1969 (4) TMI 18 - HC - Income Tax

Race club - amount received by a racing club as surcharge for local charities could not be included in assessee s taxable income

Summary

Issues Involved:
1. Whether the surcharge on admission tickets for charity constitutes taxable income for the assessee.
2. The nature of the obligation to pay the surcharge and whether it creates a trust.
3. The applicability of the doctrine of diversion of income by an overriding charge.

Detailed Analysis:

1. Whether the surcharge on admission tickets for charity constitutes taxable income for the assessee:
The primary issue was whether the amounts realized as a surcharge from tickets for local charities resulted in income for the assessee. The Income-tax Officer initially held that the surcharge was of a revenue nature and included it in the total income of the assessee, allowing a rebate under section 15B of the Indian Income-tax Act, 1922, for the amount disbursed to charity. However, the Appellate Tribunal later ruled that the receipts from the surcharge were not the assessee's income and should not be included in the taxable income.

2. The nature of the obligation to pay the surcharge and whether it creates a trust:
The court examined whether the resolution to levy a surcharge created a trust or merely an obligation to apply a part of the income after it had been received. The resolution passed by the assessee indicated that the surcharge was to be earmarked for local charities. The court referred to the Supreme Court's observations in Commissioner of Income-tax v. Shoorji Vallabhdas and Co. and Commissioner of Income-tax v. Sitaldas Tirathdas, which differentiated between income that is diverted before it reaches the assessee and income that is applied to discharge an obligation after it has been received. The court concluded that the resolution created a trust, as it indicated a clear intention to create a trust, specified the purposes and beneficiaries, and transferred the trust property to the trustee.

3. The applicability of the doctrine of diversion of income by an overriding charge:
The court discussed the principle of diversion of income by an overriding charge, emphasizing that income diverted before it reaches the assessee is deductible, while income applied after receipt is not. The court analyzed whether the surcharge was diverted before it became the assessee's income or if it was merely an obligation to apply part of the income after receipt. The court found that the resolution created a trust, thereby diverting the income before it reached the assessee.

The court also addressed the argument that the expression "local charities" was vague and uncertain, which could invalidate the trust. The court disagreed, stating that the validity of the expression depended on the background circumstances, which were not examined as the contention was not raised before the Tribunal. Even if the expression were vague, the doctrine of cy-pres could apply, ensuring the trust's validity.

Conclusion:
The court affirmed the Tribunal's decision, holding that the surcharge for local charities did not constitute the assessee's income and should not be included in the taxable income. The question referred to the court was answered in the affirmative and in favor of the assessee. The Commissioner of Income-tax was ordered to pay the costs of the reference.