Commissioner of Income-tax Vs. Sarladevi Sarabhai Trust-no. 2

Decided On : Mar-29-1988

Court : Gujarat

Notice (8): Undefined index: topics [APP/View/Case/meta.ctp, line 36]
Code Context


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			'acts' => '<a href="/act/51330/income-tax-act-1961-complete-act">Income Tax Act, 1961</a> - Sections 4(3), 11, 11(1), 11(2), 13, 13(2), 13(3), 60, 61, 62, 63, 139 and 263',
			'appealno' => 'Income-tax Reference No. 72 of 1982',
			'appellant' => 'Commissioner of Income-tax',
			'authreffered' => '',
			'casename' => 'Commissioner of Income-tax Vs. Sarladevi Sarabhai Trust-no. 2',
			'casenote' => 'Direct Taxation - exemption - Section 11 (1) of Income Tax Act, 1961 -under guidelines of Central Board of Direct Taxes charitable trust does not loose exemption under Section 11 of Act - when one trust donate amount to another charitable trust for utilization by donee trust towards its charitable purpose money should be properly utilized by donee trust for charitable purpose - either entire or part of amount may be spent or kept as corpus and recurring income utilized for charitable purpose.


Head Note:
INCOME TAX
Charitable trust--EXEMPTION UNDER S. 11--Bar of s. 13(2)(h)--Lending by charitable trust without interest and without adequate security
HELD:
On the facts of such cases, if at all, cl.(a) of sub-s. (2) of s. 13 will apply and not cl. (h) thereof, if it is shown that lending was without adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern such deposits will not be covered by s. 13(2)(h) and if at all it is only s. 13(2)(a) which would apply to such deposits. 
Income Tax Act 1961 s.11
 
 
Charitable trust--EXEMPTION UNDER S. 11--Payment of donated amount to donee trust which is itself charitable and religious.
HELD:
As per Instruction No. 1132 issued to all Commissioners by the CBDT, the donated amount to the donee trust which is religious and charitable trust which has to utilise the donation for its own purposes. It would be a proper application of the income for charitable and religious purposes.
Income Tax Act 1961 s.11
 
 
 -  -  He submitted that during the relevant year, the assessee-trust had, instead of utilising its income for its charitable or religious purposes, but that would not amount to application of income by the assessee-trust for is own charitable or religious purposes, and, therefore, the amount of donation cannot be excluded from the income of the assessee-trust as the requirement of section 11(1)(a) qua that amount was not satisfied. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i).'22. We fail to understand how the aforesaid decision can advance the case of the Revenue. ' 24. This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns o which section 13(2) applies. 25. As a result of the aforesaid discussion, it has to be held that the Revenue has failed o make out any of the contention canvassed before us in this reference.',
			'caseanalysis' => null,
			'casesref' => '',
			'citingcases' => '',
			'counselplain' => ' S.N. Soparkar, Adv.',
			'counseldef' => ' K.C. Patel, Adv.',
			'court' => 'Gujarat',
			'court_type' => 'HC',
			'decidedon' => '1988-03-29',
			'deposition' => '',
			'favorof' => null,
			'findings' => null,
			'judge' => ' R.C. Mankad and; S.B. Majmudar, JJ.',
			'judgement' => '<p style="text-align: justify;">S.B. Majmudar, J.</p><p style="text-align: justify;">1. Four questions have been referred for our opinion by the Income-tax Appellate Tribunal at the instance of the Revenue. These questions read as under : </p><p style="text-align: justify;">'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in setting aside the order of the Commissioner of Income-tax made under section 263 of the Income-tax Act, 1961 </p><p style="text-align: justify;"> 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the provisions of section 11 of the Act, do not come in the way of the assessee as the funds were applied to charitable purposes and that application was completed when the funds were donated to other charitable trusts </p><p style="text-align: justify;"> 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the provisions of section 13(2)(h) of the Act were not applicable in the instant case </p><p style="text-align: justify;"> 4. Whether the Appellate Tribunal has been right in law in not considering the contention of the Revenue that the income of the trust was utilised directly or indirectly for the benefit of prohibited categories under section 13(2)(h) read with section 13(3) and Explanation thereto and, hence, the assessee was not entitled to exemption under section 11 in vies of section 13(2)(h) of the Income-tax Act, 1961 ?' </p><p style="text-align: justify;">2. It will be necessary to have a quick glance at the factual backdrop for understanding the controversy reflected by these questions. </p><p style="text-align: justify;">3. The assessee in a public charitable trust. The relevant year of assessment in 1975-76. In the original assessment, the Income-tax Officer held that the assessee was entitled to exemption in view of section 11 of the Income-tax Act, 1961 ('the Act' for short), as applicable at the relevant time. The Commissioner of Income-tax, however, felt otherwise and issue a notice under section 263 of the Act as he noted that the income of the trust was utilised directly or indirectly for the benefit of the prohibited categories of persons as mentioned in section 13(2)(h) of the Act read with section 13(3) thereof and the Explanation thereto. The fact found by the Commissioner of Income-tax in connection with the dealings of the assessee-trust was to the effect that the trust had given donation to another public charitable rust which amounted to nothing else but defeating the basic provisions and intentions of the Act, the Truss Act and the settlor's or author's wishes. The Commissioner of Income-tax observed that the assessee had donated a particular amount to the Nehru Foundation. These trusts were created by the same group of persons. Consequently, the income was no actually applied and spent on the charitable purposes. Hence, exemption under section 11 of the Act was not available to the assessee. The Commissioner also held that the funds or the trusts were also utilised by persons in the prohibited categories under section 13(3) of the Act and hence in view of section 13(2)(h), the assessee was not entitled to exemption. The Commissioner of Income-tax subsequently held that the income of the assessee was no entitled to exemption. </p><p style="text-align: justify;">4. The assessee along with other various truss similarly situated as the present assessee, filed appeals before the Income-tax Appellate Tribunal. The Tribunal passed a consolidated order in the case of the respondent-trusts, being Sarladevi Sarabhai trust No. 2, and also many companion cases of Sarladevi Sarabhai rusts Nos. 3 to 8 and 10. After hearing the parties, the Tribunal came o the conclusion that the finding of the Commissioner of Income-tax that the assessee was not entitled to exemption under section 11 of the Act was not justified. The Tribunal held that the Commissioner of Income-tax had based his decision on two aspects, viz., (i) donations to other trusts with a condition that donations should from a part of the corpus of the trusts or otherwise did not amount o actual spending by the assessee, and (ii) the affairs were arranged in such a way that the funds remained intact and that no single pie in fact was spent. However, referring to the Board Circular F. No. 176/89/77-II(AT), the Tribunal pointed out that, according to that circular, the payment of a sum by one charitable trust to another would amount to utilisation by the donor trust and merely because the donee trust does not spend the amount donated during the year of receipt itself, exemption under section 11 was not lost. The Tribunal further held that in view of the circular, when the assessee-trust donated funds to other trusts towards the corpus or without such conditions, utilisation under section 11 in the hands of the assessee was complete and an inquiry into further utilisation by the donee rust was not contemplated under section 11. So far as the second aspect of the matter was concerned, the Tribunal noted the fact that the Commissioner of Income-tax has based his order exclusively on section 13(2)(h) read with section 13(3); hence, it would not be proper for the Tribunal to enquire into the point whether the Commissioner of Income-tax should have passed an order by applying section 13(2)(a). Referring to the Board Circulation and the decisions referred to by learned counsel for the assessee, the Tribunal noted that section 13(2)(h) is apparently not applicable as it applied only when the funds were invested in other concern. The Tribunal Held that there was a clear distinction between investments and loans. When the assessee deposited is funds in another concern (a) without right of participation in profits with that concern, (b) at a fixed rate of interest, and (c) the value of investments did not fluctuate, it did not invest funds and as such section 13(2)(h) had no application. The transactions were, therefore, loans. The Tribunal concluded that section 13(2)(h) had no application. It was accordingly held by the Tribunal that the Commissioner was not justified in applying the provisions of section 263 of the Act for the reasons mentioned by him and it was not brought out that the order passed by the Income-tax Officer were erroneous in so far as they were Prejudicial to the interests of the Revenue. Accordingly, the assessee's appeal was allowed. </p><p style="text-align: justify;">5. It is in the background of these facts and developments that the Revenue got the aforesaid four questions referred by the Tribunal for our opinion. </p><p style="text-align: justify;">6. A mere look of the aforesaid questions shows that in substance, two main contentions are required to be considered by us, viz. : </p><p style="text-align: justify;">(1) Whether the trust was not entitled to get the benefit of section 11 of the Act because instead of spending the amount itself, it had donated it to another charitable trust, subject to the condition that the donee trust has to keep intact the donated amount by way of corpus and had to utilised only income thereof for its purposes </p><p style="text-align: justify;"> (2) Whether the assessee-trust's deposits were hit by the provisions of section 13(2)(h) of the Act and, therefore, even on that ground, it would lose the benefit of section 11 of the Act </p><p style="text-align: justify;">7. Mr. Soparker, for the Revenue, submitted that as the first contention is concerned, it cannot be said that the income derived by the assessee-trust from the property held by it under the trust wholly for charitable or religious purpose was applied to such purposes in India. He submitted that during the relevant year, the assessee-trust had, instead of utilising its income for its charitable or religious purposes, but that would not amount to application of income by the assessee-trust for is own charitable or religious purposes, and, therefore, the amount of donation cannot be excluded from the income of the assessee-trust as the requirement of section 11(1)(a) qua that amount was not satisfied. Another leg of the argument of M. Soparkar on this point was that, even assuming that it can be said that donation by the charitable or religious trust of any amount to another charitable or religious trust can be considered to be an application of the donor's amount for charitable or religious purposes, even then, on the facts of he present case, the donee trust cannot utilise the donated amount for charitable or religious purposes but it had to keep it accumulated in its corpus for all time to come as it was a corpus donation and that at leas amounts to non-application of the donated amount to charitable or religious purposed and even on that ground, section 11(1)(a) was not applicable to the facts of the present case. On this very question, it was submitted by Mr. Soparkar that the circular instructions of the Central Board of Direct Taxes on which reliance has been placed by the assessee cannot be of any avail to the assessee for the simple reason that the said circular does not contemplate a situation in which the donee trust in required to accumulate the donated amount by way of preservation of the corpus and has to spend only the income therefrom and, consequently, the said circular cannot be pressed into service by the assessee on the facts of the present case. </p><p style="text-align: justify;">8. So far as the second contention is concerned, Mr. Soparkar submitted that there is nothing in section 13(2)(h) to suggest that investment by way of fixed deposits in any concern in which any person referred to in section 13(3) has substantial interest would not be covered by the express language of section 13(2)(h). Mr. Soparkar further submitted that even in this connection, the Central Board of Direct Taxes Circular on which reliance has been placed by the assessee is of no avail and hence, it must be held that the provisions of section 13(2)(h) apply to the facts of the present case and shall disentitle the assessee for the benefit of the provision of section 11 of the Act. </p><p style="text-align: justify;">9. Mr. Patel, for the assessee, on the other hand, submitted that so far as the first contention is concerned, as far as the donor goes, the moment the donation is effected in favour of the donee trust which is also a religious and charitable trust, application of the income for charitable or religious purposes is complete. That even though the donee is required to keep intact the subject-matter of the donation and it is entitled to utilised the income only for its religious and charitable purposes, it would not detract from the applicability of section 11(1)(a) so far as the donor trust is concerned. The donor rust cannot be called upon to always keep a vigil over the activities of the donee trust and even assuming that the donee trust commits breach of the conditions of the donation, it may affect the assessment of the donee but so far as the donor is concerned, once it is found that it has applied its income for religious or charitable purposed by making it available to the donee trust which has similar objects, the benefit of section 11(1)(a) can be said to have been earned by the donor. </p><p style="text-align: justify;">10. Mr. Patel also submitted that the circular letter of the Central Board of Direct Taxes dated January 5, 1978, a copy of which was made available to us by Mr. Patel and which is kept on the record of this case, squarely applies to the facts of the present case and even on that basis, the referred questions have to be answered in favour of the assessee. Mr. Patel, in this connection, placed reliance on the decisions of the Bombay High Court and Calcutta High Court reported in CIT v. Trustees of the Jadi Trust : [1982]133ITR494(Bom) and CIT v. Hindusthan Charity Trust : [1983]139ITR913(Cal) , respectively. So far as question No. 2 is concerned, Mr. Patel submitted that it is squarely answered against the Revenue by the circular (See [1971] 79 ITR 33) of the Central Board of Direct Taxes and has been rightly pressed into service by the Tribunal for deciding the matter in favour of the assessee. </p><p style="text-align: justify;">11. We shall deal with the aforesaid contentions of learned counsel for both parties while considering the aforesaid main two questions seriatim. </p><p style="text-align: justify;">Question No. 1. - Applicability of section 11(1)(a) of the Act. The relevant provisions of section 11(1)(a) read as under : </p><p style="text-align: justify;">'(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; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent. of the income from such property.' </p><p style="text-align: justify;">12. A mere look at the aforesaid provisions shows that if the assessee-trust is a rust which holds properties wholly for charitable or religious purposes, income derived from such properties in the hands of the trust would be allowed to be excluded from the total income of the previous year if it is shown that such income is applied by the said trust for charitable or religious purposes in India. The main question which we have to consider in this connection is as to whether the assessee-trust during the relevant year applied its income for charitable or religious purposes or not. What the assessee did was that it donated the concerned income to another trust which is admittedly a charitable and religious trust duly registered under the Bombay Public Trusts Act. </p><p style="text-align: justify;">13. The word 'applicable' is not defined by the Act. The dictionary meaning of the term 'apply' as given in Chambers' 20th Century Dictionary, amongst others is 'to put to use'. It cannot be gainsaid that the assessee had made use of is income for the purpose of making it available to another trust, objects of which were also of charitable or religious nature. Consequently, it cannot be said that the assessee-trust had not complied with the provisions of section 11 when it made a donation out of its income in favour of the donee trust which was also a religious and charitable trust. However, Mr. Soparkar, for the Revenue, submitted that the assessee-trust itself could not have earned exemption under section 11(1) if it had blocked its income and had not spent it for the purposes for which it was created. In that connection, he invited our attention to section 11(1)(a) itself and submitted that the maximum income which can be accumulated would be 25% of the income of such property and not more than that. This contention of the learned advocate for the Revenue is met by Mr. Patel, appearing for the assessee. He invited our attention to sub-section (2) of section 11 which provided for accumulation even the remaining 75% of the income for a maximum period of ten years subject to a notice in writing being given by the assessee to the Income-tax Officer in the prescribed manner. He also invited our attention to rule 17 of the Income-tax Rules, 1962, which prescribes a format for the notice to be given to the Income-tax officer under section 11(2). Such notice has to be in Form No. 10 and has to be delivered by the assessee to the said officer before expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income. Mr. Patel is, therefore, right when he contends that even in the hands of the donor trust, 100% of the income could have been accumulated for a maximum period of 10 years subject to the trust following the procedure laid down by the Act. If that is so, merely because, the donor trust gifted the concerned income to the donee trust which also was a religious and charitable trust, it cannot be said that the donor trust had acted contrary to the provisions of section 11(1)(a) as tried to be suggested by the learned advocate for the Revenue. </p><p style="text-align: justify;">14. Mr. Soparkar, for the Revenue, next contended that even assuming that the donor trust can be said have complied with the provisions of section 11(1)(a) by making the income covered by the donation available to the donee trust which is also a charitable and religious trust instead of utilising it by itself for such religious and charitable purposes, even then, when the donee trust asked not to utilise this amount, to treat the donation as one of the corpus and to utilise only the income accruing from the corpus for the trust purposes, it cannot be said that the donor trust had applied the income for any charitable or religious purposes in India. Even this contention cannot be accepted for the obvious reason that if the donee trust could have accumulated 100% of its income for a number of year subject to the procedure permitted by the Act, if the donee trust is asked to accumulated or to keep intact the donated amount but to utilise the income arising from the said corpus for its religious and charitable purposes, it cannot be said that the donor trust has not applied its income which is the subject-matter of the donation for religious or charitable purposes. It cannot be disputed that the donated corpus is available to the religious and charitable trust for its own purposes and these purposes are also religious and charitable purposes. The donee trust cannot utilise the corpus for any other purposes nor can it utilise the income arising from such corpus for any extraneous purposes. It is also easy to visualise that keeping the corpus intact and utilising the income accruing from the corpus for religious and charitable purposes would itself amount to application of the income arising from the corpus for religious and charitable purposes. Corpus funds also can be treated to be held for such religious and charitable purposes by the donee trust. Consequently, the contention of Mr. Soparkar that at least in cases where the assessee-trust had donated the amount to the donee trust subject to the condition that the donated amount would not be utilised but should be treated to be a donation to the corpus, the provisions of section 11(1)(a) would not apply, cannot be accepted. If any authority were needed to support the aforesaid conclusion of ours, it is supplied by the decision of the Decision Bench of the Bombay High Court in the case of CIT v. Trustees of the Jadi Trust : [1982]133ITR494(Bom) . In that case, the Division Bench consisting of Chandurkar J. (as he then was) and Sawant J. had to consider a similar question. The assessee-trust, called the Jadi trust, was to make over the net income of its trust funds by way of gift or donation to another trust called the H.C.J. Charitable Trust, so that the donee trust could utilise the net income in its hands for all or any one or more of the charitable purposes mentioned in the trust deed dated March 29, 1963, under which the H.C.J. Trust was created. The question was whether such type of utilisation of the net income of the Jadi Trust - the donor trust - could entitled the donor trust to the benefit of section 11 of the Act. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. Repelling his contention and placing reliance on a decision of the Chancery Division in IRC v. Helen Slater Charitable Trust Ltd. [1980] 1 All ER 785, wherein Slade J., spoke for the Court of Chancery, the Division Bench of the Bombay High Court quoted with approval the following observation of Slade J. in the case of Helen [1980] 1 All ER 785, rendered in the context of a parallel statutory scheme reflected by section 360(1) of the Income and Corporation Taxes Act, 1970, and section 35(1) of the Finance Act, 1965, as in force in England at the relevant time (at p. 505 of 133 ITR) : </p><p style="text-align: justify;">'Any charitable corporation which, acting intra vires, makes an outright transfer of money applicable for charitable purposes to any other corporation established exclusively for charitable purposes, in such manner as to pass to the transferee full title to the money, must be said, by the transfer itself, to have `applied' such money for `charitable purposes', within the meaning of the two sub-sections, unless the transferor knows or ought o know that the money will be misapplied by the transferee. In such circumstances, and subject to last mentioned exception, the transferor corporations is in my judgment entitled to claim exemption under the two sub-sections, without having to show how the money has been dealt with by the transferee'. </p><p style="text-align: justify;">15. Thereafter, the Bombay High Court made the following pertinent observations on the scope of section 11 of the Act (p. 505 of 133 ITR) : </p><p style="text-align: justify;">'So far as the provisions of section 11 of the Act which was in force at the material time is concerned, we do not think that the legal position is in any way different. As already pointed out when a trust which holds property for charitable or religious purposes hands over a donation to another trust which is also a trust made for the application of its funds for charitable or religious purposes, there can hardly be any doubt that it would amount o an application of income for charitable or religious purposes by the donor trust. As already pointed out, it would be permissible for a trust either to directly apply the income for charitable purposes or to a charitable work in the field as put by Slade J. or the same funds or income could be utilised through the medium of another charitable institution which applies its funds or income to charitable purposes. The Tribunal is, in our view, right in holding that the assessee was entitled to the relief under section 11(a) of the Income-tax Act, but the propriety of the direction given by the Tribunal need not be dealt with in this reference.' </p><p style="text-align: justify;">16. We respectfully agree with the view expressed by the Bombay High Court on the point. Our attention was also invited by Mr. Patel for the assessee to a decision of the Calcutta High Court in the case of CIT v. Hindusthan Charity Trust : [1983]139ITR913(Cal) . In that case, a Division Bench of the Calcutta High Court consisting of Sabyasachi Mukharji J. (as he then was) and Suhas Chandra Sen J. had to consider the question whether donation given by one charitable trust to another trust would be covered by the provisions of section 4(3) of the Indian Income-tax Act, 1922, which is the forerunner of section 11 of the Income-tax Act, 1961. The Calcutta High Court, speaking through Sabyasachi Mukharji J., in terms, held that the assessee donor trust was entitled to exemption under section 4(3) of the Income-tax Act. It must, therefore, be held that when a donor trust which it itself a charitable and religious trust donates its income to another trust, the provisions of section 11(1)(a) can be said to have been met by such donor rust and the donor trust can be said to have applied its income for religious and charitable purposes, notwithstanding the fact that the donation is subjected to any conditions that the donee trust will treat the donation as towards its corpus and can only utilise the accruing income from the donated corpus for religious and charitable purposes, and that the question whether the gifted income is to be utilised by the donee trust fully for its religious and charitable purposes or whether the donee trust had to keep intact the corpus of the donation and has to utilise only the income therefrom for its religious and charitable purposes, would not make the slightest difference, so far as entitlement of the donor trust for exemption under section 11(1) goes. </p><p style="text-align: justify;">17. Mr. Patel, for the assessee, further submitted that even apart from the aforesaid legal position, this question is also fully covered by the instruction issued to all Commissioners by the CBDT on January 5, 1978, to which we have made a reference earlier. The full text of the said instruction No. 1132 reads as under : </p><p style="text-align: justify;">'A question has been raised regarding the availability of exemption in the hands of charitable trusts of amounts paid as donation to other charitable trusts. </p><p style="text-align: justify;"> The issue has been considered by the Board and it has been decided that as the law stands at present, the payment of a sum by one charitable trust to another for utilisation by the donee trust towards its charitable objects is proper application of income for charitable purpose in the hands of the donee trust; and the donor trust will not lose exemption under section 11 of the Income-tax Act, 1961, merely because the donee trust did not spend the donation during the year of receipt itself. </p><p style="text-align: justify;"> The above position may kingly be brought to the notice of all officer working in your charge.' </p><p style="text-align: justify;">18. This instruction shows that apart from the legal position that may be emanating from various provisions of the Act, the Central Board of Direct Taxes itself has issued a clear-cut guideline to all the Commissioners of Income-tax that a charitable trust will not lose exemption under section 11 of the Act if it passes a sum of money to another charitable trust for utilisation by the donee trust towards its charitable purposes and that it shall be proper utilisation of money by the donor trust for a charitable purpose. We agree with Mr. Patel for the assessee that the said instruction squarely covers the facts of the present case. It cannot be disputed that the donor trust had made payment of the sum of money covered by the donation to another charitable trust, viz., the donee trust and also it was for utilisation by the donee rust for its charitable purpose. Utilisation does not mean that the entire amount has to be spent forthwith and that it cannot be kept as corpus and its recurring income utilised for charitable purposes. In any case, so far as the donor trust is concerned, once it makes payment of the donated amount to the donee trust which is a religious and charitable trust which has to utilise the donation for its own purposes, it would be a proper application of the income for charitable and religious purposes. </p><p style="text-align: justify;">19. Mr. Soparkar, for the Revenue, submitted that the aforesaid instruction will not apply to the facts of the present case as the circular no-where contemplates a donation wherein the donee rust is not allowed to spend the donated amount the whole hog for its charitable or religious purpose but has to keep it intact as corpus and has to utilise only the income thereof. It is not possible to agree with the aforesaid fine distinction sought to be drawn by the learned advocate for the Revenue in the light of the wording of instruction No. 1132. Even the last sentence of para. 2 indicates that whether in the given year, the donee trust has spent the donation or not, would be a totally irrelevant consideration. What the donor trust does is the only relevant matter. Utilisation by the donee trust in any year would not be relevant for the purpose of deciding whether the donor trust gets exemption under section 11 of the Act or not. This is an additional aspect of the matter, therefore, which enables the assessee to succeed. These instructions are binding on all the officers under the Act and, therefore, even apart from the legal position which we have discussed earlier, the first contention canvassed by the Revenue will have to be held to have been squarely covered against it by instruction No. 1132 itself. </p><p style="text-align: justify;">20. Before parting with the discussion on the first contention, we may refer to a decision of the Supreme Court in the case of Nizam's Religious Endowment Trust v. CIT : [1966]59ITR582(SC) , on which great reliance was placed by Mr. Soparkar for the Revenue. The said decision was rendered by the Supreme Court in the context of section 4(3)(i) of the Indian Income-tax Act, 1922, which represented a scheme parallel to the one which in reflected by section 11(1)(a) of the present Act. The facts before the Supreme Court in the aforesaid case were that by a deed dated September 14, 1950, the Nizam of Hyderabad settled certain securities for Rs. 40 lakhs on trust. Under the deed, the rust fund was to be accumulated during his lifetime and after his death, the trustees were to hold the fund upon trust to spend the income therefrom, in their absolute discretion, for one or more of four specified religious and charitable objects, two of which were for purposes within, and the other two for purposes outside, the taxable territories. The trustees could not, during the lifetime of the settlor, set apart of allocate the accumulated income or a part of it for any one or more of the objects : they could do so only after his death. The settlor was still alive. For the assessment years 1952-53 and 1953-54, the trustees claimed that the income of the trust during the relevant previous years arising form the trust was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922. Repelling this contention of the trustees, it was held by the Supreme Court, speaking through Subba Rao J., that (headnote of 59 ITR 582) : </p><p style="text-align: justify;">'The words `applied or finally set apart for application' in the second part of clause (i) of section 4(3) of the Income-tax Act indicated that unless the income from the property was applied or finally set apart for religious or charitable purposes within the taxable territories, it did not earn the exemption. A different meaning should not be given to the expression `applied or accumulated for application' in the firs part of the clause; for, on principle, there could not be any possible distinction between income from property wholly held in trust and that from a part of the property received in trust. The words `applied' and `accumulated', therefore, meant `applied or finally set apart. `Applied' meant that the income was actually applied for charitable or religious purposes in the taxable territories; and `accumulated' meant that the income was set apart during the year for future spending on such purposes. The expression `accumulated' for a purpose involved a conscious act in praesenti and posited a clear indication on the part of the trustee to set apart the income for that purpose. Therefore, under clause (i) of section 4(3), only income from property, wholly or in part held in trust, actually applied or set apart for application for future spending on religious or charitable purposes within the taxable territories was exempted from inclusion in the total income.' </p><p style="text-align: justify;">21. It was further held : </p><p style="text-align: justify;">'Until the trustees exercised their option, made a selection, and set apart the accumulations for purposes within the taxable territories, it could not be said that they were for purposes within the taxable territories; and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i).' </p><p style="text-align: justify;">22. We fail to understand how the aforesaid decision can advance the case of the Revenue. In the said case, it was found as a fact that the trustees who had got absolute discretion to set apart any part of the funds for any of the specific purposes could not exercise and had not exercised that option for the relevant years. The moment that was visualised, it became obvious that funds were neither applied nor accumulated for the concerned purpose by the trustees. In this fact-situation, therefore, the Supreme Court took the view hat the said fund did not earn exemption during the relevant assessment years. On the facts of the present case, it cannot be said that the donor trust did not apply the concerned income for the purposes contemplated by section 11(1)(a) as we have shown earlier. Consequently, on the facts of the present case, the ratio of the Supreme Court decision in the above case is not at all attracted. </p><p style="text-align: justify;">23. So far as the second contention is concerned, the Revenue is on a still weaker footing. Under what circumstances a charitable trust can be said to have lost exemption under section 11(1)(a) and in what cases the provisions of section 13(2)(h) can be said to be applicable, is also a question which is covered by another circular of the CBDT. The said Circular No. 45 is dated September 2, 1970. It reads as under : </p><p style="text-align: justify;">'For the purpose of the provision in clause (h) of sub-section (2), relating to investment of the trust funds in any concern in which any of the specified persons has a substantial interest, it may be noted that this provision has to be applied only with reference to investment in the capital of the concern as distinct from investments in the debentures of a company or by way of loans to a company or other concern. This is because under clause (a) of sub-section (2), a trust will be deemed to have used or applied its income or property is, or continues to be, lent to any such person for any period during the previous year without adequate security of adequate interest or both. From this, it follows that if the lending of the rust fund to any of the specified concerns either by way of debentures or otherwise is for adequate security and for adequate interest, that would not constitute use or application of the income or property for the benefit of the specified persons. If clause (h) of sub-section (2) is applied to such lending by way of debentures or loans for adequate security and on adequate interest, that would nullify the provisions in clause (a) and render it otiose. Such an interpretation will not be a harmonious interpretation of the provisions in clause (a) and clause (h) and cannot, therefore, be sustained.' </p><p style="text-align: justify;">24. This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns o which section 13(2) applies. The circular further indicates that in the case of lendings by trust, the provisions of clause (a) of sub-section (2) of section 13 will apply and not section 13(2)(h) and any contrary interpretation would not be a harmonious interpretation of clauses (a) and (h) of sub-section (2) of section 13. It is, therefore, obvious that on the facts of such cases, if at all, clause (a) of sub-section (2) of section 13 will apply and not clause (h) thereof, if it is shown that the lending was with adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern, such deposits are made by a trust in such concern, such deposits will not be covered by section 13(2)(h) and if at all, it is only section 13(2)(a) which would apply to such deposits. Consequently, the case of the Revenue that o such donation made by the assessee-trust, section 13(2)(h) will apply cannot be countenanced. It stands squarely answered against the Revenue by the aforesaid circular No. 45 of the Board itself. The said circular obviously is binding on the Revenue. In view of this conclusion of ours, it is not necessary for us to examine the wider submission canvassed by the learned advocate for the assessee placing reliance on the decisions of the Delhi High Court in CIT v. Eternal Science of Man's Society : [1981]128ITR456(Delhi) and of the Madras High Court in CIT v. Nachimuthu Industrial Association : [1982]138ITR585(Mad) , which have taken the view even independently of the said circular that in such circumstances and on such facts, section 13(2)(h) would not apply. We, therefore, need not dilate on these decisions. Consequently, even the second contention canvassed by the learned advocate for the Revenue is found to be devoid of any substance and the rejected. </p><p style="text-align: justify;">25. As a result of the aforesaid discussion, it has to be held that the Revenue has failed o make out any of the contention canvassed before us in this reference. All the four referred questions, therefore, are answered in the affirmative, against the Revenue and in favour of the assessee. The reference sands accordingly disposed of with no order as to costs. <p style="text-align: justify;"></p><p style="text-align: justify;">',
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		(int) 3 => '4',
		(int) 4 => '2',
		(int) 5 => '3.',
		(int) 6 => '4.',
		(int) 7 => '2',
		(int) 8 => '3 to 8',
		(int) 9 => 'two',
		(int) 10 => '176/89/77',
		(int) 11 => 'one',
		(int) 12 => '5.',
		(int) 13 => 'four',
		(int) 14 => '6.',
		(int) 15 => 'two',
		(int) 16 => '1',
		(int) 17 => '2',
		(int) 18 => '8.',
		(int) 19 => '9',
		(int) 20 => '10',
		(int) 21 => '1982]133ITR494(Bom',
		(int) 22 => '1983]139ITR913(Cal',
		(int) 23 => '2',
		(int) 24 => '79',
		(int) 25 => '33',
		(int) 26 => '11',
		(int) 27 => 'two',
		(int) 28 => '1',
		(int) 29 => '1',
		(int) 30 => 'twenty-five',
		(int) 31 => '12',
		(int) 32 => '13',
		(int) 33 => '2',
		(int) 34 => '17',
		(int) 35 => '10',
		(int) 36 => '1',
		(int) 37 => '2',
		(int) 38 => '14',
		(int) 39 => '1982]133ITR494(Bom',
		(int) 40 => '505',
		(int) 41 => '133',
		(int) 42 => 'transferee',
		(int) 43 => 'two',
		(int) 44 => 'two',
		(int) 45 => '15',
		(int) 46 => '505',
		(int) 47 => '133',
		(int) 48 => '1983]139ITR913(Cal',
		(int) 49 => 'one',
		(int) 50 => '4(3',
		(int) 51 => '17',
		(int) 52 => 'one',
		(int) 53 => '18',
		(int) 54 => '19',
		(int) 55 => '2',
		(int) 56 => '20',
		(int) 57 => '1966]59ITR582(SC',
		(int) 58 => '40',
		(int) 59 => 'one',
		(int) 60 => 'four',
		(int) 61 => 'two',
		(int) 62 => 'two',
		(int) 63 => '59',
		(int) 64 => '582',
		(int) 65 => '4(3',
		(int) 66 => '4(3',
		(int) 67 => '22',
		(int) 68 => '23',
		(int) 69 => '2',
		(int) 70 => '2',
		(int) 71 => '2',
		(int) 72 => '24',
		(int) 73 => '2',
		(int) 74 => '2',
		(int) 75 => '2',
		(int) 76 => '45',
		(int) 77 => '1981]128ITR456(Delhi',
		(int) 78 => '1982]138ITR585(Mad',
		(int) 79 => '25',
		(int) 80 => 'four'
	),
	'DATE' => array(
		(int) 0 => ''1',
		(int) 1 => '1961',
		(int) 2 => '1961',
		(int) 3 => '1975-76',
		(int) 4 => '1961',
		(int) 5 => 'the year',
		(int) 6 => 'the relevant year',
		(int) 7 => 'January 5, 1978',
		(int) 8 => '1971',
		(int) 9 => '60 to 63',
		(int) 10 => 'the previous year',
		(int) 11 => 'the previous year',
		(int) 12 => 'the relevant year',
		(int) 13 => 'ten years',
		(int) 14 => '1962',
		(int) 15 => '10 years',
		(int) 16 => 'March 29, 1963',
		(int) 17 => '1980',
		(int) 18 => '1980',
		(int) 19 => '1970',
		(int) 20 => '1965',
		(int) 21 => '1922',
		(int) 22 => '1961',
		(int) 23 => 'January 5, 1978',
		(int) 24 => '1132',
		(int) 25 => '1961',
		(int) 26 => 'the year',
		(int) 27 => '1132',
		(int) 28 => 'the given year',
		(int) 29 => 'any year',
		(int) 30 => '1132',
		(int) 31 => '1922',
		(int) 32 => 'September 14, 1950',
		(int) 33 => 'years 1952-53 and',
		(int) 34 => '1953-54',
		(int) 35 => '1922',
		(int) 36 => 'the year',
		(int) 37 => '21',
		(int) 38 => 'the relevant years',
		(int) 39 => 'years',
		(int) 40 => '45',
		(int) 41 => 'September 2, 1970',
		(int) 42 => 'the previous year'
	),
	'PERSON' => array(
		(int) 0 => 'Nos',
		(int) 1 => 'Soparker',
		(int) 2 => 'M. Soparkar',
		(int) 3 => 'Soparkar',
		(int) 4 => 'Soparkar',
		(int) 5 => 'Soparkar',
		(int) 6 => 'Patel',
		(int) 7 => 'Patel',
		(int) 8 => 'Patel',
		(int) 9 => 'Patel',
		(int) 10 => 'Patel',
		(int) 11 => 'Soparkar',
		(int) 12 => 'Patel',
		(int) 13 => 'Patel',
		(int) 14 => 'Soparkar',
		(int) 15 => 'Soparkar',
		(int) 16 => 'Chandurkar J.',
		(int) 17 => 'Sawant J.',
		(int) 18 => 'Jadi',
		(int) 19 => 'Slade J.',
		(int) 20 => 'Slade J.',
		(int) 21 => 'Slade J.',
		(int) 22 => 'Patel',
		(int) 23 => 'Suhas Chandra Sen J.',
		(int) 24 => 'Patel',
		(int) 25 => 'Patel',
		(int) 26 => 'Soparkar',
		(int) 27 => 'Soparkar',
		(int) 28 => 'Subba Rao J.'
	),
	'ORDINAL' => array(
		(int) 0 => 'second',
		(int) 1 => 'first',
		(int) 2 => 'second',
		(int) 3 => 'first',
		(int) 4 => '20th',
		(int) 5 => 'first',
		(int) 6 => 'first',
		(int) 7 => 'second',
		(int) 8 => 'second',
		(int) 9 => 'second'
	),
	'GPE' => array(
		(int) 0 => 'India',
		(int) 1 => 'India',
		(int) 2 => 'India',
		(int) 3 => 'India',
		(int) 4 => 'India',
		(int) 5 => 'Helen',
		(int) 6 => 'England'
	),
	'PERCENT' => array(
		(int) 0 => '25%',
		(int) 1 => 'the remaining 75%',
		(int) 2 => '100%',
		(int) 3 => '100%'
	),
	'WORK_OF_ART' => array(
		(int) 0 => '1 All ER 785',
		(int) 1 => '1 All ER 785'
	)
)
$desc = array(
	'Judgement' => array(
		'id' => '733675',
		'acts' => '<a href="/act/51330/income-tax-act-1961-complete-act">Income Tax Act, 1961</a> - Sections 4(3), 11, 11(1), 11(2), 13, 13(2), 13(3), 60, 61, 62, 63, 139 and 263',
		'appealno' => 'Income-tax Reference No. 72 of 1982',
		'appellant' => 'Commissioner of Income-tax',
		'authreffered' => '',
		'casename' => 'Commissioner of Income-tax Vs. Sarladevi Sarabhai Trust-no. 2',
		'casenote' => 'Direct Taxation - exemption - Section 11 (1) of Income Tax Act, 1961 -under guidelines of Central Board of Direct Taxes charitable trust does not loose exemption under Section 11 of Act - when one trust donate amount to another charitable trust for utilization by donee trust towards its charitable purpose money should be properly utilized by donee trust for charitable purpose - either entire or part of amount may be spent or kept as corpus and recurring income utilized for charitable purpose.


Head Note:
INCOME TAX
Charitable trust--EXEMPTION UNDER S. 11--Bar of s. 13(2)(h)--Lending by charitable trust without interest and without adequate security
HELD:
On the facts of such cases, if at all, cl.(a) of sub-s. (2) of s. 13 will apply and not cl. (h) thereof, if it is shown that lending was without adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern such deposits will not be covered by s. 13(2)(h) and if at all it is only s. 13(2)(a) which would apply to such deposits. 
Income Tax Act 1961 s.11
 
 
Charitable trust--EXEMPTION UNDER S. 11--Payment of donated amount to donee trust which is itself charitable and religious.
HELD:
As per Instruction No. 1132 issued to all Commissioners by the CBDT, the donated amount to the donee trust which is religious and charitable trust which has to utilise the donation for its own purposes. It would be a proper application of the income for charitable and religious purposes.
Income Tax Act 1961 s.11
 
 
 -  -  He submitted that during the relevant year, the assessee-trust had, instead of utilising its income for its charitable or religious purposes, but that would not amount to application of income by the assessee-trust for is own charitable or religious purposes, and, therefore, the amount of donation cannot be excluded from the income of the assessee-trust as the requirement of section 11(1)(a) qua that amount was not satisfied. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i).'22. We fail to understand how the aforesaid decision can advance the case of the Revenue. ' 24. This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns o which section 13(2) applies. 25. As a result of the aforesaid discussion, it has to be held that the Revenue has failed o make out any of the contention canvassed before us in this reference.',
		'caseanalysis' => null,
		'casesref' => '',
		'citingcases' => '',
		'counselplain' => ' S.N. Soparkar, Adv.',
		'counseldef' => ' K.C. Patel, Adv.',
		'court' => 'Gujarat',
		'court_type' => 'HC',
		'decidedon' => '1988-03-29',
		'deposition' => '',
		'favorof' => null,
		'findings' => null,
		'judge' => ' R.C. Mankad and; S.B. Majmudar, JJ.',
		'judgement' => '<p style="text-align: justify;">S.B. Majmudar, J.</p><p style="text-align: justify;">1. Four questions have been referred for our opinion by the Income-tax Appellate Tribunal at the instance of the Revenue. These questions read as under : </p><p style="text-align: justify;">'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in setting aside the order of the Commissioner of Income-tax made under section 263 of the Income-tax Act, 1961 </p><p style="text-align: justify;"> 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the provisions of section 11 of the Act, do not come in the way of the assessee as the funds were applied to charitable purposes and that application was completed when the funds were donated to other charitable trusts </p><p style="text-align: justify;"> 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the provisions of section 13(2)(h) of the Act were not applicable in the instant case </p><p style="text-align: justify;"> 4. Whether the Appellate Tribunal has been right in law in not considering the contention of the Revenue that the income of the trust was utilised directly or indirectly for the benefit of prohibited categories under section 13(2)(h) read with section 13(3) and Explanation thereto and, hence, the assessee was not entitled to exemption under section 11 in vies of section 13(2)(h) of the Income-tax Act, 1961 ?' </p><p style="text-align: justify;">2. It will be necessary to have a quick glance at the factual backdrop for understanding the controversy reflected by these questions. </p><p style="text-align: justify;">3. The assessee in a public charitable trust. The relevant year of assessment in 1975-76. In the original assessment, the Income-tax Officer held that the assessee was entitled to exemption in view of section 11 of the Income-tax Act, 1961 ('the Act' for short), as applicable at the relevant time. The Commissioner of Income-tax, however, felt otherwise and issue a notice under section 263 of the Act as he noted that the income of the trust was utilised directly or indirectly for the benefit of the prohibited categories of persons as mentioned in section 13(2)(h) of the Act read with section 13(3) thereof and the Explanation thereto. The fact found by the Commissioner of Income-tax in connection with the dealings of the assessee-trust was to the effect that the trust had given donation to another public charitable rust which amounted to nothing else but defeating the basic provisions and intentions of the Act, the Truss Act and the settlor's or author's wishes. The Commissioner of Income-tax observed that the assessee had donated a particular amount to the Nehru Foundation. These trusts were created by the same group of persons. Consequently, the income was no actually applied and spent on the charitable purposes. Hence, exemption under section 11 of the Act was not available to the assessee. The Commissioner also held that the funds or the trusts were also utilised by persons in the prohibited categories under section 13(3) of the Act and hence in view of section 13(2)(h), the assessee was not entitled to exemption. The Commissioner of Income-tax subsequently held that the income of the assessee was no entitled to exemption. </p><p style="text-align: justify;">4. The assessee along with other various truss similarly situated as the present assessee, filed appeals before the Income-tax Appellate Tribunal. The Tribunal passed a consolidated order in the case of the respondent-trusts, being Sarladevi Sarabhai trust No. 2, and also many companion cases of Sarladevi Sarabhai rusts Nos. 3 to 8 and 10. After hearing the parties, the Tribunal came o the conclusion that the finding of the Commissioner of Income-tax that the assessee was not entitled to exemption under section 11 of the Act was not justified. The Tribunal held that the Commissioner of Income-tax had based his decision on two aspects, viz., (i) donations to other trusts with a condition that donations should from a part of the corpus of the trusts or otherwise did not amount o actual spending by the assessee, and (ii) the affairs were arranged in such a way that the funds remained intact and that no single pie in fact was spent. However, referring to the Board Circular F. No. 176/89/77-II(AT), the Tribunal pointed out that, according to that circular, the payment of a sum by one charitable trust to another would amount to utilisation by the donor trust and merely because the donee trust does not spend the amount donated during the year of receipt itself, exemption under section 11 was not lost. The Tribunal further held that in view of the circular, when the assessee-trust donated funds to other trusts towards the corpus or without such conditions, utilisation under section 11 in the hands of the assessee was complete and an inquiry into further utilisation by the donee rust was not contemplated under section 11. So far as the second aspect of the matter was concerned, the Tribunal noted the fact that the Commissioner of Income-tax has based his order exclusively on section 13(2)(h) read with section 13(3); hence, it would not be proper for the Tribunal to enquire into the point whether the Commissioner of Income-tax should have passed an order by applying section 13(2)(a). Referring to the Board Circulation and the decisions referred to by learned counsel for the assessee, the Tribunal noted that section 13(2)(h) is apparently not applicable as it applied only when the funds were invested in other concern. The Tribunal Held that there was a clear distinction between investments and loans. When the assessee deposited is funds in another concern (a) without right of participation in profits with that concern, (b) at a fixed rate of interest, and (c) the value of investments did not fluctuate, it did not invest funds and as such section 13(2)(h) had no application. The transactions were, therefore, loans. The Tribunal concluded that section 13(2)(h) had no application. It was accordingly held by the Tribunal that the Commissioner was not justified in applying the provisions of section 263 of the Act for the reasons mentioned by him and it was not brought out that the order passed by the Income-tax Officer were erroneous in so far as they were Prejudicial to the interests of the Revenue. Accordingly, the assessee's appeal was allowed. </p><p style="text-align: justify;">5. It is in the background of these facts and developments that the Revenue got the aforesaid four questions referred by the Tribunal for our opinion. </p><p style="text-align: justify;">6. A mere look of the aforesaid questions shows that in substance, two main contentions are required to be considered by us, viz. : </p><p style="text-align: justify;">(1) Whether the trust was not entitled to get the benefit of section 11 of the Act because instead of spending the amount itself, it had donated it to another charitable trust, subject to the condition that the donee trust has to keep intact the donated amount by way of corpus and had to utilised only income thereof for its purposes </p><p style="text-align: justify;"> (2) Whether the assessee-trust's deposits were hit by the provisions of section 13(2)(h) of the Act and, therefore, even on that ground, it would lose the benefit of section 11 of the Act </p><p style="text-align: justify;">7. Mr. Soparker, for the Revenue, submitted that as the first contention is concerned, it cannot be said that the income derived by the assessee-trust from the property held by it under the trust wholly for charitable or religious purpose was applied to such purposes in India. He submitted that during the relevant year, the assessee-trust had, instead of utilising its income for its charitable or religious purposes, but that would not amount to application of income by the assessee-trust for is own charitable or religious purposes, and, therefore, the amount of donation cannot be excluded from the income of the assessee-trust as the requirement of section 11(1)(a) qua that amount was not satisfied. Another leg of the argument of M. Soparkar on this point was that, even assuming that it can be said that donation by the charitable or religious trust of any amount to another charitable or religious trust can be considered to be an application of the donor's amount for charitable or religious purposes, even then, on the facts of he present case, the donee trust cannot utilise the donated amount for charitable or religious purposes but it had to keep it accumulated in its corpus for all time to come as it was a corpus donation and that at leas amounts to non-application of the donated amount to charitable or religious purposed and even on that ground, section 11(1)(a) was not applicable to the facts of the present case. On this very question, it was submitted by Mr. Soparkar that the circular instructions of the Central Board of Direct Taxes on which reliance has been placed by the assessee cannot be of any avail to the assessee for the simple reason that the said circular does not contemplate a situation in which the donee trust in required to accumulate the donated amount by way of preservation of the corpus and has to spend only the income therefrom and, consequently, the said circular cannot be pressed into service by the assessee on the facts of the present case. </p><p style="text-align: justify;">8. So far as the second contention is concerned, Mr. Soparkar submitted that there is nothing in section 13(2)(h) to suggest that investment by way of fixed deposits in any concern in which any person referred to in section 13(3) has substantial interest would not be covered by the express language of section 13(2)(h). Mr. Soparkar further submitted that even in this connection, the Central Board of Direct Taxes Circular on which reliance has been placed by the assessee is of no avail and hence, it must be held that the provisions of section 13(2)(h) apply to the facts of the present case and shall disentitle the assessee for the benefit of the provision of section 11 of the Act. </p><p style="text-align: justify;">9. Mr. Patel, for the assessee, on the other hand, submitted that so far as the first contention is concerned, as far as the donor goes, the moment the donation is effected in favour of the donee trust which is also a religious and charitable trust, application of the income for charitable or religious purposes is complete. That even though the donee is required to keep intact the subject-matter of the donation and it is entitled to utilised the income only for its religious and charitable purposes, it would not detract from the applicability of section 11(1)(a) so far as the donor trust is concerned. The donor rust cannot be called upon to always keep a vigil over the activities of the donee trust and even assuming that the donee trust commits breach of the conditions of the donation, it may affect the assessment of the donee but so far as the donor is concerned, once it is found that it has applied its income for religious or charitable purposed by making it available to the donee trust which has similar objects, the benefit of section 11(1)(a) can be said to have been earned by the donor. </p><p style="text-align: justify;">10. Mr. Patel also submitted that the circular letter of the Central Board of Direct Taxes dated January 5, 1978, a copy of which was made available to us by Mr. Patel and which is kept on the record of this case, squarely applies to the facts of the present case and even on that basis, the referred questions have to be answered in favour of the assessee. Mr. Patel, in this connection, placed reliance on the decisions of the Bombay High Court and Calcutta High Court reported in CIT v. Trustees of the Jadi Trust : [1982]133ITR494(Bom) and CIT v. Hindusthan Charity Trust : [1983]139ITR913(Cal) , respectively. So far as question No. 2 is concerned, Mr. Patel submitted that it is squarely answered against the Revenue by the circular (See [1971] 79 ITR 33) of the Central Board of Direct Taxes and has been rightly pressed into service by the Tribunal for deciding the matter in favour of the assessee. </p><p style="text-align: justify;">11. We shall deal with the aforesaid contentions of learned counsel for both parties while considering the aforesaid main two questions seriatim. </p><p style="text-align: justify;">Question No. 1. - Applicability of section 11(1)(a) of the Act. The relevant provisions of section 11(1)(a) read as under : </p><p style="text-align: justify;">'(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; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent. of the income from such property.' </p><p style="text-align: justify;">12. A mere look at the aforesaid provisions shows that if the assessee-trust is a rust which holds properties wholly for charitable or religious purposes, income derived from such properties in the hands of the trust would be allowed to be excluded from the total income of the previous year if it is shown that such income is applied by the said trust for charitable or religious purposes in India. The main question which we have to consider in this connection is as to whether the assessee-trust during the relevant year applied its income for charitable or religious purposes or not. What the assessee did was that it donated the concerned income to another trust which is admittedly a charitable and religious trust duly registered under the Bombay Public Trusts Act. </p><p style="text-align: justify;">13. The word 'applicable' is not defined by the Act. The dictionary meaning of the term 'apply' as given in Chambers' 20th Century Dictionary, amongst others is 'to put to use'. It cannot be gainsaid that the assessee had made use of is income for the purpose of making it available to another trust, objects of which were also of charitable or religious nature. Consequently, it cannot be said that the assessee-trust had not complied with the provisions of section 11 when it made a donation out of its income in favour of the donee trust which was also a religious and charitable trust. However, Mr. Soparkar, for the Revenue, submitted that the assessee-trust itself could not have earned exemption under section 11(1) if it had blocked its income and had not spent it for the purposes for which it was created. In that connection, he invited our attention to section 11(1)(a) itself and submitted that the maximum income which can be accumulated would be 25% of the income of such property and not more than that. This contention of the learned advocate for the Revenue is met by Mr. Patel, appearing for the assessee. He invited our attention to sub-section (2) of section 11 which provided for accumulation even the remaining 75% of the income for a maximum period of ten years subject to a notice in writing being given by the assessee to the Income-tax Officer in the prescribed manner. He also invited our attention to rule 17 of the Income-tax Rules, 1962, which prescribes a format for the notice to be given to the Income-tax officer under section 11(2). Such notice has to be in Form No. 10 and has to be delivered by the assessee to the said officer before expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income. Mr. Patel is, therefore, right when he contends that even in the hands of the donor trust, 100% of the income could have been accumulated for a maximum period of 10 years subject to the trust following the procedure laid down by the Act. If that is so, merely because, the donor trust gifted the concerned income to the donee trust which also was a religious and charitable trust, it cannot be said that the donor trust had acted contrary to the provisions of section 11(1)(a) as tried to be suggested by the learned advocate for the Revenue. </p><p style="text-align: justify;">14. Mr. Soparkar, for the Revenue, next contended that even assuming that the donor trust can be said have complied with the provisions of section 11(1)(a) by making the income covered by the donation available to the donee trust which is also a charitable and religious trust instead of utilising it by itself for such religious and charitable purposes, even then, when the donee trust asked not to utilise this amount, to treat the donation as one of the corpus and to utilise only the income accruing from the corpus for the trust purposes, it cannot be said that the donor trust had applied the income for any charitable or religious purposes in India. Even this contention cannot be accepted for the obvious reason that if the donee trust could have accumulated 100% of its income for a number of year subject to the procedure permitted by the Act, if the donee trust is asked to accumulated or to keep intact the donated amount but to utilise the income arising from the said corpus for its religious and charitable purposes, it cannot be said that the donor trust has not applied its income which is the subject-matter of the donation for religious or charitable purposes. It cannot be disputed that the donated corpus is available to the religious and charitable trust for its own purposes and these purposes are also religious and charitable purposes. The donee trust cannot utilise the corpus for any other purposes nor can it utilise the income arising from such corpus for any extraneous purposes. It is also easy to visualise that keeping the corpus intact and utilising the income accruing from the corpus for religious and charitable purposes would itself amount to application of the income arising from the corpus for religious and charitable purposes. Corpus funds also can be treated to be held for such religious and charitable purposes by the donee trust. Consequently, the contention of Mr. Soparkar that at least in cases where the assessee-trust had donated the amount to the donee trust subject to the condition that the donated amount would not be utilised but should be treated to be a donation to the corpus, the provisions of section 11(1)(a) would not apply, cannot be accepted. If any authority were needed to support the aforesaid conclusion of ours, it is supplied by the decision of the Decision Bench of the Bombay High Court in the case of CIT v. Trustees of the Jadi Trust : [1982]133ITR494(Bom) . In that case, the Division Bench consisting of Chandurkar J. (as he then was) and Sawant J. had to consider a similar question. The assessee-trust, called the Jadi trust, was to make over the net income of its trust funds by way of gift or donation to another trust called the H.C.J. Charitable Trust, so that the donee trust could utilise the net income in its hands for all or any one or more of the charitable purposes mentioned in the trust deed dated March 29, 1963, under which the H.C.J. Trust was created. The question was whether such type of utilisation of the net income of the Jadi Trust - the donor trust - could entitled the donor trust to the benefit of section 11 of the Act. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. Repelling his contention and placing reliance on a decision of the Chancery Division in IRC v. Helen Slater Charitable Trust Ltd. [1980] 1 All ER 785, wherein Slade J., spoke for the Court of Chancery, the Division Bench of the Bombay High Court quoted with approval the following observation of Slade J. in the case of Helen [1980] 1 All ER 785, rendered in the context of a parallel statutory scheme reflected by section 360(1) of the Income and Corporation Taxes Act, 1970, and section 35(1) of the Finance Act, 1965, as in force in England at the relevant time (at p. 505 of 133 ITR) : </p><p style="text-align: justify;">'Any charitable corporation which, acting intra vires, makes an outright transfer of money applicable for charitable purposes to any other corporation established exclusively for charitable purposes, in such manner as to pass to the transferee full title to the money, must be said, by the transfer itself, to have `applied' such money for `charitable purposes', within the meaning of the two sub-sections, unless the transferor knows or ought o know that the money will be misapplied by the transferee. In such circumstances, and subject to last mentioned exception, the transferor corporations is in my judgment entitled to claim exemption under the two sub-sections, without having to show how the money has been dealt with by the transferee'. </p><p style="text-align: justify;">15. Thereafter, the Bombay High Court made the following pertinent observations on the scope of section 11 of the Act (p. 505 of 133 ITR) : </p><p style="text-align: justify;">'So far as the provisions of section 11 of the Act which was in force at the material time is concerned, we do not think that the legal position is in any way different. As already pointed out when a trust which holds property for charitable or religious purposes hands over a donation to another trust which is also a trust made for the application of its funds for charitable or religious purposes, there can hardly be any doubt that it would amount o an application of income for charitable or religious purposes by the donor trust. As already pointed out, it would be permissible for a trust either to directly apply the income for charitable purposes or to a charitable work in the field as put by Slade J. or the same funds or income could be utilised through the medium of another charitable institution which applies its funds or income to charitable purposes. The Tribunal is, in our view, right in holding that the assessee was entitled to the relief under section 11(a) of the Income-tax Act, but the propriety of the direction given by the Tribunal need not be dealt with in this reference.' </p><p style="text-align: justify;">16. We respectfully agree with the view expressed by the Bombay High Court on the point. Our attention was also invited by Mr. Patel for the assessee to a decision of the Calcutta High Court in the case of CIT v. Hindusthan Charity Trust : [1983]139ITR913(Cal) . In that case, a Division Bench of the Calcutta High Court consisting of Sabyasachi Mukharji J. (as he then was) and Suhas Chandra Sen J. had to consider the question whether donation given by one charitable trust to another trust would be covered by the provisions of section 4(3) of the Indian Income-tax Act, 1922, which is the forerunner of section 11 of the Income-tax Act, 1961. The Calcutta High Court, speaking through Sabyasachi Mukharji J., in terms, held that the assessee donor trust was entitled to exemption under section 4(3) of the Income-tax Act. It must, therefore, be held that when a donor trust which it itself a charitable and religious trust donates its income to another trust, the provisions of section 11(1)(a) can be said to have been met by such donor rust and the donor trust can be said to have applied its income for religious and charitable purposes, notwithstanding the fact that the donation is subjected to any conditions that the donee trust will treat the donation as towards its corpus and can only utilise the accruing income from the donated corpus for religious and charitable purposes, and that the question whether the gifted income is to be utilised by the donee trust fully for its religious and charitable purposes or whether the donee trust had to keep intact the corpus of the donation and has to utilise only the income therefrom for its religious and charitable purposes, would not make the slightest difference, so far as entitlement of the donor trust for exemption under section 11(1) goes. </p><p style="text-align: justify;">17. Mr. Patel, for the assessee, further submitted that even apart from the aforesaid legal position, this question is also fully covered by the instruction issued to all Commissioners by the CBDT on January 5, 1978, to which we have made a reference earlier. The full text of the said instruction No. 1132 reads as under : </p><p style="text-align: justify;">'A question has been raised regarding the availability of exemption in the hands of charitable trusts of amounts paid as donation to other charitable trusts. </p><p style="text-align: justify;"> The issue has been considered by the Board and it has been decided that as the law stands at present, the payment of a sum by one charitable trust to another for utilisation by the donee trust towards its charitable objects is proper application of income for charitable purpose in the hands of the donee trust; and the donor trust will not lose exemption under section 11 of the Income-tax Act, 1961, merely because the donee trust did not spend the donation during the year of receipt itself. </p><p style="text-align: justify;"> The above position may kingly be brought to the notice of all officer working in your charge.' </p><p style="text-align: justify;">18. This instruction shows that apart from the legal position that may be emanating from various provisions of the Act, the Central Board of Direct Taxes itself has issued a clear-cut guideline to all the Commissioners of Income-tax that a charitable trust will not lose exemption under section 11 of the Act if it passes a sum of money to another charitable trust for utilisation by the donee trust towards its charitable purposes and that it shall be proper utilisation of money by the donor trust for a charitable purpose. We agree with Mr. Patel for the assessee that the said instruction squarely covers the facts of the present case. It cannot be disputed that the donor trust had made payment of the sum of money covered by the donation to another charitable trust, viz., the donee trust and also it was for utilisation by the donee rust for its charitable purpose. Utilisation does not mean that the entire amount has to be spent forthwith and that it cannot be kept as corpus and its recurring income utilised for charitable purposes. In any case, so far as the donor trust is concerned, once it makes payment of the donated amount to the donee trust which is a religious and charitable trust which has to utilise the donation for its own purposes, it would be a proper application of the income for charitable and religious purposes. </p><p style="text-align: justify;">19. Mr. Soparkar, for the Revenue, submitted that the aforesaid instruction will not apply to the facts of the present case as the circular no-where contemplates a donation wherein the donee rust is not allowed to spend the donated amount the whole hog for its charitable or religious purpose but has to keep it intact as corpus and has to utilise only the income thereof. It is not possible to agree with the aforesaid fine distinction sought to be drawn by the learned advocate for the Revenue in the light of the wording of instruction No. 1132. Even the last sentence of para. 2 indicates that whether in the given year, the donee trust has spent the donation or not, would be a totally irrelevant consideration. What the donor trust does is the only relevant matter. Utilisation by the donee trust in any year would not be relevant for the purpose of deciding whether the donor trust gets exemption under section 11 of the Act or not. This is an additional aspect of the matter, therefore, which enables the assessee to succeed. These instructions are binding on all the officers under the Act and, therefore, even apart from the legal position which we have discussed earlier, the first contention canvassed by the Revenue will have to be held to have been squarely covered against it by instruction No. 1132 itself. </p><p style="text-align: justify;">20. Before parting with the discussion on the first contention, we may refer to a decision of the Supreme Court in the case of Nizam's Religious Endowment Trust v. CIT : [1966]59ITR582(SC) , on which great reliance was placed by Mr. Soparkar for the Revenue. The said decision was rendered by the Supreme Court in the context of section 4(3)(i) of the Indian Income-tax Act, 1922, which represented a scheme parallel to the one which in reflected by section 11(1)(a) of the present Act. The facts before the Supreme Court in the aforesaid case were that by a deed dated September 14, 1950, the Nizam of Hyderabad settled certain securities for Rs. 40 lakhs on trust. Under the deed, the rust fund was to be accumulated during his lifetime and after his death, the trustees were to hold the fund upon trust to spend the income therefrom, in their absolute discretion, for one or more of four specified religious and charitable objects, two of which were for purposes within, and the other two for purposes outside, the taxable territories. The trustees could not, during the lifetime of the settlor, set apart of allocate the accumulated income or a part of it for any one or more of the objects : they could do so only after his death. The settlor was still alive. For the assessment years 1952-53 and 1953-54, the trustees claimed that the income of the trust during the relevant previous years arising form the trust was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922. Repelling this contention of the trustees, it was held by the Supreme Court, speaking through Subba Rao J., that (headnote of 59 ITR 582) : </p><p style="text-align: justify;">'The words `applied or finally set apart for application' in the second part of clause (i) of section 4(3) of the Income-tax Act indicated that unless the income from the property was applied or finally set apart for religious or charitable purposes within the taxable territories, it did not earn the exemption. A different meaning should not be given to the expression `applied or accumulated for application' in the firs part of the clause; for, on principle, there could not be any possible distinction between income from property wholly held in trust and that from a part of the property received in trust. The words `applied' and `accumulated', therefore, meant `applied or finally set apart. `Applied' meant that the income was actually applied for charitable or religious purposes in the taxable territories; and `accumulated' meant that the income was set apart during the year for future spending on such purposes. The expression `accumulated' for a purpose involved a conscious act in praesenti and posited a clear indication on the part of the trustee to set apart the income for that purpose. Therefore, under clause (i) of section 4(3), only income from property, wholly or in part held in trust, actually applied or set apart for application for future spending on religious or charitable purposes within the taxable territories was exempted from inclusion in the total income.' </p><p style="text-align: justify;">21. It was further held : </p><p style="text-align: justify;">'Until the trustees exercised their option, made a selection, and set apart the accumulations for purposes within the taxable territories, it could not be said that they were for purposes within the taxable territories; and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i).' </p><p style="text-align: justify;">22. We fail to understand how the aforesaid decision can advance the case of the Revenue. In the said case, it was found as a fact that the trustees who had got absolute discretion to set apart any part of the funds for any of the specific purposes could not exercise and had not exercised that option for the relevant years. The moment that was visualised, it became obvious that funds were neither applied nor accumulated for the concerned purpose by the trustees. In this fact-situation, therefore, the Supreme Court took the view hat the said fund did not earn exemption during the relevant assessment years. On the facts of the present case, it cannot be said that the donor trust did not apply the concerned income for the purposes contemplated by section 11(1)(a) as we have shown earlier. Consequently, on the facts of the present case, the ratio of the Supreme Court decision in the above case is not at all attracted. </p><p style="text-align: justify;">23. So far as the second contention is concerned, the Revenue is on a still weaker footing. Under what circumstances a charitable trust can be said to have lost exemption under section 11(1)(a) and in what cases the provisions of section 13(2)(h) can be said to be applicable, is also a question which is covered by another circular of the CBDT. The said Circular No. 45 is dated September 2, 1970. It reads as under : </p><p style="text-align: justify;">'For the purpose of the provision in clause (h) of sub-section (2), relating to investment of the trust funds in any concern in which any of the specified persons has a substantial interest, it may be noted that this provision has to be applied only with reference to investment in the capital of the concern as distinct from investments in the debentures of a company or by way of loans to a company or other concern. This is because under clause (a) of sub-section (2), a trust will be deemed to have used or applied its income or property is, or continues to be, lent to any such person for any period during the previous year without adequate security of adequate interest or both. From this, it follows that if the lending of the rust fund to any of the specified concerns either by way of debentures or otherwise is for adequate security and for adequate interest, that would not constitute use or application of the income or property for the benefit of the specified persons. If clause (h) of sub-section (2) is applied to such lending by way of debentures or loans for adequate security and on adequate interest, that would nullify the provisions in clause (a) and render it otiose. Such an interpretation will not be a harmonious interpretation of the provisions in clause (a) and clause (h) and cannot, therefore, be sustained.' </p><p style="text-align: justify;">24. This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns o which section 13(2) applies. The circular further indicates that in the case of lendings by trust, the provisions of clause (a) of sub-section (2) of section 13 will apply and not section 13(2)(h) and any contrary interpretation would not be a harmonious interpretation of clauses (a) and (h) of sub-section (2) of section 13. It is, therefore, obvious that on the facts of such cases, if at all, clause (a) of sub-section (2) of section 13 will apply and not clause (h) thereof, if it is shown that the lending was with adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern, such deposits are made by a trust in such concern, such deposits will not be covered by section 13(2)(h) and if at all, it is only section 13(2)(a) which would apply to such deposits. Consequently, the case of the Revenue that o such donation made by the assessee-trust, section 13(2)(h) will apply cannot be countenanced. It stands squarely answered against the Revenue by the aforesaid circular No. 45 of the Board itself. The said circular obviously is binding on the Revenue. In view of this conclusion of ours, it is not necessary for us to examine the wider submission canvassed by the learned advocate for the assessee placing reliance on the decisions of the Delhi High Court in CIT v. Eternal Science of Man's Society : [1981]128ITR456(Delhi) and of the Madras High Court in CIT v. Nachimuthu Industrial Association : [1982]138ITR585(Mad) , which have taken the view even independently of the said circular that in such circumstances and on such facts, section 13(2)(h) would not apply. We, therefore, need not dilate on these decisions. Consequently, even the second contention canvassed by the learned advocate for the Revenue is found to be devoid of any substance and the rejected. </p><p style="text-align: justify;">25. As a result of the aforesaid discussion, it has to be held that the Revenue has failed o make out any of the contention canvassed before us in this reference. All the four referred questions, therefore, are answered in the affirmative, against the Revenue and in favour of the assessee. The reference sands accordingly disposed of with no order as to costs. <p style="text-align: justify;"></p><p style="text-align: justify;">',
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			(int) 5 => 'Soparkar',
			(int) 6 => 'Patel',
			(int) 7 => 'Patel',
			(int) 8 => 'Patel',
			(int) 9 => 'Patel',
			(int) 10 => 'Patel',
			(int) 11 => 'Soparkar',
			(int) 12 => 'Patel',
			(int) 13 => 'Patel',
			(int) 14 => 'Soparkar',
			(int) 15 => 'Soparkar',
			(int) 16 => 'Chandurkar J.',
			(int) 17 => 'Sawant J.',
			(int) 18 => 'Jadi',
			(int) 19 => 'Slade J.',
			(int) 20 => 'Slade J.',
			(int) 21 => 'Slade J.',
			(int) 22 => 'Patel',
			(int) 23 => 'Suhas Chandra Sen J.',
			(int) 24 => 'Patel',
			(int) 25 => 'Patel',
			(int) 26 => 'Soparkar',
			(int) 27 => 'Soparkar',
			(int) 28 => 'Subba Rao J.'
		),
		'ORDINAL' => array(
			(int) 0 => 'second',
			(int) 1 => 'first',
			(int) 2 => 'second',
			(int) 3 => 'first',
			(int) 4 => '20th',
			(int) 5 => 'first',
			(int) 6 => 'first',
			(int) 7 => 'second',
			(int) 8 => 'second',
			(int) 9 => 'second'
		),
		'GPE' => array(
			(int) 0 => 'India',
			(int) 1 => 'India',
			(int) 2 => 'India',
			(int) 3 => 'India',
			(int) 4 => 'India',
			(int) 5 => 'Helen',
			(int) 6 => 'England'
		),
		'PERCENT' => array(
			(int) 0 => '25%',
			(int) 1 => 'the remaining 75%',
			(int) 2 => '100%',
			(int) 3 => '100%'
		),
		'WORK_OF_ART' => array(
			(int) 0 => '1 All ER 785',
			(int) 1 => '1 All ER 785'
		)
	),
	'desc' => array(
		'Judgement' => array(
			'id' => '733675',
			'acts' => '<a href="/act/51330/income-tax-act-1961-complete-act">Income Tax Act, 1961</a> - Sections 4(3), 11, 11(1), 11(2), 13, 13(2), 13(3), 60, 61, 62, 63, 139 and 263',
			'appealno' => 'Income-tax Reference No. 72 of 1982',
			'appellant' => 'Commissioner of Income-tax',
			'authreffered' => '',
			'casename' => 'Commissioner of Income-tax Vs. Sarladevi Sarabhai Trust-no. 2',
			'casenote' => 'Direct Taxation - exemption - Section 11 (1) of Income Tax Act, 1961 -under guidelines of Central Board of Direct Taxes charitable trust does not loose exemption under Section 11 of Act - when one trust donate amount to another charitable trust for utilization by donee trust towards its charitable purpose money should be properly utilized by donee trust for charitable purpose - either entire or part of amount may be spent or kept as corpus and recurring income utilized for charitable purpose.


Head Note:
INCOME TAX
Charitable trust--EXEMPTION UNDER S. 11--Bar of s. 13(2)(h)--Lending by charitable trust without interest and without adequate security
HELD:
On the facts of such cases, if at all, cl.(a) of sub-s. (2) of s. 13 will apply and not cl. (h) thereof, if it is shown that lending was without adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern such deposits will not be covered by s. 13(2)(h) and if at all it is only s. 13(2)(a) which would apply to such deposits. 
Income Tax Act 1961 s.11
 
 
Charitable trust--EXEMPTION UNDER S. 11--Payment of donated amount to donee trust which is itself charitable and religious.
HELD:
As per Instruction No. 1132 issued to all Commissioners by the CBDT, the donated amount to the donee trust which is religious and charitable trust which has to utilise the donation for its own purposes. It would be a proper application of the income for charitable and religious purposes.
Income Tax Act 1961 s.11
 
 
 -  -  He submitted that during the relevant year, the assessee-trust had, instead of utilising its income for its charitable or religious purposes, but that would not amount to application of income by the assessee-trust for is own charitable or religious purposes, and, therefore, the amount of donation cannot be excluded from the income of the assessee-trust as the requirement of section 11(1)(a) qua that amount was not satisfied. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i).'22. We fail to understand how the aforesaid decision can advance the case of the Revenue. ' 24. This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns o which section 13(2) applies. 25. As a result of the aforesaid discussion, it has to be held that the Revenue has failed o make out any of the contention canvassed before us in this reference.',
			'caseanalysis' => null,
			'casesref' => '',
			'citingcases' => '',
			'counselplain' => ' S.N. Soparkar, Adv.',
			'counseldef' => ' K.C. Patel, Adv.',
			'court' => 'Gujarat',
			'court_type' => 'HC',
			'decidedon' => '1988-03-29',
			'deposition' => '',
			'favorof' => null,
			'findings' => null,
			'judge' => ' R.C. Mankad and; S.B. Majmudar, JJ.',
			'judgement' => '<p style="text-align: justify;">S.B. Majmudar, J.</p><p style="text-align: justify;">1. Four questions have been referred for our opinion by the Income-tax Appellate Tribunal at the instance of the Revenue. These questions read as under : </p><p style="text-align: justify;">'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in setting aside the order of the Commissioner of Income-tax made under section 263 of the Income-tax Act, 1961 </p><p style="text-align: justify;"> 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the provisions of section 11 of the Act, do not come in the way of the assessee as the funds were applied to charitable purposes and that application was completed when the funds were donated to other charitable trusts </p><p style="text-align: justify;"> 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the provisions of section 13(2)(h) of the Act were not applicable in the instant case </p><p style="text-align: justify;"> 4. Whether the Appellate Tribunal has been right in law in not considering the contention of the Revenue that the income of the trust was utilised directly or indirectly for the benefit of prohibited categories under section 13(2)(h) read with section 13(3) and Explanation thereto and, hence, the assessee was not entitled to exemption under section 11 in vies of section 13(2)(h) of the Income-tax Act, 1961 ?' </p><p style="text-align: justify;">2. It will be necessary to have a quick glance at the factual backdrop for understanding the controversy reflected by these questions. </p><p style="text-align: justify;">3. The assessee in a public charitable trust. The relevant year of assessment in 1975-76. In the original assessment, the Income-tax Officer held that the assessee was entitled to exemption in view of section 11 of the Income-tax Act, 1961 ('the Act' for short), as applicable at the relevant time. The Commissioner of Income-tax, however, felt otherwise and issue a notice under section 263 of the Act as he noted that the income of the trust was utilised directly or indirectly for the benefit of the prohibited categories of persons as mentioned in section 13(2)(h) of the Act read with section 13(3) thereof and the Explanation thereto. The fact found by the Commissioner of Income-tax in connection with the dealings of the assessee-trust was to the effect that the trust had given donation to another public charitable rust which amounted to nothing else but defeating the basic provisions and intentions of the Act, the Truss Act and the settlor's or author's wishes. The Commissioner of Income-tax observed that the assessee had donated a particular amount to the Nehru Foundation. These trusts were created by the same group of persons. Consequently, the income was no actually applied and spent on the charitable purposes. Hence, exemption under section 11 of the Act was not available to the assessee. The Commissioner also held that the funds or the trusts were also utilised by persons in the prohibited categories under section 13(3) of the Act and hence in view of section 13(2)(h), the assessee was not entitled to exemption. The Commissioner of Income-tax subsequently held that the income of the assessee was no entitled to exemption. </p><p style="text-align: justify;">4. The assessee along with other various truss similarly situated as the present assessee, filed appeals before the Income-tax Appellate Tribunal. The Tribunal passed a consolidated order in the case of the respondent-trusts, being Sarladevi Sarabhai trust No. 2, and also many companion cases of Sarladevi Sarabhai rusts Nos. 3 to 8 and 10. After hearing the parties, the Tribunal came o the conclusion that the finding of the Commissioner of Income-tax that the assessee was not entitled to exemption under section 11 of the Act was not justified. The Tribunal held that the Commissioner of Income-tax had based his decision on two aspects, viz., (i) donations to other trusts with a condition that donations should from a part of the corpus of the trusts or otherwise did not amount o actual spending by the assessee, and (ii) the affairs were arranged in such a way that the funds remained intact and that no single pie in fact was spent. However, referring to the Board Circular F. No. 176/89/77-II(AT), the Tribunal pointed out that, according to that circular, the payment of a sum by one charitable trust to another would amount to utilisation by the donor trust and merely because the donee trust does not spend the amount donated during the year of receipt itself, exemption under section 11 was not lost. The Tribunal further held that in view of the circular, when the assessee-trust donated funds to other trusts towards the corpus or without such conditions, utilisation under section 11 in the hands of the assessee was complete and an inquiry into further utilisation by the donee rust was not contemplated under section 11. So far as the second aspect of the matter was concerned, the Tribunal noted the fact that the Commissioner of Income-tax has based his order exclusively on section 13(2)(h) read with section 13(3); hence, it would not be proper for the Tribunal to enquire into the point whether the Commissioner of Income-tax should have passed an order by applying section 13(2)(a). Referring to the Board Circulation and the decisions referred to by learned counsel for the assessee, the Tribunal noted that section 13(2)(h) is apparently not applicable as it applied only when the funds were invested in other concern. The Tribunal Held that there was a clear distinction between investments and loans. When the assessee deposited is funds in another concern (a) without right of participation in profits with that concern, (b) at a fixed rate of interest, and (c) the value of investments did not fluctuate, it did not invest funds and as such section 13(2)(h) had no application. The transactions were, therefore, loans. The Tribunal concluded that section 13(2)(h) had no application. It was accordingly held by the Tribunal that the Commissioner was not justified in applying the provisions of section 263 of the Act for the reasons mentioned by him and it was not brought out that the order passed by the Income-tax Officer were erroneous in so far as they were Prejudicial to the interests of the Revenue. Accordingly, the assessee's appeal was allowed. </p><p style="text-align: justify;">5. It is in the background of these facts and developments that the Revenue got the aforesaid four questions referred by the Tribunal for our opinion. </p><p style="text-align: justify;">6. A mere look of the aforesaid questions shows that in substance, two main contentions are required to be considered by us, viz. : </p><p style="text-align: justify;">(1) Whether the trust was not entitled to get the benefit of section 11 of the Act because instead of spending the amount itself, it had donated it to another charitable trust, subject to the condition that the donee trust has to keep intact the donated amount by way of corpus and had to utilised only income thereof for its purposes </p><p style="text-align: justify;"> (2) Whether the assessee-trust's deposits were hit by the provisions of section 13(2)(h) of the Act and, therefore, even on that ground, it would lose the benefit of section 11 of the Act </p><p style="text-align: justify;">7. Mr. Soparker, for the Revenue, submitted that as the first contention is concerned, it cannot be said that the income derived by the assessee-trust from the property held by it under the trust wholly for charitable or religious purpose was applied to such purposes in India. He submitted that during the relevant year, the assessee-trust had, instead of utilising its income for its charitable or religious purposes, but that would not amount to application of income by the assessee-trust for is own charitable or religious purposes, and, therefore, the amount of donation cannot be excluded from the income of the assessee-trust as the requirement of section 11(1)(a) qua that amount was not satisfied. Another leg of the argument of M. Soparkar on this point was that, even assuming that it can be said that donation by the charitable or religious trust of any amount to another charitable or religious trust can be considered to be an application of the donor's amount for charitable or religious purposes, even then, on the facts of he present case, the donee trust cannot utilise the donated amount for charitable or religious purposes but it had to keep it accumulated in its corpus for all time to come as it was a corpus donation and that at leas amounts to non-application of the donated amount to charitable or religious purposed and even on that ground, section 11(1)(a) was not applicable to the facts of the present case. On this very question, it was submitted by Mr. Soparkar that the circular instructions of the Central Board of Direct Taxes on which reliance has been placed by the assessee cannot be of any avail to the assessee for the simple reason that the said circular does not contemplate a situation in which the donee trust in required to accumulate the donated amount by way of preservation of the corpus and has to spend only the income therefrom and, consequently, the said circular cannot be pressed into service by the assessee on the facts of the present case. </p><p style="text-align: justify;">8. So far as the second contention is concerned, Mr. Soparkar submitted that there is nothing in section 13(2)(h) to suggest that investment by way of fixed deposits in any concern in which any person referred to in section 13(3) has substantial interest would not be covered by the express language of section 13(2)(h). Mr. Soparkar further submitted that even in this connection, the Central Board of Direct Taxes Circular on which reliance has been placed by the assessee is of no avail and hence, it must be held that the provisions of section 13(2)(h) apply to the facts of the present case and shall disentitle the assessee for the benefit of the provision of section 11 of the Act. </p><p style="text-align: justify;">9. Mr. Patel, for the assessee, on the other hand, submitted that so far as the first contention is concerned, as far as the donor goes, the moment the donation is effected in favour of the donee trust which is also a religious and charitable trust, application of the income for charitable or religious purposes is complete. That even though the donee is required to keep intact the subject-matter of the donation and it is entitled to utilised the income only for its religious and charitable purposes, it would not detract from the applicability of section 11(1)(a) so far as the donor trust is concerned. The donor rust cannot be called upon to always keep a vigil over the activities of the donee trust and even assuming that the donee trust commits breach of the conditions of the donation, it may affect the assessment of the donee but so far as the donor is concerned, once it is found that it has applied its income for religious or charitable purposed by making it available to the donee trust which has similar objects, the benefit of section 11(1)(a) can be said to have been earned by the donor. </p><p style="text-align: justify;">10. Mr. Patel also submitted that the circular letter of the Central Board of Direct Taxes dated January 5, 1978, a copy of which was made available to us by Mr. Patel and which is kept on the record of this case, squarely applies to the facts of the present case and even on that basis, the referred questions have to be answered in favour of the assessee. Mr. Patel, in this connection, placed reliance on the decisions of the Bombay High Court and Calcutta High Court reported in CIT v. Trustees of the Jadi Trust : [1982]133ITR494(Bom) and CIT v. Hindusthan Charity Trust : [1983]139ITR913(Cal) , respectively. So far as question No. 2 is concerned, Mr. Patel submitted that it is squarely answered against the Revenue by the circular (See [1971] 79 ITR 33) of the Central Board of Direct Taxes and has been rightly pressed into service by the Tribunal for deciding the matter in favour of the assessee. </p><p style="text-align: justify;">11. We shall deal with the aforesaid contentions of learned counsel for both parties while considering the aforesaid main two questions seriatim. </p><p style="text-align: justify;">Question No. 1. - Applicability of section 11(1)(a) of the Act. The relevant provisions of section 11(1)(a) read as under : </p><p style="text-align: justify;">'(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; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent. of the income from such property.' </p><p style="text-align: justify;">12. A mere look at the aforesaid provisions shows that if the assessee-trust is a rust which holds properties wholly for charitable or religious purposes, income derived from such properties in the hands of the trust would be allowed to be excluded from the total income of the previous year if it is shown that such income is applied by the said trust for charitable or religious purposes in India. The main question which we have to consider in this connection is as to whether the assessee-trust during the relevant year applied its income for charitable or religious purposes or not. What the assessee did was that it donated the concerned income to another trust which is admittedly a charitable and religious trust duly registered under the Bombay Public Trusts Act. </p><p style="text-align: justify;">13. The word 'applicable' is not defined by the Act. The dictionary meaning of the term 'apply' as given in Chambers' 20th Century Dictionary, amongst others is 'to put to use'. It cannot be gainsaid that the assessee had made use of is income for the purpose of making it available to another trust, objects of which were also of charitable or religious nature. Consequently, it cannot be said that the assessee-trust had not complied with the provisions of section 11 when it made a donation out of its income in favour of the donee trust which was also a religious and charitable trust. However, Mr. Soparkar, for the Revenue, submitted that the assessee-trust itself could not have earned exemption under section 11(1) if it had blocked its income and had not spent it for the purposes for which it was created. In that connection, he invited our attention to section 11(1)(a) itself and submitted that the maximum income which can be accumulated would be 25% of the income of such property and not more than that. This contention of the learned advocate for the Revenue is met by Mr. Patel, appearing for the assessee. He invited our attention to sub-section (2) of section 11 which provided for accumulation even the remaining 75% of the income for a maximum period of ten years subject to a notice in writing being given by the assessee to the Income-tax Officer in the prescribed manner. He also invited our attention to rule 17 of the Income-tax Rules, 1962, which prescribes a format for the notice to be given to the Income-tax officer under section 11(2). Such notice has to be in Form No. 10 and has to be delivered by the assessee to the said officer before expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income. Mr. Patel is, therefore, right when he contends that even in the hands of the donor trust, 100% of the income could have been accumulated for a maximum period of 10 years subject to the trust following the procedure laid down by the Act. If that is so, merely because, the donor trust gifted the concerned income to the donee trust which also was a religious and charitable trust, it cannot be said that the donor trust had acted contrary to the provisions of section 11(1)(a) as tried to be suggested by the learned advocate for the Revenue. </p><p style="text-align: justify;">14. Mr. Soparkar, for the Revenue, next contended that even assuming that the donor trust can be said have complied with the provisions of section 11(1)(a) by making the income covered by the donation available to the donee trust which is also a charitable and religious trust instead of utilising it by itself for such religious and charitable purposes, even then, when the donee trust asked not to utilise this amount, to treat the donation as one of the corpus and to utilise only the income accruing from the corpus for the trust purposes, it cannot be said that the donor trust had applied the income for any charitable or religious purposes in India. Even this contention cannot be accepted for the obvious reason that if the donee trust could have accumulated 100% of its income for a number of year subject to the procedure permitted by the Act, if the donee trust is asked to accumulated or to keep intact the donated amount but to utilise the income arising from the said corpus for its religious and charitable purposes, it cannot be said that the donor trust has not applied its income which is the subject-matter of the donation for religious or charitable purposes. It cannot be disputed that the donated corpus is available to the religious and charitable trust for its own purposes and these purposes are also religious and charitable purposes. The donee trust cannot utilise the corpus for any other purposes nor can it utilise the income arising from such corpus for any extraneous purposes. It is also easy to visualise that keeping the corpus intact and utilising the income accruing from the corpus for religious and charitable purposes would itself amount to application of the income arising from the corpus for religious and charitable purposes. Corpus funds also can be treated to be held for such religious and charitable purposes by the donee trust. Consequently, the contention of Mr. Soparkar that at least in cases where the assessee-trust had donated the amount to the donee trust subject to the condition that the donated amount would not be utilised but should be treated to be a donation to the corpus, the provisions of section 11(1)(a) would not apply, cannot be accepted. If any authority were needed to support the aforesaid conclusion of ours, it is supplied by the decision of the Decision Bench of the Bombay High Court in the case of CIT v. Trustees of the Jadi Trust : [1982]133ITR494(Bom) . In that case, the Division Bench consisting of Chandurkar J. (as he then was) and Sawant J. had to consider a similar question. The assessee-trust, called the Jadi trust, was to make over the net income of its trust funds by way of gift or donation to another trust called the H.C.J. Charitable Trust, so that the donee trust could utilise the net income in its hands for all or any one or more of the charitable purposes mentioned in the trust deed dated March 29, 1963, under which the H.C.J. Trust was created. The question was whether such type of utilisation of the net income of the Jadi Trust - the donor trust - could entitled the donor trust to the benefit of section 11 of the Act. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. Repelling his contention and placing reliance on a decision of the Chancery Division in IRC v. Helen Slater Charitable Trust Ltd. [1980] 1 All ER 785, wherein Slade J., spoke for the Court of Chancery, the Division Bench of the Bombay High Court quoted with approval the following observation of Slade J. in the case of Helen [1980] 1 All ER 785, rendered in the context of a parallel statutory scheme reflected by section 360(1) of the Income and Corporation Taxes Act, 1970, and section 35(1) of the Finance Act, 1965, as in force in England at the relevant time (at p. 505 of 133 ITR) : </p><p style="text-align: justify;">'Any charitable corporation which, acting intra vires, makes an outright transfer of money applicable for charitable purposes to any other corporation established exclusively for charitable purposes, in such manner as to pass to the transferee full title to the money, must be said, by the transfer itself, to have `applied' such money for `charitable purposes', within the meaning of the two sub-sections, unless the transferor knows or ought o know that the money will be misapplied by the transferee. In such circumstances, and subject to last mentioned exception, the transferor corporations is in my judgment entitled to claim exemption under the two sub-sections, without having to show how the money has been dealt with by the transferee'. </p><p style="text-align: justify;">15. Thereafter, the Bombay High Court made the following pertinent observations on the scope of section 11 of the Act (p. 505 of 133 ITR) : </p><p style="text-align: justify;">'So far as the provisions of section 11 of the Act which was in force at the material time is concerned, we do not think that the legal position is in any way different. As already pointed out when a trust which holds property for charitable or religious purposes hands over a donation to another trust which is also a trust made for the application of its funds for charitable or religious purposes, there can hardly be any doubt that it would amount o an application of income for charitable or religious purposes by the donor trust. As already pointed out, it would be permissible for a trust either to directly apply the income for charitable purposes or to a charitable work in the field as put by Slade J. or the same funds or income could be utilised through the medium of another charitable institution which applies its funds or income to charitable purposes. The Tribunal is, in our view, right in holding that the assessee was entitled to the relief under section 11(a) of the Income-tax Act, but the propriety of the direction given by the Tribunal need not be dealt with in this reference.' </p><p style="text-align: justify;">16. We respectfully agree with the view expressed by the Bombay High Court on the point. Our attention was also invited by Mr. Patel for the assessee to a decision of the Calcutta High Court in the case of CIT v. Hindusthan Charity Trust : [1983]139ITR913(Cal) . In that case, a Division Bench of the Calcutta High Court consisting of Sabyasachi Mukharji J. (as he then was) and Suhas Chandra Sen J. had to consider the question whether donation given by one charitable trust to another trust would be covered by the provisions of section 4(3) of the Indian Income-tax Act, 1922, which is the forerunner of section 11 of the Income-tax Act, 1961. The Calcutta High Court, speaking through Sabyasachi Mukharji J., in terms, held that the assessee donor trust was entitled to exemption under section 4(3) of the Income-tax Act. It must, therefore, be held that when a donor trust which it itself a charitable and religious trust donates its income to another trust, the provisions of section 11(1)(a) can be said to have been met by such donor rust and the donor trust can be said to have applied its income for religious and charitable purposes, notwithstanding the fact that the donation is subjected to any conditions that the donee trust will treat the donation as towards its corpus and can only utilise the accruing income from the donated corpus for religious and charitable purposes, and that the question whether the gifted income is to be utilised by the donee trust fully for its religious and charitable purposes or whether the donee trust had to keep intact the corpus of the donation and has to utilise only the income therefrom for its religious and charitable purposes, would not make the slightest difference, so far as entitlement of the donor trust for exemption under section 11(1) goes. </p><p style="text-align: justify;">17. Mr. Patel, for the assessee, further submitted that even apart from the aforesaid legal position, this question is also fully covered by the instruction issued to all Commissioners by the CBDT on January 5, 1978, to which we have made a reference earlier. The full text of the said instruction No. 1132 reads as under : </p><p style="text-align: justify;">'A question has been raised regarding the availability of exemption in the hands of charitable trusts of amounts paid as donation to other charitable trusts. </p><p style="text-align: justify;"> The issue has been considered by the Board and it has been decided that as the law stands at present, the payment of a sum by one charitable trust to another for utilisation by the donee trust towards its charitable objects is proper application of income for charitable purpose in the hands of the donee trust; and the donor trust will not lose exemption under section 11 of the Income-tax Act, 1961, merely because the donee trust did not spend the donation during the year of receipt itself. </p><p style="text-align: justify;"> The above position may kingly be brought to the notice of all officer working in your charge.' </p><p style="text-align: justify;">18. This instruction shows that apart from the legal position that may be emanating from various provisions of the Act, the Central Board of Direct Taxes itself has issued a clear-cut guideline to all the Commissioners of Income-tax that a charitable trust will not lose exemption under section 11 of the Act if it passes a sum of money to another charitable trust for utilisation by the donee trust towards its charitable purposes and that it shall be proper utilisation of money by the donor trust for a charitable purpose. We agree with Mr. Patel for the assessee that the said instruction squarely covers the facts of the present case. It cannot be disputed that the donor trust had made payment of the sum of money covered by the donation to another charitable trust, viz., the donee trust and also it was for utilisation by the donee rust for its charitable purpose. Utilisation does not mean that the entire amount has to be spent forthwith and that it cannot be kept as corpus and its recurring income utilised for charitable purposes. In any case, so far as the donor trust is concerned, once it makes payment of the donated amount to the donee trust which is a religious and charitable trust which has to utilise the donation for its own purposes, it would be a proper application of the income for charitable and religious purposes. </p><p style="text-align: justify;">19. Mr. Soparkar, for the Revenue, submitted that the aforesaid instruction will not apply to the facts of the present case as the circular no-where contemplates a donation wherein the donee rust is not allowed to spend the donated amount the whole hog for its charitable or religious purpose but has to keep it intact as corpus and has to utilise only the income thereof. It is not possible to agree with the aforesaid fine distinction sought to be drawn by the learned advocate for the Revenue in the light of the wording of instruction No. 1132. Even the last sentence of para. 2 indicates that whether in the given year, the donee trust has spent the donation or not, would be a totally irrelevant consideration. What the donor trust does is the only relevant matter. Utilisation by the donee trust in any year would not be relevant for the purpose of deciding whether the donor trust gets exemption under section 11 of the Act or not. This is an additional aspect of the matter, therefore, which enables the assessee to succeed. These instructions are binding on all the officers under the Act and, therefore, even apart from the legal position which we have discussed earlier, the first contention canvassed by the Revenue will have to be held to have been squarely covered against it by instruction No. 1132 itself. </p><p style="text-align: justify;">20. Before parting with the discussion on the first contention, we may refer to a decision of the Supreme Court in the case of Nizam's Religious Endowment Trust v. CIT : [1966]59ITR582(SC) , on which great reliance was placed by Mr. Soparkar for the Revenue. The said decision was rendered by the Supreme Court in the context of section 4(3)(i) of the Indian Income-tax Act, 1922, which represented a scheme parallel to the one which in reflected by section 11(1)(a) of the present Act. The facts before the Supreme Court in the aforesaid case were that by a deed dated September 14, 1950, the Nizam of Hyderabad settled certain securities for Rs. 40 lakhs on trust. Under the deed, the rust fund was to be accumulated during his lifetime and after his death, the trustees were to hold the fund upon trust to spend the income therefrom, in their absolute discretion, for one or more of four specified religious and charitable objects, two of which were for purposes within, and the other two for purposes outside, the taxable territories. The trustees could not, during the lifetime of the settlor, set apart of allocate the accumulated income or a part of it for any one or more of the objects : they could do so only after his death. The settlor was still alive. For the assessment years 1952-53 and 1953-54, the trustees claimed that the income of the trust during the relevant previous years arising form the trust was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922. Repelling this contention of the trustees, it was held by the Supreme Court, speaking through Subba Rao J., that (headnote of 59 ITR 582) : </p><p style="text-align: justify;">'The words `applied or finally set apart for application' in the second part of clause (i) of section 4(3) of the Income-tax Act indicated that unless the income from the property was applied or finally set apart for religious or charitable purposes within the taxable territories, it did not earn the exemption. A different meaning should not be given to the expression `applied or accumulated for application' in the firs part of the clause; for, on principle, there could not be any possible distinction between income from property wholly held in trust and that from a part of the property received in trust. The words `applied' and `accumulated', therefore, meant `applied or finally set apart. `Applied' meant that the income was actually applied for charitable or religious purposes in the taxable territories; and `accumulated' meant that the income was set apart during the year for future spending on such purposes. The expression `accumulated' for a purpose involved a conscious act in praesenti and posited a clear indication on the part of the trustee to set apart the income for that purpose. Therefore, under clause (i) of section 4(3), only income from property, wholly or in part held in trust, actually applied or set apart for application for future spending on religious or charitable purposes within the taxable territories was exempted from inclusion in the total income.' </p><p style="text-align: justify;">21. It was further held : </p><p style="text-align: justify;">'Until the trustees exercised their option, made a selection, and set apart the accumulations for purposes within the taxable territories, it could not be said that they were for purposes within the taxable territories; and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i).' </p><p style="text-align: justify;">22. We fail to understand how the aforesaid decision can advance the case of the Revenue. In the said case, it was found as a fact that the trustees who had got absolute discretion to set apart any part of the funds for any of the specific purposes could not exercise and had not exercised that option for the relevant years. The moment that was visualised, it became obvious that funds were neither applied nor accumulated for the concerned purpose by the trustees. In this fact-situation, therefore, the Supreme Court took the view hat the said fund did not earn exemption during the relevant assessment years. On the facts of the present case, it cannot be said that the donor trust did not apply the concerned income for the purposes contemplated by section 11(1)(a) as we have shown earlier. Consequently, on the facts of the present case, the ratio of the Supreme Court decision in the above case is not at all attracted. </p><p style="text-align: justify;">23. So far as the second contention is concerned, the Revenue is on a still weaker footing. Under what circumstances a charitable trust can be said to have lost exemption under section 11(1)(a) and in what cases the provisions of section 13(2)(h) can be said to be applicable, is also a question which is covered by another circular of the CBDT. The said Circular No. 45 is dated September 2, 1970. It reads as under : </p><p style="text-align: justify;">'For the purpose of the provision in clause (h) of sub-section (2), relating to investment of the trust funds in any concern in which any of the specified persons has a substantial interest, it may be noted that this provision has to be applied only with reference to investment in the capital of the concern as distinct from investments in the debentures of a company or by way of loans to a company or other concern. This is because under clause (a) of sub-section (2), a trust will be deemed to have used or applied its income or property is, or continues to be, lent to any such person for any period during the previous year without adequate security of adequate interest or both. From this, it follows that if the lending of the rust fund to any of the specified concerns either by way of debentures or otherwise is for adequate security and for adequate interest, that would not constitute use or application of the income or property for the benefit of the specified persons. If clause (h) of sub-section (2) is applied to such lending by way of debentures or loans for adequate security and on adequate interest, that would nullify the provisions in clause (a) and render it otiose. Such an interpretation will not be a harmonious interpretation of the provisions in clause (a) and clause (h) and cannot, therefore, be sustained.' </p><p style="text-align: justify;">24. This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns o which section 13(2) applies. The circular further indicates that in the case of lendings by trust, the provisions of clause (a) of sub-section (2) of section 13 will apply and not section 13(2)(h) and any contrary interpretation would not be a harmonious interpretation of clauses (a) and (h) of sub-section (2) of section 13. It is, therefore, obvious that on the facts of such cases, if at all, clause (a) of sub-section (2) of section 13 will apply and not clause (h) thereof, if it is shown that the lending was with adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern, such deposits are made by a trust in such concern, such deposits will not be covered by section 13(2)(h) and if at all, it is only section 13(2)(a) which would apply to such deposits. Consequently, the case of the Revenue that o such donation made by the assessee-trust, section 13(2)(h) will apply cannot be countenanced. It stands squarely answered against the Revenue by the aforesaid circular No. 45 of the Board itself. The said circular obviously is binding on the Revenue. In view of this conclusion of ours, it is not necessary for us to examine the wider submission canvassed by the learned advocate for the assessee placing reliance on the decisions of the Delhi High Court in CIT v. Eternal Science of Man's Society : [1981]128ITR456(Delhi) and of the Madras High Court in CIT v. Nachimuthu Industrial Association : [1982]138ITR585(Mad) , which have taken the view even independently of the said circular that in such circumstances and on such facts, section 13(2)(h) would not apply. We, therefore, need not dilate on these decisions. Consequently, even the second contention canvassed by the learned advocate for the Revenue is found to be devoid of any substance and the rejected. </p><p style="text-align: justify;">25. As a result of the aforesaid discussion, it has to be held that the Revenue has failed o make out any of the contention canvassed before us in this reference. All the four referred questions, therefore, are answered in the affirmative, against the Revenue and in favour of the assessee. The reference sands accordingly disposed of with no order as to costs. <p style="text-align: justify;"></p><p style="text-align: justify;">',
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$title_for_layout = 'Commissioner of Income tax Vs. Sarladevi Sarabhai Trust no. 2 Semantic Analysis'
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$desc = array(
	'Judgement' => array(
		'id' => '733675',
		'acts' => '<a href="/act/51330/income-tax-act-1961-complete-act">Income Tax Act, 1961</a> - Sections 4(3), 11, 11(1), 11(2), 13, 13(2), 13(3), 60, 61, 62, 63, 139 and 263',
		'appealno' => 'Income-tax Reference No. 72 of 1982',
		'appellant' => 'Commissioner of Income-tax',
		'authreffered' => '',
		'casename' => 'Commissioner of Income-tax Vs. Sarladevi Sarabhai Trust-no. 2',
		'casenote' => 'Direct Taxation - exemption - Section 11 (1) of Income Tax Act, 1961 -under guidelines of Central Board of Direct Taxes charitable trust does not loose exemption under Section 11 of Act - when one trust donate amount to another charitable trust for utilization by donee trust towards its charitable purpose money should be properly utilized by donee trust for charitable purpose - either entire or part of amount may be spent or kept as corpus and recurring income utilized for charitable purpose.


Head Note:
INCOME TAX
Charitable trust--EXEMPTION UNDER S. 11--Bar of s. 13(2)(h)--Lending by charitable trust without interest and without adequate security
HELD:
On the facts of such cases, if at all, cl.(a) of sub-s. (2) of s. 13 will apply and not cl. (h) thereof, if it is shown that lending was without adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern such deposits will not be covered by s. 13(2)(h) and if at all it is only s. 13(2)(a) which would apply to such deposits. 
Income Tax Act 1961 s.11
 
 
Charitable trust--EXEMPTION UNDER S. 11--Payment of donated amount to donee trust which is itself charitable and religious.
HELD:
As per Instruction No. 1132 issued to all Commissioners by the CBDT, the donated amount to the donee trust which is religious and charitable trust which has to utilise the donation for its own purposes. It would be a proper application of the income for charitable and religious purposes.
Income Tax Act 1961 s.11
 
 
 -  -  He submitted that during the relevant year, the assessee-trust had, instead of utilising its income for its charitable or religious purposes, but that would not amount to application of income by the assessee-trust for is own charitable or religious purposes, and, therefore, the amount of donation cannot be excluded from the income of the assessee-trust as the requirement of section 11(1)(a) qua that amount was not satisfied. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i).'22. We fail to understand how the aforesaid decision can advance the case of the Revenue. ' 24. This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns o which section 13(2) applies. 25. As a result of the aforesaid discussion, it has to be held that the Revenue has failed o make out any of the contention canvassed before us in this reference.',
		'caseanalysis' => null,
		'casesref' => '',
		'citingcases' => '',
		'counselplain' => ' S.N. Soparkar, Adv.',
		'counseldef' => ' K.C. Patel, Adv.',
		'court' => 'Gujarat',
		'court_type' => 'HC',
		'decidedon' => '1988-03-29',
		'deposition' => '',
		'favorof' => null,
		'findings' => null,
		'judge' => ' R.C. Mankad and; S.B. Majmudar, JJ.',
		'judgement' => '<p style="text-align: justify;">S.B. Majmudar, J.</p><p style="text-align: justify;">1. Four questions have been referred for our opinion by the Income-tax Appellate Tribunal at the instance of the Revenue. These questions read as under : </p><p style="text-align: justify;">'1. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in setting aside the order of the Commissioner of Income-tax made under section 263 of the Income-tax Act, 1961 </p><p style="text-align: justify;"> 2. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the provisions of section 11 of the Act, do not come in the way of the assessee as the funds were applied to charitable purposes and that application was completed when the funds were donated to other charitable trusts </p><p style="text-align: justify;"> 3. Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has been right in law in holding that the provisions of section 13(2)(h) of the Act were not applicable in the instant case </p><p style="text-align: justify;"> 4. Whether the Appellate Tribunal has been right in law in not considering the contention of the Revenue that the income of the trust was utilised directly or indirectly for the benefit of prohibited categories under section 13(2)(h) read with section 13(3) and Explanation thereto and, hence, the assessee was not entitled to exemption under section 11 in vies of section 13(2)(h) of the Income-tax Act, 1961 ?' </p><p style="text-align: justify;">2. It will be necessary to have a quick glance at the factual backdrop for understanding the controversy reflected by these questions. </p><p style="text-align: justify;">3. The assessee in a public charitable trust. The relevant year of assessment in 1975-76. In the original assessment, the Income-tax Officer held that the assessee was entitled to exemption in view of section 11 of the Income-tax Act, 1961 ('the Act' for short), as applicable at the relevant time. The Commissioner of Income-tax, however, felt otherwise and issue a notice under section 263 of the Act as he noted that the income of the trust was utilised directly or indirectly for the benefit of the prohibited categories of persons as mentioned in section 13(2)(h) of the Act read with section 13(3) thereof and the Explanation thereto. The fact found by the Commissioner of Income-tax in connection with the dealings of the assessee-trust was to the effect that the trust had given donation to another public charitable rust which amounted to nothing else but defeating the basic provisions and intentions of the Act, the Truss Act and the settlor's or author's wishes. The Commissioner of Income-tax observed that the assessee had donated a particular amount to the Nehru Foundation. These trusts were created by the same group of persons. Consequently, the income was no actually applied and spent on the charitable purposes. Hence, exemption under section 11 of the Act was not available to the assessee. The Commissioner also held that the funds or the trusts were also utilised by persons in the prohibited categories under section 13(3) of the Act and hence in view of section 13(2)(h), the assessee was not entitled to exemption. The Commissioner of Income-tax subsequently held that the income of the assessee was no entitled to exemption. </p><p style="text-align: justify;">4. The assessee along with other various truss similarly situated as the present assessee, filed appeals before the Income-tax Appellate Tribunal. The Tribunal passed a consolidated order in the case of the respondent-trusts, being Sarladevi Sarabhai trust No. 2, and also many companion cases of Sarladevi Sarabhai rusts Nos. 3 to 8 and 10. After hearing the parties, the Tribunal came o the conclusion that the finding of the Commissioner of Income-tax that the assessee was not entitled to exemption under section 11 of the Act was not justified. The Tribunal held that the Commissioner of Income-tax had based his decision on two aspects, viz., (i) donations to other trusts with a condition that donations should from a part of the corpus of the trusts or otherwise did not amount o actual spending by the assessee, and (ii) the affairs were arranged in such a way that the funds remained intact and that no single pie in fact was spent. However, referring to the Board Circular F. No. 176/89/77-II(AT), the Tribunal pointed out that, according to that circular, the payment of a sum by one charitable trust to another would amount to utilisation by the donor trust and merely because the donee trust does not spend the amount donated during the year of receipt itself, exemption under section 11 was not lost. The Tribunal further held that in view of the circular, when the assessee-trust donated funds to other trusts towards the corpus or without such conditions, utilisation under section 11 in the hands of the assessee was complete and an inquiry into further utilisation by the donee rust was not contemplated under section 11. So far as the second aspect of the matter was concerned, the Tribunal noted the fact that the Commissioner of Income-tax has based his order exclusively on section 13(2)(h) read with section 13(3); hence, it would not be proper for the Tribunal to enquire into the point whether the Commissioner of Income-tax should have passed an order by applying section 13(2)(a). Referring to the Board Circulation and the decisions referred to by learned counsel for the assessee, the Tribunal noted that section 13(2)(h) is apparently not applicable as it applied only when the funds were invested in other concern. The Tribunal Held that there was a clear distinction between investments and loans. When the assessee deposited is funds in another concern (a) without right of participation in profits with that concern, (b) at a fixed rate of interest, and (c) the value of investments did not fluctuate, it did not invest funds and as such section 13(2)(h) had no application. The transactions were, therefore, loans. The Tribunal concluded that section 13(2)(h) had no application. It was accordingly held by the Tribunal that the Commissioner was not justified in applying the provisions of section 263 of the Act for the reasons mentioned by him and it was not brought out that the order passed by the Income-tax Officer were erroneous in so far as they were Prejudicial to the interests of the Revenue. Accordingly, the assessee's appeal was allowed. </p><p style="text-align: justify;">5. It is in the background of these facts and developments that the Revenue got the aforesaid four questions referred by the Tribunal for our opinion. </p><p style="text-align: justify;">6. A mere look of the aforesaid questions shows that in substance, two main contentions are required to be considered by us, viz. : </p><p style="text-align: justify;">(1) Whether the trust was not entitled to get the benefit of section 11 of the Act because instead of spending the amount itself, it had donated it to another charitable trust, subject to the condition that the donee trust has to keep intact the donated amount by way of corpus and had to utilised only income thereof for its purposes </p><p style="text-align: justify;"> (2) Whether the assessee-trust's deposits were hit by the provisions of section 13(2)(h) of the Act and, therefore, even on that ground, it would lose the benefit of section 11 of the Act </p><p style="text-align: justify;">7. Mr. Soparker, for the Revenue, submitted that as the first contention is concerned, it cannot be said that the income derived by the assessee-trust from the property held by it under the trust wholly for charitable or religious purpose was applied to such purposes in India. He submitted that during the relevant year, the assessee-trust had, instead of utilising its income for its charitable or religious purposes, but that would not amount to application of income by the assessee-trust for is own charitable or religious purposes, and, therefore, the amount of donation cannot be excluded from the income of the assessee-trust as the requirement of section 11(1)(a) qua that amount was not satisfied. Another leg of the argument of M. Soparkar on this point was that, even assuming that it can be said that donation by the charitable or religious trust of any amount to another charitable or religious trust can be considered to be an application of the donor's amount for charitable or religious purposes, even then, on the facts of he present case, the donee trust cannot utilise the donated amount for charitable or religious purposes but it had to keep it accumulated in its corpus for all time to come as it was a corpus donation and that at leas amounts to non-application of the donated amount to charitable or religious purposed and even on that ground, section 11(1)(a) was not applicable to the facts of the present case. On this very question, it was submitted by Mr. Soparkar that the circular instructions of the Central Board of Direct Taxes on which reliance has been placed by the assessee cannot be of any avail to the assessee for the simple reason that the said circular does not contemplate a situation in which the donee trust in required to accumulate the donated amount by way of preservation of the corpus and has to spend only the income therefrom and, consequently, the said circular cannot be pressed into service by the assessee on the facts of the present case. </p><p style="text-align: justify;">8. So far as the second contention is concerned, Mr. Soparkar submitted that there is nothing in section 13(2)(h) to suggest that investment by way of fixed deposits in any concern in which any person referred to in section 13(3) has substantial interest would not be covered by the express language of section 13(2)(h). Mr. Soparkar further submitted that even in this connection, the Central Board of Direct Taxes Circular on which reliance has been placed by the assessee is of no avail and hence, it must be held that the provisions of section 13(2)(h) apply to the facts of the present case and shall disentitle the assessee for the benefit of the provision of section 11 of the Act. </p><p style="text-align: justify;">9. Mr. Patel, for the assessee, on the other hand, submitted that so far as the first contention is concerned, as far as the donor goes, the moment the donation is effected in favour of the donee trust which is also a religious and charitable trust, application of the income for charitable or religious purposes is complete. That even though the donee is required to keep intact the subject-matter of the donation and it is entitled to utilised the income only for its religious and charitable purposes, it would not detract from the applicability of section 11(1)(a) so far as the donor trust is concerned. The donor rust cannot be called upon to always keep a vigil over the activities of the donee trust and even assuming that the donee trust commits breach of the conditions of the donation, it may affect the assessment of the donee but so far as the donor is concerned, once it is found that it has applied its income for religious or charitable purposed by making it available to the donee trust which has similar objects, the benefit of section 11(1)(a) can be said to have been earned by the donor. </p><p style="text-align: justify;">10. Mr. Patel also submitted that the circular letter of the Central Board of Direct Taxes dated January 5, 1978, a copy of which was made available to us by Mr. Patel and which is kept on the record of this case, squarely applies to the facts of the present case and even on that basis, the referred questions have to be answered in favour of the assessee. Mr. Patel, in this connection, placed reliance on the decisions of the Bombay High Court and Calcutta High Court reported in CIT v. Trustees of the Jadi Trust : [1982]133ITR494(Bom) and CIT v. Hindusthan Charity Trust : [1983]139ITR913(Cal) , respectively. So far as question No. 2 is concerned, Mr. Patel submitted that it is squarely answered against the Revenue by the circular (See [1971] 79 ITR 33) of the Central Board of Direct Taxes and has been rightly pressed into service by the Tribunal for deciding the matter in favour of the assessee. </p><p style="text-align: justify;">11. We shall deal with the aforesaid contentions of learned counsel for both parties while considering the aforesaid main two questions seriatim. </p><p style="text-align: justify;">Question No. 1. - Applicability of section 11(1)(a) of the Act. The relevant provisions of section 11(1)(a) read as under : </p><p style="text-align: justify;">'(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; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent. of the income from such property.' </p><p style="text-align: justify;">12. A mere look at the aforesaid provisions shows that if the assessee-trust is a rust which holds properties wholly for charitable or religious purposes, income derived from such properties in the hands of the trust would be allowed to be excluded from the total income of the previous year if it is shown that such income is applied by the said trust for charitable or religious purposes in India. The main question which we have to consider in this connection is as to whether the assessee-trust during the relevant year applied its income for charitable or religious purposes or not. What the assessee did was that it donated the concerned income to another trust which is admittedly a charitable and religious trust duly registered under the Bombay Public Trusts Act. </p><p style="text-align: justify;">13. The word 'applicable' is not defined by the Act. The dictionary meaning of the term 'apply' as given in Chambers' 20th Century Dictionary, amongst others is 'to put to use'. It cannot be gainsaid that the assessee had made use of is income for the purpose of making it available to another trust, objects of which were also of charitable or religious nature. Consequently, it cannot be said that the assessee-trust had not complied with the provisions of section 11 when it made a donation out of its income in favour of the donee trust which was also a religious and charitable trust. However, Mr. Soparkar, for the Revenue, submitted that the assessee-trust itself could not have earned exemption under section 11(1) if it had blocked its income and had not spent it for the purposes for which it was created. In that connection, he invited our attention to section 11(1)(a) itself and submitted that the maximum income which can be accumulated would be 25% of the income of such property and not more than that. This contention of the learned advocate for the Revenue is met by Mr. Patel, appearing for the assessee. He invited our attention to sub-section (2) of section 11 which provided for accumulation even the remaining 75% of the income for a maximum period of ten years subject to a notice in writing being given by the assessee to the Income-tax Officer in the prescribed manner. He also invited our attention to rule 17 of the Income-tax Rules, 1962, which prescribes a format for the notice to be given to the Income-tax officer under section 11(2). Such notice has to be in Form No. 10 and has to be delivered by the assessee to the said officer before expiry of the time allowed under sub-section (1) or sub-section (2) of section 139, whether fixed originally or on extension, for furnishing the return of income. Mr. Patel is, therefore, right when he contends that even in the hands of the donor trust, 100% of the income could have been accumulated for a maximum period of 10 years subject to the trust following the procedure laid down by the Act. If that is so, merely because, the donor trust gifted the concerned income to the donee trust which also was a religious and charitable trust, it cannot be said that the donor trust had acted contrary to the provisions of section 11(1)(a) as tried to be suggested by the learned advocate for the Revenue. </p><p style="text-align: justify;">14. Mr. Soparkar, for the Revenue, next contended that even assuming that the donor trust can be said have complied with the provisions of section 11(1)(a) by making the income covered by the donation available to the donee trust which is also a charitable and religious trust instead of utilising it by itself for such religious and charitable purposes, even then, when the donee trust asked not to utilise this amount, to treat the donation as one of the corpus and to utilise only the income accruing from the corpus for the trust purposes, it cannot be said that the donor trust had applied the income for any charitable or religious purposes in India. Even this contention cannot be accepted for the obvious reason that if the donee trust could have accumulated 100% of its income for a number of year subject to the procedure permitted by the Act, if the donee trust is asked to accumulated or to keep intact the donated amount but to utilise the income arising from the said corpus for its religious and charitable purposes, it cannot be said that the donor trust has not applied its income which is the subject-matter of the donation for religious or charitable purposes. It cannot be disputed that the donated corpus is available to the religious and charitable trust for its own purposes and these purposes are also religious and charitable purposes. The donee trust cannot utilise the corpus for any other purposes nor can it utilise the income arising from such corpus for any extraneous purposes. It is also easy to visualise that keeping the corpus intact and utilising the income accruing from the corpus for religious and charitable purposes would itself amount to application of the income arising from the corpus for religious and charitable purposes. Corpus funds also can be treated to be held for such religious and charitable purposes by the donee trust. Consequently, the contention of Mr. Soparkar that at least in cases where the assessee-trust had donated the amount to the donee trust subject to the condition that the donated amount would not be utilised but should be treated to be a donation to the corpus, the provisions of section 11(1)(a) would not apply, cannot be accepted. If any authority were needed to support the aforesaid conclusion of ours, it is supplied by the decision of the Decision Bench of the Bombay High Court in the case of CIT v. Trustees of the Jadi Trust : [1982]133ITR494(Bom) . In that case, the Division Bench consisting of Chandurkar J. (as he then was) and Sawant J. had to consider a similar question. The assessee-trust, called the Jadi trust, was to make over the net income of its trust funds by way of gift or donation to another trust called the H.C.J. Charitable Trust, so that the donee trust could utilise the net income in its hands for all or any one or more of the charitable purposes mentioned in the trust deed dated March 29, 1963, under which the H.C.J. Trust was created. The question was whether such type of utilisation of the net income of the Jadi Trust - the donor trust - could entitled the donor trust to the benefit of section 11 of the Act. The Commissioner of Income-tax contended before the Bombay High Court that the provisions of section 11 would not be satisfied in such a case. Repelling his contention and placing reliance on a decision of the Chancery Division in IRC v. Helen Slater Charitable Trust Ltd. [1980] 1 All ER 785, wherein Slade J., spoke for the Court of Chancery, the Division Bench of the Bombay High Court quoted with approval the following observation of Slade J. in the case of Helen [1980] 1 All ER 785, rendered in the context of a parallel statutory scheme reflected by section 360(1) of the Income and Corporation Taxes Act, 1970, and section 35(1) of the Finance Act, 1965, as in force in England at the relevant time (at p. 505 of 133 ITR) : </p><p style="text-align: justify;">'Any charitable corporation which, acting intra vires, makes an outright transfer of money applicable for charitable purposes to any other corporation established exclusively for charitable purposes, in such manner as to pass to the transferee full title to the money, must be said, by the transfer itself, to have `applied' such money for `charitable purposes', within the meaning of the two sub-sections, unless the transferor knows or ought o know that the money will be misapplied by the transferee. In such circumstances, and subject to last mentioned exception, the transferor corporations is in my judgment entitled to claim exemption under the two sub-sections, without having to show how the money has been dealt with by the transferee'. </p><p style="text-align: justify;">15. Thereafter, the Bombay High Court made the following pertinent observations on the scope of section 11 of the Act (p. 505 of 133 ITR) : </p><p style="text-align: justify;">'So far as the provisions of section 11 of the Act which was in force at the material time is concerned, we do not think that the legal position is in any way different. As already pointed out when a trust which holds property for charitable or religious purposes hands over a donation to another trust which is also a trust made for the application of its funds for charitable or religious purposes, there can hardly be any doubt that it would amount o an application of income for charitable or religious purposes by the donor trust. As already pointed out, it would be permissible for a trust either to directly apply the income for charitable purposes or to a charitable work in the field as put by Slade J. or the same funds or income could be utilised through the medium of another charitable institution which applies its funds or income to charitable purposes. The Tribunal is, in our view, right in holding that the assessee was entitled to the relief under section 11(a) of the Income-tax Act, but the propriety of the direction given by the Tribunal need not be dealt with in this reference.' </p><p style="text-align: justify;">16. We respectfully agree with the view expressed by the Bombay High Court on the point. Our attention was also invited by Mr. Patel for the assessee to a decision of the Calcutta High Court in the case of CIT v. Hindusthan Charity Trust : [1983]139ITR913(Cal) . In that case, a Division Bench of the Calcutta High Court consisting of Sabyasachi Mukharji J. (as he then was) and Suhas Chandra Sen J. had to consider the question whether donation given by one charitable trust to another trust would be covered by the provisions of section 4(3) of the Indian Income-tax Act, 1922, which is the forerunner of section 11 of the Income-tax Act, 1961. The Calcutta High Court, speaking through Sabyasachi Mukharji J., in terms, held that the assessee donor trust was entitled to exemption under section 4(3) of the Income-tax Act. It must, therefore, be held that when a donor trust which it itself a charitable and religious trust donates its income to another trust, the provisions of section 11(1)(a) can be said to have been met by such donor rust and the donor trust can be said to have applied its income for religious and charitable purposes, notwithstanding the fact that the donation is subjected to any conditions that the donee trust will treat the donation as towards its corpus and can only utilise the accruing income from the donated corpus for religious and charitable purposes, and that the question whether the gifted income is to be utilised by the donee trust fully for its religious and charitable purposes or whether the donee trust had to keep intact the corpus of the donation and has to utilise only the income therefrom for its religious and charitable purposes, would not make the slightest difference, so far as entitlement of the donor trust for exemption under section 11(1) goes. </p><p style="text-align: justify;">17. Mr. Patel, for the assessee, further submitted that even apart from the aforesaid legal position, this question is also fully covered by the instruction issued to all Commissioners by the CBDT on January 5, 1978, to which we have made a reference earlier. The full text of the said instruction No. 1132 reads as under : </p><p style="text-align: justify;">'A question has been raised regarding the availability of exemption in the hands of charitable trusts of amounts paid as donation to other charitable trusts. </p><p style="text-align: justify;"> The issue has been considered by the Board and it has been decided that as the law stands at present, the payment of a sum by one charitable trust to another for utilisation by the donee trust towards its charitable objects is proper application of income for charitable purpose in the hands of the donee trust; and the donor trust will not lose exemption under section 11 of the Income-tax Act, 1961, merely because the donee trust did not spend the donation during the year of receipt itself. </p><p style="text-align: justify;"> The above position may kingly be brought to the notice of all officer working in your charge.' </p><p style="text-align: justify;">18. This instruction shows that apart from the legal position that may be emanating from various provisions of the Act, the Central Board of Direct Taxes itself has issued a clear-cut guideline to all the Commissioners of Income-tax that a charitable trust will not lose exemption under section 11 of the Act if it passes a sum of money to another charitable trust for utilisation by the donee trust towards its charitable purposes and that it shall be proper utilisation of money by the donor trust for a charitable purpose. We agree with Mr. Patel for the assessee that the said instruction squarely covers the facts of the present case. It cannot be disputed that the donor trust had made payment of the sum of money covered by the donation to another charitable trust, viz., the donee trust and also it was for utilisation by the donee rust for its charitable purpose. Utilisation does not mean that the entire amount has to be spent forthwith and that it cannot be kept as corpus and its recurring income utilised for charitable purposes. In any case, so far as the donor trust is concerned, once it makes payment of the donated amount to the donee trust which is a religious and charitable trust which has to utilise the donation for its own purposes, it would be a proper application of the income for charitable and religious purposes. </p><p style="text-align: justify;">19. Mr. Soparkar, for the Revenue, submitted that the aforesaid instruction will not apply to the facts of the present case as the circular no-where contemplates a donation wherein the donee rust is not allowed to spend the donated amount the whole hog for its charitable or religious purpose but has to keep it intact as corpus and has to utilise only the income thereof. It is not possible to agree with the aforesaid fine distinction sought to be drawn by the learned advocate for the Revenue in the light of the wording of instruction No. 1132. Even the last sentence of para. 2 indicates that whether in the given year, the donee trust has spent the donation or not, would be a totally irrelevant consideration. What the donor trust does is the only relevant matter. Utilisation by the donee trust in any year would not be relevant for the purpose of deciding whether the donor trust gets exemption under section 11 of the Act or not. This is an additional aspect of the matter, therefore, which enables the assessee to succeed. These instructions are binding on all the officers under the Act and, therefore, even apart from the legal position which we have discussed earlier, the first contention canvassed by the Revenue will have to be held to have been squarely covered against it by instruction No. 1132 itself. </p><p style="text-align: justify;">20. Before parting with the discussion on the first contention, we may refer to a decision of the Supreme Court in the case of Nizam's Religious Endowment Trust v. CIT : [1966]59ITR582(SC) , on which great reliance was placed by Mr. Soparkar for the Revenue. The said decision was rendered by the Supreme Court in the context of section 4(3)(i) of the Indian Income-tax Act, 1922, which represented a scheme parallel to the one which in reflected by section 11(1)(a) of the present Act. The facts before the Supreme Court in the aforesaid case were that by a deed dated September 14, 1950, the Nizam of Hyderabad settled certain securities for Rs. 40 lakhs on trust. Under the deed, the rust fund was to be accumulated during his lifetime and after his death, the trustees were to hold the fund upon trust to spend the income therefrom, in their absolute discretion, for one or more of four specified religious and charitable objects, two of which were for purposes within, and the other two for purposes outside, the taxable territories. The trustees could not, during the lifetime of the settlor, set apart of allocate the accumulated income or a part of it for any one or more of the objects : they could do so only after his death. The settlor was still alive. For the assessment years 1952-53 and 1953-54, the trustees claimed that the income of the trust during the relevant previous years arising form the trust was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922. Repelling this contention of the trustees, it was held by the Supreme Court, speaking through Subba Rao J., that (headnote of 59 ITR 582) : </p><p style="text-align: justify;">'The words `applied or finally set apart for application' in the second part of clause (i) of section 4(3) of the Income-tax Act indicated that unless the income from the property was applied or finally set apart for religious or charitable purposes within the taxable territories, it did not earn the exemption. A different meaning should not be given to the expression `applied or accumulated for application' in the firs part of the clause; for, on principle, there could not be any possible distinction between income from property wholly held in trust and that from a part of the property received in trust. The words `applied' and `accumulated', therefore, meant `applied or finally set apart. `Applied' meant that the income was actually applied for charitable or religious purposes in the taxable territories; and `accumulated' meant that the income was set apart during the year for future spending on such purposes. The expression `accumulated' for a purpose involved a conscious act in praesenti and posited a clear indication on the part of the trustee to set apart the income for that purpose. Therefore, under clause (i) of section 4(3), only income from property, wholly or in part held in trust, actually applied or set apart for application for future spending on religious or charitable purposes within the taxable territories was exempted from inclusion in the total income.' </p><p style="text-align: justify;">21. It was further held : </p><p style="text-align: justify;">'Until the trustees exercised their option, made a selection, and set apart the accumulations for purposes within the taxable territories, it could not be said that they were for purposes within the taxable territories; and, therefore, the income from the trust created by the Nizam was not entitled to the exemption under section 4(3)(i).' </p><p style="text-align: justify;">22. We fail to understand how the aforesaid decision can advance the case of the Revenue. In the said case, it was found as a fact that the trustees who had got absolute discretion to set apart any part of the funds for any of the specific purposes could not exercise and had not exercised that option for the relevant years. The moment that was visualised, it became obvious that funds were neither applied nor accumulated for the concerned purpose by the trustees. In this fact-situation, therefore, the Supreme Court took the view hat the said fund did not earn exemption during the relevant assessment years. On the facts of the present case, it cannot be said that the donor trust did not apply the concerned income for the purposes contemplated by section 11(1)(a) as we have shown earlier. Consequently, on the facts of the present case, the ratio of the Supreme Court decision in the above case is not at all attracted. </p><p style="text-align: justify;">23. So far as the second contention is concerned, the Revenue is on a still weaker footing. Under what circumstances a charitable trust can be said to have lost exemption under section 11(1)(a) and in what cases the provisions of section 13(2)(h) can be said to be applicable, is also a question which is covered by another circular of the CBDT. The said Circular No. 45 is dated September 2, 1970. It reads as under : </p><p style="text-align: justify;">'For the purpose of the provision in clause (h) of sub-section (2), relating to investment of the trust funds in any concern in which any of the specified persons has a substantial interest, it may be noted that this provision has to be applied only with reference to investment in the capital of the concern as distinct from investments in the debentures of a company or by way of loans to a company or other concern. This is because under clause (a) of sub-section (2), a trust will be deemed to have used or applied its income or property is, or continues to be, lent to any such person for any period during the previous year without adequate security of adequate interest or both. From this, it follows that if the lending of the rust fund to any of the specified concerns either by way of debentures or otherwise is for adequate security and for adequate interest, that would not constitute use or application of the income or property for the benefit of the specified persons. If clause (h) of sub-section (2) is applied to such lending by way of debentures or loans for adequate security and on adequate interest, that would nullify the provisions in clause (a) and render it otiose. Such an interpretation will not be a harmonious interpretation of the provisions in clause (a) and clause (h) and cannot, therefore, be sustained.' </p><p style="text-align: justify;">24. This circular clearly indicates that section 13(2)(h) will cover only those cases in which investments are made by the assessee-trust in the capital of the concerns o which section 13(2) applies. The circular further indicates that in the case of lendings by trust, the provisions of clause (a) of sub-section (2) of section 13 will apply and not section 13(2)(h) and any contrary interpretation would not be a harmonious interpretation of clauses (a) and (h) of sub-section (2) of section 13. It is, therefore, obvious that on the facts of such cases, if at all, clause (a) of sub-section (2) of section 13 will apply and not clause (h) thereof, if it is shown that the lending was with adequate security or adequate interest or both. Under these circumstances, if deposits are made by a trust in such concern, such deposits are made by a trust in such concern, such deposits will not be covered by section 13(2)(h) and if at all, it is only section 13(2)(a) which would apply to such deposits. Consequently, the case of the Revenue that o such donation made by the assessee-trust, section 13(2)(h) will apply cannot be countenanced. It stands squarely answered against the Revenue by the aforesaid circular No. 45 of the Board itself. The said circular obviously is binding on the Revenue. In view of this conclusion of ours, it is not necessary for us to examine the wider submission canvassed by the learned advocate for the assessee placing reliance on the decisions of the Delhi High Court in CIT v. Eternal Science of Man's Society : [1981]128ITR456(Delhi) and of the Madras High Court in CIT v. Nachimuthu Industrial Association : [1982]138ITR585(Mad) , which have taken the view even independently of the said circular that in such circumstances and on such facts, section 13(2)(h) would not apply. We, therefore, need not dilate on these decisions. Consequently, even the second contention canvassed by the learned advocate for the Revenue is found to be devoid of any substance and the rejected. </p><p style="text-align: justify;">25. As a result of the aforesaid discussion, it has to be held that the Revenue has failed o make out any of the contention canvassed before us in this reference. All the four referred questions, therefore, are answered in the affirmative, against the Revenue and in favour of the assessee. The reference sands accordingly disposed of with no order as to costs. <p style="text-align: justify;"></p><p style="text-align: justify;">',
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LAW: section 263, section 11, section 11, section 11, section 263, the Truss Act, section 11, section 11, section 11, section 11, section 11, section 13(2)(a, section 263, section 11, section 11, section 11(1)(a, section 11, section 11(1)(a, section 11(1)(a, section 11, section 11, section 11(2, section 139, section 11(1)(a, section 11(1)(a, section 11(1)(a, the Decision Bench, section 11, section 11, section 360(1, section 35(1, the Finance Act, section 11, section 11, section 11, section 11(1)(a, section 11, section 11, section 11, section 11(1)(a, section 11(1)(a, section 11(1)(a, section 13(2, section 13, section 13, section 13

ORG: S.B. Majmudar, the Appellate Tribunal, Explanation, the Nehru Foundation, Tribunal, Sarladevi Sarabhai, Sarladevi Sarabhai, Tribunal, Tribunal, the Board Circular F. No, Tribunal, Tribunal, Tribunal, Tribunal, the Board Circulation, Tribunal, The Tribunal Held, Tribunal, Tribunal, Act, the Central Board of Direct Taxes, the Central Board of Direct Taxes Circular, the Central Board of Direct Taxes, the Bombay High Court, Calcutta High Court, CIT, the Jadi Trust, CIT, Hindusthan Charity Trust, the Central Board of Direct Taxes, Tribunal, the Bombay Public Trusts Act, Chambers, the Bombay High Court, CIT v. Trustees of, the Jadi Trust, the H.C.J. Charitable Trust, the H.C.J. Trust, the Jadi Trust - the donor trust, the Bombay High Court, the Chancery Division, IRC, Helen Slater Charitable Trust Ltd., the Court of Chancery, the Bombay High Court, the Income and Corporation Taxes Act, the Bombay High Court, Tribunal, Tribunal, the Bombay High Court, the Calcutta High Court, CIT, Hindusthan Charity Trust, Sabyasachi Mukharji J., The Calcutta High Court, Sabyasachi Mukharji J., CBDT, Board, the Central Board of Direct Taxes, the Supreme Court, Nizam's Religious Endowment Trust, the Supreme Court, the Supreme Court, Nizam of Hyderabad, the Supreme Court, ITR, Nizam, the Supreme Court, the Supreme Court, CBDT, Board, CIT v. Eternal Science of Man's Society, CIT, Nachimuthu Industrial Association

NORP: J.1, Indian, Indian, Indian

CARDINAL: Four, 2, 3, 4, 2, 3., 4., 2, 3 to 8, two, 176/89/77, one, 5., four, 6., two, 1, 2, 8., 9, 10, 1982]133ITR494(Bom, 1983]139ITR913(Cal, 2, 79, 33, 11, two, 1, 1, twenty-five, 12, 13, 2, 17, 10, 1, 2, 14, 1982]133ITR494(Bom, 505, 133, transferee, two, two, 15, 505, 133, 1983]139ITR913(Cal, one, 4(3, 17, one, 18, 19, 2, 20, 1966]59ITR582(SC, 40, one, four, two, two, 59, 582, 4(3, 4(3, 22, 23, 2, 2, 2, 24, 2, 2, 2, 45, 1981]128ITR456(Delhi, 1982]138ITR585(Mad, 25, four

DATE: '1, 1961, 1961, 1975-76, 1961, the year, the relevant year, January 5, 1978, 1971, 60 to 63, the previous year, the previous year, the relevant year, ten years, 1962, 10 years, March 29, 1963, 1980, 1980, 1970, 1965, 1922, 1961, January 5, 1978, 1132, 1961, the year, 1132, the given year, any year, 1132, 1922, September 14, 1950, years 1952-53 and, 1953-54, 1922, the year, 21, the relevant years, years, 45, September 2, 1970, the previous year

PERSON: Nos, Soparker, M. Soparkar, Soparkar, Soparkar, Soparkar, Patel, Patel, Patel, Patel, Patel, Soparkar, Patel, Patel, Soparkar, Soparkar, Chandurkar J., Sawant J., Jadi, Slade J., Slade J., Slade J., Patel, Suhas Chandra Sen J., Patel, Patel, Soparkar, Soparkar, Subba Rao J.

ORDINAL: second, first, second, first, 20th, first, first, second, second, second

GPE: India, India, India, India, India, Helen, England

PERCENT: 25%, the remaining 75%, 100%, 100%

WORK_OF_ART: 1 All ER 785, 1 All ER 785