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TMI Blog1981 (1) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... held wholly for charitable or religious purposes has been set off against the entire expenditure. In order to obviate any controversy, it may be appropriate to refer to the relevant portion of the order of the ITO to understand the basis upon which the ITO proceeded. The ITO observed in his order as follows: From the income and expenditure a/c. it is seen that the assessee received voluntary contributions amounting to Rs. 2,20,000. From the details filed it is noted that the contributions were received from two individuals and one company. While computing the aggregate income for the purpose of section 11, the said voluntary contributions have not been taken into account. The rest of the income has been set off against the entire expenditure. This has been done relying on the provisions of sec. 12(1). The method followed by the assessee is not acceptable for the reasons discussed below : Every voluntary contribution received by a trust is its income. This is clear from the opening Words, 'Any income of a trust derived from voluntary contributions', used in sec. 12(1). For the purpose of the statute such contribution has been divided into two categories, viz. : (i) contributio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (for the dharmsala) 6,000 8,127 --------------------- 1,36,045 --------------------- Aggregate income as per assessee's statement 1,03,413 Deduct : Establishment expenses 1,902 Less: Share transfer expenses 125 1,777 ----------------------- ---------------------- Income for section 11 1,01,636 ---------------------- Aggregate income as computed above 1,01,636 Dividend income u/s. 13(4) 18,977 Voluntary contributions u/s. 12(1) 2,20,000 ------------------------- 3,40,613 ------------------------- Amount of proportionate charitable expenditure attributable to Rs. 2,20,000 and Rs. 18,977 is worked out below : 1,36,045 ---------------- X 2,38,977 = Rs. 95,450 3,40,613 Therefore, expenditure for the purpose of sec. 11 (1) comes to Rs. 40,595 (Rs. 1,36,045 minus Rs. 95,450). Unspent income is computed below : Rs. Income for sec.11 1,01,636 Exemption for sec. 11 40,595 ------------------ Unspent income 61,041 " ------------------ The assessee being aggrieved by the said assessment order went up in appeal before the AAC. The AAC dealing with this aspect was of the view that there was no provision in the I. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is. The contributions received by the assessee did not form part of the income as s. 12 had no application. The Tribunal observed further that once the assessee derived income from the property held under trust for charitable and religious purposes the expenditure incurred should be deemed to have been met out of that income. The Tribunal then held that the ITO had not brought on record any material to show that the expenditure had been met out of the contributions received by the assessee. In the aforesaid view of the matter, according to the Tribunal, the allocation of expenditure made by the ITO on pro rata basis was not correct. The Tribunal referred to some decisions, some of which we shall presently note, and upheld the order of the AAC and dismissed the revenue's appeal. From this order of the Tribunal as many as seven questions were sought to be raised as questions of law that should be referred to this court under s. 256(1) of the I.T. Act, 1961. But the Tribunal has referred the questions, as we have indicated before, to this court. The Tribunal has not referred the other questions suggested by the revenue and the revenue did not come up in appeal on this aspect. Befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d down in s. 11 have to be fulfilled. The provisions of s. 12(1) do not say that voluntary contributions received from non-charitable institutions are not the income of the trust. It was found by the ITO, as we have noticed before, that the voluntary contributions in question formed part of the composite income fund of the trust out of which all its outgoings have been made in the normal course. It has also been found from the observations, as we have set out hereinbefore, that the composite fund consisted of the income of the year, may be some residue of the income of the earlier year and voluntary contributions. This formed the composite fund, out of which an expenditure of Rs. 1,44,172 was incurred by the assessee, which is in question. The question referred to us is whether, even though the assessee had received voluntary contributions from non-charitable institutions, the expenditure in question should be deemed to have been made out of the income derived from the income or the property of the trust. This was in the context of the question posed: whether the entire expenditure should be deemed to have been met from the income derived from the property held by the trust. But le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. The company had issued debentures on the principal and interest due thereunder were secured by a floating charge on the assets and undertaking of the company. Prior to 23rd May, 1921, the total income received by the company, which composed of profits assessable and not assessable to Corporation Profits Tax, was paid into one account at the bank out of which account were paid management expenses and debenture interest referred to in the year shown in the statement of the case. On 23rd May, 1921, the company had opened a separate account, called the special income account at the same bank. Into this special income account were paid the dividends received from the public utility companies referred to, as we mentioned before. Income received from some other sources were not paid into this account. Out of this special income account alone, all payments in respect of the management expenses and debenture interest were, in fact, made by the company as and from 23rd May, 1921. No money was at any time paid into the special income account except the dividends and income referred to in paras. 2(a) and (c) nor was any money ever transferred from any other account to the special income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to say to which of those debts the payment should be applied. In this connection reference was made to the decision in the case of London County Council v. Attorney General [1901] AC 26; [1900] 4 TC 265 (HL). Though the point that arose in that case was not quite the same as the point before the Court of Appeal in the decision under consideration, reliance was placed on the observation of Lord Davey in the case of London County Council v. Attorney-General. Then reliance was placed on the observation of the House of Lords in the case of Edinburgh Life Assurance Co.v. Lord Advocate [1909] 5 TC 472 and reliance was placed on the observations of Lord Atkinson in that case at p. 485 and thereafter the Master of Rolls went on to observe that it appeared to him from that judgment and from the judgment of Lord Gorrell, which contained passages to the extent, which indicated that where one would consider the business of the company which had two sources of income, the one subjected to tax and the other not, one was not entitled to assume and deem that the company had paid the money Which it ought to pay according to the most business-like Way of appropriating the expenses. It was furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e commencement of the accounting year, the assessee had made a deduction of the sum of Rs. 25,000 to the College of Engineering, Tumkur. In the assessment for the year ended 30th September, 1964, the assessee had claimed that the said sum of Rs. 25,000 should not be included in its total income of the previous year by virtue of s. 11 (1)(a) of the I.T. Act, 1961. The Appellate Tribunal as well as the authorities below disallowed the claim of the assessee on the ground that the said sum of Rs. 25,000 donated to the engineering college came from the trust fund of the assessee and not from its income of the relevant accounting year, as, on the first day of the accounting year, there were no profits available from which the funds could be donated. It was held that the benefit of s. 11(1)(a) was available provided the trust had earned profits in the previous year relevant to the assessment year. The profit and loss account of the trust showed that the donation of Rs. 25,000 formed part of the profits for the year ended on 30th September, 1964, and it was not shown that the said sum was paid out of the capital account. Therefore, the amount of Rs. 25,000 should not be included in the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT v. Samnugger lute Factory Co. Ltd. [1953] 24 ITR 265, was referred to and distinguished which we shall presently deal with. Our attention was drawn to the decision in the case of Hanuman Sugar Industries Ltd.. v. CIT [1970] 76 ITR 603, where this court was concerned with a similar question though not an identical question. There, the assessees, a limited company having a sugar mill, was also running an agricultural farm for growing sugarcane which was used in the production of sugar in its mill. Under the managing agency agreement, the assessee-company was, appointed the managing agents for period of 10 years from 1st October, 1964. The I managing agents were entitled to a remuneration by way of commission equal to 10 per cent. of the net profits subject to a minimum. In the assessment year in question, the a assessee claimed a deduction of the managing agency commission amounting to Rs. 48,735., The ITO found that the commission claimed worked out at 10 per cent. of the net profits including the agricultural profits amounting to Rs. 97,407 and being of the opinion that the assessee was entitled to deduction from the total profits only the remuneration at 10 per cent. of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be entitled to the exemption under S.: 15B. A narration of the facts would indicate that there was no composite fund out of which the contribution was made. On the other hand, the assessable income determined for particular year did not include any sum contributed by it to the Gandhi National Fund and it was exclusively contributed by the assessee from the savings not of the previous year but of a year prior to the previous year. The contributions made for charitable purposes for the year under consideration were not allowed. In those backgrounds the case was not concerned with the controversy, where there is a composite fund and a contribution is made, whether there should be any apportionment in accordance with the proportion. It is in this light that the aforesaid decision had been distinguished both by the Mysore High Court in the decision referred to hereinbefore as well as by the Orissa High Court in the decision referred to hereinbefore. Reliance was placed on the decision of this court in Basant Kumar Aditya Vikram Birla v. CIT [1968] 70 ITR 657. There, the sums claimed for allowance of rebate as donations to recognised charitable institutions, it was held, must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its assessed for distribution. At p. 425 reference was made by Lord Donovan to the decision in the case of Sterling Trust Ltd. v.. IRC [1925] 12 TC 868 (CA), which we have referred to hereinbefore. The House of Lords distinguished that case by observing that there the company had two kinds of income, one which bad come from other companies which had suffered corporation profits tax and the other income which was assessable to that tax in the company's own hands. The first kind of income was immune from further corporation profits tax; and to keep this fund intact, the company argued that it was to treat its management expenses and the debenture interest which it had to pay, as having come out of its income which still had to bear corporation profits tax so as to diminish that income and consequently the bill for tax. It was held that it was entitled so to do. But in the case before the House of Lords there were not two funds as in the Sterling Trust Ltd. case [1925] 12 TC 868 (CA) but there was only one, and none the less so because the tax assessment did not arithmetically impose the exigible rate on every dollar of the corporation's profits. The court endorsed the view of Cross J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned advocate for the revenue emphasised that there was no deeming of any provision under law. He was absolutely right. The Tribunal was right, that in the facts of that case, it was presumed or assumed that the expenditure had been met out of that income in question. This is the correct view in accordance with the principles that we have expressed. This does not affect or alter the view we have expressed. Reliance was also placed on another decision of the Supreme Court in the case of CIT v. Ramkrishna Deo [1959] 35 ITR 312. Our attention was drawn to the observations of the court at p. 316 of the report where the court reiterated that the onus was on the assessee which claimed exemption. There can also be no dispute as to that. But, here as we have noticed the facts were that there was income in the year. There was also expenditure in respect of which exemption had been claimed under s. 12 exceeding that income. The disbursement had been made from a composite fund consisting of both the voluntary contribution and the residue, if any, of the previous year's income or of the income of the year in question. In such a situation there was no scope for applying the principle of ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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