1. This is a departmental appeal and the following grounds have been taken: 1. That, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in directing the Income-tax Officer that the amount of Rs. 3,10,000 should be treated as application of income for the purpose of Section 11 of the Income-tax Act; 2. That, on the facts and in the circumstances of the case, the learned Commissioner of Income-tax (Appeals) erred in computing the total income to a minus figure from total income of Rs. 1,53,515; 3. That, the order of the learned Commissioner of Income-tax (Appeals) may be reversed and that of the Income-tax Officer restored.
2. The facts are that the assessee, a charitable trust, was having income from: (i) Interest (Rs. 1,61,589), (ii) Dividend (Rs. 51,420), (iii) Profit on sale of Investment (Rs. 2,200). The total income of the assessee for the assessment year 1982-83 was Rs. 2,15,209. The assessee debited the donation account with Rs. 3,97,500 which included donation of 3,100 preference shares of Rs. 100 each purchased in the earlier years. However, the donation as required under Section 11(1)(a) of the Income-tax Act, 1961 was given by the assessee at Rs. 87,500. The Income-tax Officer accordingly took into consideration the application of Rs. 87,500 for charitable purposes out of the income of the trust and the balance was subjected to tax.
3. The assessee came up in appeal before the Commissioner of Income-tax (Appeals). On behalf of the assessee it was urged that the donation of Rs. 3,10,000 by way of 3,100 preference shares of Rs. 100 each made out of the accumulated profit of the assessee should be considered as application of income of the year out of the total income of the trust.
Reliance was placed on the following decisions: (a) Saurashtra Cement and Chemical Industries Ltd. v. CIT [1980] 123 ITR 669 (Guj.); (c) CIT v. Khandelwal Laboratories (P.) Ltd. [1979] 118 ITR 531 (Bom.); (e) CIT v. Bangalore Woollen, Cotton & Silk Mills Co. Ltd. [1973] 91 ITR 166 (Mys.); The CIT (A) accepted the argument of the assessee and consequently directed the ITO to take 'Nil' income for the year under consideration.
4. The departmental representative very strongly supported the order of the ITO and urged that the finding of the CIT(A) should be set aside.
5. The assessee's counsel, on the other hand, filed copies of balance-sheets of the trust for the years ending 9th November, 1977 and 27th October, 1981 and urged that if the interpretation of the ITO is taken, it will be a very hard case for the trust for the application of the income. The assessee-trust out of the accumulated profit purchased shares which had been donated during the year under appeal. Therefore, the CIT (A) was justified for taking the donation by way of investment as application of income.
6. The assessee was having a total income of Rs. 2,15,209. The assessee had given donation as required under Section 11(1)(a) for Rs. 87,500.
The assessee during the year under appeal had also given donation of 3,100 preference shares of Rs. 100 each. The details of the shares and other facts are not available. But they are gathered from the balance-sheet filed by the assessee as on 9th November, 1977. In the immediately preceding year the assessee was having in stock preference shares for Rs. 6,18,100. Therefore, it is clear that 3,100 preference shares for Rs. 3,10,000 were donated during the year under appeal.
While donating the shares, it appears from the profit and loss account that the investment account was credited and donation account was debited and accordingly the assessee claimed that the amount of donation given by way of preference shares should be taken as application of income for the year. Section 11(1)(a) speaks of the residue income which will be taxed if not applied for the charitable or religious purposes or accumulated as specified in the section. If the ingredients in Section 11(1)(a) are carefully perused, the following points emerge: (i) The total income should be computed from the property held under trust wholly for charitable or religious purposes; (ii) The income applied for religious or charitable purposes will have to be excluded; (iii) The accumulated or set apart income should not be in excess of 25 per cent of the income of the property; (iv) The balance amount would be taxable. If these four ingredients are taken into consideration, it is very clear that application of income should be made out of the total income of the year. The application would diminish the total income of the assessee by the donation given or the charge created on the total income to be disbursed later on or the amount spent for charitable object or donation given to be reimbursed out of the total income of the year.
The assessee has donated 3,100 preference shares during the year under appeal. Once the shares have been donated, the investment account of the assessee has been liquidated to that extent and it would not affect the total income of the assessee. The total income has been affected by the assessee by giving a book entry. The assessee instead of crediting the investment account, while giving the donation, has credited the investment account and debited the donation account, and thus donation account is appearing in the profit and loss account. Therefore, even though, the donation account is appearing in the profit and loss account of the assessee, the total income has not diminished by the amount of donation. In fact, the investment account of the assessee has been reduced by the amount of donation given by it to another charitable institution.
7. Therefore, it is clear that by giving donation of preference shares out of the earlier years' profit would not satisfy the condition of Section 11(1)(a) and the finding given by the CIT(A) was incorrect.
This view is supported by the decision of the Hon'ble Calcutta High Court in the case of CIT v. Ramchandra Poddar Charitable Trust [1987] 164 ITR 666. In that case, the assess'ee, a charitable trust, had donated shares worth Rs. 30,000 purchased out of past accumulated profits to another charitable trust in the accounting year relevant to the assessment year 1967-68. The assessee's income during the relevant accounting period was Rs. 30,201. The Income-tax Officer found that Rs. 13,387 was applied towards charitable purposes. The expenses amounted to Rs. 328. The Income-tax Officer calculated that there was an accumulation of a sum of Rs. 16,486 out of the year's income (Rs. 30,201 minus Rs. 13,715). This exceeded 25 per cent of the assessee's income or Rs. 10,000. The assessee was, therefore, held liable to tax.
The Tribunal, however, held that the gift of shares by the assessee to another charitable trust would amount to application of its income for charitable purposes. On a reference, the Hon'ble High Court held -- The Tribunal was wrong and the gift of shares valued at Rs. 30,000 to another charitable trust would not amount to application of the income of the assessee-trust for the purpose of charity in the year under consideration.
8. Consequently, the finding given by the CIT(A) is reversed and that of the ITO is maintained.