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TMI Blog1984 (4) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... party. 3. During the previous year under consideration, the assessee had donated two sums of Rs. 12 lakhs each in favour of (i) Bhartiya Kala Kendra Trust, and (ii) Indian National Theatre Trust. In both the cases donations had been made purportedly in terms of and pursuant to the assessee's resolution dated 18-2-1975 passed in the earlier previous year (copy at pages 22 onward of the assessee's compilation). Similar donations had presumably been made by the assessee to the said two parties also during the previous year ended31-12-1975. One feature of these donations was that each donee was necessarily to appropriate Rs. 8 lakhs (out of each donation received) to its corpus of the trust and only the balance Rs. 4 lakhs was to be applied to purposes proper of the concerned donee-trust/institution. Whereas for the preceding year, the assessee was, according to its version, held entitled to full benefit of section 11(1)(a) as if the entire amounts donated to both the said parties had constituted application of the assessee's income towards charitable purposes. For the previous year under consideration, however, the ITO took the view that the portions of the donations which were, acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to any person referred to in sub-section (3), for any period during the previous year without either adequate security or adequate interest or both ; " 9. In the present case, the learned departmental representative did not dispute that the interest received by the assessee at the rate of 9 1/2 per cent per annum was adequate. He only submitted that the loan had not been given by the assessee-institution to DCM against adequate security. On this aspect the learned counsel for the assessee submitted that the DCM was financially a sound party and that the said party was able to command public deposit to the tune of several crores because of its integrity and financial soundness. It was also submitted that share capital and reserve of the DCM totalled to several crores throughout the previous year under consideration. According to the assessee's learned counsel, the financial soundness of the party to whom the loan had been given by the assessee-institution was enough consideration to take a case out of the ambit of the provisions of section 13(2)(a). We are unable to agree. Expression 'adequate security' is to be attributed its ordinary meaning, namely, pledge, mortgage, surety, g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the said provision provides for exemption from tax of income having a certain quality, namely, income derived from property held under trust wholly for charitable or religious purposes. Income bearing the said quality is, however, not exempt from tax in all the cases. One basic requirement for exemption of the income of the said quality is that it is exempt 'to the extent to which such income is applied to charitable purposes by the assessee concerned'. Lastly, over and above the extent to which income of such quality is applied by the assessee concerned to its charitable purposes in India, income of such quality would also be exempt from tax, if the balance income not exceeding twenty-five per cent is either accumulated by the assessee or set apart by the assessee for application after the expiry of the previous year under consideration to its charitable purposes. In the instant case, assessee is admittedly not seeking the benefit of accumulation or setting apart of twenty-five per cent or less of its income derived from property held under trust for charitable purposes. In other words, for claiming exemption, the assessee is relying on only the first limb of section 11(1)(a) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient trust or institution from the scope of income having the quality of being eligible for consideration for exemption from tax. According to CIT v. A. Gajapathy Naidu [1964] 53 ITR 114 (SC), provisions of the Act are to be construed on their own terms without drawing any analogy from the English statute. 15. So far as the Bombay High Court ruling in Trustees of the Jadi Trust's case is concerned, at the outset, we reproduce the following portion from the editorial headnote : " There is a clear indication in section 12 of the Income-tax Act, 1961, that the trust to which section 11 applies can make a voluntary contribution to another trust to which also section 11 applies provided the conditions laid down in section 11 are satisfied . . . ." 16. Two aspects are relevant. Firstly, that the assessment years relevant in the case before their Lordships of the Bombay High Court were 1969-70 and 1970-71 and at that time the text of section 12 was factually different from the text as on 1-4-1977. Secondly, in the extracted portion the words 'to which section 11 applies' refer to a trust/institution created wholly for charitable purposes or in the alternative to income derived from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributions were made out of an amount of Rs. 24 lakhs which the assessee had itself received from the DCM during the previous year. Out of the contributions of Rs. 12 lakhs each to the aforesaid two trusts, Rs. 8 lakhs each were donated by the assessee-trust with the condition that such contributions form part of the corpus of the donee trusts and shall be utilised for capital expenditure projects only and not on day-to-day working activities. This is clear from the following extract from Resolution No. 4 passed by the board of governors of the assessee-trust at its meeting held on18-2-1975(pages 22 and 23 of the assessee's paper book). " COPY OF RESOLUTION NO. 4 PASSED BY THE BOARD OF GOVERNORS OF SHRIRAM MEMORIAL FOUNDATION IN THEIR MEETING HELD ON 18TH FEBRUARY, 1975 : GRANT OF BKK INT. I. Resolved that : (i) a lump sum grant of Rs. 16 lakhs be made to Bhartiya Kala Kendra Trust which form part of the corpus of the trust, and shall be utilised for capital expenditure projects only and not on day-to-day working activities. II. Resolved that : (i) a lump sum grant of Rs. 16 lakhs be made to the Indian National Theatre Trust which shall form part of the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haritable purposes. In this connection kindly refer to clauses 7 and 5 of the trust deeds of Bhartiya Kala Kendra Trust and Indian National Theatre Trust, respectively. As per the above clauses, the funds contribute by our foundation have necessarily to be applied by the trusts towards their objects, which are charitable in nature. From the above discussion it is apparent that the income of our foundation, to the extent of contributions made by our foundation to the two trusts mentioned above, has been applied to charitable objects as per the requirement of section 11 of the Act." 6. There was a further letter from the assessee to the ITO. This was dated18-2-1980. This stressed again the assessee's claim that the contribution of Rs. 16 lakhs supra must be taken to have been applied for charitable purposes and went on to elaborate the position as under : " The resolution passed by the board of governors of our foundation in their meeting held on18th February, 1975, sanctioning the above grant is enclosed herewith. It would be observed from the resolution that our foundation had agreed to make the contributions subject to the following conditions : (a) The donee-trusts give an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid sum of Rs. 16 lakhs was either applied to charitable purposes or accumulated or set apart for application to such purposes as permitted by the section. Enquiry shows that neither was the case here. 2. What is the meaning of the term 'applied' found in section 11(1)(a) ? As judicially explained the word means 'actually' applied for and spent on charitable/religious purposes. Of course, even the accumulation permitted under section 11(1)(a) and section 11(2) could be looked upon as such application or spending in this regard. 3. The assessee itself could spend the amount on its objects or do so through another trust having similar objects. In other words, donations given to other similar trusts should be for current contingent expenses of the donee trusts but certainly not for forming part of the corpus of such trusts. 4. Section 12 helps in understanding the correct position in law. Where a contribution is received as earmarked for corpus, such a contribution will not form part of the income of the donee trust for purposes of section 11 and the accumulation restrictions will, therefore, not apply. In other words, such 'capital' contributions will not be available to the do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h but to retain the amounts as corpus and, hence, the donor also must be taken not to have spent its income on charitable purposes. But this reasoning is wrong. 5. Purchase of assets which are to be utilised in connection with the promotion of charitable objects also represents expenditure incurred for the promotion of charitable objects. This was evident from the decision in the case of Satya Vijay Patel Hindu Dharamshala Trust. In fact the assessee specifically drew the attention of the ITO to this decision in its letter of18-2-1980. Unfortunately neither the ITO nor the IAC said anything as to why this decision was not to be followed here. It was held here, if the charitable purpose required for its fulfilment, the purchase of a capital asset and if income is actually applied for the purchase of such capital asset, it will still constitute application of income for a charitable purpose within the meaning of section 11 (1). 6. Section 12 deals with donee trusts and is not helpful in resolving the dispute concerning a donor-trust as in this case. Any contribution made by the donor trust to another charitable trust having similar objects, whether for meeting its day-to-day expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purposes. In my view, the ITO's reliance on section 12 is perhaps misplaced as rightly pointed out by the Commissioner (Appeals). 12. In Satya Vijay Patel Hindu Dharamshala Trust's case the Gujarat High Court specifically held that the expenditure incurred by the trust there on the construction of a new dharamshala the trustees were empowered under the deed to enlarge the trust property by way of additional construction could not be said to be application to purposes other than charitable purposes of the trust. Though the facts of this case are somewhat different, the learned counsel for the assessee had referred to this decision to support the point that the donee trusts could well spend (the correct amounts donated by the assessee-trust here) on acquiring capital assets which would promote even the carrying out of the objects of the donee trusts. It is, therefore, difficult to agree with the ITO when he says that the donor trust in earmarking the donations for corpus has virtually blocked the donee trusts from spending the amounts for charitable purposes and that, therefore, such donations cannot be taken to have been applied for charitable purposes by the donor trust. 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled a miscellaneous application on the ground that on another issue while the learned Judicial Member had held that the amount of Rs. 5,050 being net interest on Rs. 77,000 deposited by the assessee-trust with DCM was taxable as the investment was hit by the provisions of section 13(1)(c)(ii), 13(2)(a) and 13(3), the learned Accountant Member had not decided the issue and had merely observed : 'The interest income being small, I have no comments to add'. This, according to the assessee, constituted a patent mistake and the appellate order, therefore, required rectification. The miscellaneous application was' heard by the learned Accountant Member, who had heard the appeal originally with another Judicial Member, as the Judicial Member who had heard the appeal originally was, in the meantime, on medical leave for quite some time. The miscellaneous application was heard on15-6-1983and the order thereon has been passed by the learned members on6-7-1983and13-7-1983, respectively. There again, there was difference of opinion between the learned members who have stated the point of difference vide their order dated28-7-1983as under : " Whether the assessee-trust could be held to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13(2)(a), i.e., whether it amounts to satisfaction of the trustees as regards the soundness of the debtor or whether, even if the trustees are convinced of the soundness of the investment, any formal overt act other than a mere promissory note, is necessary to constitute adequate security. 3. Shri Wazir Singh, the learned standing counsel for the department, has strongly relied on the order of the learned Judicial Member. In particular, he has laid great emphasis on the fact that the impugned donations of Rs. 24 lakhs by the assessee are out of the amount of Rs. 24 lakhs the assessee received from DCM during the previous year and that if the said sum of Rs. 24 lakhs cannot be treated as the deemed income of the assessee-trust, the donations by the donor trust to the donee trusts to the extent they are towards their respective corpus would not constitute application of income within the meaning of section 11. In this context, he refers to the scheme and the objects of the restrictions laid down by the Legislature by means of sections 11, 12(1) and 13. According to him, the interpretation sought to be placed by the learned Accountant Member, if accepted, will result in nullifying t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards the corpus is also an application of income. In this connection, Dr. Pal has also taken us through the Interim Report of December, 1977, of Direct Tax Laws Committee (Chokshi Committee) and the Board's Circular No. 100 [F. No. 195/1/72-IT(A-1)], dated 24-1-1973-Taxmann's Direct Taxes Circulars, Vol. 1, 1980 edn. p. 87 (copies placed in the assessee's paper book at pages 40 and 41, respectively) for the purpose of showing that the Chokshi Committee had taken note of the likely abuse of these provisions and suggested some amendments. It is a different thing that the amendments have not been carried out. The Board's circular, it is pointed out, indicates how the expression 'application of income' should be understood in the context of section 11 and is a pointer that the 'interpretation given by the learned Accountant Member to this expression is correct. As regards the second point of difference, Dr. Pal submitted that as a Third Member, I have to decide the point of difference, as formulated by the members, and should not, rather cannot, go into the question whether the order passed by the learned members on the miscellaneous application is or is not without jurisdiction. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year of the person in receipt of the income-- (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property ; " The language of the sections quoted above is clear as to its contents. Section 12 provides that voluntary contributions received by a trust with a specific direction that they shall form part of the corpus of the trust will not be treated as deemed income of the trust. The other purpose of section 12 is not relevant so far as the assessee's case is concerned. In other words, the donation of Rs. 24 lakhs received by the assessee-trust from DCM being, admittedly, towards its corpus cannot be treated as its income. The next question that arises for consideration is whether the donations made by the assessee-trust of Rs. 12 lakhs each to the donee trusts out of which Rs. 8 lakhs each is towards the corpus of the respective tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y event, I find that the decision of the Bombay High Court in the case of Trustees of the Jadi Trust supports the assessee's contention and other decisions do not have direct bearing on the issue before me. 7. As regards the second point of difference, it is desirable to refer to the provisions of section 13(2)(a) which run as under : " (1) Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-- (2) Without prejudice to the generality of the provisions of clause (c) of sub-section (1), the income or the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3),-- (a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3), for any period during the previous year without either adequate security or adequate interest or both ; " There is no dispute that the interest charged is adequate and that DCM with whom the amount is deposited is a comp ..... 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