SARABHAI FOUNDATION Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BEFORE the Tribunal, the assessee contended that for the asst. year 1973 74, the AAC has erred in forfeiting the exemption on the dividend income from the shares of the following companies received by the assessee during the asst. year 1973 74: Name of the company Amount of dividend Sercon Pvt. Ltd. 7,946 Karamchand Premchand P. Ltd. 21,534 Before the Tribunal, it was not disputed that 779 shares of Sercon Pvt. Ltd. and 222 shares of Karamchand Premchand Pvt. Ltd. were received in donation. It was also not disputed that 2,827 shares of Calico Mills Ltd. were the bonus shares, 2,696 shares were received in donation and 137 shares were purchased. The Tribunal negatived the contention of the assessee that the assessee and the persons referred to in Sub S. (3) of S. 13 had no voting power because the shares owned beneficially by them did not carry 20% of the voting power. However, the Tribunal held that the assessee should succeed on the alternative argument that 40,096 shares held by the charitable trust could not be said to have been held by the assessee or the persons referred to in sub S. (3) of S. 13 of the IT Act. The Tribunal deducted 40,096 shares from the shareholding of 1,25,796 shares and as balance of 85,673 was less than 20% of the total shares of Calico Mills which were 4,44,672, the Tribunal, by its judgment and order dt. 15th Dec., 1979, allowed the appeal and directed the ITO to give exemption on the dividend income amounting to Rs. 1,31,370 from the shares as mentioned above. Against that order, the assessee as well as the Department filed reference applications before the Tribunal. The Tribunal referred the following questions for opinion of this Court under S. 256(1) of the Act :

(2.) AT the time of hearing of this reference, the learned advocate for the applicant has submitted a statement, wherein it is, inter alia, stated that, in view of the decision of this Court in the case of CIT vs. Insaniyat Trust (1988) 71 CTR (Guj) 145 : (1988) 173 ITR 248 (Guj), if a trust received as donation some shares, then provisions of S. 13(2)(h) would not be applicable and the dividend received from the shares by the assessee was entitled to exemption. It is also stated that, in view of the aforesaid decision, the total dividend income of Rs. 1,28,094 cannot be taxed by applying the provisions of S. 13(2)(h) of the Act. With regard to the dividend of 137 shares of Calico Mills Ltd., which are purchased by the assessee, the dividend amount comes to Rs. 2,466 at the rate of Rs. 18 per share. In view of the very small tax effect on the income of Rs. 2,466 involved in this reference, the assessee does not press the question whether the Calico Mills Ltd. will be a concern wherein the persons referred to S. 13(3) had substantial interest on the basis of Expln. III of S. 13, i.e., 20% of voting power and the beneficial ownership. It is also submitted that, because of the aforesaid concession, question No. 2, which is referred at the instance of the Department, would also not survive. With regard to question No. 3, it is submitted that it should be divided into two parts (i) the shares which are received in donation or as bonus [which attracts no tax in view of the decision of this Court in Insaniyat Trust (supra)] and (ii) the dividend which is received on 137 Ahmedabad Mfg. & Calico Ptg. Co. Ltd. 1,01,890 . 1,31,370 shares of the Calico Mills Ltd. purchased by the assessee (which should be taxed in the hands of the assessee).

(3.) IN view of the aforesaid law laid down by this Court, in our view, the dividend received on the shares received by way of donation or by way of bonus, S. 13(2)(h) is not applicable. It is conceded that, the dividend income with regard to 137 shares of the Calico Mills Ltd. purchased by the assessee, may be taxed in the hands of the assessee.