Madras High Court
Commissioner Of Income Tax And Anr. vs T. N. K. And V. Educational Trust And Ors. on 17 April, 1997
Equivalent citations: [1998]233ITR182(MAD)
JUDGMENT Abdul hadi, J.
1. All these tax case references preferred by the Revenue under s. 256 of the IT Act, 1961 (hereinafter referred to as 'the Act') are connected and hence they were heard together.
2. Out of the above cases, the following cases, which relate to the same respondent-assessee, viz., T.N.K. & V. Educational Trust, Madras, relate to the assessment years as shown below :
Case No. Asst. yr.
T.C. 786 of 1984 1970-71
T.C. 411 of 1984 1971-72
T.C. 412 of 1984 1972-73
T.C. 413 of 1984 1973-74
T.C. 414 of 1984 1974-75
T.C. 415 of 1984 1975-76
T.C. 416 of 1984 1976-77
(2) The respondents-assessees and the assessment years in respect of the rest of the cases are as follows :
Case No. Name of the respondents-assessees Asst. yr.
T.C. 1 of 1997 K. N. Varadarajan Family Trust 1988-89
T.C. 18 of 1997 -do- 1987-88
T.C. 2 of 1997 P. Natarajan Family Trust 1987-88
T.C. 3 of 1997 -do- 1988-89
T.C. 4 of 1997 Ramesh Family Trust 1987-88
T.C. 5 of 1997 -do- 1988-89
T.C. 6 of 1997 Chandrasekhar Family Trust 1987-88
T.C. 7 of 1997 -do- 1988-89
T.C. 21 to 37
of 1997 -do- 1973-74 to
1986-87 and
1989-90 to
1991-92
T.C. 8 of 1997 K. N. Gnanaprakasam Family 1987-88
Trust
T.C. 14 of 1997 -do- 1988-89
T.C. 9 of 1997 M. Sivaprakasam Family Trust 1988-89
T.C. 17 of 1997 -do- 1987-88
T.C. 10 of 1997 P. Srinivasan Family Trust 1987-88
T.C. 11 of 1997 -do- 1988-89
T.C. 38 to 54 of
1997 -do- 1973-74 to
1986-87 and
1989-90 to
1991-92
T.C. 12 of 1997 K. N. Mohanram Family Trust 1987-88
T.C. 13 of 1997 -do- 1988-89
T.C. 15 of 1997 K. N. Krishnaswamy Family Trust 1987-88
T.C. 16 of 1997 -do- 1988-89
T.C. 19 of 1997 P. Gowrisankar Family Trust 1987-88
T.C. 20 of 1997 -do- 1988-89
(Thus there are these ten assessees who are respondents in T.C. Nos. 1 to 54 of 1997)
3. There is the undermentioned concession by learned counsel for the respondents-assessees in all the tax cases. However, all these tax cases are disposed of on their merits. (The concession is referred to in para. 21 and below.
4. Even before setting out the questions referred to us in the above tax cases, it would be better to state the relevant facts. The common assessees in T.C. Nos. 411 to 416 and 786 of 1984, viz., T.N.K. & V. Educational Trust, Madras, is a charitable trust constituted under a declaration of trust dt. 15th December, 1960. The author of the trust was T.N.K. Nanjappa Chettiar, the trustees being himself and five others, who are his relations. The object of the trust was particularly to establish and maintain educational institutions and hospitals for the public. On 1st August, 1969, the above referred to ten family trusts were constituted, the authors of each of them being related to one or the other of the above referred to trustees of the above referred to T.N.K. & V. Educational Trust. The objects of each of the abovesaid family trust are the following :-
"(a) to meet the educational, maintenance, marriage and other expenses of my (author's) major children".
(b) to help my other relatives by making money grants and in other ways,
(d) to make the contributions if funds permit for any charitable benevolent or religious object or objects".
5. The abovesaid declaration of Trust dt. 15th December, 1960 provided in cl. (12) therein that "if at any time the objects of the trust should become impossible of fulfilment, the properties and funds belonging to the trust shall be utilised for such charitable purposes as the trustees in office at that time may determine".
6. On 13th August, 1969, the abovesaid T.N.K. & V. Educational Trust, out of its fund, parted with Rs. 12,80,000 representing the sum total of ten cheques of Rs. 1,28,000 in favour of each of the above referred to ten family trusts. The said sums were thus paid by cheques drawn in favour of the family trusts, but endorsed by the trustees of the family trusts in favour of Devi Films (P) Ltd. with which company, the sums in question remained deposited in their respective names. Devi Films (P) Ltd. was to pay interest of such deposits. The abovesaid Devi Films (P) Ltd. was a company, in which, out of its 17 shareholders, five were the trustees of the above referred T.N.K. & V. Educational Trust.
7. Along with the aforesaid cheques, the abovesaid T.N.K. & V. Educational Trust wrote ten identical letters, addressed to each of the family trust stating, in effect, that the said contribution and any accumulation thereto should be utilised for certain specified educational purposes for the general public and that the investments of the said contributions and accumulations thereto should be kept separate from the investment of the other funds of the family trust.
8. Each of the family trusts received in due course interest from the abovesaid Devi Films (P) Ltd. and in the returns of income filed by each of the said family trust, the interest received less the amount applied for charitable purposes, was admitted as their income.
9. For the asst. yr. 1970-71 to 1972-73, the ITO in the assessments of the abovesaid T.N.K. & V. Educational Trust, held that there was no valid transfer of the abovesaid Rs. 12,80,000 in favour of ten family trusts and that therefore, the family trusts were holding the said sum on behalf of the said T.N.K. & V. Educational Trust. On that footing, the ITO treated the investment of the above said sum in Devi Films (P) Ltd. as investment of T.N.K. & V. Educational Trust. Thus, he held that the interest earned by the abovesaid ten family trusts, as stated above, were chargeable to tax in the hands of the abovesaid T.N.K. & V. Educational Trust.
10. But the said assessments were set aside by the CIT(A) in appeal. On further appeal to the Tribunal, the Tribunal directed the ITO to redo the assessments according to law in the light of its observations.
11. The ITO, accordingly made reassessments for 1970-71 to 1972-73 and also assessments for 1973-74 to 1976-77. In so doing, he held that the income from the investments made by the ten family trusts should be held as the investments of T.N.K. & V. Educational Trust and the said income was assessed in the hands of the said T.N.K. & V. Educational Trust. He reasoned out as follows :
The transfer of the funds of the ten family trusts were in terms of the minutes of the meeting of T.N.K. & V. Educational Trust held on 13th August, 1969, according to which the object of the said T.N.K. & V. Educational Trust was to establish the polytechnic institute either in Madras or in Salem, but since the said funds were insufficient for such purpose, the trustees decided to transfer the funds to the ten family trusts. However, neither the trust deed dt. 15th December, 1960, nor the objects of the family trusts contain any object of establishing a polytechnic under art. 8 of the above said declaration of trust dt. 15th December, 1960, the T.N.K. & V. Educational Trust had no power to transfer the funds in the manner the said trust has done. Under cl. 12 thereof only when the objects become impossible of fulfilment, the properties and funds could be utilised for charitable purposes. So holding, the ITO made the assessments for the abovesaid years on the abovesaid T.N.K. & V. Educational Trust in relation to the abovesaid interest income from Devi Films (P) Ltd.
12. In the further appeal to the CIT(A) he held that the abovesaid transfer of Rs. 12,80,000 was valid and that as per the abovesaid letters dt. 13th August, 1969, the said funds were given only for charity. Further, according to him the abovesaid donation of Rs. 12,80,000 was made for carrying out the objects of the abovesaid T.N.K. & V. Educational Trust and was in accordance with the abovesaid cl. 12. So holding the CIT(A) set aside the assessments made on T.N.K. & V. Educational Trust.
13. When subsequently the matter came before the Tribunal the Tribunal sustained the CIT(A)'s order, holding that the abovesaid transfer was valid and that the abovesaid donation by way of the abovesaid transfer would amount to application of income by the abovesaid T.N.K. & V. Educational Trust for charitable purposes listed in the above referred to declaration of trust dt. 15th December, 1960.
14. Now, we shall set out the common question of law referred to us under s. 256(1) of the Act in T.C. Nos. 411 to 416 of 1984, which runs as follows :
"Whether the Tribunal was justified and had valid materials to hold that the transfer of Rs. 12,80,000 to 10 family trusts of non-charitable nature amounted to application of income for charitable purposes within the meaning of s. 11 and consequently the income from such donations invested by the 10 family trusts cannot be taxed in the hands of the trust ?"
(These tax cases arise out of the common order of the Tribunal dt. 29th April, 1982).
15. The question of law referred to us under s. 256(1) of the Act in TC No. 786 of 1984 runs as follows :
"Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the interest income of Rs. 89,110 received from Devi Films (P) Ltd. it is not income of the assessee-trust and should not be taxed in its hands ?"
(This TC arises out of the order of Tribunal dt. 4th January, 1983).
16. Now coming to TC Nos. 1 to 20 of 1997, which arise out of order of the Tribunal dt. 29th April, 1994, we find that the AO denied the benefit of exemption contemplated under s. 11 of the Act, to the abovesaid ten family trusts in respect of the abovesaid referred to interest income on the ground that the abovesaid deposits with the Devi Films (P) Ltd., were not approved investments under s. 11(5) of the Act r/w s. 13(1)(d) of the Act. The first appellate authority therein concurred with the AO, but the Tribunal, by its above referred to order dt. 29th April, 1984, relying on the proviso (ii-a) to s. 13(1)(d), which (the said proviso) was introduced by the Finance No. 2) Act, 1991 w.e.f. 1st April, 1983, concluded that the abovesaid family trusts were entitled to exemption for the assessment years in question therein, viz., 1987 to 1989, as prayed for. The Tribunal further held that the trusts created on 13th August, 1969 by the abovesaid donation of Rs. 12,80,000 are charitable trusts. So holding, the Tribunal allowed the appeals before it, setting aside the order of the CIT(A).
17. The questions of law referred to us under s. 256(2) of the Act in TC Nos. 1 to 20 of 1997 are as follows :
1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law, in holding that the trusts are charitable in nature and are entitled to claim the benefit under s. 11 of the IT Act ?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the grant of certificate under s. 12A with regard to these trusts would indicate that the trusts are charitable in nature and it would not be open to the AO to reopen this question in the assessment proceedings and reach a different conclusion ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to exemption under s. 11 of the IT Act in view of the time limit upto 31st March, 1992, for converting the deposits into permissible mode of investment even though the non-specified assets had not been acquired during the previous year ?
18. Then, coming to TC Nos. 21 to 37 of 1997, they arise out of the order of the Tribunal dt. 31st August, 1994. Then, TC Nos. 38 to 54 of 1997 arise out of the order of the Tribunal dt. 29th August, 1994. In both these orders, the Tribunal relied on, only the above referred to earlier order of the Tribunal dt. 29th April, 1994.
19. Now, we shall set out the questions referred to us under s. 256(2) of the Act in TC Nos. 21 to 54 of 1997, which are as follows :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the trusts are charitable in nature and are entitled to claim benefit under s. 11 of the IT Act ?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the grant of certificate under s. 12A with regard to these trusts would indicate that the trusts are charitable in nature, and it would not be open to the AO to reopen this question in the assessment proceeding and reach a different conclusion ?
3. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled to exemption under s. 11 of the IT Act in view of the amended provisions of s. 13(1)(d) extending the time limit up to 31st March, 1992 for converting the deposits into permissible mode of investment even though the non-specified assets had not been acquired during the previous years ?
20. Learned counsel for the Revenue mainly argues that the abovesaid transfer of Rs. 12,80,000 by the above said T.N.K. & V. Educational Trust to the abovesaid ten family Trusts, is not valid at all as held by the assessing authority in TC Nos. 411 to 416 and 786 of 1984 and that in this regard both the CIT(A) and subsequently the Tribunal by its above referred to order dt. 29th April, 1982, erred. He also points out that the other reasoning of the Tribunal to the effect that the abovesaid transfer of Rs. 1,28,000 amount to application of income for charitable purposes is totally extraneous and irrelevant. According to him, the abovesaid interest income, received by the abovesaid ten family trusts, consequently have to be assessed to tax only in the hands of the abovesaid T.N.K. & V. Educational Trust and not in the hands of the said family trusts. Further, the said learned counsel also points out, in relation to the abovesaid orders of the Tribunal dt. 29th April, 1994, 31st August, 1994 and 29th August, 1994 (that is in all, with reference to TC Nos. 1 to 54 of 1997), that in view of the fact that the abovesaid transfer of Rs. 12,80,000 is not valid, there is no scope at all for granting any exemption to the abovesaid family trusts in relation to the above referred to interest income. He also submits that the other reasoning of the Tribunal in this regard to the effect that the above referred to proviso (iia) to s. 13(1)(d) is attracted in the present case, is also wrong. Further, he also points out that at any rate, the Tribunal, even without giving necessary finding that the abovesaid deposits with Devi Films (P) Ltd. had been substituted by approved form of investments as prescribed under s. 11(5) of the Act at least later, that is, on or before 31st March, 1992, as prescribed in the abovesaid proviso (iia), has grossly erred in holding that the abovesaid ten assessees (family trusts) would be entitled to get the benefit of exemption under s. 11. He also points out that the Tribunal also erred in holding as if the said ten assessees are charitable in nature.
21. Learned counsel for the assessee no doubt initially argued that in view of cl. 12 of the abovesaid declaration of trust dt. 15th December, 1960, the abovesaid donation of Rs. 12,80,000 is valid. But, later, the said learned counsel submitted that the abovesaid transfer of Rs. 12,80,000 by the abovesaid T.N.K. & V. Educational Trust to the abovesaid ten family Trusts could be held invalid and the assessment for the abovesaid entire interest income could be made on the T.N.K. & V. Educational Trust itself. He only requests that since already assessments had been made on the abovesaid family trusts on their respective abovesaid interest income received, less the portions of the said incomes spent for charitable purposes, and since accordingly that tax also had been paid by the said family trusts, credit should be given to the total amounts of tax paid, when T.N.K. & V. Trust is going to be assessed on the footing that the abovesaid transfer is invalid.
22. We have considered the rival submissions. Apart from the abovesaid concession by learned counsel for the assessees, it is clear to us that the abovesaid transfer of Rs. 12,80,000 by T.N.K. & V. Educational Trust in favour of the abovesaid ten family trusts, is invalid. Clause 12 of the abovesaid declaration of trust dt. 15th December, 1960, whereby T.N.K. & V. Educational Trust was constituted, runs as follows :
"If at any time the objects of the trust should become impossible of fulfilment the properties and funds belonging to the trust shall be utilised for such charitable purposes as the trustees in office at that time may determine."
This clause, in the present case, does not empower T.N.K. & V. Educational Trust to effect the abovesaid transfer at all. The reasons are : strictly speaking, there is no finding that the objects of the said trust "had become impossible of fulfilment". No doubt, what initially learned counsel for the assessees submitted was that the said transfer was in terms of the minutes of the meeting of T.N.K. & V. Educational Trust held on 13th August, 1969, according to which the object of the said T.N.K. & V. Trust was to establish a polytechnic institute either in Madras or in Salem, but since the said funds were insufficient for such purpose, the trustees decided to transfer to the ten family trusts. But, it must be noted, as also mentioned by the ITO, that the said declaration of trust dt. 15th December, 1960 does not at all contain any specific object of establishing polytechnic though it generally mentions educational purposes as its objects. Therefore, it cannot be said that the said objects, so generally stated, had become impossible of fulfilment. Therefore, the said cl. 12 cannot be taken to have come into operation at all in the present case.
23. That apart, cl. 12 also says that in case the abovesaid objects have become impossible of fulfilment, the properties and funds of the said trust should be "utilised for such charitable purposes as the trustees in office at that time may determine". In other words, this would only mean that the said trustees could themselves utilise the said properties and funds for some other charitable objects and it would not mean that they could transfer the said Rs. 12,80,000 to the abovesaid ten family trusts. If really the founders of the said trust of 1960 wanted to give such power to the trustees for transferring such funds to other trusts even with a view to utilise the said funds for charitable purposes, they would have specifically provided so in the said declaration of trust itself. In the absence of such specific provision in the said declaration of trust and in the light of the abovesaid expression used in cl. 12, it cannot be said that what the trustees therein had done by their abovesaid minutes of the meeting dt. 13th August, 1969, is valid in law.
24. After so holding, and while dealing with the abovesaid questions referred to us in TC Nos. 411 to 416 and 786 of 1984, we must first of all point out that the above referred to common question of law (vide para 14 above) referred to us in TC Nos. 411 to 416 of 1984 is not happily worded. No doubt the abovesaid question of law (vide para 15 above) referred to us in TC No. 786 of 1984 is correctly worded though it related to the asst. yr. 1970-71 only. In the circumstances, we reframe both the abovesaid questions as one common question in TC Nos. 411 to 416 and 786 of 1984, as follows :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the interest income received from Devi Films (P) Ltd. is not income of the assessee-trust (T.N.K. & V. Educational Trust, Madras) and should not be taxed in its hands, in relation to the asst. yrs. 1970-71 to 1976-77 ?"
25. In the light of the abovesaid conclusion reached by us regarding the abovesaid transfer, we have to answer this common question, as reframed, in the negative and in favour of the Revenue, holding that the said entire interest income received from Devi Films (P) Ltd., is only the income of T.N.K. & V. Educational Trust, Madras and the said income is taxable only in the hands of the said T.N.K. & V. Educational Trust.
26. We must also point out that one other reasoning of the Tribunal is in a way irrelevant and extraneous to the question at issue. In other words, there is no necessity for the Tribunal (after having confirmed the order of the CIT(A), which set aside the assessments on the ground that only the abovesaid ten family trusts could be assessed to tax on the abovesaid interest income), to hold that the abovesaid donation of Rs. 12,80,000 amounted to application income by the said T.N.K. & V. Educational Trust for charitable purposes.
27. As a consequence of our above referred to decision in TC Nos. 411 to 416 and 786 of 1984, we have only to hold that the abovesaid interest incomes cannot be assessed to tax in the hands of the abovesaid ten family trusts, and that the assessments, which are said to have been made already on these family trusts, are not valid. Having come to the above conclusion, we are of the view that there is no necessity for us to give our views with reference to the question whether the trusts in TC Nos. 1 to 20 are of charitable nature or not. However, it is necessary to clarify the factual position. As already seen, ten family trusts were constituted by a deed dt. 1st August, 1969. The ITO, in the orders of assessment, passed in the private family trusts held that the family trusts created by the deed dt. 1st August, 1969 are not charitable trusts. He further proceeded on the basis that there was a violation of the provisions of s. 13(1)(d)(II) of the Act as the investments were found to be unapproved securities and the assessee trusts were not entitled to exemption under s. 11 of the Act, even assuming that the trusts are charitable trusts. He further found that the trusts are private trusts and the recognition accorded by the CIT under s. 12A of the Act was not conclusive in the determination of question either as to the nature of the trust or to the applicability of the provisions of the Act granting exemption. The AAC in one group of appeals, held that the assessee was only a private discretionary trust and therefore, not entitled to the exemption, under s. 11 of the Act. He also held that there was a violation of the provisions of s. 13(1)(d) of the Act, as investments were made in unapproved securities in violation of s. 11(5) of the Act. In that view of the matter, he dismissed the appeals preferred by the assessee. The assessee, as referred to by the AO as well as by the CIT(A), meant only the private family trust created on 1st August, 1969. But in the orders passed by the other CIT(A) in the other group of appeals, the CIT(A) held that a special trust was created by a letter dt. 13th August, 1969, and that trust created on 13th August, 1969, was entitled to exemption under s. 11 of the Act. Against the orders passed by the CIT(A) dt. 30th June, 1992, the Revenue preferred appeals before the Tribunal. The appeals filed by the assessee, i.e., the private family trust came up for consideration before the Tribunal and by its order dt. 29th April, 1994. The Tribunal held that the trusts created by the letter dt. 13th August, 1969 are charitable trusts. It is relevant to notice that the family trusts were formed by a deed dt. 1st August, 1969 and the reference to the letter dt. 13th August, 1969, appears to be a mistake. Hence, the CIT also seems to have granted recognition only to the trusts created by a deed dt. 1st August, 1969. The other appeals filed by the Revenue were heard by the Tribunal. The Tribunal passed orders on 4th August, 1994, 28th August, 1994, and 31st August, 1994. In these orders also, the Tribunal held that the assessee is a charitable trust, entitled to exemption under s. 11 of the Act. The Tribunal followed its earlier orders passed in the assessee's appeal to hold that the assessee is a charitable trust. The reference to the assessee would refer to the private family trust created on 1st August, 1969. We have already held that the transfer of Rs. 12,80,000 by T.N.K. & V. Educational Trust in favour of family trust is invalid. Even, if it is assumed that a special trust, as pointed out by the CIT(A) was formed on 13th August, 1969 is accepted, since we have held that the transfer is invalid, the question of trust being created on 13th August, 1969, by the letter of that date does not arise at all. Therefore, when the finding of the Tribunal that the trusts in question are of charitable nature refer to the trusts created on 13th August, 1969, then, in view of the judgment, in TC Nos. 411 to 416 and 786 of 1984, no valid trust has come into existence. If the Tribunal refers to the trusts created on 1st August, 1969, it is not necessary to consider the question whether the trusts created on 1st August, 1969, are charitable nature or not. Therefore, we proceed on the basis that the Tribunal refers to the trust constituted by the letter dt. 13th August, 1969, and since we have held that there was no valid transfer in the eye of law, no valid trust came into existence by a letter dt. 13th August, 1969.
28. Secondly, it is also not clear whether the order of the CIT granting recognition under s. 12A of the Act, refers to the private trust created on 1st August, 1969, or to the special trust created on 13th August, 1969. Since we are proceeding on the basis that no special trust was created on 13th August, 1969, it is not necessary to consider the question whether the exemption granted to the private family trust created on 1st August, 1969, would enure benefit the trust said to be created on 13th August, 1969. In addition, we have held that there is no valid transfer of money by T.N.K. & V. Educational Trust in favour of the ten family trusts. Therefore, the further question whether there was a violation of s. 13(1)(a)(ii) of the Act in relation to the family trusts does not arise.
29. Now, coming to the request made by learned counsel for the assessees mentioned in para 21 above we are sure that if a proper application is filed by the assessee before the authority concerned incorporating the said requests, the said authority would deal with the said application in accordance with law.
30. The net result is, the common question in TC Nos. 411 to 416 and 786 of 1984 as reframed (vide para 24 above) is answered in the negative and in favour of the Revenue. In so far as TC Nos. 1 to 20 and 21 to 654 of 1997 are concerned, the common questions of law referred to as are answered as under :
(I) First Question : The Tribunal was not correct in holding that the trusts created on 13th August, 1969, are charitable in nature and entitled to claim the benefit of exemption under s. 11 of the Act. Accordingly we answer the first question of law in the negative and in favour of the Revenue.
(II) Second Question :- Since we have held that there was no valid transfer the question whether it would be open to the AO to consider the question, whether the trusts are charitable in nature or not inspite of grant of certificate under s. 12A of the Act does not arise, accordingly, we return the second question unanswered.
(III) Third Question :- It relates to the applicability of s. 13(1)(d) proviso (IIa) of the Act. Since we have held that there was no valid transfer by T.N.K. & V. Educational Trust, it is also not necessary to consider in the hands of the family trusts whether the trusts have complied with the provisions of s. 11(5) of the Act in making the investment in the approved forms, the third question of law does not arise and it is also returned without providing an answer. No costs.