1994 (12) TMI 62 - HC - Income Tax

Alternate Remedy, CBDT Circulars, Charitable Purpose, Charitable Trust, Construction Beneficial To Assessee, Harmonious Construction, Income From Business, Taxing Statutes, Writ Petition

Summary

Issues Involved:
1. Denial of exemption under section 11 of the Income-tax Act, 1961, for assessment years 1984-85 to 1991-92.
2. Validity of Circular No. 372 dated December 8, 1983.
3. Exhaustion of alternative remedies by the petitioner.

Detailed Analysis:

Point No. 1: Denial of Exemption under Section 11

The petitioner-trust, established for public charitable purposes, sought exemption under section 11 of the Income-tax Act, 1961, for the assessment years 1984-85 to 1991-92. The Income-tax Officer denied this exemption based on sub-section (4A) of section 11, introduced by the Finance Act, 1983, effective from April 1, 1984.

Section 11(1)(a) of the Act exempts income derived from property held under trust for charitable or religious purposes. Section 11(4) includes business undertakings as property held under trust. The Division Bench of the High Court in CIT v. Thanthi Trust [1982] 137 ITR 735 had previously recognized the petitioner-trust as a charitable trust, with its business carried out as a means to achieve its primary charitable purpose.

Sub-section (4A) of section 11, effective from April 1, 1984, specifies that exemption under section 11(1) will not apply to income from business unless the business is carried on by a trust wholly for public religious purposes or by an institution wholly for charitable purposes. The court held that this sub-section does not apply to the petitioner-trust because it is a public charitable trust, not a trust for public religious purposes or an institution. The business is held under trust for charitable purposes, and the income derived from it is eligible for exemption under section 11(1)(a).

Point No. 2: Validity of Circular No. 372

Circular No. 372, dated December 8, 1983, issued by the Central Board of Direct Taxes, interpreted sub-section (4A) of section 11 to apply to any profits and gains from business, whether carried on by the trust or held under trust. The court found this interpretation inconsistent with the provisions of section 11(4A) read with section 11(4). The circular incorrectly stated that sub-section (4A) applies irrespective of whether the profits and gains are derived from a business carried on by the trust or from a business undertaking held under trust for charitable purposes. Consequently, the court held that Circular No. 372 is invalid and quashed it.

Point No. 3: Exhaustion of Alternative Remedies

The petitioner did not exhaust alternative remedies available under the Income-tax Act, such as appealing to the appellate authority and the Tribunal. However, the court noted that the writ petitions had been pending for nearly five years and were admitted without raising this objection. Given the long pendency and the need for an early resolution of the issues, the court decided not to dismiss the writ petitions on this ground.

Conclusion:

The writ petitions were allowed, and the assessment orders denying exemption under section 11 for the assessment years 1984-85 to 1991-92 were quashed. Circular No. 372 was also quashed. The matters were remitted to the second respondent for fresh assessment according to the law and the court's findings, without reference to Circular No. 372. No costs were ordered.