1967 (11) TMI 31 - HC - Income Tax

Trust - validity of gift(shares) made to trust - entitlement of refund of tax deducted at source on dividends accruing on gifted shares

Summary

Issues:
Validity of the gift made by Sardar Ajaib Singh to a public charitable trust and entitlement to refund of tax deducted at source on dividends accrued on the gifted shares.

Analysis:
The case involved a public charitable trust constituted under a trust deed, which received a gift of 640 fully paid-up shares from one of its trustees, Sardar Ajaib Singh. The gift was made with the condition that it could be revoked after seven years. The trust claimed a refund of tax deducted at source on the dividend income from the shares, which was initially denied by the Income-tax Officer. The Appellate Assistant Commissioner allowed the refund, but the revenue appealed to the Appellate Tribunal.

The Tribunal held that the gift was valid and complete, and as the trust became the rightful owner of the shares during the relevant period, it was entitled to the refund of tax deducted at source. The Tribunal referred two questions to the High Court, questioning the validity of the gift and the entitlement to the tax refund.

The revenue argued that the trust was not entitled to receive gifts and donations from the public as it was not explicitly authorized in the trust deed. The revenue further contended that the gift might have formed a separate trust, and the trustees could not claim exemption under the Income-tax Act for the income from the gifted shares.

The counsel for the trust argued that the trustees had the inherent power to accept gifts and donations, and there was no requirement for express authorization in the trust deed. However, the High Court held that the trustees did not have the liberty to accept further gifts without specific authorization, as it could modify the original trust's purpose. The High Court also noted that a previous wealth-tax reference case did not support the trust's claim for tax refund on the gifted shares.

In conclusion, the High Court held that the gift by Sardar Ajaib Singh was valid but did not augment the trust. Therefore, the trust was not entitled to the refund of tax deducted at source on the dividends accrued from the gifted shares. The High Court ruled against the trust, requiring it to pay the costs of the reference to the Commissioner of Income-tax.

The judgment was delivered by Justice Banerjee, with agreement from Justice K. L. Roy.