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Commissioner of Income-tax, Central I Vs. Ashoka Charity Trust - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 271 of 1977
Judge
Reported in[1982]135ITR556(Cal)
ActsIncome Tax Act, 1961 - Sections 11 and 12
AppellantCommissioner of Income-tax, Central I
RespondentAshoka Charity Trust
Appellant AdvocateB.K. Bagchi and ;B.K. Naha, Advs.
Respondent AdvocateR.N. Bajoria, ;S.K. Bagaria and ;A.K. De, Advs.
Cases ReferredBowater Paper Corportaion Ltd. v. Murgatroyd
Excerpt:
- sabyasachi mukharji, j.1. in this reference under section 256(1) of the i.t. act, 1961, the following question has been referred to this court:'whether, on the facts and in the circumstances of the case, the tribunal was justified in holding that even though the assessee received voluntary contributions from non-charitable institutions, the expenditure incurred should be deemed to have been met out of the income derived from property held under trust 'this question has to be decided in the background of the fact that the assessee is a charitable trust. the assessment year involved is 1972-73, and the relevant accounting year is the financial year which ended on 31st march, 1972. during the accounting year relevant to the assessment year under reference the assessee received voluntary.....
Judgment:

Sabyasachi Mukharji, J.

1. In this reference under Section 256(1) of the I.T. Act, 1961, the following question has been referred to this court:

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that even though the assessee received voluntary contributions from non-charitable institutions, the expenditure incurred should be deemed to have been met out of the income derived from property held under trust '

This question has to be decided in the background of the fact that the assessee is a charitable trust. The assessment year involved is 1972-73, and the relevant accounting year is the financial year which ended on 31st March, 1972. During the accounting year relevant to the assessment year under reference the assessee received voluntary contributions amounting to Rs. 2,20,000 firm two individuals and one company. The income of the trust derived from property held wholly for charitable or religious purposes has been set off against the entire expenditure. In order to obviate any controversy, it may be appropriate to refer to the relevant portion of the order of the ITO to understand the basis upon which the ITO proceeded. The ITO observed in his order as follows :

'From the income and 'expenditure a/c. it is seen that the assessee received voluntary contributions amounting to Rs. 2,20,000. From the details filed it is noted that the contributions were received from two individuals and one company. While computing the aggregate income for the purpose of Section 11, the said voluntary contributions have not been taken into account. The rest of the income has been set off against theentire expenditure. This has been done relying on the provisions of sec. 12(1). The method followed by the assessee is not acceptable for the reasons discussed below:

Every voluntary contribution received by a trust is its income. This is clear from the opening words, 'Any income of a trust derived from voluntary contributions', used in Section 12(1). For the purpose of the statute such contribution has been divided into two categories, viz. : (i) contribution received from non-charitable institution, and (ii) contribution received from charitable institution. The first category is not to be included in the total income of the trust or institution without requiring it to fulfil the conditions laid down in Section 11. The second category also can avail of the exemption like the first category. But for the second category the conditions laid down in Section 11 have been made applicable. The provisionsof Section 12(1) do not say that voluntary contributions received from non-charitable institutions are not 'income' of the trust. The trustees also have treated the same as income by showing the contributions in the income and expenditure a/c. Therefore, the voluntary contributions in question form part of the composite income fund of the trust out of which all its outgoings have been met in the normal course. Since the conditions laid down in Section 11 are not to be fulfilled in respect of the contributions in question, the said contributions are not to be included in the 'income derived from property ' for the purposes of Section 11.

But since the contributions have formed part of the composite income fund of the trust and since the total amount applied for charitable or religious purposes has been met out of the said composite income fund, the amount of expenditure for the purpose of Section 11, in the facts and circumstances of the case, has to be arrived at by reducing the total amount of expenditure by an amount which bears to the total amount of expenditure the same proportion as the said contributions bear to the aggregate income of the trust including the said contributions. In the instant case, the trustees had a common pool into which both income from property held under trust and other income flowed and out of which the trustees in reality met all their expenses without making any distinction between the two kinds of income. For this reason the question of allocation of expenditure between the two kinds of income arises.

2. In the circumstances stated above, the amount applied for charitable or religious purposes, attributable to the said amount of the voluntary contributions is worked out below on the basis of the principle discussed above.

Rs. Aggregate charitable expenditure as per assessee's

statement.1,44,172 Deduct :Rs. Depreciation 2,127 Value of land not

purchased in the

previous year

(for the dharmsala)6,0008,1271,36,045 Aggregate income as per assessee's statement

Deduct :

Establishment expenses1,902Less: Share transfer expenses 1251,777 Income for section 111,01,636Aggregate income as computed above1,01,636Dividend income u/s. 13(4)18,977Voluntary contributions u/s. 12(1)2,20,0003,40,613Amount of proportionate charitable expenditure attributable to

Rs. 2,20,000 and Rs. 18,977 is worked out below : 1,36,045---------- X 2,38,977 = Rs. 95,450 3,40,613Therefore, expenditure for the purpose of sec. 11(1) comes to

Rs. 40,595 (Rs. 1,36,045 minus Rs. 95,450). Unspent income is computed

below :Rs.Income for sec. 111,01,636Exemption for sec. 1140,595Unspent income61,041'

The assessee being aggrieved by the said, assessment order went up in appeal before the AAC. The AAC dealing with this aspect was of the view that there was no provision in the I.T. Act or the Rules framed thereunder authorising the ITO to determine the amount applied to charitable purposes for the purposes of exemption under Section 11 of the Act on any pro rata basis. The AAC further noted that it was contended on behalf of the assessee that although there was a composite fund, the assessee had proved before the ITO beyond any doubt that out of the sum of Rs. 2,20,000 received as voluntary donations, Rs. 1,95,000 was either deposited with the banks directly or was utilised for construction of the Udippi Share Sales and no part of Rs. 1,95,000 could be said to have been utlised and included in the sum of Rs. 1,44,672 being the amount spent on the objects of the trust during the relevant year. It was further urged before the AAC on behalf of the assessee that the ITO had ignored such evidence. But, in view of the principles accepted by the AAC, the AAC held that the ITO should have granted the full benefit of exemption from tax and such exemption should not have been reduced by reason of any voluntary contribution received by the trust from non-charitable institutions.

3. Being aggrieved by this order, the revenue went up in appeal before the Tribunal. The Tribunal set out the relevant facts and the rival contentions and the decisions that were cited on behalf of the parties. The Tribunal thereafter, observed and it is necessary to set out the actual observations on the particular aspect because of the argument made before us which were as follows :

'The assessee has received donations amounting to Rs. 2,20,000 from two individuals and a company which are not charitable trusts and so Section 12 has no application. The aggregate income of the assessee including the dividend income was Rs. 1,20,613 and the expenditure incurred was Rs. 1,44,172, but the assessee had income which has been brought from the earlier year. Thus, the entire expenditure incurred has been met out of the income of this year and the income of the earlier year.'

The Tribunal, on the basis of the aforesaid observations, observed that the assessee was entitled to set off the expenditure incurred against the income derived from property under trust for charitable and religious purposes. The Tribunal went on to observe that merely because the donations had been received, which formed part of the same fund, the ITO could not disallow the expenditure on pro rata basis. The contributions received by the assessee did not form part of the income as Section 12 had no application. The Tribunal observed further that once the assessee derived income from the property held under trust for charitable and religious purposes the expenditure incurred should be deemed to have been met out of that income. The Tribunal then held that the ITO had not brought on record any material to show that the expenditure had been met out of the contributions received by the assessee. In the aforesaid view of the matter, according to the Tribunal, the allocation of expenditure made by the ITO on pro rata basis was not correct. The Tribunal referred to some decisions some of which we shall presently note, and upheld the order of the AAC and dismissed the revenue's appeal.

4. From this order of the Tribunal as many as seven questions were sought to be raised as questions of law that should be referred to this court under Section 256(1) of the I.T. Act, 1961. But the Tribunal has referred the questions, as we have indicated before, to this court. The Tribunal has not referred the other questions suggested by the revenue and the revenue did not come up in appeal on this aspect. Before we deal with the contentions raised before us for the purpose of finding an answer to the question posed, it is necessary for us to refer to the provisions of the relevant section, as it stood at the relevant time.

5. Section 11(1)(a) of the I.T, Act, 1961, as it stood in the relevant assessment year, was as follows:

Section 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.'

It is also necessary to refer to Section 12, as it stood at the relevant time, which was 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 derived from voluntary contributions and applicable solely to charitable 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 contributions as are referred to in Sub-section (1) are made to a trust or a charitable or religious institution by a trust or a charitable or religious institution to which the provisions 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 purposes of that section and the provisions of that section shall apply accordingly.'

It appears from the aforesaid section that every voluntary contribution received by a trust is its income. This would be clear from the opening words 'Any income of a trust......derived from voluntary contributions' used in Section 12(1). For the purpose of statute such contributions have to be divided into two categories, viz., (i) contributions received from non-charitable institutions, and (ii) contributions received from charitable institutions. The first category is not to be included in the total income of the trust or institution without requiring it to fulfil the conditions laid down in Section 11. The second category can also avail of the exemption of the first category, but for the second category the conditions laid down in Section 11 have to be fulfilled. The provisions of Section 12(1) do not say that voluntary contributions received from non-charitable institutions are not the income of the trust. It was found by the ITO, as we have noticed before, that the voluntary contributions in question formed part of the composite income fund of the trust out of which all its outgoings have been made in the normal course. It has also been found from the observations, as we have set out hereinbefore, that the composite fund consisted of the income of the year, may be some residue of the income of the earlier year and voluntary contributions. This formed the composite fund, out of which an expenditure of Rs. 1,44,172 was incurred by the assessee, which is in question. The question referred to us is whether, even though the assessee had received voluntary contributions from non-charitable institutions, the expenditure in question should be deemed to have been made out of the income derived from the income or the property of the trust. This was in the context of the question posed : whether the entire expenditure should be deemed to have been met from the income derived from the property held by the trust. But learned advocate for the revenue sought to emphasise the expression 'that income derived from the property held under trust wholly for charitable and religious purposes only to the extent' and we must repeat, he emphasised on the expression' to the extent', to which such income is applied to such purposes in India. His point before us was : as income of this year in question undoubtedly fell short of the total expenditure and part of the expenditure had been made, according to him, in view of the finding of the Tribunal, out of the income of the earlier years, the entirety of the expenditure would not be entitled to exemption under Section 12 of the Act. We have noticed that the contrary that was canvassed before the ITO as well as the Tribunal was whether really in respect of a composite fund there is any scope of apportioning in accordance with the proportions from the different funds in the hands of the assessee. There is no dispute that the expenditure was incurred in the year in question in respect of which exemption is claimed. There is no dispute, as would be apparent from the orders of the ITO, the AAC and the Tribunal, that there was a composite fund. There is also no dispute that in that composite fund the income of the assessee for the year was also included. In this background we have to examine, firstly, whether it was still necessary for the assessee to prove whether any particular fund was utilised for making the expenditure in order to get the exemption under Section 12 of the Act or whether there was any scope for the application of the theory of apportionment in accordance with the proportion.

6. The question, in our opinion, has been very clearly explained in the decision of the Court of Appeal in England in the case of IRC v. Sterling Trust Ltd. [1925] 12 TC 868. There, as the statement of the case would make it clear, the company's income account was derived from three different sources, viz., the dividend received from companies described in certain provisions of the Act, dividend received from companies liable to be assessed under the Corporation Profits Tax and not assessable to tax in the hands of the company under certain provisions of the English Act and, thirdly, other income which was admittedly liable to tax in the hands of the company. Different amounts of money were received for different periods of time mentioned in the statement of case. The company had issued debentures on the principal and interest due thereunder were secured by a floating charge on the assets and undertaking of the company. Prior to 23rd May, 1921, the total income received by the company, which composed of profits assessable and not assessable to Corporation Profits Tax, was paid into one account at the bank out of which account were paid management expenses and debenture interest referred to in the year shown in the statement of the case. On 23rd May, 1921, the company had opened a separate account, called the special income account at the same bank. Into this special income account were paid the dividends received from the public utility companies referred to, as we mentioned before. Income received from some other sources were not paid into this account. Out of this special income account alone, all payments in respect of the management expenses and debenture interest were, in fact, made by the company as and from 23rd May, 1921. No money was at any time paid into the special income account except the dividends and income referred to in paras. 2(a) and (c) nor was any money ever transferred from any other account to the special income account which at times was overdrawn. After referring to prov. (b) to Section 52(1) of the Finance Act, 1920, with which the case was concerned, it was observed, in the statement of case, it was admitted that the company had paid the debenture interest of the character described in the said proviso and incurred management expenses towards whereof that was mentioned. It was one of the contentions before the Commissioners of Inland Revenue that on a proper construction of the prov. (b) to Section 52(1) of the Finance Act, 1920, and in view of the fact that the advance interest was paid prior to 23rd May, 1921, date of mixed fund, composed of profits assessable and not assessable to Corporation Profits Tax, the company's claim to deduct the whole of the interest paid by it from its assessable profits only was incorrect in law and could not be substantiated and that the company was entitled to deduct from its assessable profits only a part of the interest paid which should bear the same proportion to the total interest paid as the assessable profit of the company bears to the total income of the company. The Commissioners held against the assessee's contention and the matter went up before Mr. Justice Rowlatt who felt himself bound by the decision in the case of Scottish Oils Ltd. v. IRC [1925] SC 132. In that view of the matter, Mr. Justice Rowlatt upheld the assessment made. The matter was then taken up before the Court of Appeal and it would be instructive to refer to certain observations from the observations of R. Pollock M.R. at pp. 879-880 of the report. Pollock M.R. observed that the real point that the Court of Appeal had to consider was whether or not the company was entitled to say that the company had made the payment of the debenture interest out of the moneys which were assessable to Corporation Profits Tax or whether the payment was to be treated as one which had been proportionately paid out of what we might call free and taxable income. It was observed, the question of the mode of payment which had been adopted by the company had beenconsidered very carefully in three cases which the Master of Rolls noted, and it was reiterated that it was the general rule of law that a party who paid the money had the right of applying that payment as he thought fit. It was generally applicable in the case of debtors. If there were several debts due from him, he had a right to say to which of those debts the payment should be applied. In this connection reference was made to the decision in the case of London County Council v. Attorney General [1901] AC 26 ; [1900] 4 TC 265 . Though the point that arose in that case was not quite the same as the point before the Court of Appeal in the decision under consideration, reliance was placed on the observation of Lord Davey in the case of London County Council v. Attorney-General. Then reliance was placed on the observations of the House of Lords in the case of Edinburgh Life Assurance Co. v. Lord Advocate [1909] 5 TC 472 and reliance was placed on the observations of Lord Atkinson in that case at p. 485 and thereafter the Master of Rolls went on to observe that it appeared to him from that judgment and from the judgment of Lord Gorrell, which contained passages to the extent, which indicated that where one would consider the business of the company which had two sources of income, the one subjected to tax and the other not, one was not entitled to assume and deem that the company had paid the money which it ought to pay according to the most business-like way of appropriating the expenses. It was further observed that even though it had not been done, in fact, by any separate allocation of the money as was done in the later years by putting it at the special bank account one still was entitled to treat the money as having been paid out of the fund which was most favourable to the company, which was, in this case, the taxpayer. The Master of the Rolls clearly negatived the proposition which had been good in the Court of Session, that is, the system of proportionate payment. The court further Observed that Mr. Justice Rowlatt was not strictly bound by the Scottish decision, referred to hereinbefore, but the Court of Appeal felt that it was not so bound. To the same extent, observations were made by Lord Justice Warrington, at p. 886, who observed that there was no principle of law by which the apportionment could be introduced and that it was open to the assessee-company to pay as they pleased and it was further observed that it was more advantageous to them to pay it out of the assessable income and, therefore, they must be taken to have so paid it. Lord Justice Atkin also echoed the said feeling though he had expressed some doubt about the observations made in the previous case but his Lordship was emphatic on this point that it was plain that the Income-tax Act showed that the apportionment theory which was adopted by the Commissioners of Inland Revenue as to the first part was not correct but, at any rate, if it was correct, which was so contended for by theCrown, it would be a little difficult to distinguish between that part of the payment which was apportioned to the untaxed income and that which was under the view deemed to be entirely paid out of the untaxed income. Now, it appears to us that the ratio of the said decision is that where certain expenditure is incurred or certain sums spent out of the composite fund or a composite source, unless there is a clear provision to the contrary, the theory of apportioning the expenditure in accordance with the proportionate income could not be applied. That is the test upon which the Tribunal and the AAC have proceeded in the instant case. The view we are expressing, more or less, was expressed, though slightly in a different context by the Mysore High Court in the case of Siddammanna Charities Trust v. CIT : [1974]96ITR275(KAR) . The assessee was a charitable trust. On October 1, 1963, the very first day of the commencement of the accounting year, the assessee had made a deduction of the sum of Rs. 25,000 to the College of Engineering, Tumkur. In the assessment for the year ended 30th September, 1964, the assessee had claimed that the said sum of Rs. 25,000 should not be included in its total income of the previous year by virtue of Section 11(1)(a) of the I.T. Act, 1961. The Appellate Tribunal as well as the authorities below disallowed the claim of the assessee on the ground that the said sum of Rs. 25,000 donated to the engineering college came from the trust fund of the assessee and not from its income of the relevant accounting year, as, on the first day of the accounting year, there were no profits available from which the funds could be donated. It was held that the benefit of Section 11(1)(a) was available provided the trust had earned profits in the previous year relevant to the assessment year. The profit and loss account of the trust showed that the donation of Rs. 25,000 formed part of the profits for the year ended on 30th September, 1964, and it was not shown that the said sum was paid out of the capital account. Therefore, the amount of Rs. 25,000 should not be included in the total income of the assessee for the previous year. The Division Bench of the Mysore High Court distinguished the decision of this court in the case of CIT v. Samnugger Jute Factory Co. Ltd. : [1953]24ITR265(Cal) , a decision upon which learned advocate for the revenue strongly relied and which we shall presently deal with. But before we do so, we may refer to the other decision, viz., the decision of the Orissa High Court on this point, which, in our opinion, clarifies the position. A reference may be made to the decision of the Orissa High Court in the case of Raja Shri Sailendra Narayan Bhanja Deo v. CIT : [1959]36ITR94(Orissa) . There, during the financial year 1952-53, the assessee who had derived agricultural and non-agricultural income made a donation of Rs. 10,000 to a charitable institution approved under Section 15B of the Indian I.T. Act, 1922. In its assessment to income-tax, the assessee had claimed exemption from tax underSection 15B of that amount. Revenue had found that the agricultural income of the assessee for that year was about Rs. 5 lakhs and the non-agricultural income was about Rs. 91,000 and that the sum of Rs. 10,000 was simply debited in the composite cash book maintained by the assessee without stating whether it came out of the agricultural or non-agricultural income. As there was no proof that the contribution was made solely from and out of the non-agricultural income, the department had given an allowance only to the extent of Rs. 1,754 taking the proportion between the agricultural and non-agricultural income. When the matter came up before the High Court on a reference, the assessee filed an affidavit stating that he had made various donations amounting to Rs. 74,000 and that the donation of Rs. 10,000 in respect of which he had claimed exemption was paid out of the non-agricultural income whereas the other donation amounting to Rs. 64,000 was made out of the agricultural income. It was held by the Division Bench of the Orissa High Court that having accepted the payment of the donation to a trust or a charitable institution as true, the revenue was not entitled under Section 15B to apportion the contribution between the agricultural income and non-agricultural income of the assessee and the assessee was, therefore, entitled to exemption from tax of the entire sum of Rs. 10,000. In this case also the decision of the Calcutta High Court in the case of CIT v. Samnugger Jute Factory Co. Ltd. : [1953]24ITR265(Cal) , was referred to and distinguished which we shall presently deal with. Our attention was drawn to the decision in the case of Hanuman Sugar & Industries Ltd. v. CIT : [1970]76ITR603(Cal) , where this court was concerned with a similar question though not an identical question. There, the assessees, a limited company having a sugar mill, was also running an agricultural farm for growing sugarcane which was used in the production of sugar in its mill. Under the managing agency agreement, the assessee-company was appointed the managing agents for a period of 10 years from 1st October, 1964. The managing agents were entitled to a remuneration by way of commission equal to 10 per cent. of the net profits subject to a minimum. In the assessment year in question, the assessee claimed a deduction of the managing agency commission amounting to Rs. 48,735. The ITO found that the commission claimed worked out at 10 per cent. of the net profits including the agricultural profits amounting to Rs. 97,407 and being of the opinion that the assessee was entitled to deduction from the total profits only the remuneration at 10 per cent. of the profits which was subjected to income-tax, disallowed the sum of Rs. 9,741 out of the managing agency remuneration. The Tribunal upheld the order of disallowance. It was held by this court that in view of the decision of the Supreme Court in the case of CIT v. Indian Bank Ltd, : [1965]56ITR77(SC) and the decision of the Bombay High Court in thecase of CIT v. Maharashtra Sugar Mitts : [1968]68ITR512(Bom) , which was subsequently affirmed by the Supreme Court, as we shall notice and in view of the terms and conditions of the managing agency agreement, in the instant case, the Tribunal was not right in holding that the amount of Rs. 9,741 out of the managing agency commission of Rs. 48,735 was not allowable as deduction by way of computing the profits of the assessee's business under Section 10 of the I.T. Act. It was further, observed that where a part of the income of the assessee was either excluded or was exempt under any provision of the I.T. Act, it was not permissible to disallow the proportionate part of the expenditure attributable to such an excluded or exempt income. The decision of the Bombay High Court referred to in the decision in the case of CIT v. Maharashtra Sugar Mills Ltd. : [1968]68ITR512(Bom) , was affirmed by the Supreme Court in the case of CIT v. Maharashtra Sugar Mills Ltd. : [1971]82ITR452(SC) . It is not necessary for our present purpose to refer to this aspect in any greater detail.

7. It is now necessary to refer to the decision of the Calcutta High Court in CIT v. Samnugger Jute Factory Co. Ltd. : [1953]24ITR265(Cal) . There, the expression 'any sums' in Section 15B(1) of the Indian I.T. Act, 1922, fell for consideration and the court held that the words must be sums assessable in their nature, being parts of the assessable income of the relative accounting year and sums brought into assessment and about to be brought to charge. Consequently, there could be no question of granting any exemption under Section 15B in respect of contribution to the Gandhi National Memorial Fund, if the sum representing the contribution was not part of the income assessable for the year at all. Where the total assessable income of the assessee determined for a particular year did not include a sum contributed by it to the Gandhi National Fund because such sum was contributed by it from the savings, not of the relevant previous year but of a year prior to the previous year, the assessee would not be entitled to the exemption under Section 15B. A narration of the facts would indicate that there was no composite fund out of which the contribution was made. On the other hand, the assessable income determined for a particular year did not include any sum contributed by it to the Gandhi National Fund and it was exclusively contributed by the assessee from the savings not of the previous year but of a year prior to the previous year. The contributions made for charitable purposes for the year under consideration were not allowed. In those backgrounds the case was not concerned with the controversy, where there is a composite fund and a contribution is made, whether there should be any apportionment in accordance with the proportion. It is in this light that the aforesaid decision had been distinguished both by the Mysore High Court in the decisionreferred to hereinbefore as well as by the Orissa High Court in the decision referred to hereinbefore.

8. Reliance was placed on the decision of this court in Basant Kumar Aditya Vikram Birla v. CIT : [1968]70ITR657(Cal) . There, the sums claimed for allowance of rebate as donations to recognised charitable institutions, it was held, must be sums assessable in their nature, being part of the assessable income of the relative accounting year and sums brought into the assessment and about to be brought to charge. Where the shares donated by the assessee were acquired out of its past savings, the value of those shares would not be entitled to rebate under Section 15B. In the facts narrated, it was stated that the shares concerned were 'admittedly' acquired by the assessee out of its savings of the earlier years. There was also no dispute that Jayashree Charity Trust was an institution, the donations to which attracted the provisions of Section 15B. There also the court was not at all concerned with any question of contribution or expenditure incurred out of a composite fund and no question of apportionment or distribution on a pro rata basis arose. In that view of the matter, in our opinion, the revenue cannot draw any support from the observations made in the said decision. Similar was the position with the case before the House of Lords in the case of Bowater Paper Corportaion Ltd. v. Murgatroyd (Inspector of Taxes) [1969] 74 ITR 414, where the assessee-company had received dividends from a subsidiary company resident in Canada. That company in turn had received from its subsidiaries dividends which were paid out of the profits which had borne tax in Canada and the United States. Both in Canada and the United States a higher depreciation provision was allowed for the purpose of tax than was considered proper in the subsidiaries' commercial accounts; as a result, the profits as shown in the accounts were substantially higher than the profits on which tax had been assessed. The assessee had claimed double taxation relief by way of credit for the overseas tax borne by its subsidiary on the profits out of which the dividends were paid. It was contended that 'relevant profits' within para. 9(1) of Schedule 16 to the I.T. Act, 1952, were profits as computed for the purpose of the foreign tax. The inspector had objected to the claim and the assessee-company had appealed. The Special Commissioners had held that 'relevant profits' were the profits available for distribution as shown by the accounts. Cross J. had confirmed the decision of the Special Commissioners. There the question the court was concerned with was the interpretation of the relevant profits, whether it should be assessed profits or account profits assessed for distribution. At p. 425 reference was made by Lord Donovan to the decision in the case of Sterling Trust Ltd. v. IRC [1925] 12 TC 868 , which we have referred to hereinbefore. The House of Lords distinguished that case by observingthat there the company had two kinds of income, one which had come from other companies which had suffered corporation profits tax and the other income which was assessable to that tax in the company's own hands. The first kind of income was immune from further corporation profits tax; and to keep this fund intact, the company argued that it was to treat its management expenses and the debenture interest which it had to pay, as having come out of its income which still had to bear corporation profits tax so as to diminish that income and consequently the bill for tax. It was held that it was entitled so to do. But in the case before the House of Lords there were not two funds as in the Sterling Trust Ltd. case [1925] 12 TC 868 but there was only one, and none the less so because the tax assessment did not arithmetically impose the exigible rate on every dollar of the corporation's profits. The court endorsed the view of Cross J. on this aspect of the matter. Cross J. had dealt with the Sterling Trust Ltd. case in the following manner : [1968] 1 All ER 869.

'There are not, as I see it, two funds of profits here, the accounts profits, only part of which are taxed, and the assessed profits, all of which bear tax. What are taxed are, I think, the company's profits for the year, whatever they may be ; but they are taxed according to a yardstick which may compute them at less or more than they appear in the taxpayer company's accounts.'

In that view of the matter, the ratio of the said decision also could not be applied to the facts of this case. Reliance was also placed on the decision of the Madras High Court in the case of Stanes Motors (South India) Ltd. v. CIT : [1975]100ITR341(Mad) . There also there was no composite fund out of which expenditure was claimed. The assessee had claimed deduction under Section 88(1) (now Section 80G) of the I.T. Act, 1961, of a sum of Rs. 7,050 paid out of reserves for certain charities. The departmental authorities and the Tribunal had rejected this daim in the view that the amount was not paid out of the income of the year but out of reserves. On a reference to the High Court, it was held that the rebate or deduction under the section being from the amount of income-tax on the total income of the assessee with which he was chargeable for any assessment year, unless the donations claimed for rebate had formed part of the assessable income of that year it would not be available for rebate under Section 88 and hence the assessee in the instant case was not entitled to the relief except to an extent of Rs. 174 which alone had come from assessable income of the year in question. Here again, as we have observed, there was no question of any composite fund being there. The sum which was disallowed was clearly paid out of the reserves. Learned advocate for the revenue drew our attention to the observations of the Supreme Court in the case of Keshav Mills Ltd. v. CIT : [1953]23ITR230(SC) , and relied on theobservations at p. 341 in order to emphasise the meaning of the expression 'deemed to have received'. This case was referred to us in view of the language used where the Tribunal had observed in its order that once the assessee derived income from property under charitable purpose the expenditure 'should be deemed to have been made out of the income'. Learned advocate for the revenue emphasised that there was no deeming of any provision under law. He was absolutely right. The Tribunal was right, that in the facts of that case, it was presumed or assumed that the expenditure had been met out of that income in question. This is the correct view in accordance with the principles that we have expressed. This does not affect or alter the view we have expressed.

9. Reliance was alia placed on another decision of the Supreme Court in the case of CIT v. Ramkrishna Deo : [1959]35ITR312(SC) .

10. Our attention was drawn to the observations of the court at p. 316 of the report where the court reiterated that the onus was on the assessee which claimed exemption. There can also be no dispute as to that. But, here as we have noticed the facts were that there was income in the year. There was also expenditure in respect of which exemption had been claimed under Section 12 exceeding that income. The disbursement had been made from a composite fund consisting of both the voluntary contribution and the residue, if any, of the previous year's income or of the income of the year in question. In such a situation there was no scope for applying the principle of apportioning in accordance with the proportion of income from different sources. Neither the ITO nor the AAC had clearly proceeded on that basis, nor the controversy before them was, in view* of the voluntary contribution, whether the entirety of the income should be attributed to the income in the year in question. Relying on the observations of the Tribunal, which we have set out hereinbefore, learned advocate for the revenue tried to stress that the expression 'to the extent to which such income is applied' appearing in Section 11(1)(a) of the I.T. Act, 1961, made it obligatory to find out as a fact, the entirety of the expenditure which exceeded the income in the year in question. In our opinion, this question is not open within the framework of the question posed before us. Even if we consider it from the principle the moment the disbursement or expenditure comes out of the composite fund, the theory of apportioning in accordance with a proportion does not apply, and in this respect we would like to adhere to the principle enunciated by the Court of Appeal in the case of IRC v. Sterling Trust Ltd. [1925] 12 TC 868, referred to hereinbefore.

11. In this view of the matter, we would answer the question by saying that the Tribunal was justified in holding that even though the assessee received voluntary contributions from non-charitable institutions, the expenditure incurred should be considered to have been met out from theincome derived from property held under trust. The answer is in favour of the assessee.

12. In the facts and circumstances of the case, the parties will pay and bear their own costs.

Sudhindra Mohan Guha, J.

13. I agree.


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