1. This is a common reference arising out of the order of the Income-tax Tribunal for the assessment year 1965-66. Three questions have been referred under Section 256(1) of the I.T. Act, 1961, two, at the instance of the asseseee, and one, at the instance of the Commissioner. The following are the two questions which have been referred at the instance of the assessee.
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the amount of Rs. 2,50,000 could not be said to have been applied for charitable or religious purposes in India within the meaning of Section 11(1) of the Income-tax Act, 1961, in the accounting period relevant to the assessment year 1965-66 ?
(2) If the answer to question No. (1) is in the negative, whether the assessee was entitled to any further exemption from tax of any portion of its income for the assessment year 1965-66 '
2. At the instance of the Commissioner, the following question has been referred:
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in cancelling the penalty of Rs. 20,000 levied under Section 221 of the Income-tax Act for the assessment year 1965-66?'
3. We shall first take up for consideration the questions referred at the instance of the assessee.
4. The assessee is a company registered under Section 25 of the Companies Act, 1956. The previous year under consideration ended on 31st March, 1965. The assessee derived income from a transport business which was held under trust. In addition, the assessee was a partner in two firms, viz., Messrs. Gounder & Company, Pollachi, and Messrs. Anamallais Retreading Corporation, Coimbatore. The assessee derived also income from dividend and interest on securities. It filed a return for the essessment year 1965-66, showing ' nil' income on the basis that the entire income of the year was exempt under s. 11 of the I.T. Act, 1961. The ITO determined the total income at Rs. 3,27,931 and the break-up of this amount is as follows:
Rs. Income from business: (a) Own...2,68,715 (b) Share income...38,127Income from other sources...21,081Interest on on securities...8
5. In the view of the ITO, no part of the above total income had been applied for charitable purposes during the relevant assessment year. According to him, the word ' applied ' occurring in Section 11 implied spending or utilisation of the income. He pointed out that the assessee had only appropriated out of the profit of the year a sum of Rs. 3,00,000 and credited it to the ' reserve for donation account', which was not tantamount to application of the income. The assessee put forward the plea that in the immediate succeeding year, Rs. 2,77,180 had been donated for various charitable purposes and that this donation-included the sum of Rs. 2,50,000paid to Nachimuthu Polytechnic, an educational institution, and that the said sum exceeded 75% of the income determined as taxable for that year. As the giving of donation was one of the objects of the assessee-company, the requirements of Section 11 ere said to have bean fulfilled. The ITO rejected these pleas and held that no exemption was available.
6. The assessee appealed to the AAC who held that it was not entitled to the deduction of Rs. 2,50,000, since there was no donation out of the income of the previous year. He found that the donation had been made only in the subsequent year and he agreed with the assessee that it was entitled to exemption to the extent of 25% of the income which could be accumulated for application in future to charitable purposes. The result was that he gave a sum of Rs, 81,982 as deduction and confirmed the assessment with reference to the balance.
7. The assessee appealed to the Tribunal, and the Tribunal 'held that having regard to the accounting between the assessee and the polytechnic, an educational institution, the assessee had not satisfied the requirements of Section 11 and, therefore, confirmed the order of the AAC. It is this order of the Tribunal that has given rise to the present reference at the instance of the assessee.
8. The other question referred at the instance of the Commissioner arises out of the penalty proceedings for non-payment of tax for the same year, and we shall deal with it later on.
9. Section 11(1)(a) is the material provision and it runs as follows :
' 11. (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 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. It is with reference to the second part of the clause dealing with the accumulation that the AAC gave relief to the assessee to the extent of Rs. 81,982. We are now concerned with finding out whether the assessee has applied the income derived from property held under trust, to charitable purposes in India, so as to be entitled to the exemption in respect of the balance also.
11. The application of the income in the present case to charitable purposes during the relevant previous year is sought to be supported by reference to various facts. There was a resolution passed by the assessee on 16th February, 1965, and the said resolution reads as follows:
'Resolved that the profits of the association for the year ending 31-3-1965, so permitting, a sum of Rs. 2,50,000 be given as donation to Nachimuthu Polytechnic from out of the profits of the aforesaid year.'
12. The resolution is conditional on the profits being earned in the year ended on 31st March, 1965. If there were no profits, then, this resolution could not have been given effect to. Therefore, the resolution is merely a pious expression of opinion that if and when there were profits, a sum of Rs. 2,50,000 should be given to the polytechnic.
13. The learned counsel for the assessee submitted that as soon as profits emerged on the closing of the books on 31st March, 1965, then, those profits were impressed with fiduciary character to the extent of Rs. 2,50,000. A trust is an obligation annexed to the ownership of a specific property and not with reference to a non-existent property. There are four requisites for a trust: one, the existence of the author of the trust; or someone at whose instance the trust comes into existence, the second, the beneficiary, the third a trust property, and, fourthly, there must be a divesting of the ownership by the author of the trust in favour of the beneficiary or trustee. Unless all these requisites are fulfilled a trust cannot be said to have come into existence and, in the present case, when the property itself did not exist, there is no question of any trust coming into existence. The learned counsel did not bring to our notice any decision which establishes the proposition that there could be a trust with reference to a property not then in existence, but which was likely to come into existence if at all, only in the future.
14. Mr. Srinivasamoorthy, learned counsel for the assessee, drew our attention to another resolution dated 1st September, 1965. On that day, several resolutions were passed, and the resolution, material for our purpose, runs as follows :
' Resolved that the net profit for the year ending 31st March, 1965, amounting to Rs. 3,04,994.72 be added to the surplus of Rs. 528.46 carried forward from the previous year and the total surplus of Rs. 3,05,523.18 be and is hereby disposed of as follows :
Rs. Development rebate reserve.....521.00Transfer to donation fund....3,00,000.00To carry forward.....5,002.18...3,05,523.18'
15. In the submission of the learned counsel, to the extent of Rs. 3,00,000 there has been an application or setting apart. It is not in dispute that the application must be during the relevant previous year. The sum of Rs. 3,00,000 was transferred to the donation fund only by the said resolution after the close of the previous year. Anything done subsequent to the year of account cannot be taken to be application of the income during the relevant previous year so as to satisfy the requirements of Section 11(1)(a). Further, the sum of Rs. 3,00,000 remained only as a transfer entry in the assessee's own books and there has been no divestiture on the part of the assessee with reference to this sum in favour of any one else. In the circumstances, this resolution also cannot be of any assistance to the assessee's contention.
16. The next contention was that the assessee had in its books a folio for Nachimuthu Polytechnic and that in the account of the assessee several entries have been made showing the payments made to the polytechnic. It is not in dispute that the amounts debited to the Nachimuthu Polytechnic in the assessee's books were given as and by way of loans or advances to the polytechnic. They were not given as donations. In fact, during the relevant previous year, the assessee had paid only a sum of Rs. 1,13,972. The rest of the debit balance in the assessee's books as against the polytechnic consists of earlier transactions, i.e., transactions of the earlier years. During the relevant previous year, the assessee got back a sum of Rs. 1,00,000 and another sum of Rs. 2,000. Therefore, a total sum of Rs. 1,02,000 had been got back from the polytechnic and, therefore, there was hardly any payment and, assuming that the entries could be taken to be payments, that would be only to the extent of Rs. 11,972. The amounts now claimed as having been set apart or applied for charitable purposes do not feature in the said account. As the assessee had not actually paid any sum as donation during the previous year and as the forbearance of a debt or forgoing of a debt, assuming there was such forbearance, will not amount to payment of donation, we cannot take the entries as any payments out of the income of the year.
17. The learned counsel relying on a decision of the Supreme Court in H.E.H. Nizam's Religious Endowment Trust v. CIT : 59ITR582(SC) , contended that the word ' applied ' in Section 11 of the I.T. Act meant ' applied or finally set apart ' for the benefit of the trust and that the allocation as made in the assessee's books was enough to show that the relevant amount was finally set apart or applied for charitable purposes. We are unable to agree. It is not in dispute that there was no communication sent to the polytechnic showing that any such sum had been set apart in its favour. If at least that had been done and if there had been any reciprocal entries in the books of the polytechnic, there could be some justification in the contention that the amount was set apart or applied for charitable purposes. In the present case, except for the making of the entries in the assessee's own books, which entries could have been reversed if and whenthe assessee chose to do, the assessee had not done anything which can characterise the payments as donation or application of the income of the trust for any charitable purposes.
18. In the balance-sheet, the amount is merely shown as reserve for donation. There was a balance under the said account even earlier and this amount is added to it. Merely adding this sum to such a reserve in the account cannot be taken as any application of the income for any charitable purpose, or setting apart for any charitable purpose. The result is that the first question referred to us has to be answered in the affirmative and in favour of the revenue.
19. The second question would not arise, because, even on its own language, it would arise for consideration only if the answer to the first question is in the negative. We may also point out that the second question is not intelligible and in a way intriguing, and neither side was in a position to throw light on the purport of the said question. It is not possible, and at any rate, it is unnecessary to answer such a question.
20. We now turn to the reference made at the instance of the Commissioner. The assessee was liable to pay a sum of Rs. 2,09,386 on or before 10th March, 1970, for the assessment year 1965-66. The assessee was permitted to pay the amount by 30th of June, 1970, or on the date of the disposal of the appeal, whichever was earlier. As the amount was not paid, the ITO imposed a penalty of Rs. 20,000 on 15th December, 1970, which was reduced on appeal to Rs. 6,000. There was no further appeal to the Tribunal and the matter rested there. The ITO thereafter imposed a further penalty of Rs. 29,610, as, according to him, a sum of Rs. 1,48,046 still remained unpaid. In imposing this penalty, which was reduced to Rs. 20,000 on appeal, the ITO remarked that the assessee had not replied to the show-cause notice issued. The reply reached the officer after he levied the penaly. The assessee pleaded paucity of funds apart from stating that, as the income was exempt, no tax was due. Looking into all these circumstances and the reasons for which the assessee considered that the amount was not liable to be taxed, the Tribunal took the view that though there was default, the default was only technical and venial in nature and that no penalty need have been imposed. The penalty was accordingly cancelled. It is against this part of the order of the Tribunal that the Commissioner has obtained reference of the question already set out.
21. Section 221(1) of the I.T. Act, in so far as it is material, runs as follows:
'221. (1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount ofthe arrears...be liable, by way of penalty, to pay such amount as the Income-tax Officer may direct, and in the case of a continuing default, such further amount or amounts as the Income-tax Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears :
Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard :
Provided further that where the Income-tax Officer is satisfied that the default was for good and sufficient reasons, no penalty shall be levied under this section. '
22. It is unnecessary to set out the rest of the provision. Though the main part of Section 221(1) enables an ITO to levy penalty, still, under the second proviso, he need not levy such penalty or cannot levy any such penalty if he is satisfied that the default was for good and sufficient reasons. Therefore, we have to examine whether the default in the present case was for good and sufficient reasons. This is essentially a question of fact.
23. The Tribunal has relied on the bona fides of the assessee's plea that the amount was not liable to be taxed and also on the paucity of funds as a result of which the assessee was not in a position to pay. As regards the liability to tax the matter was pending on appeal and actually we have just now disposed of the reference arising out of the Tribunal's order in the appeal against the assessment. It cannot be stated that the appeal was a frivolous one. The matter raised contentious issues and in such circumstances if the assessee believed that there was no liability to tax and, if the Tribunal considered that as the basis for cancellation of the penalty the Tribunal's conclusion cannot be challenged as erroneous in law. Paucity of funds also has been taken into account. A large amount was due from the polytechnic, which is an educational institution whose capacity to return the amounts taken as advances cannot be said to be good. In these circumstances, the Tribunal cannot be taken to have committed any error in cancelling the penalty. The question referred at the instance of the Commissioner is accordingly answered in the affirmative and against the revenue.
24. As neither party has succeeded wholly in the reference, there will be no order as to costs.