177. Whether provisions of section 13(2)(h), providing for forfeiture of exemption, apply with reference to shares in company initially settled on trust or donated to it subsequently
Circular No. 51 was issued by the Central Board of Direct Taxes on 23 December 1970. Its subject is 177. Whether provisions of section 13(2)(h), providing for forfeiture of exemption, apply with reference to shares in company initially settled on trust or donated to it subsequently.
This grants an exemption or a relief under a provision that allows one. Read the conditions attached: an exemption notification is construed strictly, and a condition missed is the exemption lost.
Reads 'funds of the trust' in section 13(2)(h) widely, so that forfeiture of exemption reaches shares as well as cash. Following paragraph 21 of Circular No. 45 dated 2-9-1970 on section 13 as substituted by the Finance Act, 1970, the Board says the expression covers uninvested cash, shares, stocks, Government securities and property of every kind belonging to the trust. Since the provision catches funds that continue to remain invested during the previous year as well as fresh investment, a trust that still holds after 31-12-1970 shares in a company in which its author or a person specified in section 13(3) is substantially interested forfeits exemption, whether the shares came with the original corpus or were acquired later. The same applies to capital in a concern other than a company. If the investment exceeds 5 per cent of the concern's capital the whole of the trust's income loses exemption; if it does not exceed 5 per cent, only the income from that investment does.
A question had been raised whether section 13(2)(h) applied to shares initially settled on the trust or donated to it later, as distinct from shares the trust itself bought.
177. Whether provisions of section 13(2)(h), providing for forfeiture of exemption, apply with reference to shares in company initially settled on trust or donated to it subsequently
1. Reference is invited to paragraph 21 of the Board’s Circular No. 45, dated 2-9-1970 which explains the scope and ambit of section 13 as substituted by the Finance Act, 1970.
2. A question has been raised whether the provision in section 13(2)(h), which provides for the forfeiture of exemption from tax in a case where the trust funds are invested in a concern in which the author of the trust or other persons specified in section 13(3) have a substantial interest, would apply with reference to shares in a company initially settled on the trust or donated to it subsequently. The Board have been advised that the expression "funds of the trust", as used in section 13(2)(h), is wide enough to cover not only uninvested cash but also shares, stocks, Government securities, etc., and, in fact, property of every kind belonging to the trust. Now, the provisions of section 13(2)( h) apply not only in a case where the funds of the trust are invested, during the relevant previous year, in any concern in which the author or other persons referred to in section 13(3) have a substantial interest but also in a case where such funds, having been invested in such a concern before the beginning of the relevant previous year, continue to remain so invested for any period during that previous year. It, therefore, follows that a trust will forfeit exemption from tax if it continues to hold, after December 31, 1970; shares in a company in which its author, or other connected persons, are substantially interested, regardless of whether the shares form part of the original corpus of the trust or were subsequently acquired by it. The same considerations will apply in regard to investment towards capital of any concern other than a company. In other words, if a trust, which has invested its funds, in any concern in which the author, etc., are substantially interested, does not divest itself of such investment before January 1, 1971, it will forfeit the exemption from tax on its entire income if the investment in such concern exceeds 5 per cent of the capital of the concern. Where the investment does not exceed 5 per cent of the capital of the concern, the exemption from tax will be forfeited only in relation to the income from such investment and not in relation to the remainder of its income.
Circular : No. 51 [F. No. 152/(49)70-TPL], dated 23-12-1970.
On a trust assessment denying section 11 exemption because the corpus still holds shares of the settlor's concern.
Source: the Income Tax Department’s own published text — its page for this instrument.
