Income Tax Appellate Tribunal - Mumbai
Bfc Officers' Welfare Trust No. Vi & Ors. vs Income-Tax Officer on 25 April, 1997
Equivalent citations: [1997]63ITD169(MUM)
ORDER
M.K. Chaturvedi, J.M.
1. These appeals by the assessee are directed against the order of the CIT(A)-V, Mumbai and pertain to the asst. yr. 1989-90.
2. The solitary issue raised in these appeals relates to the question that whether the Revenue was correct in subjecting the trust income to the maximum marginal rate as per the provisions of s. 164 of the IT Act, 1961, (hereinafter called the "Act").
3. Briefly the facts : Bharat Forge Co. Ltd. is a public limited company. It is controlled by the Kalyani Group of Pune. It created forty trusts. These trusts were said to have been created for the welfare of the employees of the company. All these trusts were created in August, 1980 with an initial contribution of Rs. 1,000 from the company. Subsequently, the company gave another contribution of Rs. 3 lakhs to each of the forty trusts. In 1981, all the forty trusts invested the funds almost in entirety in purchasing the shares of Bharat Forge Co. Ltd. from the market. Each trust purchased 5,700 to 6,000 shares on an average price of Rs. 50 to Rs. 55 per share. Thereafter each of the forty trusts had been returning income by way of dividends from shares. Right upto the relevant year of assessment, the dividend income continued to be invested in fixed deposits. It was noted by the AO that from 1980 to the end of the accounting year i.e. to 31st March, 1989, no part of the accumulated dividend and interest income was spent on any welfare measure for the specified beneficiary employees. In the relevant accounting year, the assessee sold most of the shares purchased originally together with bonus and rights, etc. to the companies wholly controlled by the members of the Kalyani family. The AO was of the view that the creation of welfare trust in 1980 was not bona fide. He, therefore, subjected the income to the maximum marginal rate. It would be pertinent to reproduce the observations of the AO contained in para 4 of the order of the CIT(A) in the case of Trust No. VI.
"Scrutiny of records indicates that this is one of the trusts created for the benefit of the employees of Bharat Forge Co. Ltd. in the year 1980. It is further seen that the beneficiaries under the trust are the officers of certain category of the company. The objects of the trust are as under :
(i) to give scholarship assistance and encouragement to the beneficiaries for education and practical experience;
(ii) to give financial, technical and administrative assistance to the beneficiaries for construction of residence for themselves and for the furniture and furnishings therein;
(iii) to encourage, help and assist financially and administratively to the beneficiaries in establishing, running and developing co-operatives for their benefit, and welfare.
(iv) to give medical help of all types including complete hospitalisation in India and abroad;
(v) to arrange and help financially and administratively excursions and tours to places of interest and education;
(vi) to construct or to acquire by purchase or to take on hire and to conduct and maintain holiday homes and resorts and sanitoriums for the benefit and welfare of the beneficiaries;
(vii) to establish, run, manage and administer funds and endowments for the purpose of providing relief to the beneficiaries on occasions of natural calamities such as earthquakes, fires, flood, etc.;
(viii) to own or take on hire and to run, conduct and maintain all types of educational, medical and other institutions and establishments of whatsoever nature, which the trustees in their absolute discretion think fit and proper for the benefit and welfare of the beneficiaries, and this purpose may be attended upon by the trustees, themselves independently or jointly with any other trust/s of like nature;
(ix) to do everything that the trustees in their absolute discretion think fit and proper for the welfare of the beneficiaries;
The trustees are hereby authorised in their own discretion to make and frame scheme or schemes for carrying out the aforesaid objects or purpose of the trust.
5. Verification of the records further indicates that during the last 10 years the trust has not planned anything for the beneficiaries and the income earned every year and after applying tax at the appropriate rate has been accumulated for all these years. It is further noticed that the shares sold by the trustees have been acquired by one company Kalyani Consultants (P) Ltd. Pune. It is needless to mention that Bharat Forge Co. Ltd. is also locate and controlled from Pune. The shares owned and now sold by all the trusts membering about 40 trusts set up by the settlor company namely, Bharat Forge Co. Ltd.; Pune have been acquired by Kalyani Consultants (P) Ltd. The full consideration of the said shares has also not been paid to the trustees so far. The trust has returned interest on the sale consideration outstanding from the said Kalyani Consultants (P) Ltd.
6. To the query why no amount has been spent on the objects of the trust, it has been stated that the amount earned by the trust was not sufficient for undertaking any sort of welfare activities of the trust and towards the end of year 1990 the trust has drawn plans and schemes outlining how to spend the amount. Copies of Medical Welfare Scheme and Educational Scholarship Scheme said to have been framed by the trust were filed during (sic-in) respect of payments of Rs. 15,905 and Rs. 5,086 issued by Electricals Hospital, Pune and Shri S. R. Chandak. Both the receipts indicate that the payment has been from Bharat Forge Ltd. Medical Welfare Trust. The name of the assessee-trust does not in anyway agree with the said name.
7. It is the contention of the assessee-trust that the rate applicable to it is the appropriate rate and not to be taxed at maximum rate as it is a trust created bona fide by a person carrying on a business or profession exclusively for the benefit of the persons employed in such business of profession and governed by proviso (iv) of s. 164(1).
8. The records of the trust do not, however, speak favourably for the appropriate rate to be applied on the income as the trust cannot be said to have been created bona fide for the benefits of the employees as during the last 10 years the trust has not taken any action to distribute the income to fulfil the objects of the trust. It is further seen that the shares held by the trust have not been transferred to a company in the group of Bharat Forge Co. Ltd. In the circumstances, it cannot be held that the trust fund has been separately kept and its income is being used for the benefits of the employees as mentioned under s. 164(1)(iv) of the Act. Life of 10 years is sufficient period for any organisation to formulate rules, regulations or schemes for the distribution of its income for the beneficiaries, if the trust has been actually set up bona fide for the benefits of the employees of the company. Only during the end of the year 1990 the trust thinks of formulating certain schemes for the fulfilment of the objects of the trust. Production of two receipts in respect of payments received from Bharat Forge Ltd., Medical Trust does not help the assessee trust for its failure to distribute the income during the last 10 years. How many of the beneficiaries have retired, resigned, retrenched, died since the inception of the trust i.e. 1980. The property of the trust being equity shares of Bharat Forge Co. Ltd. have not been transferred to another (P) Ltd. Co. in the same group of Co's without receiving full and final consideration as on 31st March, 1989. In view of the aforesaid facts, I am constrained to conclude that this is not a trust created bona fide for the benefits of the employees of Bharat Forge Co. Ltd. and in the circumstances the rate of tax applicable on the total income will be that of maximum rate."
4. The CIT(A) observed that the main reason for setting up the trusts was to mop up a large chunk of floating stock of the company and thereby strengthen the control of Bharat Forge in the hands of Kalyani Group. Years later, at an opportune time, these shares were bought by Kalyani group of companies. It was found by the CIT(A) that these trusts were only paper trusts. These were used only as instruments for subserving the interest of Kalyani group. For this and other reasons, he agreed with the AO that no bona fide trust was created for the benefit of the employees. It was, therefore, held that there trusts were rightly subjected to tax at the maximum marginal rate. Hence, these appeals.
5. Shri T. P. Trivedi and Shri P. R. Toprani, learned counsel appeared before us on behalf of the assessee. Relevant documents and papers were filed. It was vehemently contended the Revenue was not correct in subjecting trusts to tax at the maximum marginal rate. It was submitted by the learned counsel that the case of the assessee falls within the ambit and purview of proviso (iv) to sub-s. (1) of s. 164 of the Act. It was stated that in the preceding years, bona fide of the trust was not doubted. Tax was charged at the ordinary rates and the prescription of s. 164 was not invoked. According to the learned counsel, the bona fide as to the character of the trust can only be adjudged at the time of its creation. As such, in the year 1980 when these trusts were created, it was open for the Revenue to challenge the bona fide character of the trust. In that year no doubt was raised as to the bona fide of the trust. Now, it is not open for the Department to consider the bona fide of the trust. Its character cannot be challenged in the year under consideration. For this proposition, learned counsel placed reliance on the following :
1. CIT vs. Chunilal Raichand Trust (1991) 189 ITR 631 (Bom);
2. Seth Keshrichand Kaitan Education & Welfare Trust vs. CIT (1982) 138 ITR 351 (Cal); and
3. CIT vs. Walchand Diamond Jubilee Trust (1958) 34 ITR 228 (Bom).
6. Sri Trivedi in explaining the meaning of the word "bona fide" referred the Tomlin's law Dictionary. It is defined as under :
Bona fide : In good faith; without fraud or deception; honestly, as distinguished from bad faith; openly, sincerely. That we say is done bona fide which is done really with a good faith, without any fraud or deceit."
Learned counsel also referred the Law Lexicon to explain that the payments really is bona fide made means payments which the party does not intend to reclaim.
7. In order to demonstrate that the trust was created bona fide, it was submitted as under :
1. The trust was irrevocable
2. Para 14 of the Deed of Trust dt. 8th August, 1980, was referred to. This reads as under :
"14. Irrevocable trust : This Trust shall be and remain irrevocable for all times and the company both hereby release, relinquish, disclaim, surrender and determine all rights or powers, to restore to the company or to reclaim any interest in the trust fund and the investments for the time being representing the same or the income thereof to the intent that the trust fund is to be held by the trustees upon the trusts and subject to the powers, provisions, agreements and declarations contained in these presents to the entire exclusion of the settlor. It is further declared and directed that if any disposition made by this trust deed shall fall by reason of it being void and also if any interest in the trust fund or income thereof regarded in law as being not disposed of, the disposition or interest so failing or remaining undisposed of shall be held by the trustees upon the trust for the beneficiaries referred to above and the intention is that there shall not be and resulting trust for the company and that the fund or part thereof or income or part thereof which might be otherwise regarded as reverting to the company shall be paid over to and be held in trust for the benefit of such beneficiaries as in law are capable or receiving the same in such manner and in such proportion to such one or more of them to the exclusion of others or other as the trustees may think fit.
8. This Deed of Trust was made between Bharat Forge Co. Ltd. on the one part and Dr. Neelkanth Annappa Kalyani, Mr. Babasaheb Neelkanth Kalyani and Mr. Virendra Kantilal Seth, on the other part as the trustees.
9. It was stated that these trusts were created as per the scheme contemplated under proviso (b) to sub-s. (2) of s. 77 of the Companies Act, 1956. This reads as under :
Sec. 77. Restrictions on purchase by company, or loans by company for purchase of its own or its holding company's shares.
(1) ............
(2) No public company and no private company which is a subsidiary of a public company shall give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or in its holding company :
Provided that nothing in this sub-section shall be taken to prohibit :
(a) the lending of money by a banking company in the ordinary course of its business, or
(b) the provision by a company, in accordance with any scheme for the time being in force, of money for the purchase of, or subscription for, fully paid up shares in the company or its holding company being a purchase or subscription by trustees of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried office or employment in the company; or
(c) the making by a company of loans, within the limit laid down in sub-s. (3) to persons (other than directors, or managers) bona fide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid shares in the company or its holding company to be held by themselves by way of beneficial ownership."
10. Next, it was argued that till 28th February, 1997, the assessee incurred an expenditure of Rs. 2,20,37,304 for the furtherance of the objects of these forty trusts. Details of the expenditures were filed. It transpires from the perusal of the details that all these expenditures were incurred in the subsequent years. In the preceding years, there was no expenditure on the objects of the trust.
11. Shri Y. P. Trivedi further stated that when the shares were sold in the year 1987 sufficient amount of corpus was built up. Expenditure, on the welfare activities was deferred in the interest of the employees only. No part of the income of the trust came back to the company.
12. Our attention was invited on s. 40A(11) of the Act. This section also enacts the overriding provision and entitles the assessee, who has, before 1st March, 1984, paid any sum to any fund, trust, etc. referred to in s. 40A(9).
(i) to claim that the unutilised amount be repaid to him, and where any claim is so made, the unutilised amount shall be repaid, as soon as may be, to him;
(ii) to claim that any asset, being land, building, machinery, plant or furniture acquired or constructed by the fund, trust, etc. out of sum paid by the assessee, be transferred to him and where any claim is so made, such asset shall be transferred, as soon as may be, to him. It was stated that option was not exercised under s. 40A(11) to take back the money.
13. It was further stated that there was no move or takeover by the settlor company. These trusts were not created to strengthen of the Kalyani group. These were formed bona fide for the benefit of the company employees in terms of the scheme as per the provisions of s. 77(2B) of the Companies Act, 1956.
14. Sri Arbind Modi, learned Departmental Representative appeared before us. It was vehemently argued that the assessee failed to establish the bona fide character of the trust. As such the benefit of proviso (iv) to sub-s. (1) of s. 164 cannot be conferred to the assessee. In regard to the applicability of the decision of the jurisdictional High Court rendered in the case of Chunilal Raichand Trust (supra) it was argued that the said decision was rendered in relation to the applicability of proviso (iii) to sub-s. (1) of s. 164. The case of the assessee is not falling within the ken of this section. The learned Departmental Representative made a distinction between the provision laid down in the proviso (iii) and (iv) of sub-s. (1) of s. 164. The language of the second proviso is stated to be different. The conditions precedent for the applicability of the proviso were not similar. Therefore, the decision rendered in the context of proviso (iii), according to the learned Departmental Representative cannot be applied in the facts and circumstances of the present case.
15. It was stated that the assessee did not formulate any scheme in relation to the welfare measures. Funds were not utilised, apropos, the welfare activities. On the contrary, funds were utilised by the Kalyani group leasing companies. How assessee can be permitted to suspend the welfare activities for more than a decade ? There is no iota of evidence to indicate that the assessee formulated a scheme to provide welfare measures. De hors welfare activities, trust cannot be construed to be a welfare trust. It is just a trust and not a welfare trust. The subsequent conduct of the assessee is not relevant in construing the bona fide of the trusts. According to Sri Modi, it was a clear case of inside trading which is against the public policy. It was stated that the trust was a discretionary trust. Therefore, it attracts maximum marginal rate. Commenting on the exigency for creating the trust, the learned Departmental Representative submitted that certainly welfare was not the real objective. These trusts were ostensibly for the welfare of the employees. Trustees had absolute discretion to utilise the trust properties. There was no any scheme or safeguard for the proper disbursement of the funds. Further, it was stated that the onus lies on the assessee to prove the bona fide. To buttress his point, Sri Modi relied on some precedents.
16. We have heard the rival submissions in the light of the material placed before us and the precedents relied upon. In the case of CIT vs. Chunilal Raichand Trust (supra), the assessee was a discretionary trust. The assessment was made under s. 164(1) of the IT Act. The short question that had arisen was whether the assessee's case falls under proviso (iii) to sub-s. (1) of s. 164. It was held that the situation that was obtaining on the day the trust was created is relevant and not the situation in the year for which the assessment is being made. The expression "having regard to all the circumstances existing at the relevant time, that the trust was created bona fide exclusively for the benefit of the relatives of the settlor" occurring in cl. (iii) clearly indicates that it is the situation that was obtaining at the time of the creation of the trust that is relevant. This decision was rendered in the context of interpretation of cl. (iii) of sub-s. (1) of s. 164.
17. In the present case, the assessee claims that its case comes within the ambit of cl. (iv) of the proviso to s. 164(1) of the IT Act. The language of this proviso is different. The purport is not the same. Therefore, the decision which was rendered in the context of cl. (iii) of the proviso is not relevant. In the instant case, we are concerned with, altogether a different type of situation.
18. The word of the statute should be given a sensible meaning so as to make them effective. This idea is inculcated in the well-known maxim : "ut res magis valeat quam pereat".
We now read cl. (iv) of the proviso to s. 164. This is an under :
"(iv) the relevant income is receivable by the trustees on behalf of a provident fund, superannuation fund, gratuity fund, pension fund or any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession."
It transpires from the perusal of this clause that it concerns with the income receivable by the trustees on behalf of the :
(A) provident fund, superannuation fund, gratuity Fund, Pension fund; or (B) any other fund created bona fide by a person carrying on a business or profession exclusively for the benefit of persons employed in such business or profession.
It is abundantly clear from the language of this section that "bona fide" is to be seen in respect of only those funds which are listed in category (B). The requirement of the clause is that the fund must be created "bona fide", by one who is carrying on the business or profession. This fund must be exclusively for the benefit of persons employed in such business or profession.
19. Sec. 164 concerns with private discretionary trusts. Discretionary trust is defined in Snell's Principles of Equity, 25th Edn. (1965) at p. 129 as under :
"A discretionary trust is one which gives the beneficiary on right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit .........."
The beneficiary thus has no more than a hope that discretion will be exercised in his favour."
The assessee-trusts are discretionary trusts. There is no dispute on this point. The contention of the assessee is that for taxing the trust income maximum marginal rate should not be applied as the assessee-trusts come within the umbra of the cl. (iv) of the proviso to s. 164.
20. In the case of Seth Keshrichand Khaitan Education & Welfare Trust vs. CIT (supra) the trust was created for the benefit of relatives. There was no evidence that the trust funds were misapplied. It was held that where there was no conduct which indicated that the trustees had applied the fund for any benefit of themselves or in derogation of the trust but there was only a non-application of the fund for the objects of the trust since its inception, that by itself would not be decisive factor and cannot lead to the conclusion that at the time of creation of the trust, it was not bona fide. This case was decided in the context of sub-cl. (iii) to proviso to sub-s. (1) of s. 164. Therefore, it is not relevant in deciding the matter.
21. In the case of CIT vs. Walchand Diamond Jubilee Trust, (supra), a charitable trust was created. The recital of the trust indicated that the settlor was anxious to strengthen the hands of the organisation which controlled the companies in which he had an interest. Directors were rendered to utilise the income from accumulated investments for a specified charitable objects after 18 years. The Court held that so long as the income from the trust property was not spent on and non-charitable object and was set apart or accumulated for the ultimate object of carrying out the charitable purpose then even in the intervening period, during which the income was accumulated, the trust continued to be a charitable trust, the property was held on a charitable trust and the income from the trust was exempt from tax. This case is not also relevant for our purpose because in the instant case, we are concerned with the contribution to the non-statutory funds. We got to see whether this fund was created ostensibly for the welfare for the employees or indeed, its object was to promote welfare. To understand this aspect, it would be beneficial to keep in focus, the scheme of the Act made in this regard.
22. With a view to discourage creation of such trusts, etc. the Finance Act, 1984, brought certain changes in the statute. Sec. 40A(9) was enacted. It places a ban, with retrospective effect from asst. yr. 1980-81, on allowability of any sum paid by the assessee as an employer towards the setting up or formulation of, or as contribution to, any fund, trust, etc. for any purpose except where such sum is paid or contributed for the purposes of and to the extent required under any other law.
23. With a view to mitigate the hardship in genuine and bona fide cases, s. 40A(10) enacts provisions of overriding nature and provide allowability of so much of the sum referred to in s. 40A(9) as the fund, trust, etc. referred to in that section has before 1st March, 1984, bona fide laid out or expended by way of expenditure wholly and exclusively for the welfare of the employees.
24. Sec. 40A(11) enacts overriding provisions and entitles the assessee, who has before 1st March, 1984, paid any sum to any fund, trust, etc. referred to in s. 40A(9) to claim that the unutilised amount be repaid to him and, where any claim is so made, the unutilised amount shall be repaid as soon as may be, to him.
25. Sec. 77 of the Companies Act, put a restriction on purchase by a company or loans by a company for purchase of its own or its holding company share. The reason for the restriction is that such purchase amounts to trafficking in its own shares thereby enabling the company in an unhealthy manner, to influence the price of its own shares in the market. It amounts to the reduction of capital which can only be effected with the sanction of the Court and in the manner laid down by ss. 100 to 102.
26. Proviso (b) to sub-s. (2) of s. 77 of the Companies Act, is reproduced here as under :
"Provided that nothing in this sub-section shall be taken to prohibit :
(a) ............
(b) the proviso by a company in accordance with any scheme for the time being in force of money for the purchase of, or subscription for fully paid-up shares in the company or its holding company, being a purchase or subscription by trustees, of or for shares to be held by or for the benefit of employees of the company, including any director holding a salaried office or employment in the company."
27. It is important to see whether the scheme formulated by the company calls for the benefit of the employee or for its own benefit. It was held in the case of S. B. Adityan & Ors. vs. ITO (1964) 52 ITR 453 (Mad) that in determining whether a trust was entitled to exemption under the provisions of the IT Act, the AO is not bound to confine himself to the terms of the trust deed. It is open to him to take other factors also into consideration to determine the true purpose and character of the trust and the income therefrom and he is entitled to call upon the assessee to produce further evidence relating to the matter.
28. In the case of CIT vs. Thanthi Trust (1982) 137 ITR 735 (Mad), it was held that the result of an enquiry made in one year is not conclusive or binding in subsequent years.
29. The apex Court in the case of Municipality of Bhiwandi & Nizampur vs. Kailash Sizing Works AIR 1975 SC 529 at p. 531 observed thus : Reckless disregard of consequences and mala fides stand equal, where the actual state of mind of the actor is relevant. This is so in the eye of law, even if there might be variations in the degree of moral reproach deserved by recklessness and mala fides. The definition of the expression "done in good faith" as given in s. 3(22) of General Clauses Act, 1897 was referred to before the apex Court which prescribes that a thing shall be deemed to be done in "good faith" where it is in fact done honestly, whether it is done negligently or not. It was said that an authority is not acting honestly where an authority has suspicion that there is something wrong and does not make further enquiries. Being aware of possible harm to others, and acting in spite of, is acting with reckless disregard of consequences. It is worse than negligence. This decision of the apex Court was also discussed and considered in the case of CIT vs. Drapco Electric Corpn. (1980) 122 ITR 341 (Guj).
30. The term bona fide connotes good faith. This is a Latin phrase taken over bodily from the Latin bona "good", and fides, "faith". The content of this phrase is closely connected with things and actions, which have relation to mind and motive of individual. It indicates honesty of the purpose.
31. In the case of Novopan India Ltd. vs. CCE 73 ELT 769 (SC) the Hon'ble apex Court at para 18 of the order held as under :
"18. We are, however, of the opinion that, on principle, the decision of this Court in Mangalore Chemicals - and in Union of India vs. Wood Papers referred to therein - represents the correct view of law. The principle that in case of ambiguity, a taxing statute should be construed in favour of the assessee assuming that the said principle is good and sound - does not apply to the construction of an exception or an exempting provision, they have to be construed strictly. A person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision. In case of doubt or ambiguity, benefit of it must go to the State. This is for the reason explained in Mangalore Chemicals and other decisions, viz each such exception/exemption increases the tax burden on other members of the community correspondingly. Once of course, the provision in found applicable to him, full effect must be given to it ......"
32. We have carefully perused the material available on record. We have also noted that till the year under consideration no welfare activity was undertaken by the trust. Just setting some funds and saying that it is for the welfare of the employee is not sufficient. It is important that the trust must carry out the welfare activities. De hors welfare activities, the trust cannot be construed to be a welfare trust. Nothing produced before us to demonstrate that even some welfare schemes were formulated. There was no utilisation of funds for the well-being of the workers. Funds were utilised for making investments in the group companies. Basic requirement as contemplated in the objective clause was not meted with. The employees who were working at the time of formation and retired did not get any benefit. Details submitted before us show that funds were utilised for the welfare activities only in the subsequent years. This might be due to the lurking fear of the levy of maximum marginal rate. Assessee failed to establish the 'bona fide'. As such, the case of the assessee is beyond the ken of cl. (iv) of the proviso to sub-s. (1) of s. 164.
33. We have perused the impugned orders. We are inclined to agree with the reasons adduced to buttress the point in issue. Accordingly, we uphold the same.
34. In the result, the appeals of the assessee stand dismissed.