Income Tax Appellate Tribunal - Madras
M. Ct. Muthiah Chettiyar Family Trust vs Third Income-Tax Officer on 11 June, 1996
Equivalent citations: [1982]1ITD199(MAD)
ORDER
Data entry of volume itd001 from page No. 199 to 320.
Shri A. Krishnamurthy, Judicial Member
1. These three appeals relating to three assessees, Sir M. Ct. Muthiah Chettiar Family Trust, M. Ct. Trust and S. Rm. M. Thirupani Trust, relating to their income-tax assessment for the year 1972-73 were analogously taken up and argued by the same counsel, Shri C. Ramakrishna for the assessee and the learned standing counsel Shri A. N. Rangasamy for the department involving identical dispute for our consideration and determination. With the consent of the parties, therefore, these three appeals are disposed of by this common consolidated order.
2. For the purpose of considering the dispute and the facts relating thereto, the learned counsel for the assessee took up the case of M. Ct. Trust and it is common ground of the parties that the facts in the other cases are more or less similar and raise the identical dispute. The appeals are directed in each case against the order of the Commissioner under section 263 of the Income-tax Act, 1961 ("the Act"). The undisputed facts in this case are that the assessee is a public charitable trust eligible for tax exemption in accordance with section 11 of the Act. Section 11 provides that income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India is not liable to be included in the total income and it permits accumulation or setting apart for application to such purposes in India to the extent of 25 per cent of the income. In other words, the exemption from inclusion of the income of the trust wholly for religious or charitable purposese will be available only if 75 per cent of the income derived from property held on trust is applied to religious or charitable purposes, but under sub-section (2) where the 75 per cent of such income as determined and stated therein is not applied, or is not deemed to have been applied to charitable or religious purposes as provided but is accumulated or set apart either wholly or partly for application to such purposes, such accumulated part of the income will be also entitled to exclusion from the total income of the rpevious year concerned on fulfilment of certain conditions, one of which is that the person in receipt of such income gives to the ITO a notice in writing in the prescribed manner specifying the purpose for which the income is being accumulated or set apart and for the period for which such income is to be accumulated or set apart, such period of accumulation not exceeding in any case ten years. Another condition provided is for investment of the moneys accumulated or set apart in securities or deposits specified in the section.
It was found in the instant case that the assessee had applied by a notice given in the prescribed form for accumulation of the entire income of the previous years relevant to the assessment year 1962-63 and nine subsequent previous years till the previous year ending 1971-72. No part of the income whatsoever of any such previous years was infact applied to any of the purposes till 28-12-1971 when the entire investments representing the accumulated income for the concerned years were handed over to a new charitable trust known as "M. Ct. Muthiah Chettiar Foundation" for the purpose of carrying out certain charitable purposes. The aggregate amount of the income of M. Ct. Trust for the assessment years 1962-63 to 1971-72 as stated in the order of the Commissioner as to which there is no dispute, is Rs. 12,54,458. In the assessment made for the assessment year 1972-73, the ITO included in the assessment not only the income of the relevant previous year ended 13-4-1972 but also the income of the previous year relevant to the assessment year 1962-63, Rs. 2,49,392 as not having been utilised within the time allowed and, therefore, as having become taxable under section 11(2). It was stated that the addition made by the ITO is the subject-matter of appeal before the appellate authorities and has not been disposed of by the first departmental appellate authority.
3. The Commissioner on finding that the assessee has not spent any part of the accumulated income during the assessment years 1962-63 to 1971-72 under section 11(2) (a) as declared in its notice in the prescribed form, considered that the order of the ITO, including in the assessment of the year under appeal, that only the unspent income of the assessment year 1962-63 as attracting provisions of section 11(3) and not of the other subsequent years, to be erroneous and prejudicial to the interests of the revenue. He, accordingly, initiated procceedings under section 263 and after considering the submissions in response to the show cause notice revised the assessment by enhancing the income assessed so as to include the income accumulated for all the ten years. Thus, he recomputed the income of the assessee at Rs. 13,39,316 as against Rs. 3,34,250 assessed by the ITO. It is against this order that the present appeal has been filed by the assessee.
4. The learned counsel for the assessee first of all invited our attention to the provisions of section 11 and emphasised the fact that nowhere in the section has the word "spent" been used and the Commissioner has totally erred in equating the word "spent" to the word "applied". The first and the foremost contention made by him on behalf of the assessees is that the handing over of the accumulated income for ten years in the shape of investments to the another trust having the identical objects and for fulfilment of the purposes for which the assessee accumulated such income amounted to application as required under the section and as this was done before the expiry of the period of ten years, the provisions of section 11(3) are not attracted. Reliance was strongly placed in this connection on the recent decision of the Madras High Court in Thanthi Trust v. CIT [1981] 123 ITR 155. The learned counsel also referred to and relied on the decision in Inland Revenue Commissioners v. Helen Slater Charitable Trust Ltd. [1980] All ER 785 referred to in the Madras High Court decision in Thanthi Trust's case (supra). We were also furnished with Xerox copy of the judgment in the Helen Slater Charitable Turst's case (supra). In this case, it is pointed out, it has been held that where a charitable corporation makes an outright transfer of money applicable for charitable purposes to any other charity in such manner as to pass to the transferee full title to the money to be taken, it must be taken by the transfer itself to have applied such money for charitable purposes within the meaning of section 360(1) (c) of the Income & Corporate Taxes Act 1970 and section 35(1) of the Finance Act, 1965, considered in the judgment, unless the transferor knew or ought to have known that the moneys would be misapplied by the transferee. The assessee's learned counsel also invited our attention to the decision of the Andhra Pradesh High Court in CIT v. Trustees of H. E. H. Nizam's Charitable Trust [1981] 131 ITR 497 wherein it was held that in order to secure exemption under section 11(1) (a) it is sufficient if the assessee provides for or sets apart a fund for charitable purposes and it is not necessary that the assessee must have "spent" the amounts specified for charitable purpose during the relevant assessment year and further supported this contention by that there is a difference between the words "spent" and "applied". The alternative contention raised on behalf of the assessee is that at any rate the Commissioner was not justified in bringing to charge the 100 per cent of the accumulated income of each year because the permitted accumulation for a period of ten years contemplated under the Act on the conditions specified and consequences of the violation thereof under sub-section (3) of section 11 covered and comprehended only 75 per cent of income required to be applied otherwise under section 11 and with regard to 25 per cent of the income of any year accumulation thereof is permitted without any strings attached including limiting of the period for which that part can be accumulated. In other words, so far as the 25 per cent of the income in any previous year is concerned, the assessee is at liberty to accumulate and to choose to apply it whenever it liked and the undertaking given in the prescribed notice specifying the purchases for which the accumulation is made or period for which it is made does not apply to the 25 per cent.
5. At this stage it may also be stated that the assessee had filed additional grounds stating the facts that the question whether the assessee-trust was entitled to exemption for the year 1962-63 was under dispute and was resolved in favour of the assessee by the judgment of a single judge of the Madras High Court on 3-11-1971 in M. Ct. Muthiah Chettiar Family Trust (supra), that such decision was contested by the ITO but confirmed by the Division Bench of the same High Court and that the petition of the ITO for leave to appeal was also dismissed in April 1977, but still the Income-tax Department has not finally accepted the position as it has filed a petition for special leave to the Supreme Court. It was contended that in view of the uncertainty caused by the series of proceedings mentioned above disputing the assessee's claim for exemption, the Commissioner should have held that in computing the period within which the accumulated income had to be spend under section 11(3) the time taken in pursuing the proceedings in the High Court and the Supreme Court on the question of taxability should be excluded. Bu the learned counsel specifically stated that he does not wish to press the additional ground in this case.
6. The learned standing counsel for the department submitted in reply that the assessees having applied in the prescribed Form No. 10 for accumulation of the income for the specified period and for purposes stated therein had to utilise the accumulated income within the period allowed and if this was not done the consequence of provision of section 11(3), clause (c), stood attracted automatically. The application of the income contemplated for the purpose of section 11(3) in this case is actual utilisation by the assessee-trust of the accumulated amounts of income to the specified purposes mentioned in the application itself and did not envisage the application of income in any other manner, such as handing over the accumulated income to another trust having identical charitable purposes even if such handing over could be regarded as application. He laid considerable emphasis on the fact that in section 11(3) (c) the word used is "utilised" as distinguished from the word "applied" occurring elsewhere in the section. According to him, there is a clear distinction between the word "applied" and the word "utilised" and the Legislature must be held to have used deliberately and designedly the different expressions occurring in section 11(3) (c) with clear intent and purpose that the amount accumulated should be utilised by the concerned trust itself to the particular objects or purposes specified in the prescribed application submitted in this connection and if it is not done the consequence of treating the amount not so applied as the income of the previous year following the expiry of the period for which the accumulation is permitted must follow. In this connection he submitted that in construing the provisions of the section and to give effect to the intention of the Legislature, it is necessary to have regard to the objects of the provisions of the Act introduced in this connection and the clauses explaining the provisions. He invited our attention to the amendment made by the Finance Act, 1970 to section 11 [1970] 76 ITR (St.) 123 and to the budget speech of the Finance Minister in this connection [1970] 75 ITR (St.) 25 where it is stated that in the case of charitable and religious trusts exemption from tax would be allowed only in respect of income actually applied to the purpose of the trust in the same year or within three months of the close of the year and further the exemption will be forfeited altogether if the trust fund constituting its corpus or income are invested in a concern in which the author or the founder of the trust or any of his relatives is substantially interested and the amount of the investment exceeds 5 per cent of the capital of that concern and that these provisions will curb the use of the funds of charitable and religious trusts to acquire control over industry or business. We were also taken through the relevant memoranda explaining the position of the Finance Bill, 1970 with regard to the amendment appearing [1970] 75 ITR (St.) 87 entitled "Measures for plugging loopholes in the law leading to tax avoidance". He further contended that there was no power or any authorisation in the trust deeds of the assessee-trusts which enable them to hand over the accumulated income to another trust for application even if it be for charitable puposese and, therefore, the ratio of the decision in Helen Slater Charitable Trust (supra) cannot be applied to the facts of this case. In that case it was held that where a charitable association acting intra vires makes an outright transfer of money applicable for charitable purposes to any other charity in such manner as to pass to the transferee the full title to the money the transfer itself would have to be treated as application of money for charitable purposes because, it was stated, the articles of that charitable corporation specifically authorised such handing over. He further submitted that if the proposition contended by the assessee were to be accepted, namely that the handing over of the accumulated income to another charitable trust on the eve of the expiry of the period of accumulation permitted would amount to application to charitable purposes, then it will defeat the very object of the enactment and the intention of the Legislature and render the provisions totally nugatory because that will open up a highway to tax avoidance by which one particular charitable trust can accumulate income for a period of ten years and then hand over to another trust which can in turn accumulate it for another ten years and then hand over to yet another trust and so on ad infinitum. It was, therefore, submitted that in construing the relevant provisions and the words in the section the object and purpose of the enactment must be kept in mind. They should not be construed as authorising a device to defeat the purpose and intention of the Legislature and for avoiding payment of legitimate tax to the Government. Reference was made to and reliance placed in this connection on the decision of the Gujarat High Court in Wood Polymer Ltd. In re. [1977] 109 ITR 177. Lastly, we were also referred to a judgment of the Madras High Court in CIT v. S. R. M. Ct. M. Thiruppani Trust [Tax Case No. 993 of 1977 and Reference No. 687 of 1977] wherein it was found that the assessee had recovered an outstanding debt due to it from a debtor and as a process of realisation of the outstanding asset, being a building, was acquired by the assessee and the Court held that such a realisation and even acquisition of a building or property does not amount to application of income for charitable purposes. It was stated that the conversion of one asset into another is not an application of the income for charitable purposes and further the acquisition of property per se does not serve the purpose of application. It was also pointed out that the assessee's attempt to take the matter in appeal to the Supreme Court failed and the High Court rejected the assessee's petition in this connection. We were furnished with a copy of the judgment of the High Court and the copy of the order rejecting the petition for leave to appeal to the Supreme Court.
7. The learned counsel for the assessees reiterated the submission that the handing over the securities representing the accumulated income to another trust with a view to carry out the purposes amounted to application of income as held in the decisions cited by him and clause (c) of section 11(3) will come into play only if there is no application. He also submitted that in fact and in substance there is no difference between the word "applied" and "utilised" as contended by the learned standing counsel.
8. Before we consider the rival contentions of the parties and dispose of the dispute, it is necessary to clear the deck on certain aspects which seem to have arisen in this case and which appears to have necessitated the reference of these appeals to a larger Bench. In a note kept by the then Vice-President, presumably upon the suggestions and notes of the Members before whom the appeals seem to have come up for hearing on an earlier occasion three points involving somewhat complicated questions are said to arise. The first is as to whether the assessees who are themselves trusts could create yet another trust and hand over their accumulated income to that trust for the purpose of carrying out the charitable objects and thereby claim to have utilised the accumulated income within the meaning of section 11. The second is as to whether in computing the period of ten years for utilisation of the accumulated income the time taken by certain litigation in regard to the propriety of investment made out of the accumulated income should be considered. The third is about the impact of the amendment made to section 11(3) in 1971 and 1976 - whether they will apply retrospectively to the income prior to the amendment. But in the course of the hearing before us Point Nos. 2 and 3 stated above were specifically given up on behalf of the assessees as not pressed. We have already earlier referred to the fact of the assessee not pressing the additional ground filed, which involves Point No. 2 stated above. In the course of hearing, the learned counsel for the assessees also specifically stated that he does not wish to press the contention regarding the effect of the amendment stated above. As regards the first point, the question as to the competence of the assessee-trust themselves creating another trust, it was common ground of the parties that no such question arose for consideration at the instance of either parties and that neither of them seek an adjudication or decision on any such point which was not the case of either party.
9. The only question, therefore, that arises for our consideration and decision is as to whether the handing over of the accumulated income by the assessee-trust to another charitable trust having the identical objects and for fulfilment of the purposes for which the assessee accumulated such income amounted to application as required under the provisions of the Act. As we have already stated, the assessee's contention is that application to charitable purpose does not necessarily mean spending the amount on specified individual objects or purposes, whereas the departments's stand is that the amounts of income must be actually spent upon specified individual items falling within the connotation "charitable purposes". In this context, we may first of all consider the decision of the Madras High Court in Thanthi Trust's case (supra). In this case the assessee-trust as originally created was for the purpose of (1) establishing Dina Thanthi (daily newspaper) as an organ of educated public opinion for the Tamil reading public; (2) to disseminate news and to ventilate opinion upon all matters of public interest through the said newspaper; (3) to maintain the said newspaper and its press in an efficient condition, and devoting the surplus income of the newspaper and its press, after defraying all expenses, in improving and enlarging the said newspaper and its services and placing the same on a footing of permanency. Under power reserved in clause 3(j) of the original trust deed, the founder of the trust executed a supplementary deed directing the trustees to spend the surplus income for certain purposes specified therein presumably to bring them under the amended provisions of the Act defining the charitable objects under section 2(15) of the Act. One of the points that arose for consideration by the High Court in connection with the claim for exemption under section 11 was as to whether there had been an application of the income of the trust for charitable purposes. The objection of the revenue in this connection was that 75 per cent of the amount was only spent by making book entries in favour of a college without accounts of the college reflecting the corresponding entries. According to the revenue mere book entry would not amount to application of income to that extent for charitable purposes and, therefore, exemption was not allowable. The assessee's contention was that on account of accepting such entries as application of income in the past the revenue was estopped from taking a contrary view in the relevant assessment year. The relevant question that was referred to the High Court on this point was as under :
"Whether, on the facts and in the circumstances of the case, the mere crediting, of 75 per cent of the assessee's income to the accounts of Adityanar College of Arts and Science in the assessee's book will amount to application within the meaing of section 11 of the Income-tax Act, 1961 ?"
The question was referred at the instance of the assessee. The High Court while rejecting the contention based on the part conduct and practice of the department accepting such treatment in the accounts as application for purposes under section 11 and granting exemption accordingly on the ground that the principles laid down in H. A. Shah & Co. v. CIT [1956] 30 ITR 618 (Bom.) can apply only to a case where there is possibility of two different practices both of which are consistent with law and the tax authorities accepted one practice and later insist on a different practice which is likely to cause hardship and injustice to the assessee and such principle will not apply to a case where the practice adopted earlier is not consistent with law, had expressed the view that the principles laid down in the decision in Heles Slater Charitable Trust (supra) will apply to that case and held that since in the case of the assessee before them credit entries has been followed up by drawal of a portion of the amount by the concerned college in one year, and more than the amount credited in another year it clearly lead to the inference that the amount has been kept as a fund for educational purposes which can be operated at any time by the college. It was further observed that if the assessee had actually handed over the amounts on the dates when the credit entries were made to the college physically and it had deposited the same with a bank or with a third party for drawal of such amount as required by it in future, it cannot be said that there has been no application for educational purposes and that the fact that the educational institution chose to keep the money with the assessee trust itself cannot make any difference so long as it has been shown by the revenue that the assessee-trust retained any substantial interest over the money standing to the credit of the educational institution. It was also noticed that in the decision in Helen Slater Charitable Trust's case (supra), the Court construed the phrase "applied for charitable purposes" as including transfer of funds outright to another charitable institution which has exclusively charitable objects and the disposition of assets by one institution in favour of another institution in such manner as to pass the whole title in such assets to the transferee must ordinarily amount to an application of such assets within the normal use of the legal terminology. In other words, the Madras High Court has evidently quoted with approval the principles stated by the Court in Helen Slater Charitable Trust's case (supra) that transfer of funds outright by one charitable institution to another having exclusively charitable objects would amount to application to charitable purposes. On a plain application of these principles to the facts of the instant case, it cannot be disputed that by the assessee-trust handing over the amount or the fund represented by the accumulated income for several years to another charitable trust established undisputedly with the carrying out identical objects for which the assessee-trust was formed and accumulated the income the assessee must be held to have itself applied the same to charitable purposes. It is, however, necessary to meet two objections of the revenue in this regard. The first is that the assessee is not authorised and has no power to donate or make over its accumulated income to another trust and the second is based on the difference in the expressions used in clause (a) and clause (c) of section 11(3). Whereas clause (a) speaks of any income referred to in sub-section (2) being applied to purposes other than charitable, etc., clause (c) speaks of any such income being not utilised for the purposes for which it is set apart, etc. So far as the first objection is concerned even without reference to the specific provisions of the objects of the assessee-trust and as a general proposition in law it can be said that if handing over by a charitable trust of its income to be applied for charitable purposes to another charitable trust having similar or other objects of charity amounts to application to charitable purposes as seems to have been held in Helen Slater Charitable Trust's case (supra) and Thanthi Trust's case (supra) and the assessee-trust by its objects is entitled or authorised to apply to charitable purposes, which position the revenue evidently does not dispute, then clearly the act of the assessee-trust handing over the accumulated income to another charitable trust is intra vires by way of application of income unless any particular mode or manner in which the application has to be made is prescribed or directed by the provisions of the trust deed. But looking to the terms of the trust deed also we are satisfied that the assessee's impugned action is within its powers and charter and is authorised therein. The purposes for which the income of the assessee-trust has to be applied are stated in the trust deed as under :
(1) To establish or maintain and manage hospitals, clinics, laboratories and medical research centres and to provide the poor with medical and surgical advice and aid.
(2) To acquire or take over any hospitals, clinics, laboratories or research centres and to maintain and manage them.
(3) To establish, maintain and manage educational institutions or libraries for imparting general, technical or scientific knowledge or knowledge in any subject or of any languages.
(4) To take over any educational institutions or libraries and maintain and manage such institutions.
(5) To award scholarships or stipends to students to enable them to prosecute their studies in India or in foreign countries and to award prizes to students for proficiency in any subject or language.
(6) To render financial assistance to any existing hospitals or educational institutions.
(7) To give subscriptions or donations to any relief funds by way of charity.
(8) To do all such other lawful things as are incidental or conducive to the attainment of the above objects.
10. Now, according to the preamble of the trust to which the accumulated income has been made over, namely, M. Ct. M. Chidambaram Chettiyar Foundation dated 28-12-1971 executed by the three trusts, namely, Yhirupani Trust, M. Ct. Muthiah Chettiar Family Trust and the assessee M. Ct. Trust, the three trusts are desirous of "(a) establishing and maintaining a hospital and a school to be constructed in the property known as "Rama Vilas", situated in Luz Church Road, Mylapore, Madras, which has recently been purchased by the Thirupani Trust for this purpose, and (b) repairing, renovating reconstructing and/or expanding Sir M. Ct. Muthiah Chettiar Hich School, Lady Muthiah Chettiar Girls High School and M. Ct. M. Chidambaram Chettyar Memorial Boys Hostel, all situated in Madras and M. Ct. M. Chidambaram Chettyar amd Memorial Higher Elementary School, Kandukathan" and that "in view of the magnitude of the scheme and especially in order to expeditiously construct the hospital and school" it was considered expedient that a separate trust should be created for the aforesaid purposes, appointing a competent and independent body of persons as the Board of Trustees. This foundation was created by a transfer of a sum of Rs. 5,000 by each of the settlor trust and the funds or assets of these institutions transferred by settlors or other persons including income and accumulation thereof are required to be applied for the purposes as under :
(a) to construct a hospital in the premises belonging to Thirupani Trust and known as "Rama Vilas" situated in Luz Church Road, Mylapore, Madras, and maintaining and managing the said hospital and for such purpose to prepare a scheme and carry it out as expeditiously as possible;
(b) to repair, renovate, reconstruct and/or expand Sir M. Ct. Muthiah Chettiar High School, Lady Muthiah Chettiar Girls High School and M. Ct. M. Chidambaram Chettiar Memorial Boys Hostel all situated in Madras, and expand M. Ct. M. Chidambaram Chettyar Memorial Higher Elementary School, Kandukathan;
(c) to meet all expenses necessary and incidental for carrying out the aforesaid purposes and for management of the Trust hereby constituted;
(d) subject to availability of funds after providing for the aforesaid objects, to construct a school for education in "Rama Vilas" property and maintain and manage the school.
Clauses 4 and 5 of the Foundation Trust deed read as under :
"4. The Rama Vilas property will continue to be the property of the Thirupani Trust. The Board of Trustees are, however, authorised to enter the premises, construct the hospital and school as aforesaid and manage the hospital and school. The property tax and other outgoings in respect of the Rama Vilas property shall be paid by the Board of Trustees out of the funds available with them.
5. The Board of Trustees hereby undertake to act diligently, promptly and expeditiously in carrying out the aforesaid objects and utilise the said funds only for the said objects and not utilise them for any other purposes whatsoever."
11. Now, undoubtedly clauses 1 to 4 of the assessee-trust authorised it to establish, maintain and manage educational institutions, hospitals, etc., and to take over any existing ones and maintain and manage the same and even aprat from clause 8 it stands to reason that the power to establish, maintain, manage or take over an educational institution, etc., imply all powers to carry out the said purposes in any manner expedient, suitable or convenient and to take all steps and actions necessary and incidental thereto. If, therefore, it is considered that it would be more expedient and affective way to achieve the objects in clauses 1 to 4 mentioned above to create a separate and independent foundation and to entrust the same with the task of executing and achieving the object of establishing or taking over any educational institution and maintaining and managing the same, the trust must be held to have the implied authority to do all such things inherent or embedded in the main objects. However, clause 8 specifically and expressly authorises he assessee-trust to do all such other lawful things as are incidental or conducive to the attainment of the above objects. We are, therefore, not impressed by this objection of the revenue that the trust is not specifically authorised to make over its accumulated income to another charitable trust to carry out the objects for which the assessee-trust has been formed.
12. Coming to the other objection based on section 11(3) and clauses (a) and (c), here also we do not find any merit in the department's objection. In the first place, the two clauses are designed to meet different situations. Clause (a) covers cases where income accumulated for charitable purposes in accordance with sub-section (2) is applied to non-charitable non-religious purposese or there is a change in the purpose for which it is accumulated or set apart, whereas clause (c) is aimed at non-utilisation or user of the accumulated income within the period contemplated under clause (a) of sub-section (2) of section 11 or in the year immediately following the expiry of the period for which accumulation is permitted. In other words, under clause (c) even where the income accumulated over the period mentioned in sub-section (2), clause (a) continues to be accumulated for application to charitable pupose after the period or after the year following the exipry of the period specified, the exemption shall cease to apply. Under clause (a) the exemption can be withdrawn and the accumulated income brought to charge even during the period for which accumulation is permitted where the income is applied to puposes other than charitable purposes or ceases to be accumulated therefor, whereas in clause (c) the exemption is withdrawn and the income brought to tax only after the expiry of the period. We have been furnished with the dictionary meaning of the words "utilised" and "used". The word "utilised" according to the Wagnal's New Standard Dictionary means "to turn to practical account; make (something) profitable or serviceable by applying (it) to some use improve" and the word "use" means "to employ for the accomplishment of a purpose; turn to account; make use of". etc. According to the Chambers' Twentieth Century Dictionary, 'utilise" means "to make use of, turn to use" and the meaning of "use" is "act of using" or "state or fact of being used", etc. We do not think the difference in the expression "utilised" in clause (c) and "used" in clause (a) make difference of any consequence and it appears to us that they are more or less used as synonymous terms. However, even assuming that the word "utilised" should be held to mean that the accumulated income should be held to be spent or used for a specified purpose, we consider that even then the assessee satisfies the requirement. As we have already stated, the assessee by taking the steps of forming the M. Ct. Muthiah Foundation for the specific purpose of acquiring or establishing certain educational institutions or hospitals, etc., and maintaining them and by handing over of the accumulated income to it for more effective way of implementing the object has, according to us, utilised the accumulated income for the purpose, stated in the notice given by it to the income-tax authorities under section 11(2). As an instance, we may refer to the notice of the assessee addressed to the ITO under section 11(2) dated 14-3-1963 relating to the assessment year 1962-63. According to this notice, it has been decided by resolution passed by the trustees on 1-3-1963 that out of the income of the trust for the previous year, relevant to the assessment year 1962-63 and subsequent nine previous years 100 per cent of the income of the trust should be accumulated or set apart till the previous year ending 1971-72 in order to enable the trustees to accumulate sufficient funds for carrying out the purposes specified therein. Undoubtedly, the formation of the Foundation Trust and the transfer of the accumulated income to it for the establishment and maintenance of hospitals and schools is towards fulfilment of some of the objects of charitable purposes and it amounts to the actual application of income to such purpose. It is to be noted that according to the recital in the Foundation Trust, the property known as "Rama Vilas" has actually been purchased by Thirupani Trust for the purpose of establishing and maintaining hospitals and schools. According to us, therefore, the assessee has utilised the accumulated income for the specified purpose for which it has given the notice to the ITO under section 11(2) and not application or utilisation of the income in any other manner not warranted by the purpose indicated in the notice was done. We also do not find anything in the objects stated in the various clauses explaining the provisions of the Act, introduced in this connection which would defeat the assessee's claim and support the stand of the department. What is stated in the object as disentitling the claim for exemption is that under the guise of application or accumulation of income the funds of the trust should not be invested in or used by any concern in which the author or founder of the trust or his relative has substantial interest and further that where a trust considers it necessary that sufficient funds should be accumulated to finance the establishment of any institution or other objects of charity it must be allowed to do so and to apply such income within a reasonable time. As regards the argument of the revenue based on the apprehension that if handing over of the accumulated income by one charitable trust to another charitable trust on the eve of the period of expiry of the accumulation permitted would amount to application to charitable purposes then it will defeat the very object of the enactment and the intention of the Legislature and render the provisions totally nugatory, we have not been referred to any particular circumstance in this case which would support such an apprehension. Even otherwise, there is no force in this argument because the authorities already referred to, namely, the principles in Helen Slater's Charitable Trust's case (supra) and the decision of Madras High Court in Thanthi Trust (supra) show that such handing over of the accumulated income by the one charitable trust to another charitable trust having identical or similar objects of charity itself amounts to application of income for charitable purposes and so long as this concept of application of charity stands the fact that it may give rise to certain loopholes which may be taken advantage of by persons in an attempt to avoid payment of legitimate tax can be no consideration in applying the law laid down and it is for the Legislature to plug the loophole, if necessary by appropriate legislation. We also do not find anything in the judgment of the Madras High Court in Thirupani Trust (supra) to support the revenue, as the facts therein are different and distinguishable because all that happened in the case is that the assessee had recovered an outstanding debt due to it from a debtor and as a process of realisation of such outstanding an asset, being a building, was acquired by the assessee. In such circumstances, the Court held that such a realisation of an outstanding and even acquisition of building or property does not amount to application of income for charitable purposes and it was only a case of conversion of one asset into another.
13. There was also some discussion at the hearing as already adverted to as to whether the word "applied" must mean "spent". In Nizam's Charitable Trust (supra), it was held that it is sufficient if the assessee provides or sets apart funds for charitable purpose and it is not necessary that the assessee must spend the amount specified for a charitable purpose during the concerned year. It was found in that case that the trustees were only providing for the expenditure for charitable purposes by passing necessary resolutions and debiting the same to the income and expenditure account without acutally spending the amount for the purpose for which they were earmarked. It was held that the word "applied" does not necessarily mean "spent" and even if the money is earmarked and allocated for the purpose of the institution for which it was intended, it might be deemed to have been applied for that purpose. In the Thanthi Trust's case (supra), the High Court referred to the Allahabad High Court decision in Bhau Ram Jawaharmal v. CIT [1971] 82 ITR 772 wherein the Allahabad High Court has taken the view that it is not necessary in every case for the validity of the gift that there should be physical delivery of the amount by the donor to the donee and that a transfer can be effected in the books of donor's firm by making a debit entry in the accounts of the donor and making a corresponding credit entry in the accounts of the donee and that so long as the entries made in the respective accounts put the gifted amount beyond and control of the donor resulting in his ownership being replaced by the ownership of the donee, there is no reason why a valid gift cannot be effected through such book entries. The Court also considered certain other decisions of the Delhi and Karnataka High Courts and it appears to us from the discussion and the principles stated therein that where an assessee-trust has completely divested itself of the ownership of the money or put the money beyond its control and within the disposing power of the donee or the institution or the fund in whose favour it is applied, then it would amount to application to the purpose for which it is set apart or placed, beyond its own control. In other words, the view taken appears to be that if by the book entries of crediting the amounts in favour of the institution or fund, the institution or fund is fully aware of the conduct of the assessee and is able to draw funds for its own use, then it would amount to utilisation of the money for the purpose of making it available to the educational institution even though the fund may be lying with the donor-charitable trust. In the present case, however, it cannot be disputed that so far as the assessee-trust is concerned, it has completely divested itself of the ownership of the accumulated income by handing it over to the Foundation and the said accumulated income is no longer at the behest and control of the assessee. Therefore, the assessee has completely divested itself of the ownership of the accumulated income and it is beyond its control.
14. It would follow from the foregoing conclusions that the Commissioner was not justified in holding that the accumulated income of the trust for the years concerned was not applied to charitable purposes within the period specified in the notice or in the year immediately following the expiry thereof and, therefore, his order recomputing the income is not justified. The assessee, therefore, succeeds in its appeal on this point.
15. In view of our finding above, the decision on the alternative contention of the assessee that at any rate the Commissioner was not justified in bringing to charge 100 per cent of the income of each year because the permitted accumulation contemplated under the Act only refers to 75 per cent of the income of each year becomes redundant. However, to completely dispose of the appeal before us on all the grounds raised, we proceed to dispose of this point also. We find considerable merits in the assessee's contention in this behalf. Section 11(1) exempts income derived from property held under trust wholly for charitable or religious purposes where it is wholly applied to such purposes and permits accumulation of such income for application up to 25 per cent thereof. Sub-section (2) of section 11 is concerned with the 75 per cent of the income required to be applied under section 11(1) to qualify for exemption and permits accumulation of the same on certain conditions. Sub-section (3) states the consequences of any violation of the conditions or where the amount accumulated is applied for non-charitable purposes or ceases to be accumulated for charitable purposes. Therefore, sub-section (3) does not impinge on the permitted accumulation of 25 per cent under section 11(1) for which there is no time limit and the assessee is at liberty to choose its own time for application of the amount for charitable purposes. The only condition found, therefore, in section 11(1) is that the accumulation should be for charitable or religious purposes and not for any other purposes. We would, therefore, hold that the Commissioner was not justified in taking 100 per cent of the income of each year even assuming that in the facts of this case it cannot be held that the assessee has applied the accumulated income to charitable purposes within the period provided under section 11(3).
16. For all the reasons stated above, we set aside the order of the Commissioner and allow the assessee's appeals.