The Commissioner of Income-Tax, New Delhi Vs. the Eternal Science of Man's Society, New Delhi and Ors. (29.08.1980 - DELHC) - Court Judgment

Leila Seth, J.

(1) These eight references pertain to three different assesseds, but as the points involved are common, they are being dealt with together. These references have been made by the Tribunal at the instance of the Commissioner of Income-tax, New Delhi. The assessed-respondent in Income-tax References Nos. 136 to 138 of 1977 is the Eternal Science of Man's Society, New Delhi and the assessment years are 1970-71, 1971-72 and 1972-73. In Income-tax References Nos. 219 to 221 of 1977, the assessed-respondent is M/s. Daulat Ram Public Mission, New Delhi and the assessment years are 1970-71, 1971-72 and 1972-73. M/s. Daulat Ram General Educa- corporation Society, New Delhi is the assessed-respondent in Income-tax Ref- erences Nos. 226 and 227 of 1977 and the assessment years are 1969-70 and 1970-71. All three assesseds are charitable institutions,

(2) The questions in the respective references are as follows : The Eternal Science of Man's Society, New Delhi

1. Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 4 lakhs received by the asscssee trust in the form of 6,40,000 shares of Motor & General Finance Ltd. from Mjs. Daulat Ram Public Trust was not taxable income m the hands of the receiving trust isader the provisions of section 11 and section 12(2) of the Income-tax Act. 1961 for the assessment year 1970-71? 2. Whether on the fads and in the circumstances of the case the Tribunal was correct in law in excluding the interest income of Rs. 14.896 for the assessment year 1971-72 and Rs. 34.305 for the assessmant year 1972-73 by holding that the provisions of section 13(2)(h) are not applicable to the assessed trust'

Mis. Daulat Ram Public Mission., New Delhi

'1. Whether on the fads and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs. 2,21,300 received by the asscssee trust in the form of 22,130 shares of Motor and General Finance Ltd. from Daulat Ram Public Trust was not taxable income in the hands of receiving trust under the provision of scections 11 12(2) of the Income-tax Act for the assessment year 1970-71? 2. Whether on the fads and in the circumstances of the case, the Tribunal was correct in law in excluding the interest of Rs. 13,765 and Rs. 17,021 for the assessment years 1971-72 and 1972-73 respectivly by holding 'that the provisions of section 13(2)(h) are not applicable to the assessed trust'?'

'Whether on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the voluntary contribution received by the assessec trust in the form of shares of Motor & General Finance Ltd. amounting to Rs. 1.30.000 in the assessment year 1969-70 and Rs. 2.20.000 in the assessment year 1970-71 and Goodwill India Limited amounting to Rs. 75,450 from M/s. Daulat Ram Public Trust were not taxable income in the hands of the receiving trust under the provisions of Sections 11 and 12(2) of the Income-tax Act, 1961?'

(3) Before setting out the facts on the basis of which the above questions have been referred, it is advisable to refer briefly to the- relevant statutory provisions. Chapter Iii of the Income-tax Act (to be referred to in brief as ''the Act') contains provisions pertaining to income which does not form part of The total income. Section 11, which is in this Chapter, deals with income derived from property held for charetable or religiou's purposes. It provides, inter alia. that if this income is applied wholly to cliaritable/religious purposes in India, it is to be excluded from the total income of the recipient. Section 12 deals with the income of trusts and institutions from voluntary contri- butions. The section before its amendment by the Finance Act of 1972 with effect from 1st April. 1973 stood as follows:

12.Income of trusts ornstitutions 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 trustee 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 subsection (1 ) arc 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 purpose of that section and the provisions of that section shall apply accordingly.'

Section 13 makes section 11 inapplicable in certain cases. It provides, inter alia, in section 13(l)(c)(ii) that the income of a charitable trust will not be excluded from the total income, if any part of such income or property of the trust is during the previous year applied or used directly or indirectly for the benefit of certain persons as referred to in sub-section (3). These persons referred to in sub-section (3) are, the author of the trust, the founder of the institution, a person who has made a substantial contribution to the trust or institution, a trustee or manager of the trust; if the author, founder or person is a Hindu undivided family then a member of the family; a relative of the author, founder, person, member, trustee or manager; or a concern in which any of the above-mentioned persons has a substantial interest. Section 13(2) provides that the income or property of the trust shall be deemed to have been used or applied for the benefit of a person as provided in sub-section (3) in various circumstances. One of these circumstances as set out in clause (a), is, if any part of the income or property of the trust is or continues to be lent to such person for any period during the previous year without adequate security or adequate interest or both. Clauses (b) to (g) provide other circumstances which are not relevant in the present cases. Clause (h) provides a further circumstance, that is, if any funds of the trust or institution are, or continue to remain invested for any period during the previous year (not being a period before 1st January, 1971) in any concern in which any person has a substantial interest.

(4) SUB-SECTION (4) of section 13, however, provides that the exemption under section 11 or 12 shall not be denied in relation to any income other than the income arising to the trust from such investment by reason only that the funds of the trust or the institution have been invested in a concern in which such person has a substantial interest, if the interest does not exceed five per cent of the capital of the concern. This is a mitigating provision which seeks to ignore small investments in prohibited areas.

(5) We shall now deal with the facts of the various references : I.T.R. 136 to 138/1977 : The Eternal Science of Man's Society, New Delhi, during the relevant previous year ending 31st March, 1970, spent no money and involved itself in no activity. However, it received donations in the form of 40,000 shares of Rs. 10 each of Motor and General Finance Limited from M/s Daulat Ram Public Trust. This public trust was also governed by the provisions of sections 11, 12 and 13 of the Act.

(6) These shares of Motor and General Finance Limited were donated to the assessed-respondent by way of an endowment fund to form a part of the corpus of the assessed-society. The assessed received them as such with the further restrictions that these shares could not be utilized by the assessed for its objects nor could the shares be sold without the prior permission of the donor trust. It was only the dividend income of the shares which could be Utilized for the objects of the assessed.

(7) As the assessed did not expend any moneys in the relevant year, it gave notice to the Income-tax Officer that it would accumulate the funds. The notice was given on 14th July, 1970, under section 11(2) of the Act in Form No. 10. The purpose of the accumulation was mentioned therein but was subsequently revised on 6th June, 1972 and 4th November, 1972.

(8) The Income-tax Officer felt that the assessed-society was not entitled to the benefits of the exemption under section 11 and added the value of the 40,000 shares of Motor and General Finance Limited amounting to Rs. 4 lakhs as also the dividend income of Rs. 74,973 to the income of the society. She also rejected the notice for accumulation as being belated. According to her, it should have been filed by 31st July, 1970 complete in all particulars. In her opinion, notice as initially filed, was vague with regard to purpose. The subsequent revisions, were according to her, not acceptable, especially as there was no application for condensation of delay. Since she treated, the amount of Rs. 4,74,973 as the income of the assessed, she held that the investment in Government securities was inadequate. After giving an exemption under section 11(1) of the Act of 25 per cent, the taxable income was held to be Rs. 3,56,230.

(9) On appeal the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer and observed that the expression 'such contributions' in section 12(2) of the Act is not limited to contributions constituting income of the receiving trust but is wide enough to cover all contributions including contributions forming part of the' capital of the receiving trust. thereforee, voluntary contributions made by one charitable trust to another whether out of income or corpus to be held by the receiving trust as corpus is to be deemed to be income derived from property for the purpose of section 11 of the Act, The receiving trust would, thereforee, be liable to tax on these donations, Unless it satisfied the conditions for exemption. The conditions laid down in section 11(2) were not satisfied as the investment in Government securities was inadequate, being only Rs, 75,899.

(10) On further appeal the Tribunal held that the Income-tax Officer and the Appellate Assistant Commissioner had erred in adding the sum of Rs. 4 lakhs as the income of the assessed-trust. The reason being that the shares had come to the assessed by way of corpus which it was forbidden to utilize for its objects, or to sell without prior permission of the donor. In any case, if a sale was permitted, the proceeds were to be treated as a part of the endowment fund and the corpus of the society. It was only the dividend income from these shares which could be utilized for the purposes of the trust. In these circumstances the Tribunal deleted the addition of Rs. 4 lakhs.

(11) The Tribunal also deleted the addition of the dividend income of Rs. 74,9731- as it observed that the assessed had invested an adequate sum in Government securities and had filed an application in Form No. 10 much before the due date, fulfillling the conditions of section 11(2) of the Act.

(12) With regard to the assessment years 1971-72 and 1972-73, the Income-tax Officer found that the amounts of Rs. 74,886 and Rs 1,11,229.00 earned as dividend income and interest for the twoyears respectively had not been spent during the years under consideration. Further, as the notice with regard to accumulation of Income in Form No. 10 was defective for the assessment year 1970-71 and, thereforee, out of time, there was no valid notice in operation. She also held that the accumulated funds were not invested as per the requirement of section 11(2)(b) of the Act, so the assessed was not entitled to the exemption under section 11(2) of the Act. She also noted that the founding members of the society together with their relatives had a substantial interest as defined in section 13(4) Explanationn (3) (i) in the two companies i.e. Motor and General Finance Limited and Goodwill India Limited. thereforee she held that the income of the trust received from funds invested in these two compa- nies was liable to tax under section 13(4) of the Act.

(13) She also observed that under section 13(3) of the Act. it was- the collective share holding of all the interested persons that had to be taken into consideration in establishing substantial interest under section 13(1) Explanationn (3) (i). Further Mis. Daulat Ram Public Trust having made substantial contributions to the assessed-trust, the share holding? of M/s. Daulat Ram Public Trust would have to be included in the list and on inclusion the interest of the persons under section 13(3) would exceed the 20 per cent allowable limit. The dividends of the two companies and interest amounting to Rs. 74.8861 and Rs. 1,11,229.00 for the assessment years 1971-72 and 1972-73 respectively would, thereforee, be chargeable to tax under section 13(2)(h) of the Act.

(14) On appeal, the Appellate Assistant Commissioner confirmed the additions of dividend income in both the years but deleted the addition' of interest income. He observed that it was not the Income-tax Officer's case that the funds of the assessed-society had been lent without adequate security. thereforee, he held that the saving provision of section 13(4) of the Act would apply and the interest income should be excluded from the total, income. The amounts of Rs. 14,8861- and Rs. 34,3091- for assessment years 1971-72 and 1972-73 respectively were consequently excluded.

(15) On eppeal by the Department, the Tribunal observed that as nothing had been lent to any of the persons interested in the trust, the order of the Appellate Assistant Commissioner did not call for any interference. The assessed's appeal with regard to the dividend income was also dismissed as the Tribunal held that the founding members together with their relatives and Daulat Rain Public Trust, a substantial contributor to the assessed-society, had substantial interest in the two companies Motor and General Finance Limited and Goodwill India Limited.

(16) Itr 2191221171 2191221171 The facts of Daulat Ram Public Mission are similar.

(17) Briefly stated the assessed-mission received from Daulat Ram Public Trust, in the assessment year 1970-71, capital contributions in the form of shares of Motor and General Finance Limited worth Rs-. 2,21,300-. These contained restrictions on sale as mentioned above in the case of Eternal Science of Man's Society. These shares were to form the corpus of the mission. Dividend income of Rs. 64,0681- was also received in the same year. For the years 1971-72 and 1972-73, the dividend, interest and short term capital gains came to a figure of Rs. 77,717/ and Rs. 98.6891- respectively. None of the amounts had been spent during the years under consideration. The notice for accu- mulation in Form No. 10 was filed on 14th July, 1970. and subsequently revised on 7th June, 1972 and 4th November, 1972.

(18) The donation of 22130 shares of Motor and General Finance Limited received by the assessed-mission from Daulat Ram Public Trust and valued at Rs. 2213001- was held to be taxable by the Income-tax Officer. She also held Form No. 10 to be invalid and 1567 belated for the same reasons as noticed above in the case of the Eternal Science of Man's Society, New Delhi. In the dual circumstances, she held that the investment in' Government securities was inadequate and taxed the dividend income as well.

(19) For the years 1971-72 and 1972-73, the provisions of section 13 were held to be applicable by her, as the founder members of the society together with their relatives and M[s.Daulat Ram Public Trust had a substantial interest in the two companies. Motor and General Finance Limited and Goodwill India Limited. She, thereforee, held the dividend income from these two companies was chargeable to tax under section 13(4) read with section 13(2)(h) of the Act. The interest income of Rs. 13,764.80 and Rs. 17021 for the assessment years 1971-72 and 1972-73 respectively was also included in the total income for the purpose of tax-

(20) On appeal, the Appellate Assistant Commissioner, on the same reasoning, as noticed above in the case of Eternal Science of Man's Society, held that the voluntary donation received by the assessed of the shares in Motor and General Finance Limited was income of the assessed trust within the provisions of sections 11 and 12(2) of the Act. He also held that the conditions of section 11(2) were not complied with and, thereforee, confirmed the addition of Rs. 2,21,300 as also the dividend income of Rs. 64,068.00 for the assessment year 1970-71. However, the Tribunal allowed the asscssee's appeal on the basis and reasoning of the decision in Eternal Science of Man's Society.

(21) With regard to the assessment years 1971-72 and 1972-73, the Appellate Assistant Commissioner held that form No. 10 was valid and the assessed society had complied with the conditions for accumu- lation under section 11 of the Act. It would, thereforee, have been en- titled to exclude the income, except that in view of the provisions of section 13, the exemption available under section 11 was forfeited with regard to dividend income. This was because the founder members to- gether with the relatives and M/s. Daulat Ram Public Mission had a substantial interest in the two companies. However, he held that in view of the saving provision in section 13(4), the interest income would be excluded from the total income..

(22) Both the Revenue and the assessed appealed. The Tribunal dismissed the appeals of both the parties following its decision in the case of M/s- Eternal Science of Man's Society.

(23) Itr 226-227/77 : The case of M/s. Daulat Ram General Education Society is also of a similar nature.

(24) The Society was established on 17th January, 1969. During the assessment year 1969-70 (accounting year ending on 31st March, 1969) the assessed-society received shares by way of donation to the corpus from M/s. Daulat Ram Public Trust. These were shares of Motor and General Finance Limited amounting to Rs. 1,80,0001- and shares of Goodwill India Limited amounting to Rs. 75,450.00. In assessment year 1970-71, the Society received a further donation from the Daulat Ram Public Trust of shares of Motor and General Finance Limited valued at Rs. 2,20,000, The restrictions with regard to user and transfer as mentioned above in the case of Eternal Science of Man's Society were also imposed on the gift of these shares. But, as in the case of the other two assesseds, the Income-tax Officer held that these donations given by the trust were to be treated as income in the hands of the recipient assessed-society. In the assessment year 1970-71, the assessed also earned a dividend income of Rs. 69,469. No amount of this was spent in that year. The assessed, however, gave a notice on 14th July, 1970 in Form No. 10 regarding accumulation of funds. This was subsequently revised on 7th June, 1972, and further clarified on 4th November, 1972. For similar reasons as set out in the case of Eternal Science of Man's Society, the Income-tax Officer held Form No. 10 to be invalid and belated. She also held that the investment in Government securities was inadequate as the income was Rs. 2,20,000+Rs. 69,469=Rs. 2,89,469. Thus the benefit of the exemption under section 11 was not available to the assessed society. But section 11(1) exemption of 25 per cent was taken into consideration in arriving at the total income.

(25) On appeal, the Appellate Assistant Commissioner dealt with the matter at length. But on the same reasoning as in Eternal Science of Man's Society, he dismissed both the appeals.

(26) On further appeal by the assessed, the Tribunal followed its decision in the Eternal Science of Man's Society and allowed both the appeals.

(27) On the above facts one common question arises in the cas5 of all three assesseds and that is : Does a voluntary contribution of shares, given by a donor charitable trust with the express condition that they be held a.s corpus of the recipient charitable society and accepted as much. become the income of the donee society?

(28) Normally a gift of shares or its own capital by a charitable trust to another charitable trust would be income in the hands of the recipient trust. The recipient trust would be free to spend the moneys or expend the property as it liked in furtherance of its objects. But in the instant cases the donor trust attached specific conditions to the donation. These were : (i) that the donation constitute the corpus of the donee trust or be held as an accretion to the corpus of the donee trust; (ii) that no part of the donation be utilized by the donee trust for its objects; (iii) that no part of the donation be sold without the prior permission of the donor trust; and (iv) if such permission were granted the sale proceeds be treated as part of the endowment fund or corpus of the donee trust. The donee trust accepted the donation subject to these conditions., In these circumstances', we are of opinion that there is a material difference with regard to the gift in the instant cases as compared to the normal gift of shares by one charitable trust to another. This conclusion, we think, is borne out by the provisions contained in section 12 which have been extracted earlier.

(29) SUB-SECTION (1) of section 12 exempts income of a charitable or religious trust/institution derived from voluntary contribution applicable solely to charitable/religious purposes. Sub-section (2) deals with 'such contributions' as are referred to in sub-section ( 1 ). thereforee, 'such contributions' in sub-section (2) refer to contributions which constitute income of the recipient trust. It would, thereforee, appear that 'any income' of a trust derived from voluntary contributions made to a trust by another trust or charitable institution or religious institution to which the provision of section 11 apply, will be deemed to be income derived from property for the purpose of that section in the hands of the recipient trust or institution. The section relates to 'any income' of the trust and not to the capital or endowment of the trust.

(30) In the present cases, as noticed above, the voluntary contributions did not constitute income in the hands of the recipient trust. The conditions imposed on the voluntary contributions ensured that they were to be part of the capital or corpus of the donee trust. These voluntary contributions not being income, would fall outside the scope of section 12(1) and, thereforee, outside the ambit of section 12(2) of the Act.

(31) The position has now been clarified in the amended section 12 which was substituted in place of the section as set out above. The new section 12 provides that any voluntary contributions received by a charitable trust would be deemed to be income derived from property unless they contain a specific direction that they shall form a part of the corpus of the recipient trust. thereforee, such capital contributions can be retained by the donee trust as corpus without attracting any income-tax liability.

(32) Further, section 2(24) of the Act which defines income did not include 'voluntary contributions' prior to its amendment by the Finance Act, 1972 with effect from 1st April, 1973. By this amendment clause (iia) was introduced which provided as follows:

'24............. (iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution. Explanationn. For the purposes of this sub-clause, 'trust' includes any other legal obligation.'

Here too, the distinction between voluntary contributions per se and voluntary contributions with a specific direction that they form part of the corpus has been mentioned. The former is income and the latter is not.

(33) We are, thereforee, of the view that the voluntary contributions to capital assets are to be excluded from the taxable income.

(34) It may be pertinent to mention in this connection a decision of the Allahabad High Court, which is in consonance with our view. This is the ease of Sri Dwarkadheesh Charitable Trust v. lncome tax Officer, Kanpur, : [1975]98ITR557(All) and a special leave petition against this judgment v/as dismissed, on 28th October, 1975. Mr. Justice Satish Chandra (as he then was) speaking for the court held that voluntary contributions made with a specific direction that they shall form part of the corpus of the donee-trust and acccpted by the donee-trust as such are not voluntary contributions which constitute income within the meaning of section 12(1) of' the Act, because. the subject matter' of the donation becomes part of the corpus or capal of the donee-trust and cannot constitute income of the receiving trust. Such contributions will not, thereforee, fall within the purview of sub-section (2) of section 12 of the Act.

(35) For the reasons outlined above question No. 1 in the cases of Eternal Science of Man's Society and M/s. Daulat Ram Public Mission and the only question in the case of M/s Daulat Ram General Education Society referred to us is answered in the affirmative and in favor of the assesseds.

(36) Question No. 2 in the cases of Eternal Science of Man's Society and M/s. Daulat Ram Public Mission relates to the point whether the provisions of section 13(2)(h) of the Act are attracted to interest income.

(37) The provisions of section 13 have been briefly outlined earlier. On a reading of clause (a) of sub-section (2) of section 13 and clause (h) of the same sub-section it would, appear to us that a distinction has been made by the statute between loans and other investments. Clause (a) of sub-section (2) of section 13 appears to provide for a situation where income or property of the trust is lent to a person, specified in sub-section (3) of section 13 without adequate security or adequate interest or both. Clause (h) of sub-section (2) of section 13, however, appears to deal with a situation where funds of the trust are, or continue to remain invested in a concern in which a person specified in sub-section (3) has a substantial interest. The two provisions have to be construed in a harmonious manner. If investments are held to include loans, as urged by counsel for the Revenue, it would render clause (a) of sub-section (2) of section 13. otiose. Since a specific provisions for loans has been made in clause (a) of sub-section (2) of section 13, we feel that these should not be included in the generic term as investments in clause (h) of sub-section (2) of section 13. It would thus appear that if the funds of the trust are invested in debentures or loans then clause (a) of sub-section (2) of section 13 would be applicable; whereas if the funds are invested in equity capital i.e. shares etc. then clause (h) of sub-section (2) of section 13 would be attracted. This distinction also accords with reasons, as in the former case there is no parficipation in profits and no fluctuation, of the investment but only a fixed interest return: where's in the latter there is a participation in profits and the value of the investment fluctuates. In the case of a loan or debenture what has to be examined is whether adequate security or adequate interest or both have or have not beens provided. In the present referances, it is not the case of the Revenue that the funds of the assessed have been lent without adequate interest or security. In these circumstances, we feel that the deeming provisions of sub-section (2) of section 13 are not attracted. thereforee, the incoins or property of the trust cannot be deemed to have been used or applied for the benefit of the persons specified in sub-section (3).

(38) It is pertinent to note that the Appellate Assistant Commissioner was of the opinion that the aggregate of the funds invested in Goodwill India Limited did not exceed 5 per cent of the capital of that company', as capital meant equity capital as opposed to loans etc. He, thereforee, felt that the saving provision of section 13(4) would apply and exempted the interest incomes from the total incomes of the assesseds. However, on appeal, the Tribunal refused to interfere with the order of the Appellate Assistant Commissioner on the basis that nothing had been lent to any of the persons interested in the trust, without adequate security or interest.

(39) For the reasons outlined above, question No. 2 in the case of Eternal Science of Man's Society and M/s. Daulat Ram Public Mission, New Delhi are answered in the affirmative and in favor of the assesseds.

(40) In the result, all the questions are answered in favor of the assesseds who would be entitled to costs from the Revenue. Counsel's fee one set Rs. 500.