BAFNA CHARITABLE TRUST Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference under section 256(1) of the Income -tax Act, 1961 (for short 'the Act'), the Income -tax Appellate Tribunal has referred the following questions of law to this court for opinion at the instance of the assessee : '1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 11(1A) of the Income -tax Act, 1961, in respect of short -term capital gains of Rs. 1,51,040 ?

(2.) WHETHER , on the facts and in the circumstances of the case, the transaction of sale of the property coupled with the liability of Rs. 1,51,040 constituted a single transaction and, accordingly, the net consideration was only Rs. 2,11,040 within the meaning of section 11(1A) and the Explanation (iii) of the Income -tax Act, 1961 ?' 2. This reference pertains to the assessment year 1972 -73, the previous year being the year ended on March 31, 1972. The material facts giving rise to this reference are as follows : The assessee is a charitable trust. During the relevant assessment year, the assessee -trust sold its right to obtain the conveyance of certain immovable property, which was a capital asset, to a co -operative housing society for a sum of Rs. 3,62,340 and in that process, obtained capital gain of Rs. 1,51,040. The assessee thereafter advanced a sum of Rs. 2,10,000 to the purchaser and obtained an English mortgage of the plot of land so purchased by the co -operative society. The assessee claimed that it had acquired another capital asset for a sum of Rs. 2,10,000 and hence its income from capital gain was exempt under section 11(1A) of the Income -tax Act, 1961, (for short 'the Act'). This claim of the assessee was rejected by the Income -tax Officer. He, therefore, determined the total income of the assessee -trust at Rs. 1,51,040 and forwarded the draft assessment order to the assessee. The assessee having objected to the draft assessment order, it was forwarded by the Income -tax Officer to the Inspecting Assistant Commissioner. The Inspecting Assistant Commissioner was of the opinion that the mortgage loan was not a capital asset and hence the investment made by the assessee did not fall within the provisions of section 11(1A) of the Act. He, therefore, held that the assessee was not entitled to exemption from tax in respect of the capital gain derived by it on the sale of the capital asset and confirmed the draft order of the Income -tax Officer and issued directions accordingly. The assessee appealed to the Commissioner of Income -tax (Appeals). The Commissioner of Income -tax (Appeals) held that the mortgage debt was a capital asset and it was not covered by any of the exclusions contained in section 2(14) of the Act. The Commissioner (Appeals), therefore, held that the assessee having acquired a mortgage debt, was entitled to exemption under section 11(1A) of the Act. Aggrieved by the order of the Commissioner (Appeals), the Revenue appealed to the Income -tax Appellate Tribunal. The Tribunal held that the English mortgage acquired by the assessee was not a capital asset within the meaning of section 2(14) of the Act, and hence, utilisation of the sale consideration of the capital asset transferred by the assessee for mortgage did not result in the acquisition of a new capital asset as required by section 11(1A)(a) of the Act. The Tribunal, therefore, held that the assessee was not entitled to any exemption in respect of the capital gain derived by it by transfer of the capital asset under section 11(1A) of the Act. Accordingly, the Tribunal set aside the order of the Commissioner (Appeals) and restored that of the Income -tax Officer. For the sake of completeness, the Tribunal also considered the alternate submission of the Revenue that even if the acquisition of mortgage debt was held to be acquisition of a capital asset and the assessee was held to be covered by the provisions of section 11(1A) of the Act, he would be entitled only to a partial exemption from capital gain because the amount that had been utilised in acquiring the new asset was only a part of the total consideration received by the assessee on transfer of the capital asset. The Tribunal accepted the above contention of the Revenue and held that the assessee having utilised for obtaining the English mortgage a sum of Rs. 2,10,000 only out of the net sale consideration of Rs. 3,62,340, it would be entitled to exemption of a portion of the short -term capital gains. Hence, this reference at the instance of the assessee.

(3.) DR . V. Balasubrarnanian, learned counsel for the Revenue, relies on the reasoning of the Tribunal and submits that the Tribunal was justified in holding that the case of the assessee did not fall within the provisions of section 11(1A) of the Act.