Income of trusts or institutions from contributions. - Income Tax - 378/CBDT

INSTRUCTION NO. 378/CBDT Dated: February 3, 1972 Section(s) Referred: 12(2) Statute: Income - Tax Act, 1961 Reference is invited to the attached copy of letter No. 3326 dated the 6th August, 1971 from the Indian Chamber of Commerce, Calcutta (printed below) and the Board's reply of even number and dated thereto. A copy of the detailed opinion recorded by the Ministry of Law on this subject is also attached for reference and guidance. 2. It will be seen from the Board's reply to the Indian Chamber of Commerce that according to Section 12(2) of the Income-tax Act, 1961 a trust or institution of charitable or religious kind mentioned therein should be liable to tax as may be indicated within the terms of Section 11 ibid, in respect of contributions received from another such trust or institution, irrespective of whether the contributions constitute income of the receiving trust/institution or are an accretion of capital to its corpus. 3. The Assistant Commissioners, Authorised Representatives and Income-tax Officers in the charge may please be appraised of the position accordingly. Copy of letter No. 3326 dated 6-8-1971 from the Secy. General Indian Chamber of Commerce, Calcutta to the Chairman C.B.D.T- I am desired to invite your kind attention to the need for issuing a suitable clarification to the effect that section 12(2) of the Income-tax Act, 1961 does not apply to transfer of corpus by one charitable or religious trust to another such Trust. This clarification is necessary to enable avoid multiplicity of preceedings and possibility of trust being subjected to unnecessary hardship. When the new Income-tax Act, 1961 was enacted, far-reaching changes were made in the provisions relating to charitable and religious trusts, By section 11 it was for the first time, provided that a trust will have to spend 75% of its income derived from property held under trust to claim tax exemption on such income. Simultaneously section 12(2) was enacted to safeguard avoidance of this provision of spending 75% of the income by trusts by one trust giving its income by way of contribution to another trust. In such an event the first trust could claim tax exemption under section 11 on the ground that it had applied its income for charitable purpose. The second trust in the absence of section 12(2) could claim tax exemption of such contributions under section 12(1) on the ground that the same being voluntary contribution was exempt from tax under section 12(1). Section 12(2), by legal fiction made voluntary contribution by a trust to be income derived from property in the hands of the receiving trust and thus made provisions of section 11 applicable to such voluntary contributions, making it obligatory for the receiving trust to spend the contributions for charitable purposes. The question of avoidance of provisions of section 11 does not however, arise when corpus is transferred by one trust to another. It may here be added that by amendments made to section 11 by the Finance Act, 1970, 100% of the income derived from property has now to be spent by a trust and therefore the matter has assumed all the more importance. From the above it will be obvious that provisions of Section 12(2) were intended and would apply only to contributions made by a trust to another trust from out of its income derived from property and should not apply to contributions made by a trust from out of its corpus, or accumulated income which has been converted into corpus. Further on a reading of section 12(1) and 12(2) it is clear that the provisions of section 12(2) will apply only where contributions by one trust to another constitute income of the receiving trust and would not apply to assets received by the receiving trust forming part of its capital which is intended to be held as its corpus. Section 12(1) exempts income derived from voluntary contribution. Section 12(2) deals with 'such contributions ' as are referred to in sub-section (1) i.e., contributions which constitute income of the receiving trust. Having regard to what has been stated above and a reading of section 12(1) and 12(2) it will thus be clear that by legal fiction sub-section (2) merely deems certain contributions of the nature of income under section 12(1) to be income under section 11. The section however, does not convert capital receipt into an income receipt. As the matter is of considerable importance to trusts. I am directed to request you to kindly issue necessary clarification in the matter to the effect that contributions by one trust to another trust out of its corpus, to be held by the receiving trust as its corpus, will not be hit by the provisions of section 12(2) of the Income-tax Act. The Chamber trusts that the matter will receive your sympathetic consideration. Copy of Secy. C.B.D.T letter F. No. 180/33/71-IT(AI) dated 3-2-1972 to the Secy. General, Indian Chamber of Commerce, Calcutta. Elucidation of the provisions of Section 12(2) of the Income-tax Act, 1961. I am directed to invite a reference to your letter No. 3326 dated the 6th August, 1971 addressed to the Chairman, Central Board of Direct Taxes and to say that the matter has been carefully considered. Having regard to the scheme of Section 12 of the Income-tax Act, 1961, the provisions of sub-section (2) thereof should be taken as not limited only to voluntary contributions constituting income of the receiving trust, but as being wide enough to cover all contributing trust. An endowment or capital donation which is intended to be held by the receiving trust as an accretion to the corpus of the trust would therefore fall within the purview of section 12(2) and the receiving trust would be liable to tax on these donations unless the conditions of exemption laid down in Section 11 (including the restriction of accumulation) are fulfilled. ADVICE OF MINISTRY OF LAW MINISTRY OF LAW JUSTICE DEPARTMENT OF LEGAL AFFAIRS Section 11 and 12 of the Income-tax Act, 1961 should be read together. Section 11 deals with income derived from property held under trust for charitable or religious purposes. Such income is not to be included in the total income of the person receiving it if the conditions of exemption laid down in the section are fulfilled. One of the conditions needing attention in this behalf is that where a charitable or religious trust derives income form property and accumulates it, exemption under the section may be denied to such accumulated income beyond the prescribed limit. Further before the exemption may be claimed the section imposes an obligation to apply the income to charitable or religious purposes in India and not abroad. 2. Section 12 deals with the income of trusts or institutions from voluntary contributions. Section 12(1) exempts the income of a charitable or religious trust derived from voluntary contributions and applicable solely to charitable or religious purposes. This section also applies to an institution which is religious or charitable. In order to claim exemption under section 12(1) the following conditions must be fulfilled. (i) The income must be the income of a charitable or religious trust. (ii) the income of such a trust must be derived from voluntary contributions, i.e., from donations made for religious or charitable purposes. (iii) the income of such a trust must be applicable solely to charitable or religious purposes. Any income of a charitable or religious trust fulfilling the above conditions would be exempt from tax, irrespective of the fact whether such income is applied to charitable or religious purposes or is accumulated for application in future. In such a case it is not necessary that the conditions of exemption laid down in section 11 should be fulfilled by the trust. 3. A charitable trust may give its income by way of contribution to and other charitable trust. The income of the former trust would be exempt under section 11 on the ground that it is applied to a charitable purpose. The latter trust, even while accumulating the income so received, might claim exemption under section 12(1) on the ground that it is derived from a voluntary contribution. 4. Section 12(2) has been included in the Act with a view to avoiding the circumvention of tax by the adoption of the above device. This section deems voluntary contributions in the hands of the receiving trust to be income derived from property for the purposes of section 11. Thus such voluntary contributions would be eligible to claim exemption only if the conditions laid down in section 11 are fulfilled. The provisions of section 12(2) apply not withstanding anything contained in section 12(1) of the Act. 5. The question arises whether the expression 'such contributions' in section 12(2) refers only to the contributions which constitute the income of the receiving trust or covers all contributions, including contributions made to the receiving trust as part of its capital. In this connection it is significant to note that while section 12(1) deals with 'income of a trust.....derived from voluntary contributions' section 12(2) deals with 'such contributions as are referred to in sub-section (1)'. i.e., contributions which are voluntary in nature. Voluntary contributions may or may not constitute income of the receiving trust. When the expression used in section 12(2) is 'such contributions' it must be given its wide meaning. The said expression cannot be equated with the expression 'income........derived from voluntary contribution', being the expression used in section 12(1). 6. In view of the above the expression 'such contributions' in section 12(2) is not limited to voluntary contributions constituting income of the receiving trust but includes voluntary contributions forming part of its capital as in the case of an endowment or capital donations which is intended to be held as an accretion to the corpus of the trust. All these contributions would fall within the purview of section 12(2) and hence the receiving trust would be liable to tax on donations by way of voluntary contributions unless the conditions of exemption laid down in section 11 (including the restriction of accumulation and the obligation to apply the moneys to charitable or religious purposes in India) are fulfilled. 7. The question arises whether the above construction of section 12(2) is in any way affected by the non obstinate clause used at the commencement of the section. Section 12(2) commences with the expression. "Notwithstanding anything contained in sub-section (1)". Sub-section (1) deals with the income of a charitable or religious trust or institution from voluntary contributions. Section 12(2) deals with "such contributions as are referred to in sub-section (1)", i.e. voluntary contributions. Such contributions may be voluntary contributions constituting income of the receiving trust or may be voluntary contributions forming part of its capital. The question posed as above would depend upon the true construction of the obstinate clause used in section 12(2) of the Act. 8. The purpose of a non obstinate clause generally is not to restrict or limit the operation of the main provision but rather to emphasise its wide scope by pointing to some difficulty, notwithstanding the existance of which the main provision is to prevail. By providing a non obstinate clause the draftsman, in effect, says that though there may be a difficulty arising in the operation of the main provision by the existence of some contradictory provision elsewhere, the main provision is to operate notwithstanding that other provision. On this view it is clear that it would be erroneous to limit the clear language of a main provision by reference to the scope of the non obstinate clause. 9. The true method of construing a non obstinate clause has been laid down by Bhagwati, J., In Dominion of India V. Shirinbai A Irani, (1955) 1 S.C.R. 206 at 213: "If the words of the enactment are clear and are capable of only one interpretation on a plain and grammatical construction of the words thereof a non obstinate clause has to be read as clarifying whole position and must be understood to have been incorporated in the enactment by the legislature by way of abundant caution and not by way of limiting the ambit and scope of the operative part of the enactment" Similarly in Aswini Kumar Ghosh V. Arabinda Bose, (1953) S.C.R. 1 at 21 Patanjali Sastri, C.J., laid down the correct approach to the construction of a non obstinate clause in these words: "It should first be ascertained what the enacting part of the section provides on a fair construction of the words used according to their natural and ordinary meaning and the non obstinate clause is to be understood as operative to set aside as no longer valid anything contained in relevant existing laws which is inconsistent with the new enactment". 10. In view of the above I take view that the wide words of the operative part of section 12(2) are not controlled by the non obstinate clause contained at the commencement of the section. The words "such contributions" in the said section are not limited only to contributions constituting income of the receiving trust but are wide enough to cover all contributions including contributions forming part of the capital of the receiving trust. 11. It follows that voluntary contributions made by one charitable or religious trust to another such trust out of its corpus, to be held by the receiving trust as its corpus, would be hit by the provisions of section 12(2) of the Act.