TMI Blog1988 (3) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... instant case? 4. Whether, the 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 Explanation thereto and hence, the assessee was not entitled to exemption under section 11 in view of section 13(2)(h) of the Income-tax Act, 1961? 2. 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 ITO held that the assessee was entitled to exemption in view of section 11 of the Income-tax Act, 1961 ('the Act') as applicable at the relevant time. The Commissioner, 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 as mentioned in section 13(2)(h) of the Act read with section 13(3) thereof and Explanation thereto. The fact found by the Commissioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y into further utilisation by donee-trusts was not contemplated under section 11. So far as the second aspect of the matter was concerned, the Tribunal noted the fact that the Commissioner 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 should have passed an order by applying section 13(2)(a). Referring to the Board circular and decisions referred to by the 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 another concern. The Tribunal held that there was a clear distinction between investments and loans. When the assessee deposited funds in another concern (a) without right of participation in profits with that concern, (b) at a fixed rate of interest, and (c) the value of investments did not fluctuate, it did not invest funds and as such section 13(2 )(h) had no application. The transactions were, therefore, loans. The Tribunal concluded that section 13(2)(h) had no application. It was accordingly held by the Tribunal that the Commissioner was not jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corpus for all times to come as it was 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 Board 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 donee-trust is required to accumulate the donated amount by way of preservation of corpus and has to spend only income thereof and consequently, the said circular cannot be pressed in service by the assessee on the facts of the present case. So far as the second contention is concerned, Mr. Soparkar submitted that there is nothing in section 13( 2)(h) to suggest that investment by way of fixed deposits in any concern in which any person referred to in section 13(3) has substantial interest would not be covered by the express language of section 13(2)(h) . Mr. Soparkar further submitted that even in this connection, the Board circular on which reliance has been pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operty held for charitable or religious purposes.-(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 wholly for charitable or religious purposes, income derived from such properties in the hands of the trust would be allowed to be excluded from the total income of the previous year if it is shown that such income is applied by the said trust for charitable or religious purposes in India. The main question which we have to consider in this connection is as to whether the assessee-trust during the relevant year applied its income for charitable or religio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 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. 8. Mr. Soparkar for the revenue next contended that even assuming that 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 utilising1 by itself for such religious and charitable purpose, even then, when the donee-trust is asked not to utilise this amount to treat the donation as one of corpus and to utilise only the income accruing from the corpus for the trust purposes, it cannot be said that donor trust had applied the income for any charitable or religious purposes in India. Even this contention cannot be accepted for the obvious reason that if the donee-trust could have accumulated 100 percent of its income for a number of years subject to the procedure permitted by the Act, if the donee-trust is asked to accumulate or to keep intact the donated amount but to utilise income arising from the said corpus for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Bombay High Court quoted with approval the following observation of Slade, J., in the case of Helen Slater Charitable Trust Ltd. (supra) rendered in the context of a parallel statutory scheme reflected by section 360(1) of the Income and Corporation Tax 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' such money for 'charitable purposes' within the meaning of the two sub-sections, unless the transferor knows or ought to know that the money will be misapplied by the transferee. In such circumstances and subject to the lastmentioned exception the transferor corporation is in my judgment entitled to claim exemption under the two sub-sections, without having to show how the money has been dealt with by the transferee. (p. 505) Thereafter, the Bombay High Court made the following pertinent obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the donation as to its corpus and can only utilise the accrued income from the donated corpus for religious and charitable purposes, and that the question whether gifted income is to be utilised by donee-trust fully for its religious and charitable purposes or whether donor 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 for exemption under section 11(1) goes. 9. Mr. Patel for the assessee further submitted that even apart from the aforesaid legal position, this question is also fully covered by the instruction issued to all Commissioners by the Board on 5-1-1978 to which we have made a reference earlier. Full text of the said Instruction No. 1132 reads as under: A question has been raised regarding the availability of exemption in the hands of charitable trusts of amounts paid as donation to other charitable trusts. The issue has been considered by the Board and it has been decided that as the law stands at present, the payment of a sum by one charitable trust to another for utilisation by the donee-tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t does is the only relevant matter. Utilisation by donee-trust in any year would not be relevant for the purpose of deciding whether the donor trust gets exemption under section 11 or not. This is an additional aspect of the matter, therefore, which enables the assessee to succeed. These instructions are binding to 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 squarely covered against it by Instruction No. 1132 itself. 11. Before parting with discussion on the first contention, we may refer to a decision of the Supreme Court in the case of H.E.H. Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582 on which great reliance was placed by Mr. Soparkar for the revenue. The said decision was rendered by the Supreme Court in the context of section 4(3)(i) of the Indian Income-tax Act which represented a parallel scheme to the one which is reflected by section 11(1)(a) of the Income-tax Act. The facts before the Supreme Court in the aforesaid case were that by a deed dated 14-9-1950, the Nizam of Hyderabad settled certain securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. (p. 582) 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) (p. 583) 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 trustees who had got absolute discretion to set apart any part of the fund for any of the specific purposes could not exercise and had not exercised that option for the relevant years. Moment that was visualised it became obvious that funds were neither applied nor accumulated for the concerned purpose by the trustees. In this fact situation, therefore, the Supreme Court took the view that the said fund did not earn exemption during the relevant assessment years. On the facts of the present case, it cannot be said that the donor trust did not apply the concerned income for the purposes contemplated by section 11(1)(a) as we have shown earlier. Consequently, on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subsection (2) of section 13 will apply and not clause (h) thereof, if it is shown that 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, the case of the revenue that to such donation made by the assessee-trust section 13(2)(h) will apply cannot be countenanced. It stands squarely answered against the revenue by the aforesaid Circular No. 45 of the Board itself. The said circular obviously is binding to the revenue. In view of this conclusion of ours, it is not necessary for us to examine the wider submission canvassed by the learned advocate for the assessee placing reliance on the decisions of the High Court in C1T v. Eternal Science of Man's Society [1981] 128 ITR 456 and the Madras High Court in CIT v. Nachimuthu Industrial Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X
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