Jurisdiction u/s. 263 cannot be invoked if Order is erroneous but not prejudicial to interest of revenue

IN THE ITAT BANGALORE BENCH ‘C’

Al Ameen Educational Society

Versus

Director of Income-tax (Exemption), Bangalore

IT APPEAL NO. 575 (BANG.) OF 2011

[ASSESSMENT YEAR 2006-07]

SEPTEMBER 28, 2012

ORDER

N.V. Vasudevan, Judicial Member – This is an appeal by the assessee against the order dated 21-03-2011 of DIT(E), Bangalore passed u/s 263 o the IT Act, 1961.

2. The assessee is a charitable trust carrying on the charitable activity of providing education. For assessment year 2006-07, the assessee filed return of income declaring a net deficit of Rs. 3,61,77,979/-. During the previous year, the assessee sold land belonging to it. In the return the assessee had given the computation of capital gains on sale of land as follows:

CAPITAL GAINS

Less: Exemption u/s.11(1A) for investing the proceeds in Capital Asset to be held as corpus of Trust

Amount deemed to have been utilized for Charitable purpose

The assessee declared taxable long term capital gains on sale of one of its property for Rs. 3,41,169/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (the Act).

3. Later on the AO issued a notice u/s 148 of the Act on 30-11-2007 for the reason that the net consideration received on sale of the property had not been invested in capital assets by the assessee and therefore, computation of capital gain by the assessee had to be determined afresh.

In the re-assessment proceedings, the AO worked out the LTCG as follows:

“The assessee has sold land for Rs. 4,00,00,000/-and has invested Rs. 2,78,38,080/- in acquiring new capital asset and thus, declared a sum of Rs. 3,41,169/- being taxable long term capital gain. The assessee has claimed exemption u/s11(1A) of the Income-tax Act for investing the proceeds in the capital asset to be held as corpus of the trust. For claiming exemption u/s 11(1A) of the Act, the whole of net consideration has to be invested in capital assets whereas the assessee has invested part of the sale proceeds i.e. Rs. 2,78,38,080/- and thus not entitled for exemption u/s 11(1A) of the Income-tax Act, 1961 for the entire capital gains. So, the capital gains of Rs. 1,03,53,927/- (Rs. 1,48,77,358 x Rs. 2,78,38,080/Rs. 4,00,00,000) only is exempt and the balance of Rs. 45,23,430/- is taxable as worked out under.”

4. The DIT(E) in exercise of powers u/s 263 of the IT Act, 1961 was of the view that the aforesaid computation of capital gains done by the AO in the assessment proceedings in the order passed u/s 147 of the Act dated 30- 12-2008 was erroneous and prejudicial to the interest of revenue. Accordingly, the DIT(E) issued a show cause notice dated 21-02-2011 proposing to recompute the capital gains. According to the DIT(E) when a charitable trust derives capital gain on sale of its capital asset then the provisions of sec.11(1A) will be applicable. From the perusal of the capital gains which we have set out above, it can be seen that the transfer is claimed by the assessee to have taken place during the previous year relevant to assessment year 2006-07. The assessee has been receiving advance for the sale of the property right from the previous year relevant to assessment year 2002-03. Even prior to the Assessment year 2006-07, the Assessee had invested sale consideration received on transfer of the capital asset in new assets. According to the DIT(E), the investment in purchase of capital asset claimed by the assessee for the assessment years 2002-03 to 2004-05 ought not to have been considered as investment in new asset by the AO, as these investments had been made in the previous year prior to previous year in which the transfer of the capital asset took place. The action of the AO in accepting the claim of the assessee in this regard was erroneous and has resulted in prejudice to the interest of the revenue. This was the basis on which the DIT(E) issued a show cause notice to the assessee.

5. In reply to the aforesaid show cause notice, the assessee submitted that it had entered into an agreement for the sale of the property as early as 12-07-2001 and a transfer had taken place during the previous year relevant to assessment year 2002-03 and therefore, the capital gain cannot be brought to tax in assessment year 2002-03, though wrongly declared by he assessee in the return of income for the assessment year 2006-07. The assessee further submitted that the computation of LTCG has to be done in accordance with the provisions of sec.45 to 55A of the Act and the assessee should be entitled to the benefit of indexation of the cost of acquisition of the capital asset. The assessee also submitted that the order of the AO accepting the claim of the assessee cannot be said to be erroneous and prejudicial to the interest of revenue.

6. The DIT(E) however, did not accept the plea of the assessee and he held as follows:

“In the return of income filed for the assessment year 2006-07, the assessee has determined the ‘capital gains’ at Rs. 3,41,169/-. The computation of capital gain as per the assessment order in question is as under:

From the above computation, it is seen that the AO has determined the capital gain by considering indexed cost of acquisition amounting to Rs. 2,51,22,641/- investment in capital assets from 2001-2002, 2002-03, 2003-04 & 2005-06 amounting to Rs. 2,78,38,080/- and exemption of capital gains due to investment in new assets of Rs. 1,03,53,927/-.

5(a), Section 11 of the Act, grants exemption in respect of income derived from properties held under trust for charitable or religious purposes, subject to the conditions set out therein. One of the condition is that the income is applied for charitable or religious purposes. Income derived from sale of capital assets is also income in the hands of charitable institutions falling under section 11 of the Act. With a view to enable the trusts to get the benefit of exemption in respect of capital gains, section 11(1A) was inserted by the Finance (No.2) Act, 1971.

5(b) It is clear from sub-section (1A) of section 11 of the Act that in a case where the assessee derives any capital gain from transfer of a capital asset held by it under trust for charitable or religious purposes, the capital gain arising from the transfer of such capital asset shall be deemed to have been applied for charitable or religious purposes to the extent specified therein, if the whole or any part of the sale consideration is utilized for acquiring another capital asset to be so held. As per the provisions of section 11(1A) the investment in new capital assets for computing the capital gains has to be made during the year in which capital gain is taxable. The investment in new assets made in earlier years cannot be considered during this year in which capital gain is offered to tax During the year, the assessee has utilized only Rs. 67,26,875/- of the sales consideration for acquiring new capital asset which is to be considered as per the provisions of sec.11(1A)(a)(ii).

5(c) Further, the AO has determined the capital gain by considering indexed cost of acquisition amounting to Rs. 2,51,22,641/- for which the assessee is not eligible since the income of charitable institution is to be computed on commercial principles and sec.11(1A) itself refers to ‘net consideration’. Therefore, what is required to be reinvested is the entire net consideration, after deduction relating to transfer. It is such amount, which is required to be invested. The question of calculation of capital gains with indexed cost and other requirements of sec.48 could have no application for this purpose in the case of charitable entities.

5(d) With regard to assessee’s contention that the transfer of the asset in question took place in the FY: 2001-02 and no capital gain is taxable in the current year is not acceptable, as the assessee itself has chosen to offer the capital gain to tax in the current year. Raising the issue at this stage is not warranted.

5(e) Further, he exemption u/s11(1A)(a)(ii) is not allowable as the investment of Rs. 67,26,875/- in new capital asset during the year does not exceed the cost of acquisition of Rs. 1,33,01,892/-5(f) According to the provisions of section 11(1A), the computation of capital gain would be as under:

In the circumstances, I hold that the order of the AO is erroneous and prejudicial to the interest of the revenue. Therefore, the assessment order passed u/s 143(3) r.w.s.147 of the Income-tax Act, 1961 on 30-12-2008 is set aside with a direction to the AO to re-compute the capital gains after affording necessary opportunity of being heard to the assessee.”

7. Aggrieved by the order of the DIT(E), the assessee has preferred the present appeal before the Tribunal.

8. The learned counsel for the Assessee submitted that jurisdiction u/s.263 of the Act can be invoked only when the order which is sought to be revised in proceedings u/s.263 of the Act is (i) erroneous and (ii) prejudicial to the interest of the revenue. It was submitted that the existence of both the aforesaid conditions are necessary for exercising jurisdiction u/s.263 of the Act. It was further elaborated that the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 on the scope of powers u/s.263 of the Act has held that where two views are possible on an issue and the AO has taken one of such possible view, the order of the AO cannot be said to be erroneous. It was further submitted that the CIT in exercise of powers u/s.263 of the Act cannot seek to substitute his/her view with that of the AO. In the light of the above legal position it was submitted that the view of the CIT in the order u/s.263 of the Act was:

(i)  that when capital assets are transferred by a charitable trust, the capital gain on such sale has to be determined in accordance with the provisions of Sec.11(1A) of the Act and not under the normal provisions of the Act viz., Section 45 to 55A of the Act.

(ii)  The investment of the capital gain in acquiring another capital asset by the Assessee was in the earlier years and such investment cannot be said to be application of income for charitable trusts. It was only investments made during period after transfer of the capital asset that can be considered as application of income for the purpose of Sec.11(1A) of the Act.

9. On point (i) above, the learned counsel for the Assessee relied on the decision of the Amritsar Bench of ITAT in the case of Akhara Ghamanda Dass v. Asstt. CIT [2001] 114 Taxman 27 (ASR.)(Mag.) wherein the Amritsar Bench held that even in the case of Trusts capital gain has to be taxed and calculated in accordance with the provisions of Sec.45 to 55A of the Act and that all exemptions, exceptions, deductions and benefits specified in those provisions will be available even to a charitable trust.

10. On point (ii) above, the learned counsel for the Assessee relied on the decision of the Mumbai Bench of ITAT in the case of Trustees of Shri Ramnagar Trust No. 1 v. Third ITO [1985] 13 ITD 426 wherein it was held that advances received by a trust in the period earlier to the previous year in which transfer of a capital asset by a trust takes place, if invested in purchase of capital asset should be considered as application of capital gain for charitable purpose.

11. Thus it was argued that the view taken by the AO while accepting the claim of the Assessee in the order of assessment was a possible view as the same was in consonance with the view expressed by the Tribunal in the cases referred to above. The CIT in exercise of powers u/s.263 of the Act cannot exercise powers u/s.263 of the Act just because according him another view was possible on the issue.

12. The learned DR on the above submission of the learned counsel for the Assessee submitted that in the case of a charitable trust when capital asset are transferred by a charitable trust resulting in capital gain the provisions of Sec.11(1A) alone will be applicable. Accordingly the net consideration received on transfer has to be invested in another capital asset to consider the same as application of income u/s. 11(1A) of the Act.

13. We have considered the rival submissions. For a proper appreciation of the rival contentions, the provisions of Sec.11(1A) of the Act and the reasons why those provisions were introduced need to be first set out. They are as follows:

Income from property held for charitable or religious purposes.

11. (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

………..

(1A) For the purposes of sub-section (1),-

(a)  where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:-

(i)  where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of such capital gain;

(ii)  where only a part of the net consideration is utilised for acquiring the new capital asset, so much of such capital gain as is equal to the amount, if any, by which the amount so utilised exceeds the cost of the transferred asset;

(b)  where a capital asset, being property held under trust in part only for such purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the appropriate fraction of the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purposes to the extent specified hereunder, namely:-

(i)  where the whole of the net consideration is utilised in acquiring the new capital asset, the whole of the appropriate fraction of such capital gain;

(ii)  in any other case, so much of the appropriate fraction of the capital gain as is equal to the amount, if any, by which the appropriate fraction of the amount utilised for acquiring the new asset exceeds the appropriate fraction of the cost of the transferred asset.

Explanation.-In this sub-section,-

 (i)  “appropriate fraction” means the fraction which represents the extent to which the income derived from the capital asset transferred was immediately before such transfer applicable to charitable or religious purposes;

(ii)  “cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of sections 48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within the meaning assigned to that expression in sub-clause (b) of clause (1) of section 55;

(iii) “net consideration” means the full value of the consideration received or accruing as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with such transfer.

14. The CIT has proceeded to apply the provisions of Sec.11(1A)(a)(ii) of the Act. Thus it is clear that the capital asset is property held under trust wholly for charitable or religious purposes. Sec.11(1A)(b) applies only when the property held under trust in part only for such purposes, is transferred. It is in the light of the provisions of Sec.11(1A)(a) that the present case has to be decided. The above provisions of Sec.11(1A) were introduced by the Finance (No.2) Act, 1971 w.r.e.f. 1-4-1962. The CBDT in Circular No.72 dated 6.1.1972 has explained the purpose behind introduction of the above provisions (in so far as it relates to Sec.11(1A)(a) of the Act which is applicable in the present case) as follows:

“Capital gains derived by Charitable and religious trusts:

73. Under section 11, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As “income” includes “capital gains”, a charitable or religious trust would forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the stipulated period. In some cases, charitable or religious trusts are required to sell, in the interest of the trust, capital assets forming part of the corpus of the trust property solely with a view to acquiring other capital assets to be held as part of the corpus of trust. The requirement that the capital gains arising from such transactions should be utilised for charitable or religious purposes, during the accounting year itself or within three months immediately following, has the unintended effect of progressively reducing the corpus of the trust and the income yielded by it.

74. This difficulty has been accentuated as a result of certain amendments made in the scheme of tax exemption of charitable and religious trusts through the Finance Act, 1970. Under one of these amendments, a charitable or religious trust would forfeit exemption from tax on its income if the trust funds, constituting its corpus or income, are invested in a concern in which the author or founder of the trust or any substantial contributor to it or any relative of such author, founder or contributor is substantially interested. Where the investment of the trust funds in such concern exceeds 5 per cent of the capital of the concern, exemption is forfeited in respect of the whole of the income of the trust, while in a case where the investment does not exceed 5 per cent, the exemption is lost only in respect of the income from such investment, the other income continuing to enjoy tax exemption. In order to enable charitable and religious trusts to change their investments suitably, without forfeiting exemption from tax, a specific provision was also made in the Income-tax Act to the effect that the aforesaid provisions would not apply in a case where the investment of the trust funds in the prohibited concerns does not continue after 31-12-1970. In order to avail of the benefit of this relaxation, many charitable or religious trusts divested themselves of investments in prohibited concerns before 1-1-1971. If the provisions of the law were construed strictly, such trusts would have forfeited exemption from tax in respect of their income by way of capital gains arising from the transfer of such investments unless they applied such incomes to charitable or religious purposes during the relevant accounting year or within three months immediately following.

75. The question of eliminating the disadvantage to charitable or religious trusts in being obliged to spend away the capital gains arising from the transfer of assets constituting the corpus of the trust instead of adding to the corpus, was considered by Government in 1963 and administrative instructions were issued to the effect that where a charitable or religious trust transferred a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilised the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital gains so utilised should be regarded as having been applied to the charitable or religious purposes of the trust. These instructions have recently been reiterated.

76. With a view to placing the aforesaid administrative instructions on a legal footing and removing the disadvantage to charitable and religious trusts for the past as also the future, section 11 has been amended, by section 5 of the Finance (No. 2) Act, 1971 by way of insertion of a new sub-section (1A). Under the new sub-section, it has been provided that in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer (i.e., full value of the consideration as reduced by the expenditure incurred wholly and exclusively in connection with the transfer) is utilised for acquiring another capital asset to be held as part of the corpus of the trust, the capital gain arising from the transfer will be regarded as having been applied to charitable or religious purposes. Where the whole of such net consideration is utilised in acquiring the new capital asset, the entire amount of the capital gain will be regarded as having been applied to charitable or religious purposes, while in a case where only a part of the net consideration is utilised for acquiring the new capital asset, an amount, if any, by which the cost of acquisition of the new asset exceeds the aggregate of the cost of acquisition of the capital asset transferred and the cost of any improvements made to such asset, will be regarded as having been applied to such purposes.”

15. The above provisions can be explained in the form of the following example. If the entire net consideration is used to acquire new asset then there is no difficulty as nothing will be taxable (Sec.11(1A)(a)(i) of the Act). When cost of acquisition and improvement of the asset transferred is say Rs. 10 lakhs, the net consideration is say Rs. 20 lakhs and the cost of the new asset is Rs. 11 lakhs then Rs. 1 lakh will be deemed as income applied for charitable purposes u/s.11(1A) of the Act (Section 11(1A)(a)(ii)). If the cost of acquisition of the new asset is only Rs. 10 lakhs or less than the benefit of exemption u/s.11(1A)(a) of the Act cannot be availed of.

16. The provisions of Sec.11(1A)(a)(ii) of the Act contemplates a computation of capital gain under the normal provisions of the Act. This is clear from the expression used in Sec.11(1A)(a) of the Act which refers to “where a capital asset, being property held under trust wholly for charitable or religious purposes, is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then, the capital gain arising from the transfer…”. So also Sec.11(1A)(a) (ii) of the Act which uses the expression “so much of such capital gain…”. The expression capital gain or the mode of computation of capital gain has not been defined for the purpose of Sec. 11(1A) of the Act and therefore the normal expression capital gain and the computation of such capital gain as laid down in the provisions of Sec.45 to 55A of the Act will apply. For determining the quantum of capital gain which will be deemed to be application of income for charitable purpose and become eligible to get exemption u/s. 11(1) of the Act, the provisions of Sec.11(1A) of the Act have to be applied.

16.1 In the light of the legal position as explained above let us see as to whether the Assessee can claim the benefit of provisions of Sec.11(1A)(a) of the Act and to what extent. The provisions applicable in the present case was Sec. 11(1A)(a)(ii) of the Act because the entire net consideration was not utilized in acquiring another capital asset to be held under trust wholly for charitable or religious purposes. The net sale consideration received on transfer in the present case was Rs. 4,00,00,000/-. The cost of acquisition of the property without the benefit of indexation was Rs. 1,33,01,892/-. As we have already held capital gain on transfer of capital asset has to be made in accordance with the provisions of Sec.45 to 55A of the Act. Such computation would be as follows:

CAPITAL GAINS

17. The Assessee has entered into agreement for sale of the property on 12.7.2001. The amount received by the Assessee towards sale consideration over a period of time and utilization of the same for acquiring new capital asset were as follows:

17.1 In the case of Trustees of Shri Ramnagar Trust No. 1’s case (supra) it has been held that advances received by a trust in the period earlier to the previous year in which transfer of a capital asset by a trust takes place, if invested in purchase of capital asset in the period earlier to the previous year in which transfer of the capital asset takes place such purchase should also be considered as application of capital gain for charitable purpose. If that decision is applied then the difference between the sum of Rs. 2,78,38,080/-which is the investment out of net sale consideration received on transfer of capital asset made by the Assessee and the cost of the transferred asset would be deemed to have been applied to charitable or religious purposes. The expression “Cost of the transferred asset” is defined in Expln. (ii) to Sec.11(1A) of the Act, and it lays down that “Cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of Sec.48 and 49) of the capital asset which is the subject of the transfer and the cost of any improvement thereto within meaning assigned to that expression in sub-clause (b) of Clause (1) of Section 55. Thus the difference between the capital gain utilized in acquisition of new assets viz., Rs. 2,78, 38,080 and the indexed cost of acquisition viz., Rs. 2,51,22,641/- viz., Rs. 27,15,449/- should be considered as application of capital gain for charitable purpose which would be entitled to exemption income u/s.11(1) of the Act. The remaining sum of Rs. 1,21,61,909.33 Ps. (Rs. 1,48.77.358.33 Ps. being capital gain as per normal provisions of the Act and Rs. 27,15,449 which is eligible for exemption as application of capital gain for charitable purpose u/s.11(1A)(a)(ii) of the Act), should be considered as not applied for charitable purposes and not eligible for deduction u/s.11(1) of the Act.

18. In the light of the above discussion, we are of the view that the order of the AO was erroneous. The argument of the learned counsel for the Assessee that two views were possible on the interpretation of the provisions of Sec.11(1A) of the Act and that the AO has adopted a possible view and therefore in exercise of powers u/s.263 of the Act, the CIT cannot substitute his views with that of the AO, cannot be accepted. The rationale behind the provisions of Sec.11(1A) of the Act as explained in the CBDT Circular referred to earlier and the provisions themselves are very clear. However, even the CIT, in exercise of his powers u/s.263 of the Act has overlooked the correct interpretation of the provisions of Sec.11(1A)(a)(ii) of the Act and therefore to this extent his order is modified as stated above.

19. The capital gain to the extent not utilized for acquiring new asset, will be considered as income of the trust and all consequences like accumulation etc., should be allowed. Having held that the order of the O was erroneous let us examine as to whether the same was prejudicial to the interest of revenue.

20. The learned counsel for the Assessee submitted before us that for invoking power u/s.263 of the Act, the order sought to be revised should be (i) erroneous and (ii) prejudicial to the interest of the revenue. According to him the order of the AO which was revised by the CIT u/s.263 of the Act, even assuming that the same was erroneous, was not prejudicial to the interest of the Revenue. In this regard it was submitted that capital gain is also income of the charitable trust and to the extent to which is not applied in the manner set out in Sec.11(1A) (a)(ii) of the Act, will become taxable. If however such capital gain which is not used to acquire new asset is applied for charitable purposes then it cannot be taxed as the conditions mentioned in Sec.11(1) are satisfied. In this regard it was pointed out that in the order of assessment u/s.143(3) read with Sec.148 of the Act dated 30.12.2008 which was revised in the impugned order passed u/s.263 of the Act, the AO has computed total income of the Assessee as follows:

Total income as per Income & Expenditure

21. It was argued that the above application over and above the income should be considered as application of capital gain for charitable purposes and therefore capital gain cannot be brought to tax. In this regard, reliance was placed on the decision of the Hon’ble Calcutta High Court in the case of CIT v. East India Charitable Trust [1994] 206 ITR 152. The Assessee in the case before the Hon’ble Calcutta High Court in the aforesaid decision was a trust. The assessment year involved was 1982-83 for which the previous year ended on 31st Dec., 1981. During the relevant previous year, the assessee-trust sold shares of various companies which formed the corpus of the trust fund for a net consideration of Rs. 37,78,640. On this transaction, the capital gains shown amounted to Rs. 23,79,538. The assessee claimed that the net consideration of the sale was utilised for acquiring new capital assets as under :

Out of the above, a sum of Rs. 7,00,000 was invested after 31st Dec., 1981, and an option was exercised under the Explanation to s. 11(1) requesting the ITO to treat the above sum as deemed application during the year ended on 31st Dec., 1981. It was urged that the capital gains of Rs. 23,79,538 was, therefore, exempt from tax under s. 11(1) of the IT Act, 1961. On the above facts one of the question before the Hon’ble Calcutta High Court was as to whether despite the acquisition of the fresh capital asset not being within the accounting year relevant to the asst. yr. 1982-83, the exemption under s. 11(1A) shall relate back to the asst. yr. 1982-83 by reason of the fact that the assessee exercised an option under the Explanation to s. 11(1) requesting the ITO to treat the above sum as deemed application during the year ended on 31st Dec., 1981.

22. The Hon’ble Calcutta High Court held as follows:

“Sec. 11(1) reads as follows :

“(1)  Subject to the provisions of ss. 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

(a)  income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property;

(b)  income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent. of the income from such property;….

Explanation.-For the purposes of cls. (a) and (b),-

(1)  in computing the twenty-five per cent. of the income which may be accumulated or set apart, any such voluntary contributions as are referred to in s. 12 shall be deemed to be part of the income;

(2)  if, in the previous year, the income applied to charitable or religious purposes in India falls short of seventy-five per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount-

(i)  for the reason that the whole or any part of the income has not been received during that year, or

(ii)  for any other person,

then,-

(a)  in the case referred to in sub-cl. (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount; and

(b)  in the case referred to in sub-cl. (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,

may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-s. (1) or sub-s. (2) of s. 139, whether fixed originally or on extension for furnishing the return of income) be deemed to be income applied to such purposes, during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-cl. (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-cl. (ii), during the previous year immediately following the previous year in which the income was derived.”

18. In our view, by reason of the option exercised under the Explanation to s. 11(1), the assessee is entitled to the benefit under s. 11(1A) inasmuch as the definition of income as contained in s. 2(24) of the Act includes capital gains as one of the species of income. That being so, the option as exercisable with regard to income should also avail to capital gains provided such option is exercised in writing before the expiry of the time allowed under sub-s. (1) of s. 139 for furnishing the return. Therefore, the amount of Rs. 7 lakhs utilised in acquiring fixed deposits with the Bharat Petroleum Corporation Ltd. and the Bharat Electronics Ltd. should also be allowed exemption under the said provision for the asst. yr. 1982-83.” (emphasis supplied)

23. It is clear from the aforesaid decision of the Hon’ble Calcutta High Court that capital gain is also income of the trust and Sec.11(1A) of the Act is not the only way in which capital gain has to be applied for charitable purposes. It is one of the way of applying capital gain for charitable purpose. If capital gain is applied for charitable purpose of the Assessee not by acquiring a new asset but for other charitable purpose, then there is no reason why it should not be considered as application of income for charitable purpose enabling the Assessee to claim exemption u/s.11(1) of the Act. In the present case there is no question of application for accumulation of income for being spent for charitable purpose in future because such application is already deemed to have been made in the previous year itself.

24. Admittedly, even as per the order of assessment there was application for charitable purpose, even after disallowance of depreciation made by the AO, of a sum of Rs. 1,60,23458 over and above the receipts of the Assessee during the previous year. The capital gain considered as not utilized for charitable purposes u/s.11(1A) of the Act is only a sum of Rs. 1,21,61,909.33 Ps. The surplus utilization of Rs. 1,60,23,458 should be sufficient to set off the capital gain not utilized for charitable purpose u/s.11(1A) of the Act. Thus the net deficit in this AY to be carried forward for set off in the later years would be Rs. 1,60,23,458 – Rs. 1,21,61,909.33 Ps. Viz., Rs. 38,61,909.67 Ps.

25. From the aforesaid discussion it is clear that though the order of the AO was erroneous, the same was not prejudicial to the interest of the revenue as no part of the capital gain became taxable because of loss of exemption u/s.11(1A) of the Act. Since the order sought to be revised u/s.263 of the Act was erroneous but not prejudicial to the interest of the revenue, jurisdiction u/s.263 could not have been invoked by the CIT. We hold accordingly and quash the order u/s.263 of the Act. The appeal of the Assessee is allowed with the above directions and computation.

26. In the result, the appeal by the Assessee is allowed.