1986 (7) TMI 49 - HC - Income Tax

Summary

Issues:
1. Entitlement to tax exemption under section 11 for a trust wholly for charitable purposes.
2. Exemption of income from hedging transactions under the trust deed.
3. Entitlement to deduction under section 80G for donations made to charitable institutions.

Analysis:

Issue 1:
The case involved determining whether the assessee-trust was entitled to tax exemption under section 11 read with section 2(15) of the Income-tax Act, 1961, as a trust wholly for charitable purposes. The Income-tax Officer initially allowed the exemption for a previous assessment year. The High Court affirmed the trust's entitlement to exemption, emphasizing that the trust fulfilled all essential conditions for exemption under the Act. The court found no doubt that the trust was wholly for charitable purposes, as per the provisions of the Act.

Issue 2:
Regarding the exemption of income from hedging transactions under the trust deed, the Revenue argued that such transactions were not permitted under the trust's objects and were conducted for profit, making them taxable. However, the court held that the purpose of the hedging transactions was to protect the trust from possible loss due to market fluctuations, not to earn profits. The court emphasized that the transactions were made to safeguard the trust and were not speculative in nature. The court concluded that the income from hedging transactions was exempt from tax in line with the trust's charitable objectives.

Issue 3:
The question of entitlement to deduction under section 80G for donations made to charitable institutions was automatically answered in favor of the assessee based on the affirmative rulings for the first two issues. The court found that since the trust was entitled to tax exemption under section 11 and the income from hedging transactions was also exempt, the trust was eligible for deductions under section 80G for donations made to charitable institutions.

In conclusion, the High Court ruled in favor of the assessee on all three issues, confirming the trust's entitlement to tax exemption under section 11, the exemption of income from hedging transactions, and the eligibility for deductions under section 80G. The court highlighted the charitable nature of the trust's activities and the prudence exercised in conducting the hedging transactions to protect the trust's assets.