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TMI Blog1983 (2) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... rd to disobey the directions of the joint managing directors. The trust was admittedly for the benefits of the employees of Escorts Ltd. and not for the benefit of general public. The ITO, therefore, held that it was not a charitable trust within the meaning of section 2(15) of the Income-tax Act, 1961 ('the Act'), and is a discretionary trust. 3. On going through the accounts for the period24-12-1976to31-3-1977the ITO found that Escorts Ltd. had donated a sum of Rs. 10 lakhs to the assessee-trust for the corpus of the trust. This amount was put in the bank and interest was earned but no part of it was spent for the beneficiaries and a sum of Rs. 500 has been charged as the audit fee. The ITO also noticed that in the next year, the assessment year 1978-79, the company had given a further sum of Rs. 20 lakhs to the trust specifically for the corpus of the trust. In the next year the trust had given the amount of Rs. 30 lakhs as a loan to Goetze India Ltd., a subsidiary of Escorts Ltd., on interest. Only a sum of Rs. 12,896 was spent on welfare activities in the next year. The ITO, therefore, held that the employees were not getting the benefit of the trust because a major part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the assessee and the resolution passed therein. He also went through the extract from preamble of the trust deed dated24-12-1976and provisions of clauses 4, 6, 8, 13, 15, 17, 27, 31 and 32 thereof which he has reproduced in his order. On a careful consideration of the provisions of the trust deed, the board resolution, etc., the Commissioner (Appeals) concluded that the assessee-trust was a separate legal entity from its author, the Escorts Ltd. The IAC's view that the trust was a mere extension of the business purpose of the Escorts Ltd. was incorrect. It was also not possible to agree with the ITO that the trust would in this case be under the control of the author when out of five trustees, three of them were employees and two were managing directors of the author-company. For a private discretionary trust the law did not require compulsory application of its income to its objects from year to year. Therefore, failure of the assessee to spend its income for the benefit of the employees in this year or in the next, did not affect the genuineness of the trust or its claim for exemption. In fact, the accounts show that the trust had spent a substantial part of its funds towar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the author during this year was its assessable income. The trust expected to receive money from the author from year to year so that there was continuity of expectation to receive donations. He further held that the sum of Rs. 10,01,000 had been received by the assessee-trust without any special condition as referred to in clause 8 of the trust deed. Therefore, the said amount was received by the trust, irrespective of the stipulation of the donor that it was towards the corpus, as ordinary trust funds which could be treated as income or capital at the discretion of the trustees under clause 27 of the trust deed. The Commissioner (Appeals), therefore, upheld the assessment of Rs. 10,01,000 as the income of the assessee. He allowed Rs. 500 for audit expenses. As regards the charging of income-tax at 65 per cent under section 164(1)(ii), the Commissioner (Appeals) accepted the assessee's contention that its case fell within the proviso (iv) and, therefore, it was not assessable at 65 per cent but as an AOP. 9. The department and the assessee are both aggrieved and are in appeal. So far as the department is concerned, the only ground is against the order of the Commissioner (App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fected party before an order adverse to it is passed. Detailed arguments were advanced in this respect. Though this point was not urged before the Commissioner (Appeals) and does not directly arise out of his order, the contention was that the IAC's direction dated 6-3-1980 was invalid and in the event of our being inclined to uphold the finding of Commissioner (Appeals) that the amount was otherwise taxable, the matter would have to be sent back to the IAC for giving the assessee an opportunity of being heard on the direction dated 6-3-1980 in respect of which the assessee has right to be heard. The learned departmental representative in reply relied on the order of the Commissioner (Appeals) and particularly stressed the point that what was received by the assessee-trust was its income and as income it should be assessed. 11. We have considered the rival contentions. The main point at issue is whether the sum of Rs. 1,000 and Rs. 10 lakhs received by the assessee-trust from Escorts Ltd. in the assessment year 1977-78 and Rs. 20 lakhs in the assessment year 1978-79, is a revenue receipt in its hands and, therefore, taxable. The assessee-trust, as is clear, is not a religious or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trust) to be the income of the trust from property held under the trust. This section recognizes a basic principle that contributions specifically made with the-direction that they shall form part of the corpus of the trust cannot be treated as its income. Section 2(24) defines income. Sub-clause (iia) which reads as follows was introduced in it with effect from1-4-1973: " 'income' includes-- (iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution." The definition is indeed inclusive but unless under general principles governing taxation of income, it could be said that donations specifically for corpus of the trust can be treated as income, it would not be possible to hold that donations received by the trust in this case were its income. Introduction of sub-clause (iia) in the definition of income under section 2(24) clearly shows that but for the introduction of this sub-clause voluntary contributions to religious or charitable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng corpus. On the same page, the learned author observes that : "Another important thing to be observed regarding corpus is about its complete exemption without any condition or restrictions." 20. According to the Allahabad High Court decision in Dwarkadheesh Charitable Trust's case, where a donor-trust makes a gift on the express condition that the subject-matter will form part of corpus and it is accepted as such, the donee-trust would be guilty of misapplication of its assets, if it spends the donation as if it were its income, and it could be restrained in suitable proceedings from committing breach of trust. The Commissioner (Appeals) was, therefore, in error in holding that the assessee could treat the donation as if it were its income. 21. Thus on general principles the conclusion we have arrived at is that : 1. A voluntary contribution to a trust is not its income under the general law. 2. A voluntary contribution with a specific condition that it shall form part of its corpus is not its income which can be brought to tax. 22. In support of our conclusions, the Allahabad High Court ruling in Dwarkadheesh Charitable Trust's case clinches the issue. That was indee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings from committing breach of trust.The fact that a contribution made with a specific direction that it shall form part of the corpus of the donee-trust is valid in law, is corroborated by the amendments made by Parliament to section 12 by the Finance Act 16 of 1972, whereby Parliament expressly excluded contributions 'made with a specific direction that they shall form part of the corpus of a trust or institution' from being deemed to be income derived from property for purposes of section 11. In this view, voluntary contributions made with a specific direction that they shall form part of the corpus of the donee-trust and accepted by the donee-trust as such, are not voluntary contributions which constitute income within the meaning of section 12(1) and such contributions are not within the purview of sub-section (2)." Thus this ruling against which Special Leave Petition was refused by the Supreme Court, clinches the issue in favour of the assessee, that what it received from Escorts Ltd. towards its 'corpus' cannot be treated as its income. 23. The learned Commissioner (Appeals) thought that merely because the contributions were expected to be received every year, they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessments should be made on a precautionary basis and the contributions should be disallowed in the hands of the donor Escorts Ltd. Clearly, the IAC envisaged that there should not be double taxation, i.e., disallowance in the hands of the donor and taxation in the hands of the receiver, i.e., the assessee. Now that the amount donated to the assessee-trust has been disallowed in the hands of the donor, the department has no justification to press on with this assessment. Therefore, on this ground also, this assessment is unsustainable in law. 30. The learned counsel for the assessee raised another point before us though it was not part of the ground of appeal, i.e., that principles of natural justice were violated and also the statutory requirements of proviso to section 144A(1) ignored by the IAC in this case so that the assessment order becomes invalid in law. As is clear from the order of the Commissioner (Appeals), the IAC had given directions under section 144A on1-2-1980which read as follows : " Section 2(24) gives the definition of income which is of course inclusive definition. This section has been amended w.e.f.1-4-1973to include therein clause (iia), [about] volunta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd under section 144B and we should not take a hypertechnical view to nullify the assessment already made. 32. We have considered the rival contentions. Though a number of rulings were cited on the principle of natural justice and photostat copy of the Supreme Court decision in the case of S.L. Kapoor v. Jagmohan (sic) was also filed. We do not propose to refer the same because in the instant case there is also statutory injunction under the proviso to section 144A that no direction which is prejudicial to the assessee shall be issued before an opportunity is given to the assessee to be heard. The contravention of this proviso is not in dispute in this case. The question arises as to what should be done in a case like this. Normally we would have restored the matter to the IAC at the stage at which the illegality supervened so as to give the assessee an opportunity of being heard on the point at issue before giving a direction prejudicial to the assessee. But in the instant case we notice that doing so would only be an idle formality and would hardly be of any benefit to the assessee. The reason is that the assessee did get an opportunity of being heard when the draft assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X
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