1974 (4) TMI 31 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Section 12(2) of the Income-tax Act, 1961, to donations made to charitable trusts.
2. Distinction between income and capital in the context of voluntary contributions.
3. Validity and enforceability of donations made with specific directions to form part of the corpus of the donee-trust.
4. Interpretation of Section 12(1) and Section 12(2) of the Income-tax Act, 1961, in relation to voluntary contributions.

Detailed Analysis:

1. Applicability of Section 12(2) of the Income-tax Act, 1961, to Donations Made to Charitable Trusts:
The primary question was whether the donations made to the petitioner-trusts by the J. K. Charitable Trust were covered by Section 12(2) of the Income-tax Act, 1961. The court examined the provisions of Chapter III of the Income-tax Act, which deals with income that does not form part of total income. Section 11 deals with incomes from property held for charitable or religious purposes, and Section 12 provides for income of trusts or institutions from voluntary contributions. Section 12(2) is in the nature of a proviso to Section 12(1) and deems certain contributions to be income derived from property for the purposes of Section 11. The court concluded that the donations in question, made with specific directions to form part of the corpus of the donee-trusts, were not covered by Section 12(2) and could not be deemed to be income from property held under trust within the meaning of Section 11.

2. Distinction Between Income and Capital in the Context of Voluntary Contributions:
The court emphasized the well-settled distinction between "income" and "capital" in tax jurisdiction. Generally, the Income-tax Act does not tax capital; it is confined to income, while capital is dealt with by the Wealth-tax Act. The court stated that if a voluntary contribution is deemed to be capital in the hands of the receiving trust, it will not be considered income. Therefore, such contributions would be outside the purview of Section 12(1) and, consequently, Section 12(2).

3. Validity and Enforceability of Donations Made with Specific Directions to Form Part of the Corpus of the Donee-Trust:
The court held that if a donor trust makes a gift on the express condition that the subject-matter will constitute capital or corpus of the receiving trust, and the donee-trust accepts the gift subject to that condition, the subject-matter of the donation becomes part of the corpus or capital of the donee-trust. This bilateral contract is valid and enforceable. The court noted that there is no law prohibiting such a transaction and that the receiving trust would be guilty of misapplication of its assets if it spends the donation as if it were income.

4. Interpretation of Section 12(1) and Section 12(2) of the Income-tax Act, 1961, in Relation to Voluntary Contributions:
The court interpreted Section 12(1) as dealing with voluntary contributions that constitute or are deemed to be income in the hands of the receiving trust. Section 12(2) applies to contributions covered by Section 12(1) and deems them to be income derived from property for purposes of Section 11. The court concluded that voluntary contributions made with specific directions to form part of the corpus of the donee-trust and accepted as such are not within the purview of Section 12(1) or Section 12(2). The court also highlighted that the amendments made by Parliament to Section 12 by the Finance Act 16 of 1972 corroborate this interpretation, as they expressly excluded contributions made with specific directions to form part of the corpus of a trust or institution from being deemed income derived from property for purposes of Section 11.

Conclusion:
The court concluded that the contributions made by the J. K. Charitable Trust to the petitioner-trusts formed part of the petitioners' capital or corpus and did not constitute income within the meaning of Section 12(1). Therefore, these contributions were not covered by Section 12(2) and could not be treated as income from property held under trust for purposes of Section 11. The dividend income received by the petitioner-trusts on the shares donated by the J. K. Charitable Trust would be governed by Section 11 of the Act. The petitions were allowed, and the Income-tax Officer was directed not to include the value of the shares received by way of donations as the petitioners' income but to treat the dividend income as governed by Section 11 of the Act. The petitioners were entitled to costs.