TMI Blog1980 (8) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... ciety, New Delhi, is the assessee-respondent in Income-tax References Nos. 226 and 227 of 1977 and the assessment years are 1969-70 and 1970-71. All three assessees are charitable institutions. The questions in the respective references are as follows : Eternal Science of Man's Society, New Delhi. 1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of ₹ 4 lakhs received by the assessee-trust in the form of ₹ 40,000 shares of Motor General Finance Ltd. from M/s. Daulat Ram Public Trust was not taxable income in the hands of the receiving trust under the provisions of section 11 and section 12(2) of the Income-tax Act, 1961, for the assessment year 1970-71 ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in excluding the interest income of ₹ 14,896 for the assessment year 1971-72 and ₹ 34,305 for the assessment year 1972-73 by holding that the provisions of section 13(2)(h) are not applicable to the assessee-trust ? Daulat Ram Public Mission, New Delhi. 1. Whether, on the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributions and applicable solely to charitable or religious purposes shall not be included in the total income of the trustees or the institution, as the case may be. (2) Notwithstanding anything contained in sub-section (1), where any such contributions as are referred to in sub-section (1) are made to a trust or a charitable or religious institution by a trust or a charitable or religious institution to which the provisions of section 11 apply, such contributions shall, in the hands of the trust or institution receiving the contributions, be deemed to be income derived from property for the purposes of that section and the provisions of that section shall apply accordingly. Section 13 makes s. 11 inapplicable in certain cases. It provides, inter alia, in s. 13(1)(c)(ii) that the income of a charitable trust will not be excluded from the total income, if any part of such income or property of the trust is during the previous year applied or used directly or indirectly for the benefit of certain persons as referred to in sub-s. (3). These persons referred to in sub-s. (3) are, the author of the trust, the founder of the institution, a person who has made a substa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for its objects nor could the shares be sold without the prior permission of the donor trust. It was only the dividend income of the shares which could be utilized for the objects of the assessee. As the assessee did not expend any monies in the relevant year, it gave notice to the ITO that it would accumulate the funds. The notice was given on 14th July, 1970, under s. 11(2) of the Act in Form No. 10. The purpose of the accumulation was mentioned therein but was subsequently revised on 6th June, 1972, and 4th November, 1972. The ITO felt that the assessee-society was not entitled to the benefits of the exemption under s. 11 and added the value of the 40,000 shares of Motor and General Finance Ltd. amounting to ₹ 4 lakhs as also the dividend income of ₹ 74,973 to the income of the society. She also rejected the notice for accumulation as being belated. According to her, it should have been filed by 31st July, 1970, complete in all particulars. In her opinion, the notice, as initially filed, was vague with regard to purpose. The subsequent revisions were, according to her, not acceptable, especially as there was no application for condonation of delay. Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, therefore, out of time, there was no valid notice in operation. She also held that the accumulated funds were not invested as per the requirements of s. 11(2)(b) of the Act, so the assessee was not entitled to the exemption under s. 11(2) of the Act. She also noted that the founding members of the society together with their relatives had a substantial interest as defined in s. 13(4), Expln. 3(i), in the two companies, i.e., Motor and General Finance Ltd. and Goodwill India Ltd. Therefore, she held that the income of the trust received from funds invested in those two companies was liable to tax under s. 13(4) of the Act. She also observed that under s. 13(3) of the Act, it was the collective shareholding of all the interested persons that had to be taken into consideration in establishing substantial interest under s. 13(1), Expl. 3(i). Further, M/s. Daulat Ram Public Trust having made substantial contributions to the assessee-trust, the shareholdings of M/s. Daulat Ram Public Trust would have to be included in that list and on inclusion, the interest of the persons under s. 13(3) would exceed the 20 per cent. allowable limit. The dividends of the two companies and interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me reasons as noticed above in the case of Eternal Science of Man's Society, New Delhi. In the dual circumstances, she held that investment in Govt. securities was inadequate, and taxed the dividend income as well. For the years 1971-72 and 1972-73, the provisions of s. 13 were held to be applicable by her, as the founder members of the society together with their relatives and M/s. Daulat Ram Public Trust had a substantial interest in the two companies, Motor and General Finance Ltd. and Goodwill India Ltd. She, therefore, held the dividend income from these two companies chargeable to tax under s. 13(4) read with s. 13(2)(h) of the Act. The interest income of ₹ 13,764.80 and ₹ 17,021 for the assessment years 1971-72 and 1972-73, respectively, was also included in the total income for the purpose of tax. On appeal, the AAC, on the same reasoning as noticed above in the case of Eternal Science of Man's Society, held that the voluntary donation received by the assessee of the shares in Motor and General Finance Ltd. was income of the assessee-trust within the provisions of ss. 11 and 12(2) of the Act. He also held that the conditions of s. 11(2) were not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds. This was subsequently revised on 7th June, 1972, and further clarified on 4th November, 1972. For similar reasons as set out in the case of Eternal Science of Man's Society, the ITO held the Form No. 10 to be invalid and belated. She also held that the investment in Govt. securities was inadequate as the income was ₹ 2,20,000 + ₹ 69,469 = ₹ 2,89,469. Thus the benefit of the exemption under s. 11 was not available to the assessee-society. But s. 11(1)- the exemption of 25 per cent.-was taken into consideration in arriving at the total income. On appeal, the AAC dealt with the matter at length. But on the same reasoning as in the Eternal Science of Man's Society, he dismissed both the appeals. On further appeal by the assessee, the Tribunal followed its decision in the Eternal Science of Man's Society and allowed both the appeals. On the above facts one common question arises in the case of all three assessees and that is : Does a voluntary contribution of shares, given by a donor charitable trust with the express condition that they (the shares) be held as corpus of the recipient charitable society and accepted as such, become the income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) and therefore, outside the ambit of a s. 12(2) of the Act. The position has now been clarified in the amended s. 12 which was substituted in place of the section as set out above. The new s. 12 provides that any voluntary contributions received by a charitable trust would be deemed to be income derived from property unless they contain a specific direction that they shall form a part of the corpus of the recipient trust. Therefore, such capital contributions can be retained by the donee trust as corpus without attracting any income-tax liability. Further, s. 2(24) of the Act which defines income, did not include voluntary contributions prior to its amendment by the Finance Act, 1972, with effect from 1st April, 1973. By this amendment cl. (iia) was introduced which provided as follows : (iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution. Explanation.-For the purposes of this sub-clause, ' trust &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a concern in which a person specified in sub-s. (3) has a substantial interest. The two provisions have to be construed in a harmonious manner. If investments are held to include loans, as urged by counsel for the revenue, it would render cl. (a) of sub-s. (2) of s. 13 otiose. Since a specific provision for loans has been made in cl. (a) of sub-s. (2) of s. 13, we feel that these should not be included in the generic term as investments in cl. (h) of sub s. (2) of s. 13. It would thus appear that if the funds of the trust are invested in debentures or loans then cl. (a) of sub-s. (2) of s. 13 would be applicable ; whereas if the funds are invested in equity capital, i.e., shares, etc., then cl. (h) of sub-s. (2) of s. 13 would be attracted. This distinction also accords with reason, as in the former case there is no participation in profits and no fluctuation of the investment but only a fixed interest return ; whereas in the latter there is a participation in profits and the value of the investment fluctuates. In the case of a loan or debenture what has to be examined is whether adequate security or adequate interest or both have or have not been provided. In the present reference ..... X X X X Extracts X X X X X X X X Extracts X X X X
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