ORDER
By the Court - As three reference applications relating to asst. yrs. 1969-70, 1970-71 and 1971-72 have been referred for disposal by this court in which identical questions of law arises. The office is directed to register the reference application for asst. yr. 1969-70, as 8/76, for the asst. yr. 1970-71 as 8(a) of 1976 and for asst. yr. 1971-72 as 8(b) of 1976. All the three reference applications are disposed of by one single order.
2. The following questions of law have been referred by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur.
1. 'Whether, on the facts and in the circumstances of the case, the assessee Trust was entitled to exemption from tax under s. 11 read with s. 2(15) of the IT Act, 1961 as being a Trust wholly for charitable purposes.
2. If the answer to question No. 1 be in affirmative, then whether, the income of the Trust from hedging transactions was or was not exempt from tax as being de-hors the trust deed.
3. If the answer to question No. 1 and/or question No. 2 be in the negative then whether the trust is entitled to deduction under s. 80G of the IT Act, 1961 in respect of donation made to Charitable Institutions in the application of the objects of the Trust.'
3. These questions of law relates to the asst. yrs. 1969-70, 1970-71 and 1971-72. The Income-tax reference No. 8 of 1976 will relate to asst. yrs. 1960-70 and 8(a) and 8(b) of 1976 shall relate to asst. yrs. 1970-71 and 1971-72 respectively. As above mentioned identical questions of law arises in respect of all assessment years the same are disposed of by one single order.
4. Brief facts of the case as mentioned in the statement of the case are that M/s. Rajasthan Charity Trust, Jaipur (hereinafter referred to as the assessee) is a trust created under the Indenture dt. 23-4-1956. Initially the property settled upon the trust consisted of Rs. 20,000 shares of Gwalior Webbing Co. Ltd. of Rs. 10 each fully paid up. The objectives of the trust have been enumerated in cl. 3 of the said indenture and which are also mentioned in detail in statement of the case and we do not consider it necessary to repeat the same. In course of time the shares originally settled upon the trust were sold and the cash realised therefrom was invested with some other concerns. Fresh donations were also received from several parties. Thus, the trust fund grew larger and the income therefrom was applied for the object of the trust. The CIT, Delhi and Rajasthan by his order dt. 22-4-1963 held that donations made to the assessee will be exempt under s. 80G of the Act in the hands of the donors subject to limits and conditions prescribed in the said section. This order of the Commissioner helped the trust to collect more donations with order to augment its funds. After examining the various terms of the trust deed and other documentary evidence, the ITO held that the trust fulfilled all the conditions laid down under the Act to qualify itself for exemption from Income-tax. In March, 1968, the assessee received as donations from Shri Mahadeoji Loyalka, 11,500 shares of Indian Iron and Steel Co., Ltd. which were taken in the books of the trust at their market value of Rs. 1,88,140 at Rs. 16.36 per share. A further donation of 3,500 shares of Indian Iron and Steel Co. Ltd. was received in May, 1968 from Smt. Amrita Loyalka and these shares were taken in the books of the trust at their market value of Rs. 60,200 at Rs. 17.20 per share. Soon after getting the first lot of the shares of Indian Iron and Steel Co. Ltd., the trustees were apprehensive that the price of these shares might go down because of manipulative transactions carried out by some powerful groups. The trustees, therefore, started making forward sales of the shares of Indian Iron and Steel Co. Ltd. held by them right from the beginning of the accounting year relevant to the asst. yr. 1969-70. The trustees however, did not part with these shares but purchased them again on the delivery date by paying the difference. Thus, during the course of the period covered by 3 accounting years relevant to the assessment years, the trustees carried out hedging transactions with respect to the shares in question. As apprehended by the trustees, the prices of these shares went down during the relevant period and this resulted in profits of Rs. 33,090, Rs. 35,100 and Rs. 52,500 in share hedging transactions for assessment years in question.
5. During the assessment proceedings the ITO found that business operations were conducted by the assessee in share hedging transactions from which the above mentioned profits were credited in respect of the relevant assessment years, in the profit and loss account. The ITO vide his order sheet entry required the assessee to show as to why the said transactions may not be taken as business and it was further required to show cause as to why entire income may not be subjected to tax.
6. In response to the notices, one of the trustee certified that the profit in shares hedging account was only in the nature of income of the trust from transactions entered in the hedge contract against the trusts shareholding of Indian Iron and Steel Co. Ltd. to safeguard against any loss through price fluctuations and that the trustees never entered into purchase or sale transactions in any kind of shares during the respective years.
7. The ITO in respect of all the assessment years held that the hedging transactions entered into by the trust constituting a business activity which did not come within the definition of 'Charitable purposes' given under s. 2(15) of the Indian IT Act, 1961 (hereinafter referred to as the Act), as including relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on of any activity of profit. The ITO as such rejected the assessees claim for exemption not only in respect of the profits in shares hedging account but also in respect of interest on its other investments which had been treated as exempt for the assessment years 1968-69. The ITO computed the total incomes of the assessee at Rs. 1,86,257, Rs. 2,22,608 and Rs. 2,01,208 in respect of the three assessment years respectively.
8. Thereafter, on an application moved by the assessee for recover the amount were reduced with which we are not concerned.
9. Aggrieved against the order of the ITO, the assessee filed an appeal before AAC in respect of the assessment years. The AAC decided the appeals partly in favour of the department and partly in favour of the assessee. Aggrieved against the orders of the ld. AAC both the assessee and the department filed appeals before the Tribunal. On behalf of the assessee it was submitted that the entire income should be treated as exempted income. On the other hand, on behalf of the department it was submitted that the trust was not entitled to any exemption under s. 11(1)(a) of the Act due to its involvement in hedging transactions which were activities carried on for profits within the meaning of s. 2(15) of the Act. The Tribunal after considering the contentions of the parties and scrutinising the terms of the trust deed held that none of the items mentioned in cl. 3 of the trust deed militates against the concept of charitable purposes. The Tribunal further observed that items No. 9, 10 and 11 of cl. 3 speak only of acts useful to the public and by its very terms, falls within the definition. The Tribunal also took the view that when the object of the trust is to do acts beneficial to the community, it is plainly an object of general public utility. The Tribunal after referring to proviso 8 of s. 43(5) of the Act also took the view that the transactions entered into by the trustees with a view to guard against the loss in the holdings of stocks and shares are not speculative transactions within the meaning of sub-s. 5 of s. 43 of the Act. The Tribunal did not accept the contention of the revenue and held that the hedging transactions were entered into by the trustees to safeguard against loss due to fluctuation in the prices. The case of CIT v. P. Krishna Warrier : [1972]84ITR119(Ker) was relied by the revenue before the Tribunal. The Tribunal held that facts of that case were not at all applicable, to the facts of the present case. In the result the Tribunal allowed the appeals filed by the assessee but dismissed the appeals filed by the department. On an application moved by the department the questions mentioned above have been referred by the Tribunal for the opinion of this court.
10. So far as the question No. 1 mentioned above is concerned Mr. Surolia, ld. counsel for the revenue was unable to show any mistake taken by the Tribunal. It may be further observed that the ITO himself had stated in the assessment order for the asst. yr. 1968-69 that the trust satisfied all the essential conditions for exemption under the Act and the ITO actually allowed such exemption for the asst. yr. 1968-69. There can be no manner of doubt that the assessee trust was entitled to exempt from tax under s. 11 read with s. 2(15) of the Act as this was a trust wholly for 'charitable purposes'. The question No. 1 is therefore, answered in the affirmative and in favour of the assessee. Question No. 2, Mr. Surolia ld. counsel for the revenue in this regard submitted that the objects of the trust did not permit the assessee to make hedging transactions and such transactions were de-hors the trust deed. It was also submitted that the hedging transactions done in the present case by the assessee were with a motive of profit and the same being business transactions, the assessee was liable to tax on such transactions.
11. On the other hand Mr. Mehta, ld. counsel for the assessee submitted that the hedging transactions were done in order to protect the trust from possible loss due to fluctuations in the share market. The transactions were made in order to protect the trust from possible loss. It was further submitted that the pre-dominant object in making such transactions was not in profit, but, to safeguard the trust from loss. Reliance in support of the above contention is placed on CIT v. Andhra Pradesh State Road Transport Corporation : [1986]159ITR1(SC) . It was further submitted by Mr. Mehta that the case : [1972]84ITR119(Ker) , on which reliance was placed by the revenue before the Tribunal has itself been overruled by the Full Bench of the same High Court in P. Krishna Warrier v. CIT, Kerala : [1981]127ITR192(Ker) .
12. We have given our thoughtful consideration to the arguments advanced by ld. counsel for both the parties. The very purpose and object of hedging transaction is to protect Trust from possible loss. In such transactions the person undertakes the risk in order to reduce the loss. It cannot be said in the kind of transactions made in the present case that the object of the assessee was to earn profits. It is the duty of the trustee to take care as an ordinary prudent man to make any transaction which may be beneficial to the objects of the trust. In the present case it has been proved on record that the charitable trust was not a dealer in shares and securities but was merely an investor in shares. The hedging transactions were made to guard against the loss in the holding of shares on account of the price fluctuations in the shares. In our view, the Tribunal was right in holding that the transactions were entered into by the trustees with a view to guard against the loss in the holding of stocks and shares and such transactions cannot be termed as speculative transactions within the meaning of sub-s. (5) of s. 43 of the Act. We did not find any force in the argument of ld. counsel for the revenue that the transactions in share hedging constituted an activity which was not permitted by the trust deed. It may also be mentioned that the assessee had submitted before the Tribunal that Rs. 31,000 were spent on education, Rs. 80,800 were given as donation to Pilani Agricultural Institute during the accounting period relevant to asst. yr. 1969-70. It was also pointed out by the assessee before the Tribunal that Rs. 40,000, Rs. 60,000 and 23,000 were given as donations to Pilani Agricultural Research Institute, Hindi Shala, Bombay and U. P. Vidya Mandir respectively, during the accounting period relevant to the asst. yr. 1970-71. The ITO was not able to point out any item of income which might have been applied by the assessee for non-charitable purposes for during any one of the assessment years under consideration. Thus, we are clearly of the view that the income from hedging transactions in the present case are also exempted from tax. Question No. 2 is answered accordingly in favour of the assessee and a against the revenue.
13. In view of the answers to the above mentioned two questions in the affirmity as indicated above, question No. 3 is automatically answered, in favour of the assessee and against the revenue.
14. In the facts and circumstances of the case, parties shall bear their own costs.