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Commissioner of Income-tax Vs. Birla Education Trust - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 202 of 1977
Judge
Reported in(1985)44CTR(Cal)263,[1985]153ITR579(Cal)
ActsIncome Tax Act, 1961 - Sections 11(1), 11(3) and 11(4)
AppellantCommissioner of Income-tax
RespondentBirla Education Trust
Appellant AdvocateB.K. Bagchi and ;R.C. Prosad, Advs.
Respondent AdvocateR.N. Bajoria and ;S.K. Bajoria, Advs.
Excerpt:
- .....1961, is applicable to an expenditure which is not allowable as a deduction from the income of the business undertaking owned by a charitable or religious trust. the question relates to the assessment year 1965-66 in respect of an assessee which is a public charitable trust. the assessee carries on business of running a textile mill and a technological institute of textiles. the trust filed a return showing a total income of rs. 14,24,379 under the head 'other sources'. it claimed a refund of rs. 3,75,755 under section 237 of the i.t. act.2. the ito held that the trust is a public charitable trust which has been granted exemption under section 11 of the i.t. act. he observed that the trust has certified that the entire expenditure incurred by it was for charitable purposes in relation to.....
Judgment:

Satish Chandra, C.J.

1. The interesting question of law that requires our consideration in this reference is whether Section 11(4) of the I.T. Act, 1961, is applicable to an expenditure which is not allowable as a deduction from the income of the business undertaking owned by a charitable or religious trust. The question relates to the assessment year 1965-66 in respect of an assessee which is a public charitable trust. The assessee carries on business of running a textile mill and a technological institute of textiles. The trust filed a return showing a total income of Rs. 14,24,379 under the head 'Other sources'. It claimed a refund of Rs. 3,75,755 under Section 237 of the I.T. Act.

2. The ITO held that the trust is a public charitable trust which has been granted exemption under Section 11 of the I.T. Act. He observed that the trust has certified that the entire expenditure incurred by it was for charitable purposes in relation to the objects of the trust and no expenditure was incurred outside India. The accumulation of income at the end of the year was below the maximum permissible limit of 25%. The certificate was accepted after verification. The ITO computed the net profit of the textile mill run by the assessee-trust. He held that a sum of Rs. 9,547 debited to the profit and loss account was not an admissible deduction for a business undertaking. According to him, the net profit of the textile mill came to Rs. 40,25,148 while the net profit of the business undertaking as per accounts was Rs. 40,15,601. The difference of Rs. 9,547, though admittedly spent by the assessee for charity and donation, was held by him to be income taxable under Section 11(4) of the I.T. Act, 1961.

3. The assessee went on appeal. The AAC upheld the assessee's submission that Sub-section (4) of Section 11 was not applicable to an expenditure which was liable to exclusion under Section 11(1) of the Act.

4. The Department filed an appeal before the Appellate Tribunal. It was submitted that Section 11(4) was applicable to the sum of Rs. 9,547 in question. The accountant member agreed with the submission made on behalf of the Revenue. The judicial member, however, took the contrary view. The matter was referred to a third member under Section 255(4) of the Act. The third member agreed with the opinion of the judicial member. In the result, it was held that Section 11(4) was not applicable. The case was governed by Section 11(3). The matter was sent back to the ITO for passing a fresh order.

5. At the instance of the Revenue, the Tribunal has referred the following questions of law for our opinion :

'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions applicable are not Sub-section (4) but Sub-sections (1) and (3) of Section 11 of the Income-tax Act, 1961, and hence the case should be sent back to the Income-tax Officer ?

(2) Whether, on the facts and in the circumstances of the case, the provisions of Sub-section (4) of Section 11 of the Income-tax Act, 1961, are applicable and whether the excess of the income from the business undertaking as determined by the Income-tax Officer in accordance with the provisions of the Act over the income shown in the account of the business undertaking can be assessed to tax ?'

6. Let us consider the scheme of Section 11 of the I.T. Act (as it stood prior to its amendment in 1970). It is headed 'Income from property held for charitable or religious purposes'. Sub-section (4) of Section 11 provides that for the purpose of this section 'property held under trust' includes a business undertaking so held. Thus, the entire Section 11 including its various Sub-sections, apply to income derived from, inter alia, a business undertaking.

7. Sub-section (2) of Section 11 says that income derived from property held under trust wholly for charitable or religious purposes, shall not be included in the total income of the person in receipt of the income, to the extent to which such income is applied to such purposes in India. It permits accumulation of income to the extent of 25%.

8. Thus, under Section 11(1), accumulation of income up to 25% as well as the application of rest of income wholly for charitable or religious purposes, is not liable to be included in the total income of the trust.

9. Sub-section (2) of Section 11 deals with cases where application of income wholly for charitable or religious purposes falls short of 75% of the income. It permits exclusion of such income if the trust complies with certain formalities and invests such income in Government or approved securities,

10. Sub-section (3) of Section 11 deals with the income of a trust which is applied to purposes other than charitable or religious purposes. Such income is not entitled to exclusion. It is deemed to be taxable income of the person in receipt thereof.

11. Sub-section (4) of Section 11 then provides :

'(4) For the purposes of this 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 Income-tax Officer shall have power to determine the income of such undertaking in accordance with the provisions of this 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. Sub-section (4) is neither a charging section nor a machinery provision entitling the ITO to assess the income for the purpose of levying tax. It comes into operation where a claim is made that the income of the business undertaking of a trust shall not be included in the total income of the person in receipt thereof. Such a claim can only be made under Section 11(1). When such a claim is made, the ITO has been authorised to determine the income. Where the income so determined is in excess of the income as shown in the account books of the undertaking, then such excess shall be deemed to have been applied to purposes other than charitable or religious purposes.

13. There is no indication in Sub-section (4) of Section 11 that it was intended to be in derogation of or to supersede or supplant any other provision of Section 11. For instance, any income which is applied to purposes other than charitable or religious purposes for which the trust has been established, is by virtue of Sub-section (3) of Section 11, deemed to be income of the person receiving it. It is not entitled to exclusion under Sub-section (1) of Section 11. Thus, an expenditure for purposes other than charitable or religious purposes is liable to be dealt with by Sub-section (3), and by reason of its operation, it is not entitled to exclusion under Sub-section (1). Will such a case be also covered by Sub-section (4) and under it such expenditure be 'deemed' to be applied to purposes other than charitable or religious purposes If so, it will mean that a situation directly and specifically dealt with by Section 11(3), is also provided for by Sub-section (4) of Section 11 indirectly by employing a fiction. Such a construction will make Sub-section (4) a clumsy repetition of the effect of Sub-section (3). There is no indication of any compelling reason for which Parliament may have intended such a situation.

14. It appears to us that Sub-section (4) was intended for a different contingency. It was meant to cover a different situation. It was not intended to apply to application of income.

15. Under Sub-section (4), the ITO can determine the income and compare it with the income appearing in the accounts. The income spoken of in Sub-section (4) appears to us to be the gross income and not the net income of the business undertaking. The net income is computed after granting the admissible deductions. The deductions admissible from income of a business undertaking are not always the same as application of income wholly for charitable or religious purposes. They may or may not be admissible deduction from business income under the provisions relating to assessment of income. Yet they are entitled to exclusion under Sub-section (1) of Section 11 because they represent application of income wholly for charitable or religious purposes.

16. Here, the ITO has to scrutinise the accounts and see if there is suppression of income or manipulation of accounts with a view to conceal income. He could see whether there are items which are deemed to be income under some provision of the I.T. Act and which have not been accounted for in the books of the undertaking, or there may be some receipts which are really in the nature of income and which have not been reflected in the accounts. This interpretation of Sub-section (4) of Section 11 is in consonance with the legislative intent as disclosed by the Finance Minister who spoke in Parliament while this provision was under consideration.

17. It is now settled that the speech of the mover of the Bill is relevant. In Varghese v. ITO : [1981]131ITR597(SC) , P.N. Bhagwati J., held (at p. 608):

'Now, it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation was enacted. This is in accord with the recent trend in juristic thought not only in Western countries but also in India, that interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible.'

18. Smt. Tarakeswari Sinha participating in the debate on September 1, 1961, stated in relation to Sub-section (4) of Section 11:

'Suppose a factory has got a capacity for an annual income of Rs. 15 lakhs but for avoiding a particular portion of the tax, sometimesthe trustees or the donors have manipulated the accounts. They say that the income of the factory is only Rs. 10 lakhs and not Rs. 15 lakhs, thus avoiding tax payment on Rs. 5 lakhs which goes to their own pocket. For plugging this hole, actually powers were taken by the income-tax authorities to scrutinise the accounts to find out that the income shown in the books is the correct and has not been more. That was the only safeguard that has been provided by the sub-clause.'

19. Thus, Sub-section (4) was intended to uncover tax evasion by manipulation of the account books. It was not intended to apply to application or expenditure of income by the business undertaking. As already seen, the non-application of income for purposes of the trust was dealt with by Sub-section (3) of Section 11.

20. It was submitted by the learned counsel for the Revenue that out of Rs. 9,547 in question, a sum of Rs. 1,000 was given as donation to the Congress Committee at Hissar. It is settled that the donation to a political party is not an expenditure for a charitable purpose. Even so, it will be a case of an expenditure covered by Sub-section (3), with the result that it will be an application of income not liable to be excluded under Sub-section (1) of Section 11. It will not be deemed income under Sub-section (4).

21. In our opinion, the amount of Rs. 9,547 which was admittedly spent by the trust for charity and donations did not attract Section 11(4). It has to be dealt with under Section 11(3). The Tribunal was justified in remanding the case to the ITO for passing a fresh order.

22. We answer the first question in the affirmative, in favour of the assessee and against the Department and the second question in the negative, in favour of the assessee and against the Department. There will be no order as to costs.

Suhas Chandra Sen, J.

23. I agree.


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