Skip to content


Commissioner of Income-tax, Delhi-ii Vs. Eternal Science of Man's Society (29.08.1980 - DELHC) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax References Nos. 136 to 138, 219 to 221 and 226 and 227 of 1977
Judge
Reported inILR1980Delhi1559
ActsIncome Tax Act, 1961 - Sections 2(24), 11, 11(1), 11(2), 12, 12(1), 12(2), 13, 13(1), 13(2), 13(3) and 13(4)
AppellantCommissioner of Income-tax, Delhi-ii;Commissioner of Income-tax, Delhi-ii;Commissioner of Income-tax
RespondentEternal Science of Man's Society;Daulat Ram Public Mission and;Daulat Ram General Education Society
Excerpt:
.....ram education society received donations in the form of shares which were to form a corpus of the assessed society with the restriction that only the dividend income and not the shares could be utilised by the assessed for its objects and the shares could not be sold except with the prior permission of the donor trust. the question raised for determination is whether a voluntary contribution of shares given by a donor charitable trust with the express condition that they be held as corpus of the recipient charitable society and accepted as such becomes the income of the donee society and as to whether the provisions of section 13(2)(h) are attracted to interest income it was,; 1. that normally a gift of shares or its won capital by one charitable trust to another charitable trust would..........year 1972-73 by holding that the provisions of section 13(2)(h) are not applicable to the assessed-trust daulat ram public mission, new delhi. '1. whether, on the facts and in the circumstances of the case, the tribunal was correct in law in holding that the sum of rs. 2,21,300 received by the assessed-trust in the form of 22,130 shares of motor and general finance ltd. from daulat ram public trust was not taxable income in the hands of the receiving trust under the provisions of sections 11 and 12(2) of the income-tax act, for the assessment year 1970-71 2. whether, on the facts and in the circumstances of the case, the tribunal was correct in law in excluding the interest of rs. 13,765 and rs. 17,021 for the assessment years 1971-72 and 1972-73, respectively, by holding that the.....
Judgment:

Smt. Leila Seth, J.

1. These eight references pertain to three different assessed, but as the points involved are common, they are being dealt with together. These references have been made by the Tribunal at the instance of the Commissioner of Income-tax, New Delhi. The assessed-respondent in the Income-tax Reference Nos. 136 to 138 of 1977 is the Eternal Science of Man's Society, New Delhi, and the assessment years are 1970-71, 1971-72 and 1972-73. In Income-tax References Nos. 219 to 221 of 1977, the assessed-respondent is M/s. Daulat Ram Public Mission, New Delhi, and the assessment years are 1970-71, 1971-72 and 1972-73. M/s. Daulat Ram General Education Society, New Delhi, is the assessed-respondent in Income-tax References Nos. 226 and 227 of 1977 and the assessment years are 1969-70 and 1970-71. All these assesseds are charitable institutions.

2. The question in the respective references are as follows :

Eternal Science of Man's Society, New Delhi.

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 4 lakhs received by the assessed-trust in the form of Rs. 40,000 shares of Motor & General Finance Ltd. from M/s. Daulat Ram Public Trust was not taxable income in the hands of the receiving trust under the provisions of section 11 and section 12(2) of the Income-tax Act, 1961, for the assessment year 1970-71

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in excluding the interest income of Rs. 14,896 for the assessment year 1971-72 and Rs. 34,305 for the assessment year 1972-73 by holding that the provisions of section 13(2)(h) are not applicable to the assessed-trust

Daulat Ram Public Mission, New Delhi.

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 2,21,300 received by the assessed-trust in the form of 22,130 shares of Motor and General Finance Ltd. from Daulat Ram Public Trust was not taxable income in the hands of the receiving trust under the provisions of sections 11 and 12(2) of the Income-tax Act, for the assessment year 1970-71

2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in excluding the interest of Rs. 13,765 and Rs. 17,021 for the assessment years 1971-72 and 1972-73, respectively, by holding that the provisions of section 13(2)(h) are not applicable to the assessed-trust

Daulat Ram General Education Society, New Delhi. 'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the voluntary contribution received by the assessed-trust in the form of shares of Motor & General Finance Ltd. amounting to Rs. 1,30,000 in the assessment year 1969-70 and Rs. 2,20,000 in the assessment year 1970-71 and Goodwill India Ltd. amounting to Rs. 75,450 from M/s. Daulat Ram Public Trust were not taxable income in the hands of the receiving trust under the provisions of sections 11 and 12(2) of the Income-tax Act, 1961 ?'

3. Before setting out the facts on the basis of which the above question have been referred, it is advisable to refer briefly to the relevant statutory provisions. Chapter III of the Income-tax Act, 1961 (to be referred to in brief as 'the Act'), contains provisions pertaining to income which does not form part of the total income. Section 11, which is in this Chapter, deals with income derived from property held for charitable or religious purposes. It provides, inter alia, that if this income is applied wholly to charitable/religious purposes in India, it is to be excluded from the total income of the recipient. Section 12 deals with the income of trusts and institutions from voluntary contributions. The section before its amendment by the Finance Act of 1972 with effect from 1st April, 1973, stood as follows :

'12. Income of trusts or institutions from voluntary contributions. - (1) Any income of a trust for charitable or religious purposes or of a charitable or religious institution or religious purposes shall not be included in the total income of the trustees or the institution, as the case may be.

(2) Notwithstanding anything contained in sub-section (1), where any such contribution as are referred to in sub-section (1) are made to a trust or a charitable or religious institutions of section 11 apply, such contributions shall, in the hands of the trust or institution receiving the contributions, be deemed to be income derived from property for the purpose of that section and the provisions of that section shall apply accordingly.'

4. Section 13 makes s. 11 inapplicable in certain cases. It provides, inter alia, in s. 13(1)(c)(ii) that the income of a charitable trust will not be excluded from the total income, if any part of such income or property of the trust is during the previous year applied or used directly or indirectly for the benefit of certain persons as referred to in sub-s. (3). These persons referred to in sub-s. (3) are, the author of the trust, the founder of the institution, a person who has made a substantial contribution to the trust or institution, a trustee or manager of the trust; if the author, founder or person in an HUF then a member of the family; a relative of the author, founder, person, member, trustee or manager; or a concern in which any of the abovementioned persons has a substantial interest. Section 13(2) provides that the income or property of the trust shall be deemed to have been used or applied for the benefit of a person as provided in sub-s. (3) in various circumstances. One of these circumstances as set out in clause (a) is, if any part of the income or property of the trust is or continues to be lent to such person for any period during the previous year without adequate security or adequate interest or both. Clauses (b) to (g) provide other circumstances which are not relevant in the present cases. Clause (h) provides a further circumstances, that is, if any funds of the trust or institution are, or continue to remain invested for any period during the previous year (not being a period before 1st January, 1971) in any concern in which any person has a substantial interest.

5. Sub-section (4) of s. 13, however, provides that the exemption under s. 11 or 12 shall not be denied in relation to any income other than the income arising to the trust from such investment by reason only that the funds of the trust or the institution have been invested in a concern in which such person has a substantial interest, if the interest does not exceed five per cent. of the capital of the concern. This is a mitigating provision which seeks to ignore small investments in prohibited areas.

6. We shall now deal with the facts of the various references : -

I.T.R. Nos. 136 to 138-77 :

The Eternal Science of Man's Society, New Delhi, during the relevant previous year ending 31st March, 1970, spent no money and involved itself in no activity. However, it received donations in the form of 40,000 shares of Rs. 10 each of Motor and General Finance Ltd. from M/s. Daulat Ram Public Trust. This public trust was also governed by the provisions of ss. 11, 12 and 13 of the Act.

These shares of Motor and General Finance Ltd. were donated to the assessed-respondent by way of an endowment fund to form a part of the corpus of the assessed-society. The assessed received them as such with the further restrictions that these shares could not be utilized by the assessed for its objects nor could the shares be sold without the prior permission of the donor trust. It was only the individual income of the shares which could be utilized for the objects of the assessed.

As the assessed did not expend any monies in the relevant year, it gave notice to the ITO that it would accumulate the funds. The notice was given on 14th July, 1970, under s. 11(2) of the Act in Form No. 10. The purpose of the accumulation was mentioned therein but was subsequently revised on 6th June, 1972, and 4th November, 1972.

The ITO felt that the assessed-society was not entitled to the benefits of the exemption under s. 11 and added the value of the 40,000 shares of Motor and General Finance Ltd. amounting to Rs. 4 lakhs as also the dividend income of Rs. 74,973 to the income of the society. She also rejected the notice for accumulation as being belated. According to her, it should have been filed by 31st July, 1970, complete in all particulars. In her opinion, the notice, as initially filed, was vague with regard to purpose. The subsequent revisions were, according to her, not acceptable, especially as there was no application for condensation of delay. Since she treated the amount of Rs. 4,74,973 as the income of the assessed, she held that the investment in Govt. securities was inadequate. After giving an exemption under s. 11(1) of the Act, of 25 per cent., the taxable income was held to be Rs. 3,56,230.

On appeal, the AAC confirmed the order of the ITO and observed that the expression 'such contributions' in s. 12(2) of the Act is not limited to contributions constituting income of the receiving trust but is wide enough to cover all contributions including contributions forming part of the capital of the receiving trust. thereforee, voluntary contributions made by one charitable trust to another whether out of income or corpus to be held by the receiving trust as corpus is to be deemed to be income derived from property for the purpose of s. 11 of the Act. The receiving derived from property for the purpose of s. 11 of the Act. The receiving trust would, thereforee, be liable to tax on these donations, unless it satisfied the conditions for exemption. The conditions laid down in s. 11(2) were not satisfied as the investment in Govt. securities was inadequate, being only Rs. 25,899.

On further appeal the Tribunal held that the ITO and the AAC had erred in adding the sum of Rs. 4 lakhs as the income of the assessed-trust, the reason being that the shares had come to the assessed by way of corpus which it was forbidden to utilize for its objects, or to sell without prior permission of the donor. In any case, if a sale was permitted, the proceeds were to be treated as a part of the endowment fund and the corpus of the society. It was only the dividend income from these share which could be utilized for the purposes of the trust. In these circumstances, the Tribunal deleted the addition of Rs. 4 lakhs.

The Tribunal also deleted the addition of the individual of the dividend income of Rs. 74,973, as it observed that the assessed had invested an adequate sum in Govt. securities and had filed an application in Form No. 10 much before the due date, fulfillling the conditions of s. 11(2) of the Act.

With regard to the assessment years 1971-72 and 1972-73, the ITO found that the amounts of Rs. 74,886 and Rs. 1,11,229 earned as dividend income and interest for the two years respectively, had not been spent during the years under consideration. Further, as the notice with regard to accumulation of income in Form No. 10 was defective for the assessment year 1970-71 and, thereforee, out of time, there was no valid notice in operation. She also held that the accumulated funds were not invested as per the requirements of s. 11(2)(b) of the Act, so the assessed was not entitled to the exemption under s. 11(2) of the Act. She also noted that the founding members of the society together with their relatives had a substantial interest as defined in s. 13(4), Expln. 3(i), in the two companies, i.e., Motor and General Finance Ltd. and Goodwill India Ltd. thereforee, she held that the income of the trust received from funds invested in those two companies was liable to tax under s. 13(4) of the Act.

She also observed that under s. 13(3) of the Act, it was the collective shareholding of all the interested persons that had to be taken into consideration in establishing substantial interest under s. 13(1), Expl. 3(i). Further, M/s. Daulat Ram Public Trust having made substantial contributions to the assessed-trust, the shareholdings of M/s. Daulat Ram Public Trust would have to be included in that list and on inclusion, the interest of the persons under s. 13(3) would exceed the 20 per cent. allowable limit. The dividends of the two companies and interest amounting to Rs. 74,886 and Rs. 1,11,229 for the assessment years 1971-72 and 1972-73, respectively, would, thereforee, be chargeable to tax under s. 13(2)(h) of the Act.

On appeal, the AAC confirmed the additions of dividend income in both the years but deleted the addition of interest income. He observed that it was not the ITO's case that the funds of the assessed-society had been lent without adequate security. thereforee, he held that the saving provisions of s. 13(4) of the Act would apply and the interest income should be excluded from the total income. The amounts of Rs. 14,886 and Rs. 34,309 for assessment years 1971-72 and 1972-73, respectively, were consequently excluded.

On appeal by the department, the Tribunal observed that as nothing had been lent to any to the persons interested in the trust, the order of the AAC did not call for any interference. The assessed's appeal with regard to the dividend income was also dismissed as the Tribunal held that the founding members together with their relatives and Daulat Ram Public Trust, a substantial contributor to the assessed-society, had substantial interest in the two companies, Motor and General Finance Ltd. and Goodwill India Ltd.

I.T.R. Nos. 219-221/77

The facts of Daulat Ram Public Mission are similar.

Briefly stated the assessed-mission received from Daulat Ram Public Trust, in the assessment year 1970-71 capital contribution in the form of shares of Motor and General Finance Ltd. worth Rs. 2,21,300. These contained restrictions on sale as mentioned above in the case of Eternal science of Man's Society. These shares were to form the corpus of the mission. Dividend income of Rs. 64,068 was also received in the same year. For the years 1971-72 and 1972-73, the dividend, interest and short term capital gains came to a figure of Rs. 77,717 and Rs. 98,689, respectively. None other amounts had been spent during the years under consideration. The notice for accumulation in Form No. 10 was filed on 14th July, 1970, and subsequently, revised on 7th June, 1972, and 4th November, 1972.

The donation of 22,130 shares of Motor and General Finance Ltd. received by the assessed-mission from Daulat Ram Public Trust and valued at Rs. 2,21,300 was held to be taxable by the ITO. She also held the Form No. 10 to be invalid and belated for the same reasons as noticed above in the case of Eternal Science of Man's Society, New Delhi. In the dual circumstances, she held that investment in Govt. securities was inadequate, and taxed the dividend income as well.

For the years 1971-72 and 1972-73, the provisions of s. 13 were hold to be applicable by her, as the founder members of the society together with their relatives and M/s. Daulat Ram Public Trust had a substantial interest in the two companies, Motor and General Finance Ltd. and Goodwill India Ltd. She, thereforee, held the dividend income from these two companies chargeable to tax under s. 13(4) read with s. 13(2)(h) of the Act. The interest income of Rs. 13,764.80 and Rs. 17,021 for the assessment years 1971-72 and 1972-73, respectively, was also included in the total income for the purpose of tax.

On appeal, the AAC, on the same reasoning as noticed above in the case of Eternal Science of Man's Society, held that the voluntary donation received by the assessed of the shares in Motor and General Finance Ltd. was income of the assessed-trust within he provisions of ss. 11 and 12(2) of the Act. He also held that the conditions of s. 11(2) were not complied with and, thereforee, confirmed the addition of Rs. 2,21,300 as also the dividend income of Rs. 64,068 for the assessment year 1970-71. However, the Tribunal allowed the assessed's appeal on the basis and reasoning of the decision in Eternal Science of Man's Society.

With regard to the assessment years 1971-72 and 1972-73, the AAC held that Form No. 10 was valid and the assessed-society had complied with the conditions for accumulation under s. 11 of the Act. It would, thereforee, have been entitled to exclude the income, except that in view of the provisions of s. 13, the exemption available under s. 11 was forfeited with regard to dividend income. This was because the founder members together with the relatives and M/s. Daulat Ram Public Mission had a substantial interest in the two companies. However, he held that in view of the saving provision in s. 13(4), the interest income would be excluded from the total income.

Both the revenue and the assessed appealed. The Tribunal dismissed the appeals of both the parties following its decision in the case of M/s. Eternal Science of Man's Society.

I.T.R. Nos. 226-227/77

The case of M/s. Daulat Ram General Education Society is also of a similar nature.

The society was established on 17th January, 1969. During the assessment year 1969-70 (accounting year ending on 31st March, 1969) the assessed-society received shares by way of donation to the corpus from M/s. Daulat Ram Public Trust. These were shares of Motor and General Finance Ltd. amounting to Rs. 1,80,000 and shares of Goodwill India Ltd. amounting to Rs. 75,450. In the assessment year 1970-71, the society received a further donation from the Daulat Ram Public Trust of shares of Motor and General Finance Ltd. valued at Rs. 2,20,000. The restrictions with regard to user and transfer as mentioned above in the case of Eternal Science of Man's Society were also imposed on the gift of these shares. But as in the case of the other two assessed's, the ITO held that these donations given by the trust were to be treated as income in the hands of the recipient assessed-society. In the assessment year 1970-71, the assessed also earned a dividend income of Rs. 69,469. No amount of this was spent in that year. The assessed, however, gave a notice on 14th July, 1970, in Form No. 10 regarding accumulation of funds. This was subsequently revised on 7th June, 1972, and further clarified on 4th November, 1972. For similar reasons as set out in the cases of Eternal Science of Man's Society, the ITO held the Form No. 10 to be invalid and belated. She also held that the investment in Govt. securities was inadequate as the income was Rs. 2,20,000 + Rs. 69,469 = Rs. 2,89,469. Thus the benefit of the exemption under s. 11 was not available to the assessed-society. But s. 11(1) - the exemption of 25 per cent. - was taken into consideration in arriving at the total income.

On appeal, the AAC dealt with the matter at length. But on the same reasoning as in the Eternal Science of Man's Society, he dismissed both the appeals.

On further appeal by the assessed, the Tribunal followed its decision in the Eternal Science of Man's Society and allowed both the appeals.

On the above facts one common question arises in the case of all three assesseds and that is : Does a voluntary contribution of shares, given by a donor charitable trust with the express condition that they (the shares) be held as corpus of the recipient charitable society and accepted at such, become the income of the donee-society

Normally, a gift of shares or its own capital by a charitable trust to another charitable trust would be income in the hands of the recipient trust. The recipient trust would be free to spend the moneys or expend the property as it liked in furtherance of its objects. But in the instant cases the donor trust attached specific conditions to the donation. These were : (i) that the donation do constitute the corpus of the donee trust or be held as an accretion to the corpus of the donee trust; (ii) that no part of the donation be utilized by the donee trust for its objects; (iii) that no part of the donation be sold without the prior permission of the donor trust; and (iv) if such permission were granted, the sale proceeds be treated as part of the endowment fund or corpus of the donee trust.

The donee trust accepted the donation subject to these conditions. In these circumstances, we are of opinion that there is a material difference with regard to the gift in the instant cases as compared to the normal gift of shares by one charitable trust to another. This conclusion, we think, is borne out by the provisions contained in s. 12 which have been extracted earlier.

7. Sub-section (1) of s. 12 exempts income of a charitable or religious trust/institution derived from voluntary contribution applicable solely to charitable/religious purposes. Sub-section (2) deals with 'such contributions' as are referred to in sub-s. (1). thereforee, 'such contributions' in sub-s. (2) refers to contributions which constitute income of the recipient trust. It would, thereforee, appear that 'any income' of a trust derived from voluntary contributions made to a trust by another trust or charitable institution or religious institution to which the provisions of s. 11 apply will be deemed to be income derived from property for the purpose of that section in the hands of the recipient trust or institution. The section relates to 'any income' of the trust and not to the capital or endowment of the trust.

8. In the present cases, as noticed above, the voluntary contributions did not constitute income in the hands of the recipient trust. The conditions imposed on the voluntary contributions ensured that they were to be part of the capital or corpus of the donee trust. These voluntary contributions not being income, would fall outside the scope of s. 12(1) and thereforee, outside the ambit of a s. 12(2) of the Act.

9. The position has now been clarified in the amended s. 12 which was substituted in place of the section as set out above. The new s. 12 provides that any voluntary contributions received by a charitable trust would be deemed to be income derived from property unless they contain a specific direction that they shall form a part of the corpus of the recipient trust. thereforee, such capital contributions can be retained by the donee trust as corpus without attracting any income-tax liability.

10. Further, s. 2(24) of the Act which defines income, did not include 'voluntary contributions' prior to its amendment by the Finance Act, 1972, with effect from 1st April, 1973. By this amendment clause (iia) was introduced which provided as follows :

'(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution.

Explanationn. - For the purposes of this sub-clause, 'trust' includes any other legal obligation.'

11. Here too, the distinction between voluntary contributions per se and voluntary contributions with a specific direction that they form part of the corpus has been mentioned. The former is income and the latter is not.

12. We are, thereforee, of the view that the voluntary contributions to the capital assets are to be excluded from the taxable income.

13. It may be pertinent to mention in this connection a decision of the Allahabad High Court, which is in consonance with our view. This is the case of Sri Dwarkadheesh Charitable Trust v. ITO : [1975]98ITR557(All) , and a special leave petition against this judgment was dismissed on 28th October, 1975. Mr. Justice Satish Chandra (as he then was), speaking for the court, held that 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 s. 12(1) of the Act, because the subject-matter of the donation becomes a part of the corpus or capital of the donee-trust and cannot, constitute income of the receiving trust. Such contributions will not, thereforee, fall within the purview of sub-s. (2) of s. 12 of the Act.

14. For the reasons outlined above, question No. 1 in the cases of Eternal Science of Man's Society and M/s. Daulat Ram Public Mission and the only question in the case of M/s. Daulat Ram General Education Society referred to us is answered in the affirmative and in favor of the assessed.

15. Question No. 2 in the cases of Eternal Science of Man's Society and M/s. Daulat Ram Public Mission relates to the point whether the provisions of s. 13(2)(h) of the Act are attracted to interest income.

16. The provisions of s. 13 have been briefly outlined earlier. On a reading of c. (a) of sub-s. (2) of s. 13 and clause (h) of the same sub-section, it would appear to us that a distinction has been made by the statute between loans and other investments. Clause (a) of sub-s. (2) of s. 13 appears to provide for a situation where income or property of the trust is lent to a person specified in sub-s. (3) of s. 13 without adequate security or adequate interest or both. Clause (h) of sub-s. (2) of s. 13, however, appears to deal with a situation where funds of the trust are or continue to remain invested in a concern in which a person specified in sub-s. (3) has a substantial interest. The two provisions have to be construed in a harmonious manner. If investment are held to include loans, as urged by counsel for the revenue, it would render clause (a) of sub-s. (2) of s. 13 otiose. Since a specific provision for loans has been made in clause (a) of sub-s (2) of s. 13, we feel that these should not be included in the generic term as investments in clause (h) of sub s. (2) of s. 13. It would thus appear that if the funds of the trust are invested in debentures or loans then clause (a) of sub-s. (2) of s. 13 would be applicable; whereas if the funds are invested in equity capital, i.e., shares, etc., then clause (h) of sub-s. (2) of s. 13 would be attracted. This distinction also accords with reason, as in the former case there is no participation in profits and no fluctuation of the investment but only a fixed interest return; whereas in the latter there is a participation in profits and the value of the investment fluctuates. In the case of a loan or debenture what has to be examined is whether adequate security or adequate interest or both have or have not been provided. In the present references, it is not the case of the revenue that the funds of the assessed have been lent without adequate interest or security.

17. In these circumstances, we feel that the deeming provisions of sub-s. (2) of s. 13 are not attracted. thereforee, the income or property of the trust cannot be deemed to have been used or applied for the benefit of the persons specified in sub-s. (3).

18. It is pertinent to note that the AAC was of the opinion that the aggregate of the funds invested in Goodwill India Ltd. did not exceed 5 per cent. of the capital of that company as capital meant equity capital as opposed to loans etc. He, thereforee, felt that the saving provision of s. 13(4) would apply and exempted the interest income from the total income of the assesseds. However, on appeal, the Tribunal refused to interfere with the order of the AAC on the basis that nothing had been lent to any of the persons interested in the trust without adequate security or interest.

19. For the reasons outlined above, question No. 2 in the case of Eternal Science of Man's Society and M/s. Daulat Ram Public Mission, New Delhi, are answered in the manufacture and in favor of the assesseds.

20. In the result, all the questions are answered in favor of the assesseds who would be entitled to costs from the revenue. Counsel's fee, one set Rs. 500.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //