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TMI Blog1981 (4) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... eed dated 29th March, 1963, viz., relief of the poor, advancement and propagation of education and learning, giving medical relief and the advancement of any other object of general public utility were charitable purposes. The trust deed of 29th March, 1963, also referred to certain other charitable purposes such as erecting or helping in the erection of building or otherwise providing housing accommodation to or for the benefit of the poor, making available to the poor including the lower middle class persons the benefit of sanatorium or health, home or a home for rest and recreation at any place in India, giving scholarships or loans to students for prosecuting their studies and giving monetary aid or other help for relief from natural calamities like famine, floods, cyclone, tempest, earthquake or otherwise. The trust deed on 5th March, 1968, by which the assessee-trust was created reproduced in detail the relevant clauses 4, 5 and 6 of the trust deed dated 29th March, 1963. We are concerned in this reference with the assessment years 1969-70 and 1970-71 for the period 5th March, 1968, to 31st March, 1969. The assessee-trust derived dividend income of Rs. 32,867 out of which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder s. 2(15) and under s.11 of the Act and that the present was a case of a trust within a trust holding that the trust deed dated March 5, 1968, created twin trusts, viz., one requiring the trustees of the Jadi Trust to pay the income from the trust fund-to the HCJ Trust and the second requiring the trustees of the HCJ Trust to spend the income on charitable purposes for the period up to January 31, 1983. The Tribunal took the view that for the period March 5, 1968, to March 31, 1983, the trust fund was settled upon trust for charitable purposes to be carried out through the medium of the HCJ Trust. We are not in this reference concerned with that part of the deed of trust which creates from February 1, 1983, of the trust of which the beneficiaries would be the settlor's grandsons. Having found that in view of the directions contained in the trust deed dated 5th March, 1968, requiring the assessee-trust to make over the income of the trust fund to the HCJ Trust for spending on charity and to the latter trust to utilise such income for all or any one or more of the charitable purposes, the Tribunal found that the property of the assessee-trust could be said to be held wholly fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 for application to such purposes in India, to the extent to which the income so accumulated is not in excess of twenty-five per cent. of the income from the property or Rs. 10,000, whichever is higher." Now, as already pointed out, it has not been disputed throughout the proceedings that the HCJ Trust is a trust for charitable purposes. By cl. 4 of the trust deed dated 5th March, 1968, it was provided that " the trustees shall ......... for the period ending on 31st January, 1983, pay, transfer and hand over as and by way of gift or donation the balance of such interest, dividends and income of the trust fund (hereinafter called 'the net income of the trust fund ') to the trustees of the said deed of trust created by the settlor bearing date the 29th day of March, 1963, and known by the name of HCJ Charitable Trust to the intent that the trustees of the said HCJ Charitable Trust shall pay or utilise the net inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and in such a case only the part of the accumulated income which is not in excess of twenty-five per cent. of the income from property or Rs. 10,000, whichever is higher, is to be excluded for the purposes of s. 11 (1) from the total income of the assessee for the relevant previous year. We are really not concerned in this reference with the provisions relating to an accumulation and we need not, therefore, refer to the provisions of sub-s. (2) of s. 11. The real question which requires to be decided is whether it is possible to read the provisions of the first part of cl. (a) of s. 11(1), as requiring that, in order to avail of the benefit of s. 11(1)(a), the trustees who hold property under trust wholly for charitable or religious purposes, must themselves conduct directly a charitable or religious activity or whether it is permissible for the trustees to donate that income to another trust which is established for a charitable or religious purpose and which applies its income from whatever sources received, for charitable or religious purposes. There is nothing in law to prevent a settlor from creating a trust wholly for charitable or religious purposes and directing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses or of a charitable or religious institution derived from voluntary contributions is not to be included in the total income of the trustees or the institution, as the case may be, if the income is applicable solely to charitable or religious purposes. Sub-section (2) contemplates that when voluntary contributions are made to a trust for charitable or religious purposes, the income of which is applicable solely to charitable or religious purposes, and such contributions are made by a trust or a charitable or religious institution, to which the provisions of s. 11 apply, and sub-s. (2) further provides that the provisions of s. 11 of the Act shall apply accordingly to such a trust or institution receiving voluntary contributions. The effect of sub-s. (2) of s. 12, therefore, is that when a trust, the income of which is derived from property held under trust wholly for charitable or religious purposes, makes a voluntary contribution to another trust or a charitable or religious institution to which the provisions of s.11 apply then while directing that such voluntary contributions should be treated as income from property for the purposes of s.11 in the hands of the trust or char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect to the decision of the Tribunal. It is no doubt, true that so far as the present case is concerned, the ITO has been directed to ascertain as to how much of the income given by way of donation to the HCJ Trust had been applied through the medium of that trust to charitable purposes or accumulated for application to such purposes. But apart from the present case, it appears to us that for the purposes of s. 11 of the Act, it would be enough for the donor-trust to show that the donation of the income of the donor trust had been handed over to the donee-trust which is itself created for charitable purposes, but, as already pointed out, a rider will have to be added to this that it may be necessary in a given case to ascertain whether the funds are deliberately being diverted to non-charitable purposes through the medium of the donee-trust. Our attention has been invided to a decision in IRC v. Helen Slater Charitable Trust Ltd. [1980] 1 All ER 785; [1980] 3 WLR 157 (Ch D), where a similar question, viz., whether it is permissible for a trust for charitable purposes to apply its income to charitable purposes through the medium of the other trust was concerned. In that case, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therance of the foundation's authorised charitable objects and on that basis held that the sums in dispute were applied by the trust for charitable purposes only. A case was stated for the opinion of the court at the instance of the Crown and the question of law for the opinion of the court was, whether, on the facts stated in the case, the Commissioner's decision was erroneous in point of law. Slade J., who heard the reference, referred to the meaning of the word " applied " given by Lord Macnaghten in Williams v. Papworth [1900] AC 563 at 567 (PC) in which Lord Macnaghten had observed that " the word 'applied' does not import a power of selection : it simply means 'devoted to' or 'employed for the special purpose of' ". The learned judge then went on to observe as follows in the context of the question whether money has been " applied for charitable purposes " for the purposes of s. 360(1) of the Income and Corporation Taxes Act, 1970, and s. 35(1) of the Finance Act, 1965 (pp. 164, 165 of [1980] 3 WLR): "In the light of authorities such as these, it becomes obvious that, in particular cases, difficult borderline questions may arise as to whether money has been 'applied for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w what use the recipient charity has made of the money ". We may at this stage briefly reproduce the relevant part of s. 360(1) of the 1970 Act (U.K.) and s. 35(1) of the Finance Act, 1965 (U.K.) which fell for consideration before Slade J. Section 360(1)(c) of 1970 Act so far as material provided as follows (p. 160): " The following exemptions shall be granted on a claim in that behalf to the Board ...... (c) exemption-(i) from tax under Schedule C in respect of any interest, annuities, dividends or shares of annuities, (ii) from tax under Schedule D in respect of any yearly interest or other annual payment, and (iii) from tax under Schedule F in respect of any distribution, where the income in question forms part of the income of a charity, or is, according to rules or regulations established by Act of Parliament, charter, decree, deed of trust or will, applicable to charitable purposes only, and so far as it is applied to charitable purposes only ........ Section 35(1) of the Finance Act, 1965, provides (p. 160): "Subject to subsection (2) of this section a gain shall not be chargeable gain if it accrues to a charity and is applicable and applied for charitable purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trustees of the assessee-trust for and on behalf of the HCJ Trust because the amount has to be donated to the HCJ Trust for charitable purposes. The contention before us was that it has already been ascertained that the amounts given by way of donation to the HCJ Trust have been applied to charitable purposes by the HCJ Trust and, therefore, the HCJ Trust would itself be entitled to the exemption under s. 11 of the Act and consequently no income would be assessable to tax in the hands of the assessee-trust. It is, however, not possible to discuss this controversy at this stage of the reference finally though it cannot be disputed that the assessee-trust was receiving income for the benefit of the HCJ Trust and consequently the provisions of s. 161(1) would be attracted for the purposes of determining whether the assessee is liable to be assessed to any tax on the income by way of donation to the HCJ Trust. In the view which we have taken, the questions referred have to be answered as follows: Question No. 1.-In the affirmative and in favour of the assessee. Question No. 2.-In the affirmative and in favour of the assessee. The assessee to get the costs of this referenc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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