Income Tax Appellate Tribunal - Delhi
Kohinoor Charitable Trust vs Income-Tax Officer on 18 February, 1991
Equivalent citations: [1991]37ITD406(DELHI)
ORDER
A. Kalyanasundharam, Accountant Member
1. The assessee has claimed the benefit of Section 11 and Section 2(75) of the Income-tax Act and this claim has been refused to it on the ground that, the funds of the appellant trust have been utilized in such a manner to benefit the children of the settlor of this trust.
2. The appellant trust's Balance Sheet as on 31-3-1985 showed a payment under the account 'Advance Rent' of Rs. 2,38,500. This was enquired by the assessing officer. The assessee had submitted that, the trust had taken on long lease a building from M/s. Atul Trust, by means of a lease deed dt. 16-3-1983. The lease deed stated the monthly rental to be Rs. 1,200 and the amount of deposit was Rs. 2,60,000 adjustable monthly of Rs. 1,000 against the rental. The lease of the building was also stated to be for running of a school. The trust finding it difficult to run the school, gave the premises free of any rent to Cambridge School of Society which actually was running a school.
3. The assessing officer's objections are that, (a) M/s Atul Trust was a family trust created for the benefit of the children of Mr. Chaidur Rahman, Mr Abdul Qadir and Mr Nool Alam; (b) the assessee trust was created on 21-1-1983 vide a trust deed by Mr. Abdul Qadir with the aim and objects of advancement, promotion of education and all other allied charitable objects as are defined under the I.T. Act; (c) the Cambridge School was being run by the Trustees of Atul Trust directly through their relations who are nominated to the management of the school; (d) the appellant trust was left with a very meagre amount after the advance of the rent deposit of Rs. 2,60,000 for carrying on of the objects of the Trust; (e) the transaction was colourable because the funds of the appellant trust was made available to the private family trust,, the enjoyment of which was with the beneficiaries; and (f) applying Section 13(3) of the Act, the appellant trust was denied the exemption under Section 11.
4. In appeal before Dy. CIT(A), the appellant had placed his reliance on the recognition and registration was granted by the Commissioner of Income-tax under Section 12A(e) of the Act as also the exemption under Section 80G of the Act. The Dy. CIT(A) had observed as under while rejecting the claim of the assessee:
I have heard the appellant's counsel. On going through the details filed and on perusal of the ITO's order, I find that the action of the ITO is correct. The ITO has discussed at length the reasons for disallowing the expenditure. Action of the ITO is confirmed and the appeal is dismissed.
5. The appellant trust has thus come before me for redressal of its grievance of non-acceptance of its claim that, there was no diversion of funds of the trust to the benefits of the family members of the settlor and therefore, the denial of the exemption under section was improper.
6. Shri Agarwal submitted that, the registration as was granted to the appellant trust is still effective. The registration as was granted to the Cambridge School has been placed at page 15 and that this was so issued on 28-3-1987. He then made reference to the particulars of the Trustees of the appellant trust. Atul Trust and the Cambridge School Society, which has been placed at page 16 of the paper book. He submitted that, though there are some relatives, but the fact remained that, the Cambridge School Society was running the school. It is also not in dispute, that, the appellant trust's activity not including the taking on lease of the premises belonging to Atul Trust is otherwise wholly and completely charitable in nature. He pleaded that, even the present activity of taking on lease, further giving it free of rent to another charitable trust continues to remain charitable in nature because, it is the same as donation made by one charitable trust to another charitable trust, which donation is always considered to be an application of income of the donor trust The appellant trust had taken the lease for running of a school. Since there already existed another school which required the premises for its school activity, it was decided to give the premises free of rent. His contention was either the appellant trust could have used the premises for carrying on of its objectives or provide it to another with similar objectives, in either case, the activity continues to be charitable in nature. He placed reliance on CIT v. Trustees of 'the Jadi Trust [1982] 133 ITR 494 (Bom.) at page 501 and also on CIT v. Sarladevi Sarabhai Trust(No. 2) [1988] 172 ITR 698, at page 708. He further contended that, Atul Trust had a large property which was let to several tenants. He referred to the particulars of the tenants placed at page 14 of the paper book. He submitted with reference to this detail, tenants with much smaller areas had placed a higher deposit and the rental was also high, while the appellant trust with large area had given a very lower deposit and the rental was also quite low as per the present standards of the rent of premises. He therefore strongly contended that, the allegation of the revenue that, the provision of deposit was diversion of the funds of the trust to the beneficiaries of the private trust is clearly wrong, when the fact of deposit being too low, combined with the low rental is considered in its true light. He therefore pleaded that, the transaction being one for the furtherance of the objects of the trust, the trust should be granted exemption under Section 11 of the Act.
7. The rival submissions and the various materials that had been placed on record have been duly taken note of and considered for arriving at the conclusions on the issue in this appeal.
7.1 The sequence of events are recapitulated for the sake of facility. The assessee trust was formed on January 21, 1983 by means of a deed drawn up by Mr Abdul Qadir. The objectives of the trust was to run educational institutions. With the intention of furthering its objectives, viz., running of a school, it had taken on lease a portion of the building belonging to the private family trust of Mr Abdul Qadir, on a monthly rental of Rs. 1,200 and also had kept in security deposit of Rs. 1,60,000 adjustable towards monthly rental at Rs. 1,000 each. This lease was execued on March 16, 1983. The trustees of the assessee trust, then by means of an agreement dt. July 23,1983 with Cambridge School of Society gave the said premises free of rent to them for the running of the school.
7.2 The primary objection of the revenue is on the fact that, the trustees of the private family trust, the appellant trust and the Cambridge School are close relatives and therefore, the transaction is a colourable one. This has triggered off his other conclusion, viz., the private family trust being provided with the funds of the appellant charitable trust, thus benefiting the family trust, is caught by the mischief of Section 13(3) of the Act. For coming to this conclusion, the assessing officer had also taken note of the very short gap between the appellant trust taking the premises on lease, and it sub-leasing to the other trust running the school, which is also managed by the family members of the trustees. The revenue is of the opinion that, since the transaction has been effected with the private family trust, the members of which are also trustees of the assessee trust, the property of the charitable trust having been allowed to be placed at the control of the private family trust, is one of those acts not permitted by Section 13 and thus the charitable trust had made itself disentitled to the exemption under Sections 11 & 12 of the Act.
7.3 The appellant's claim is on the other hand that, there is no restriction for any dealings or transactions between the trustees of the charitable trust and the private trust, though the trustees might be close relatives, so long as, the transactions are in the attainment of the objectives of the charitable trust and that, the private trust in fact did not receive any undue benefit and the dealings are at normal rates or lower than that rate. In support of this contention, the list of tenants, the rental charged, the deposit taken from various tenants were referred to.
7.4 For coming to the conclusion in the present issue, it had become essential to examine the provisions of Section 13 of the Act, for ascertaining, whether, there is any restriction wholly or partly for having any kind of dealing similar to the one in the present case. Does the section prohibit or prescribe a total ban of any transaction by a charitable trust with the family members of that trust or concerns in which the trustees are partners, directors, proprietors etc.?
7.5 Section 13(1) prescribes general conditions under which, the charitable institutions, income shall not be excluded from the total income of the trust as provided under Sections 11 and 12 of the Act. The relevant sub-clause with which we are presently confined to is contained (a) which states "any part of the income from the property held under trust for charitable purposes, which does not enure for the benefit of the public". The other Sub-clause is (d) of Section 13 which states that, "in case any income of the charitable trust if for any period during the previous year, any funds of the trust are invested or deposited after the 28th day of February, 1983, otherwise than in any one or more of the forms or modes specified in Sub-section (5) of Section 11".
Sub-section (2) of Section 13 has prescribed certain particular circumstances relating to the income or the property or any part of the income or property, under which, it shall be deemed to have been used or applied for the benefit of the persons specified in Sub-section (3) of Section 13 of the Act. These circumstances are:-
1. If any part of the income or property of the trust is lent or continues to be lent for any period during the previous year without either adequate security or adequate interest or both;
2. If land, building or other property is or continues to be made available for any period during the previous year without charging adequate rent or other compensation;
3. If any amount is paid by way of salary, allowance or otherwise during the previous year out of the resources of the trust for services rendered by that person to such trust and the amount so paid is in excess of what may be reasonably paid for such services;
4. If the services of the trust are made available without adequate remuneration or other compensation;
5. If any share, security or other property is purchased by or on behalf of the trust or institution from such person during the previous year for consideration which is more than adequate;
6. If any share, security or other property is sold by or on behalf of the trust or institution to such person during the previous year for consideration which is less than adequate;
7. If any income or property of the trust is diverted during the previous year in favour of that person, provided that, the income or the property so diverted does not exceed one thousand rupees;
8. If funds of the trust are or continue to remain invested for any period during the previous year in any concern in which such person has substantial interest.
7.6 Section 13(3) defines the persons which have been referred to in Sections 13(1)(c) and 13(2) and they are:-
1. The author or founder of the institution;
2. The person who has made substantial contribution to the trust, i.e., whose contribution during the previous year" exceeded Rs. Twenty five thousand;
3. Where the author, founder or person is a HUF, then a member of the family;
4. Any trustee of the trust or manager of the institution;
5. Any relative of any such author, founder, person, member, trustee or manager;
6. Any concern in which such persons as in 1 to 5 above have substantial interest.
7.7 Sub-section (4) of Section 13 provided that, the parameters and other provisions specified in Section 13(1)(c) & (d) would not apply to a trust, if the aggregate of the amount of the funds of the trust invested in a concern where the persons have substantial interest in that concern does not exceed five per cent of the capital of that concern and the trust shall not be denied the exemption.
7.8 From the above sections it clearly emerges out that any charitable trust if the following circumstances are attracted to it, then it would lose the right of exemption of its income under Section 11 of the Act The circumstances are: (a) the income from the trust does not result in any benefit to the public; (b) invested or kept in deposit in form and modes other than those specified in Section 11 (5)(c) persons who are either the settlor, or a substantial contributor or his relatives or his family members or concerns in which they have substantial interest, have the following dealings with the charitable trust in respect of the income or property or any part thereof: (i) borrowed the income or property or continues to be borrowed without adequate security or interest or both; (ii) use any land, building, property is allowed to be used without payment of rent or compensation; (iii) receive any salary, allowance or otherwise which is in excess of the adequate remuneration or compensation; (iv) utilize the services without adequate remuneration or compensation; (v) purchase any security, share or other property at a consideration lower than the adequate consideration; (vi) sell any security, share or any property to the trust at a consideration which is more than, adequate consideration; (Vii) take away any income of the trust as their own; and (Viii) allows the funds to be retained by concerns in which they are interested substantially.
In the light of the above parameters, the facts relating to the appellant are examined for the purpose of the finding, whether the trust is caught by the conditions which has the effect of it losing the exemption.
7.9 The first condition for denial of the exemption of Sections 11 & 12 is that, income from the property held under trust does not enure for the benefit of the public. The question is, does the present appellant by keeping the trust funds in deposit with the private family trust, has denied any benefit accruing to the public? The answer on the face of it is an emphatic no, because, the space taken on rent, having been given to another trust running a school, the benefit to the public has been ensured and maintained.
The second condition is that, funds of the institution or trust are in vested or deposited otherwise than in any of the forms or modes specified in Section 11(5) of the Act. The question that arises is whether it could be said that, the trust having paid the deposit of Rs. 2,60,000 for procuring the space at Rs. 1,200 monthly rental is akin or similar to investment or keeping in deposit the funds of the trust? The word ' invest' as is generally understood, means' to lay out for profit, as by buying property, shares etc., to lay out money, make a purcharse'. (Chambers Twentienth Century Dictionary 1972 edition at page 691). The term 'deposit' has been defined to mean 'to lodge as a pledge, something entrusted to anothers care, esp., money put in a bank, a bailment where one entrusts goods to another to be kept without recompense'. (Chambers Twentieth Century Dictionary 1972 Edition, at page 346). The above two terms therefore impliedly mean that, the funds of the trust should be invested or deposited with a view to make profit or income and if it is so invested or deposited, then it shall be done only in the modes specified in Section 11(5) of the Act, The question that arises is that can it be said whether, the amount paid by way of security deposit for obtaining a lease is in the nature of an investment or deposit for making a profit or income. The answer is clearly in the negative, because, the intention is to obtain a lease of premises on rent for running of a school and the condition for the lease was that, the lessee shall keep in money by way of security deposit during the tenure of the lease, which deposit was adjustable towards the monthly rental. This security deposit therefore cannot be said to be an investment or deposit in the nature specified in the Section 13(1)(d) of the Act.
7.10 The particular parameters specified in Sub-section (2) of Section 13 are examined now with reference to the facts of the present case :
(a) The first talks of income or property or any part thereof being lent or allowed to remain lent without adequate security. This shall not apply because, it is not the case of any lending but providing a security for obtaining of lease of premises.
(b) The second talks of land, building or property being made available, which is not the case in the present appeal, and it therefore does not apply.
(c) The third talks of payment of salary, allowance, or otherwise which is found to be in excess, which is not the case and therefore, this shall not apply.
(d) The fourth talks of services being made available without adequate remuneration, which is also not the case, because, taking the premises on rent is not the same as providing of any service.
(e) The fifth spells out purchase of any share, security or other property, the consideration of which is more than adequate. The taking on lease is similar to purchase of a property. This means that, it becomes essential to examine whether, the amount of security provided is adequate or more than adequate. In this connection, it becomes necessary to consider the fact of the other portions of the property which are also let by the private family trust and whether, the rentals as paid by others are at par with the amount agreed to be paid by the assessee and whether they had also placed any deposit and if so, whether, the deposit so taken from others is commensurate with the one paid by the assessee and where no deposits are taken, is the rental charged is less than or more than what was paid by others and the assessee, considering the element of the security deposit.
The names of the lessees, floor and floor areas let, rental charged, security deposit taken as placed by the assessee at page 14 of the paper book, being relevant is brought out below:-
Name Floor & Area in Rent Security deposit
No. sq.ft. Rs. Rs.
Cheena Gas Services G.F. - 6 120 300.00 5,000.00
Matleb Beg G.F. - 6 120 125.00 17,000.00
Pradeep Kumar Malhotra G.F. - 8 300.00 5,000.00
Salimuddin G.F. - 16 59 100.00 15,000.00
Mohd. Tyaib G.F. - 17 59 100.00 15,000.00
Mohd. Sadiq G.F. - 29 75 300.00 8,000.00
Abdul Salam G.F. - 22 96 100.00 20,000.00
Mohd. Iqbal Ansari G.F. - 29 75 300.00 8,000.00
Up Town Trading & Basement 2,000.00 4,00,000,00
Inv. Ltd.
Kohinoor Charitable Trust 1st Floor 3,500 1,200.00 2,60,000.00
National Insurance Co. Ltd. G.F. 1,726 4,142.00 0.00
Out of the above parties, the assessee trust and Up Town Trading & Inv. Ltd. have paid deposits of greater amount than the others and at the same time, the assessee trust is occupying a larger area, and its rent as well as the deposit when compared to the Up Town Trading Inv. Ltd. company's rental and deposit is positively very low. In the case of the insurance company, which is a Government of India Enterprise, the area taken is less than half taken by the assessee trust, but the rental is more than three and half times the rent paid by the assessee trust, but there is no deposit taken. Taking the prevailing interest rate in 1983 of 12% on the deposits and adding the same to the rental from the assessee trust, the company with the Government company, the following emerge out. The assessee trust's rental would be (1200 x 12) Rs. 14,400 + Rs. 31,200 = Rs. 45,600. The company's rental would be (2000 x 12) Rs. 24,000 + Rs. 24,000 = Rs. 48,000. The Govt. company's rental is (4142 x 12) Rs. 49,704. On this basis, the rental plus the deposit does not appear to be excessive at all, as in any event it is lower than that is charged from others. Therefore, the fifth condition of consideration being more than adequate does not apply to the facts of the present case.
(f) The sixth condition is a sale of the property for consideration which is less than adequate. This does not apply, since there was no sale at all.
(g) This condition talks of diversion of the income or property of the trust in favour of the person. The term 'divert' means 'change direction of, turn from business' (page 379 of Chambers Twentieth Century Dictionary, 1972 edition). This means the income of the trust which is lawfully that of the trust, the same has been so changed direction of that, it is claimed to belong to the person/s other than the trust itself. This situation does not apply at all, because, the provision of deposit is for obtaining of valuable right of lease, and therefore, such placement of money cannot be said to be diversion of the income. The effect of the placement of the money in deposit is something has been obtained in return and the same was found to be adequate consideration as in (e) above and this cannot be stated to be equivalent to diversion at all. Since this is not a case of diversion at all, the quantum limit of Rs. 1,000 provided in this condition would not be applicable also.
(h) This last condition talks of the funds of the trust remaining invested in any concern in which the trustee, his relative, etc. have substantial interest. This is not the case of investment and therefore, this condition would have no relevance to the present case.
7.11 In view of foregoing enumeration, on the facts and the circumstances of the case the restrictive provisions are not attracted and therefore, the trust cannot be denied the exemption which is rightfully under the Act. Before I part, I may observe, that, the circumstances between persons related to each other, as is in the present case, is not barred under the Act. The restrictive conditions are provided so as to segregate the non-genuine trusts from genuine trusts, from non-genuine transactions from the genuine transactions etc. if it had been the intention to bar from any transaction taking place between a charitable trust, trustees and their relations and the settlor, then there was no need to list out the particular circumstances which would result in the disentitlement of the exemption under Section 11. The safeguard parameters having been defined under the Act, a strict interpretation is only necessary for coming to the conclusion as to the exact nature of the transactions between related parties, especially when one of them happens to be a charitable trust. The parameters as defined in Section 13(2)(a) to (h) are quite exhaustive covering most possible situations. The Legislature found it perhaps too harsh to provide a bar of any transaction, had laid out conditions such as the consideration being adequate, adequate security, reasonable payment for services rendered, purchase and sale being at adequate consideration, there being no diversion of the income of the trust, no part of the funds allowed to remain invested in concerns etc. If the argument of the revenue had to be accepted as was intended, then, there might be a situation when there may be none who would be considerate to provide his property on rental, which rental is slightly lower than the market rent to any charitable trust, if his only interest was to make a profit from the transaction. The revenue had doubted the very purpose of floating of the assessee trust, since, the trust was left with very little funds with it for the carrying on of its objectives after the payment of deposit. This may no doubt be a factual position, but it shall also not be overlooked that, the trust has acquired the valuable right of lease of the premises and in the furtherance of its objectives, it was in a position to provide the same to another charitable trust, which was able to run the school from that premises. The end-result of this circuitous process was that, the public did get the benefit of a school being run in a locality. The other objection was centered towards the fact of the trustees of the two charitable trusts and the private family trust being relatives of the settlor of the assessee trust. This by itself is no cause of concern, except that, such situations positively need to be looked up under magnifying glasses for any possible situation of gaining benefit, which would otherwise not be possible to be gained, that too at the cost of the public. The settlor or his family members or the concern in which they have substantial interest, if they become the beneficiaries without any adequate cost to them, the transaction is definitely not to be encouraged, because, it is clearly for the benefit of those persons and the charitable trust is only used as a front end. But any normal benefit accruing to settlor or his relative or their concerns in respect of any dealings with the charitable trust, for which benefit, the charitable trust has .been adequately compensated, then, the transaction cannot be held to be a colourable one. In the light of the above finding and observations, the transaction of taking on lease of premises belonging to the M/s. Atul Trust, a private discretionary trust having been done at slightly lower market rate, which cannot be said to be excessive, the deposit being made as part of this transaction, cannot also be termed as invested or deposited within the meaning of Section 11 (5) of the Act, the trust having not infringed any of the provisions contained in Section 13 (1) and (2), the exemption that was denied to it under Sections 11 and 12 of the Act is not proper in the circumstances of the case. The assessing officer is accordingly directed to allow exemption under Section 11 to the assessee.
8. In the result, the appeal is allowed.