TMI Blog1995 (2) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, 1961 ? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the provision of section 13(1)(c) of the Income-tax Act, 1961, is applicable to the facts of the present case and as such the assessee is not entitled to get exemption under section 11 of the Income-tax Act, 1961 ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 1,29,966 being the legal expenses incurred by the assessee for defending Marga Guru, the president of the association and other members of the association against criminal charges is not allowable as a permissible expenditure while computing the income of the assessee ? 5. Whether the Tribunal was justified in law in holding that the legal expenses incurred by the assessee for defending criminal charges arising out of the personal civil rights and unconnected with the aims and objects of the assessee-organisation as such are not allowable deduction ? " The facts as found by the Tribunal are as follows : The assessee is the Ananda Marga Pracharaka Sangha. The assessment year involved is 1979-80. The assessee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arga' through discourses, open addresses, personal contact and through the medium of literature in the shape of books, pamphlets and periodicals, etc., and/or art, e.g., visual displays, and other media. 2. To arrange meetings, to instil knowledge amongst the people. 3. To take up the following for the welfare of the human race : (a) Literacy drive, (b) Social reforms, (c) Relief work, (d) Anti-corruption and anti-rowdyism, (e) Encouragement of literary faculties, (f) Encouragement of moral and cultural aspects, (g) Economic, physical, mental and spiritual development. 4. To exert and expand all its resources for the cause of peace, social security and universal world fraternity. 5. To collect and raise funds from worldly sources such as charity donations from members of the society for promoting causes beneficial to mankind irrespective of distinctions like caste, creed, colour or nationality and to help the Government of the country, State or municipality in all its constructive programmes. It is stated by learned counsel for the assessee that the aforesaid expenditure of Rs. 1,32,016 was incurred in respect of the following : (i) Marga Guru Ananda Murti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and the Commissioner of Income-tax (Appeals). He in support placed reliance upon the following authorities : (i) Parshva Properties Ltd. v. CIT [1976] 104 ITR 631 (Cal.) ; (ii) CIT v. Ahmedabad Controlled Iron and Steel Reg. Stockholders Association (P.) Ltd. [1975] 99 ITR 567 (Guj) ; (iii) Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1975] 98 ITR 568 (Delhi) ; (iv) Iron Traders Pvt. Ltd. v. CIT [1974] 97 ITR 606 (Delhi) ; (v) Rohtas Industries Ltd. v. CIT [1968] 67 ITR 361 (Patna) ; and (vi) J. B. Advani and Co. Ltd. v. CIT [1950] 18 ITR 557 (Bom). 8. The learned Departmental Representative, on the other hand, contended that litigation expenses for defending Marga Guru and the members of their association cannot be allowed as expenses out of the income of the assessee. According to him, the income of the assessee has been improperly spent for the benefit of these persons who were responsible for their personal acts and omissions. 9. We have minutely considered the respective submissions of the parties and all the case-laws referred to by learned counsel for the assessee. The case-laws touching the subject-matter in issue discuss the principles laid down by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be correlated even remotely to the aims and objects of the assessee. They are obviously personal to the Marga Guru and the members of his association. No amount of income of the assessee can be spent on defending such charges though the accused are members of the assessee. In the case of Smt. Saraswati Dalmia v. CIT [1981] 7 Taxman 186, before the Delhi High Court, the facts were that the assessee was the chairman of an insurance company. She was prosecuted for misappropriation of certain securities of the said insurance company. The Delhi High Court maintained the disallowance of legal expenses spent in defending the assessee since the expenditure was not incurred for an act having emanated in the ordinary course of the business. The High Court considered the cases of Ahmedabad Stockholders Association [1975] 99 ITR 567 (Guj) and Lakshmiji Sugar Mills v. CIT [1975] 98 ITR 568 (Delhi) and distinguished them on facts. It is, thus, abundantly clear that expenses incurred for defending criminal charges arising out of the personal acts and omissions and for vindicating personal civil rights unconnected with the aims and objects of the assesseeorganisation are not allowable deductions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 11. The finding of the Commissioner of Income-tax (Appeals), on this point, is contradictory to his own finding that the assessee is not entitled to deduction of Rs. 1,32,016. It is, therefore, held that the assessee is not entitled to exemption under section 11." At the hear ing before us, learned counsel for the assessee directed his submission to the question of the assessee's entitlement to exemption under section 11 in the context of its objects. The Income-tax Officer was of the opinion that the assessee-organisation is a social as well as spiritual organisation having political overtones not conforming with the definition of charitable purpose in section 2(15) of the Act and is not, therefore, entitled to exemption under clause 11. The Assessing Officer has denied exemption firstly on this ground, but in order to fortify the denial he has further observed that the assessee even if accepted as a charitable institution, attracts the vice of section 13(1)(c) of the Act in so far as the Marga Guru and the executive members of the organisation have personally derived benefit by having their defence in the criminal proceedings at the expense of the funds of the assessee. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals) was convinced by the argument that the defence of the said Marga Guru and the executive members was essential for the self-preservation of the assessee because failure to provide a fitting defence against the criminal proceedings, which were as alleged by the assessee brought with the sole purpose of maligning the assessee, would bring the society into disrepute. But for such defence, the Marga Guru or the executive members would have been defenceless as they have no means of their own to arrange for their defence by reason of complete devotion to the work of the assessee-society, it is submitted. The Tribunal has taken the view that as in the case of allowability of litigation expenses in either civil or criminal proceedings in a trade, in this case also the crucial factor for consideration is whether the assessee can be regarded as having incurred the liability to spend for the litigation in its capacity as a charitable institution or whether the expenditure has been incurred in relation to the carrying on of its charitable activity. The Tribunal's answer was that the assessee which claims its aims and objects as religious, philosophical and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture in that case is not allowable as expenditure of the business. Even where the expenditure is partly for the purposes of the business and partly for defending himself not as a trader but as an ordinary person from Punishment likely to be imposed on conclusion of the prosecution, the expenses cannot be allowed. But, the position becomes different in the first situation. For example, where the assessee incurs expenditure in defending his employee the assessee would be protecting his own business interests by defending the employee. The expenditure in such a situation shall be wholly and exclusively incurred for the purposes of the business. In the case cited the assessee was a private limited company and was a partner in a firm represented by its managing directors. There was a first information report against the firm as also against the individual partners that they had committed an offence under the Essential Commodities Act. The assessee incurred expenditure in defending its managing director. The court held that the managing director of the assessee-company stood in the same position as the agent or employee of an assessee to the limited extent to which the allegations cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the first information report showed that there was internal dissension in the organisation of the society. It is undeniable that some of the disciples defected and proved to be rebels against Marga Guru and the self-same dissenters happened to be the victims of the crime. The charge of murder emanating from such circumstances cannot be said to be either prima facie groundless or a direct incident of the assessee's course of the activity for the noble purpose of social and moral uplift of the people and society at large. We have considered the contentions of the parties. In our view, the same principle as applies to allowability of expenses for defence in a criminal proceeding emanating in the course of carrying on a trade shall also apply to expenses for defence that a charitable institution may have to incur for the defence of any of its founders or trustees getting involved in criminal prosecution in the course of carrying out the objects of the trust. Because, though the criminal indictment is personal and the benefit may accrue to the person indicted where the expenses are met by the charitable institution, such personal benefit is immaterial in the context that the defen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prosecuted for their work done as employees and during the course of employment of the assessee, the assessee had incurred the expenditure which could be allowed as deduction in carrying on the business of the assessee. The aim and purpose of the expenditure was to protect the assessee's employees and thereby to protect the assessee's good name and thereby to carry on the business. Further, it has to be borne in mind that unless an assessee was prepared to defend its employees for consequences while working as employees and in the course of employment, it will be difficult for an assessee to obtain the services and co-operation of its employees without which it was not possible for any assessee to carry on its business. In so far as the expenses were incurred in defending the accused persons in respect of the acts alleged to have been committed in the course of employment of the assessee while carrying on the business of the assessee, in our opinion, unless it can be said that the expenditure was not incurred bona fide, which is not the case here, it should be allowed in computing the total income of the assessee under section 10(2)(xv) of the Act." By analogy here the founder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax has registered the society as a charitable institution any unfavourable impression that one may subjectively bear in mind on account of the criminal proceedings would not alter matters. It may be mentioned here that the registration of the charitable society as a charitable society under section 12A is not an idle or empty formality. This is apparent from the tenor of the provisions of section 12A. It requires that not only an application should be filed in. the prescribed form setting out the details of the origin of the trust but also the names and addresses of the trustees and/or managers. The form further requires a certified copy of the instrument of its creation as well as two copies of the latest accounts of the applicant-trust or institution for as far back as three years to accompany each application. The requirement of obtaining the details as also the copies of the past accounts cannot be said to be a ceremonial one. The purpose is to examine the objects of creation as well as an empirical study of the past activities of the applicant for three years where the application is made belatedly so that the Commissioner could come to a conclusion on examination of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case, the criminal charge itself was that the accused as leaders of the society allegedly inspired the murders in a foul and sinister attempt to retain their grip on the society. The allegation has not been proved. Once the innocence of the accused is no more liable to be questioned, the criminal charges have to be taken to have arisen from the course of their activities. The society can have a say that their activities were wrongly projected and they were falsely and maliciously implicated in criminal charges. It cannot but be said that they would not have to face the trial in the criminal court but for pursuing the path they took to achieve their objects. Learned counsel for the assessee argued one more point. He referred us to the provisions of section 30 of the West Bengal Societies Registration Act, which says that the society has an obligation to follow the direction of the donor where the donors make any donation with the specific instruction to use it for a purpose specified and not otherwise. Such instruction has a binding force on the society and the society has a legal obligation to carry out such instructions strictly in accordance with it. We have examined the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of learned counsel. In the foregoing paragraphs, we have dealt with questions Nos. 1, 3 and 4, but question No. 5 is connected with question No. 4. It relates to an expense of Rs. 7,339 on litigation relating to the deportation of one disciple, named Amitabha, a U. S. national, and the criminal proceeding against one Monindra Deba and other workers under section 307 of the Indian Penal Code, for possession of explosives. But, these expenses are incurred not for the founder or the executive members or any trustees, but for the common workers. Therefore, such expenses cannot have total disqualifying effect. So, the only question raised is about the allowability of the expenses as application of income. In our view, the question of personal civil rights of the persons may or may not have nexus with the objects of the assessee. At least no evidence is there to rely upon to come to a finding that such legal expenses were so related to the society's activity. In that view, we hold that the expenses for defending the worker against criminal charges or for restoring the personal civil rights of a worker will depend on the facts of the case which have not been brought out by the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n making the application for registration can have retrospective effect only where such registration upon condonation is granted on or after the said date. That is the intention of the Legislature, otherwise the Legislature would not have specified the effective date for the operation of the amended proviso. We are not, however, inclined to accept this view. According to us, before the amendment, the proviso as worded left a vacuum or a gap not providing an answer this way or the other to the question whether the condonation of delay and registration upon the belated application would entitle the applicant charitable trust or institution to the benefit of such legislation from inception. Therefore, the duty falls on the court to uncover the legislative intent by proper reading of the provisions. The very intention of the Legislature to allow the trust or institution to make a belated application explaining the cause of delay postulates that the delay in making the application, when occurring for reasonable cause, should not stand in the way of a trust getting privilege of exemption. The requirement of the main provision, i.e., clause (a) is that the trust or institution shall make ..... X X X X Extracts X X X X X X X X Extracts X X X X
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