Judgment:
S.P. Bharucha, J.
1. This reference under section 256(1) of the Income-tax Act, 1961, is made at the instance of the Revenue and raises the following two questions :
'(1) Whether, on the facts and in the circumstances of the case, the income by way of capital gain arising from the sale by the assessee of the shares of Bajaj Auto Ltd. before January 1, 1971, is exempt from tax in the assessment of the assessee for the assessment year 1971-72 ?
(2) Whether, on the facts and in the circumstances of the case, the income of the assessee from dividends on the shares of Bajaj Auto Ltd. and Hindustan Sugar Mills Ltd. which arose before January 1, 1971, was exempt from tax in the assessment for the assessment year 1971-72 ?'
2. The reference is concerned with the assessment year 1971-72, the previous year for which is the year ended March 31, 1971. The assessee is a public charitable trust. It has income, inter alia, from dividends. It held 6,615 shares in Bajaj Auto Ltd. all of which had been acquired prior to April 1, 1970. It sold 1,625 shares of Bajaj Auto Ltd. in December, 1970, and realised a capital gain of Rs. 3,23,375 in consequence. In its return for the relevant assessment year, the assessee did not include the said capital gain. The Income-tax Officer, in his assessment order, found that the said capital gain was taxable. Allowing a deduction of 65% as was permissible under the Act, he included in the assessee's total income the sum of Rs. 1,13,182 on account of the said capital gain.
3. The assessee filed an appeal before the Appellate Assistant Commissioner. It contended that though it had a substantial in Bajaj Auto Ltd., the income arising from the said capital gain was exempt under section 11. The Appellate Assistant Commissioner rejected the contention having regard to the provisions of the section 13 and dismissed the appeal.
4. The assessee preferred a second appeal to the Income-tax Appellate Tribunal. The Tribunal said that it was well-known that capital gains were a kind of profits outside the purview of income. Capital gains were included in the taxable total income only by virtue of a fiction created under the Act. The fiction was not created merely by section 2(24) which prescribed that income included any capital gains chargeable under section 45. Section 45 laid down that any profits or gains arising from the transfer of a capital asset would be chargeable to income-tax. It had to be emphasised that the charge to capital gains arose from the transfer of a capital asset and not merely from the holding of the capital asset. Therefore, the income from capital gains could not be considered to be income arising from the investment. In these circumstances, the said capital gins could not be included in the total income of the assessee.
5. Mr. Jetly, learned counsel for the Revenue, pointed out, quite rightly that the second question should not be answered in view of the decision of the Supreme Court in CIT v. Damodaran : [1980]121ITR572(SC) . The only application for reference before the Tribunal was made by the Revenue and it was in regard to the first question. Although the Tribunal had decided against the assessee in regard to the subject-matter of the second question, the assessee did not seek reference in respect thereof. The situation, therefore, is squarely covered by the aforementioned decision of the Supreme Court. The Tribunal was not competent to refer the second question at the instance of the assessee on an application for reference filed by the Revenue. In the words of the Supreme Court, the reference of that question must be considered to be void. The second question accordingly, will not be answered.
6. In regard to the first question, relating to the said capital gain from the sale by the assessee of he shares of Bajaj Auto Ltd., Mr. Jetly drew our attention to the provisions of section 11 and section 13. Section 11 provides for income which shall not be included in the total income derived from property held under trust for charitable or religious purposes created before April 1, 1952. Section 13 provided for the situation when the exemption conferred by section 11 shall not operate. Sub-section (4) thereof reads thus :
'(4) Notwithstanding anything contained in clause (c) of sub-section (1) in a case where the aggregate of the funds of the trust or institution invested in a concern in which any person referred to in sub-section (3) has a substantial interest, does not exceed five per cent. of the capital of that concern, the exemption under section 11 or section 12 shall not be denied in relation to any income other than the income arising to the trust or the institution from such investment, by reason only that the funds of the trust or the institution have been invested in a concern in which such person has a substantial interest.'
7. The Tribunal interpreted the words 'arising... from such investment' therein and concluded that a capital gain from the sale of the investment could not be said so arise from the investment.
8. We find it difficult to appreciate the Tribunal reasoning. Section 2(24) defining income, includes capital gains which are chargeable under section 45. The word 'income' in section 13 must, therefore, be read as inclusive of income arising from such capital gains. Upon construction, therefore, the said capital gain from sale of the shares of Bajaj Auto Ltd. was income to which the provisions of section 13(4) applied and, therefore, the exemption under section 11 was not available in relation to that capital gain.
9. We find support for this construction in section 11 itself. Sub-section (1A) therefore refers to the sale of a capital asset by a trust consequent upon which a capital gain arises. The sub-section provides for the exemption of such capital gains from income-tax in certain contingencies.
10. Mr. Jetly also drew our attention to a department circular dated January 6, 1972, whereunder the object of introducing section 11(1A) in the Act with effect from April 1, 1962, was explained. The circular proceeds upon the basis that, as income included capital gains, a trust forfeited the exemption from income-tax in respect of its income by way of capital gains unless such income was applied to the purposes of the trust within the period stipulated under the act. The introduction of section 11(1A) was, the circular explained, to provide exemption under certain circumstances in regard to the liability of such capital gains to income-tax.
11. In our view, therefore, the Tribunal was in error in holding that the said capital gain from the sale of the shares of Bajaj Auto Ltd. by the assessee was not liable to income-tax.
12. Mr. Pandit, learned counsel for the assessee, drew our attention to the argument which was advanced on behalf of the assessee before the Tribunal. The argument was that the capital gain having accrued before January 1, 1971, which is the date mentioned in section 13(2)(h) and since it was only by virtue of the operation of section 13(2)(h) that the assessee could be hit by the provisions of section 13(1)(c), the income which was of a period prior to January 1, 1971, continued to remain exempt under section 11 as the prohibition under section 13(1)(c) was not applicable and was found to be 'not acceptable'. It was open to the assessee to have applied to the Tribunal to refer to this court a question based upon this argument. The assessee did not do so. Not having done so, it is beyond the ambit of this court's jurisdiction to go into the argument. In a reference application, the court is obliged to restrict itself to the questions posed.
13. In the result, the first question is answered in the negative and in favour of the Revenue. The second question cannot be answered.
14. No order as to costs.