TMI Blog1980 (8) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 4 lakhs received by the assessee-trust in the form of Rs. 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 III 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 Rs. 14,896 for the assessment year 1971-72 and Rs. 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 in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 2,21,300 received by the assessee-trust in the form of 22,130 shares of Motor and General Finance Ltd. from Daulat Ram Public Trust was not taxable income in the hands of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstitution by a trust or a charitable or religious institution to which the provisions of section 1 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. II 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 substantial contribution to the trust or institution, a trustee or manager of the trust; if the author, founder or person is an HUF then a member of the family; a relative of the author, founder, person, member, trustee or manager; or a concern in which any of the abovementioned persons has a substantial interest. Section 13(2) provides that the income or proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 4 lakhs as also the dividend income of Rs. 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. Since she treated the amount of Rs. 4,74,973 as the income of the assessee, she held that the investment in Govt. securities was inadequate. After giving an exemption under s. 11(1) of the Act, of 25 per cent., the taxable income was held to be. Rs. 3,56,230. On appeal, the AAC confirmed the order of the ITO and observed that the expression " such contributions " in s. 12(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amounting to Rs. 74,886 and Rs. 1,11,229 for the assessment years 1971-72 and 1972-73, respectively, would, therefore, be chargeable to tax under s. 13(2)(h) of the Act. On appeal, the AAC confirmed the additions of dividend income in both the years but deleted the addition of interest income. He observed that it was not the ITO's case that the funds of the assessee-society had been lent without adequate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 13,764.80 and Rs. 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 complied with and, therefore, confirmed the addition of Rs. 2,21,300 as also the dividend income of Rs. 64,068 for the assessment year 1970-71. However, the Tribunal allowed the assessee s appeal on the basis and reasoning of the decision in Eternal Science of Man's Society. With regard to the assessment years 1971-72 and 1972-73, the AAC held that Form No. 10 was valid and the assessee-society had complied with the conditions for accumulation under s. 11 of the Act. It would, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the total income. On appeal, the ACC 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 of the donee-society ? Normally, a gift of shares or its own capital by a charitable trust to another charitable trust would be income in the hands of the recipient trust. The recipient trust would be free to spend the moneys or expend the property as it liked in furtherance of its objects. But in the instant cases the donor trust attached specific conditions to the donation. These were: (i) that the donation do constitute the corpus of the donee trust or be held as an accretion to the corpus of the donee trust; (ii) that no part of the donation be utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 specific direction that they shall form part of the corpus of the trust or institution. Explanation.-For the purposes of this sub-clause, 'trust' includes any other legal obligation. " Here too, the distinction between voluntary contributions per se and voluntary contributions with a specific direction that they form part of the corpus has been mentioned. The former is income and the latter is not. We are, therefore, of the view that the voluntary contributions to the capital assets are to be excluded from the taxable income. It may be pertinent to mention in this connection a decision of the Allahabad High Court, which is in consonance with our view. This is the Case of Sri Dwarkadheesh Charitable Trust v. ITO [1975] 98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable; 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 references, it is not the case of the revenue that the funds of the assessee have been lent without adequate interest or security. In these circumstances, we feel that the deeming provisions of sub-s. (2) of s. 13 are not attracted. Therefore, the income or property of the trust cannot be deemed to have been used or applied for the benefit of the persons specified in sub-s. (3). It is pertinent to note that the AAC was of the opinion that the aggregate of the funds invested in Goodwill India Ltd. did not exceed 5 per cent. of the capital of that company as capital meant equity capital as opposed to loans etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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