1983 (2) TMI 103 - AT - Income Tax

Summary

Issues Involved:
1. Whether the trust qualifies as a charitable trust under Section 2(15) of the Income-tax Act, 1961.
2. Whether the donations received by the trust for the corpus are taxable as income.
3. The applicability of Section 164(1)(ii) and the appropriate tax rate.
4. The validity of the assessment process and adherence to natural justice principles.

Detailed Analysis:

1. Charitable Trust Status:
The trust, formed by Escorts Ltd. with an initial contribution of Rs. 1,000, aimed to provide financial assistance for the benefit of employees and their families for education and medical relief. The ITO concluded that the trust was not a charitable trust within the meaning of Section 2(15) of the Income-tax Act, 1961, as it primarily benefited the employees of Escorts Ltd. and was under the control of the company's managing directors and employees. The Commissioner (Appeals) disagreed, stating that the trust was a separate legal entity from Escorts Ltd. and that its failure to spend income on beneficiaries did not affect its genuineness or claim for exemption.

2. Taxability of Donations:
The ITO held that the donations received for the corpus were taxable as income, not as capital receipts, since the trust was not a charitable or religious trust. The Commissioner (Appeals) upheld this view, stating that the trust deed allowed trustees to treat any receipt as income. However, the Tribunal found that under general principles, voluntary contributions specifically for the corpus are not income. The Tribunal cited the Allahabad High Court ruling in Dwarkadheesh Charitable Trust's case, which distinguished between income and capital, concluding that contributions towards the corpus could not be treated as income.

3. Applicability of Section 164(1)(ii):
The Commissioner (Appeals) accepted the assessee's contention that the trust fell within the proviso (iv) of Section 164(1) and thus was not assessable at a flat rate of 65% but as an Association of Persons (AOP). The department argued that the proviso should be read ejusdem generis, and the trust could not be equated with provident or pension funds. The Tribunal upheld the Commissioner's view, agreeing that the proviso could not be read ejusdem generis and the trust fell within the exception provided.

4. Validity of Assessment Process:
The assessee argued that the IAC's direction under Section 144A was changed without giving an opportunity to be heard, violating natural justice principles. The Tribunal noted that although there was an initial contravention, the assessee did get an opportunity to be heard under Section 144B. Therefore, the Tribunal did not find any actual injustice and decided the appeals on merits.

Conclusion:
The Tribunal allowed the assessee's appeals, holding that the contributions received for the corpus were not taxable as income. The assessments for the years 1977-78 and 1978-79 were reversed, and the contributions of Rs. 10,01,000 and Rs. 20 lakhs, respectively, were deleted from the assessment. The Tribunal also emphasized that the assessments could not stand as they would result in double taxation, being disallowed in the hands of the donor and taxed in the hands of the trust.