TMI Blog1999 (11) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. The income so accumulated should have been utilised for the purposes for which it was accumulated before April 1, 1972. The purposes for which the accumulation was sought are stated as follows : "(i) to establish and maintain and manage hospitals, clinics, laboratories and medical research centres and to provide the poor with medical relief, surgical advice and aid ; (ii) to acquire or take over any hospitals, clinics, laboratories or research centres and to maintain and manage them ; (iii) to establish, maintain and manage educational institutions or libraries for imparting technical knowledge or scientific knowledge, or knowledge in any subject or language ; (iv) to award scholarships or stipends to students to enable them to prosecute their studies in India or in foreign countries and to award prizes to students for proficiency in any subject or language ; (v) to render substantial financial aid to any existing hospital or educational institutions ; (vi) to give substantial donations to any relief, fund by way of charity." As earlier stated, the entire income of the assessee for the previous year relevant to the assessment year 1961-62 and nine subsequent previ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable purposes and handing over of accumulated income to another charitable trust was within the powers of the assessee-trust and it would amount to application of its income. The Tribunal further held that the assessee was specifically authorised to make over the accumulated income to another charitable trust to carry out other objects of the said charitable trust. The Tribunal held that there is no difference between the employment of the expression, "utilised" in clause (c) and the expression, "used" in clause (a) of section 11(3) of the Act. According to the Tribunal, as the assessee had taken steps for forming M. Ct. Muthiah Foundation for the specific purpose of acquiring or establishing certain educational institutions, hospitals and maintaining them, the assessee handed over the accumulated income to it for implementing the objects, and the assessee had utilised the income for the purposes stated by it in the notice given to the Income-tax Officer under section 11(2) of the Act. The Tribunal held that the assessee had completely divested itself of its ownership over the accumulated income by handing it over and put it beyond its control and it would amount to utilisation f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l was justified in law in holding that the accumulated income of the trust for the years concerned was utilised for the purpose for which it was accumulated or set apart and, therefore, it should not be deemed to be the income of the assessee for the relevant assessment year ?" Mr. J. Jayaraman, learned senior counsel appearing for the Revenue, submitted that exemption under section 11 is granted on application of income for charitable or religious purpose and if the trust applies 75 percent of its income, then, an exemption of 100 percent is granted under section 11 of the Act. He submitted that in case the trust decides to accumulate its income, the accumulation can be done subject to certain conditions and the income should be accumulated for the purposes specified in the notice given to the Income-tax Officer. He also submitted that the accumulated income should be utilised by the assessee for the purpose for which the income was accumulated and by handing over of the accumulated income to another trust, the assessee had not utilised the income for the purpose of accumulation and it would not qualify for exemption under section 11(3)(c) of the Act. He submitted that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e misuse of the moneys and the assessee had lost the control over the moneys. He submitted that the provisions should be construed in a reasonable manner and, according to him, the expression, "utilised" in section 11(3)(c) would also include "applied" and the Legislature has not employed the expression "spent". He, therefore, submitted that it is not necessary that the accumulated income should be handed over to an existing institution. Learned counsel strongly placed reliance on a decision of the Gujarat High Court in the case of CIT v. Sarladevi Sarabhai Trust (No. 2) [1988] 172 ITR 698 and the circular of the Board referred to therein and submitted that the utilisation does not mean that the amount should be spent forthwith. According to learned counsel for the assessee, the assessee had lost its complete control and it had completely divested itself of its ownership over the moneys by handing over the moneys to another trust and, therefore, it is not necessary that the money should be handed over to an existing institution. He placed stress on the expression, "utilisation" and submitted that the accumulated funds were applied for bona fide purposes in furtherance of the object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ablish and maintain a hospital and a school to be constructed in the property known as "Rama Vilas", situate at Luz Church Road, Mylapore, Chennai, which was purchased by Thiruppani Trust and to repair, renovate, reconstruct and to expand the M. Ct. Muthiah Chettiar High School, Lady Muthiah Chettiar Girls High School and M Ct. M. Chidambaram Chettiar Memorial Boys' Hostel all situate at Madras and M. Ct. M. Chidambaram Chettiar Memorial Higher Elementary School at Kanadukathan. The trustees felt that in view of the magnitude of the scheme and in order to expeditiously construct the hospital and the school, a separate trust should be formed appointing a competent and independent body of persons as board of trustees. Accordingly, the foundation trust was created by transfer of a sum of Rs. 5,000 by each of the settlor-trusts and the funds or assets of the institutions, were transferred by the settlors or other persons including the income and accumulation thereof are required to be applied for the following purposes : (a) to construct a hospital in the premises belonging to Thiruppani Trust and known as "Rama Vilas" situated in Luz Church Road, Mylapore, Madras, and maintaining an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e given to the Income-tax Officer in the prescribed manner specifying the purpose for which the income is being accumulated and the period for which the income is to be accumulated. The period should not exceed ten years. Rule 17 of the Income-tax Rules, 1962, prescribes that the notice which is required to be given under section 11(2)(a) should be in Form No. 10. The second condition is that the amount so accumulated has to be invested in any Government security as specified in section 11(2)(b)." The trust is allowed to accumulate its income for a maximum period of ten years. The condition is that the trust should specify in the prescribed form the purpose for which the income is accumulated or set apart. It is not enough for the trustees to repeat the objects of the trust, but must specify a particular purpose for which the income is being accumulated. We are in agreement with the view of the Calcutta High Court in Director of I. T. (Exemption) v. Trustees of Singhania Charitable Trust [1993] 199 ITR 819 wherein the Calcutta High Court held that the long-term accumulation should be for a definite and concrete purpose or purposes and the charitable trust cannot use its objects a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. J. K. Charitable Trust [1992] 196 ITR 31 (All) and CIT v. Trustees of H. E. H. the Nizam's Charitable Trust [1981] 131 ITR 497 (AP)). The Board has also reiterated the same position of law and issued a circular dated January 5, 1978, wherein the Board has stated that the payment of a sum by one charitable trust to another for utilisation by the donee trust towards its charitable objects is proper application of income for charitable purpose in the hands of the donee trust. Recently, the Supreme Court in the case of S. Rm. M. Ct. M. Tiruppani Trust v. CIT [1998] 230 ITR 636 has also taken the view that the money spent for purchase of a building which is to be utilised as a hospital would amount to application of income under section 11(1) of the Act. The contention of Mr. C. Ramakrishna, learned counsel for the assessee, was that the assessee had invested in Government securities for a period of ten years and the assessee had lost the complete control over the money and before the expiry of the period mentioned in section 11(3)(c) of the Act, the trustees have utilised the income for the purpose for which it was accumulated. He referred to the decision in Short v. Poole Corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agement in various forms over the years. It is only with the above objectives, section 11 of the Act has to be interpreted. The House of Lords in the above decision made a distinction between tax avoidance and tax mitigation schemes and the relevant passage reads as under : "Tax avoidance was to be distinguished from tax mitigation. The hall mark of tax avoidance is that the taxpayer reduces his liability to tax with out incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option. Where the taxpayer's chosen course is seen upon examination to involve tax avoidance (as opposed to tax mitigation), it follows that tax avoidance must be at least one of the taxpayer's purposes in adopting that course, whether or not the taxpayer has formed the subjective motive of avoiding tax." We are of the opinion, the assessee-tru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which it was so accumulated. The later amendment in section 11(3A) of the Act, which was introduced by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1976, also gives a clue that the word, "utilisation" in section 11(3)(c) should be interpreted to mean "application", as under section 11(3A) of the Act, it is permissible for the Income-tax Officer to change the purpose of application of income, if the trustees state before the Income-tax Officer that the income accumulated cannot be applied for the purposes due to the reasons mentioned therein. Though the word, "utilisation" in normal connotation would connote spending of money for the purposes for which the income was accumulated, in the context of section 11(3)(c), the more appropriate meaning that can be assigned is that the expression "utilisation" would mean application of the income. As seen earlier, section 11(3), in our opinion, is so designed to take care of different situations ; where the trust applies its income for a non-charitable purpose or where the trust converts its securities or deposits before the expiry of the period or where the trust had not applied the amount for the purposes for which it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be the meaning to the expression "utilised" as "applied" in section 11(3)(c) of the Act is also in consonance with the subsequent amendment in section 11(3A) of the Act. We have seen, by the judicial development, the expression "applied" has been construed to include cases of handing over the money by one trust to another public charitable trust. Further, the argument that the view we have taken would encourage tax avoidance by the public trust permitting the trust to hand over the accumulated income to another trust which may hold it for ten years and then transfer to a third trust with an endless, unbroken chain of passing on the money from one trust to another without actual utilisation of the money is unacceptable. That cannot be a ground to give a normal meaning of the word, "utilised." The benefit of accumulation of income is expressly provided by the Legislature as a tax mitigation scheme and when in the view of the Legislature it is not a tax avoidance, it is not possible for the court to hold that it will encourage tax avoidance. Further, it is not the case of the Revenue that the transfer is not real but a sham transfer or the donee trust is not a genuine or real trust. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have pooled their reserves and handed over the entire accumulated income to the donee trust so that the donee trust can carry out the purpose for which the income was accumulated during the course of ten years in an effective manner. Therefore, we are of the opinion that the assessee by this process, had not contravened any of the provisions of section 11(3) of the Act and the Commissioner was not justified in directing the officer to levy the tax on the entire accumulated income as well as income of the assessee in the assessment year in question. We are of the view that the Appellate Tribunal was justified in cancelling the order of the Commissioner. Accordingly, we answer the first question of law, as refrained by us, in the affirmative and against the Revenue. In view of our answer to the first question. it is not necessary to render any answer to the second question, though the issue raised in the said question is concluded against the Revenue by the decisions of the Supreme Court in Addl. CIT v. A. L. N. Rao Charitable Trust [1995] 216 ITR 697 and S. RM. M. CT. M. Tiruppani Trust v. CIT [1998] 230 ITR 636 However, in the circumstances of the case, there will be no order as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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