1992 (8) TMI 10 - HC - Income Tax

Summary

Issues Involved:
1. Status of the assessee trust as a charitable trust.
2. Entitlement to exemption under section 11 of the Income-tax Act, 1961.
3. Applicability of the provisions of section 164(1) of the Income-tax Act, 1961.

Detailed Analysis:

1. Status of the Assessee Trust as a Charitable Trust:
The assessee, Naresh Sengupta Foundation, was assessed by the Income-tax Officer as an association of persons for the assessment years 1980-81 and 1982-83. The trust was created by a deed of trust dated December 26, 1979. The trust deed specified that 12.5% of the gross income was to be utilized for the social and customary needs of the donor-founder's family. The Tribunal held that the trust had no element of charity as a significant portion of its income was allocated to its own establishment, reserve fund, and payment of taxes. Only a small portion was directed towards scholarships, which was at the discretion of the trust committee. Therefore, the Tribunal concluded that the trust could not be considered a charitable trust.

2. Entitlement to Exemption under Section 11 of the Income-tax Act, 1961:
The assessee claimed exemption under section 11, which was initially allowed by the Appellate Assistant Commissioner but later denied by the Tribunal. The Tribunal's decision was based on the fact that the trust deed allowed 12.5% of the income to be used for the donor-founder's family's social and customary needs. The High Court noted that under the provisions of the Income-tax Act, 1961, a trust created after the commencement of this Act must hold property wholly for charitable purposes to be eligible for exemption. Since the trust deed contained a clause for non-charitable purposes, the trust did not meet the requirements of section 11(1). The court emphasized that the existence of a provision for non-charitable purposes in the trust deed disqualified the trust from being considered wholly charitable, regardless of whether the income was actually used for charitable activities.

3. Applicability of the Provisions of Section 164(1) of the Income-tax Act, 1961:
The Appellate Assistant Commissioner had held that the provisions of section 164(1) did not apply to the assessee. However, the Tribunal and subsequently the High Court found that since the trust deed allowed for a portion of the income to be used for non-charitable purposes, the trust could not be considered wholly charitable. The High Court cited various precedents to support the view that a trust with a clause for non-charitable purposes does not qualify for exemption under section 11, even if the income is not actually used for those non-charitable purposes. The court concluded that the trust did not meet the requirements of section 11(1) and was not entitled to the exemption.

Conclusion:
The High Court affirmed the Tribunal's decision that the assessee trust was not entitled to the benefit of exemption under section 11 of the Income-tax Act, 1961. The court held that the trust deed's provision allowing 12.5% of the income for the donor-founder's family's social and customary needs disqualified the trust from being considered wholly charitable. The court answered the question in the affirmative and against the assessee, with no order as to costs.