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Income Tax Appellate Tribunal, DATED 04.06.2018 IN SO FAR IT
I.T.A No.744/2018
IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 10TH DAY OF FEBRUARY 2023 PRESENT THE HON’BLE MR. JUSTICE P.S. DINESH KUMAR AND THE HON’BLE MR. JUSTICE T.G. SHIVASHANKARE GOWDA I.T.A NO.744 OF 2018
BETWEEN:
M/S. SITARAM JINDAL FOUNDATION JINDAL NAGAR, TUMKUR ROAD BANGALORE-560 073 (PAN: AAATS 3638 N) REPRESENTED BY ITS TRUSTEE SRI. B.D. GARG S/O B.L. GARG AGED 63 YEARS
…APPELLANT
(BY SHRI. S. PARTHASARATHI, ADVOCATE)
[THROUGH VIDEO CONFERENCE]
AND:
THE ADDL. DIRECTOR OF INCOME-TAX (EXEMPTION) RANGE-17, 6TH FLOOR UNITY BLDG ANNEXE MISSION ROAD BANGALORE-560 027 …RESPONDENT
(BY SHRI. K.V. ARAVIND, STANDING COUNSEL)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF THE INCOME TAX ACT, 1961 ARISING OUT OF ORDER DATED 04.06.2018 PASSED IN ITA NO.750/BANG/2017, FOR THE ASSESSMENT YEAR 2011-2012 PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW THEREIN AND ALLOW THE APPEAL AND SET-ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL DATED 04.06.2018 IN SO FAR IT
I.T.A No.744/2018
PERTAINS TO THE APPEAL OF THE REVENUE IN I.T.A. NO.750/BANG/2017 FOR THE ASSESSMENT YEARS 2011-12, AND ETC.
THIS INCOME TAX APPEAL, HAVING BEEN HEARD AND RESERVED FOR JUDGMENT ON 22.11.2022 COMING ON FOR PRONOUNCEMENT OF JUDGMENT, THIS DAY, P.S. DINESH KUMAR J., PRONOUNCED THE FOLLOWING:-
JUDGMENT
This appeal by the assessee, directed against the order dated June 04, 2018 in ITA No. 750/Bang/2017 has been admitted to consider following questions of law: i. Whether the Appellate Tribunal is justified in disallowing the claim of the appellant on the loss of Investment when the redemption of the Investment was made solely for the purpose of protecting the funds of the trust? ii. Whether the Appellate Tribunal is justified in not appreciating the facts that even if the investments were made out of corpus fund when interest is earned thereon or the capital gain accrues on such transfer, are to be treated as income for purposes of computation Section 11 of the Act? iii. Whether the Appellate Tribunal is justified in disallowing the claim of the appellant-Trust merely relying on the decision of the Hon'ble Calcutta High Court in the case of Hindusthan Welfare Trust v. DIT(E) reported in 201 ITR 564 (Cal) without considering the facts of the present case in question?
I.T.A No.744/2018
Heard Shri. S. Parthasarathi, learned Advocate for the Assessee and Shri. K.V. Aravind, learned Standing Counsel for the Revenue.
Briefly stated the facts of the case are, the Appellant/Assessee was established in the year 1969 and carries out various social activities on charitable basis. It filed returns for the A.Y.1 2011-12 declaring Nil income. Assessee had invested in units of mutual funds which is approved under Section 11(5) of the Income Tax Act, 19612 r/w Rule 17C of the Income Tax Rules, 1962 but on redemption, it suffered capital loss of Rs. 1,58,79,259/- and the same was claimed as deduction in the computation of income.
The AO3 disallowed the deduction claimed by the assessee and concluded that the investment was made out of the corpus fund and therefore any loss incurred out of corpus fund cannot be claimed as deduction inasmuch as corpus itself is exempted from tax.
1 Assessment Year 2 ‘the Act’ in short. 3 Assessing Officer
I.T.A No.744/2018
On appeal, CIT(A)4 vide order dated December 29, 2016 has allowed the loss by holding that speculative transactions have a specific meaning under Section 43(5) of the Act and that even if the investments are made out of corpus fund, when interest is earned thereon or capital gains accrues on their transfer, the same are to be treated as income under the Act. The ITAT5 has reversed the order passed by CIT (A). Hence, this Appeal.
Shri. S. Parthasarathi, for the Assessee submitted that: assessee had invested in units of mutual fund which is an approved investment under Section 11(5) of the Act, read with Rule 17C of the IT Rules, 1962 and the said investments do not have the character of "speculative transaction"; the ITAT has failed to appreciate that assessee has not invested even a single rupee of Trust money in speculative transaction and perpetual series of bonds;
4 Commissioner of Income Tax (Appeal) 5 Income Tax Appellate Tribunal.
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all the transactions and investment were delivery based and redemption was with the single purpose of protecting the corpus of the Trust and not for trading on commercial lines; the Revenue has not furnished any proof to sustain its contention that the assessee was involved in speculative transaction; the investments in mutual funds units were made in F.Y.6 2007-08 and redeemed after holding the same for 3 years with a capital loss of Rs. 1,58,79,259/- and the loss was incidental particularly when the assessee’s investment as on March 31, 2011 was Rs. 151.13 crores; the investment in mutual funds units were made out of general funds/earmarked funds/maturing proceeds of bonds and fixed deposits but not made out of corpus funds.
6 Financial Year
I.T.A No.744/2018
Opposing the appeal, Sri K.V. Aravind, learned Senior Standing Counsel for the revenue submitted that: investments in the mutual funds were made out of the corpus funds, any loss incurred on their account cannot be claimed as deduction because corpus fund itself is exempted from tax; income from the property under the trust has to be computed by applying the concept of real income wherein any loss incurred shall not be considered while computing the income; the loss incurred was due to investment in perpetual series bond on commercial lines and not for the purpose of protecting the interest of corpus of the trust. Therefore, there is no nexus between the activities of the trust and incurring loss on account of investing in perpetual bond; though, corpus fund is exempted from tax, these are to be considered for the limit of maximum amount i.e, upto 10 lakhs which is not chargeable to income tax.
I.T.A No.744/2018
We have carefully considered rival contentions and perused the records.
In substance, the assessee’s contention is that transactions were delivery based and redemption was undertaken to protect the interest of the assessee-Trust and not for trading on commercial lines.
Undisputed facts of the case are, assessee had made investments in mutual funds permitted under Section 11(5) of the Act. The unit of mutual funds in which investments was made was sold in the previous year relevant to A.Y. Due to sale, assessee suffered loss of Rs.1,58,79,259/-. This amount has been claimed as deduction.
The ITAT has recorded in para 21 of its Order that the facts of this case are similar to the one in Hindustan Welfare Trust Vs. Director of Income Tax7. It has extracted the views taken by the AO and CIT(A) and agreed with the view taken by the AO. The view taken by the AO’s is, the
7 201 ITR 564 (Cal)
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investments were made out of corpus donations and such donations are not regarded as income under Section 11 of the Act. Therefore, the loss on sale of such investment will also not be relevant while determining the income of the Trust.
Admittedly, the assessee foundation has invested in units of mutual funds which are permissible under Section 11(5) of the Act. On redemption it has suffered a capital loss. The AO has disallowed the deduction on premise that the corpus fund was exempted from tax. It is not in dispute that the assessee-foundation has suffered loss. It is settled that tax can be imposed on real profits and it cannot be done without deducting the losses. Shri. Parthasarathi has relied upon National Co-operative Development Corporation Vs. Commissioner of Income Tax8, wherein the Hon’ble Supreme Court of India has held thus: “38. We may record here that income has to be determined on the principles of commercial accountancy. There is, thus, a distinction between ‘real profits’ ascertained on principles of commercial accountancy. In the
8 (2020) 119 taxmann.com 137 (SC)
I.T.A No.744/2018
case of Poona Electric Supply Co. Ltd. v. CIT Bombay City this Court has held that income tax is on the real income. In the case of a business, the profits must be arrived at on ordinary commercial principles. The scheme of the IT Act requires the determination of ‘real income’ on the basis of ordinary commercial principles of accountancy. To determine the ‘real income’, permissible expenses are required to be set off. In this behalf, we may also usefully refer to the judgment in CIT, Gujarat v. S.C. Kothari where the following principle was laid down: “6. …The tax collector cannot be heard to say that he will bring the gross receipts to tax. He can only tax profits of a trade or business. That cannot be done without deducting the losses and the legitimate expenses of the business...” There is, thus, a clear distinction between deductions made for ascertaining real profits and thereafter distributions made out of profits. 11 (1965) 3 SCR 818 12 (1972) 4 SCC 402. The distribution would be application of income. There is also a distinction between real profits ascertained on commercial principles and profits fixed by a statute for a specific purpose. Income tax is a tax on real income.”
Thus, what is taxable is the real income. If the AO’s view is to be accepted, it would lead to incongruous results. We say so because in the event, the assessee had
I.T.A No.744/2018
earned profit in the instant transaction, the Revenue would have imposed tax on assessee. There cannot be different standards of examining facts when the assessee earns profit and when it suffers loss. Therefore, the AO’s order confirmed by ITAT is perverse and unsustainable in law. 14. Hence, the following:
ORDER
a) This appeal is allowed. b) Order dated 04.06.2018 passed by ITAT in ITA No.750/Bang/2017 is set aside. Order passed by the CIT(A) is restored. c) The substantial questions of law are answered in favour of the assessee and against the Revenue. No costs.
Sd/- JUDGE
Sd/- JUDGE SPS