1991 (4) TMI 19 - HC - Income Tax

Charitable Trust, Draft Assessment Order U/S 144B, Exemption For Charitable Trust, IAC s Instructions U/S 144-A, Interest And Rent Received By Charitable Trust

Issues Involved:
1. Competence of the Inspecting Assistant Commissioner under sections 144A and 144B.
2. Charitable nature of object clause 2(h) of the trust deed.
3. Applicability of section 11(3) to donations made to other charitable trusts.
4. Substantial interest of the trust authors/trustees in M/s J. K. Commercial Corporation.
5. Adequacy of interest/rent received by the trust under section 13(2)(a).
6. Applicability of section 13(2)(h) to shares received by the trust.
7. Impact of share transactions on the trust's charitable status under section 2(15).
8. Apparent mistake in the Tribunal's order dated September 27, 1977.
9. Jurisdiction of the Income-tax Officer in reassessment proceedings.
10. Applicability of the second proviso to section 13(1)(c) to transactions before June 1, 1979.

Detailed Analysis:

1. Competence of the Inspecting Assistant Commissioner:
The Tribunal found that the Inspecting Assistant Commissioner exceeded his jurisdiction by giving directions beyond the purview of the draft assessment order and the assessee's objections. The court upheld this view, stating that any such directions should have been preceded by a notice and hearing under section 144A. Thus, the Tribunal's decision was affirmed in favor of the assessee.

2. Charitable Nature of Object Clause 2(h):
Clause 2(h) of the trust deed, which involves establishing industrial homes for teaching arts and handicrafts to unemployed persons, was interpreted by the Tribunal as charitable. The court agreed, noting that payments made under this clause were akin to stipends rather than regular wages, thereby affirming the clause's charitable nature.

3. Applicability of Section 11(3):
The Tribunal opined that donations to other charitable trusts were within the trustees' powers under clause 2(k) of the trust deed and did not constitute application of income for non-charitable purposes. The court agreed, holding that such contributions do not attract the provisions of section 11(3). This decision was rendered in favor of the assessee.

4. Substantial Interest in M/s J. K. Commercial Corporation:
The Tribunal found that the authors/trustees' shareholding in M/s J. K. Commercial Corporation was only 13%, below the 20% threshold defined by Explanation 3 to section 13(4). The court upheld this finding, ruling in favor of the assessee.

5. Adequacy of Interest/Rent:
The Tribunal determined that the interest rates on loans and the rent for leased properties were not inadequate. The court agreed, noting the secured nature of the loans and the seasonal rental income from the hill station property. Thus, this issue was resolved in favor of the assessee.

6. Applicability of Section 13(2)(h) to Shares:
The Tribunal held that bonus shares received by the trust could not be considered an investment under section 13(2)(h). The court concurred, stating that the issuance of bonus shares was a bona fide transaction and did not fall within the mischief of the said section.

7. Impact of Share Transactions:
The Tribunal found that the trust's dealings in shares were not by way of business but were prudent investment changes. The court upheld this finding, affirming that such transactions did not affect the trust's charitable status under section 2(15).

8. Apparent Mistake in Tribunal's Order:
The Tribunal's decision to dismiss the Revenue's rectification application was not challenged. The court, therefore, affirmed the Tribunal's order in favor of the assessee.

9. Jurisdiction of the Income-tax Officer:
The assessee's counsel conceded that these questions raised minor issues. The court declined to address these questions, effectively leaving the Tribunal's findings undisturbed.

10. Applicability of the Second Proviso to Section 13(1)(c):
The Tribunal held that the second proviso to section 13(1)(c) did not save transactions made before June 1, 1979, from the disability under section 13(2)(h). The court did not address this issue directly as it was conceded to be minor by the assessee's counsel.

Conclusion:
The court answered the critical questions in favor of the assessee, affirming the charitable nature of the trust's activities and the adequacy of its transactions under the relevant sections of the Income-tax Act. The reference was disposed of without costs.

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