1. The following is the question referred at the instance of the Commissioner of Income-tax :
' Whether, on the facts and in the circumstances of the case, the income of the assessee is exempt from tax under Section 11 of the Income-tax Act for the assessment year 1970-71 '
2. The assessee is a trust originally constituted by the late Sir M. Ct. Muthiah Chettiar, who set apart a sum of money for effecting and carrying out Thiruppani, or repairs to old Hindu temples, building new ones, giving aid to or establishing hostels, educational or industrial institutions, and giving relief to the poor or afflicted. The funds set apart were invested in the money-lending and banking business carried on by the family of Sir Muthiah Chettiar. After his death, his son executed a declaration on 20th October, 1930, and got it registered at Rangoon. The said trust deed and connected papers were lost during enemy action in Burmah. Consequently, the two grandsons of the original founder executed a deed declaration of trust dated 20th February, 1969, for the purposes, which it is not in dispute, are charitable.
3. On 1st March, 1963, the trustees resolved that the income of the trust should be accumulated, for a period of 10 years commencing from 13th April, 1961, for utilisation in the maintenance of temples, conduct of festivals, establishment of hostels, giving medical aid to the poor and starting or aiding educational institutions, including granting of scholarships to deserving students. The establishment of an orphanage was also referred to as one of the objects in the resolution.
4. A sum of Rs. 93,000, being 100% of the income of the trust earned during the year ended 13th April, 1963, was invested in Govt. securities and an application was made to the ITO to exempt the income of the trust from tax by giving notice in Form No. 10, in pursuance of the said resolution. The ITO granted the necessary permission, and in accordance with it, the assessee-trust invested a sum of Rs. 7,31,017.97 in Govt. securities. The total income earned from 12th April, 1962, up to 12th April, 1969, came to Rs. 9,54,849'55. The tax deducted at source therefrom amounted to Rs. 2,23,831-58, and there was a balance of Rs. 7,31,017.97, which was the amount invested in Govt. securities.
5. At this stage, the balance-sheet of the assessee for the years ended on 12th April, 1969, and 12th April, 1970, may be summarised.
Summarised balance-sheet as at 12-4-1969Liabilities Rs. AssetsRs. Capital fund31,91,649-76Investments in State and Central Govt. securities5,78,021-28Sundry creditors500-00Investments in fully paid equity shares of companies8,22,500-00Bank overdrafts3,88,772-60Advances to S. RM. M. CT. M. Firm, Rangoon
To Emcete & Sons (P.) Ltd.
---------------19,32,962.85Income-tax deducted at source2,47,414.58Cash on hand23.65------------------------------35,80,922.3635,80,922.36------------------------------Summarised balance-sheet as at 12-4-1970LiabilitiesRs. AssetsRs. Capital fund34,16,859.79Investment in State and Central Govt. securities7,29,273.50Sundry creditors200.00In fully paid equity shares of companies8,22,500.00Bankoverdrafts4,52,063.02Land
8,00,000.00Advances to Emcete & Sons (P.) Ltd.10,87,541.23Income-tax deducted at source2,78,529.37Cash and bank balances1,278.71------------------------------38,69,122.8138,69,122.81------------------------------
6. As regards the capital fund, which appeared at Rs. 31,91,649.76 as on 12th April, 1969, it has gone up to Rs. 34,16,859.79 as on 12th April, 1970. The increase is explainable as follows :
Rs. As per last balance-sheet31,91,649-76Add : Donation during the year61,000.00
---------------32,52,649-76Excess of income over expenditure1,64,210-03
7. It may be seen from the balance-sheet as on 12th April, 1970, that there is a purchase of land for Rs. 1,50,000 and buildings for Rs. 8,00,000, As regards the buildings, it was taken over in recovery of a debt due from S.RM. M. CT. M. Firm, Rangoon, amounting to Rs. 7,82,792.44, which is shown in the balance-sheet as an asset in the nature of ' advance', as on 12th April, 1969. The balance to make up the sum of Rs. 8,00,000 has been drawn from the advance made to Emcete & Sons (P.) Ltd., which as on 12th April, 1969, stood at Rs. 11,50,170-41 and which after the withdrawal stood at Rs. 10,87,541.23 as on 12th April, 1970.
8. The sum of Rs. 1,64,210.03 was the excess of income over expenditure earned during the period from 13th April, 1969, to 13th April, 1970.
9. It would be usual to find a profit and loss appropriation account in the case of companies in order to disclose as to how the profit earned by the company has been dealt with. In the case of companies, the amount would ordinarily be appropriated for, (a) making a provision for taxation, (b) making a provision for dividends, and (c) the balance, if any, would be taken to the balance-sheet. In the present case, as the trust is exempt from taxation and as the trust had also applied to the ITO for accumulation of the income over the period contemplated by the provisions of the Act, the total amount of the surplus of the income over expenditure, viz., Rs. 1,64,210.03, was taken over to the capital fund.
10. We are now concerned with the assessment year 1970-71, for which the previous year ended on 13th April, 1970. The assessee filed a return showing Rs. 1,64,210, including the tax deducted at source of Rs. 31,115, as income. The assessee claimed full exemption under Section 11(1) of the Act. In the letter accompanying the return the assessee contended that a sum of Rs. 8,00,000 had been applied in purchasing a building for the purpose of the trust. Since the assessee had not invested the accumulation of profits in Govt. securities, the ITO wrote a letter on 19th January, 1973, asking for the reasons for non-investment of the accumulation in Govt. securities, as in earlier years, in accordance with the option exercised under Section 11(2) of the Act. The assessee's contention was that in view of the investment of the sum of Rs. 8,00,000 in the purchase of the building, it was exempt and that there was no need to invest it in Govt. securities.
11. The ITO found that the sum of Rs. 8,00,000 referred to as invested inthe building represented the purchase of a property called ' Rama Vilas 'in Luz Church Road on 25th March, 1970. The purchase considerationof Rs. 8,00,000 was discharged by adjustment of the debt due fromS. RM. C. T. M. Firm of which the two grandsons of the founder are thepartners.
12. The chartered accountants representing, the assessee wrote on 30th January, 1973, that if the income of the assessee was utilised for the purpose of charity, then Section 11 did not require that the income should be accumulated, and that what was basically required was that the income should be utilised for the purpose of the trust. The ITO rejected this contention and he brought a sum of Rs. 1,81,195 consisting of the following to tax:
Rs. Excess of income over expenditure1,64,210Add : Expenses on agricultural lands disallowed 327Registration fees, stamps, etc., in connection with the purchase of the property (agricultural land)16,658
13. It may be seen that the expenditure of a sum of Rs. 16,658 represents the stamp and registration charges on the acquisition of the agricultural land, which is shown in the balance-sheet of the relevant year at Rs. 1,50,000, The result of the assessment was a tax demand of Rs. 83,940 after giving credit for the tax deducted at source amounting to Rs. 31,109.
14. The assessee appealed to the AAC contending that the purchase of the building was itself utilisation of the fund for charitable purposes. The AAC rejected this contention. There were two other contentions. It is not necessary for us to go into them here. The result was that the assessee had to file an appeal before the Appellate Tribunal on the assessment so sustained.
15. There was a difference of opinion between the Accountant Member and the Judicial Member constituting the Bench. The Accountant Member was of the opinion that the assessee was eligible for exemption even when it purchased property for the purposes of the charitable trust. The Judicial Member was of the contrary opinion. In his view, no portion of the income derived by the assessee from the property held in trust during the relevant year had been utilised in the purchase, of the property and, therefore, the assessee was not eligible for exemption under Section 11. This difference of opinion was referred to a third member as required by the provisions of the Act. The said member, who was then the Vice President of the Tribunal, agreed with the Accountant Member and held that the assessee was eligible for the exemption. The result was that the assessee's case for exemption was accepted by the majority of the members of the Tribunal, who heard the case, and the appeal was accordingly allowed. The Commissioner has brought this matter, on a reference, to this court.
16. The assessee's claim for exemption has to be considered in the light of the provisions of Section 11(1)(a) of the Act, as it was then in force. The provision, as then in force, to the extent relevant, 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 ;..,...
Explanation.--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.'
17. Clause (2) of Section 11 provided :
' Where the persons in receipt of the income have complied with the following conditions, the restriction specified in Clause (a) or Clause (b) of Sub-section (1) as respects accumulation or setting apart shall not apply for the period during which the said conditions remain complied with-
(a) such persons have, by notice in writing given to the Income-tax Officer in the prescribed manner, specified the purpose for which the income is being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years ;
(b) the money so accumulated or set apart is invested in any Government security as defined in Clause (2) of Section 2 of the Public Debt Act, 1944 (18 of 1944), or in any other security which may be approved by the Central Government in this behalf.'
18. Sub-s. (2), on the basis of which the assessee was claiming exemption all these years, provided for two conditions being complied with : (1) giving a notice in writing to the ITO specifying the purpose for which the income was to be accumulated and the period for which the income was to be accumulated, the period not exceeding ten years, and (2) the money so accumulated being invested in Govt. securities. In the present case, as already seen, the assessee had given a notice to the ITO for the accumulation of the income for a period of ten years. The year under consideration falls within the said period of ten years. The second condition that had to be complied with by the assessee was investment in Govt. securities. Itwas not the case of the assessee that it had invested the money accumulated in Govt. securities. Thus, the assessee had not complied with the twin conditions of Section 11(2). The assessee had thus to fall back upon Section 11(1)(a). Under that provision, the assessee had to apply the income for charitable purposes in India. It could without attracting tax liability accumulate to the extent of twenty-five per cent, thereof or Rs. 10,000, whichever was higher. The case of the assessee was that it had applied the income for charitable purposes by investing the trust funds in purchasing the property known as ' Rama Vilas '. Right through, before all the authorities including the Tribunal, the only case of the assessee was that because it had invested Rs. 8,00,000 in the purchase of this property, it had complied with the provisions of Section 11(1)(a).
19. Two decisions appeared to have been mainly relied on before the Tribunal in support of the contention of the assessee. In Satya Vijay Patel Hindu Dharamshala Trust v. CIT : 86ITR683(Guj) , the trust was created and certain immovable properties were transferred to it to be administered as a Hindu Dharamshala. During the relevant previous years, the trustees spent the entire surplus income in constructing a new dharamshala. It was held that the fact that the amount was spent for capital purposes was not relevant as, under the provision, what was necessary was that the income had to be utilised for charitable purposes. The section did not require that the expenditure to be incurred should only be on revenue account. The capital nature of the expenditure was thus considered to be irrelevant, so long as the income was spent on the objects of the trust. We have in T.C. Nos. 461 of 1975, 231 and 232 of 1976 and 350 to 1977 in CIT v. Kannika Parameswari Devasthanam and Charities, in a judgment dated 18th July, 1979 : 133ITR779(Mad) , followed this decision in principle. These cases have absolutely no scope for any application to the facts herein. In the Gujarat case, construction and maintenance of a dharamshala was an object of the trust. The expenditure was incurred on such an object. Purchasing a property cannot be an object of the trust, much less a charitable object thereof. In the Madras case, the matter had to be investigated.
20. The other decision referred to before the Tribunal was that of the Jammu and Kashmir High Court in CIT v. Shri Krishen Chand Charitable Trust . In that case the net profit for the relevant year was Rs. 1,89,640. The assessee wrote to a bank to purchase Govt. securities for Rs. 2,00,000 and sent a bank draft for this purpose. The bank purchased securities for Rs. 1,87,778.62 and sent back the balance. As the profit for the year amounted to Rs. 1,89,640, there was a shortfall of the investment to the extent of Rs. 1,861.67. The ITO did not, therefore, allow the exemption under Section 11(2). It was held that the assessee waseligible for the exemption, because the exemption was available under Section 11(1)(a), as, under the said provisions, the assessee could accumulate twenty-five per cent. of the income of the trust. The learned judges held that a combined reading of Section 11(1) and (2), showed that Section 11(2), while enlarging the scope of the exemption, removed the restriction imposed by Section 11(1)(a) but that it did not take away the exemption allowed by Section 11(1)(a), so that so long as the assessee had not accumulated more than 25% of the income, it could get the exemption under Section 11(1)(a). In the present case, it is not suggested that the assessee had invested any money in Government securities or that there is only a shortfall, which is less than 25% so as to apply that decision.
21. Thus, as these two decisions are not applicable, the matter has to be considered only in the light of a proper construction of Section 11(1)(a). If the contention, which found favour with the accountant member and also with the third member, is to be accepted, then in no case can a charitable trust be taxed. The trust has to only go on purchasing properties year after year stating that it is doing so for charitable purposes, so that it is out of the reach of the I.T. authorities. A contention like this has only to be stated to be rejected. It is so obvious that it cannot countenance acceptance in the scheme of the I.T. Act as designed in Section 11.
22. What has happened in the present case is that the assessee has recovered an outstanding due to it from its debtor. Where the assessee recovers an outstanding, it cannot be stated that it has applied the income of the trust for charitable purposes. The asset, as it is sometimes called, is 'in meal or in malt '. The change of its shape or form involves no application of the income for charitable purposes.
23. Before the Tribunal the assessee appears to have contended that it did not want to liquidate the Govt. securities for the purpose of paying the vendor of the property in cash and that it, therefore, adopted the idea of squaring up the debt by purchase of the property. Even where the assessee sells the Govt. securities and purchases another property, it would not certainly be complying with the provisions of the statute. Conversion of one asset into another is not an application of the income for charitable purposes. If this position were to be accepted, even the need to keep the income invested in Govt. securities envisaged by the section can be circumvented by purchasing other assets. The policy of Parliament to canalise the trust income only in Govt. securities would be defeated, and the object behind the enactment of the section would stand frustrated. Such an interpretation would have to be avoided.
24. Before the third member an attempt was made to show that this property was purchased for the purpose of construction of a hospital relying on a resolution of 20th February, 1970. The departmental representativeappearing before the Tribunal protested against any fresh evidence being adduced by the assessee at that stage. The third Member also does not appear to have admitted the said evidence. In these circumstances, it is not necessary to consider whether the purchase of this property is a step in the realisation of the objective of the provision of a hospital contemplated as an object of the trust.
25. Learned counsel for the assessee contended on the strength of a passage from the judgment of the Gujarat High Court in Satya Vijay Patel Hindu Dharamshala Tryst v. CIT : 86ITR683(Guj) , that there is some presumption that the purchase has been made out of the current year's income. There is no need to draw on any presumption when the facts clearly stare one in the face and show that the asset was acquired in realisation of an outstanding due. Further, in a case where the assessee claims an exemption, the burden is on him to establish the claim. He cannot be said to have discharged his burden by merely relying on some rule of presumption for which there is no warrant in law. Further acquisition of property per se does not serve the purpose of application. Even assuming that there is any scope for the play of any rule of presumption, in the context of this case, such a presumption is of no avail.
26. Mr. C. Ramakrishna, the learned counsel appearing for the assessee before us, strenuously contended that a sum of Rs. 1,50,000 had been utilised for the purchase of the agricultural land and that this at least must be taken into account in finding out whether the income of-the trust was utilised for charitable purposes. This contention had not been taken at any earlier stage. The only explanation given by the assessee for not complying with the condition of Section 11(2) was that it had purchased a property known as ' Rama Vilas '. This acquisition has now been found to be irrelevant in the context of the provisions of the statute. Therefore, the assessee cannot be allowed to fall back upon the investment in agricultural land at this stage.
27. The result is that the question referred to us is answered in the negative and against the assessee. The learned counsel for the assessee, however, contended that the authorities have not so far considered that to the extent of 25% of the income the assessee could accumulate in accordance with Section 11(1)(a). The question referred to us does not cover this aspect. Thus, we do not think it proper to go into it and we would only leave it to the assessee to urge it, if necessary. There will be no order as to costs.