S. GROVER, J.M. ORDER We have assessee and Revenue in cross-appeals against order dt. 30th Nov., 1984 passed by CIT (A)-I, New Delhi in relation to assessment framed under s. 143(3) in respect of asst. yr. 1981-82 on 30th Jan., 1984. accounting year was financial year ending 31st March, 1981. 2 . return was filed on 31st Aug., 1981 declaring nil income. statement of income and expenditure projected dividends of Rs. 3,62,098. From details furnished ITO noticed that dividends of Rs. 10,792.50 and Rs. 24,670 were received from Goetze India Ltd. and Sharpedge Ltd. hereinafter referred as companies, respectively. It is accepted position that Escorts Ltd. was one of authors of trust and substantially interested in both said companies and had further given substantial contributions to funds of assessee-foundation. Escorts Limited and said companies were accordingly covered under s. 13(2)(h) of IT Act, 1961 (hereinafter referred to as Act ). ITO stated that though investments were made by assessee in said two companies in contravention of s. 13(2)(h) of Act but these being less than 5 per cent of capital only dividends received were taxable in terms of s. 13(4) of Act. 3. In year before us assessee-trust sold shares for Rs. 59,07,398 but claimed that since total sale consideration was utilised for acquiring another capital asset being units of Unit Trust of India, capital gain totalling Rs. 46,57,599 was to be considered as application under s. 11(1A) of Act. ITO however, denied claim. We considered it convenient and expedient to notice paras 4, 5 and portion of para 6 as also para 8 of assessment order because it shall project picture of basis of assessment: "4. However, perusal of records shows that shares were sold up to 31st March, 1981, but units were not purchased up to 31st March, 1981. assessment proceedings for each assessment year are independent and since there is no provision under s. 11(1A) that consideration on account of sale of asset can be utilised for purchase of another asset in subsequent year or any other year, benefit of s. 11(1A), would not be available to assessee- foundation. assessee-foundation claimed that since they had applied under Expln. 2 to s. 11(1), therefore, units acquired in next year should be considered as application for this year. In my view Expln. 2 to s. 11(1) does not extend time under s. 11(1A), because under s. 11(1A) amount utilised for purchase of another asset has been only deemed as application of income and is, in fact, not application of income as required under s. 11(1). 5. In view of above, I am of opinion that capital gain amounting to Rs. 46,67,599 would be considered as part of income of assessee- foundation and will not qualify under s. 11(1A). Apart from it, out of total capital gain of Rs. 46,67,599 capital gain to extent of Rs. 89,292 and Rs. 2,57,306 is on account of sale of shares of Goetze (India) Ltd. and Sharpedge Ltd., respectively, two companies which are prohibited in terms of s. 13(3). income received either by way of dividend or as capital gain on account of investments in these two companies would be taxable in terms of s. 13(4) as word used in s. 13(4) talks of any income and not of income from dividends only. capital gain from these two companies works out to Rs. 3,46,598. 6. above discussion leads to conclusion that sum of Rs. 35,462 being dividend from Sharpedge Ltd. and Goetze (India) Ltd. and Rs. 3,46,598, capital gain from sale of shares of these two companies would be taxable under s. 13(4) and would not be considered for application of income under s. 11(1). remaining income is computed as under: Rs. Rs. Gross Dividend 3,62,098 Less dividend from Sharpedge 35,462 3,26,636 Ltd. & Goetze Ltd. Dispensary receipt 1,31,436 Misc. receipt 1,937 Interest on F.D. 1,20,542 Profit on sale of shares 46,67,599 Less profit on sale of shares of 3,46,598 Goetze India & Sharpedge Ltd. 43, 21 ,001." "8. Since capital gain in respect of shares of Goetze (India) Ltd. and Sharpedge Ltd. do not qualify for consideration under s. 11(1)(a), therefore, it will have to be considered whether capital gain has arisen on account of holding of long-term capital assets or otherwise. perusal of records of assessee-foundation shows that only 540 shares of Goetze (India) Ltd. and 1,542 shares of Sharpedge Ltd. were held by assessee-foundation in asst. yr. 1978-79 and these shares have been sold on 25th March, 1981, therefore, these shares were held as long-term assets. capital gain of Rs. 2,57,305 is o n account of 2,467 shares of Sharpedge Ltd. and on proportionate basis, long-term capital gain on sale of 1,542 shares would be Rs. 1,60,815. Similarly capital gain on sale of 10,625 shares of Goetze (India) Ltd. is Rs. 77,380 and on proportionate basis long-term capital gain on sale of 540 shares would be Rs. 3,980. Thus out of total capital gain of Rs. 3,46,598 long-term capital gain is Rs. 1,64,795. deduction under s. 80T on this long-term capital gain works out to Rs. 68,918. Therefore, long-term capital gain assessable to tax would be Rs. 95,877 and short-term capital gain on these shares would be Rs. 1,81,803. Similarly dividend received from these two companies has not been considered under s. 11(1)(a). Therefore, benefit under s. 80L would be available. deduction allowable under s. 80L in this year was Rs. 3,000 at maximum and, therefore, dividend income from these two companies includible in assessable income would be Rs. 32,462 only." 4. Before CIT (A) first contention raised was that limited companies cannot be treated as authors of trust, in view of provision of s. 13, relevant portions of which, for this order, are being reproduced below to be kept in view: "13. (1) Nothing contained in s. 11 or s. 12 shall operate so as to exclude from total income of previous year of person in receipt thereof- (a) ** ** ** (b) ** ** ** (c) in case of trust for charitable or religious purposes or charitable or religious institution, any income thereof- (i) ** ** ** (ii) if any part of such income or any property of trust or institution (whenever created or established) is during previous year used or applied, ** ** ** (2) Without prejudice to generality of provisions of cl. (c) (and cl.(d)) of sub-s. (1), income or property of trust or institution or any part of such income or property shall, for purposes of that clause, be deemed to have been used or applied for benefit of person referred to in sub-s. (3),- (a) to (c) ** ** ** (d) if services of trust or institution are made available to any person referred to in sub-s. (3) during previous year without adequate remuneration or other compensation; ** ** ** (3) persons referred to in cl. (c) of sub-s. (1) and sub-s. (2) are following, namely:- (a) author of trust or founder of institution; (b) any person who has made substantial contribution to trust or institution, that is to say, any person whose total contribution up to end of relevant previous year exceeds twenty-five thousand rupees; (c) where such author, founder or person is HUF, member of family; (cc) any trustee of trust or manager (by whatever name called) of institution; (d) any relative of any such author, founder, person, member, trustee or manager as aforesaid; (e) any concern in which any of persons referred to in cls. (a), (b), (c)(cc) and (d) has substantial interest. (4) Notwithstanding anything contained in cl. (c) of sub-s. (1) but without prejudice to provisions contained in cl. (d) of that sub-section, in case where aggregate of funds of trust or institution invested in concern in which any person referred to in sub-s. (3) has substantial interest, does not exceed five per cent of capital of that concern, exemption under s. 11 or s. 12 shall not be denied in relation to any income other than income arising to trust or institution from such investment, by reason only that funds of trust or institution have been invested in concern in which such person has substantial interest." argument was that use of words "relative of any such author, founder or person" in cl. (d) of s. 13(3) automatically limits author to individual, i.e., living being and as limited company cannot be considered as such, terminology used in cl. (a) rules out limited company from purview of s. 13(3). CIT (A) rejected such contention as without having any force and we are in complete agreement with such approach. reason being that clauses of sub-s. (3) of s. 13 have to be read independently. Merely because cl. (d) refers to any relative of any such author, etc., does not mean that same restricts meaning of term "the author of trust" or "the founder of institution" used in cl. (a). Clause (d) on contrary brings within its ambit relatives of any such author only where such author is human being or living being. As in case of cl. (d) use of words "HUF" in cl. (c) does not restrict meaning of expression "author or founder of trust" in cl. (a). Under Trust Act and in other Acts of Indian Civil Code even company or corporate body or artificial juridical person can be author or founder of trust or institution. It would be wholly wrong to read in sub-s. (3) different meaning. 5 . Alternatively, it was submitted that purchase of shares of company does not amount to investment in company. Such submission was also rejected and rightly so because only possible way of investing in company is to buy its shares. In this connection, we may refer with advantage to judgment of Hon'ble Delhi High Court in case of CIT vs. Eternal Science of Man's Society (1980) 19 CTR (Del) 384 : (1981) 128 ITR 456 (Del) and particularly observations as follows: "On reading of cl. (a) of sub-s. (2) of s. 13 and cl. (h) of same sub- section, it would appear to us that distinction has been made by statute between loans and other investments. Clause (a) of sub-s. (2) and s. 13 appears to provide for situation where income or property of trust is lent to person specified in sub-s. (3) of s. 13 without adequate security or adequate interest or both. Clause (h) of sub-s. (2) of s. 13, however, appears to deal with situation where funds of trust are or continue to remain invested in concern in which person specified in sub-s. (3) has substantial interest. two provisions have to be construed in harmonious manner. If investments are held to include loans, as urged by counsel for Revenue, it would render cl. (a) of sub-s. (2) of s. 13 otiose. Since specific provision for loans has been made in cl. (a) of sub-s. (2) of s. 13, we feel that these should not be included in generic term as investment in cl. (h) of sub-s. (2) of s. 13. It would thus appear that if funds of trust are invested in debentures or loans then cl. (a) of sub-s. (2) of s. 13 would be applicable; whereas if funds are invested in equity capital, i.e., shares, etc., then, cl. (h) of sub-s. (2) of s. 13 would be attracted. This distinction also accords with reason, as in former case there is no participation in profits and no fluctuation of investment but only fixed interest return; whereas in latter there is participation in profits and value of investment fluctuates." 6. ITO in terms recorded that like two companies Escorts Ltd. also came within prohibitory category under s. 13(2)(h) and under s. 13(4) of Act and there has been no denial in that regard. 7. AO denied claimed exemption in relation to entire capital gains of Rs. 46,67,599, though on preliminary ground that since gains were not utilized in acquisition of new capital asset within accounting year deeming fiction of "application of income" was not available. 8 . ITO without prejudice to his above action held that in any case capital gains to extent of Rs. 89,292 and Rs. 2,57,306 in relation to sales of shares of two companies were taxable in view of provisions of s. 13(4) as words used in said sub-section was "any income" and not income from dividends only. 9 . However from perusal of details of sales of shares filed before us, which were before ITO and CIT (A), we noticed that these included sale of 1,37,050 shares of Escorts Limited between 25th March and 27th March 1981 for consideration of Rs. 48,53,322.50 which formed part of total sales of Rs. 59,07,398. There was another sale of 51 shares of Escorts Ltd. on 30th March, 1981. CIT (A) has not touched this aspect apparently because he accepted contention that if provisions of s. 11(1A) of Act could be said to be available prohibitions and constraints of s. 13(4) were not available to Revenue to deny exemption. 10. Before CIT (A) assessee arguing in same sequence as assessment was framed firstly contended that ITO had wrongly given different treatment in respect of sales of shares of two companies which formed very small proportion of total sales, and then submitted that since assessee had exercised option and was not in position to acquire new capital asset out of sale proceeds, considering time factor and in fact had purchased units of Unit Trust of India within short time after close of accounting year, basis of assessment with regard to assessability of capital gain was not correct. 11. Paras 6 and 7 of order of learned CIT (A) we like to notice here: "6. Ground No. 4: appellant has contended that IAC (Assessment) erred in holding that excess of income over application and accumulation allowable under s. 11(1)(a) was Rs. 33,32,435. It is also contended that IAC erred in holding that said amount of Rs. 33,32,435 was taxable in hands of appellant. Briefly stated facts are that during assessment year under appeal assessee-trust sold shares held by it. total sale consideration in respect of these shares was shown at Rs. 59,07,398. After adjusting cost of acquisition of said shares appellant arrived at net capital gain of Rs. 46,87,599. appellant claimed exemption under s. 11(1A)(a) on ground that sale proceeds of said capital asset was invested in purchase of another capital asset in units and as such amount earned by trust on sale of such shares was exempt from tax as per provisions contained under sub-s. (1A) of s. 11 where capital asset being property held under trust wholly for charitable or religious purpose is transferred and if whole or any part of net consideration is utilised for acquiring another capital asset to be so held other than capital gain arising from transfer is deemed to have been applied for charitable or religious purposes. IAC, however, rejected contention of appellant on ground that though sales of shares was effected by 31st March, 1981 but investment in new asset was made beyond close of accounting period, i.e., beyond 31st March, 1981. investment in purchase of new capital asset namely units, was made sometime in April 1981, i.e., in following accounting period. IAC accordingly held that since investment in new capital asset was not made within accounting period in which old capital asset was transferred and net consideration received appellant did not fulfil condition laid down in relevant sub-section and as such net receipts on sale of capital asset cannot be deemed to have been applied for religious or charitable purposes. During assessment proceedings appellant further contended that as per Expln. 2 to s. 11(1) if income cannot be applied for charitable or religious purposes up to statutory time limit laid down during relevant accounting period assessee can exercise option for applying same in next following accounting period. option is to be exercised in writing before time for filing of return under s. 139(2) expires. relevant provision of Expln. 2 to s. 11(1) also states that option can be exercised for application of balance amount in following accounting period for reason that whole or any part of income has not been received during that year or for any other reason. appellant accordingly contended while exercising option in writing before filing of return for relevant assessment year that on account of reason that there was not enough time to apply funds inasmuch as there was no enough time for investing in new capital asset appellant may be allowed option to apply said capital gains in purchase of new capital asset in following accounting period. IAC, however, rejected contention of appellant on ground that Expln. 2 to s. 11(1) does not extend time allowed under s. 11(1A). He accordingly held that only that net consideration which is actually utilised for investment in new capital asset within accounting period itself will be deemed as application of income and not any investment in following accounting period. IAC after allowing deduction in respect of actual application of income for charitable purpose during relevant period and deduction of capital gain on sales of shares of two companies, Goetze (India) Ltd. and Sharpedge Ltd., which are dealt with separately and discussed above vide ground Nos. 2 and 3 and arrived at balance taxable amount of Rs. 33,32,435 after taking into account deduction to extent of 25 per cent of gross amount. 7. During appellate proceedings it was contended that IAC was not justified in rejecting contention of appellant that Expln. 2 to s. 11(1) is equally applicable to case where net consideration is received on transfer of capital assets as laid down under s. 11(1A). contention was that merely because Expln. 2 is interposed between sub-s. (1) and sub-s. (1A) does not mean that Explanation is not to be extended in case where legislature allowed concession regarding net sale consideration of transfer of capital asset to be deemed as applied for charitable religious purposes, in case net consideration is invested in purchase of another capital asset. It was also stated that deemed provision as laid down in sub-s. (1A) should be extended to its logical extent. Where law deems net consideration to be applied for charitable purpose on ground that net consideration was invested in purchase of alternative assets same should also be extended to option which Explanation allows to assessee in certain circumstances for application of shortfall in income of trust beyond statutory limit. As per s. 11(1) where trust for any reason is not able to apply 75 per cent of income during relevant accounting period trust is entitled to exercise of option to apply shortfall in following accounting period after exercising option. option can be exercised: (i) before time for filing of return under s. 139(2) expires, (ii) there should be reason for exercising option. One reason has been specifically enumerated in Explanation itself namely where for reason that trust have not yet received consideration or received income and obviously trust is prevented from applying said amount during relevant accounting period and second for any other reason. Though term any other reason is not specified obviously reason even in second category or second circumstances will have to be by similar or of same species as enumerated in first item. In first item reason for which law allows option to trust to apply income in following accounting year is that income itself or amount itself has not reached killing of trust and as such trust is prevented from applying said income for charitable purposes. In second category also there has to be specific reason or circumstances which constrain trust from applying income for charitable purpose during relevant accounting period. reason obviously is not to be merely will or wish or discretion of trustees but reason has to be of kind that there are circumstances for which trust is prevented from applying income for charitable or religious purposes. contention of appellant was that from perusal of details filed regarding sale of shares held by trust in various companies it will be seen that shares were sold during last week of closing month of relevant accounting period. sale proceeds of shares were received from purchasers/brokers as late as on 30th March, 1981 or even 31st March, 1981. sale proceed which was received in form of cheques was credited to trust bank account either in last week of accounting period or during month of April 1981 after clearance. It was, therefore, stated that circumstances for which assessee-trust could not invest net sale proceeds in purchase of new capital asset was that funds had not yet reached its pocket and circumstances are in nature of specific reason enumerated in Explanation, namely that income has not been received by trust during relevant accounting period. contention of appellant was that case of appellant either specifically falls in first category itself or even in second category, i.e., for any other reason reason being similar to species of reason mentioned in category one. It was also contended that IAC was not justified in arriving at conclusion that Expln. 2 to s. 11(1) is not applicable to s. 11(1A). It was contended that IAC has arrived at said conclusion merely on ground that sub-s. (1A) follows Expln. 2 to s. 11(1). It was pointed out that IAC has not appreciated language used in s. 11(1A). It was stated that from perusal of opening words of sub-s. (1A) it will be seen that it states "For purposes of sub-s. (1)". It was, therefore, contended that automatically entire provision in sub-s. (1) has to be r/w provision contained in sub-s. (1A). As such Expln. 2 which covers main sub-clause of sub-s. (1) is equally applicable to sub-s. (1A). Even otherwise it was stated that deeming provision as per sub-s. (1A) has to be taken to its logical extent and that law provides that it is deemed to be applied if it is invested in purchase of alternative capital asset. There is no reason why meaning of term application used in sub-s. (1) r/w Expln. 2 should not be r/w provision contained in sub-s. (1A). appellant also relied on Board's circular issued explaining provision contained in sub-s. (1A) when same was inserted by Finance (No. 2) Act, 1971. Board's instructions are contained in Department circular No. 1972 dt. 6th Jan., 1972. relevant portion of circular reads "Under s. 11 of IT Act as income derived from property held under trust for charitable or religious purpose is exempt from income-tax to extent such income is actually applied to such purposes during previous year itself or within three months next following. As income includes capital gain chargeable or item would fulfil exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to purpose of trust during stipulated period....." In these circumstances it was contended that IAC has not properly appreciated provision contained in sub-s. (1A) and has not followed even Board's clarification/instruction issued as above. contention of appellant is legally correct. appellant is entitled to exemption in respect of capital gain received on transfer of assets for reason that appellant within period of one month, i.e., during month of April itself invested net sale proceeds in new capital assets, i.e., units and had duly exercised option as per Expln. 2 before time for filing return under s. 139 for relevant assessment year expired. IAC is accordingly directed to allow exemption as provided under s. 11(1A) by treating same as deemed application of income." 1 2 . Most of paras 6 and 7 record contentions and decision and inference is only in last three sentences. CIT (A) accepted that provisions of s. 11(1A) saved assessee and that when these are available s. 13(4) would not come into operation. 13. We, however, view abovesaid provisions differently. heading of s. 13 reads: "Sec. 11 not to apply in certain cases" and opening words are "nothing contained in s. 11 or s. 12 shall operate so as to exclude from total income of previous year", etc., etc. other relevant provisions of section we have already reproduced. section was substituted by Finance Act, 1970 w.e.f. 1st April, 1971 and "or s. 12" was inserted by Finance Act, 1972 w.e.f. 1st April, 1973. Sub-s. (1A) to s. 11 was brought on statute book by Finance (No. 2) Act of 1971 and it does not state that notwithstanding anything contained to contrary in this Act. On other hand it is only for purpose of sub-s. (1) of s. 11 of Act. Therefore, we entertain absolutely no doubt that once prohibition of s. 13 operated, exemption under s. 11 was not available except to extent provided in section. Therefore, prohibition/restrictions were applicable in respect of capital gain/dividend/income in relation to companies coming under prohibitive categories of s. 13 and benefits of s. 11(1A) were not available as these are meant for transaction falling outside abovesaid category. 14. In view of above discussion, we reject ground Nos. 1, 2 and 3 of assessee's appeal in which grievance projected is: (i) that provisions of s. 13(3) have been wrongly held to be applicable, author of trust being company; (ii) that it has been wrongly held that purchase of shares of any company amounts to investment contemplated by s. 13(2)(h) of Act; and (iii) that dividends received from two companies (Goetze and Sharpedge) were assessable to tax under s. 13(1)(c) r/w s. 13(2)(h) and 13(3) of Act. assessee fails in respect of ground No. 4 also against CIT (A)'s decision that depreciation and amounts written off could not be treated as application of income and for this, we make CIT (A)'s order as basis. 15. Revenue's appeal is allowed though we leave computation of assessable income to AO in view of our decision above. 16. In result whereas assessee's appeal is rejected on all grounds Revenue's appeal is allowed as indicated above. *** ESCORTS FOUNDER WELFARE TRUST v. INSPECTING ASSISTANT COMMISSIONER