1988 (3) TMI 455 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal was correct in setting aside the order of the Commissioner under section 263 of the Income-tax Act, 1961.
2. Whether the Tribunal was correct in holding that the provisions of section 11 of the Act do not hinder the assessee as the funds were applied to charitable purposes.
3. Whether the Tribunal was correct in holding that the provisions of section 13(2)(h) of the Act were not applicable in this case.
4. Whether the Tribunal was correct in not considering the revenue's contention that the income of the trust was utilized for the benefit of prohibited categories under section 13(2)(h) read with section 13(3) and Explanation thereto.

Detailed Analysis:

1. Setting Aside the Commissioner's Order under Section 263:
The Tribunal set aside the Commissioner's order, which was based on two main aspects: (i) donations to other trusts did not amount to actual spending by the assessee, and (ii) the funds remained intact without being spent. The Tribunal referred to Board Circular F. No. 276/89-77-11 (AT), which clarified that the payment of a sum by one charitable trust to another amounts to utilization by the donor trust. The Tribunal concluded that the Commissioner was not justified in applying section 263 as the orders passed by the ITO were not erroneous or prejudicial to the interests of the revenue. Therefore, the Tribunal's decision to set aside the Commissioner's order was affirmed.

2. Application of Section 11:
The Tribunal held that the assessee-trust's donation to another charitable trust constituted an application of income for charitable purposes under section 11. The Tribunal noted that the Board Circular and judicial precedents support the view that donations to other charitable trusts are considered a proper application of income. The Tribunal also emphasized that the donor trust is not required to monitor the donee trust's use of the funds, as long as the donee trust is also a charitable entity. Therefore, the Tribunal's interpretation that section 11 was applicable was upheld.

3. Applicability of Section 13(2)(h):
The Tribunal found that section 13(2)(h) was not applicable as it pertains to investments in another concern, not loans or deposits. The Tribunal distinguished between investments and loans, noting that the assessee's transactions were loans and not investments. The Tribunal concluded that section 13(2)(h) did not apply to the assessee's deposits. This interpretation was supported by Board Circular No. 45, which clarified that section 13(2)(h) applies only to investments in the capital of a concern. Thus, the Tribunal's conclusion that section 13(2)(h) was not applicable was affirmed.

4. Non-Consideration of Revenue's Contention:
The Tribunal did not consider the revenue's contention that the income of the trust was utilized for the benefit of prohibited categories under section 13(2)(h) read with section 13(3) and Explanation thereto. The Tribunal noted that the Commissioner's order was based exclusively on section 13(2)(h), and it would not be proper to inquire into whether section 13(2)(a) should have been applied. The Tribunal's decision to not consider this contention was based on the scope of the Commissioner's original order.

Conclusion:
All four questions referred by the Tribunal were answered in the affirmative, against the revenue and in favor of the assessee. The Tribunal's findings were upheld, affirming the assessee's entitlement to exemption under section 11 and the non-applicability of section 13(2)(h). The reference was disposed of with no order as to costs.