1984 (4) TMI 110 - AT - Income Tax

Charitable Or Religious Trust, Deemed Income, Income From Property, Public Charitable Trust, Voluntary Contributions

Summary

Issues Involved:
1. Taxability of interest income of Rs. 5,200.
2. Tax treatment of Rs. 16 lakhs donated to two trusts.

Issue 1: Taxability of Interest Income of Rs. 5,200

The Income Tax Officer (ITO) determined that the interest income of Rs. 5,200 received from Delhi Cloth & General Mills Ltd. (DCM) was taxable. The ITO's reasoning was based on the application of sections 13(1)(c) and 13(2)(a) of the Income-tax Act, 1961, which prohibit certain transactions with substantial contributors to the trust. The ITO argued that DCM had made substantial contributions to the assessee institution, and hence, the interest income was taxable despite section 11(1)(a).

The Commissioner (Appeals) disagreed, holding that the interest income was not taxable since the loan was not lent without adequate security or adequate interest. The Commissioner noted that similar interest receipts had previously been exempt from tax under section 11(1)(a).

The revenue contested this finding, asserting that the loan lacked adequate security, thus invoking section 13(2)(a). The departmental representative argued that financial soundness alone does not constitute adequate security, which should be understood as pledge, mortgage, surety, guarantee, etc.

Upon review, it was concluded that the financial soundness of DCM could not be considered adequate security within the meaning of section 13(2)(a). Therefore, the interest income of Rs. 5,200 was deemed taxable.

Issue 2: Tax Treatment of Rs. 16 Lakhs Donated to Two Trusts

The assessee claimed exemption under section 11(1)(a) for Rs. 16 lakhs donated to Bhartiya Kala Kendra Trust and Indian National Theatre Trust, arguing that these donations were applied to charitable purposes. The ITO, however, contended that Rs. 8 lakhs of each Rs. 12 lakh donation, earmarked for the corpus of the donee trusts, did not qualify as application of income towards charitable purposes.

The Commissioner (Appeals) accepted the assessee's contention, holding that the entire Rs. 16 lakhs should be considered as applied to charitable purposes.

The revenue appealed, arguing that section 12 excludes contributions made with a specific direction to form part of the corpus from being considered as income derived from property held under trust. Therefore, the Rs. 16 lakhs transferred to the corpus of the donee trusts did not qualify as application of income for charitable purposes.

The Tribunal analyzed sections 11(1)(a) and 12, noting that section 11(1)(a) provides exemption for income applied to charitable purposes, while section 12 deems voluntary contributions with specific directions to form part of the corpus as not forming part of the income. The Tribunal concluded that the Rs. 16 lakhs transferred to the corpus of the donee trusts did not qualify as application of income by the assessee towards its charitable purposes.

The Tribunal also referenced judicial precedents, including the case of Trustees of the Jadi Trust, which indicated that donations to other charitable trusts could be considered as application of income for charitable purposes. However, the Tribunal distinguished the present case based on the specific direction for the corpus, ruling that the Rs. 16 lakhs did not constitute application of income for charitable purposes.

Separate Judgments by Judges:

1. The Judicial Member held that the interest income of Rs. 5,200 was taxable due to the lack of adequate security for the loan to DCM and that the Rs. 16 lakhs donated to the corpus of the donee trusts did not qualify as application of income for charitable purposes.

2. The Accountant Member partially concurred but suggested that the financial soundness of DCM could be considered adequate security. He also opined that donations to the corpus of other charitable trusts could be seen as application of income for charitable purposes.

3. The Third Member (President) resolved the difference of opinion by agreeing with the Judicial Member on the taxability of the interest income and with the Accountant Member on the application of income for charitable purposes, emphasizing the need for formal security for loans under section 13(2)(a).

Conclusion:

The appeal was partly allowed, with the interest income of Rs. 5,200 being taxable and the Rs. 16 lakhs donated to the corpus of the donee trusts not qualifying as application of income for charitable purposes.