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C.I.T. versus R.K.T. TRUST

High Court of Judicature at Allahabad

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C.I.T. v. R.K.T. Trust - INCOME TAX REFERENCE No. 7 of 1987 [2004] RD-AH 1251 (29 October 2004)

 

This is an UNCERTIFIED copy for information/reference. For authentic copy please refer to certified copy only. In case of any mistake, please bring it to the notice of Joint Registrar(Copying).

HIGH COURT OF JUDICATURE OF ALLAHABAD

Reserved

Income Tax Reference No. 7 of 1987

The Commissioner of Income Tax (central) Kanpur

Vs.

Shri Radha Krishna Temple Trust, Kanpur

AND

Wealth Tax Reference  No. 11 of 1987

The Commissioner of Income Tax (central) Kanpur

Vs.

Shri Radha Krishna Temple Trust, Kanpur

Hon'ble R.K.Agrawal, J.

Hon'ble Prakash Krishna, J.

(Delivered by R.K.Agrawal, J.)

In the Income Tax Reference No. 7 of 1987 which arises under the Income Tax Act, 1961, hereinafter referred to as the I.T.Act, the Income Tax Appellate Tribunal, Allahabad has referred the following three questions of law under Section 256(1) of the I.T.Act, for opinion to this Court.

"1.Whether on the facts and circumstances of the case the I.T.A.T. Allahabad was justified in holding that an investment of the value thereof received by a Trust by way of donation cannot be treated as an investment within the meaning of Section 13 of the Income Tax Act, 1961?

2. Whether, in the law and on the facts of the case, the Tribunal was justified in holding that the Income-tax Officer was wrong in invoking the provisions of Section 13(1)(certiorari quashing the order dated) and 13(2)(h) of the Income Tax Act, 1961 in this case?

3. Whether, in the law and on the facts of the case, the Tribunal was justified in allowing exemption u/s 11 of the Income Tax Act, 1961 to the trust?"

Whereas in Wealth Tax Reference No. 11 of 1987 which arises under the Wealth Tax Act, 1957, hereinafter referred to as the W.T.Act, the Income Tax Appellate Tribunal, Allahabad has referred the following three questions of law under Section 27(1) of the W.T.Act, for opinion to this Court.

"1.Whether, in law and in circumstances of the case, the I.T.A.T., Allahabad was justified in holding that an investment of the value thereof received by the Trust by way of donation cannot be treated as an investment within the meaning of Section 13 of the Income-tax Act, 1961?

2. Whether, in law and on facts of the case, the Tribunal was justified in holding that I.T.O. was  wrong in invoking the provisions of sections 13(1)(c) and 13(2)(h) of the Income Tax Act, 1961 in this case?

3. Whether in law and on facts of the case, the Tribunal was justified in allowing exemption u/s 11 of the Income Tax Act, 1961 to the trust ignoring the following facts:-

(a) that M/s J.K. Synthetics Ltd. had made a substantial contribution i.e. for Rs. 70,000/- to the corpus of the assessee-trust and was prohibited person within the meaning of section 13(3)(b) of the I.T.Act, 1961?

(b) That the assessee-trust was hit by provisions of section 13(2)(h) of the I.T.Act, 1961 as the funds of the assessee trust to the extent of Rs. 13,400/- were invested in equity shares of M/s J.K. Synthetics Ltd. who was prohibited person within the meaning of section 13(3)(b) of the Income-tax Act, 1961?"

As both the references relate to Shri Radha Krishna Temple Trust, Kanpur they are taken up for hearing together and are being decided by a common order.

The Income Tax Reference relates to the Assessment Years 1973-74, 1976-77 and 1978-79 whereas the Wealth Tax Reference relates to the Assessment Year 1973-74.

Briefly stated the facts giving rise to the Income Tax Reference  are as follows :-

The respondent Shri Radha Krishna Temple Trust, Kanpur is a Public Religious Trust and derives income from rent, dividend, interest etc. It claimed exemption under Section 11 of the I.T.Act in respect of its income. The Income Tax Officer did not allow the exemption under Section 11 of the Act on the ground that the trust was hit by the provisions of Sections 13(1)(c) and 13(2)(h) of the I.T.Act because the trust fund remained invested in concerns in which the trustees were substantially interested. The respondent preferred separate appeals before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner had held that investment of the value thereof received by the trust by way of donation could not be treated as investment within the meaning of Section 13(2)(h) of the I.T.Act and, therefore, the trust was eligible for exemption under Section 11 of the I.T.Act. The Revenue's appeals before the Tribunal have failed.

Briefly stated the facts giving rise to the Wealth Tax Reference  are as follows :-

The respondent-assessee which is a trust created with the object of maintaining Sri Radha Krishna Temple took the factory premises of M/s J.K. Ginning Factory on lease and let the same out on rent to various tenants. It also constructed certain shops and flats of its own and let the same out of rent. The rental income during the assessment year amounted to Rs. 1,11,472/-. The leasehold right was not settled on the trust by its founders. The activity of the trust of taking premises on lease on normal charges and letting the same out to tenants on higher rent and construction of shops and flats, which were never the object of the trust, was treated to be indulged in the activity of profit by the Wealth Tax Officer. The funds of the trust continued to remain invested in M/s J.K. Synthetics Ltd., a concern in which person enumerated in Section 13(3) had substantial interest. The Wealth Tax Officer, therefore, held that the trust was hit by Section 13(2)(h) of the I.T.Act. Taking recourse to the provisions of Section 21A of the W.T.Act which provided that such property of the trust which had been used for the benefit of any person referred to in sub-section (3) of Section 13 is liable to wealth-tax the Wealth Tax Officer was of the opinion that provisions of Section 13(1)(c) read with Section 13(2)(h) of the I.T.Act and Section 21A of the W.T.Act were applicable and accordingly refused to allow exemption under the Act. Feeling aggrieved the respondent preferred appeal before the Appellate Assistant Commissioner which came into conclusion that the provisions of Sections 13(1)(c) and 13(2)(h) of the I.T.Act as also Section 21A of the W.T.Act are not applicable. The Revenue's appeal before the Tribunal has failed.

We have heard Sri Shambhoo Chopra, learned standing counsel for the Revenue and Sri R.S.Agarwal, learned counsel for the respondent.

The learned counsel for the Revenue submitted that the trustees of J.K.Charitable Trust are the executors of the trust. The trustees of J.K.Charitable Trust have substantial interest in M/s J.K.Synthetics Ltd. and there shareholdings in the Company exceeds 20%. The trustees of the respondent trust are also relatives of the trustees of J.K.Charitable Trust. In view of the shareholdings of the respondent trust in J.K. Synthetics Ltd. the trust is not entitled to exemption under Section 11 of the I.T.Act. In support of his submission, he relied upon the following decisions:

1. Commissioner of Income Tax vs. Jamnalal Bajaj Sewa Trust [(1988) 171 ITR 568 (Bom.)]

2. Director of Income Tax vs. Bharat Diamond Bourse [(2003) 259 ITR 280 (SC)

Sri R.S.Agarwal, learned counsel appearing for the respondent however, submitted that the respondent trust had received shares of J.K. Synthetics Ltd as donation and it had not invested any amount as an investment in the said Company. Thus, there is no question of prohibition contained under Section 13(3)(b) of the I.T.Act in the present case and, therefore, the trust was eligible for exemption under Section 11 of the Act. In support of the aforesaid submission, he relied upon the following decisions:

1. Commissioner of Income Tax vs. J.K.Charitable Trust [(1992) 196 ITR 31 (Alld.)];

2. Commissioner of Income Tax  vs. Lalbhai Dalpatbhai Charity Trust [(1994) 209 ITR 865 (Guj)];

3. Commissioner of Income Tax vs. Sir Shri Ram Foundation [(2001) 250 ITR 55 (Del.)]

Having heard learned counsel for the parties we find that the entire share holding/investment in J.K.Synthetics Ltd was received by the trust by way of donation and the question of exemption under Section 11 of the Act has proceeded on that basis. Sri Shambhoo Chopra, learned counsel for the Revenue, however, disputed this position but as there is no specific question referred to us on this finding, we are proceeding on the basis that the shares of J.K.Synthetics Ltd. have been received by the trust by way of donation and the trust had not made any investment in the said Company. Sections 13(1)(c) and 13(2)(h) of the I.T.Act are reproduced below:

"S.13. Section 11 not to apply in certain cases. (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--

....

(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof--

(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or

(ii) if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied,

directly or indirectly for the benefit of any person referred to in sub-section (3):

Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution:

Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any persons referred to any sub-section (3) in so far as such use or application relates to any period before the 1st day of June, 1970;

(2) Without prejudice to the generality of the [provisions of clause (c) and clause (d) of sub-section (1), the income of 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),--

.....

(h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub-section (3) has a substantial interest."

From a reading of the aforesaid provisions it will be seen that the provisions under Section 11 or 12 of the I.T.Act shall not apply where the income of the trust for charitable or religious purpose are used or applied directly or indirectly for the benefit of any person referred to in sub-section (3) and/or if any funds of the trust or institution are invested for any period during the previous year and or continue to remain invested for any period during the previous year in any concern in which any person referred to in sub-section (3) has a substantial interest.

In the case of Jamnalal Bajaj Sewa Trust (supra) the Bombay High Court was considering the question where a public charitable trust was holding shares in Bajaj Auto Ltd. It had sold some of the shares in December, 1970 and realized capital gains but in its return for the relevant assessment year, the trust did not include the said capital gains. The Income Tax Officer held that the capital gains were taxable. However, the Tribunal accepted that the capital gains could not be considered as income within the meaning of Section 13(4) of the I.T.Act and deleted the addition. The Bombay High Court has held that the capital gain had to be considered to be income within the meaning of Section 13(4) of the I.T.Act and the trust was not entitled to exemption under Section 11 of the I.T.Act. The aforesaid decision is of no help of the Revenue as in the said case the Bombay High Court was considering a case as to whether the capital gain has to be treated as income under Section 13(4) of the I.T.Act or not whereas the controversy involved in the present case is entirely different.

In the case of  Bharat Diamond Bourse (supra) the Apex Court has held that the expression ''founder of the institution' in Section 13(3)(a) of the I.T.Act means that the person concerned should be originator of the institution or at least one of the persons responsible for the coming into existence of the institution. Contribution of money is not an inexorable test of a person being a ''founder', though it might happen often that the person who originates an institution may often also fund it. The aforesaid decision is also not applicable in the present case as the controversy is entirely different.

In the case of J.K.Charitable Trust (supra) this Court has held that issuance of bonus shares cannot be treated as investment by the assessee-trust.

In the case of Lalbhai Dalpatbhai Charity Trust (supra) the Gujarat High Court has held that on a plain reading of Clause (h) of sub-section (2) of Section 13 of the I.T.Act it is clear that it covers investment of trust funds in any concern in which any of the persons specified in sub-section (3) has substantial interest. In the present case the dividends were on the shares which constituted in the initial corpus of the trust and, therefore, should not have been brought under the provisions of Section 13 of the Act and the Tribunal was right in holding that the provisions of Section 13(2)(h) of the I.T.Act will not be applicable to the facts and circumstances of the present case in view of the holding of the assessee-company.

In the case of Sir Shri Ram Foundation (supra) the Delhi High Court has held that in construing the provisions of Section 13(2) of the I.T.Act the expression ''fund' has to be understood in the context of the provisions of Section 13(2)(h) of the I.T.Act, and not only with reference to dictionaries or to commercial parlance or to the principles of accountancy. The expression used is ''funds' and not ''fund'. ''Funds' means money in hand or cash according to some dictionaries. This would be the proper meaning to be attributed to the expression ''funds' as appearing in the provision. The fundamental requirement of Section 13(2)(h) is that there must be investment of funds of a trust. If any expanded meaning is given to include assets other than money in hand or cash or credit balance in a bank account, it is evident that they are not capable of being invested as such. Other assets of the trust apart from money in hand or cash or balance in bank will have to be converted into money or cash before the same can be invested. The expression ''invest' connotes a positive act on the part of the trust whereby the funds of the trust are laid out or committed in any particular property or business or transaction with the object of earning a profit or financial advantage or return. What is contemplated is the trust having assets in the form of money or cash or balance in a bank or any other form capable of being invested or by a positive act which pursuant to a decision of the trust is laid out or committed in a concern of a nature specified before it can be held that such an investment comes within the mischief of Section 13(2)(h) of the I.T.Act.

We are in respectful agreement with the principles laid down by the Delhi High Court in the aforesaid case that the words ''funds' and ''investment' have different meaning and the investment ought to be made by the trust out of its funds as per requirement under Section 13(2)((h) of the Act and not those investments which have already been made on the receipts by way of donation.

We also find that the Calcutta High Court in the cases of  Commissioner of Income Tax vs. Birla Charity Trust [(1988) 170 ITR 151]; J.K.Trust vs. Commissioner of Wealth Tax [(1994) 205 ITR  524; Commissioner of Income Tax vs. Bhoruka Public Welfare Trust (1999) 240 ITR 513, the Gujarat High Court in the cases of Commissioner of Income Tax vs. Insaniyat Trust (1988) 173 ITR 248; Commissioner of Income Tax vs. Sahitya Trust (1993) 203 ITR 349; Commissioner of Income Tax vs. Lalbhai Dalpatbhai Charity Trust (1994) 209 ITR 865; Sahabhai Foundation vs. Commissioner of Income Tax (1994) 209 ITR 390; the Bombay High Court in the cases of Trustees of Mangaldas N. Verma Charitable Trust vs. Commissioner of Income Tax (1994) 207 ITR 332; Commissioner of Income Tax vs. Pittie Charitable Trust (1994) 207 ITR 1053 have also taken the similar view. Thus, we are of the considered opinion that the value of the investment received by the trust by way of donation cannot be treated as investment within the meaning of Section 13(2)(h) of the I.T.Act. In the present case the respondent-trust had received shares of M/s J.K.Synthetics Ltd. by way of donation, therefore, it cannot be treated that the trust has made investment on its funds in respect of the aforesaid donation.

In view of the conclusion arrived at that provisions of Sections 13(1)(c) and 13(2)(h) of the I.T.Act are not applicable the Tribunal was justified in granting the exemption under the Wealth Tax Act also.

In view of the foregoing discussions, we answer the questions referred to us in the affirmative i.e. in favour of the assessee and against the Revenue.  However, there shall be no order as to costs.

October  29, 2004

MZ.


Copyright

Reproduced in accordance with s52(q) of the Copyright Act 1957 (India) from judis.nic.in, indiacode.nic.in and other Indian High Court Websites

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