1. This appeal by the assessee is directed against the order of the AAC and relates to the assessment year 1977-78. The assessee, is a charitable trust and in this year the assessee had declared an amount of Rs. 1,14,349 as profit on sale of shares. The assessee had claimed before the ITO that a capital gain of Rs. 96,606 arising from the sale of 7,000 shares of Orissa Cement Ltd. should be treated as having been applied to charitable purpose as provided under Section 11(1A) of the Income-tax Act, 1961 ('the Act'). This section reads as under : (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) ** ** ** (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.
This section was inserted by the Finance (No. 2) Act, 1971 but it was given retrospective effect from 1962. Under Section 11 income derived from property held under trust only for charitable purpose or for religious purposes is exempt to the extent to which income is applied to such purposes. Where the charitable trust owns certain capital assets and such capital assets are transferred it may result in a capital gain. The requirement of Section 11(1A) would be that this capital gain should also be applied for charitable purposes in order to get the exemption. However, this section which takes place of earlier executive instruction provides that it was not necessary for the capital gains to be actually applied for charitable purposes if the net consideration received on the sale of the capital asset is utilised for acquiring another capital asset to be so held. In fact this provision treats the acquisition of another capital asset to be so held to be deemed application for charitable or religious purposes. la case there is a part utilisation the exemption is given to a part of the capital gains and similar fraction has to be worked out if the income of the trust is only partly held to be under trust for charitable purposes.
2. The ITO found that 7,000 shares of Orissa Cement Ltd. were sold in February 1976. These shares had been purchased for Rs. 81,193 and were sold for Rs. 1,77,800, thus, resulting in capital gain of Rs. 96,607.
In the month of May 1976 the assessee acquired certain shares in various companies and the total sales consideration of Rs. 1,77,800 was utilised for this purpose. However, the assessee-company again sold these shares in different companies in the months of July, August and September 1976. The accounting year of the assessee ended on 31-12-1976. As a result of sale of these shares the assessee again realised some capital gains and there was a gain of Rs. 17,742 on the sale of these shares. In all the assessee had capital gains of Rs. 1,14,349. The assessee had claimed exemption only in respect of the capital gains of Rs. 96,606 and not regarding the others.
3. The ITO found that the sale proceeds or the net consideration on the sale of Orissa Cement Ltd.'s shares were not held as capital assets in the later part of the accounting period. According to him, the term 'so held' was of great significance and the assessee had to hold the new capital asset as a part of the corpus of the trust. The ITO held that the benefit under Section 11(1A) could not be given to the assessee in respect of the capital gains of Rs. 96,607. The assessee had contended before the ITO that the requirement was only for acquiring a capital asset for the said consideration and not for holding it for any specified time. The ITO did not agree to it and assessed the whole of the capital gains of Rs. 1,14,349, without allowing the exemption in respect of Rs. 96,607.
4. When the matter came before the AAC, he looked at the transactions from a different angle. He accepted the contention of the assessee that conditions laid down in Section 11(1A) were fulfilled in respect of the transactions regarding Orissa Cement Ltd.'s shares. According to him, the requirements of that section were satisfied as the newly acquired shares were held as capital asset after the realisation of the sale consideration. He also found that there was no time limit for holding the capital assets. He, therefore, held that capital gain of Rs. 96,607 should be treated as application towards charitable purposes within the meaning of Section 11(1A).
5. The learned AAC, however, referred to the comments made in the book Taxation of Charity by Shri M.P. Agrawal and reproduced the following paragraph appearing : Assets acquired out of income allowed as charitable expenses.--Sale proceeds comprise cost of an asset (plus profit). Cost would have been incurred in an earlier year. If the asset was acquired out of the funds of the trust, the corresponding amount would have been considered in the year of the acquisition. If the asset constituted an item of charitable expenditure and the investment therein was allowed as application of income to charitable purpose vide Satya Vijay Patel Hindu Dharamshala Trust v. CIT  86 ITR 683 (Guj.), the entire proceeds should be considered to be capital gains. The assumption underlying the case of a capital asset is that it was acquired out of the capital. The presumption would not hold good where the investment in the asset was allowed as application of income. As such, in a case, the entire proceeds may be deemed to be income and the provision of Section 11(1A) should not apply at all.
However, it would be expedient to clarify the position by a legislative provision.
6. The learned AAC agreed with the author and came to the conclusion that on the second set of transactions where the various shares had been sold the original cost of such shares should be taken only at Rs. 81,193 after excluding the amount of Rs. 96,607 which had already been treated as expense as applied for charitable purpose and exempted under 11(1A). In view of this interpretation the learned AAC came to the conclusion that the total sale proceeds were for Rs. 1,95,542 and the capital gains would come to Rs. 1,14,349. Thus, after all these arguments and interpretations, the AAC held that the assessee could not get relief asked for by it.
7. It has been submitted before us by the learned counsel for the assessee that the interpretation placed by the learned AAC was without any basis. He pointed out that the AAC has accepted that the capital gains of Rs. 96,607 was eligible for exemption under Section 11(1A). He further pointed out that this finding of the AAC has not been challenged by the department by way of appeal or cross-objection. In respect of the second set of transactions he submitted that there was no justification for treating the cost of acquisition of these shares after excluding the capital gains earned on the first transaction. He challenged the observations made in the commentary relied upon by the AAC and submitted that the Gujarat High Court did not hold anything as stated by the AAC. He pointed out that the cost of acquisition was a question of fact and if the shares sold in the second transaction were in fact acquired for a particular consideration that alone should be taken as the cost of acquisition. He also submitted that the learned author has himself stated that the law required to be amended or clarified if the meaning suggested is to follow. It was contended by the learned counsel for the assessee that if a fiction is created it was for a specific purpose and that fiction cannot be extended to other purposes. For this he relied on the decision in the case of CIT v.Amarchand N. Shroff  48 ITR 59 (SC).
8. The learned counsel for the assessee also raised an alternative submission and a ground has also been submitted in this regard. He contended that if any capital gains was to be assessed in the hands of the assessee benefit under Section 80T of the Act should also be allowed. The departmental representative has relied on the order of the AAC.9. In the course of arguments the learned counsel for the assessee has drawn our attention to the submission made before the ITO where it had been stated that the sales consideration of shares of Orissa Cement Ltd. at no point of time were not held as capital asset. Even after resale of these newly acquired shares the sale consideration was reinvested by the trustees in deposits in various companies which were bearing interest. It is also stated that these deposits were also part of the corpus of the trust.
10. The departmental representative relied on the order of the AAC and submitted that the capital asset which is acquired should be held as such by the assessee.
11. We have carefully considered the facts of the case. The ground taken by the assessee is that the AAC erred in upholding the action of the ITO of denying the benefit available to the trust under the provisions of Section 11(1 A) in respect of profit on sale of 7,000 shares of Orissa Cement Ltd. although the conditions were duly complied with. Though the ITO had treated the amount of Rs. 1,14,349 as taxable capital gains, the assessee had claimed that the profit of Rs. 96,607 which was the gain on sale of 7,000 shares of Orissa Cement Ltd. should be treated to have been applied for charitable purposes within the meaning of Section 11(1 A). Thus, the claim of the assessee was not relating to a further amount of Rs. 17,742 which was computed as capital gains. The AAC on the basis of reasoning given in his order has also held that the capital gain would work out to Rs. 1,14,349 though he accepted the plea of the assessee that Rs. 96,607 earned by way of capital gain on sale of 7,000 shares of Orissa Cement Ltd. should be treated as applied for charitable purposes. Thus, the reasonings apart, the ITO as well as the AAC have computed the capital gains of Rs. 1,14,349 and have held it to be taxable for the purposes of Section 11.
As already stated above, the ground before us is confined to the treatment of the capital gains of Rs. 96,607 on the sale of 7,000 shares of Orissa Cement Ltd. We have, therefore, to consider the whole issue in respect of this capital gain of Rs. 96,607, which is a part of the capital gain included by the ITO as well as the AAC. The submission of the learned counsel for the assessee that in respect of this amount the AAC has agreed with him and there was no appeal or cross-objection on that point would, in our view, not debar us from considering the position regarding this capital gain as the ground raised before us is in respect of this capital gain. The department as a respondent could even support the conclusion arrived at by the learned AAC by again raising the question which has been decided against the revenue by the AAC.12. Section 11 provides for exemption of the income derived from property held under trust for 'charitable purposes' to the extent to which such income is applied to such purposes in India. The trust has to apply at least 75 per cent of its total income including any capital gains during the relevant previous year in order to be entitled to exemption on the entire amount of its income. In order to enable the charitable trusts to change the form of the capital assets held by them and to hold investments which do not disqualify the charitable trust under the provisions of the Act, executive instructions had been issued prior to the insertion of Sub-section (1A) of Section 11 that where the capital gain is utilised in acquiring a new capital asset for the purposes of the trust it would be considered to be in application of the income for the purpose of the trust. This exemption was later on provided on a statutory footing when Sub-Section (1A) was added with retrospective effect from the insertion of the Act. This sub-section provides that in a case where a capital asset is transferred and it results in some capital gain, it is not necessary for the trust to utilise the capital gains by spending it for charitable purposes if the trust utilises the net consideration received on the transfer of the capital asset for acquiring another capital asset to be held as the corpus of the trust. On doing so the capital gains are deemed to have been applied for charitable or religious purposes and, thus, it is excluded under Section 11(1) for the purposes of taxation. The other provisions of the sub-section relate to such cases where a part of the net consideration is so utilised or the trust is held in part for charitable purposes. We are not concerned with such a case.
13. We have already reproduced above the provisions of Section II (1 A). The ITO has interpreted the term 'capital asset to be so held' and according to him, this makes it obligatory on the assessee to hold the new asset as part of the corpus of the trust. As the ITO found that the shares purchased out of net consideration on the sale of 7,000 shares of Orissa Cement Ltd. were again sold by the charitable trust, he was of the view that the conditions of this Sub-section were not satisfied.
He was of the view that the sale of the newly purchased shares within the short period disentitle the assessee to the benefits under Sub-section (1A) of Section 11. According to him, the meaning as well as the spirit of Section 11(1 A) was not satisfied. The ITO did not accept the plea of the assessee that mere purchase of shares in five different companies should be taken as sufficient compliance with the provisions of Section 11(1A) and the fact that new shares were also sold shortly could not make any difference.
14. The AAC did not agree with this view of the ITO and according to him so far as the capital gain of Rs. 96,607 was concerned, the requirements of the section were satisfied. He, however, proceeded to consider the matter from a different angle. We will first proceed to consider the view taken by the learned AAC, before we come back to the ITO.15. The AAC was of the view that when the net sale proceeds of 7,000 shares of Orissa Cement Ltd. was Rs. 1,77,800 and this sale proceed was utilised for acquiring fresh shares, the cost of acquisition in respect of the new shares was only Rs. 81,193 as the balance of Rs. 96,607 was the amount of capital gains which should already be treated as applied for charitable purposes within the meaning of Section 11(1A). In giving this interpretation the learned AAC relied on certain observations given in the book, Taxation of Charity, by Shri M.P. Agrawal. We are of the view that the inference drawn by the AAC does not follow from the provisions of the Act and there does not appear to be any justification for changing the meaning of cost of acquisition by excluding the capital gains on the first transaction on the ground that the assessee had already got benefit out of it. The learned author of the book which has been relied upon by the AAC also felt that the interpretation given by him could not follow unless an amendment was made in law for this purpose. According to us, this will not be a question of mere clarification but for a specific provision to be made which will depart from the normal meaning of cost of acquisition. The observations in the book may suggest the author's view as to what law should be but we are not concerned with that problem. We are here to consider the law are it stands. The decision of the Gujarat High Court in the case of Satya Vijay Patel Hindu Dharamshala Trust v. CIT  86 ITR 683 would also not result in giving to the provisions a meaning which the AAC has adopted. Each transfer of a capital asset results in a capital gain on consideration of the cost of acquisition and the sale consideration and other relevant facts. It is not possible to telescope various transactions in the manner in which the learned AAC has done. We, therefore, hold that the AAC has erred in holding that on the second set of transactions themselves there was a capital gain of Rs. 1,14,349.
16. This, however, is not the end of the matter. We have still to consider the view taken by the ITO about the holding of the capital asset by the charitable trust. No time limit as such is given for this purpose in the Sub-section (1A) of Section 11. The requirement of law is that it is open to a charitable trust to change the form of capital asset and if merely that is done the capital gain arising from the transfer of capital assets could not be chargeable to tax as the capital gains be treated as having been applied for charitable purposes within the fiction of law created under Section 11(1A). When one capital asset is sold and another capital is acquired, then that capital asset should be held as property held under trust. A reasonable meaning of this provision insofar as the particular assessment year is concerned, is that in that year the trust could hold some capital asset in place of the original capital assets. In other words, if at the end of the year the ITO finds that a trust is holding a capital asset in place of a capital asset which had earlier been transferred the intervening capital gains should not be assessed to tax subject to the provisions of this Sub-section. There is nothing in the statute itself which prohibits the charitable trust from converting the capital assets more than once. But the basic condition is that the entire sale consideration should be utilised for acquiring capital assets which continue to be held as capital asset in one form or the other throughout the year.
17. The above view, which according to us, represents the correct interpretation of the provisions of the law also follows from the other part of Section 11. It is the income of a particular year which is taken into consideration. We would see whether the conditions of this section are satisfied or not. The application of income for charitable purposes has to be in that year or in any other period in relation to that year. The income which is set apart for charitable purposes has also to be in the year itself. The percentages which are provided for the purposes of application or accumulation are also in respect of a particular year. Sometimes for the application of income a further time of a year or so is given but that too is in connection with the accounting year itself. Applying the above view to the facts of the case, we find that the inference drawn by the AAC about Rs. 96,607 was not correct. If after transferring a capital asset the sale proceeds are utilised to acquire some other capital assets which are again transferred and the proceeds are held in cash by the charitable trust, it cannot be held that the conditions of Section 11(1A) are satisfied.
On this issue, therefore, we hold that the AAC erred in giving the finding about the capital gains of Rs. 96,607. The interpretation placed by the ITO was more reasonable but he did not consider all the relevant aspects as we will see below. In this case we had to see that whether the sale consideration of Rs. 1,77,800 was utilised in acquiring capital assets which were held as capital assets up to the end of this year. After the newly acquired shares were again transferred the assessee realised the sale consideration more than the sale consideration realised on the sale of the shares in Orissa Cement Ltd. If this amount of Rs. 1,77,800 out of the sale considerations of the newly acquired capital asset was again utilised in acquiring capital assets, the assessee satisfied the conditions laid down in Section 11(1A). This aspect of the matter has not been gone into by the ITO or the AAC. They have not found out as to how the sale proceeds were utilised after the sale proceeds were utilised after the second set of sales. The assessee had stated before the ITO that the sale consideration was reinvested in some deposits. We do not have before us clear facts to indicate the form in which the sale proceeds were held by the charitable trust. The submission was made before us that they were in the form of fixed deposits with certain limited companies.
Though we have got the balance sheet of the trust before us we have no way of ascertaining as to which were the fixed deposits which were acquired out of the sale proceeds relating to the original sale of 7,000 shares in Orissa Cement Ltd. In the absence of the full details about the nature of the final investments made out of the sale proceeds of the capital assets, it is not possible for us to give a finding whether the net consideration was utilised in acquiring any capital asset which stood as capital assets at the end of the year. Deposits in a company may be of many types and there can be fixed deposits which can certainly be considered as a capital asset. At the same time there can be deposits which are another way of holding cash and it can be utilised and treated freely as cash. It will all depend on the terms of the fixed deposits which might have been acquired by the assessee. This fact would require to be looked into by the ITO.18. In this connection we may point out that under Sub-section (2) of Section 11 where a part of the trust income is accumulated or set apart for charitable purposes, it is not included in the total income if certain conditions are fulfilled. One of the conditions is regarding the investment of such money and such investment is permitted as deposits in post office savings bank or a scheduled bank or a co-operative society engaged in the business of banking. It is also provided that the money so accumulated or set apart may be deposited or continue to remain deposited during any previous year commencing before 1-4-1981 with any other banking company. Thus, the investment by way of deposits is not disproved by the statute insofar as the charitable trusts are concerned. We would, therefore, direct the ITO to ascertain the details of the investments acquired out of the net consideration of the sales of Orissa Cement Ltd.'s shares and to find out whether the assets held at the end of the year out of those investments could be considered to be capital assets. If it is so, the assessee's claim regarding the treatment of the capital gains of Rs. 96,607 will have to be accepted.
19. Before we close we may mention that the treatment of fixed deposits in a company as a capital asset may not be considered by the revenue to be a proper form of capital asset. Capital asset is defined in the Act and it includes property of any kind and the exclusions are given in the definition in Section 2(14) of the Act itself. According to this definition, if there is a fixed deposit held by a person it can also be considered as a capital asset. We have already said that it can depend on the terms and the use of an asset whether it is a capital asset or otherwise. In case of a possible misuse, the law has to make the necessary provisions as there are already provisions in Section 11 against a possible misuse.
20. As the matter is restored to the file of the ITO, with the above directions, the appeal shall be treated as allowed for statistical purposes.