1. The appellant-assessee is a trust. The appeal is from the order of the Commissioner (Appeals), dated 19-2-1983, whereby the appeal was dismissed. The question is whether the authorities below were justified in not treating the amounts received by the assessee and expended by it as deemed application of the funds of the trust within the meaning of Section 11(1)(a) of the Income-tax Act, 1961 ('the Act').
2. We may at the outset observe that it is a settled fact that the assessee is a charitable trust entitled to the benefit of Section 11 in view of the decision of the Tribunal in the case of the assessee itself for the assessment years 1971-72 to 1974-75 [IT Appeal Nos. 1666 to 1668 (Bom.) of 1979]. The trust had been created by a deed dated 2-7-1965. It had in its corpus a landed property at Borivli. The appellant had entered into an agreement with Elel Hotels & Investments (P.) Ltd. ('purchaser' for brevity sake) on 17-8-1971 agreeing to sell the property for a consideration of Rs. 24 lakhs which was payable in instalments. The sale transaction did not go forward as the parties had contemplated in the agreement. However, the assessee had received various sums of money since 17-8-1971 from the purchaser which were in the nature of advances. The conveyance was actually executed in 1979-80 and consideration for capital gains arose in the assessment under consideration, namely, 1979-80. The transaction brought about capital gains of Rs. 10,75,689. The assessee contended before the ITO that the sale consideration received from the purchaser in instalments in the various years earlier to 1979-80 had been applied for the purpose of achieving the object of the trust and that the capital gains accountable in the assessment year 1979-80 should be taken as deemed application within the meaning of Section 11(1). The ITO did not agree with the assessee. The assessee also did not succeed before the Commissioner (Appeals) and in his view too the assessee had not paid any amount during the year under appeal to discharge the loans contracted earlier. The circular issued by the CBDT in No. 100 [F. No.195/l/72-IT(A-1)], dated 24-1-1973 shown to the Commissioner (Appeals) by the assessee, was not applicable to this case, in his view.
Consequently, the appeal resulted in a rejection.
3. On behalf of the assessee, it was contended that Section 11(1)(a) docs not specify the year in which the application of funds had to be made and that repayment of the loan originally taken to fulfil the objects of the trust would amount to application of income for charitable purposes to meet the requirement of Section 11(1) and before us also the circular of the Central Board of Direct Taxes in No. 100, dated 24-1-1973, was relied upon. The learned departmental representative relied upon the orders of the authorities below.
4. The assessee had received various sums of money from the purchaser from 1971-72 to 1978-79 and the Commissioner (Appeals) has given details of the same in para 3 of his order and we do not wish to reproduce the same for that is not very material. These amounts were advances paid pursuant to the agreement for sale and those sums had to be adjusted towards the sale price when the conveyance took place. The balance sheet as at 31-3-1972 shows that there was a massive deficit of over Rs. 23,000. In the subsequent years also, there was a deficit for which ample proof is given. One of the objects of the trust was to conduct hospitals and dispensaries, besides giving medical care and assistance to poor and needy persons. The object was also to help students in prosecuting studies. From 1972-73 onwards up to 1979-80 the assessee had spent for the purpose of hospitals, education, society, etc., several lakhs of rupees and they were all in the direction of achieving the objects of the trust. These expenses had to be necessarily met from the purchaser since its financial position was none too happy from 1972 onwards. In sum, the assessee had applied the amount it had received from the purchaser for achieving the objects of the trust in the respective years of receipt.
5. If an agreement for sale fructifies into a sale, then whatever payment the vendee has paid to the vendor as advances will have to be adjusted towards the sale price. Advance will, therefore, form a part of the sale price when the sale goes forward. Till the time the sale actually takes place, the amount received by the vendor will remain to the credit of the vendee. The vendor cannot seek exemption under Section 11 in the year of receipt of the advance. Conveyance as it happened in this case, may get postponed at the instance of the vendee or on account of breach on the part of the vendee. So, if the trust had applied the receipts for the purpose of fulfilling its objects at any time before the question of 'capital gains' arises for consideration in the year of transfer, it should serve the purpose of law in Section 11(1).
6. Since the actual conveyance was in 1979-80, the question of considering the income to 'capital gains' arose only in that assessment year. Although the application is anterior to the event leading to capital gains, it can be seen that in 1979-80, when the transfer took place, the earlier receipts were adjusted towards the sale consideration.
7. The circular of the Central Board of Direct Taxes in No. 100, dated 24-1-1973, which is certainly binding on the department, is clear to say that 'repayment' of the loan originally taken to fulfil one of the objects of the trust will amount to the application of the income for 'charitable and religious purposes'.
8. The assessee had in anticipation of the gains resulting from the sale, obtained money from the purchaser in advance and spent it in various manners to fulfil the objects of the trust. We must point out here that Section 11(1) does not specify the point at which the income has to be spent. All that the provision requires is that the income must have been applied for the purposes of the trust as of the year in which the income becomes eligible to a claim for exemption.
9. In the instant case, perhaps it was in the interest of the trust to apply the advances for charitable purposes immediately. So, till the time of actual transfer there was obligation on its part to account.
When the conveyance was made the earlier advances got adjusted with the sale consideration, wiping off all the obligations. The spirit of the Board's circular applied to this case. Taking all the facts into consideration, we are of the opinion that the income of the assessee by way of capital gains had been applied in a manner entitling it to claim the exemption under Section 11(1). We hold the point in favour of the assessee and reverse the orders of the authorities below.