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income-tax Officer Vs. Shri Ram Memorial Foundation - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Delhi
Decided On
Judge
Reported in(1984)9ITD655(Delhi)
Appellantincome-tax Officer
RespondentShri Ram Memorial Foundation
Excerpt:
1. this appeal has been preferred by the revenue against order dated 9-10-1981 of the commissioner (appeals).2. 1977-78 is the assessment year concerned. calendar year is the previous year. the assessee is an institution assessed in the status of aop and with the aid of section 144b of the income-tax act, 1961 ('the act') provisions. assessment was finally completed by the ito as per order dated 6-9-1980 determining total income at rs. 16,05,050. the assessee had, on the other hand, claimed exemption under section 11(1)(a) of the act in respect of its entire income of rs. 24,05,200.said income comprised two items, namely, receipts amounting to rs. 24 lakhs from delhi cloth & general mills ltd. ('dcm') by way of donation for application to charitable purposes and rs. 5,200, interest.....
Judgment:
1. This appeal has been preferred by the revenue against order dated 9-10-1981 of the Commissioner (Appeals).

2. 1977-78 is the assessment year concerned. Calendar year is the previous year. The assessee is an institution assessed in the status of AOP and with the aid of Section 144B of the Income-tax Act, 1961 ('the Act') provisions. Assessment was finally completed by the ITO as per order dated 6-9-1980 determining total income at Rs. 16,05,050. The assessee had, on the other hand, claimed exemption under Section 11(1)(a) of the Act in respect of its entire income of Rs. 24,05,200.

Said income comprised two items, namely, receipts amounting to Rs. 24 lakhs from Delhi Cloth & General Mills Ltd. ('DCM') by way of donation for application to charitable purposes and Rs. 5,200, interest income received from the said very party.

3. During the previous year under consideration, the assessee had donated two sums of Rs. 12 lakhs each in favour of (i) Bhartiya Kala Kendra Trust, and (II) Indian National Theatre Trust. In both the cases donations had been made purportedly in terms of and pursuant to the assessee's resolution dated 18-2-1975 passed in the earlier previous year (copy at pages 22 onward of the assessee's compilation). Similar donations had presumably been made by the assessee to the said two parties also during the previous year ended 31-12-1975. One feature of these donations was that each donee was necessarily to appropriate Rs. 8 lakhs (out of each donation received) to its corpus of the trust and only the balance Rs. 4 lakhs was to be applied to purposes proper of the concerned donee-trust/institution. Whereas for the preceding year, the assessee was, according to its version, held entitled to full benefit of Section 11(1)(a) as if the entire amounts donated to both the said parties had constituted application of the assessee's income towards charitable purposes. For the previous year under consideration, however, the ITO took the view that the portions of the donations which were, according to the assessee, to form part of the corpus of the donee-trust/institution could not be said to be the income applied by the assessee towards its charitable purposes. The ITO completed the assessment accordingly.

4. Regarding the interest income of Rs. 5,200 received from the DCM, the ITO found that "the said party had within the meaning of Section 13(3)(b) of the Act made a substantial contribution to the assessee-institution up to the end of the previous year under consideration and that, hence, the prohibition as contained in Section 13(1)(c) was attracted. The ITO, accordingly, held the said sum to be taxable despite Section 11(1)(a).

5. The assessee went in appeal to the Commissioner (Appeals). The Commissioner accepted the assessee's contention that sums of Rs. 12 lakhs each, donated by the assessee to the said two parties with the reservation that Rs. 8 lakhs was by each donee party, to be made corpus of the donee-trust should be held as incomes applied by the assessee-institution to its charitable purposes.

6. Further, the Commissioner vide para 6 of his order held that the interest income of Rs. 5,200 (minus auditor's fee of Rs. 150) was not taxable, inasmuch as the sum on loan of which the assessee-institution had earned the interest in question, could not be said to have been lent without adequate security or adequate interest. He also noted that in the past similar interest receipts had been held to attract exemption from tax under Section 11(1)(a).

7. Being aggrieved by the Commissioner (Appeals) findings on the question of taxability of incomes of Rs. 16 lakhs and Rs. 5,050 as aforesaid, the revenue has come up in appeal.

8. So far as taxability of interest income by virtue of exception contained in Section 13(1)(c) is concerned, the revenue relied on the presumption arising under Section 13(2)(a) inasmuch as the applicability of Section 13(3)(b) to DCM was not in dispute. Section 13(2)(a) runs as under : (2) Without prejudice to the generality of the provisions of Clause (c) of Sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in Sub-section (3),-- (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in Sub-section (3), for any period during the previous year without either adequate security or adequate interest or both ; 9. In the present case, the learned departmental representative did not dispute that the interest received by the assessee at the rate of 9 1/2 per cent per annum was adequate. He only submitted that the loan had not been given by the assessee-institution to DCM against adequate security. On this aspect the learned Counsel for the assessee submitted that the DCM was financially a sound party and that the said party was able to command public deposit to the tune of several crores because of its integrity and financial soundness. It was also submitted that share capital and reserve of the DCM totalled to several crores throughout the previous year under consideration. According to the assessee's learned Counsel, the financial soundness of the party to whom the loan had been given by the assessee-institution was enough consideration to take a case out of the ambit of the provisions of Section 13(2)(a). We are unable to agree. Expression 'adequate security' is to be attributed its ordinary meaning, namely, pledge, mortgage, surety, guarantee, etc.

If that were not the intention of the Parliament in wording Section 13(2)(a), as presently worded, the Parliament would have included in the said provision the mention of sound finances of the party concerned. The assessee fails.

10. As regards the question whether the impugned amount of Rs. 16 lakhs being the income of the assessee-institution could be said to have been applied by the assessee to its charitable purposes, admitted facts are that during the previous year ended 31-12-1976, a contribution of Rs. 12 lakhs each was made by the assessee to Bhartiya Kala Kendra Trust and Indian National Theatre Trust. This contribution was made by the assessee out of the grant of Rs. 24 lakhs, which the assessee had received from DCM during the said previous year itself. Out of the said contribution of Rs. 12 lakhs each by the assessee to the aforesaid two trusts, Rs. 8 lakhs each were towards corpus of the respective trusts and Rs. 4 lakhs each only were for those trusts' recurring expenditure.

11. At this stage we set out the text of Section 11(1)(a) and Section 12 of the Act as standing on 1-4-1977 : 11. Income from property held for charitable or religious purposes--(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 or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property ; 12. Income of trusts or institutions from contributions.--Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of Section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and Section 13 shall apply accordingly.

12. Reading of Section 11(1)(a) would show that the said provision provides for exemption from tax of income having a certain quality, namely, income derived from property held under trust wholly for charitable or religious purposes. Income bearing the said quality is, however, not exempt from tax in all the cases. One basic requirement for exemption of the income of the said quality is that it is exempt 'to the extent to which such income is applied to charitable purposes by the assessee concerned'. Lastly, over and above the extent to which income of such quality is applied by the assessee concerned to its charitable purposes in India, income of such quality would also be exempt from tax, if the balance income not exceeding twenty-five per cent is either accumulated by the assessee or set apart by the assessee for application after the expiry of the previous year under consideration to its charitable purposes. In the instant case, assessee is admittedly not seeking the benefit of accumulation or setting apart of twenty-five per cent or less of its income derived from property held under trust for charitable purposes. In other words, for claiming exemption, the assessee is relying on only the first limb of Section 11(1)(a) and is contending that the entire income of Rs. 24 lakhs donated by the assessee to the said two trusts should be held to have been applied to its charitable purposes. As indicated earlier, according to the department's version, only Rs. 8 lakhs of the said sum of Rs. 24 lakhs has been applied by the assessee-institution to its charitable purposes during the previous year under consideration.

13. To properly appreciate the fact of transfer of impugned Rs. 16 lakhs to the two donee-trusts, it would be necessary to take into consideration the provisions of Section 12, as reproduced above. In the light of Section 12 the effect of imposition of condition by the assessee-institution on the two donee-trusts that Rs. 16 lakhs is to form part of their corpus is that in the hands of the donee trusts, said Rs. 16 lakhs does not form part of their income derived from property held under trust and that, hence, said Rs. 16 lakhs would not even attain the quality of income to be considered for exemption in the hands of the donee-trusts. The net result would, therefore, be that so far as Rs. 16 lakhs is concerned, in respect thereof neither any accumulation has been made by the assessee, nor any setting apart has been made by the assessee. It is a clear case of just transfer of Rs. 16 lakhs and not of an application of that sum by the assessee to its charitable purposes. The fact that both the donee-trusts have been created for charitable purposes is in this regard, namely, for determining the question of application of income of the assessee by it towards- its charitable purposes, is just not relevant even if question of identity of charitable purposes of donor assessee and (sic).

14. During arguments Satya Vijay Patel Hindu Dharamshala Trust v. CIT [1972] 86 ITR 683 (Guj.) came to be referred to. In that case no diversion or transfer of income by an assessee to another entity was involved at all. The assessee strongly relied on CIT v. Trustees of the Jadi Trust [1982] 133 ITR 494 (Bom.) and an English ruling IRC v. Helen Slater Charitable Trust Ltd. [1980] 1 All. ER 785. So far as the English ruling is concerned, it should suffice to say that there is no indication before us that in the English law there existed provisions corresponding to Section 12, so as to exclude sums received as contributions with specific direction of their forming part of the corpus of the recipient trust or institution from the scope of income having the quality of being eligible for consideration for exemption from tax. According to CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC), provisions of the Act are to be construed on their own terms without drawing any analogy from the English statute.

15. So far as the Bombay High Court ruling in Trustees of the Jadi Trust's case (supra) is concerned, at the outset, we reproduce the following portion from the editorial headnote : There is a clear indication in Section 12 of the Income-tax Act, 1961, that the trust to which Section 11 applies can make a voluntary contribution to another trust to which also Section 11 applies provided the conditions laid down in Section 11 are satisfied ....

16. Two aspects are relevant. Firstly, that the assessment years relevant in the case before their Lordships of the Bombay High Court were 1969-70 and 1970-71 and at that time the text of Section 12 was factually different from the text as on 1-4-1977. Secondly, in the extracted portion the words 'to which Section 11 applies' refer to a trust/institution created wholly for charitable purposes or in the alternative to income derived from property held under such trust. But the expression 'provided the conditions laid down in Section 11 are satisfied' refers to the satisfaction of the requirement as to actual application of income to charitable purposes either to the extent of 100 per cent or to the extent of 75 per cent or more together with other alternatives as regards accumulation, setting apart, etc., as aforesaid. In the instant case, by excluding the sum of Rs. 16 lakhs from the scope of donee-trusts' income having the quality of being exempt, the scope for further application of the provisions of Section 11(1)(a) in the hands of the donee-trusts for necessary application, subject to scrutiny by income-tax department to charitable purposes of the donee-trusts is clearly ruled out altogether. That being the position, we have no hesitation in holding that the Commissioner's finding merits to be reversed.

17. In passing we would mention in brief that the aspect that for earlier assessment year, the assessee-institution is stated to have got away with such relief need not hold us. Ruling of the Delhi High Court in D.L.F. Housing & Construction (P.) Ltd. v. CIT [1982] 9 Taxman 207 is in point.

1. There were two points of dispute in this appeal. The first was regarding the taxability of sum of Rs. 5,200 as income. The matter is discussed in paragraphs 6 to 9 of my learned brother's order. The interest income involved being small, I have no comments to add.

2. The second point in dispute is the tax treatment of a sum of Rs. 16 lakhs, being part of the contributions made by the assessee-trust to two other trusts. Here I find, perhaps a different view from that taken by my learned brother is worth examining. I need hardly add that I have gone through the order of my learned brother with care and stand considerably benefited by such perusal.

3. The facts are not too involved. The assessee-trust was registered under the Societies Registration Act, 1860, on 30-9-1976. The objects of the assessee-trust are charitable in terms of Section 2(75) of the Act and there is no dispute on this.

4. During the previous year (which ended on 31-12-1976) a contribution of Rs. 24 lakhs was made by the assessee to two trusts, viz., Bhartiya Kala Kendra Trust (Rs. 12 lakhs) and Indian National Theatre Trust (Rs. 12 lakhs). These contributions were made out of an amount of Rs. 24 lakhs which the assessee had itself received from the DCM during the previous year. Out of the contributions of Rs. 12 lakhs each to the aforesaid two trusts, Rs. 8 lakhs each were donated by the assessee-trust with the condition that such contributions form part of the corpus of the donee trusts and shall be utilised for capital expenditure projects only and not on day-to-day working activities.

This is clear from the following extract from Resolution No. 4 passed by the board of governors of the assessee-trust at its meeting held on 18-2-1975 (pages 22 and 23 of the assessee's paper book).

COPY OF RESOLUTION NO. 4 PASSED BY THE BOARD OF GOVERNORS OF SHRIRAM MEMORIAL FOUNDATION IN THEIR MEETING HELD ON 18TH FEBRUARY, 1975 : (i) a lump sum grant of Rs. 16 lakhs be made to Bhartiya Kala Kendra Trust which form part of the corpus of the trust, and shall be utilised for capital expenditure projects only and not on day-to-day working activities.

(i) a lump sum grant of Rs. 16 lakhs be made to the Indian National Theatre Trust which shall form part of the corpus of the trust, and shall be utilised for capital expenditure projects only and not on day-to-day working activities.

(i) out of the proposed lump sum grant of Rs. 16 lakhs each to Bhartiya Kala Kendra Trust and the Indian National Theatre Trust, Rs. 8 lakhs be paid to each of them by the end of February, 1975.

5. There was no dispute before the ITO that the contribution of Rs. 24 lakhs received by the assessee-trust from DCM formed part of its income in terms of Section 12 but exempt under Section 11 subject to the fulfilment of the conditions therein on accumulation or setting apart.

Naturally the ITO raised the query whether the income of the assessee-trust for this year (including the sum of Rs. 24 lakhs deemed to be its income in terms of Section 12) had been applied to charitable purposes ; or accumulated or set apart to the extent and in the manner permitted by Section 11 itself. The assessee wrote to the ITO in the matter on 28-1-1980. It pointed out firstly, that the assessee was specifically authorised under Rule 33 of its rules and regulations to make contributions from its funds to any other trust or society having objects similar to its own, and that it was under the authority of this rule that the said contribution of Rs. 16 lakhs was made (Rs. 8 lakhs to each of the trusts) with the rider that the said amounts were towards the corpus of the donee-trusts. The assessee also pointed out to the ITO in this letter that the two donee-trusts were charitable institutions and were recognised as such under Section 80G of the Act.

It then explained the position in law on the query raised by the ITO as under : The contributions made by our foundation towards corpus of the above trusts are allowable to us under Section 11 of the Act being application of income towards charitable purposes. Section 11 nowhere makes a distinction between a contribution made towards corpus of any other trust or towards recurring expenditure of the other trusts. As far as foundation is concerned, the amounts have been given away by our foundation to be utilised for charitable purposes. Moreover, our foundation has not retained any control over the funds. Therefore, the same amounts to application of income by our foundation for charitable purposes.

It may be stated that the donee-trusts have to utilise the funds and income therefrom only for charitable purposes. In this connection kindly refer to Clauses 7 and 5 of the trust deeds of Bhartiya Kala Kendra Trust and Indian National Theatre Trust, respectively. As per the above clauses, the funds contribute by our foundation have necessarily to be applied by the trusts towards their objects, which are charitable in nature.

From the above discussion it is apparent that the income of our foundation, to the extent of contributions made by our foundation to the two trusts mentioned above, has been applied to charitable objects as per the requirement of Section 11 of the Act.

6. There was a further letter from the assessee to the ITO. This was dated 18-2-1980. This stressed again the assessee's claim that the contribution of Rs. 16 lakhs supra must be taken to have been applied for charitable purposes and went on to elaborate the position as under : The resolution passed by the board of governors of our foundation in their meeting held on 18th February, 1975, sanctioning the above grant is enclosed herewith. It would be observed from the resolution that our foundation had agreed to make the contributions subject to the following conditions : (a) The donee-trusts give an undertaking not to sell, transfer or otherwise alienate the property or utilise the property belonging to them for any purpose other than those specified in their trust deeds.

(b) Name of Sir Shri Ramji is associated with activities of the donee-trusts.

(c) Our foundation will have three nominees in their board of trustees.

(d) The donee-trusts will submit annual accounts and report on the activities every year.

Against the contribution of Rs. 16 lakhs each to Bhartiya Kala Kendra Trust and Indian National Theatre Trust towards their capital expenditure, an amount of Rs. 8 lakhs each was contributed by our foundation during the accounting year ended 31st December, 1976, relevant to the assessment year 1976-77 out of the funds of our foundation. The above contributions were accepted by your predecessor in assessment year 1976-77. The balance contribution of Rs. 8 lakhs each had been made during the accounting year ended 31st December, 1976, relevant to the assessment year in question.

Bhartiya Kala Kendra Trust and Indian National Theatre Trust are charitable institutions recognised under Section 80G of the Income-tax Act, 1961, and contributions made by our foundation towards the corpus of the above trusts are to be utilised by the above trusts for charitable purposes only. Therefore, as far as our foundation is concerned, the amounts contributed to the above trusts have been applied to charitable purposes and are allowable under Section 11 of the Income-tax Act, 1961.

7. Evidently, the ITO was not satisfied with the above claims. He proposed to include the above sum of Rs. 16 lakhs in the total income of the assessee this year for taxation. He said so in his draft assessment order and sent a copy to the assessee. (There was a reference to the IAC under Section 144B on this matter.) The assessee once again raised objections. This was by the letter dated 27-3-1980.

It pointed out there what (according to it) the term 'applied' meant in the context of Section 11(1)(a). It also drew support in this regard from certain judicial authorities.

8. The authorities were not impressed. Following the directions of the IAC, the ITO brought to tax the said sum of Rs. 16 lakhs as income not applied to charitable purposes this year. The said addition was based on the following reasoning : 1. The basic exercise is to see whether in terms of Section 11(1)(a) the said sum of Rs. 16 lakhs was either applied to charitable purposes or accumulated or set apart for application to such purposes as permitted by the section. Enquiry shows that neither was the case here.

2. What is the meaning of the term 'applied' found in Section 11(1)(a) As judicially explained the word means 'actually' applied for and spent on charitable/religious purposes. Of course, even the accumulation permitted under Section 11(1)(a) and Section 11(2) could be looked upon as such application or spending in this regard.

3. The assessee itself could spend the amount on its objects or do so through another trust having similar objects. In other words, donations given to other similar trusts should be for current contingent exepenses of the donee trusts but certainly not for forming part of the corpus of such trusts.

4. Section 12 helps in understanding the correct position in law.

Where a contribution is received as earmarked for corpus, such a contribution will not form part of the income of the donee trust for purposes of Section 11 and the accumulation restrictions will, therefore, not apply. In other words, such 'capital' contributions will not be available to the donee-trusts for meeting their current expenditure at any stage. It follows from this that when such a donation for corpus is made, the donor is directing the donee not to spend that amount and in such circumstances it cannot be said that the assessee-trust spent its income or applied the same to the extent of Rs. 16 lakhs given by them towards corpus.

The ITO, thus, brought to tax the sum of Rs. 16 lakhs holding it to be not applied by the assessee-trust for charitable purposes in the year under consideration. The assessee appealed.

9. The Commissioner (Appeals) did not find it possible to endorse the action of the ITO. He held that the said sum of Rs. 16 lakhs could not be brought to tax in the manner done by the ITO. In coming to this conclusion, he recorded the following : 1. The objects of the assessee-trust are : to establish, promote, maintain and aid educational and research institutions and libraries, grant scholarships, prizes and trophies, make endowments and do all acts, deeds and things to further the cause of learning.

Vide Rule 33, the appellant is also authorised to make contributions from its funds or property to any other trust or society having objects similar to those of the appellant.

2. In pursuance of the aforesaid objects and rules, out of its current year's income the assessee contributed Rs. 8 lakhs each to the corpus of the Indian National Theatre Trust and the Bhartiya Kala Kendra Trust, the objects' of the donee trusts are as under : To promote artistic and cultural expression through drama, music, education and cognate activities.

Promotion of music, dance, drama and cultural and educational activities connected therewith. To establish, support and maintain music, dance, drama and artists, schools and colleges.

3. The above donations were made to the donee trusts with the condition that they shall be utilised only for capital expenditure and the property so acquired would not be sold or otherwise utilised or disposed of for any purpose other than those specified in their respective trust deeds.

4. There is no dispute that the assessee could itself spend its income in furtherance of its objects. The ITO's objection is, in view of Section 12, that the donee trusts were virtually directed by the assessee not to spend the sums of Rs. 8 lakhs each but to retain the amounts as corpus and, hence, the donor also must be taken not to have spent its income on charitable purposes. But this reasoning is wrong.

5. Purchase of assets which are to be utilised in connection with the promotion of charitable objects also represents expenditure incurred for the promotion of charitable objects. This was evident from the decision in the case of Satya Vijay Patel Hindu Dharamshala Trust (supra). In fact the assessee specifically drew the attention of the ITO to this decision in its letter of 18-2-1980.

Unfortunately neither the ITO nor the IAC said anything as to why this decision was not to be followed here. It was held here, if the charitable purpose required for its fulfilment, the purchase of a capital asset and if income is actually applied for the purchase of such capital asset, it will still constitute application of income for a charitable purpose within the meaning of Section 11(1).

6. Section 12 deals with donee trusts and is not helpful in resolving the dispute concerning a donor-trust as in this case. Any contribution made by the donor trust to another charitable trust having similar objects, whether for meeting its day-to-day expenses or for investment in capital assets has to be looked upon as income applied for charitable purposes of donor trust, within the meaning of Section 11.

7. For the assessment year 1974-75 also, there was a similar situation. The assessee had made a contribution of Rs. 9,50,000 to the corpus of Bhartiya Kala Kendra Trust. The only difference in that year was, the contribution was made out of the corpus of the assessee-trust. The assessee contended for the year even this contribution was expenditure incurred in furtherance of the objects of the assessee. The ITO accepted this claim for that year.

In the above view, the Commissioner (Appeals) deleted the inclusion of Rs. 16 lakhs. The revenue is in appeal.

10. Shri R.N. Dave, appearing for the department, relied on the order of the ITO. He reiterated the position taken by the ITO. As regards the assessee, Shri O.P. Vaish, the learned Counsel, referred to the submissions of the assessee before the authorities below. He also relied on the decision in Satya Vijay Patel Hindu Dharamshala Trust's case (supra) and also on the decision in the case of Trustees of the Jadi Trust (supra).

11. I find it difficult to accept the ITO's approach as correct. He has inferred from the language of Section 12 that the assessee-trust has prevented the donee trusts from spending their funds for charitable purposes. Reliance was (I think) rightly placed for the assessee on the Trustees of the Jadi Trust's case (supra). The Bombay High Court considered the language of Section 12 in that case. It held that when a trust which holds property for charitable purposes hands over a donation to another charitable trust, it would amount to an application of income for charitable purposes by the donor-trust. The donor-trust would be entitled to the exemption under Section 11 although it may be necessary to ascertain whether the funds are deliberately being diverted to non-charitable purposes through the medium of a donee-trust. The Court specifically followed in this regard Helen Slater Charitable Trust Ltd.'s case (supra). In the instant case, there is no suggestion from the revenue that the funds in question have been deliberately diverted to non-charitable purposes through the medium of the donee-trusts. The only objection of the ITO is that the donor trust by earmarking the donations for corpus has prevented the donee trusts from applying the funds for charitable purposes. In my view, the ITO's reliance on Section 12 is perhaps misplaced as rightly pointed out by the Commissioner (Appeals).

12. In Satya Vijay Patel Hindu Dharamshala Trust's case (supra) the Gujarat High Court specifically held that the expenditure incurred by the trust there on the construction of a new dharamshala the trustees were empowered under the deed to enlarge the trust property by way of additional construction could not be said to be application to purposes other than charitable purposes of the trust. Though the facts of this case are somewhat different, the learned Counsel for the assessee had referred to this decision to support the point that the donee trusts could well spend (the correct amounts donated by the assessee-trust here) on acquiring capital assets which would promote even the carrying out of the objects of the donee trusts. It is, therefore, difficult to agree with the ITO when he says that the donor trust in earmarking the donations for corpus has virtually blocked the donee trusts from spending the amounts for charitable purposes and that, therefore, such donations cannot be taken to have been applied for charitable purposes by the donor trust.

13. Once the conclusion is reached that the donations towards corpus to the two other charitable trusts amount to application of income for charitable purposes by the donor trust [on the authority of the decision of the Bombay High Court in Trustees of the Jadi Trust's case (supra)], the question of accumulation required by Section 11 does not arise. It cannot, therefore, be argued that the accumulation provisions contained in Section 11 have not been fulfilled with regard to the said donations. As I said before, there is no dispute here that both the donee trusts have been created for charitable purposes. It is probable, (as my learned brother has pointed out in paragraph 16 of his order) that by excluding the sum of Rs. 16 lakhs from the ambit of 'income' in the hands of the donee trusts, there remains no scope for further application of the provisions of Section 11(1)(a) as regards these donee trusts and the revenue will not be in a position, therefore, to bring that aspect under its scrutiny. The remedy for this, however, lies elsewhere perhaps. As the statutory provisions now stands and as judicially interpreted it is difficult to hold that the said donation of Rs. 16 lakhs was not applied for charitable purposes by the assessee-trust here.

14. I also find that the same view as above was taken by the Delhi Bench 'A' of the Tribunal in this very case for the assessment year 1976-77 concerning a donation of Rs. 1 lakh given by the assesses to Shriram Centre for Industrial Relations and Human Resources, the donation being earmarked for the corpus of the donee trust, which was also a recognised charitable trust [IT Appeal No. 3021 (Delhi) of 1980 dated 28-8-1981]. I would, therefore, maintain the Commissioner (Appeals)'s order in this regard.

1. The learned members who heard the appeal, originally, differed on an issue and have stated the point of difference vide their order dated 31-1-1983 as under : Whether the assessee-institution could be said to have applied (within the meaning of Section 11(1)(a) of the Income-tax Act) to its specified charitable purposes the entire amounts of Rs. 12 lakhs each gifted by the assessee to two donee trusts with the specific direction that in each donee's case Rs. 8 lakhs was to form part of the corpus of the respective donee trust Subsequent thereto, the assessee filed a miscellaneous application on the ground that on another issue while the learned Judicial Member had held that the amount of Rs. 5,050 being net interest on Rs. 77,000 deposited by the assessee-trust with DCM was taxable as the investment was hit by the provisions of Section 13(1)(c)(ii), 13(2)(a) and 13(3), the learned Accountant Member had not decided the issue and had merely observed : 'The interest income being small, I have no comments to add'. This, according to the assessee, constituted a patent mistake and the appellate order, therefore, required rectification. The miscellaneous application was heard by the learned Accountant Member, who had heard the appeal originally with another Judicial Member, as the Judicial Member who had heard the appeal originally was, in the meantime, on medical leave for quite some time. The miscellaneous application was heard on 15-6-1983 and the order thereon has been passed by the learned members on 6-7-1983 and 13-7-1983, respectively.

There again, there was difference of opinion between the learned members who have stated the point of difference vide their order dated 28-7-1983 as under : Whether the assessee-trust could be held to have lent the sum of Rs. 77,000 to the Delhi Cloth and General Mills Ltd. without adequate security within the meaning of Section 13(2)(a) of the Act and, hence, the interest income of Rs. 5,200 therefrom was rightly brought to tax by the Income-tax Officer for the assessment year 1977-78 2. The facts have been correctly and elaborately stated by the learned members in their respective orders. For the sake of convenience, I am referring to them in brief. The assessee had received a donation of Rs. 24 lakhs towards its corpus from DCM during the previous year and, as such, this amount was not the assessee's deemed income within the meaning of Section 12. In its turn, the assessee had donated a sum of Rs. 12 lakhs to each of the two charitable trusts, namely, Bhartiya Kala Kendra Trust and Indian National Theatre Trust. As per the stipulations attached to these donations, a sum of Rs. 8 lakhs each was to be appropriated towards the corpus of these trusts and the balance of Rs. 4 lakhs each was to and could be applied for the purposes of the trusts. The dispute has been whether the donation of Rs. 8 lakhs each made by the assessee to the other two trusts towards their respective corpus amounts to application of income in the hands of the assessee-trust for charitable purposes. This is important as, in case it is held that these donations do not amount to application of income for charitable purposes, the assessee-trust will forfeit the exemption to that extent having neither applied the income nor set apart the income in terms of Section 11(1)(a).

The assessee-trust has, admittedly, been receiving a lot of donations from DCM from time to time and, as such, the provisions of Section 13(3)(b) are applicable. During the previous year, the assessee has deposited a sum of Rs. 77,000 with DCM on interest at the rate of 9| per cent per annum. DCM is a financially sound company but the amount has been deposited without any formal security. The rate of interest, it is common ground, is adequate. Section 13(2)(a) lays down that in a case like this, the income forfeits exemption as laid down in Section 13(1)(c) unless the amount is lent not without adequate security or adequate interest or both. The dispute is regarding the purport and scope of the expression 'adequate security' in the context of Section 13(2)(a), i.e., whether it amounts to satisfaction of the trustees as regards the soundness of the debtor or whether, even if the trustees are convinced of the soundness of the investment, any formal overt act other than a mere promissory note, is necessary to constitute adequate security.

3. Shri Wazir Singh, the learned standing counsel for the department, has strongly relied on the order of the learned Judicial Member. In particular, he has laid great emphasis on the fact that the impugned donations of Rs. 24 lakhs by the assessee are out of the amount of Rs. 24 lakhs the assessee received from DCM during the previous year and that if the said sum of Rs. 24 lakhs cannot be treated as the deemed income of the assessee-trust, the donations by the donor trust to the donee trusts to the extent they are towards their respective corpus would not constitute application of income within the meaning of Section 11. In this context, he refers to the scheme and the objects of the restrictions laid down by the Legislature by means of Sections 11, 12(1) and 13. According to him, the interpretation sought to be placed by the learned Accountant Member, if accepted, will result in nullifying the effect of Sections 12 and 13. It is stated that before its substitution by the Finance Act, 1972, with effect from 1-4-1973, Section 12 had a different purpose altogether and the decisions interpreting the said section will have no bearing whatsoever on the interpretation of the section as it now stands. In this regard, the learned standing counsel has placed reliance on the decision of the Bombay High Court in the case of Trustees of the Jadi Trust (supra), the decision of the Supreme Court in the case of H.E.H. Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582, the decision of the Delhi High Court in the case of CIT v. Eternal Science of Man's Society [1981] 128 ITR 456 and the decision of the Madras High Court in the case of CIT v. S. Ramaswamy Iyer [1977] 110 ITR 364. As regards paragraph 11 of the learned Accountant Member's order, it is submitted that Section 12 has, certainly, an impact on Section 11 and the Accountant Member was not right in holding that Section 11 need not take colour from Section 12.

As regards the second point of difference, the learned standing counsel argued that the order passed by the members on the miscellaneous application is wholly without jurisdiction inasmuch as when the learned Accountant Member observed : 'The interest income being small, I have no comments to add.', he had accepted the order of the learned Judicial Member and there was, thus, no difference of opinion on the second issue whatsoever.

4. Dr. Devi Pal, the learned Counsel for the assessee, has, on the other hand, strongly relied on the order of the Accountant Member. He stated that both the donee trusts are as much public charitable trusts as the assessee-trust and that the income-tax department has given them certificates under Section 80G. It is then pointed out that the objects of the assessee-trust include giving donations by the assessee-trust to other trusts or institutions having similar objects. Therefore, the donations by the assessee-trust to the two trusts cannot but be held to be application of income for charitable purposes. According to Dr. Pal, the Bombay High Court's decision in Trustees of the Jadi Trust's case (supra) supports the assessee's contention rather than that of the department. The Madras High Court in its decision in the case of CIT v.Thanthi Trust [1982] 137 ITR 735 at pages 774-775 is stated to have clearly held that donation towards the corpus is also an application of income. In this connection, Dr. Pal has also taken us through the Interim Report of December, 1977, of Direct Tax Laws Committee (Chokshi Committee) and the Board's Circular No. 100 [F. No. 195/l/72-IT(A-I)], dated 24-1-1973--Taxmann's Direct Taxes Circulars, Vol. 1, 1980 edn. p.

87 (copies placed in the assessee's paper book at pages 40 and 41, respectively) for the purpose of showing that the Chokshi Committee had taken note of the likely abuse of these provisions and suggested some amendments. It is a different thing that the amendments have not been carried out. The Board's circular, it is pointed out, indicates how the expression 'application of income' should be understood in the context of Section 11 and is a pointer that the interpretation given by the learned Accountant Member to this expression is correct.

As regards the second point of difference, Dr. Pal submitted that as a Third Member, I have to decide the point of difference, as formulated by the members, and should not, rather cannot, go into the question whether the order passed by the learned members on the miscellaneous application is or is not without jurisdiction.

On merits, he placed reliance on the Kerala High Court's decision in Palai Central Bank Ltd. v. Jacob P. Cherian AIR 1963 Ker. 128, paragraph 18, Section 58A of the Companies Act, 1956, and Rule 3 of the Companies (Acceptance of Deposits) Rules for showing that deposits into the companies like the assessee are very secure. According to him, the expression 'adequate security' only means and can and should mean that the trustees should be fully satisfied about the safety of the monies advanced. Alternatively, he submitted that the promissory note by the company could itself be treated as an adequate security. In this manner, Dr. Pal has argued that the learned Accountant Member has correctly held that the amount of Rs. 77,000 was deposited by the assessee-trust with the DCM on adequate security.

5. In reply, it is submitted by the learned standing counsel that the use of the expression 'without adequate security' is not a mere formality and some overt act in the nature of formal security is a must. According to him, the financial position of a company is always fluid and mere subjective safety of the investment has no meaning when the Legislature specifically requires adequate security. It is stated that regulatory provisions regarding the acceptance of deposits, etc., have nothing to do with adequate security. The Madras High Court's decision in the case of Thanthi Trust (supra) deals with a case of spending the amount and is, therefore, distinguishable. In any event, their Lordships in that case were dealing with Section 12 before its substitution in 1973.

6. In order to appreciate the rival contentions on the first point of difference, it is desirable to refer to the provisions of Section 12 as well as Section 11(1)(a) which read as under : 11. Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of Section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and Section 13 shall apply accordingly.

12. (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 or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property ; The language of the sections quoted above is clear as to its contents.

Section 12 provides that voluntary contributions received by a trust with a specific direction that they shall form part of the corpus of the trust will not be treated as deemed income of the trust. The other purpose of Section 12 is not relevant so far as the assessee's case is concerned. In other words, the donation of Rs 24 lakhs received by the assessee-trust from DCM being, admittedly, towards its corpus cannot be treated as its income. The next question that arises for consideration is whether the donations made by the assessee-trust of Rs. 12 lakhs each to the donee trusts out of which Rs. 8 lakhs each is towards the corpus of the respective trusts is or can be said to be application of the assessee-trust's income for charitable purposes. In this context, it is pertinent to mention that there is no dispute that the assessee is a public charitable trust, that the objects of the assessee-trust provide for giving of donations to trusts with similar objects and that the donations have been given by the assessee in furtherance of its aforesaid objects. Once there is no dispute about these three aspects, it is difficult to comprehend the arguments advanced on behalf of the department that merely because a part of the donation is towards the corpus of the donee trusts, it should not be treated as application of income. In my opinion, the learned Accountant Member is right in holding that Section 12 has no bearing whatsoever on the interpretation of the expression 'application of income' as used in Section 11(1)(a).

The fact that the amounts so donated will not form part of the deemed income of the donee-trusts under Section 12 has no bearing whatsoever on the question whether the amounts donated amount to application of income in the hands of the assessee-trust under Section 11(1)(a).

Whether an amount donated is or is not an application of income depends on whether the donation is in furtherance of the objects of the assessee-trust and not on whether the amount donated will form part of the income of the donee-trusts. In my view, it is clear that the department has mixed up the issues under confusion.

There is one more aspect which requires consideration. The department has assumed that the assessee-trust has made the two donations of Rs. 12 lakhs each to the two trusts out of the donation of Rs. 24 lakhs it received from DCM. This assumption is not correct. DCM's stipulation has been that the amount of Rs. 24 lakhs is towards the corpus.

Therefore the assessee-trust could not have spend or applied a penny out of the aforesaid amount. It could not spend or apply income from the amount. The above donations by the assessee-trust are out of its income, real or deemed. In the circumstances, there is really no justification for mixing up the donation received and the donations given and for considering whether the amount of donations given by the assessee would constitute application of income. In this view of the matter, it is not really necessary to refer to the case laws relied upon by the parties. In any event, I find that the decision of the Bombay High Court in the case of Trustees of the Jadi Trust (supra) supports the assessee's contention and other decisions do not have direct bearing on the issue before me.

7. As regards the second point of difference, it is desirable to refer to the provisions of Section 13(2)(a) which run as under : (1) Nothing contained in Section 11 or Section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-- (2) Without prejudice to the generality of the provisions of Clause (c) of Sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in Sub-section (3),-- (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in Sub-section (3), for any period during the previous year without either adequate security or adequate interest or both ; There is no dispute that the interest charged is adequate and that DCM with whom the amount is deposited is a company hit by the provisions of Section 13(3)(b). Therefore, the only question that requires consideration is whether the amount of Rs. 77,000 deposited by the assessee-trust with DCM was or can be said to be without adequate security. In this context it may be mentioned that there is no dispute about the financial soundness of DCM and the satisfactory regulatory provisions of the Company Law administration in the matters of acceptance of deposits, etc. It is also not in dispute that having regard to the donations received by the assessee-trust from the said company, the small investment of Rs. 77,000 is very much secured. The short question is whether the expression 'adequate security' herein means that there must be a formal overt act or whether the trustees' satisfaction from the material circumstances that the investment is adequately secured, is enough. According to me, the view propounded by the learned standing counsel is too technical a view. In the circumstances, while the departmental authorities can go into the question whether the investment is really safe or secured, it is not desirable to deny exemption on the ground that there is no formal adequate security. I am inclined to take the view that 'without adequate security' means 'without adequately secured' and since it cannot be said that the deposit was not safe, I agree with the learned Accountant Member that the assessee's case does not fall within the provisions of Section 13(2)(a).

8. In the result, the order will now go to the Bench for deciding the appeal according to the majority view.


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