Commissioner of Income Tax and Another vs BTM Education Trust

K.L. Manjunath, J.—The revenue has come up in this appeal being aggrieved by the order passed by the Tribunal, Bangalore in ITA No. 611/Bang/2001, dated 31-1-2005 for the assessment year 1991-92 raising the following substantial questions of law:

(i) Whether the Tribunal was correct in holding that the Assessee trust having provided funds, and the property having been purchased in the name of individual trustee, Sri S. Jayaprakash Mady would not amount to violation of Sections 13(2)(a) and 12(2)(g) of the Act for denial of exemption under Sections 11 and 12 of the Act ?

(ii) Whether the Tribunal was correct in holding that the Karnataka Land Reforms Act, 1961 prohibited the Assessee from purchasing the property in its own name and therefore it was forced to purchase the property in the name of the trustee and despite there being violation of public policy, the Tribunal extended exemption in favour of the Assessee ?

(iii) Whether the Tribunal was correct in holding that rentals were being paid to the trust for utilising this property by the trustees in their individual capacity and one of the trustees company and therefore it should be deemed to be held that the property was being utilized for the purposes of the trust and exemption can be allowed ?

We have head the learned Counsel for the parties.

The Assessee filed the return of income for the relevant assessment year. It was processed u/s 143(1)(a) of the Income Tax Act (for short the Act) and later on it was reopened by issuing a notice u/s 148 of the Act on the ground that while completing the assessment, the assessing officer has given the benefit under Sections 11 and 12 of the Act and later on it was noticed that the Assessee trust had advanced certain money to one Sri S.J. Mady without adequate security in violation of Section 13(2)(a) of the Act which amounts to diversion of the funds of the trust in favour of a trustee. Accordingly, the case was reopened and order of assessment came to be passed by taxing at the maximum marginal rate. The Assessee assailing the same contested the case on the ground that there is no violation of Sections 11 and 12 of the Act. According to Land Reforms Act a trust could not purchase agricultural land in its name. Since the trust was intending to set up an agriculture college and research centre, it had authorised its trustee, Sri. J.P. Mady to purchase the property in his name for and on behalf of the trust. Accordingly the agricultural land was purchased at Rs. 4,72,665 which is inclusive of Rs. 1,95,000 advanced to the vendor during the assessment year 1989-90. Later on, in the month Of March 1993, the Assessee felt that no useful purpose would be served in keeping the land. Accordingly, the land was sold to Sri J.P. Mady for a sum of Rs. 5,00,000 and had offered capital gain and the capital gain offered by the trust has been accepted by the department.

Being aggrieved by the order of assessment, the Assessee filed an appeal before the Commissioner (Appeals), which appeal came to be dismissed against it. The Assessee filed an appeal before the Tribunal which appeal has been allowed granting the relief to the Assessee. Being aggrieved by the same, the revenue has come up in this appeal.

It is the specific case of the revenue that the Tribunal did not consider the effect of Sections 11 and 12 of the Act. According to him, the Assessee having failed to maintain the funds of the trust and when there is violation of Section 13(2)(a) and 13(2)(g) of the Act, the Appellant was justified in canceling the registration under Sections 11 and 12 of the Act. He further contends that at the first instance, there was no necessity for the Assessee to pay the advance to Sri J.P. Mady, which amounts to misapplication of the trust money and that the purchase of the land by the trust in the name of Sri J .P. Mady amounts to violation of Karnataka Land Reforms Act and he further contends that the sale of the property by the Assessee to Sri J.P. Mady is also not for the benefit of the Assessee as the same is sold for a nominal amount of Rs. 5,00,000, which does not reflect the actual market value and therefore he contends that the Tribunal was not justified in granting the relief to the Assessee.

Per contra, Sri Sarangan, the learned senior counsel for the Assessee, contends that the Tribunal was justified in granting the relief since the Assessee has not violated any of the provisions under Sections 11 - 13 of the Act. According to him, the Assessee being a charitable institution with an intention to cater the need of the students in order to establish an agriculture college and research centre had an intention to purchase the land on account of the prohibition of the trust to acquire the land under the provisions of the Karnataka Land Reforms Act, the money was advanced to Sri J.P. Mady who was one of the trustees of the society. Accordingly, the land was purchased. Later on, the trust resolved to sell the land sold in favour of Sri J.P. Mady as the land was not suitable on account of the land is adjoining to Bannerughatta National Park, as the crops in and around the surrounding villages used to be destroyed by the elephants of Bannerughatta National Park. He further contends that while selling the property, the trust had not sold the same by undervaluing the lands. It has made a profit and capital gain was offered by the Assessee to the department and capital gain has also been received by the department, which would only show that the transaction of the Assessee has been regularized by the revenue. He further contends that once the department has accepted the capital gain offered by the Assessee, a presumption has to be raised in favour of the Assessee to the effect that the land was actually owned by the Assessee. Therefore, he requests the court to dismiss the appeal.

Having heard the learned Counsel for the parties, the facts in this case are not in dispute to the following extent. That there is a prohibition to acquire the land by the Assessee under the provisions of the Land Reforms Act. It is also not in dispute that the lands were purchased in the name of Sri J.P. Mady one of the trustees of the Assessee out of the funds of the Assessee. It is also not in dispute that the trust has sold the very same property to Sri J.P. Mady for a sum of Rs. 5,00,000 in the year 1993 and capital gain has been offered, which has been accepted by the revenue. From these facts, it is clear to us that even though there was a prohibition for the Assessee to acquire the land, it has acquired the land in the name of the trustee and the trust has treated the land as its property and has sold the same to the very same trustee in whose name the land was purchased, which fact has been accepted by the revenue by accepting the capital gain offered by the Assessee. If the case of the revenue is considered that there is a violation of Sections 11, 12 and 13 of the Act, we cannot understand what would be the effect of the acceptance of the capital gain by the revenue, which was offered by the Assessee on account of the sale of the property to Sri J.P. Mady. If the intention of the Assessee was to misutilise or misapply the funds of the trust by financing the funds to Sri. J.P. Mady and that the lands standing in the name of Sri J.P. Mady, could not have sold the lands to Sri J.P. Mady by the Assessee and offer it to capital gains.

All the authorities did not consider the effect of acceptance of the capital gains by the revenue either to hold that there is violation of Sections 11 - 13 of the Act or to hold that the trust fund has been misutilised or misapplied. If the revenue has accepted the capital gains, it goes without saying that the land is held by the trust. If the land is held by the trust in the name of one of the trustees, there cannot be any question of violation of Section 13 of the Act. Since this aspect of the matter has not been considered either by the Tribunal or by the Commissioner (Appeals) or by the assessing officer, we are of the opinion that without answering the question of law framed herein, the matter has to be remanded to the assessing officer to consider the effect of receipt of capital gain by the revenue and in spite of the receipt of capital gain whether it can be said that there is violation of Section 13 of the Act in order to deny registration u/s 11 or 12 of the Act.

Accordingly, the appeal is allowed in part. The matter is remanded to the assessing officer for fresh consideration.