1. These four appeals, two each by the assessee and the department, respectively, pertain to the assessment years 1977-78 and 1978-79. For the sake of convenience they are being disposed of by this common order.
2. The assessee is a private discretionary trust formed by Escorts Ltd. vide trust deed dated 24-12-1976 with an initial contribution of Rs. 1,000. The trust was formed for providing financial assistance regularly for the benefit of the employees and dependent members of their families for the purpose of education, medical relief, etc. The company had appointed five trustees, two of them were joint managing directors of Escorts Ltd. and three of them employees of Escorts Ltd. The ITO concluded that because the trustees were two joint managing directors and three employees of the company, the company will always have absolute control on the affairs of the trust since the three employees of the Escorts Ltd. cannot afford to disobey the directions of the joint managing directors. The trust was admittedly for the benefits of the employees of Escorts Ltd. and not for the benefit of general public. The ITO, therefore, held that it was not a charitable trust within the meaning of Section 2(15) of the Income-tax Act, 1961 ('the Act') and is a discretionary trust.
3. On going through the accounts for the period 24-12-1976 to 31-3-1977, the ITO found that Escorts Etd. had donated a sum of Rs. 10 lakhs to the assessee-trust for the corpus of the trust. This amount was put in the bank and interest was earned but no part of it was spent for the beneficiaries and a sum of Rs. 500 has been charged as the audit fee. The ITO also noticed that in the next year, the assessment year 1978-79, the company had given a further sum of Rs. 20 lakhs to the trust specifically for the corpus of the trust. In the next year the trust had given the amount of Rs. 30 lakhs as a loan to Goetze India Ltd., a subsidiary of Escorts Ltd., on interest. Only a sum of Rs. 12,896 was spent on welfare activities in the next year. The ITO, therefore, held that the employees were not getting the benefit of the trust because a major part of the amount was spent on administrative expenses.
4. The assessee claimed that the sum of Rs. 10 lakhs/Rs. 20 lakhs received from Escorts Ltd. was not includible in its income as it was a capital receipt. Since the trust is not a charitable trust or a religious trust, the ITO held that the donation received for the corpus was not exempt under Section 2(24) or Section 12 of the Act. It was income from vocation and would, therefore, be assessable since it was not a capital receipt. The matter was referred to the IAC under Section 144B of the Act and the IAC agreed with the ITO that the amount was taxable as the income of the trust. He further held that whatever sums were transferred to the trust by Escorts Ltd. were in furtherance of its own purpose rather than the purpose for which the trust was formed.
It was, therefore, simply an extension of business purpose of Escorts Ltd. and the amount was, therefore, had to be taxable. He directed the ITO, assessing Escorts Ltd., to assess this amount which Escorts Ltd. had given to the assessee-trust in the hands of the Escorts Ltd. Since the assessee-trust had filed a return the amount was directed to be taxed protectively in its hands. The assessment order is clear that the assessment was made as a precautionary measure without prejudice of the department's claim to assess the same income in the hands of the Escorts Ltd. The income was taxed at 65 per cent under Section 164(1)(ii) of the Act.
5. The assessee came in appeal before the Commissioner (Appeals), who considered the matter in great detail. He noted that the matter was earlier before the IAC under Section 144A who had given the directions on 1-2-1980, [and] that the contributions received by the assessee-trust in this and the next year will not be treated as income of the trust. However, the ITO referred the matter back to the IAC on 4-3-1980 and on 6-3-1980. The IAC varied the directions to assess the amount in the hands of the assessee. The ITO, thereafter, passed a draft assessment order under Section 144B and referred the matter to the IAC who directed that a protective assessment may be made in the hands of the assessee but primarily the amount should be disallowed in the hands of the Escorts Ltd. The Commissioner (Appeals) looked into the minutes of the board meeting held on 14-12-1976 to consider forming [the formation of] an irrevocable trust in the name of the assessee and the resolution passed therein. He also went through the extract from preamble of the trust deed dated 24-12-1976 and provisions of Clauses 4, 6, 8, 13, 15, 17, 27, 31 and 32 thereof which he has reproduced in his order. On a careful consideration of the provisions of the trust deed, the board resolution, etc., the Commissioner (Appeals) concluded that the assessee-trust was a separate legal entity from its author, the Escorts Ltd. The IAC's view that the trust was a mere extension of the business purpose of the Escorts Ltd. was incorrect. It was also not possible to agree with the ITO that the trust would in this case be under the control of the author when out of five trustees, three of them were employees and two were managing directors of the author-company. For a private discretionary trust the law did not require compulsory application of its income to its objects from year to year. Therefore, failure of the assessee to spend its income for the benefit of the employees in this year or in the next, did not affect the genuineness of the trust or its claim for exemption. In fact, the accounts show that the trust had spent a substantial part of its funds towards fulfilling its objects. He also held that the assessee having returned income of Rs. 6,208, its assessment on an income of Rs. 10,07,708 cannot be said to be a precautionary or a protective assessment. It has to be supported by the material to be brought on record by the ITO but there was no such material in the orders of the ITO or IAC. Since the accounts of the trust had to be audited under Clause 15, the payment of Rs. 500 as audit fee was quite reasonable and should have been allowed.
6. The Commissioner (Appeals) noted that the objects of the trust as laid down in Clauses 5 and 6 of the trust deed were to use the sums available at the discretion of the trustees for the benefit of the employees of the Escorts Ltd. and the dependent members of their families which could not be fulfilled within a limited period of time or by a single grant of funds from the author. The objects being continuing and directly linked with the business of the author, the assessee-trust could reasonably expect to receive grants from the author on continuous basis from year to year. The minutes of the board's meeting dated 14-12-1976 also refers to the provisions of funds by the author regularly. The sum of Rs. 10 lakhs was provided only for the year ending 31-12-1976. The initial payment of Rs. 1,000 made to the trust was not specifically towards the corpus of the trust.
7. The Commissioner (Appeals) further noted that the trust deed does not make any distinction between the corpus of the trust and the income of the trust. It only refers to the trust funds in Clause 4 of the trust deed and enjoins upon the trustees to use the same for purposes of the trust. Clause 27 of the deed leaves it to trustees to determine whether any money or property for the purpose of this trust is to be considered as capital or income or whether out of capital or income any expenses or outgoings are to be paid. In other words, the trustees have the power to treat any or every receipt of the trust as its income, irrespective of the direction of the donor. The trustees would, therefore, be within their rights even if they chose to distribute the sum of Rs. 10 lakhs paid to the trust as corpus, as non-refundable grants to the employees for their benefits.
8. The Commissioner (Appeals) then discussed a mass of case law and came to the conclusion that the sum of Rs. 10,01,000 received by the trust from the author during this year was its assessable income. The trust expected to receive money from the author from year to year so that there was continuity of expectation to receive donations. He further held that the sum of Rs. 10,01,000 had been received by the assessee-trust without any special condition as referred to in Clause 8 of the trust deed. Therefore, the said amount was received by the trust, irrespective of the stipulation of the donor that it was towards the corpus, as ordinary trust funds which could be treated as income or capital at the discretion of the trustees under Clause 27 of the trust deed. The Commissioner (Appeals), therefore, upheld the assessment of Rs. 10,01,000 as the income of the assessee. He allowed Rs. 500 for audit expenses. As regards the charging of income-tax at 65 per cent under Section 164(1)(ii), the Commissioner (Appeals) accepted the assessee's contention that its case fell within the proviso (iv) and, therefore, it was not assessable at 65 per cent but as an AOP.9. The department and the assessee are both aggrieved and are in appeal. So far as the department is concerned, the only ground is against the order of the Commissioner (Appeals) that the tax is not chargeable at the flat rate of 65 per cent, while the assessee-trust is in, appeal against the assessment of Rs. 10,01,000 as the income of the assessee-trust. We have heard the learned departmental representative and the counsel for the assessee. In the departmental appeal the contention is that proviso (iv) to Section 164(1) is inapplicable since that proviso should be read ejusdem generis and if so interpreted, the assessee-trust cannot be equated with the provident fund, superannuation fund, gratuity fund, pension fund, etc. In that event, charging of income-tax at 65 per cent would be correct. On behalf of the assessee this contention was opposed and the order of the Commissioner (Appeals) was supported. It was contended that the proviso cannot be read as ejusdem generis. The assessee's case does squarely fall within the exception provided under proviso (iv). In support of the assessee's appeals very detailed arguments were addressed. The main thrust of these arguments was that when a donation is given to a trust for corpus under the general law, it cannot be treated as the income of the receiving trust. Corpus means the capital of the trust and the capital of the trust cannot be treated as its revenue income either by the income-tax department or by the trust itself, because if, as the learned Commissioner (Appeals) says the trust was to treat the amount received specifically for corpus as its trust fund and to apply it for the revenue purposes, it would be committing a breach of trust and could be hauled up in appropriate proceedings.
10. It was also urged that the assessment has been made protectively and the ITO has disallowed the deduction in the hands of the Escorts Ltd. There cannot be a double disallowance both in the hands of the Escorts Ltd. and assessment in the hands of the assessee of the same amount and such an action would amount to double taxation of the same amount, which is not permissible. Lastly, it was urged that the 1AC having given the directions under Section 144A on 1-2-1980 not to treat the sum of Rs. 10,01,000 as the income of the trust without giving the assessee an opportunity of being heard, reversed that directions by letter dated 6-3-1980. In doing so he had contravened the mandatory provisions of Section 144A and also the general principle of an opportunity of being heard, being given to the affected party before an order adverse to it is passed. Detailed arguments were advanced in this respect. Though this point was not urged before the Commissioner (Appeals) and does not directly arise out of his order, the contention was that the lAC's direction dated 6-3-1980 was invalid and in the event of our being inclined to uphold the rinding of Commissioner (Appeals) that the amount was otherwise taxable, the matter would have to be sent back to the IAC for giving the assessee an opportunity of being heard on the direction dated 6-3-1980 in respect of which the assessee has right to be heard. The learned departmental representative in reply relied on the order of the Commissioner (Appeals) and particularly stressed the point that what was received by the assessee-trust was its income and as income it should be assessed.
11. We have considered the rival contentions. The main point at issue is whether the sum of Rs. 1,000 and Rs. 10 lakhs received by the assessee-trust from Escorts Ltd. in the assessment year 1977-78 and Rs. 20 lakhs in the assessment year 1978-79, is a revenue receipt in its hands and, therefore, taxable. The assessee-trust, as is clear, is not a religious or charitable trust. The provisions of Sections 11, 12 and 13 of the Act do not, therefore, apply to it. There are no guidelines in the Act as to how donations to the private discretionary trust like the assessee, particularly when they are specifically given and accepted for forming part of the corpus, are to be treated. We have, therefore, to be guided by the general principles for taxation of income and the connotation of income. We may point out that no authority has been cited before us as covering a case like this and we have not come across any direct decision either. We have, therefore, thought it fit to start from first principles.
12. Corpus has not been defined in the Act. According to the Oxford Dictionary 'corpus' means 'capital sum originally lent or invested'.
According to Webster's Dictionary it means 'the principal of a fund or estate as distinct from income or interest'. According to Osborn's Concise Law Dictionary, it means 'the capital of a fund as contrasted with income'. In Random House Dictionary of the English Language the meaning of corpus is 'a principal or capital sum as opposed to interest or income'.
13. Since the word 'corpus of the trust' appears in Section 12, the matter as to the meaning of 'corpus' came for consideration before the Courts in India. In Sri Dwarkadheesh Charitable Trust v. ITO  98 ITR 557 (All.), corpus was equated with capital.
14. The next question that falls for consideration is whether a donation given to the trust, specifically with a condition that it shall form part of the 'corpus' can be treated as the income of the trust. Generally speaking, the Indian Income-tax Act taxes income and not the capital. The learned departmental representative argued that every thing that 'comes in' or is 'received' by the assessee is its income and what is income is taxable. The proposition is, in our opinion, too widely stated to be accepted. We may in this regard refer to the decision of the Supreme Court in Parimisetti Seetharamamma v.CIT  57 ITR 532. In fact it would be wrong to say that every receipt is taxable under the Act unless it is specifically exempted by any of its provisions.
15. Section 12 deems voluntary contributions received by a trust created wholly for charitable or religious purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust) to be the income of the trust from property held under the trust.
This section recognizes a basic principle that contributions specifically made with the direction that they shall form part of the corpus of the trust cannot be treated as its income. Section 2(24) defines income. Sub-clause (iia) which reads as follows was introduced in it with effect from 1-4-1973: (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 a specific direction that they shall form part of the corpus of the trust or institution.
The definition is indeed inclusive but unless under general principles governing taxation of income, it could be said that donations specifically for corpus of the trust can be treated as income, it would not be possible to hold that donations received by the trust in this case were its income. Introduction of Sub-clause (iia) in the definition of income under Section 2(24) clearly shows that but for the introduction of this Sub-clause voluntary contributions to religious or charitable trust could not be treated as income under the Income-tax law. Even then there is no mention in Section 2(24) of voluntary contributions received by a non-religious or non-charitable trust and the obvious conclusion would be that they cannot form part of the taxable income of the receiving trust. That apart, the fact that even in the deeming provision introduced vide Sub-clause (iia) in Section 2(24), the voluntary contributions received by a religious or charitable trust with specific direction that they shall form part of corpus are excluded from the definition of income, would lead to the inevitable conclusion that the voluntary contributions with a specific direction that they shall form part of the corpus cannot be treated as 'income' under the Act.
16. According to Halsbury's Laws of England, third edition, Vol. 20, page 12, it is the quality of the receipt in the hands of the recipient, which is to be regarded in determining whether it ranks as income. Applying this criteria, the assessee-trust received these amounts as its capital or corpus and, therefore, it cannot be treated as its income. As we shall hereafter demonstrate, the learned Commissioner (Appeals) was in error in observing that it was open to the assessee to utilise these amounts received specifically as corpus, as if it was its income.
17. On the same volume of Halsbury's Laws of England, it is laid down that: Gifts or voluntary allowances are not income in the hands of the recipient unless they are attached to and form part of the emoluments of an office, employment or vocation. (p. 422) Even applying these principles, the amounts received by the assessee from the author of trust cannot be treated and taxed as its income.
18. Voluntary contributions means money 'gifted, given gratuitously without consideration and does not mean money paid willingly without compulsion'-Taxation of Charitable & Religious Trusts by B.K. Shroff, C.A., 1979 edition, p. 132. Thus a voluntary contribution is in law treated as if it is a gift. A gift cannot be treated and assessed as income in the hands of the recipient for as a gift it would be application of the donor's income.
19. On page 217 of S.P. Pahwa's Taxation of Charitable Trusts, 1980 edition, it is stated that the corpus cannot be used for meeting normal and day to day expenses" of the trust. Doing so, would defeat the character of its being corpus. On the same page, the learned author observes that: Another important thing to be observed regarding corpus is about its complete exemption without any condition or restrictions.
20. According to the Allahabad High Court decision in Dwarkadheesh Charitable Trust's case (supra), where a donor-trust makes a gift on the express condition that the subject-matter will form part of corpus and it is accepted as such, the donee-trust would be guilty of misapplication of its assets, if it spends the donation as if it were its income and it could be restrained in suitable proceedings from committing breach of trust. The Commissioner (Appeals) was, therefore, in error in holding that the assessee could treat the donation as if it were its income.
21. Thus on general principles the conclusion we have arrived at is that: 1. A voluntary contribution to a trust is not its income under the general law.
2. A voluntary contribution with a specific condition that it shall form part of its corpus is not its income which can be brought to tax.
22. In support of our conclusions, the Allahabad High Court ruling in Dwarkadheesh Charitable Trust's case (supra) clinches the issue. That was indeed a case of inter-trust donation and the trusts were for religious and charitable purposes. However, their Lordships have come to their conclusion on the basis of general principles as to what is 'income' or 'corpus' and in spite of the fact that Section 12(2) deemed inter-trust contributions or donations as if they were income derived from property for purposes of Section 11, their Lordships held that contributions made and received specifically to form part of the corpus of the receiving trust cannot constitute income of the receiving trust.
Their Lordships observed as follows: In tax jurisdiction there is a well-settled and well-known distinction between 'income' and 'capital'. Generally speaking, the Income-tax Act does not tax capital; it is confined to income.
Capital is dealt with by the Wealth-tax Act.
If in law a voluntary contribution constitutes or is deemed to be capital in the hands of the receiving trust, it will not be a voluntary contribution which is income in its hands. Such a contribution will not be covered by Sub-section (1) of Section 12 and so also not by Sub-section (2).
Normally, if a charitable trust makes a gift of property which constitutes its own capital or corpus, it will be income in the hands of the receiving trust., The receiving trust will be free to apply or spend the property which is the subject-matter of gift for any of the purposes for which it can spend money or property; though the property was capital in the hands of the donor trust, it will be deemed to be income in the hands of the receiving trust. But, if the donor trust makes the gift on the express condition that the subject-matter will constitute capital or corpus of the receiving trust and the donee-trust accepts the gift or donation subject to the condition that it will form part of the capital or corpus of the donee-trust, the subject-matter of the donation becomes part of the corpus or capital of the donee-trust. In such a case the subject-matter of the donation will not constitute, or be deemed to be, the income of the receiving trust. There is no law which prohibits such a transaction. A bilateral contract to that effect is perfectly valid and enforceable. If, in spite of it, the receiving trust spends the donation as if it were its income, the receiving trust would be guilty of misapplication of its assets and could be restrained in suitable proceedings from committing breach of trust.
The fact that a contribution made with a specific direction that it shall form part of the corpus of the donee-trust is valid in law, is corroborated by the amendments made by Parliament to Section 12 by the Finance Act 16 of 1972, whereby Parliament expressly excluded contributions 'made with a specific direction that they shall form part of the corpus of a trust or institution' from being deemed to be income derived from property for purposes of Section 11.
In this view, voluntary contributions made with a specific direction that they shall form part of the corpus of the donee-trust and accepted by the donee-trust as such, are not voluntary contributions which constitute income within the meaning of Section 12(1) and such contributions are not within the purview of Sub-section (2). (p.
561) Thus this ruling against which Special Leave Petition was refused by the Supreme Court, clinches the issue in favour of the assessee, that what it received from Escorts Ltd. towards its 'corpus' cannot be treated as its income.
23. The learned Commissioner (Appeals) thought that merely because the contributions were expected to be received every year, they were in the nature of income. Regularity of receipt from year to year is one of the attributes of income but merely because a sum is received every year, it does not become income. In the instant case, the receipt towards corpus being 'capital receipt', in the eye of law it cannot become.
income merely because it is received every year. If and when the contribution is received without its being specifically earmarked for 'corpus', the question of its being treated as 'income' might arise but not so in these years.
24. The learned Commissioner (Appeals) has observed that the sum of Rs. 1,000 which was the initial contribution with which the trust was created was not specifically towards the 'corpus' of the trust. Maybe the same words were not used as were used in case of later contributions but the sum with which a trust is created would normally be assumed to be its corpus.
25. So far as Clause 27 is concerned, it gives the trustees the right to decide what is capital or income only 'in the case of doubt'. The trustees would clearly be committing a breach of trust if they were to treat a contribution given and received specifically towards corpus as its income by applying Clause 27. The conclusion of the Commissioner (Appeals) in para 5(1) is, therefore, clearly wrong.
26. In para 6 the conclusions of the learned Commissioner (Appeals) that the contributions are income are clearly wrong for reasons given by us already. The rulings relied upon are clearly inapplicable to the case in hand. In para 6.1 reliance is placed on the decision of the Supreme Court in Bhagwan Dass Jain v. Union of India  128 ITR 315 but that ruling is altogether in a different context, i.e., meaning of income in entry No. 82, List I of the Seventh Schedule of the Constitution. That ruling is of no assistance to the revenue.
27. On behalf of the assessee a number of rulings were cited but we have discussed already only those which were relevant to the point at issue.
28. On the basis of the above discussion, we are of the opinion that the learned Commissioner (Appeals) was in error in holding that the sums of Rs. 1,000 and 10 lakhs in the assessment year 1977-78 and Rs. 20 lakhs in the assessment year 1978-79 were its income liable to tax.
His orders are reversed.
29. There is another reason why these assessments cannot be allowed to stand. The IAC directed that these assessments should be made on a precautionary basis and the contributions should be disallowed in the hands of the donor Escorts Ltd. Clearly, the IAC envisaged that there should not be double taxation, i.e., disallowance in the hands of the donor and taxation in the hands of the receiver, i.e., the assessee.
Now that the amount donated to the assessee-trust has been disallowed in the hands of the donor, the department has no justification to press on with this assessment. Therefore, on this ground also, this assessment is unsustainable in law.
30. The learned counsel for the assessee raised another point before us though it was not part of the ground of appeal, i.e., that principles of natural justice were violated and also the statutory requirements of proviso to Section 144A(1) ignored by the IAC in this case so that the assessment order becomes invalid in law. As is clear from the order of the Commissioner (Appeals), the IAC had given directions under Section 144A on 1-2-1980 which read as follows: Section 2(24) gives the definition of income which is of course inclusive definition. This section has been amended w.e.f. 1-4-1973 to include therein Clause (iia), [about] voluntary contributions received by a trust created wholly or partly for charitable or religious purposes. Even in this definition the contributions made with a specific direction to form part of the corpus have been taken out of the definition of income. Firstly the trust under consideration is not a trust created wholly or partly for charitable or religious purposes as it is discretionary private trust and secondly Escorts Ltd. have specifically stated that the contributions were made by them to form as corpus of the trust. In fact in this regard a copy of the resolution passed by the board of directors in their meeting held on 19-9-1977 is also available on record. Considering these facts I hereby direct that the contributions received by the trust for these two years will not be treated as income of the trust.
Thus the IAC decided that the contributions received by the assessee-trust during these two years will not be treated as income of the trust. It appears that the ITO was not satisfied with this direction and persisted with his view that this amount of donation to the assessee-trust should be brought to tax as income. He accordingly, addressed another letter dated 4-3-1980 to the IAC seeking reconsideration of the matter. The IAC modified his directions by letter dated 6-3-1980 and approved the proposed action of the ITO.Thereafter, the ITO sent a draft assessment order to the assessee and with its objection forwarded the matter to the IAC who approved of the protective assessment of the amount in the hands of the assessee, with the directions to the ITO, assessing the company Escorts Ltd., to disallow the same in its hands.
31. The contention of the learned counsel for the assessee was that the IAC changed the directions under Section 144A without giving the assessee an opportunity of being heard as required by the proviso to Section 144A. This direction was undisputably prejudicial to the assessee; therefore the direction under Section 144A became invalid.
That being so it was urged either we should quash the proceedings altogether or alternatively, we should restore the matter before the IAC at the stage at which the illegality intervened in view of the Supreme Court decision in the case of Guduthur Bros. v. ITO  40 ITR 298. As against this the learned departmental representative pointed out that the assessee got a proper opportunity of being heard under Section 144B and we should not take a hypertechnical view to nullify the assessment already made.
32. We have considered the rival contentions. Though a number of rulings were cited on the principle of natural justice and photostat copy of the Supreme Court decision in the case of S.L. Kapoor v.Jagmohan (sic) was also filed. We do not propose to refer the same because in the instant case there is also statutory injunction under the proviso to Section 144A that no direction which is prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard. The contravention of this proviso is not in dispute in this case. The question arises as to what should be done in a case like this. Normally we would have restored the matter to the IAC at the stage at which the illegality supervened so as to give the assessee an opportunity of being heard on the point at issue before giving a direction prejudicial to the assessee. But in the instant case we notice that doing so would only be an idle formality and would hardly be of any benefit to the assessee. The reason is that the assessee did get an opportunity of being heard when the draft assessment order with the assessee's objection thereto was forwarded to the IAC under Section 144B. Thus, in fact the assessee did get an opportunity of being heard though there was initially a contravention of proviso to Section 144A. On the facts on record and looking to what has actually transpired under Section 144B, we are of the opinion that the assessee cannot complain of any actual injustice in this case. We have been influenced in this decision also by the fact that on merits we have decided the appeals in favour of the assessee.
33. In the result the appeal by the assessee are allowed and the contribution of Rs. 10,01,000 in the assessment year 1977-78 and Rs. 20 lakhs in the assessment year 1978-79 is deleted from the assessment.
34-35. [These paras are not reproduced here as they involve minor issues.]