TMI Blog2012 (12) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... his order for the assessment year 1992-93 that the application of the income generated by the business is not the relevant consideration and what is relevant is whether the activity is so inextricably connected or linked with the objects of the trust that it could be considered as incidental to those objectives. It was contended on behalf of the assessee that the mere letting out of the factory on lease w. e. f. 01.01.1992 does not amount to carrying on of any business. We are unable to accept this contention. Decision in the case of Thanthi Trust [2001 (1) TMI 80 - SUPREME COURT] distinguished - the observations of the Supreme Court must be understood and appreciated in the background of the facts in that case and should not be extended indiscriminately to all cases. It was contended on behalf of the assessee that in case we hold that the assessee-trust is not eligible for exemption because the Katha business was itself not held under trust, it would produce an anomalous or discriminatory result inasmuch as all that is required is for the settler of the trust to declare that the Katha business itself would be held in trust. It is not for us to comment on the contention; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spitals, etc. Clause 19 of the trust deed provided that the trust may "carry on any business for and on behalf or in the name of the trust for the sole object of applying the income and profits thereof for the purposes of objects of the trust". Another fact to be noticed here is that the founder - trustees were partner of firms which were themselves engaged in the business of the manufacture and sale of Katha. 4. After the formation of the trust, a business was commenced in the name of the trust for the manufacture of Katha. The funds for this business admittedly came from sister concerns of the firms in which the founder - trustees were partners and borrowings from banks and other agencies. A production unit was set up in the name "Mahesh Udyog" at Mahesh Nagar in District Una, Himachal Pradesh in the year 1972. This unit started production on 08.02.1973. Sometime in the year 1978, this unit was leased to M/s. Shankar Trading Co. (P) Ltd., a sister concern in which close relations of the trustees held substantial interest. The unit continued to be run by the aforesaid company. The trust was in receipt of monthly lease rental since then; the rental was revised sometime in the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board of Directors of the company who are managing the business. He, therefore, held that the provisions of Section 11(4) of the Act were not applicable and the provisions of Section 11(4A) of the Act were applicable. He noted that in the Delhi office the trading activities comprised of purchases and sales made through sister concerns in which the founder trustees were substantially interested and the claim of the assessee that the work in connection with the business of the trust is mainly carried on by the trustees was not supported by the facts. He also observed that the affairs of the trust were closely controlled by the two founder - trustees and the beneficiaries i.e. the members of the public did not have any say. He further held that the profits and gains of the business were not incidental to the attainment of the objects of the trust. In this view of the matter the benefit of Section 11 of the Act was denied and the assessment was completed on a total income of Rs. 62,86,390/- consisting of the profits of the Katha business. 7. In the appeal filed against the assessment, the assessee contended that it was a public charitable trust existing for the benefit of the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny application to the assessee's case because the business itself was held under trust, the CIT (Appeals) was unable to agree with the assessee. According to him the facts in Thanthi Trust (supra) were different; there, the founder of the trust was carrying on the business of printing and publishing a Tamil daily newspaper as its sole proprietor and the business itself was settled upon trust. In the present case, according to the CIT (Appeals), the trust was formed with a cash of Rs. 2,200/- contributed by the two founder trustees but no business undertaking as such was settled upon trust. On the basis of this distinction, the CIT (Appeals) took the view that the judgment of the Madras High Court did not apply. 8. The aforesaid view of the CIT (Appeals) was sufficient to dispose of the appeal before him but for the sake of completeness and in deference to the arguments taken before him, he proceeded to consider the case on the assumption that the judgment of the Madras High Court applied to the assessee's case. He observed that even if the judgment is held applicable to the present case, the question to be examined would be whether the business can be considered to be property he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settled upon trust and cannot be said to be a business held under trust. The source for the business came from borrowings and contributions by the sister concerns and not from the trust, except to a meagre extent of Rs. 2,100/-. The property held under trust may no doubt include subsequent accretions to the corpus of the trust fund but it cannot include acquisitions in relation to which the trust stood in the capacity of a debtor to third parties, according to the CIT (Appeals). The business undertaking no doubt belonged to the assessee - trust and the business was also carried on by it, but for these reasons the business cannot be held to constitute property held under trust. Having held that the business was not held under trust, the CIT (Appeals) proceeded to consider the further question whether the carrying on of the Katha business was incidental to the attainment of the objects of the trust. It was submitted before him on the basis of clause 19 of the trust deed that the whole purpose of the business was to provide funds or generate income for being applied to the charitable activities listed in the trust deed. The submission was rejected by the CIT (Appeals) by holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) in which the effect of the amendment was considered. It was held that the Supreme Court has noted the amendment and held that it did not have any adverse effect on the claim of exemption under Section 11, provided the income from the business carried on by the trust is utilised by the trust for the purposes achieving the objects of the trust; that would be a case of the business activity being incidental to the attainment of the objects of the trust. The Tribunal held that this decision squarely covered the controversy in the present case. In this view of the matter it directed the assessing officer to allow the exemption under Section 11 and thus allowed the appeal of the assessee. 13. It may be noted that the Tribunal did not specifically address itself to the question, which arose out of the order of the CIT (Appeals), whether the business itself can be said to be property held under trust within the meaning of Section 11(4) of the Act. There is no discussion in the order of the Tribunal as to the impact of the various clauses of the trust deed which were referred to by the CIT (Appeals) while making a distinction between the objects of the trust and the powers of the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contention of the revenue in that case was that since clause (ia) was a special provision dealing with the topic of exemption in respect of a business carried on for and on behalf of a trust, any claim for exemption as regards the profits of such business can be made only under that provision, and when the conditions laid down therein are not satisfied, it is not open to the assessee to fall back upon the general provision contained in Section 4(3)(i) and claim exemption thereunder on the ground that business is property. The Lahore High Court held that the fact that the business carried on on behalf of the trust failed to satisfy the two conditions laid down in Section 4(3)(ia) was no reason why it should not be exempted from taxation if it fell within Section 4(3)(i) and the main ground of the decision is that the two categories mentioned in the two clauses having been enacted as two different clauses, it must be taken that the one did not exclude the other. This judgment of the Lahore High Court was approvingly referred to by the Supreme Court in J.K. Trust v. Commissioner of Income-tax, [1957] 32 ITR 535. The judgment of the Supreme Court in J.K. Trust v. CIT (supra) was fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissioner of Income Tax, Gujarat v. Surat Art Silk, [1998] 121 ITR 1, a decision of five Judges of the Supreme Court. It was observed that if a business undertaking is held under trust for a charitable purpose, the income therefrom would be entitled to the exemption under Section 11(1) of the Act. In the case before us the finding of the CIT (Appeals), in his order for the assessment year 1992-93, is that the Katha business was not held under trust, but it was a business commenced by the trustees with the aid and assistance of borrowings from the sister concerns in which the settlors and the trustees or their close relatives had substantial interest, as well as from banks. It is thus with the help of the borrowed funds, or in other words, the funds not belonging to the assessee trust, that the Katha business was commenced and profits started to be earned. The CIT (Appeals) has also found that the earnings from the business were utilised to pay off the borrowings. It was for these reasons that he held that through the business undertaking belonged to the trust and the business was carried on by or on behalf of the trust, but for those reasons the business cannot be said to constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was whether the office of managing agency which was an office of profit was in fact settled upon trust and, therefore, could be considered to be business held under trust. The Supreme Court held that for the purposes of Section 4(3)(i) of the 1922 Act, the office of managing agency was property which could be held under trust. The Revenue thereupon pointed out that on the terms of Exhibit 'A', which was the deed of trust executed by the settlors on 15.06.1945, the properties which the trustees are to hold and stand possessed of were only the sum of Rs. 1,00,000/- and any donations and contribution received by the trustees and all accretions thereto and investment in securities made from time to time representing the accretions, and contended that on the terms of the trust deed, the managing agency which was acquired on 10.09.1945 for a period of 20 years cannot be said to be property held under trust since no part of the initial amount of Rs. 1,00,000/-, which was settled upon the trust, was utilised in the acquisition of the managing agency so as to impress it with the character of accretion. While repelling this contention, the Supreme Court held as under, (T. L. Venkataraman Iy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing agents, did not matter. The Court was, in the light of these facts and circumstances, inclined to hold that both the documents, namely Exhibits 'A' and 'B', formed part of an integral scheme and what the settlors had in view in clause 3 of Exhibit 'A' was the very managing agency which was acquired under Exhibit 'B'. The test appears to us to be that the business, if it is to be considered as property held under trust, should have been either acquired with the help of the fund originally settled upon trust or the original fund that was settled upon trust must have a substantial and real connection with the later acquisition or carrying on of the business by the trustees. The facts of the present case do not measure up to the test. The fund originally settled upon trust was a meagre amount of Rs. 2,100/- at the time of the creation of the trust on 08.09.1971. It is undisputed that the Katha unit in Himachal Pradesh was set up in the year 1972 with the aid and assistance of the borrowed amounts, the borrowings being both from the concerns in which the settlors/ trustees held substantial interest and from commercial banks. There is thus no nexus or integration between the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant case is a horse-racing concern, inasmuch as law enjoins that such property must be held under a trust or other legal obligation and not the fund derived therefrom. We have already shown that Jorhat Races were not the subject-matter of a trust and only a trust has been created in respect of the surplus fund. The surplus fund really emanates from a property which is not a subject-matter of the trust and as such in the absence of any legal obligation fastened thereto, no exemption can be allowed under Section 11 of the Act." These cases reiterate the position that the question to be examined is whether the business itself is held under trust or is merely carried on by and on behalf of the trust. It is also significant that Section 11(1) of the Act starts with the expression "subject to the provisions of Sections 60 to 63 ..". These Sections find place in Chapter V of the Act. Section 60 provides for the consequences of a transfer of income where there is no transfer of assets. It says that where a person transfers merely the income from an asset without transferring the asset itself, he would continue to be chargeable to income tax. Section 61 provides for the consequences of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Shankar Trading Co. (P) Ltd., a sister concern in which the close relatives of the trustees had substantial interest. The lease rent which was initially Rs. 25,000/- per month was revised to Rs. 50,000/- per month w. e. f. 01.04.1987 and thereafter to Rs. 1,00,000/- per month w.e.f. 31.12.1991. There is ample authority for the proposition that leasing out of a factory for monthly rentals is one form of carrying on a business. The judgment of the Calcutta High Court in Directors of Income Tax (Exemption) v. Sahu Jain Trust, [2011] 243 CTR (Cal.) 131 dealt with a different factual situation. There the trust derived income from sub-letting tenanted properties. This activity was branded as business activity and the provisions of Section 11(4A) of the Act were invoked. The Calcutta High Court held that there was no material on record to justify the view taken by the assessing officer that it was a business activity; it was just a simple sub-letting not amount to carrying on of any business. The present case does not fall under the category dealt with by the Calcutta High Court. We are, therefore, not inclined to accept the submission that no business was carried on by the trustees. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... education, patriotism, Indian culture, running of hospitals and dispensaries, etc. It would in our opinion be disastrous to extend the sweep of the observations made by the Supreme Court (quoted above) in the case of Thanthi Trust (supra), on the facts of that case, to all cases where the trust carries on business which is not held under trust and whose income is utilised to feed the charitable objects of the trust. We are, therefore, of the respectful opinion that the observations of the Supreme Court must be understood and appreciated in the background of the facts in that case and should not be extended indiscriminately to all cases. 26. It was contended on behalf of the assessee that in case we hold that the assessee-trust is not eligible for exemption because the Katha business was itself not held under trust, it would produce an anomalous or discriminatory result inasmuch as all that is required is for the settler of the trust to declare that the Katha business itself would be held in trust. It is not for us to comment on the contention; we cannot question the legislative wisdom and if there is really an anomalous or discriminatory resultant position, it is for the legisla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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