1. The main issue involved in this appeal is whether the refund of tax of Rs. 4,20,321 could be treated as the assessee's income available for application on the objects of the trust.
2. The assessee is a public charitable trust. The assessment year is 1983-84 and the relevant previous year is the calendar year 1982.
3. Right from its inception the ITO had granted exemption to the entire income of the assessee under Section 11 of the Act. However, relying on certain changes made in the relevant provisions of the Act in respect of the assessment years 1972-73 and 1973-74, the ITO held that the assessee was not entitled to exemption under Section 11 of the Act, as it had held shares of M/s. Godrej & Boyce Mfg. Co. Ltd. The assessee, therefore, was required to pay tax of Rs. 4,01,541 in the assessment year 1972-73 and Rs. 2,54,460 in the assessment year 1973-74. The assessee had preferred appeals against the said action of the ITO before the Appellate Asstt. Commissioner, who had confirmed the action of the ITO. Thereafter, the assessee had come up in appeal before the Tribunal and the Tribunal in its consolidated order dated 30-9-1978 in I.T. A. Nos. 3306,3307,3376 and 3378/Bom/1977-78, held that since the provisions of Section 13(2)(h) of the Act were not applicable in the assessee's case, the income-tax authorities were not justified in not granting exemption to the assessee under Section 11 of the Act. In his order dated 7-9-1981, the ITO gave effect to the order of the Tribunal and determined the refund amounting to Rs. 4,20,321 to the assessee. It may be mentioned that the Revenue has not accepted the said order of the Tribunal and has preferred a reference, to the Hon'ble Bombay High Court, which was granted by the Tribunal and is pending for disposal in the Hon'ble High Court.
4. On the aforesaid facts in their meeting held on 29-3-1982 the Board of Trustees of the assessee-trust decided the treatment to be accorded to the refund of Rs. 4,20,321 in the following manner : Mr. F.P. Sarkari informed the Board that the balance in Home Savings Account of Godrej Trust is Rs. 4,70,131.62 which consists of income-tax refund of Rs. 4,20,321 for A.Y. 1972-73 and 1973-74 and the balance of Rs. 49,810.62 as on 1-1-1982 and the Trustees have to decide whether the amount of Rs. 4,20,321 received as refund from income-tax office is to be spent within the stipulated time as allowed by Income-tax Act, 1961 or to set aside as provisions for taxation till such time the appeal preferred to Bombay High Court by Income-tax Office is finally decided.
Mr. S.E. Dastur informed the Board that in his view the income tax refund received by the Trust cannot be construed as income of the Trust available for application for charitable purposes as our right to utilise the same is restricted because of the reference preferred to Bombay High Court by the Commissioner is still pending and in the event of the matter being decided against the Trust by Bombay High Court, the Trustees will be liable to pay back the refund amount as income-tax for Assessment years 1972-73 and 1973-74. If the Trustees were to spend away the money on charitable purposes no funds will be available to meet the tax liability. After due consideration, it was decided that the income-tax refund should not be considered as income for the year ended 31-12-1982. It was further decided that the refund of Rs. 4,20,321 be set apart wholly without prejudice to the contention that the same does not represent income, as required under Section 11 (2) of the Income-tax Act, for application by 31-12-1991 to : (2) In the event of such liability not arising, by way of donations to Hospital for founding or starting a Ward or beds in the Hospital or for grant to educational institutions or providing medical and/or educational help to the poor and needy.
It was further resolved that the notice as required under the Income-tax Act be given to the Income-tax Officer, Trust Circle, Bombay, informing about the setting apart of the sum of Rs. 4,20,321.
5. For the year under appeal the assessee filed its return of Income of Rs. 11,994 along with the following Note :- The refund received by the Trust for the assessment years 1972-73 and 1973-74 amounting to Rs. 4,20,321 cannot be construed as income of the Trust available for application for charitable purposes, as the right to utilise the same is restricted because of the Reference Application preferred to Bombay High Court by the Commissioner of Income-tax.
Without prejudice, assuming for sake of argument that the said refund of Rs, 4,20,321 is to be considered as the income of the Trust, the same has been, by a Resolution passed by the Trustees on 29th March, 1982 set apart for application by 31st December, 1991 to - (a) payment of income-tax if the same becomes payable and (b) in the event of such liability not arising, by way of donations to hospital for founding or starting a Ward or beds in the hospital or for grant to educational institutions.
6. The ITO framed the assessment under Section 143(3) read with Section 11 of the Act, determining the surplus at "Nil" in the following manner :- In the note appended to the Explanation of income, the assessee has stated that the refund of Rs. 4,20,321 received from the Department for the Assessment years 1972-73 and 1973-74 is not treated as income as there is no of spending the amount as a reference application preferred by the Department is pending in the High Court. No such restrictions were imposed in any of the record for those years. The refund referred to above is part of tax deducted at source which was not considered as income in those years. Hence the said amount of Rs. 4,20,321 is included in the income of the assessee. Alternatively, the assessee has requested that should the said refund be taken as income and included in the income of the year, the said amount should be allowed as accumulation under Section 11(2) for which a notice under Section 11(2) together with a copy of the resolution is allowed. As per this notice, the purpose of accumulation is to pay the taxes if found payable and in the event of such liability arising, the same would be utilised for donations to hospitals founding or to start a ward or beds in hospital or for grant to educational institutions (other conditions for accumulation are satisfied). Accumulation is allowed.
After discussing the case with the assessee's representative taxable surplus is arrived at as follows :-Gross income as per I & E Account 16,194Add: Amount of refund 4,20,321 ---------Statutory deduction 1,09,128 1,09,331 --------- ----------Less : Deduction allowed 3,27,184 under Section 11(2) ----------- Surplus Nil 7. In appeal before the AAC it was strongly urged on behalf of the assessee that the ITO erred in holding that the refund of tax of Rs. 4,20,321 represented income of the assessee which was available for application on the objects of the Trust. It was submitted that even though the assessee had won the appeals before the Tribunal in respect of the assessment years 1972-73 and 1973-74, which resulted in the refund of tax of Rs. 4,20,321. The said amount cannot be treated as the income of the assessee which could be spent on the objects of the Trust, in view of the fact that the said order of the Tribunal had not been accepted by the Revenue and the matter was pending in the Hbn'ble High Court on a reference. In other words, the assessee wanted to impress upon the AAC that it had a reasonable belief to come to the conclusion that the refund of Rs. 4,20,321 should not be considered as surplus available for spending towards the charitable object of the assessee, in view of the fact that if the revenue was to succeed before the Hon'ble High Court, then there will be no fund left to pay the tax liability. It was under these circumstances that the Board of Trustees passed a resolution on 29-3-1982 to hold Rs. 4,20,321 in Trust till the reference application is finally disposed of by the Hon'ble High Court and not to treat the said amount as available for application towards the charitable objects of the assessee-trust. The assessee also filed a copy of its Balance Sheet wherein the refund amount has been shown in the liability side under the head "Suspense Account". It was further submitted that for the purposes of the applicability of the provisions of Section 11 of the Act, the income of the assessee-trust should be determined on commercial principles and should not be computed as provided under the Act. Reliance was placed on the decision of the Hon'ble Madras High Court in the case of CIT v. Rao Bahadur Calavala Cunnan Chetty Charities [1982] 135 ITR 485 and of the Hon'ble Andhra Pradesh High Court in the case of CIT v. Trustee of HEM. the Nizam's Supplemental Religious Endowment Trust [1981] 127 ITR 378. Reliance was also placed on the order of the Tribunal in the assessee's own case in I.T A. Nos. 1447 & 1448/Bom/83 in respect of the assessment years 1974-75 and 1975-76. It was, therefore, contended that Rs. 4,20,321 should not be considered as the income available for application on the objects of the Trust. The AAC rejected the assessee's contention in the following manner : The appellant is right in stating that while computing the income under section'11 of the I.T. Act, 1961,itis to becomputed on commercial basis. The learned Income Tax Appellate Tribunal has also referred to : '(An outgo like income tax is an outgo like any other tax on property or sales tax and it is very necessary that a provision should be made in the accounts to meet that liability. When the assessee made these provisions in the accounts, there was a genuine apprehension that the assessee would be called upon to pay these taxes, under these circumstances, the assessee had done only what any prudent person would do. Under these circumstances, the provision made for payment of tax has to be considered as a legitimate outgo in ascertaining the commercial income of the Trust.' Thus, it can be seen that the provision which has been made by the appellant in earlier years for income tax were treated as part of application of income of the trust. At the relevant point of time in the previous year relevant to assessment year 1983-84, when the refund of Rs. 4,20,321 was received by the appellant, there was no existing liability on the trust. The appellant by way of abundant precaution set apart this sum and transferred this amount to suspense account saying that if the Commissioner of Income-tax was to succeed before the High Court, the same will be available for making the payment of tax. But it is to be borne in mind that at the relevant point of time, there was no liability and at best it can be said that this liability was in the nature of contingent liability.
The liability which would arise in future on the happening of such event cannot be allowed as allowable deduction. Such has been the view of the various Courts as in the case of Peter Merchant Ltd. v. Stedefod [1948] 30 Tax (at 496). The Supreme Court in the case of the Indian Molasses Co. (P.) Ltd. v. CIT [1959] 37 ITR 66 has observed that expenditure which is deducted for income-tax purposes is one which is towards a liability actually existing at the time but the putting aside of money which may become expenditure on the happening of event is not expenditure. In view of these decisions, the amount of Rs. 4,20,321 would be treated as part of the income and the contention of the appellant is rejected.
It will not be out of place to mention that the ITO has not taxed the amount as full amount has been allowed to be accumulated.
8. Being aggrieved by the order of the AAC the assessee has come up in appeal before the Tribunal. The learned Counsel for the assessee reiterated the submissions, which were made before the income tax authorities and strongly urged that unless and until the assessee had a right to utilise the amount of refund, the refund granted by the revenue has not become its "income". In this connection, he pointed out that even though the assessee has won its appeals before the Tribunal for the assessment years 1972-73 and 1973-74, the revenue has not accepted the decision of the Tribunal and the matter is still pending in a reference before the Hon'ble High Court. In case the Hon'ble High Court decide the reference in favour of the revenue and against the assessee, the assessee will have to pay back the refunded amount to the Revenue. Relying on the decision of the Hon'ble Supreme Court in the case of CIT v. Hindustan Housing & Land Development Trust Ltd. [1986] 161 ITR 524, he further submitted that when the right to receive the amount of refund is in dispute, the amount of refund cannot be treated as the income available for application. In other words, he wanted to impress upon the Tribunal that since the assessee has no right to utilise the amount of refund, the same has not acquired the character of "income" for the purposes of the application of the relevant provisions of the Act. He also relied upon the decision of the Hon'ble Allahabad High Court in the case of J.K. Synthetics Ltd. v. ITO [1976] 105 ITR 864, especially the observations appearing at page 867 of the Report. In this connection, he stated that the assessee-trust had started with a corpus of Rs. 5,000 only. According to him, since the reference pending in the High Court is not a commercial litigation, the Trustees would be personally liable to make good the amount of refund, if the amount of refund is treated as the income of the assessee which the assessee would be obliged to spend in order to qualify for exemption under Section 11 of the Act. Not only that, the Trustees would be required to pay interest till they repay the amount of refund to the revenue. He, therefore, fervently urged that till the Hon'ble High Court decide the reference pending before them, the amount of refund should not be treated as the income of the assessee for the purposes of determining exemption under Section 11 of the Act.
Alternatively, he submitted that in view of the order of the Tribunal in the assessee's own case for the assessment years 1974-75 and 1975-76 (ITA Nos. 1447 & 1448/Bom/83 dated 11-9-1983), the provision made for payment of tax, in the event of the Hon'ble High Court deciding the reference against the assessee, be considered as legitimate application of income.
9. The learned representative for the department, on the other hand, supported the action of the income-tax authorities. According to him, just because the reference is pending in the Hon'ble High Court, the character of the amount of refund would not change, as the assessee became entitled to it due to the order of the Tribunal for the assessment years 1972-73 and 1973-74 which went in favour of the assessee. The character of income does not cease merely because it is given to the assessee by way of refund. The learned representative for the department further submitted that the decision in the case of Hindustan Housing & Land Development Trust (supra) would not be of much help to the assessee, as in that case the issue was in respect of the compensation payable to the assessee and not the refund of tax as in the instant case. Similarly, in the case of J.K. Synthetics Ltd. (supra), the issue was regarding refund of excise duty, while in the instant case we are concerned with the refund of that amount of income-tax which was originally treated as application of income. In any event, according to the learned representative for the department, the likelihood of repayment of the amount of refund depending on the decision of the Hon'ble High Court in a reference pending before them is a contingent liability which cannot be allowed in determining the commercial profits of the assessee. For this proposition, he relied on the decision of the Hon'ble Supreme Court in the case of Indian Molasses Co. (P) Ltd. v. CIT [1959] 37 ITO 66. He, therefore, urged that we should uphold the action of the income-tax authorities.
10. The learned Counsel for the assessee in his reply submitted that the decision in the case of Indian Molasses Co. (P) Ltd. (supra) has no application to the facts and circumstances obtaining in the instant case, for in the reported case the issue was whether the asscssee was entitled to deduction of a liability which was contingent in nature..
However, in the instant case it is the assessee's contention that the amount of refund granted by the Revenue was not its income available for application on objects of the Trust.
11. We have carefully considered the rival submissions of the parties as well as material already brought on record and we are inclined to agree with the decision taken by the Income-tax authorities. The ITO had denied exemption to the assessee under Section 11 of the Act in respect of the assessment years 1972-73 and 1973-74 on the ground that the assessee-trust was hit by the provisions of section I3(2)(h) of the Act. However, in appeal preferred by the assessee before the Tribunal, the Tribunal was pleased to hold that the assessee-trust was not hit by the provisions of Section 13(2)(h) of the Act. In this view of the matter, the assessee was entitled to refund of tax for these two years.
In fact, the assessee has received the amount in question. It is no doubt true that the revenue had preferred a reference against the order of the Tribunal for the assessment years 1972-73 and 1973-74 and the same is pending before the Hon'ble High Court. However, that fact by itself would not change the character of the amount of refund granted viz., income available for application on the objects of the Trust. In this view of the matter, we are not prepared to accede to the submissions made on behalf of the assessee that the amount of refund cannot be treated as the income available for application till the disposal of the reference by the Hon'ble High Court. We have carefully gone through the two reported decisions relied on behalf of the assessee and we entirely agree with the stand taken on behalf of the Revenue that they would not be of much help to the assessee, as the facts and circumstances are different. In the case of Hindustan Housing and Land Development Trust Ltd. (supra), the Hon'ble Supreme Court was dealing with an issue of the treatment to be accorded to compensation payable on the acquisition of land. In the instant case there is no question of any compensation payable to the assessee. On the contrary, the issue involved in the present appeal is regarding the treatment to be accorded to the amount of income-tax refund already granted to the assessee. In our view, even in common parlance it cannot be denied that the assessee had full right on the utilisation of the amount of refund.
In other words, the amount of refund already obtained by the assessee has to be treated as the income available for application for the purposes of Section 11 of the Act. Similarly, in the case of J.K.Synthetics Ltd. (supra), the Hon'ble High Court was concerned with the provisions of Section 41(1) of the Act and therefore, the ratio laid down therein cannot have any application to the facts and circumstances obtaining in the instant case. Coming to the submissions made on behalf of the asscssee, that the reference pending in the Hon'ble High Court is not a commercial litigation and, therefore, the Trustees would be personally liable to make good the amount of refund, in the event, the Hon'ble High Court decide the reference against the assessee if in the meanwhile, the assessee utilises the amount of refund for charitable purposes, we need only note that this possibility docs not change the position in law. Further, we are not impressed by the submissions made on behalf of the assessee that the Trustees would not only be personally liable to make good the amount of refund, but they would also be liable to pay interest thereon. All these eventualities cannot, in our opinion, change the character of the amount of refund as income available for application. We would, therefore, hold that the amount of refund has to be treated as the income available for application.
12. This brings us to the alternative submission that unequivocally expressed intention of paying this sum as taxes if and when High Court decision goes against the assessee should be regarded as application of income itself. Obviously it is a case of setting apart an income rather then application of income. The point is that the impugned sum has been set apart for a purpose and it has not been applied for the purpose.
The assessee cannot claim that the sum stands applied for the purpose of the trust while assessee actually stands possessed of the sum - it cannot have the cake and eat it too. Department has already allowed relief on that basis.
13. Before we part with this order, we would like to observe that we do appreciate the predicament in which the assessee is placed, as under the relevant provisions of the Act the accumulation of income is allowed only up to a period of 10 years which in the instant case is getting over on 31-12-1991 and there is no hope that the reference would be disposed of by the Hon'ble High Court by that time. If we were to accept the submissions made on behalf of the assessee, that would certainly soften the rigour of the extremely drastic restrictions contained in the relevant provision of the Act. and would be more in conformity with the logic and equity. However, once it is shown that the case of the assessee comes within the letter of the law he has to be taxed, however, great the hardship may appear to the judicial mind.
Such hardship can be remedied only by the legislation and not by judicial interpretation.