Calcutta High Court
Commissioner Of Income-Tax vs Birla Janahit Trust on 9 August, 1990
Equivalent citations: [1994]208ITR372(CAL)
JUDGMENT Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1977-78, two questions of law have been referred to this court. The first question is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Raja Baldeodas Birla Santotikosh made a legally valid transfer of shares of Messrs. Jiyaji Rao Cotton Mills Ltd., and the assessee was the rightful owner thereof, being assessable on the dividend income arising from such shares and also entitled to tax credit under Section 199 of the Income-tax Act ?"
This question came up for consideration before us in Income-tax Reference No. 51 of 1980 (CIT v. Birla Janhit Trust) for the assessment year 1975-76, where the judgment was delivered on August 7, 1990. Following the said decision, we answer the question by saying that the transfer in favour of the assessee-trust was voidable but until it is avoided, and irrespective of the fact whether the assessee was the rightful owner of such shares, the income from dividend on those shares shall be assessed in the hands of the assessee-trust and, accordingly, the assessee is entitled to the benefit of tax credit under Section 199 of the Income-tax Act, 1961.
2. Let us now turn to question No. 2 which is as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the net dividend should be considered for the purpose of Section 11 of the Income-tax Act and that the adjustment of establishment expenses should not be done to arrive at the figure of 75 per cent. of the income to be applied for charitable purposes ?"
The second question relates to the administrative expenses to the tune of Rs. 13,459 deducted by the Income-tax Officer from the gross income of the assessee. The Income-tax Officer took the balance as the income of the trust and applied the rate of 75 per cent. to this balance in order to determine the amount that should be spent to enable the assessee to claim exemption under Section 11 of the Income-tax Act. The assessee filed an appeal to the Appellate Assistant Commissioner contending that the administrative expenses should not have been deducted from the gross income. The Appellate Assistant Commissioner accepted the claim of the assessee and directed the Income-tax Officer to consider the administrative expenses as an amount spent for charitable purposes.
3. Being aggrieved, the Revenue filed an appeal to the Tribunal. The Income-tax Appellate Tribunal has observed that there is nothing in Section 11 which says that the income of the assessee-trust should be taken at a figure after deducting administrative expenses from the gross income. The Tribunal upheld the decision of the Appellate Assistant Commissioner and dismissed the appeal of the Department.
4. Before us, the contentions urged before the Tribunal have been reiterated.
5. It appears from the order of the Appellate Assistant Commissioner that the assessee has incurred the expenditure on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust and not only to earn the income from dividend. It is now well-settled that in determining the portion of income applied or accumulated for charitable or religious purposes, regard should be had to the trust income in a commercial sense or according to the accounts of the trust and not the total income as computed under the provisions of the Income-tax Act. Our attention has been drawn to several decisions in this connection. In Deo Radha Madhava Lalji Genda Trust v. Property Tax Officer , it has been observed that tax liability and other outgoings in respect of the trust property are all incidental expenses relating to and connected with the main objects of the trust, which are exclusively religious and charitable. If the trust property is not properly maintained and proper accounts are not kept, the very existence of the trust would be in jeopardy and its object and purpose would be lost. In this view of the matter, simply because a part of the rental income is spent in the maintenance, repairs, payment of salaries to employees, taxes and legal expenses, etc., it could not be said that the income derived from the trust property was not applied exclusively to religious or charitable purposes.
6. In CIT v. Trustees of H. E. H. the Nizam's Supplemental Religious Endowment Trust , it has been held that with regard to the income of the trust as such, it is the accounts of the trust alone that had to be taken into consideration. It was held that expenses incurred by way of payment of income-tax and wealth-tax during the relevant year were incidental to the carrying out of the charitable purposes of the trust. Such payments were outgoings in that particular year and were incidental to the carrying out of the objects of the trust.
7. In CIT v. Estate of V.L. Ethiraj , it was held that income from properties would have to be arrived at in the normal commercial manner without reference to the provisions which were attracted by Section 14.
8. In CIT v. Janaki Ammal Ayya Nadar Trust , it was held that payment of tax is necessary to preserve the property of the trust when a demand is lawfully made. Therefore, the expenditure incurred by way of payment of tax out of the current year's income has to be considered as application for charitable purposes.
9. In CIT v. Jayashree Chanty Trust [1986] 159 ITR 280, this court held that the income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust.
10. In our view, income applied to meet expenses, such as normal expenses of management may not, strictly speaking, be charitable but they are termed as incidental to the carrying out of charitable purposes. Such expenses should not be excluded from exemption. In Jayashree Chanty Trust's case , a circular of the Central Board of Direct Taxes dated June 19, 1968 (Circular No. 5-P(LXX-6), was relied upon. It was, inter alia, laid down in the said circular as follows (at page 285) (see also [1969] Indian Tax Laws, Appx. II, p. Ixxxv) :
"Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word 'income' should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under Section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner should be not less than 75 per cent. of the latter, if the trust is to get the full benefit of the exemption under Section 11(1)."
After quoting that circular, this court observed as follows (at page 286) :
"This circular makes it clear that the word 'income' in Section 11(1)(a) must be understood in a commercial sense. The entire income of the trust, in the commercial sense, has been spent for the purpose of charity. There is no reason to deny the benefit of exemption granted by Section 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity."
In our view, therefore, the expenditure on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust must be considered as application for charitable purposes. However, in this case the quantum of the expenditure for carrying out the objects and purposes of the trust and the expenditure made to earn the income had not been separately allocated or determined. We, therefore, answer the second question by saying that the Tribunal was right in holding that the assessee will be entitled to the benefit of the expenditure made on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust only ; but any expenditure incurred for earning the income from dividend will not qualify as amounts spent for carrying out the objects and purposes of the trust.
11. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.
12. In agree.