1985 (5) TMI 37 - HC - Income Tax

Summary

Issues Involved:
1. Exemption of one-eighth of the annual income of the wakf transferred to the reserve fund u/s 11(1)(a) or (b) read with section 2(15) of the Income-tax Act, 1961.
2. Exemption of 49/64ths share of the income of the wakf allocated to the qaumi account u/s 11(1)(a) or (b) read with section 2(15) of the Income-tax Act, 1961.

Summary:

Issue 1: Exemption of Reserve Fund Income
The court examined whether the one-eighth of the annual income of the wakf transferred to the reserve fund was exempt from tax u/s 11(1)(a) or (b) read with section 2(15) of the Income-tax Act, 1961. The Full Bench judgment in Hakim Abdul Hamid v. CIT [1973] 90 ITR 203 was referenced, which held that seven-eighths of the reserve fund was exempt under section 4(3) of the Indian Income-tax Act, 1922. The Income-tax Officer initially denied the exemption under the 1961 Act, but the Appellate Assistant Commissioner and the Tribunal later recognized the exemption for the qaumi income and a proportionate part of the reserve fund. The court upheld this view, stating that the ultimate destination of the reserve fund was for charitable purposes, thus exempting seven-eighths of the one-eighth portion of the annual income transferred to the reserve fund.

Issue 2: Exemption of Qaumi Account Income
The court considered whether the 49/64ths share of the income allocated to the qaumi account was exempt from tax u/s 11(1)(a) or (b) read with section 2(15) of the Income-tax Act, 1961. The Department argued that the trust's object was to run a commercial institution, which is not a charitable purpose. However, the court found that the trust's income, although derived from a business, was used for charitable purposes. The Supreme Court's judgment in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 was cited, which clarified that the source of income does not affect the charitable nature of the trust if the income is used for charitable purposes. The court concluded that the 49/64ths share of the income allocated to the qaumi account was indeed exempt from tax.

Conclusion:
The court answered the two questions as follows:
1. Seven-eighths of the one-eighth portion of the annual income of the wakf transferred to the reserve fund is exempt from tax u/s 11(1)(a) or (b) read with section 2(15) of the Income-tax Act, 1961.
2. The 49/64ths share of the income allocated to the qaumi account is exempt from tax.

The parties were directed to bear their own costs.