TMI Blog1988 (3) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that the provisions of section 13(2)(h) of the Act were not applicable in the instant case ? 4. Whether the Appellate Tribunal has been right in law in not considering the contention of the Revenue that the income of the trust was utilised directly or indirectly for the benefit of prohibited categories under section 13(2)(h) read with section 13(3) and the Explanation thereto and, hence, the assessee was not entitled to exemption under section I in view of section 13(2)(h) of the Income-tax Act, 1961 ? " It will be necessary to have a quick glance at the factual backdrop for understanding the controversy reflected by these questions. The assessee is a public charitable trust. The relevant year of assessment is 1975-76. In the original assessment, the Income-tax Officer held that the assessee was entitled to exemption in view of section 11 of the Income-tax Act, 1961 (" the Act " for short), as applicable at the relevant time. The Commissioner of Income-tax, however, felt otherwise and issued a notice under section 263 of the Act as he noted that the income of the trust was utilised directly or indirectly for the benefit of the prohibited categories of persons a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exemption under section 11 was not lost. The Tribunal further held that in view of the circular, when the assessee-trust donated funds to other trusts towards the corpus or without such conditions, utilisation under section 11 in the hands of the assessee was complete and an inquiry into further utilisation by the donee trust was not contemplated under section I 1. So far as the second aspect of the matter was concerned, the Tribunal noted the fact that the Commissioner of Income-tax had based his order exclusively on section 13(2)(h) read with section 13(3); hence, it would not be Proper for the Tribunal to enquire into the point whether the Commissioner of Income-tax should have passed an order by applying section 13(2)(a). Referring to the Board Circular and the decisions referred to by learned counsel for the assessee, the Tribunal noted that section 13(2)(h) is apparently not applicable as it applied only when the funds were invested in other concern. The Tribunal held that there was a clear distinction between investments and loans. When the assessee deposited its funds in another concern (a) without right of participation in profits with that concern, (b) at a fixed rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to another charitable or religious trust can be considered to be an application of the donor's amount for charitable or religious purposes, even then, on the facts of the present case, the donee trust cannot utilise the donated amount for charitable or religious purposes but it had to keep it accumulated in its corpus for all time to come as it was a corpus donation and that at least amounts to non-application of the donated amount to charitable or religious purposes and even on that ground, section 11(1)(a) was not applicable to the facts of the present case. On this very question, it was submitted by Mr. Soparkar that the circular instructions of the Central Board of Direct Taxes on which reliance has been placed by the assessee cannot be of any avail to the assessee for the simple reason that the said circular does not contemplate a situation in which the donee trust is required to accumulate the donated amount by way of preservation of the corpus and has to spend only the income therefrom and, consequently, the said circular cannot be pressed into service by the assessee on the facts of the present case. So far as the second contention is concerned, Mr. Soparkar submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... squarely answered against the Revenue by the circular (See [1971] 79 ITR (St) 33, 41) of the Central Board of Direct Taxes and has been rightly pressed into service by the Tribunal for deciding the matter in favour of the assessee. We shall deal with the aforesaid contentions of learned counsel for both the parties while considering the aforesaid main two questions seriatim. Question No.1.-Applicability of section 11(1)(a) of the Act. The relevant provisions of section 11(1)(a) read as under : " ( 1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; and where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent. of the income from such property. " A mere look at the aforesaid provisions shows that if the assessee trust is a trust which holds properties w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (2) of section 139, whether fixed originally or on extension, for furnishing the return of income. Mr. Patel is, therefore, right when he contends that even in the hands of the donor trust, 100% of the income could have been accumulated for a maximum period of 10 years subject to the trust following the procedure laid down by the Act. If that is so, merely because, the donor trust gifted the concerned income to the donee trust which also was a religious and charitable trust, it cannot be said that the donor trust had acted contrary to the provisions of section 11(1)(a) as tried to be suggested by the learned advocate for the Revenue. Mr. Soparkar, for the Revenue, next contended that even assuming that the donor trust can be said to have complied with the provisions of section 11(1)(a) by making the income covered by the donation available to the donee trust which is also a charitable and religious trust instead of utilising it by itself for such religious and charitable purposes, even then, when the donee trust is asked not to utilise this amount, to treat the donation as one of the corpus and to utilise only the income accruing from the corpus for the trust purposes, it canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as whether such type of utilisation of the net income of the Jadi Trust the donor trust could entitle the donor trust to the benefit of section 11 of the Act. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. Repelling this contention and placing reliance on a decision of the Chancery Division in IRC v. Helen Slater Charitable Trust Ltd. [1980] 1 All ER 785, wherein Slade J., spoke for the Court of Chancery, the Division Bench of the Bombay High Court quoted with approval the following observation of Slade J. in the case of Helen [1980] 1 All ER.785, rendered in the context of a parallel statutory scheme reflected by section 360(1) of the Income and Corporation Taxes Act, 1970, and section 35(1) of the Finance Act, 1965, as in force in England at the relevant time : " Any charitable corporation which, acting intra vires, makes an outright transfer of money applicable for charitable purposes to any other corporation established exclusively for charitable purposes, in such manner as to pass to the transferee full title to the money, must be said, by the transfer itself, to have 'applied' su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sachi Mukharji J., in terms, held that the assessee donor trust was entitled to exemption under section 4(3) of the Income-tax Act. It must, therefore, be held that when a donor trust which is itself a charitable and religious trust donates its income to another trust, the provisions of section 11(1)(a) can be said to have been met by such donor trust and the donor trust can be said to have applied its income for religious and charitable purposes, notwithstanding the fact that the donation is subjected to any conditions that the donee trust will treat the donation as towards its corpus and can only utilise the accruing income from the donated corpus for religious and charitable purposes, and that the question whether the gifted income is to be utilised by the donee trust fully for its religious and charitable purposes or whether the donee trust had to keep intact the corpus of the donation and has to utilise only the income therefrom for its religious and charitable purposes, would not make the slightest difference, so far as entitlement of the donor trust f or exemption under section 11(1) goes. Mr. Patel, for the assessee, further submitted that even apart from the aforesaid le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... truction will not apply to the facts of the present case as the circular nowhere contemplates a donation wherein the donee trust is not allowed to spend the donated amount the whole hog for its charitable or religious purpose but has to keep it intact as corpus and has to utilise only the income thereof. It is not possible to agree with the aforesaid fine distinction sought to be drawn by the learned advocate for the Revenue in the light of the wording of instruction No. 1132. Even the last sentence of para. 2 indicates that whether in the given year, the donee trust has spent the donation or not, would be a totally irrelevant consideration. What the donor trust does is the only relevant matter. Utilisation by the donee trust in any year would not be relevant for the purpose of deciding whether the donor trust gets exemption under section 11 of the Act or not. This is an additional aspect of the matter, therefore, which enables the assessee to succeed. These instructions are binding on all the officers under the Act and, therefore, even apart from the legal position which we have discussed earlier, the first contention canvassed by the Revenue will have to be held to have been squa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied' meant that the income was actually applied for charitable or religious purposes in the taxable territories ; and 'accumulated' meant that the income was set apart during the year for future spending on such purposes. The expression 'accumulated' for a purpose involved a conscious act in praesenti and posited a clear indication on the part of the trustee to set apart the income for that purpose. Therefore, under clause (i) of section 4(3), only income from property, wholly or in part held in trust, actually applied or set apart for application for future spending on religious or charitable purposes within the taxable territories was exempted from inclusion in the total income. It was further held : " Until the trustees exercised their option, made a selection, and set apart the accumulations for purposes within the taxable territories, it could not be said that they were for purposes within the taxable territories ; and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i). " We fail to understand how the aforesaid decision can advance the case of the Revenue. In the said case, it was found as a fact that the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quate interest, that would nullify the provision in clause (a) and render it otiose. Such an interpretation will not be a harmonious interpretation of the provisions in clause (a) and clause (h) and cannot, therefore, be sustained. " This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns to which section 13(2) applies. The circular further indicates that in the case of lendings by trust, the provisions of clause (a) of sub-section (2) of section 13 will apply and not section 13(2)(h) and any contrary interpretation would not be a harmonious interpretation of clauses (a) and (h) of sub-section (2) of section 13. It is, therefore, obvious that on the facts of such cases, if at all, clause (a) of sub-section (2) of section 13 will apply and not clause (h) thereof, if it is shown that the lending was without adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern, such deposits will not be covered by section 13(2)(h) and if at all, it is only section 13(2)(a) which would apply to such deposits. Consequently, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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