TMI Blog1981 (1) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... enses, in improving and enlarging the said newspaper and its services and placing the same on a footing of permanency. Sri S. B. Adityan, hereinafter referred to as "the founder", appointed himself, his brother, S.T. Adityan, and his son, B. R. Adityan, as the first set of trustees to administer the trust. Clause 3(j) of the said deed provided that the founder may " by supplementary instruments confer upon the trustees such additional powers as may be required or found necessary for the proper administration of the trust ". Clause 3(k) provided that " if for any reason the Daily Thanthi becomes defunct or its publication is discontinued, the properties of the trust may, at the discretion of the then trustees, be employed for any charitable purposes ". On July 9, 1957, the founder executed a supplementary dead whereunder he declared that the trust created by the document dated March 1, 1954, was irrevocable. On May 22, 1959, two other trustees were co-opted. The said Thanthi Trust claimed exemption under s. 4(3)(i) of the Indian I.T. Act, 1922, in respect of its income for the assessment years 1955-56 to 1961-62 on the strength of the trust deed dated March 1, 1954. The Indian I.T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt stating that since the initial purpose for which the trust was originally founded had been achieved, he gave further directions to the trustees to utilise the surplus income and funds of the trust for allied purposes set out in the supplementary deed and that it was within his rights to do so. The court by its judgment dated March 2, 1962, held that it was clear that the object of the trust was not in any manner opposed to law and there was nothing illegal in the prayer being allowed and passed a decree declaring that the trustees were bound, under the trust deed dated March 1, 1954, and the supplementary deed dated June 28, 1961, to utilise the surplus income and the funds of the Thanthi Trust, after defraying all expenses in connection with the newspaper business, for one or other of the purposes set out in the schedule to the decree. In the schedule to the decree, six purposes mentioned in the supplementary deed dated June 28, 1961, had been set out. The claim of the trust for exemption under s. 4(3)(i) of the 1922 Act in respect of the assessment years 1955-56 to 1961-62 and under s. 11 of the 1961 Act for the assessment years 1962-63 to 1967-68 were the subject-matter of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue preferred appeals to the Tribunal contending, inter alia, (1) that the supplementary deed dated June 28, 1961, which was the subject-matter of C.S. No. 90 of 1961, was invalid and ineffective inasmuch as the founder who had divested himself of his interest in the newspaper business and had created an irrevocable trust in respect thereof had no power to alter the terms of the trust deed and that cl. 3(j) of the original deed only empowered the founder to confer additional powers on the trustees for the proper administration of the trust and had not conferred any power on the founder of the trust to alter the objects of the trust, (2) that the judgment and decree in C.S. No. 90 of 1961 not being a judgment in rem was not binding on the Revenue, that the judgment was rendered in originating summons wherein complicated questions of law and fact could not be gone into, that without going into the question of the validity of the supplementary deed dated June 28, 1961, it cannot be relied on by the trust, and that the institution of such a suit was not genuine but collusive and fraudulent, (3) that even if the supplementary deed was valid and effective, no property having bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the surplus income from the business for the carrying out of the objects set out in the schedule to the decree, that the decree by its own force created a legal obligation on the trustees to carry out the objects of the trust as set out in the schedule to the decree and that the decree obtained in the said suit was not collusive or sham as alleged by the Revenue. The Tribunal further held that as the entire business was held in trust for the objects mentioned in the schedule to the decree, the Revenue was not right in its submission that no property was held in trust for the charitable objects mentioned in the supplementary deed as also in the schedule to the decree in C.S. No. 90 of 1961. Coming to the question of application of the income, the Tribunal held that the mere crediting of the amounts cannot be taken to be application of the amounts for charitable purposes, that the exemption under s.11 was not absolute but qualified, that the fact that in the earlier years the crediting of the amounts in the accounts of the trust in favour of the Adityanar College of Arts and Science was accepted by the Revenue as a proper application as contemplated under s. 11 cannot estop the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... references to this court and a consolidated reference has been made wherein the following questions have been referred for the opinion of this court: " (1) Whether, on the facts and circumstances of the case, by reason of the judgment and decree of the Madras High Court in C.S. No. 90 of 1961, the objects of the trust are only those that are set out in the schedule to the said decree and not those for which the trust was originally founded and that such objects are charitable objects within the meaning of section 2(15) of the Income-tax Act, 1961 ? (2) Whether, on the facts and circumstances of the case, the trustees are not bound to apply the income that is left after meeting, the lawful and normal expenses for running the business for carrying out the objects set out in the schedule to the decree in C.S. No. 90 of 1961 ? (3) Whether, on the facts and circumstances of the case, the Tribunal was right in holding that the trust is in respect of the entirety of the business for the objects mentioned in the schedule to the decree in C.S. No. 90 of 1961 on the file of the High Court, Madras, and not merely in respect of the income from the said business ? (4) Whether, on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per and its services and placing the same on a footing of permanency. Clause 3(j) enables the founder, by supplementary instruments, to confer upon the trustees such additional powers as may be required or found necessary for the proper administration of the trust. Clause 3(k) provides that if for any reason the Daily Thanthi becomes defunct or its publication is discontinued the properties of the Thanthi Trust may, at the discretion of the then trustees, be employed for any charitable purposes. For the assessment years 1955-56 to 1958-59, the trust claimed an exemption in respect of its income under s. 4(3)(i) of the 1922 Act. The ITO rejected the claim for exemption on the basis of an opinion given by the CBR by his order dated October 6, 1961. At that stage the trustees filed writ petitions before this court challenging the said orders and for prohibiting the I.T. authorities from assessing the income of the trust. A Division Bench of this court held in S. B. Adityan v. 1st ITO [1964] 52 ITR 453 that the order of the ITO dated 6th November, 1961, was obviously bad and was liable to be quashed as the ITO had based his order on the opinion of the Central Board of Revenue and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench of this court in Thanthi Trust v. ITO [1973] 91 ITR 261, after referring to the terms of the trust deed and the view taken by the ITOs in the earlier assessment proceedings, held that the ITO had no jurisdiction to reopen the question of genuineness of the trust in any of the years in question and that even if there had been a misapplication of the trust funds that would not affect the genuineness of the trust which had been created under the trust deed dated April 1, 1954. In that connection, the Bench had observed (p. 284): " It is well established that the subsequent acts and conduct of the founder of the trust cannot affect the trust if there has been already complete dedication. (Vide Krishnaswamy Pillai v. Kothandarama Naicken [1914] 27 MLJ 582; 25 IC 428 (Mad), Sunder Singh Mallah Singh Sanatan Dharam High School Trust, Indaura v. Managing Committee, Sunder Singh Mallah Singh Rajput High School, Indaura, [1938] 1 MLJ 359; AIR 1938 PC 73 and Gokuldoss Jamnadoss Co. v. Lakshminarasimhalu Chetti [1940] 2 MLJ 409; AIR 1940 Mad 920). , If a valid and complete dedication had taken place, there would be no power left in the founder to revoke and no assertion on his part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trust deed, we are not inclined to go into that question. The Tribunal has held that even if the supplementary deed was not valid, the decree in C.S. No. 90 of 1961 creates valid legal obligation on the trustees to spend the income of the trust on the charitable objects set out in the schedule to the decree, and that will attract s. 11 of the Act. The findings alone are the subject-matter of the first three questions referred to us. The question as to whether the Tribunal is right in holding that the founder of the trust has no power to modify or add to the objects of the original trust and as such the supplementary deed is not valid has not been specifically referred to us. Therefore, it is not necessary for us to go into that question, though the Revenue has also invited us to go into that question and has referred to the decision in CIT v. S. Ramaswami Iyer [1977] 110 ITR 364 (Mad). We, therefore, refrain from going into that question on the ground that it has not been specifically referred to us as arising out of the decision of the Tribunal. The Revenue next contends that (1) the Tribunal is in error in holding that the decree in C.S. No. 90 of 1961 creates a legal obligat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the original trust deed and as modified by the supplementary deed will fall within the exemption provided in s. 11 (1)(a). It is pointed out by the learned counsel for the Revenue that since the objects mentioned in the original trust deed involves the running of a press which is admittedly an activity for profit, the original trust, even as modified by the supplementary deed, cannot be taken to be for charitable purposes and, therefore, the trust is not entitled to claim the benefit of the exemption under s.11. According to the learned counsel for the Revenue, if the object of the trust is the advancement of an object of general public utility involving the carrying on of any activity for profit, then it will cease to be a charitable purpose as defined in s. 2(15). In this case, admittedly the trust is carrying on newspaper business for profit. But the question is whether the trust as modified, whose entire income has to be spent exclusively for carrying on charitable objects will cease to be charitable merely because it carries on an activity for profit. Section 2(15), which defines " charitable purpose ", excludes advancement of any other object of general public utility involvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use. The first question will be, is the income derived from property held under trust or legal obligation ? Property of every person or society or association of persons is not necessarily held under trust. Registration of a society makes no difference to this point. On the other hand, the fact that property yields a profit will not debar the claim. Actually the fact that property in this context includes a business undertaking necessarily means that there will be profit... During the course of the discussion, some illustrations were given. It was enquired whether Anath Vidyarthi Griha is covered. It obviously is ...... It is obvious because it is a charitable trust and it is not run for profit. It is run for charity... The point then raised was, will the fact that the Anath Vidyarthi Griha runs a printing press make a difference in this ? My answer would be 'No.'... Another illustration given was of a hospital with some free wards and some paying wards. Again, subject to certain normal assumptions, that would qualify. The fact that the press or the paying wards earn some income will not disqualify them.... Having made these general observations, I shall specifically deal with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... permanency. Though the said objects mentioned in the original trust deed can be treated as charitable objects for the purpose of s. 4(3)(i) of the 1922 Act, as was held in Trustees of the " Tribune ", In re [1939] 7 ITR 415 (PC), the said objects cannot now be considered as charitable objects in view of s. 2(15) of the 1961 Act, for all the three objects referred to above were with reference to the establishment of Dina Thanthi as an organ of educated public opinion for the Tamil reading public, the maintenance of the said newspaper and its press and the enlargement of the same on a footing of permanency which means that the predominant object of the trust was to carry on a news paper business-an activity for profit. Presumably it is for this reason the founder of the trust had executed a supplementary deed dated June 28, 1961, directing the trustees to spend the surplus income from the trust for the following purposes : (1) Establishing and running a school or college for the teaching of journalism; (2) Establishing and/or running or helping to run schools, colleges or other educational institutions for teaching arts and science; (3) Establishing scholarships for students of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tamil reading public, that it has been disseminating news and ventilating opinion on all matters of public interest, that the paper and its press have been maintained in an efficient condition, enlarged and improved and placed on a footing of permanency and that, as the said three objects set out in the original deed having been already achieved, the necessity has arisen to give directions to the trustees to spend the surplus income after meeting the expenses of the newspaper business on the charitable objects referred to therein. Admittedly the decree in the said suit creates a legal obligation on the trustees to spend the entire surplus income for the six charitable objects referred to in the schedule to the decree. Section II contemplates a property held under trust or under other legal obligation. It is in this connection, the learned counsel for the Revenue submits, that no property is held under legal obligation for the new objects set out in the supplementary deed or in the schedule to the decree in C.S. No. 90 of 1961, and that the legal obligation is only in respect of the surplus income and not in respect of the property yielding income, and, therefore, s. 11 cannot s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objects referred to in the original trust deed, the same property cannot be held under trust for the additional objects referred to in the supplementary deed and in the schedule to the decree in C.S. No. 90 of 1961. The supplementary deed as well as the decree in C.S. No. 90 of 1961 proceed on the basis that as the original objects had since been achieved, new objects had been substituted for them. The new objects are purely charitable. If the new objects have been substituted for the original objects set out in the original trust deed, then the property held for the original objects should be taken to have been held for the new objects. As a matter of fact the decree in C.S. No. 90 of 1961 specifically states that the trustees are bound to carry out the objects set out in the Schedule to the decree with the income from the Thanthi Trust. Therefore, it is not possible to say that no property is held under trust or other legal obligation for the new objects set out in the supplementary deed. The learned counsel for the Revenue would then submit that as the trustees have been given the discretion to spend the surplus from the trust for any of the six objects referred to in the sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business itself, then there is no question of making any claim for exemption. If the entire income has been spent in connection with the newspaper business that will automatically be exempted as an expenditure wholly or exclusively laid out for the business. The question of claiming exemption will arise only when there is surplus income after defraying the normal expenses connected with the newspaper business. Once there is a surplus, there is no discretion left in the trustees to spend the same for any non-charitable purpose and they are bound to spend the same for any of the charitable purposes referred to in the schedule to the decree, all of which are admittedly charitable objects. The learned counsel for the Revenue then contends that the decision in C.S. No. 90 of 1961 rendered in a friendly action between the trustees and the founder of the trust, cannot bind the Revenue and, therefore, the Revenue is not estopped from contending that the founder of the Trust has no power to execute the supplementary deed modifying or substituting the new objects of the trust. According to the Revenue the decision in C.S. No. 90 of 1961 has been rendered on an originating summons where d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the said dispute and the court held that the presence of the Revenue was not necessary and they could not be joined as defendants to the action. The learned Law Lord has quoted with approval the observations of Lord Greene M. R. in Asher v. London Film Productions Ltd. [1944] 1 All ER 77 (CA), where it has been observed (at pp. 77, 78): " I have often thought that, in cases of this kind, it is extremely inconvenient that the Crown (which is vitally interested) cannot, under the existing procedure, be made a party or otherwise appear. The result is that the Crown is technically not bound by any decision which may be pronounced in its absence.... 1 venture to suggest that the Inland Revenue authorities might usefully consider whether it might not be worthwhile approaching the Rule Committee with a view to obtaining enactment of rule under which they could receive notice of litigation of this kind and should be given a right to attend and put forward any argument or facts they thought right. The corollary would be that they would be bound by the decision, and the whole matter would be cleared up between everybody concerned." In the third case, a claim was made under s. 25A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at p. 135): " The decree in scheme suit is, or has the effect of, a judgment in rem. In Suraj Gir v. Bramh Narain, AIR 1946 All 148, a Division Bench held that a scheme framed under s. 92 of the CPC was binding on every one whether a worshipper or not, including even one who might have claimed an hereditary trusteeship and had brought a suit to enforce such a right before the settlement of such a scheme. In Sunni Central Board of Wakf v. Sirajul Haq, AIR 1954 All 88, another Division Bench of the same High Court held that a suit under s. 92, CPC, could be maintained only in respect of a public trust of a permanent character and the judgment in such a suit would be a judgment in rem and not a judgment in personam. The learned counsel for the trust submits that the decision in C.S. No. 90 of 1961 is more or less a decision given under s. 92 of the CPC or under s. 34 of the Trusts Act and such a decision is to be taken as a judgment in rem. It is also pointed out by the learned counsel that even if the founder of the trust had no power to supplement or substitute the objects of the trust, wherever it is found that the trust has got surplus income, the court has inherent jurisdicti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular purpose for which a charitable trust is created fails or by reason of certain circumstances the trust cannot be carried into effect either in whole or in part, or where there is a surplus left after exhausting the purposes specified by the settlor, the court would not, when there is a general charitable intention expressed by the settlor, allow the trust to fail but would execute it 'cy-pres', that is to say, in some way as nearly as possible to that which the author of the trust intended. In such cases, it cannot be disputed that the court can frame a scheme and give suitable directions regarding the objects upon which the trust money can be spent. As a result of the above discussion, the contention of the Revenue that the decision in C.S. No. 90 of 1961 cannot bind the Revenue and, therefore, the property cannot be taken to have been held under a legal obligation to perform the charitable objects cannot be accepted. We, therefore, agreeing with the Tribunal, hold that the decision in C.S. No. 90 of 1961 creates a legal obligation on the trustees to spend the income from the trust after defraying the expenses of the newspaper business for the charities set out in the schedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t education within the meaning of s. 2(15) but an object of general public utility, that, however, the publication of newspapers and journals involved the carrying on of an activity for profit and the income of the trust was, therefore, not exempt from tax and that as the expression If general public utility " itself excluded the object of private gain, the trust in that case, carrying on a commercial activity for profit, was not entitled to claim the exemption under s. 11. In Indian Chamber of Commerce v. CIT [1975] 101 ITR 796, the Supreme Court held that though the objects of the Indian Chamber of Commerce were primarily promotional and protection of Indian trade interest and other allied service operations falling, within the expression "advancement of an object of general public utility ", the income of the Chamber from these activities could not be exempted under s. 11 as it was carrying on its activities for profit. According to the learned judges in that case an activity which yields profit or gain in the ordinary course must be presumed to have been done for profit or gain and to bring himself within s. 2(15) of the Act, the onus is on the assessee to show that his objects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution is relief of the poor, education or medical relief, the requirement of the definition of " charitable purpose " would be fully satisfied, even if an activity for profit is carried on in the course of the actual carrying out of the primary purpose of the trust or institution. The principle laid down by the Supreme Court in the said decision seems to squarely apply to the facts of this case. In this case the property held under trust or under legal obligation is the business itself and the entire income from the business has to be utilised for the various charitable objects set out in the schedule to the decree in C.S. No. 90 of 1961. Thus, the objects will clearly fall under the head It relief of the poor, education, medical relief, etc.", and merely because the trust is carrying on an activity for profit for the purpose of carrying on the charitable objects referred to in the schedule to the decree, it cannot be deprived of the benefit of section 11. In the above case the Supreme Court has also approved the decisions of the Kerala High Court and the Andhra Pradesh High Court in CIT v. Cochin Chamber of Commerce and Industry [1973] 87 ITR 83 (Ker) and A. P. State Road Transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it loses the benefit of s. 11 is accepted, no trust can carry on any business even for the fulfilment of the charitable objects, such as, relief of the poor, education and medical relief and, therefore, such a contention cannot be accepted. If the intention of the Legislature were to prohibit a trust or institution established for a charitable purpose or for the promotion of an object of general public utility from carrying on any activity for profit, it would have provided in the clearest terms that no such trust or institution should carry on any activity for profit. On the other hand the Legislature by enacting s. 11(4) under which the business may also be the property held under trust appears to contemplate a trust actually carrying on a business for charitable purposes or for general public utility. In this case the founder of the trust has, clearly evinced an intention to create a public charitable trust as seen from the preamble and cl. 3(k) of the original trust deed and the charitable objects referred to in the schedule to the decree in C.S. No. 90 of 1961 have to be fulfilled from and out of the income from the business which is directed to be held under trust or other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Institution Institution Rs. Rs. 1966-67 1968-69 20-3-1972 10,41,689-47 3,04,035 1967-68 1969-70 19-4-1972 8,99,535-00 16,61,500 ---------------------------------------------------------------------------------------------------------------------------------------------- Though the AAC held that such crediting of the accounts of the college and the drawal of amounts by the college from their accounts and the utilisation of the same for its purposes would amount to an application the Tribunal had taken the view that mere crediting of the amount in favour of the college may not amount to an application. Crediting 75% of the income every year in favour of the college had been the practice followed by the trust in all the earlier years and the I.T. authorities have been accepting the same as amounting to an application of the 75% of the funds as required in s. 11. It is only in respect of the assessment years in question that the Revenue has taken up the plea that the mere crediting of 75% of the income in favour of the college will not amount to application as contemplated by s. 11. The I.T. authorities had been approving this mode of application of income and have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then the authorities are not bound to accept the earlier practice. The Tribunal then went into the question as to whether the mere book entries in favour of the college will amount to an application as contemplated by s. 11 and held that such book entries will not amount to the actual application of the funds as contemplated by s. 11 and, in that view, remitted the matter to the tax authorities to go into the question as to how much of the income in each of the years has been actually applied for charitable purposes. To show that notwithstanding the book entries in favour of the college in the accounts of the trust, the accounts of the college did not show the amounts as receipts and hence there was no actual application of the amount for the charitable purposes as contemplated by s. 11, the Revenue filed a petition T.C.M.P. No. 463 of 1980 for leave to file copies of annexs. 11, 12 and 13, already filed before the Tribunal as part of the application for reference , and to treat the same as part of the record in this case. The said petition has been filed under s. 256(2) of the I.T. Act read with s. 151, CPC. The annexures which are sought to be filed now as part of the record a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that question. It is well established that this court acting on a reference under s. 256 cannot refer to any documents which are not referred to in the statement of case. In CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191, the Supreme Court has specifically ruled that the jurisdiction of the High Court in the matter of I.T. references made by the Appellate Tribunal is an advisory jurisdiction and that the duty of the court is to accept the findings of fact given by the Tribunal and answer the questions of law on that footing unless the findings of the Tribunal can be successfully assailed on the ground that there is no evidence for the conclusions on the facts recorded by the Tribunal. The Supreme Court again reiterated that principle in CIT v. Greaves Cotton Co. Ltd. [1968] 68 ITR 200, saying that the High Court while disposing of a reference under s. 66 of the Indian I.T. Act, 1922, is not a court of appeal and, therefore, it is not open to the High Court on such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal, that it should confine itself to the facts as found by the Tribunal and answer the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication for purposes of s. 11 and giving exemption under s.11 on that basis and contends that the tax authorities are estopped from going behind their conduct and questioning the mode of application continuously followed by the trust in all the earlier years. Reference has been made to the decision in H. A. Shah Co. v. CIT [1956] 30 ITR 618 (Bom), wherein it has been held that though the principle of res judicata cannot apply to the proceedings under the I.T. Act and the decision with reference to one year may not constitute res judicata for the assessment in the subsequent year, still, if as a result of taking a different view from that adopted, in the earlier years, by the tax authorities, considerable injustice is likely to be caused to the assessee, the authorities can be prevented from taking a different and inconsistent view to the one taken in the earlier years. But, however, it is not possible for us to accept this contention of the learned counsel for the trust. We are inclined to accept the view taken by the Tribunal that where the practice adopted by the assessee and accepted by the tax authorities in the earlier years is found to be not strictly in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the account books of the donor could be relied upon as affording cogent evidence of gift though the entries as such might not conclusively establish a real and effective gift and that the subsequent acts and conduct of the parties taken along with the entries of credit in the books of account together cumulatively established a valid gift. In A. M. Abdul Rahaman Rowther Co. v. CIT [1965] 56 ITR 556 another Division Bench of this court has taken the view that whether the possession of the thing gifted should be given physically to the donees depends on the subject-matter of the gift and that where the subject-matter of the gift consists of the assets of a firm, entries in the accounts followed by such acts as would effectuate a divestment on the part of the donor would be sufficient. In that case the assessee who was the sole proprietor of a business, purported to make certain gifts to two of his married daughters by incorporating certain entries in his accounts and debiting himself to the extent of Rs. 50,000 and crediting his two daughters with a sum of Rs. 25,000 each. Subsequently, a partnership deed was executed with the assessee and his two daughters as partners and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the amount transferred to the reserve fund in the relevant years should be taken to have been applied or finally set apart for application for charitable purposes and, therefore, eligible for exemption under s. 4(3)(i). In Smt. B. Muniyamma v. CGT [1979] 117 ITR 47, a Bench of the Karnataka High Court had held that it was not necessary in every case for the validity of a gift that there should be a physical delivery by the donor to the donee, that a transfer could be effected by making debit entries in the accounts of the donor and correspondingly making credit entries in the account books of the donee, and so long as the amount debited puts the amount beyond the control of the donor and results in his ownership in it being replaced by the ownership of the donee, a valid gift was effected. As against the said contention, the learned counsel for the Revenue submits that the word " application " is to be understood as actually expended and a mere credit entry cannot be taken as proof of the application and refers to the following decisions in support. Hanmantram Ramnath v. CIT [1946] 14 ITR 716 (Bom) was a case where an assessee made an oral declaration of trust in November, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the gift was ineffective as the donee cannot be said to have entered into possession and control of the money when the money itself did not exist. In Nachimuthu Industrial Association v. CIT [1980] 123 ITR 611, this court held that the mere making of entries in the assessee's own books, which entries could have been reversed if and when the assessee chose to do, will not amount to an application of the income for charitable purposes, unless there was a communication sent to the educational institution that any such sum had been set apart in its favour and there had been reciprocal entries in the books of the educational institution. Based on the above decisions, the learned counsel for the Revenue contends that the mere entries in the assessee's own books of account crediting the amount in favour of the educational institution will not amount to an application as contemplated by s. 11, as the assessee having the dominion and custody of the account books, can always reverse those entries, so long as the amount has not been put physically in the hands of the institution. There can be no doubt that the mere credit entries in favour of the educational institution made in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he evidence. Even though the amount had been credited and such credit entries had been accepted by the educational institution, still, if the assessee had not completely divested its ownership of the money and had retained some beneficial interest therein, such as investing the same either in its own business or with third parties and getting interest thereon, the gift as evidenced by the credit entries cannot be said to be complete. However, unless the Revenue, which had the opportunity to inspect the accounts of the assessee, is in a position to say whether the assessee has utilised the money covered by the credit entries in its own business or invested the same and earned interest thereon and thus had a beneficial interest in the money, it cannot be assumed that the assessee had retained any beneficial interest in the money, after making the credit entries. Therefore, the assessee should be taken to have fully divested itself of the monies credited and kept the same always ready for payment to the educational institution. Further, in these proceedings, right from the beginning, the Revenue has not taken up the plea that the assessee has not divested its ownership in the money cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Corporation Taxes Act, 1970, and s. 35(1) of the Finance Act, 1965, the court held that a charitable institution which makes an outright transfer of money applicable for charitable purposes to any other charity 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 s. 360(1) of the 1970 Act and s. 35(1) of the 1965 Act, unless the transferor knew or ought to have known that the money would be misapplied by the transferee and that the trust which has applied the money for charitable purposes was entitled to exemption without having to show how the money had been dealt with by the transferee-institution. The provisions under which exemption from tax was claimed in that case were as follows (at p. 160): " Section 360(1)(c) of the 1970 Act: The following exemptions shall be granted on a claim in that behalf to the Board . ...... (c) exemption-(i) from tax under Schedule C in respect of any interest, annuities, dividends or shares of annuities, (ii) from tax under Schedule D in respect of any yearly interest or other annual payment, and (iii) from tax under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication as contemplated by the exemption provisions. This contention was overruled by the court holding that the word " applied " does not import a power of selection, but it simply means " devoted to " or " employed for the special purpose of ". The court construed the phrase " applied for charitable, purposes " as including transfer of funds outright to another charitable institution which was exclusively charitable objects and the disposition of assets by one institution in favour of another institution in such manner as to pass the whole title in such assets to the transferee must ordinarily amount to an application of such assets within the normal use of the legal terminology. Since the credit entries in this case have been followed up by with drawal of a portion of the amount by the college in one year, and more than the amount credited in another year, it will clearly lead to the inference that the amount has been kept as a fund for the educational purposes which fund can be operated at any time by the college. If the assessee has actually handed over the amounts on the dates when the credit entries were made to the college physically and it bad deposited the same with the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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