Gujarat High Court
N.N. Desai Charitable Trust vs Commissioner Of Income Tax on 5 May, 1999
Equivalent citations: [2000]246ITR452(GUJ)
Author: A.R. Dave
Bench: A.R. Dave
JUDGMENT Rajesh Balia, J.
1. Rule. Service of rule is waived by learned counsel for the respondent.
2. Heard learned counsel for the parties.
3. This petition is directed to quash the order of the CIT, Surat, dated 18th Feburary, 1999, by which application of the petitioner under s. 80G(5) of the IT Act, 1961, has been rejected. Petitioners are trustees of N. N. Desai Charitable Trust. The said trust is a public charitable trust registered under the Bombay Public Trusts Act, 1950. The objects of the petitioner-trust are wholly charitable. The trust was also registered under s. 12A of the IT Act vide entry in register of applications at No. 110-931-N/97, dated 28th November, 1991.
4. This being a wholly charitable trust was entitled to exemption from tax in respect of its income under ss. 11 and 12 of the Act. Under s. 11(1)(a)(b) and (c) of the Act income from any property held for charitable purposes, and under clause (d) of s. 11(1) of the Act, income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution are not liable to be included in the total income of the previous year of the person in receipt of the income. Under s. 12 any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) are for the purposes of s. 11 deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of s. 11 as well as s. 13 would apply. Section 12A of the Act envisages that the provisions under s. 11 and s. 12 making certain income of trust or institution, wholly for charitable or religious purposes, exempt from inclusion in the computation of total taxable income would not apply unless an application for registration of trust or institution in the prescribed form is made to the Chief CIT or the CIT, as the case may be. Section 13 enumerates conditions under which the provisions of ss. 11 and 12, which would otherwise make income of the trust not liable to be included in the computation of total taxable income would not apply. These provisions deal with conditions subject to which income of such trust is exempt from tax and not liable to be included in computation of total income.
5. Section 80G, on the other hand, envisages where a donor can claim deduction in computing his total income in respect of donations made by him to various funds or institutions mentioned in sub-s. (2) of s. 11(1). The deduction which the donor can claim over such donations may be equal to the whole of such sum or 50 per cent of the donations depending on the funds to which donations have been made and which have been classified for the purpose of allowing deduction in two classes. In one set of funds or institutions an amount equal to the whole of the sum is allowable as deduction in the assessment of donor while in others a sum equal to 50 per cent of the donation is allowed as deduction subject to a maximum limit prescribed in the Act. In the list of funds or institutions, donation to which could qualify for deduction from the income of a donor included a residuary clause in the form of clause (iv) of sub-s. (2) of s. 11(1) which reads, "sums paid by assessee in previous year as donation to any other fund or institution to which this section applies."
6. Sub-s. (5) of s. 11(1) provides donation to which fund or trust qualifies for deduction under sub-s. (2)(a)(iv).
7. We are here concerned with an application made under sub-s. (5) of s. 11(1) in which clause (vi) was inserted w.e.f. 1st October, 1991, by the Finance (No. 2) Act, of 1991 which required that in relation to donation made after 31st day of March 1992, the institution or fund for the time being is approved by the CIT in accordance with the rules made in this behalf. Simultaneously, r. 11AA was inserted in the Rules. The approval could be for more than one year at a time, upto 5 years, and can be renewed from time to time. It may further be noticed that prior to insertion of these provisions, as a general practice recognition certificate of an institution, donations to which qualify for deduction under s. 11(1), was being issued by the respondents.
8. In pursuance of these statutory provisions effective from 1st October, 1991, petitioner applied for the approval of the trust for the purposes of s. 11(1) and it was granted to the petitioner, in the first instance, on 10th January, 1992, which was valid up to 31st March, 1993. Thereafter, approval was renewed for a further period of 5 years extending upto 31st March, 1998. The petitioner, on expiry of the period of approval, applied for renewal. That application has been rejected by the respondent CIT by the impugned order dated 18th February, 1999. Before making the order, a notice was given to the petitioner on 7th December, 1998, inviting clarifications of the petitioner on certain aspects of the matter. Ultimately, the only reason that prevailed with the CIT to deny the application for approval for a further period reads thus in the impugned order, "I have considered the submissions made by the trustee. For grant of recognition under s. 80G(5) certain conditions have to be satisfied. The first condition as provided in s. 80G(5) reads as below :
(i) where the institution or fund derives any income, such income would not be liable to inclusion in its total income under the provisions of ss. 11 and 12 (or clause (22) or clause (22A) or clause (23) or clause (23AA) or clause (23C) of s. 10."
From the above, it is clear that the income of the trust should not be liable to inclusion in its total income under s. 11 or 12 of the IT Act. In the instant case, the income of the trust is liable to be taxed because it has not been applied towards objects of the trust to the extent of 75 per cent. The fact has also been admitted by the trustee. Hence, the trust does not fulfil the condition laid down in s. 80G(5)(i) of the IT Act. Therefore, it is not possible for me to allow renewal of recognition under s. 80G(5) of the IT Act. The application of the trust for renewal of recognition under s. 80G(5) is, therefore, rejected."
9. From the aforesaid it appears that the sole ground that has prevailed with the CIT in refusing the application is that because in the past for some period the petitioner has not applied 75 per cent of the income of the trust for the purposes of the trust, therefore, the income of the assessee was liable to be included in the taxable income and the assessee did not fulfil the condition of s. 80G(5)(i) of the Act.
10. It would be apposite here to reproduce the relevant provisions of s. 80G(5)(i) of the Act.
"Where the institution or fund derives any income such income would not be liable to inclusion in its total income under the provisions of ss. 11 and 12 [or clause (22) or clause (22A) or clause (23) or clause (23AA) or clause (23C) of s. 10".
11. Before embarking on analysing the provisions of sub-s. (5) of s. 11(1), one must notice that s. 11(1) does not relate to assessment of the trust or the institution whose income are not liable to be included in the computation of taxable income under various provisions of the Act referred therein. Primarily, s. 11(1) is related to giving deduction in respect of donations made by a person who, but for this provision, would not be eligible for such deduction because the donations are not ordinarily considered to be expenses incurred for the purpose of earning income and liable to be deducted therefrom. Since all donations generally are not treated eligible for deduction, but only such donations as are made to funds or institution named in sub-s. (2) of s. 11(1) are eligible for such deduction and as noticed by us above, it also includes a general clause "any fund or institution to which this section applies" a provision was needed to identify the trusts or funds or institution not specifically named in statute, but fell in that category. That object was achieved by enacting sub-s. (5) of s. 11(1) which helps identify the funds or institutions donation to which qualifies for deduction under s. 11(1). It provides that fund or institution referred to in clause (2)(iv) are such whose income would not be liable to be included in its total income under the provisions of ss. 11 and 12 or clause (22) or clause (22A) or clause (23) or clause (23AA) or clause (23C) of s. 10. Prior to insertion of clause (vi), it being not a statutory requirement, even in the absence of a certificate under s. 11(1), it was possible for a donor to satisfy an ITO independently about the eligibility of donation made by him for deduction. It was in order to keep a check on an inquiry into such details which may not be possible for every donor to harness and make good a claim which otherwise he is legitimately entitled to make, and also to relieve ITO to hold such enquiry in respect of donations made to such institution at different levels and to avoid possibility of different conclusions reached by different officers in relation to donations made to the same fund or institution, to simplify the procedure, the provision was made for recognising, what was, a prevailing practice by making a statutory provision in that regard. It is also to be noticed that whether the income of an institution or fund would ultimately be liable to inclusion in its total income at the close of assessment year or not cannot be determined at the time of making of donation. The eligibility of the donation for deduction has to be considered with reference to the point of time at which donation is made and not with respect of the time in future depending on assessment of the donee. That is where the use of the verb in future tense 'would' has been used and not in present or past perfect tense so as to take into consideration the actual inclusion or exclusion or the extent of inclusion or exclusion. The direct nexus of clause (i) of sub-s. (5) of s. 11(1), appears to us, is to the eligibility of the institution or the fund to claim that its income is not liable to be included in computation of total income. The two are different concepts. First, whether an institution or fund is such whose income is not liable to be included in the computation of total income it depends on its status or character. The second is actual assessment of income, which necessarily takes place in future after donation is received by the donee on fulfilment of other conditions about application of income by the eligible trusts, which in the very nature of things can operate only after receipt of income. The actual extent of exclusion from or inclusion in the computation of total income, the receipts of such institution or fund, depends on fulfilment of further conditions which may or may not exist at the close of the year and has no direct relation to the purpose with which the provision is made. The latter falls in the realm of the assessment of the trust, institution or fund which derives income which is not ordinarily includible in its total income. The liability to assessment is not affected by issuance of recognition certificate or approval certificate issued under clause (vi) of sub-s. (5) of s. 11(1) nor it depends upon the fact whether donor is ultimately gets deduction in respect of such donation. It may be relevant to take cognisance that all donations are not in their entirety eligible for deduction. There exists a maximum limit also for such eligibility and donations beyond such limit by a person may not get deduction, even if it is to an approved institution under s. 11(1). Likewise, actual inclusion of any income in the assessment of the donee as taxable income, does not affect the entitlement of the donor to claim deduction under s. 11(1), if on the date when he made the donation the conditions were fulfilled. That was the law before the insertion of clause (vi) and apart from the fact that by introducing clause (vi) with r. 11AA a method of proving the eligibility to claim deduction has been provided by the statute, there has been no alternation in the substantive provision, that is to say, entitlement of the donor to claim deduction depends on the eligibility of the donee to claim exemption of its income on the date when donation is made. Examining from this angle, we find that for applicability of ss. 11 and 12, what is required is that such trust must have moved an application for registration under s. 12A and registered for that purpose. Once a trust is registered under s. 12A, its income from property, which includes donations whether covered under s. 11(1)(d) or under s. 12 such donations are deemed to be income from property, is not to be included in its total income under s. 11 or s. 12. The equiry under s. 80G(5) cannot go beyond that.
12. A perusal of s. 11 and s. 12 would disclose that income from property held for charitable or religious purposes under a trust is not included in the total income of the previous year of the persons in receipt of the income where any such income has accumulated or set apart for application to such purposes in India to the extent to which the income so accumulated or set apart is not in excess of 25 per cent of the income from such property. In clause (d) of sub-s. (1) of s. 11 income in the form of voluntary contributions made with a specific direction that they shall for part of the corpus of the trust or institution, that is to say, donations made with directions that the donation shall form part of corpus of the trust or institution are also not includible in the income of the trust. It may be further observed that merely because the accumulation of the income from property exceeds 25 per cent it does not result in inclusion of the entire income in the taxable income of the assessee. The two conditions speak out, firstly, that income derived from property to the extent to which such income is applied to such purposes in India is not to be included in the computation of total income and it is only where there is accumulation of income, such accumulation exceeds 25 per cent shall not be liable to be exempt from income but in case accumulation is restricted to 25 per cent even accumulation is not to be included in the computation of total taxable income. That too is not in absolute terms. In that regard sub-s. (2) of s. 11 points out certain conditions and contingencies in which that limit is also relaxed. We need not dilate here in detail on this aspect. This we have noticed only for the purpose of showing, firstly, that as on the date when donation is made which is the relevant date for the purposes of claim of donor to deduction under s. 11(1) it is not possible to point out what shall be the exact state of affairs that will exist at the close of the year nor is it possible for the person considering the application for approval, which requires to consider whether the income derived by such trust would not be liable to be included in its total income, can determine, nor as on the date of application whether the income which will henceforth be derived by the trust asking for approval, if it is otherwise eligible to claim exemption from the inclusion of such income in the taxable income, would in fact be entitled to sustain that claim to the fullest extent or not at the time of assessment. That is the jurisdiction and Authority of the AO to enquire into and make appropriate order at the time when assessment of the trust is being made. The Authority examining the question whether a fund or institution is eligible to be certified for the purposes of s. 11(1) is not to act as an AO and pronounce upon the pending assessments. The CIT, in examining this aspect, in respect of pending assessments, in our opinion, exceeded his jurisdiction while considering the application for approval. He, as a matter of fact, stepped into the jurisdiction of the AO, decided upon the claim of the assessee in respect of its assessment of income then pending and acted as if he was the AO deciding upon the assessment of the trust. While dwelling on the merits of pending assessment he failed to consider that upto 31st March, 1998, the trust has already enjoyed approval and the donors who had already made donations to it would be entitled to such benefit notwithstanding the fate of assessment of the trust. The actual assessment of the trust and its actual liability to tax in accordance with provisions of s. 11 and 12 and 12A has no bearing on the claim of the donors for what benefit approval is accorded. Explanation 2 to s. 80G(5) which tells in no uncertain terms that a deduction to which the assessee is entitled in respect of donation made to an institution or fund to which sub-s. (5) applies shall not be denied merely on either or both the following grounds, namely, that any part of income of the institution or fund has become chargeable to tax due to non-compliance with any of the provisions under s. 11, s. 12 and/or s. 12AA and under clause (c) of sub-s. (1) of s. 13 the exemption under s. 11 or 12 can be denied to an institution or fund in respect of income accruing or arising to it from any investment referred to in clause (h) of sub-s. (2) of s. 13.
13. Likewise, the institution or fund whose income is not to be included in the taxable income of the recipient under provisions of s. 10, namely, clause (22) or clause (22A) or clause (23) or clause (23AA) or clause (23C) would go to show that these clauses identified different institutions for the purpose of granting exemptions, some of which require approval by publication in Official Gazette, some of which require to bear a particular character or the like. Once that character or the condition is fulfilled, s. 10 operates. For illustration, under clause 22, as it was in force upto 31st March, 1999, any income of a university or other educational institution existing solely for educational purposes and not for purposes of profit was not to be included in total income. Now, if an approval is sought by such institution what the approving Authority can seek to enquire is whether the applicant university or educational institution which is solely existing for educational purposes, and whether its purpose is not to earn profit. Under clause (23) exemption is in respect of income of an association or institution established in India which may be notified by the Central Government in the Official Gazette having regard to the fact that the association or institution has as its object the control, supervision, regulation or encouragement in India of the games of cricket, hockey, football, tennis or such other games or sports as the Central Government may, by notification in the Official Gazette, specify in this behalf. The application for approval in respect of any such institution, if it falls within clause (iv) of sub-s. (2) of s. 80G, an enquiry by the CIT could only extend to find out whether the association or institution is so notified under s. 10(23). It cannot by itself examine the validity or correctness of notification nor can it grant approval even if he concludes that such institution exists for the purposes mentioned in sub-s. (23), if notification by Central Government is not issued in that regard. That is demonstrative of the scope of enquiry by the CIT while enquiring the existence of condition under s. 80G(5)(i). That extends to eligibility to exemption under various provisions of the IT Act referred to in that sub-section, but not to actual assessment which depends on fulfilment of further conditions by the eligible institutions, trusts or funds. In none of these cases inquiry of the CIT under s. 80G(5)(vi) extend to the actual computation of income under the assessment that is likely to be framed. We see no reason that such exercise can be taken in respect of a trust which is claiming exemption not under s. 10 but under s. 11 and 12 of the Act, once the CIT finds that the person who is claiming approval is the assessee who claimed his income not liable to be included in taxable income under s. 11 or 12. The enquiry relates to whether it is registered under s. 12A, whether it is a trust wholly for charitable purposes or religious purposes, and whether income received by it is liable to be considered under s. 11, but it does not go beyond that to examine as an AO whether the income received by it at the close of any particular year or years was or was not actually be included in taxable income in the past. This consideration must be whether the income receivable by it will or will not be liable to be considered for exclusion under s. 11. Such enquiry obviously cannot include in enquiry whether at the close of previous year the donee will actually be able to sustain such claim because of non-fulfilment of some conditions by him as to applicability or accumulation of income, as it is not possible to predicate that in praesenti when donation is made. As we have noticed above, that question would depend upon the facts existing at the close of the assessment year and at the time of considering the application it cannot be examined in the light of what is going to happen in pending assessments in respect of which approval certificate was already existing and assessment of which would not affect the donations made to the trust during that year.
14. Viewed from any angle, we are of view that the order of the CIT refusing approval is founded on wholly irrelevant consideration by trenching upon the field of AO by pronouncing on the taxability or non-taxability of any income in respect of the assessments for past year which are yet to be completed, and does not relate to period for which approval, if accorded, is to operate.
15. As a result, we allow this Special Civil Application, quash the impugned order and direct the CIT to make a fresh order in accordance with law.
16. Rule is made absolute. There shall be no order as to costs.