Skip to content


Commissioner of Income-tax Vs. Rao Bahadur Calavala Cunnan Chetty Charities - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 643 and 644 of 1975 (Reference Nos. 466 and 467 of 1975)
Judge
Reported in[1982]135ITR485(Mad)
ActsIncome Tax Act, 1961 - Sections 10(22), 11, 11(1), 14 and 25
AppellantCommissioner of Income-tax
RespondentRao Bahadur Calavala Cunnan Chetty Charities
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateNone
Cases ReferredCloth Traders (P.) Ltd. v. Addl.
Excerpt:
.....and of the charities maintained by the assessee, computed under the appropriate heads would be the total income of the assessee-institution for the years of account as relevant to the assessment years 1965-66 and 1966-67 ?' 2. one rao bahadur calavala cunnan chetty the purposes included medical relief, education and relief of the poor. in order to enable the ito to go into the figures in the light of its order, the orders of the ito as well as those of the aac were set aside, with a direction for assessment being made in the manner indicated in its order and in accordance with law. section 11 gives the exemption as well as the exclusion, subject to certain conditions. ' 13. the same position holds good in india also because what is chargeable to income-tax is left to be determined..........and of the charities maintained by the assessee, computed under the appropriate heads would be the total income of the assessee-institution for the years of account as relevant to the assessment years 1965-66 and 1966-67 ?'2. one rao bahadur calavala cunnan chetty died leaving a will dated 19th july, 1920, under which he left legacies and by which he directed that after realising the outstandings due to him and payment of the debts due by him and after meeting the probate and other expenses, as well as the legacies, the residue of his estate was to be constituted into a trust for certain purposes as set out in the will. the purposes included medical relief, education and relief of the poor. after the application of the income by the trustees to the aforesaid charitable purposes, it was.....
Judgment:

Sethuraman, J.

1. The Appellate Tribunal has referred the following questions under Section 256(1) of the I.T. Act, 1961 :

'1. Whether, for the purpose of computing accumulation in excess of 25 per cent. as laid down under Section 11(1)(a) of the Income-tax Act, 1961, 'income' has to be computed under the various heads as enumerated under the Income-tax Act ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that while determining the 'accumulated income' the income from the two schools, one run at Trivellore and the other at Perambur by the assessee-institution, should also be taken into account and the income therefrom should be computed under the head 'Other sources' ?

3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the aggregate of the surplus or deficit of the two schools run by the assessee and of the charities maintained by the assessee, computed under the appropriate heads would be the total income of the assessee-institution for the years of account as relevant to the assessment years 1965-66 and 1966-67 ?'

2. One Rao Bahadur Calavala Cunnan Chetty died leaving a will dated 19th July, 1920, under which he left legacies and by which he directed that after realising the outstandings due to him and payment of the debts due by him and after meeting the probate and other expenses, as well as the legacies, the residue of his estate was to be constituted into a trust for Certain purposes as set out in the will. The purposes included medical relief, education and relief of the poor. After the application of the income by the trustees to the aforesaid charitable purposes, it was directed that the residue, if any, of the income was to be held by the trustees on trust for such charities as the testator may direct by any codicil or which the High Court of Judicature at Madras may under the cypres doctrine or otherwise determine.

3. The assessment years under consideration are 1965-66 and 1966-67, the relevant previous years being the financial years preceding them. In this period, consequent on the originating summons taken out by the trustees, this court by order dated 25th of May, 1965, permitted the trustees to spend the surplus income on certain charities as listed in a schedule to the order. Such charities were twelve in number and they included donations to begger homes, leprosy clinics, etc.

4. There were three sets of accounts maintained by the trust. One set of accounts related to the R. B. C, C. Hindu High School, Trivellore, and another set related to the R. B. C. C. High School, Perambur, both of which were run by the trust itself and the third related to the R. B. C. C. Charities, Madras. The substantial income was from rents from properties. Taking the year ended March 31, 1965, the rental income came to Rs. 1,31, 412.26. Interest from G.P. Notes and other deposits came to Rs. 15,721.15. There were sundry receipts by way of sale of old papers and rent from certain lands amounting to Rs. 738.10. The total gross income came to Rs. l,47,871.51. The charity maintained an office and the establishment and other expenses including audit fees, court expenses,etc., came to Rs. 35,421.07. The property tax and quit rent came to Rs. 40,980'66. There were sundry expenses in the shape of repair, land rent, electrical re-wiring, etc. After taking into account the expenditure and the amounts paid out of the trust estate to various institutions and temples and other charities, the balance left in the hands of the trustees at the end of the year came to Rs. 24,517. In the books relating to the High School at Trivellore, the main receipts were from the Government to cover teachers' salaries. . There were also small fee collections and interest from investments. The total came to Rs. 91,375.07 and after meeting the salaries to the staff in the school and other expenses, the surplus left was Rs. 10,000.88. Similarly, with reference to the High School at Perambur, the total receipts which were substantially the receipts from the Government towards salaries, etc., and which included some fee collections, and interest, came to Rs. 1,57,970.38 and after meeting the outgoings by way of salaries to the staff and other expenses, there was a surplus of Rs. 24,024.55. Unfortunately, the Tribunal has proceeded as if there were some deficits in the Perambur High School accounts, which is an obvious mistake. These surpluses had not been taken over to the trust accounts.

5. The ITO considered the assessee's claim for exemption under Section 11 of the I.T. Act. He was of the view that the assessee had accumulated more than 25 per cent. of the income which could have been accumulated in order to be eligible for the exemption. He, therefore, brought to tax the excess, over 25 per cent., of the accumulations. The result was that for the assessment years 1965-66 and 1966-67, with which we are now concerned, the ITO brought to tax Rs. 22,120 and Rs.27,270, respectively.

6. The assessee appealed to the AAC and contended that there was no accumulation of the income, much less any excess over 25 per cent. as contemplated by Section 11. The AAC worked out the figures in his own way and came to the conclusion that the taxable income for the assessment year 1965-66 would be Rs. 13,250 as against Rs. 23,911 taken by the ITO. For the assessment year 1966-67, he came to the conclusion that the taxable income should be computed at Rs. 17,744 as against Rs. 27,270 taken by the ITO. He reduced the assessments accordingly.

7. The assessee appealed to the Appellate Tribunal challenging the order of the AAC for each of the two years under reference. The Tribunal, after going through the facts and also considering the statutory provisions, came to the conclusion that the authorities below had not applied the provisions properly. In substance, the Tribunal's conclusions were that the ITO should determine the actual income in accordance with the Act, and arrive at 25 per cent. thereof and that after having ascertained the said figures the ITO had to determine whether there was any surplus left which was in excess of the said 25 per cent. If there was such an excess, the amountwould have to be brought to tax and if there was no excess, the assessee would be eligible for the exemption. In order to enable the ITO to go into the figures in the light of its order, the orders of the ITO as well as those of the AAC were set aside, with a direction for assessment being made in the manner indicated in its order and in accordance with law. The revenue has brought up this matter on reference by raising the questions already extracted.

8. The assessee, though served with notice, was not present. Mr. Jayaraman, the learned counsel for the Commissioner, took us through the orders of all the authorities and placed the matter fairly, and in all its perspective including those aspects which would be expected to have been placed on behalf of the assessee.

9. The contention for the Commissioner was that the Tribunal was wrong in proceeding as if the income to be considered for the purpose of Section 11 had to be worked out in the manner contemplated by the provisions of the Act. Section 11 is one of the provisions which occurs in Chap. III with the chapter heading 'Incomes which do not form part of total income'. Section 10 gives a list of income or receipts which would be excluded from the computation of total income. In other words, Section 10 sets out the categories of income which are exempt from tax and which stand excluded from total income. Section 11 gives the exemption as well as the exclusion, subject to certain conditions. Section 11, in so far as it is material and as it was in force in the relevant year, ran as follows :

'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......'

10. Clause (b) of Section 11(1) deals with a case where the property is partly held under trust and Clause (c) deals with particular types of charities with which we are not concerned. The Explanation to Section 11(t) runs as follows:

'For the purposes of Clauses (a) and (b), in computing twenty-five per cent. of the income from any such property as is referred to in the said clauses for any previous year, the income from such property for the year immediately preceding the previous year may be adopted, if that income is higher than the income for the previous year.'

11. Sub-section (2) provides that where the persons in receipt of the income had complied with the restrictions specified in Clauses (a) and (b) of Sub-section (1) as respects accumulation or setting apart then such accumulations can be for a period of 10 years subject to a notice in writing to the ITOs in the prescribed manner specifying the purpose for which the income is being accumulated or set apart. The money so accumulated or set apart is to be invested in any Govt. security. If the income so accumulated is not utilised after the expiry of ten years, then the income which remains so unutilised would be deemed to be the income of the previous year immediately following the expiry of the period of ten years. Sub-section (4) of Section 11 provides that for the purpose of the 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 the 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.

12. The provision uses two expressions: (1) 'total income' and (2) 'income derived from property held under trust'. 'Total income' is an expression denned in the Act in Section 2(45) as meaning the total amount of income referred to in Section 5, computed in the manner laid down in the Act. However, there is no definition of 'income'. The word 'income' is an expression of elastic ambit and the courts have always qualified their description by saying that it is not exhaustive. In two Royal Commissions in U.K., one headed by Lord Macmillan and the other by Lord Radcliffe, the irony of the absence of a definition of income in the Act was pointed out and ultimately both the Commissions did not attempt to define income. In a recent decision of the House of Lords in Lord Chetwode v. IRC [1977] 1 All ER 638, Lord Wilberforce, observed at p. 641 :

'It is notorious that there is not and never has been any definition of income in the UK tax code.'

13. The same position holds good in India also because what is chargeable to income-tax is left to be determined according to the statutory provisions of the Act in the light of the elastic concept of income. That is why Section 2(24) defines 'income' as including particular category of receipts. The idea is more to bring in all the categories of income which are brought to tax by applying a legal fiction so that by their non-inclusion in the definition, such categories did not escape taxation. In the absence of any definition of 'income' we have to proceed on the basis of it as a concept, as understood in general parlance. Income would ordinarily exclude a receipt byway of capital. More gross receipt cannot also be taxed as income. It may be broadly stated that what is taxed is not also any gross receipt. The receipt must be revenue in nature and is to be taxed after excluding the necessary outgoings.

14. Even in interpreting the several provisions wherever the expression 'income' occurs, there has been some divergence in the meaning given and that is because of the context. For instance in Cloth Traders (P.) Ltd. v. Addl. CIT : [1979]118ITR243(SC) , the Supreme Court had to consider Section 80M, under which, where the gross total income of an assessee being a domestic company, includes any income by way of dividends from a domestic company, certain deductions are permitted. The meaning of the expression 'income by way of dividend' came up for consideration and it was pointed out that the entire amount of the dividend income without deduction of interest paid on borrowings for acquiring the shares would constitute the income. Here the receipt was taken to represent income wholly. In Cambay Electric Supply Industrial Co. Ltd. v. CIT : [1978]113ITR84(SC) , the Supreme Court was concerned with the construction of Section 80E which dealt with deduction in respect of profits and gains from specified industry in the case of certain companies. In the case of a company to which Section 80E applies, where the total income includes any profits and gains attributable to the business of generation or distribution of electricity, etc., then a deduction from such profits and gains of an amount equal to 8 per cent. thereof was envisaged in arriving at the total income. The question was whether this income is to be computed in the manner laid down by the Act. The Supreme Court pointed out after referring to the relevant statutory provisions that in computing the profits for purpose of the special deductions under Section 80E items of unabsorbed depreciation and unabsorbed development rebate carried forward from earlier years will have to be Deducted before arriving at the figure on which the 8 per cent. contemplated by that section was to be calculated. Though the words that occur in Section 80E are 'profits and gains', it is well settled that it does not make any real difference. 'Income' is a more general term than 'profits and gains'. Similarly, construing Section 80-O in Addl. CIT v. Isthmian India, Maritime P. Ltd. : [1978]113ITR570(Mad) , where income by way of royalties, commission, fees or other similar receipts were under consideration, it was pointed out that 'any income by way of royalty, commission, fees or any similar payment received' cannot mean any income of that category arrived at, after deducting the expenses referable thereto. These decisions have been noticed by us only to emphasise that the concept of income has to be gathered from the context in which the expression occurs. In other words, the word 'income' takes its colour from its context.

15. Section 11 contemplates an application of the income for charitable purposes. The charity can accumulate 25 per cent. of the income. The application as well as the accumulation has necessarily to be the income as accounted for in the accounts, and not as computed under the I.T. Act, subject of course to what is provided in Sub-section (4) of Section 11.

16. This is because the Act sometimes deals with income attributed by some statutory fiction. There can be no distribution or accumulation of what is taxed under some fiction. The Supreme Court in CIT v. Bipinchandra Maganlal & Co. Ltd. : [1961]41ITR290(SC) considered the question whether the expression 'smallness of profits' has to be understood in the sense of smallness of assessable income. It was pointed out that a company normally distributes dividends out of its business profits and not out of its assessable income and that even though the assessable income of a company may be much, the commercial profits may be so small that compelling distribution of the difference between the balance of the assessable income reduced by the taxes payable and the amount distributed as dividend would require the company to fall back either upon its reserves or upon its capital which in law it could not do. Applying the same reasoning, the expression 'income' has to be understood in the popular or general sense and not in the sense in which the income is arrived at for purpose of assessment to tax by the application of some artificial provisions either giving or denying deduction. That income cannot be understood in the sense of what is arrived at for the purpose of income-tax would be clear if we pay some attention to Section 10. For instance, Section 10(1) exempts agricultural income. It is not necessary to find out what the agricultural income is. It is enough if the agricultural income as a category is excluded. There is no need or scope to arrive at the income in the manner contemplated by the I.T. Act. Other instances can be multiplied. Taking into account, the purpose for which the conditions of Section 11(1)(a) arc imposed, it would be clear that we have to consider the income as arrived at in the context of what is available in the hands of the assessee, subject of course to any adjustment for expenses extraneous to the trust. If the expression 'income' is so understood, then we have to take the accounts of the assessee with reference to the receipts and deduct therefrom the expenses necessary for earning or looking after that income. The net amount that remains would be available for distribution or application for charitable purpose. In applying the income for charitable purposes, even capital expenditure may be incurred. Therefore, the nature of the expenditure in the hands of the entity which receives the money is not the criterion. So long as the assessee disburses the amount for charitable purposes, whether the amounts are utilised for capital or revenue purposes by the charity concerned, the assessee would have complied with that part of the requirement of Section 11, namely,application of the income for charitable purposes. The authorities will have to find out as to whether they are really charitable purposes or not. Subject to such examination, the application of the income for charitable purposes will have to be excluded and it is only the balance that would require examination for finding out whether the assessee has complied with the rule of accumulation to the extent of Rs. 10,000 or 25 per cent. of the income, whichever is higher.

17. The House of Lords in Lord Chetwode v. IRC [1977] 1 All ER 638, considered the question as to what was the income over which the taxpayer had power to enjoy. The income had been derived from company in the Bahama Islands to which the assessee had transferred his funds for investment. The question was whether the net income from the company in Bahamas was to be taken into account or the gross income. Having regard to the object and language in Section 412, the House of Lords held that the income, subject to such deduction as may be available for any assessee in the United Kingdom, would have to be taken into account, and not the net income as shown in the books of the company in Bahamas. In the course of the judgment, Lord Wilberforce observed as regards the general concept of income, without taking into account the scope or object of Section 412 of the Act of the United Kingdom, as follows (p. 640):

'It was common ground, before the Special Commissioners, that the taxpayer had 'power to enjoy' the income of Attleborough, but this leaves open the question, which is that now before the House, of what the 'income' of Attleborough consists. Is this the gross income, consisting of the dividends received, or is it 'net' income after deduction of costs and expenses ?

At first sight, this might appear a simple enough question to answer. Granted that the taxpayer had power to enjoy the income of Attleborough, and that what he is liable to be charged with is 'any income' of Attleborough, all that might appear to be necessary would be to look at the revenue accounts of Attleborough for the relevant year and to see what, in revenue terms, is the outcome of the period. Since any such accounts would show, and did in fact show, a balance after crediting the dividends received, and debiting the costs and expenses incurred in relation to the investments, this balance must represent the 'income' of Attleborough, to be imputed, under Section 412, to the taxpayer. It would, of course, be open to scrutiny whether the costs and expenses were of a revenue, as opposed to a capital, nature and perhaps also whether they were reasonable in quantum but subject to these checks, the 'income' must be arrived at, in principle in this way.'

18. But this approach was discarded in the particular case because of the objective with which Section 412 of the U.K. Act had been enacted. If Section 412had not come in the way, then the income would have been computed in the commercial manner without reference to any provision of the Act granting or denying deduction. That is the legal position which would have to be applied to the facts in the instant case.

19. In fact wherever the statute contemplated the income being computed in the manner set out in the provisions of the Act, appropriate words are used. For instance, in Section 80E, which was considered by the Supreme Court in Cambay Electric Supply Industrial Co. Ltd, v. CIT : [1978]113ITR84(SC) , after the expression 'total income' the following words are added in brackets: 'as computed in accordance with the other provisions of this Act'. This emphasises that wherever Parliament considered that the computation should be in accordance with the provisions of the Act, it introduced the concept by using appropriate language. In the absence of any such language in Section 11(1), we consider that the computation as envisaged by the other provisions of the Act cannot be imported into Section 11(1).

20. The Tribunal has in a way mixed up the notion of total income in understanding the expression 'income from property held under trust'. Section 14 occurs in the chapter 'Computation of total income'. It provides that all income for the purposes of charge of income-tax and computation of total income be classified under certain heads. Therefore, the computation under the different categories or heads arises only for the purposes of ascertaining the total income for the purposes of charge. Those provisions cannot be introduced to find out what the income derived from the property held under trust to be excluded from the total income is, for the purpose of the exemptions under Chap. III.

21. There is one further error in the order of the Tribunal. The Tribunal has proceeded on the basis that the receipts from rents amounting to Rs. 1,31,412 during the year ending with 31st of March, 1965, would have to be considered under the head 'Income from house property' and the net income arrived at under that head. In the view that we have explained above, the determination of the income as if the sum of Rs. 1,31,412 relates to house property and would, therefore, have to be considered in the context of the provisions of Sections 22 to 27, would not be correct. Those provisions enact certain technical rules for the purpose of the ascertainment of income for the particular head for purposes of charge and as seen already that cannot be imported into the determination of the income of the property held in trust for the purpose of Section 11 which excludes that income from the computation of total income. The view that we have taken above is also consistent with the circular of the Central Board of Direct Taxes dated 19th June, 1968, reproduced in V.S. Sundaram's Law of Income Tax In India, 11th Edn., p. 798.

22. The result is that the first question is answered as follows: The income from the properties held under trust would have to be arrived at in the normal commercial manner without reference to the provisions which are attracted by Section 14. Twenty-five percent, thereof will have to be ascertained and if the assessee had accumulated more-than twenty-five per cent., then the consequences contemplated by Section 11II will follow. The remand made by the Tribunal will, therefore, have to stand and the ITO will compute the income in the light of the above.

23. We may take up questions Nos. 2 and 3. These two questions deal with the surplus derived from running the two schools, one at Trivellore and the other at Perambur. These two schools are admittedly educational institutions. Section 10(22) provides that any income of a university or other educational institution, existing solely for educational purposes and not for purposes of profit should be excluded from the total income. The accounts of these two institutions are available as annexures. From a perusal of these accounts, it is clear that substantially the income is by way of grants from the Government and the expenses are in running the two institutions. There is some surplus but the surplus would be referable to the educational institutions as such. Section 10(22) would exempt the whole of the income. We had occasion to consider this question in our judgment reported in Addl. CIT v. Aditanar Educational Institution : [1979]118ITR235(Mad) . We pointed out that the income from such educational institutions would be wholly exempt even though such institutions were run by another trust. Though the schools themselves do not appear to be held in trust, they are institutions brought into existence by the trust and, therefore, the income would be eligible for exemption. In fact, in the present case, there is a finding by the Tribunal that the trust was not carrying on any business of running these schools. In view of this finding the exemption in its full amplitude as contemplated by Section 10(22) would apply. The Tribunal has unfortunately not noticed this provision. It is for the ITO to consider this provision in the light of the judgment in Addl. CIT v. Aditanar Educational Institution : [1979]118ITR235(Mad) , and the opinion we have expressed above.

24. The Tribunal has held that the income from these institutions could be taken as income from other sources which is wrong and is inconsistent with the exemption available under Section 10(22). The direction of the Tribunal that the income from these schools will have to be assessed under the head 'Other sources' will also be erroneous in the light of the above observations made by us while considering Section 11. The question of 25 per cent. accumulations would, therefore, have no relevance in the context of Section 10(22). The second question is answered in the negative and in thelight of the directions given above. The third question is also answered in the negative.

25. There will be no order as to costs.


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