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1982 (1) TMI 117

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..... mmissioner under section 263 of the Income-tax Act, 1961 ("the Act"). The undisputed facts in this case are that the assessee is a public charitable trust eligible for tax exemption in accordance with section 11 of the Act. Section 11 provides that 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 is not liable to be included in the total income and it permits accumulation or setting apart for application to such purposes in India to the extent of 25 per cent of the income. In other words, the exemption from inclusion of the income of the trust wholly for religious or charitable purposes will be available only if 75 per cent of the income derived from property held on trust is applied to religious or charitable purposes, but under sub-section (2) where the 75 per cent of such income as determined and stated therein is not applied, or is not deemed to have been applied to charitable or religious purposes as provided but is accumulated or set apart either wholly or partly for application to such purposes, such accumulated part of the income will be also entitled to exclusi .....

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..... to be erroneous and prejudicial to the interests of the revenue. He, accordingly, initiated proceedings under section 263 and after considering the submissions in response to the show cause notice revised the assessment by enhancing the income assessed so as to include the income accumulated for all the ten years. Thus, he recomputed the income of the assessee at Rs. 13,39,316 as against Rs. 3,34,250 assessed by the ITO. It is against this order that the present appeal has been filed by the assessee. 4. The learned counsel for the assessee first of all invited our attention to the provisions of section 11 and emphasised the fact that nowhere in the section has the word "spent" been used and the Commissioner has totally erred in equating the word "spent" to the word "applied". The first and the foremost contention made by him on behalf of the assessees is that the handing over of the accumulated income for ten years in the shape of investments to the another trust having the identical objects and for fulfilment of the purposes for which the assessee accumulated such income amounted to application as required under the section and as this was done before the expiry of the period of .....

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..... e accumulated. In other words, so far as the 25 per cent of the income in any previous year is concerned, the assessee is at liberty to accumulate and to choose to apply it whenever it liked and the undertaking given in the prescribed notice specifying the purchases for which the accumulation is made or period for which it is made does not apply to the 25 per cent. 5. At this stage it may also be stated that the assessee had filed additional grounds stating the facts that the question whether the assessee-trust was entitled to exemption for the year 1962-63 was under dispute and was resolved in favour of the assessee by the judgment of a single judge, of the Madras High Court on 3-11-1971 in M.Ct. Muthiah Chettiar Family Trust, that such decision was contested by the ITO but confirmed by the Division Bench of the same High Court and that the petition of the ITO for leave to appeal was also dismissed in April 1977, but still the Income-tax Department has not finally accepted the position as it has filed a petition for special leave to the Supreme Court. It was contended that in view of the uncertainty caused by the series of proceedings mentioned above disputing the assessee's cla .....

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..... e invited our attention to the amendment made by the Finance Act, 1970 to section 11 and to the budget speech of the Finance Minister in this connection where it is stated that in the case of charitable and religious trusts exemption from tax would be allowed only in respect of income actually applied to the purpose of the trust in the same year or within three months of the close of the year and further the exemption will be forfeited altogether if the trust fund constituting its corpus or income are invested in a concern in which the author or the founder of the trust or any of his relatives is substantially interested and the amount of the investment exceeds 5 per cent of the capital of that concern and that these provisions will curb the use of the funds of charitable and religious trusts to acquire control over industry or business. We were also taken through the relevant memoranda explaining the position of the Finance Bill, 1970 with regard to the amendment entitled "Measures for plugging loopholes in the law leading to tax avoidance". He further contended that there was no power or any authorisation in the trust deeds of the assessee-trusts which enable them to hand over th .....

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..... d that the conversion of one asset into another is not an application of the income for charitable purposes and further the acquisition of property per se does not serve the purpose of application. It was also pointed out that the assessee's attempt to take the matter in appeal to the Supreme Court failed and the High Court rejected the assessee's petition in this connection. We were furnished with a copy of the judgment of the High Court and the copy of the order rejecting the petition for leave to appeal to the Supreme Court. 7. The learned Counsel for the assessees reiterated the submission that the handing over the securities representing the accumulated income to another trust with a view to carry out the purposes amounted to application of income is field in the decisions cited by him and clause (c) of section 11(3) will come into play only if there is no application. He also submitted that in fact and in substance there is no difference between the word "applied" and "utilised" as contended by the learned standing counsel. 8. Before we consider the rival contentions of the parties and dispose of the dispute, it is necessary to clear the deck on certain aspects which seem .....

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..... nding the amount on specified individual objects or purposes, whereas the department's stand is that the amounts of income must be actually spent upon specified individual items falling within the connotation "charitable purposes". In this context, we may first of all consider the decision of the Madras High Court in Thanthi Trust's case. In this case the assessee-trust as originally created was for the purpose of (1) establishing Dina Thanthi (daily newspaper) as an organ of educated public opinion for the Tamil reading public ; (2) to disseminate news and to ventilate opinion upon all matters of public interest through the said newspaper ; (3) to maintain the said newspaper and its press in an efficient condition, and devoting the surplus income of the newspaper and its press, after defraying all expenses, in improving and enlarging the said newspaper and its services and placing the same on a footing of permanency. Under power reserved in clause 3(j) of the original trust deed, the founder of the trust executed a supplementary deed directing the trustees to spend the surplus income for certain purposes specified therein presumably to bring them under the amended provisions of th .....

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..... unt has been kept as a fund for educational purposes which can be operated at any time by the college. It was further observed that if the assessee had actually handed over the amounts on the dates when the credit entries were made to the college physically and it had deposited the same with a bank or with a third party for drawal of such amount as required by it in future, it cannot be said that there has been no application for educational purposes and that the fact that the educational institution chose to keep the money with the assessee trust itself cannot make any difference so long as it has been shown by the revenue that the assessee-trust retained any substantial interest over the money standing to the credit or the educational institution. It was also noticed that in the decision in Helen Slater Charitable Trust's case, the Court construed the phrase "applied for charitable purposes" as including transfer of funds outright to another charitable institution which has exclusively charitable objects and the disposition of assets by one institution in favour of another institution in such manner as to pass the whole title in such assets to the transferee must ordinarily amoun .....

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..... ed that the assessee's impugned action is within its powers and charter and is authorised therein. The purposes for which the income of the assessee-trust has to be applied are stated in the trust deed as under : (1) To establish or maintain and manage hospitals, clinics, laboratories and medical research centres and to provide the poor with medical and surgical advice and aid. (2) To acquire or take over any hospitals, clinics, laboratories or research centres and to maintain and manage them. (3) To establish, maintain and manage educational institutions or libraries for imparting general, technical or scientific knowledge or knowledge in any subject or of any languages. (4) To take over any educational institutions or libraries and maintain and manage such institutions. (5) To award scholarships or stipends to students to enable them to prosecute their studies in India or in foreign countries and to award prizes to students for proficiency in any subject or language. (6) To render financial assistance to any existing hospitals or educational institutions. (7) To give subscriptions or donations to any relief funds by way of charity. (8) To do all such other lawful .....

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..... erty and maintain and manage the school. Clauses 4 and 5 of the Foundation Trust deed read as under: "4. The Rama Vilas property will continue to be the property of the Thirupani Trust. The Board of Trustees are, however, authorised to enter the premises, construct the hospital and school as aforesaid and manage the hospital and school. The property tax and other outgoings in respect of the Rama Vilas property shall be paid by the Board of Trustees out of the funds available with them. 5. The Board of Trustees hereby undertake to act diligently, promptly and expeditiously in carrying out the aforesaid objects and utilise the said funds only for the said objects and not utilise them for any other purposes whatsoever." 11. Now, undoubtedly clauses 1 to 4 of the assessee-trust authorised it to establish, maintain and manage educational institutions, hospitals, etc., and to take over any existing ones and maintain and manage the same and even apart from clause 8 it stands to reason that the power to establish, maintain, manage or take over an educational institution, etc., imply all powers to carry out the said purposes in any manner expedient, suitable or convenient and to tak .....

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..... th the dictionary meaning of the words "utilised" and "used". The word "utilised" according to the Wagnal's New Standard Dictionary means "to turn to practical account ; make (something) profitable or serviceable by applying (it) to some use improve" and the word "use" means "to employ for the accomplishment of a purpose ; turn to account ; make use of" etc. According to the Chambers' Twentieth Century Dictionary, "utilise" means "to make use of, turn to use" and the meaning of "use" is "act of using" or "state or fact or being used", etc. We do not think the difference in the expression "utilised" in clause (c) and "used" in clause (a) make difference of any consequence and it appears to us that they are more or less used as synonymous terms. However, even assuming that the word "utilised" should be held to mean that the accumulated income should be held to be spent or used for a specified purpose, we consider that even then the assessee satisfies the requirement. As we have already stated, the assessee by taking the steps of forming the M.Ct. Muthiah Foundation for the specific purpose of acquiring or establishing certain educational institutions or hospitals, etc., and maintaini .....

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..... allowed to do so and to apply such income within a reasonable time. As regards the argument of the revenue based on the apprehension that if handing over of the accumulated income by one charitable trust to another charitable trust on the eve of the period of expiry of the accumulation permitted would amount to application to charitable purposes then it will defeat the very object of the enactment and the intention of the Legislature and render the provisions totally nugatory, we have not been referred to any particular circumstance in this case which would support such an apprehension. Even otherwise, there is no force in this argument because the authorities already referred to, namely, the principles in Helen Slater's Charitable Trust's case and the decision of Madras High Court in Thanthi Trust show that such handing over of the accumulated income by the one charitable trust to another charitable trust having identical or similar objects of charity itself amounts to application of income for charitable purposes and so long as this concept of application of charity stands the fact that it may give rise to certain loopholes which may be taken advantage of by persons in an attempt .....

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..... wnership being replaced by the ownership of the donee, there is no reason why a valid gift cannot be effected through such book entries. The Court also considered certain other decisions of the Delhi and Karnataka High Courts and it appears to us from the discussion and the principles stated therein that where an assessee-trust has completely divested itself of the ownership of the money or put the money beyond its control and within the disposing power of the donee or the institution or the fund in whose favour it is applied, then it would amount to application to the purpose for which it is set apart or placed, beyond its own control. In other words, the view taken appears to be that if by the book entries of crediting the amounts in favour of the institution or fund, the institution or fund is fully aware of the conduct of the assessee and is able to draw funds for its own use, then it would amount to utilisation of the money for the purpose of making it available to the educational institution even though the fund may be lying with the donor-charitable trust. In the present case, however, it cannot be disputed that so far as the assessee-trust is concerned, it has completely di .....

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