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P. Janardhan Reddy Memorial Trust Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Hyderabad
Decided On
Judge
Reported in(1984)7ITD832(Hyd.)
AppellantP. Janardhan Reddy Memorial Trust
Respondentincome-tax Officer
Excerpt:
.....as well as the provisions of section 11 of the act which provide for exclusion from the total income of income derived from property held by a trust if requisite conditions are satisfied. in the light of the various contentions put forth, we would proceed to decide the case giving our reasons for the conclusion which we are arriving at.7. first of all, we will assume that the assessee is not a trust to which the provisions of section 11 apply. we have set out the break up of the income of rs. 51,921. this includes gross dividend income received from acc of which two items were deferred dividends payable after the close of the accounting period and of which we have given particulars earlier. normally, a question would have arisen whether the deferred dividends could be assessed in.....
Judgment:
1. This appeal is by the assessee which, as the name suggests, is a trust. It is also not in dispute that the trust is one which has been created wholly for religious or charitable purposes. The assessment year involved is 1976-77. The assessee had filed a return in the status of an AOP in which the total income shown was Rs. 51,920. Accompanying the return was a letter which stated that in the financial year 1-4-1975 to 31-3-1976, which was the accounting period, relevant to the assessment year 1976-77, now under consideration, the actual receipts came to only Rs. 38,362 and the amount spent for the purposes of the trust including expenses and some tax payments came to Rs. 35,140 and, therefore, there was no tax liability for the assessment year 1976-77.

2. The break up of the amount of Rs. 51,920, which was shown in the return of income, was as under : Tata Iron 201 E 384.00 1,285 Tata Iron 201 E 384.00 1,284 ACC 1826 E 5,880.00 25,564 Modern Mills 1000 E 575.00 2,500 The AMCP Company 1 E 3.45 15 _________ _______ The break up of the amount said to have been expended of Rs. 35,140 was as under :Amounts utilised and spent for Rs. Rs.the purposes of the trust-Scholarships paid 21,600Income-tax (disputed) paid 13,300Challan for revised petition 25Expenses for the auditor to gothe payment of the disputed tax 215 35,140 ______ ______ At this stage, it is relevant to point out that the actual receipts of dividends from Associated Cement Companies Ltd. (ACC) shown at Rs. 7,592 is the net figure. The gross amount of dividends was Rs. 9,850 and tax deducted at source was Rs. 2,268. It has to be further clarified that the ACC had declared aggregate gross dividends of Rs. 25,564 on 20-12-1975 but out of this only Rs. 9,860 was dividend payable immediately. Rs. 7,851 was the first deferred dividend payable on 5-7-1976 together with interest at 8 per cent and another amount of Rs. 7,851 was the second deferred dividend payable on 5-7-1971 together with interest at 8 per cent. These deferred dividends were declared having due regard to the provisions of the Companies (Temporary Restrictions on Dividends) Act, 1974, read with the Companies (Temporary Restrictions on Dividends) Amendment Act, 1975.

3. In making the assessment, the ITO took the figure of gross dividends at Rs. 25,564 from ACC and accepted the total income of Rs. 51,921 of which he have given the break up earlier, except for a small addition of Rs. 766. The assessment framed on 6-7-1977 does not contain any discussion on the claim of the assessee that no tax was payable by it.

4. There was an appeal to the AAC. This was decided ex parte as none had appeared on behalf of the assessee. The AAC broadly adverted to the facts which we have set out earlier and held that the assessee is entitled only to deduction of the expenditure of Rs. 21,600 on scholarships. He, thus, reduced the total income assessed of Rs. 52,690 by Rs. 21,600.

5. The assessee is in appeal before us and contends in the grounds of appeal that the assessee should be declared as not liable to tax.

6. We have heard at length the learned counsel for the assessee and the learned departmental representative both of whom took us through the relevant provisions of the Income-tax Act, 1961 ('the Act') such as Sections 56 to 58 of the Act under which income from other sources is to be computed, as well as the provisions of Section 11 of the Act which provide for exclusion from the total income of income derived from property held by a trust if requisite conditions are satisfied. In the light of the various contentions put forth, we would proceed to decide the case giving our reasons for the conclusion which we are arriving at.

7. First of all, we will assume that the assessee is not a trust to which the provisions of Section 11 apply. We have set out the break up of the income of Rs. 51,921. This includes gross dividend income received from ACC of which two items were deferred dividends payable after the close of the accounting period and of which we have given particulars earlier. Normally, a question would have arisen whether the deferred dividends could be assessed in this year having regard to the ratio of the judgments of the Supreme Court in J. Dalmia v. CIT [1964] 53 ITR 83 and Ramesh R. Saraiya v. CIT [1965] 55 ITR 699. This is because it can be contended that deferred dividends were not unconditionally made available to the assessee in the year of account in which they were declared. However, in view of certain provisions of the Companies (Temporary Restrictions on Dividends) Amendment Act, the entire dividends would become assessable. Section 4 of the aforesaid Act-[1975] 100 ITR (St.) 3-provides that the provisions of the Act apply in relation to the whole of the dividend declared as they apply in relation to dividend which is declared but payment of no part of which is deferred. Therefore, by a fiction of law, though a part is deferred, the entire dividend for the purposes of the Act [barring exception provided in Section 10 of the Companies (Temporary Restrictions on Dividends) Amendment Act] would become includible. The exception in Section 10 is only one in the matter of recovery of tax, i.e., the assessee is not to be treated in default with reference to any tax due on deferred dividends till ,35 days after the instalment of such deferred dividend becomes due. Hence, in view of the aforesaid deeming provision, the inclusion of the entire amount of dividends of the assessee is in order and where the assessee is a trust to which the provisions of Section 11 of the Act were not applicable, total income as computed and the assessment as made would be unexceptionable.

8. We now come to the provisions of Section 11. According to the assessee they should be declared not assessable to tax. The question that arises is if , the income computed in terms of the provisions of the Act, assuming the assessee to be a trust to which the provisions of Section 11 were not applicable, was as much as Rs. 51,921. If the assessee has spent only a lesser amount, can the assessee get exemption in respect of its full income The AAC was under the impression that since only Rs. 21,000 were expended on scholarships, exemption would be admissible only to that extent. There was further tax payment of Rs. 13,300 though referable to the earlier assessment years, which was paid in this year. The AAC apparently considered that this amount was not spent for the purposes of the trust and, therefore, did not exclude this amount of income. The plea of the assessee before us is not only for exclusion of the further amount of Rs. 13,300 which represents tax payment in the year of account and which was not allowed as a deduction by the AAC, but that the assessee should be fully exempted from tax.

Fortunately for us, we now have the decision of the Andhra Pradesh High Court in the case of CIT v. Trustee of H.E.H. The Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378, which in our view, provides a complete answer to the issues before us. The relevant provisions of Section 11 as reproduced in the judgment read as under : 11. (1) Subject to the provisions of Sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income- (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated for application to such purposes in India, to the extent to which the income so accumulated is not in excess of twenty-five per cent of the income from the property or rupees ten thousand, whichever is higher ; (b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India ; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent of the income from the property held under trust in part....

(2) Where the persons in receipt of the income have complied with the following conditions, the restriction specified in Clause (a) or Clause (b) of Sub-section (1) as respects accumulation or setting apart shall not apply for the period during which the said conditions remain complied with- (a) such persons have, by notice in writing given to the ITO in the prescribed manner, specified the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years ; (b) the money so accumulated or set apart is invested in any Government security as defined in Clause (2) of Section 2 of the Public Debt Act, 1944 (XVIII of 1944), or in any other security which may be approved by the Central Government in this behalf.

(3) Any income referred to in Sub-section (1) or Sub-section (2) as is applied to purposes other than charitable or religious purposes as aforesaid or ceases to be accumulated or set apart for application thereto or is not utilised for the purpose for which it is so accumulated in the year immediately following the expiry of the period allowed in this behalf shall be deemed to be the income of such person of the previous year in which it is so applied, or ceases to be so accumulated or so set apart or, as the case may be, of the previous year immediately following the expiry of the period aforesaid.

(4) For the purposes of this section 'property held under trust' includes a business undertaking so held and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the ITO shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment ; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes and accordingly chargeable to tax within the meaning of Sub-section (3).(p. 383) With reference to the aforesaid provisions, their Lordships have observed : What was contended by Mr. Anjaneyulu, the learned counsel for the assessee, is that in the above section the reference is to income and where a trust also holds a business undertaking, the income accruing from the business undertaking is liable to be determined by the ITO in accordance with the provisions of this Act. It is common ground that this trust property does not hold any business undertaking. Thus, Sub-section (4) of Section 11 of the Act is not at all attracted. But, as contended by Mr. Anjaneyulu, only to the limited extent of finding out the mode of determination of the income of the trust, by way of contrast, reference can be had to this Sub-section. Undoubtedly, Sub-section (4) of Section 11 of the Act, specifically lays the mode of determination of the income of the business undertaking of a trust. A similar provision is not to be found with regard to the other income of the trust. By an inferential process, it can be said that that mode of determination by the ITO is only restricted to the income of the business undertaking....

Impliedly excepting the income with regard to the business undertaking as would be assessed by the ITO, the income that has to be computed with regard to a trust is one based on the accounts of the trust. Thus, giving the full effect of Sub-section (4) of Section 11 under which the power to determine the income by the ITO is limited only to business undertakings of a trust, the income of the trust to be determined could be based only on the accounts of the trust.... (p. 384) Their Lordships have clarified the import of the provisions of Section 11(4) vis-a-vis the other Sub-sections of Section 11. Section 11(4) clearly provides that where the income of a business undertaking held by a trust is computed in accordance with the provisions of the Act relating to assessment and income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes and would, accordingly, be chargeable to tax. Therefore, had the total income computed in the present case been from a business undertaking, then the difference between Rs. 51,920, which is the total income computed and the amount actually spent by the assessee of Rs. 35,140 (assuming all were admissible outgoings for the purposes of the trust) would have fallen to be taxed. But, the income in the present case is not from business. It is from dividends assessable under the head 'Income from other sources'. There is no provision obtaining, as in Section 11(4), which enjoins that for computing the income under the head 'Income from other sources' the provisions of the Act have to be applied for determining the quantum of income derived for purposes of Section 11 and if there is an excess of what would otherwise have been the quantum of assessable income over income as per the books, such excess should be brought to tax. It is in the absence of such. a provision that their Lordships have said that by an inferential process, it has to be concluded that the special mode of determination by the ITO is restricted only to the income of a business undertaking, thereby impliedly accepting that income with regard to a business undertaking for determining the adequacy of expenditure for the purposes of the trust in terms of Section 11 would be taken as assessed by the ITO, whereas all other income has to be taken only on the basis of the accounts of the trust for the purposes of determining such adequacy of expenditure. We, therefore, have to go to the accounts of the trust in the present case as there is no business undertaking and we find that the gross receipts of the year came to Rs. 38,361 as culled out from the consolidated bank and cash accounts (total incomings Rs. 41,076 excluding opening balance Rs. 2,715). The gross outgoings are comprised of Rs. 21,600 in respect of scholarships paid.

Rs. 13,300 in respect of income-tax paid in the year, Rs. 215 miscellaneous travelling expenses and Rs. 25 for a revision petition.

The balance is only Rs. 3,221. As far as the item of Rs. 21,600 is concerned, the AAC has already allowed a deduction and the revenue is not in appeal. Regarding the amounts of Rs. 215 and Rs. 25 there can be no dispute that they were spent for the purposes of the trust. The amount remaining is only the tax payment of Rs. 13,300. Here again, ws have the direct authority of the judgment of the Andhra Pradesh High Court already referred to, wherein their Lordships have observed : ... It is true that payments on account of income-tax and wealth-tax are not expenditure by themselves for the purpose of the trust. But it can hardly be disputed that such expenses are incidental to the carrying out of charitable purposes. It is an incidence of the income or the accumulation of the income of the trust....(p. 387) Therefore, the tax payment of Rs. 13,300 is also application of income for charitable purposes in India. The assessee has, therefore, applied Rs. 35,140 out of income derived from property in the year as computed for purposes of Section 11 of Rs. 38,361. We may clarify, the amount of deferred dividends cannot represent income 'derived' from property in the year of account. Such income was 'derived' only on the dates when it was made available to the assessee which fell subsequent to the accounting year because the term 'derived' is not synonymous with mere declaration when availability of funds is postponed under the resolution granting the dividends itself. The surplus is, thus, only Rs. 3,221 and the application of income for charitable purposes, therefore, does not fall short of 75 per cent of income derived in the year. Therefore, the entire income of the assessee becomes non-liable to tax. The question does not arise of bringing to tax the difference between Rs. 35,140 and the total income computed of Rs. 51,920, since there is no income included in the total income which is from a business undertaking in which event alone the question of taxing such income would have arisen.

9. The result is, the assessee is not liable to tax for the assessment year 1976-77. The appeal is allowed.


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