1997 (4) TMI 37 - HC - Income Tax

Summary

Issues Involved:

1. Validity of the transfer of Rs. 12,80,000 by T. N. K. and V. Educational Trust to ten family trusts.
2. Taxability of the interest income from Devi Films Private Limited.
3. Charitable nature of the family trusts.
4. Applicability of section 11 and 13(1)(d) of the Income-tax Act, 1961, to the family trusts.
5. Impact of grant of certificate under section 12A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Validity of the Transfer of Rs. 12,80,000 by T. N. K. and V. Educational Trust to Ten Family Trusts:

The court examined whether the transfer of Rs. 12,80,000 by T. N. K. and V. Educational Trust to ten family trusts was valid under the declaration of trust dated December 15, 1960. Clause 12 of the trust deed stated that "if at any time the objects of the trust should become impossible of fulfilment, the properties and funds belonging to the trust shall be utilised for such charitable purposes as the trustees in office at that time may determine." The court found that there was no finding that the objects of the trust had "become impossible of fulfilment." The trust deed did not specifically include the establishment of a polytechnic, and thus, the general educational purposes had not become impossible of fulfilment. Therefore, the transfer was invalid as clause 12 did not empower the trustees to transfer funds to other trusts.

2. Taxability of the Interest Income from Devi Films Private Limited:

The court reframed the question to determine whether the interest income received from Devi Films Private Limited should be taxed in the hands of T. N. K. and V. Educational Trust. Given the invalidity of the transfer, the court held that the interest income from Devi Films Private Limited is the income of T. N. K. and V. Educational Trust and should be taxed in its hands. The Tribunal's reasoning that the transfer amounted to the application of income for charitable purposes was deemed irrelevant.

3. Charitable Nature of the Family Trusts:

The court addressed whether the family trusts created on August 1, 1969, were charitable in nature. The Income-tax Officer had held that the family trusts were not charitable and had violated section 13(1)(d)(ii) of the Act by investing in unapproved securities. The Tribunal had previously held that the trusts were charitable and entitled to exemption under section 11. However, since the transfer of Rs. 12,80,000 was invalid, the court found no need to determine whether the family trusts were charitable.

4. Applicability of Section 11 and 13(1)(d) of the Income-tax Act, 1961, to the Family Trusts:

The court examined whether the family trusts were entitled to exemption under section 11 of the Act, given the non-approved investments. The Tribunal had relied on proviso (iia) to section 13(1)(d), which extended the time limit for converting deposits into permissible investments. However, since the transfer was invalid, the court held that the family trusts were not entitled to exemption under section 11, and the question of compliance with section 11(5) did not arise.

5. Impact of Grant of Certificate Under Section 12A of the Income-tax Act, 1961:

The court considered whether the grant of a certificate under section 12A indicated that the trusts were charitable and whether the Assessing Officer could reopen this question. Since the transfer was invalid, the court found that the question of the applicability of the section 12A certificate did not arise.

Conclusion:

The court answered the common question in T. C. Nos. 411 to 416 and 786 of 1984 in the negative, holding that the interest income from Devi Films Private Limited is taxable in the hands of T. N. K. and V. Educational Trust. The court also held that the family trusts created on August 13, 1969, are not entitled to claim the benefit of exemption under section 11 of the Act. The second and third questions of law in T. C. Nos. 1 to 54 of 1997 were returned unanswered as they were rendered irrelevant by the invalidity of the transfer. The court suggested that the assessees could apply for credit for taxes already paid by the family trusts.