Sr. Counsel has drawn our attention to the report of UNICEF on “A Case Study of Shiksha Sathi: An Example of UNICEF Gujarat’s Collaboration Model in Education”, a copy of which has been filed in the paper Book. The Ld. Sr. Counsel emphatically submitted that the activity of the Trust was squarely covered in the definition of ‘charitable purpose’ as it was working for the advancement of general public utility in the field of education.
On the issue of denial of exemption under Section 11 & 12 of the Act by invoking provisions of Section 13(1)(c) r.w.s. 13(3) of the Act, the Ld. Sr. Counsel submitted that tax on capital gain on transfer of shares, if any, was avoided by the trustee and not by the assessee trust. He explained that the assessee trust had duly disclosed the transaction of donation of shares received, sale of shares and applied the sale proceeds in accordance with the provisions of the Act and there was no avoidance of any capital gain payment on the part of the assessee. The Ld. Sr.
& 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 16 of 24 Counsel further submitted that the provisions of Section 13(1)(c) of the Act can be applied in respect of transactions as notified in Section 13(2) of the Act. He submitted that the provisions of Section 13(3) of the Act have to be read jointly with provisions of Section 13(1)(c) and Section 13(2) of the Act. The Ld. Sr. Counsel contended that the Ld. CIT(A) had not invoked the provisions of Section 13(2) of the Act. He explained that the transaction of the assessee was, in fact, not covered at all, in any of the clauses of Section 13(2) of the Act. Therefore, the provisions of Section 13(1)(c) of the Act were not applicable in the case of the assessee. In this regard, he has placed reliance on the following decisions: -
1) Shree Kamdar Education Trust vs. ITO 74 taxmann.com 253 (Hon’ble Gujarat HC) 2) CIT vs. Insaniyat Trust, 173 ITR 248 (Hon’ble Gujarat HC) 3) Sera Foundation vs. ITO (Exemption), 26 taxmann.com 126 (ITAT-Delhi Bench) Submission of Revenue
Per contra, Shri Alpesh Parmar, the Ld. CIT DR has taken us through the facts as recorded by the Ld. CIT(A). He submitted that the fact that the tax on capital gain on sale of 80,00,000 shares donated to the assessee trust, was avoided by the trustee by making this arrangement, was not denied. In view of this fact, the Ld. CIT(A) had rightly invoked the provisions of Section 13(1)(c) of the Act to deny the claim of exemption under Section 11 & 12 of the Act. He, therefore, strongly supported the order of the ld. CIT(A).
& 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 17 of 24 Findings and order
We have carefully considered the rival submissions. The Assessing Officer had denied the exemption under Section 11 & 12 of the Act primarily for the reason that the assessee was not engaged in any charitable activity. However, the Ld. CIT(A) has held that the exemption under Section 11 & 12 of the Act cannot be denied on the basis of the facts & reasons as recorded by the Assessing Officer. We, therefore, do not deem it necessary to delve upon this issue in detail. Suffice is to observe that even if the assessee was not imparting any formal education, its activities were covered in the definition of ‘charitable purpose’ under Section 2(15) of the Act, as it was engaged in the activities of advancing of any other object of general public utility in the field of education. The work of the Foundation was acknowledged in the UNICEF case study, referred earlier. The work done by the assessee trust is discussed in detail in the said report and after going through the same, we are of the considered opinion that the assessee trust was engaged in the activities of charitable purpose.
As regarding denial of exemption under Section 11 & 12 of the Act by invoking the provisions of Section 13(1)(c) of the Act, it will be relevant to reproduce the provisions of Section 13(1) and 13(2) of the Act, which is as under:-
13. (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof—
(a) any part of the income from the property held under a trust for private religious purposes which does not enure for the benefit of the public; & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 18 of 24 (b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste;
(bb) [***] (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 the 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- section (3), such part of income as referred to in sub-clauses (i) and (ii):
Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (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-section (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-clause (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-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970; …………….. (2) Without prejudice to the generality of the provisions of clause (c) and clause (d) of sub-section (1), the income or the property of the trust or & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 19 of 24 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-section (3),— (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3) for any period during the previous year without either adequate security or adequate interest or both; (b) if any land, building or other property of the trust or institution is, or continues to be, made available for the use of any person referred to in sub-section (3), for any period during the previous year without charging adequate rent or other compensation; (c) if any amount is paid by way of salary, allowance or otherwise during the previous year to any person referred to in sub-section (3) out of the resources of the trust or institution for services rendered by that person to such trust or institution and the amount so paid is in excess of what may be reasonably paid for such services; (d) if the services of the trust or institution are made available to any person referred to in sub-section (3) during the previous year without adequate remuneration or other compensation; (e) if any share, security or other property is purchased by or on behalf of the trust or institution from any person referred to in sub-section (3) during the previous year for consideration which is more than adequate; (f) if any share, security or other property is sold by or on behalf of the trust or institution to any person referred to in sub-section (3) during the previous year for consideration which is less than adequate; (g) if any income or property of the trust or institution is diverted during the previous year in favour of any person referred to in sub- section (3): Provided that this clause shall not apply where the income, or the value of the property or, as the case may be, the aggregate of the income and the value of the property, so diverted does not exceed one thousand rupees; (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-section (3) has a substantial interest.
& 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 20 of 24 21. There is no denial to the fact that Shri Pratul K. Shroff, the trustee who had made donation of 80,00,000 shares to the assessee Trust, was included in the definition of “persons referred to in clause (c) of sub- section (1) and sub-section (2)” as given in section 13(3) of the Act. As per the provisions of Section 13(1)(c) of the Act, if any part of income enures or any income or any property of the trust is used or applied directly or indirectly for the benefit of any person referred in Section 13(3) of the Act, then the assessee will not be eligible to claim exemption under Section 11 & 12 of the Act. We have to, therefore, examine as to whether any income or any property of the trust was enured or used or applied for the benefit of trustee Shri Pratul K. Shroff, during the year. From the facts as already discussed earlier, we do not find that any income or property of the assessee trust was directly or indirectly utilised or applied for the benefit of the trustee Shri Pratul K. Shroff. It was rather a reverse situation, as the trustee Shri Pratul K. Shroff had utilised his property (80,00,000 shares) in favour of the assessee trust by making the corpus donation. Further, the provisions of Section 13(2) of the Act stipulates certain conditions whereby income or property of the trust shall be deemed to be used or applied for the benefit of the person mentioned in section 13(3) of the Act. It is found that the Ld. CIT(A) had neither invoked the provisions of Section 13(2) of the Act nor demonstrated as to how any of the conditions as mentioned in Section 13(2) of the Act, was applicable to the facts of the present case. Prima facie, we find that none of the conditions as specified in clause (a) to clause (h) of Section 13(2) of the Act are applicable to the facts of the present case. The clause (e) of section 13(2) is not applicable as the shares were not purchased at more than adequate consideration, rather were received free of cost as corpus donation. The clause (f) of Section 13(2) of the Act & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 21 of 24 is applicable where any share or security or property is sold on behalf of the trust to any person referred in sub-section (3) of the Act for a consideration which is less than adequate. In the present case, the shares of e-Infochip Limited were sold by the assessee not to the specified person under Section 13(2) of the Act but altogether to a third person i.e. Arrow. Further, the shares were also not sold for inadequate consideration. Rather the allegation of the Revenue is that the shares were sold at exorbitantly high price vis-à-vis their fair market value. Therefore, clause (f) of Section 13(2) of the Act is not applicable to the facts of the present case. Further, clause (h) of Section 13(2) of the Act is applicable where the funds of the trust are invested in any concern in which the specified person under Section 13(3) of the Act has a substantial interest. In the present case, the assessee has not invested the funds received on sale of shares in any concern in which the trustee Shri Pratul K. Shroff had a substantial interest. Since the transaction of the assessee was not covered in any of the clauses as specified in Section 13(2) of the Act, the invocation of provisions of Section 13(1)(c) of the Act, to deny the exemption under Section 11 & 12 of the Act, was not proper.
Hon’ble Gujarat High Court in the case of Shree Kamdar Education Trust vs. ITO (supra) had an occasion to examine the mischief of Section 13(1)(c) of the Act. The observation of the Hon’ble High Court is found to be as under: -
“8. This brings to the element of diverting the income of the trust to the trustees and near relatives. Section 11 of the Act grants exemption to income from property held for charitable or religious purpose subjects to fulfilment of condition contained therein. Section 13 of the Act, on the other hand, pertains to cases where Section 11 would not apply. As per clause(c) of sub-section (1) of section 13, nothing contained in section 11 shall operate so as to exclude from the total income of the assessee being a trust for charitable or religious purpose or a charitable or religious institution, if any part of such income or any property of the trust or the institution is, during the previous year, used or & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 22 of 24 applied directly or indirectly for the benefit of any person referred to in sub- section (3). Sub-section (3) of section 13, in turn, specifies the persons referred to in clause (c) of sub-section (1) which includes the author of the trust or the founder of the institution, any trustee of the trust or manager of the institution and any relative of such author, founder, trustee or manager etc. Thus, if any part of the income of the trust was, during the previous year, used or applied directly or indirectly for the benefits of any such person, in relation to such income, section 11 exemption would not apply.”
The Hon’ble Gujarat High Court held in that case that Section 13(1)(c) of the Act does not prohibit normal transactions between the trust and the persons referred to in section 13(3) of the Act. Further that, what was relevant, was the use or the application of any part of the income of the trust, directly or indirectly, for the benefit of any such person referred to in sub-section 3 of the Act. In the present case, we do not find any use or application of any part of income of the trust for direct or indirect benefit of Shri Pratul K. Shroff, the trustee. Therefore, the provisions of section 13(1)(c) of the Act cannot be invoked in respect of donation of shares made by the trustee to the assessee trust.
In the case of Insaniyat Trust (supra), the Hon’ble Gujarat High Court held that “The Legislature has, while categorising the transactions in clauses (a) to (h) of Section 13(2) laid down as to in what regard each of the transaction has to be. In other words, the Legislature has specified items or things to which each transaction must relate.” Therefore, the Revenue was required to relate the transaction of the assessee trust with specific clause (a) to (h) of section 13(2) of the Act in order to invoke the provisions of Section 13(1)(c) of the Act. In the absence of any such correlation, the invocation of Section 13(1)(c) of the Act, in order to deny the exemption under Section 11 & 12 of the Act, cannot be held as proper. As already discussed earlier, the & 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 23 of 24 assessee’s case was not covered in any the clauses of section 13(2) of the Act.
In the case of Sera Foundation (supra), relied upon by the assessee, shares of Mawana Sugar Limited and Siel Limited were received as corpus donation. These shares were sold and the amount received was credited to the bank statement as corpus fund. The assessee’s conduct of selling the shares was branded as colourable device. The co-ordinate bench of Delhi Tribunal had held that only the form of asset was changed from shares to cash and the original corpus donation remained as it is, in the hands of the trust. Further, the proviso (iia) to section 13(1)(d) of the Act required the trust to dispose of its holdings in the form of shares within one year from the date of its acquisition. Therefore, the transaction cannot be held as colourable device. In the present case also, the shares received as donation from the trustee were required to be sold within a period of one year. The assessee trust has merely converted its corpus donation of shares into cash and this transaction cannot be held as a colourable device. The sale proceeds of the shares were not utilised for the benefit of the trustee Shri Pratul K. Shroff and, therefore, there was no occasion to invoke the provisions of Section 13(1)(c) of the Act.
In view of the above facts and discussions, we are of the considered opinion that the Ld. CIT(A) was not correct in denying the exemption under Section 11 and 12 of the Act by invoking provisions of Section 13(1)(c) of the Act. The order of the Ld. CIT(A) on this issue is quashed and the Grounds nos.1 to 5 as taken by the assessee, are allowed.
Ground no.6 pertains to initiation of penalty proceedings under Section 270A of the Act. This ground is only consequential in nature and is, therefore, dismissed.
& 769/Ahd/2025 Assessment Years: 2018-19 ACIT(E) vs. Dr. KR Shroff Foundation Page 24 of 24 28. In the result, appeal of the assessee is partly allowed
In the final result, the appeal of the Revenue is dismissed whereas the appeal of the Assessee is partly allowed.
Order pronounced in the open Court on this 5th August, 2025.