Madras High Court
Commissioner Of Income-Tax vs Nagarathu Vaisiyargal Sangam on 19 August, 1998
Equivalent citations: [2000]246ITR164(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT A. Subbulakshmy, J.
1. The assessee is a society registered under the Societies Registration Act, on March 20, 1959, created before April 1, 1962, that is, even before the commencement of the Income-tax Act, 1961. The bye-laws of the society are registered with the Registrar. The objects of the society are to provide financial assistance to deserving students for educational purposes, medical relief, pension to widows, incurring funeral expenses and providing financial help for the poor for conducting marriages of their dependants without distinction of caste, creed or community. For the assessment year 1982-83, the assessee filed its return disclosing its status as that of association of persons, declaring an excess of expenditure over income to the extent of Rs. 3,260. The assessee claimed exemption under Sections 11 to 13 of the Income-tax Act, 1961. The Income-tax Officer found that the assessee made certain payments to its office bearers, who were interested persons and so the provisions of Section 13(1)(c)(ii) are applicable. The assessee filed an appeal before the Commissioner of Income-tax. The assessee claimed that all the payments made were approved by the resolution passed by the board of directors and the executive committee and all the payments related to charity and the assessee incurred various expenditure for religious ceremonies and so, the assessee is entitled for exemption that was accepted by the Commissioner. The Commissioner of Income-tax was of the view that the assessee did not apply its income for non-charitable and non-religious purposes and the expenditure incurred by the assessee in the premises of various temples are all incidental to its objectives, which include performance of marriages and performance of other religious rites. The Commissioner of Income-tax had found that such acts of charity necessarily involve acts of religious ceremonies and as expenses were incurred in the temples in furtherance of the objects of the society for charitable purposes in order to render assistance to the poor people and accordingly granted exemption to the expenses incurred. The Tribunal confirmed the view of the Commissioner of Income-tax thus dismissing the appeal preferred by the Department. So, at the instance of the Revenue, this reference has been made.
2. The questions under reference are :
"(1) Whether the Tribunal is right in law in holding that the assessee is entitled to exemption under Section 11 of the Income-tax Act, 1961 ?
(2) Whether the Tribunal is right in law in holding that the Income-tax Officer was not correct in invoking the provisions of Section 13(1)(c) of the Income-tax Act, 1961, in regard to payment of Rs. 10,001 to Shri Thatha Chettiar, president of the society, and other payments and advances to interested persons as the same fall under the first proviso to Section 13(1)(c) of the Income-tax Act, 1961 ?"
3. The assessee-society was registered under the Societies Registration Act on March 20, 1959, and was registered before April 1, 1962. The assessee claims exemption under Section 11 of the Act. The assessee had made certain payments to its office bearers and the assessee had also incurred various expenses in education, medical relief, etc., in pursuance of the objects of the society. The assessee claims that it is entitled to exemption under Section 11 of the Act. The assessee claims that all the payments were approved and so the assessee is entitled to the benefit of Section 13(1)(c), first proviso. As per Section 11 of the income-tax Act the following income shall not be included in the total income.
"(a) income derived from property held under trust wholly for charitable or religious purpose, to the extent to which such income is applied to such purposes in India ; and, where any such income is 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 twenty-five per cent. of the income from such property ;
(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act; to the extent to which such income is applied to such purposes in India ; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent. of the income from such property." Section 13(1)(c) reads as follows :
"Section 11 not to apply in certain cases.--(1) Nothing contained in Section 11 or Section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof-- . . .
(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof-
(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or
(ii) if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in subsection (3) :
Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of Sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in Sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution :
Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of Sub-clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in Sub-section (3), in so far as such use or application relates to any period before the 1st day of June, 1970."
4. The assessee claims exemption as it has incurred various expenses for religious ceremonies in temples, and also payment of honorarium and remuneration paid to the secretary, pongal allowance, sitting fees paid to the office bearers, allowing service pension, allowance to directors, etc., and the payments made to various office bearers were approved by the resolution passed by the board of directors. The assessee also made a presentation of Rs. 10,001 to Shri Thatha Chettiar, the president of the institution on his 68th birthday as retirement benefit.
5. Clause 26 of the bye-laws provides that any bye-law can be altered through a special resolution. The Commissioner of Income-tax had found that there is a mandate for making certain payments and payments to interested persons in accordance with the rules governing the institution and the mandate itself was made after 1962 and the mandate may be contained in a resolution framed even after April 1, 1962, and that the resolution is in accordance with the rules and the rules themselves were framed before April 1, 1962, which view was confirmed by the Tribunal. The apex court's decision in CIT v. Rattan Trust [1997] 227 ITR 356 is relevant in the context. The headnote of this report may usefully be extracted and set out below :
"Section 13 of the Income-tax Act, 1961, provides for exigencies when the provisions of Section 11 would not be applicable. Section 13 was amended by the Finance Act, 1970, with effect from April 1, 1971. Section 13 of the Income-tax Act was substituted by a new Section by the Finance Act, 19'70, with effect from April 1, 1971. It was stated that under one of the proposed amendments, all charitable or religious trusts or institutions created or established after March 31, 1962, will be denied the benefit of exemption from income-tax if any part of their income or property enures or is, during the previous year, applied, directly or indirectly, for the benefit of the author, founder, substantial contributor or relative aforesaid or for the benefit of any concern in which any such author, founder, substantial contributor or relative has substantial interest. In the case of trusts or institutions created or established before April, 1, 1962, the exemption from tax will be denied only if their income is applied for the benefit of the author, founder, etc., otherwise than in compliance with a mandatory term of the trust or a mandatory rule governing the institution'. A similar provision was made in Section 21A of the Wealth-tax Act, 1957.
The requirements of the first proviso to Section 13(1)(c)(ii) of the Income-tax Act and the first proviso to Section 21A of the Wealth-tax Act, 1957, are (1) the trust should have been created before April 1, 1962, and (2) the trustees apply the funds of the trust in a concern in which they themselves are interested, if there was a mandatory provision in the trust deed for such a purpose. Such a mandate in the trust deed should have existed before April 1, 1962, and could not have been brought in by amending the trust deed at a later stage after that crucial date, even if the trust deed authorised the trustees to amend the trust deed to bring in the mandatory condition or requirement for them to invest funds of the trust in a concern in which they might be interested. Any other interpretation would set at naught the proviso and would defeat the very purpose for which the provisos were added in Section 13 of the Income-tax Act and Section 21A of the Wealth-tax Act. The purport of the provisos is in no way obscure and the provisos would apply, only if the trust created before April 1, 1962, mandated at that time, that the trustees could invest the funds of the trust in a concern in which they were interested being the persons referred to in Clause (c)(ii) of Sub-section (1) and Sub-section (2) by virtue of Sub-section (3) of Section 13 of the Income-tax Act and Section 21A of the Wealth-tax Act.
The assessee was a trust created by a deed of trust dated March 28, 1942. Clause 41 of the trust deed provided for amendment to the provisions of the trust deed with regard to the conduct and management of the trust. Clause 39 as it originally stood did not make mandatory provisions regarding the investments of the funds of the trust in a concern in which the trustees had an interest. Clause 39 as it originally stood required all monies to be invested in such banks or securities in such manner as may be approved by the trustees. The trustees were authorised to purchase even property, from the surplus funds in their hands. By virtue of the power conferred on the trustees by Clause 41 of the trust deed, Clause 39 was amended by resolution of the trustees dated March 14, 1971. Clause 39, as amended mandated the trustees to keep the funds of the trust with G in which company admittedly the trustees were interested. The assessee claimed exemption from income-tax and wealth-tax. The Income-tax Officer denied the exemption but the Tribunal allowed the appeals of the assessee. On references both under the Income-tax Act and the Wealth-tax Act, the High Court affirmed the view taken by the Appellate Tribunal and decided the questions in favour of the assessee. On appeals by the Revenue to the Supreme Court :
Held, reversing the decision of the High Court, (i) that the interest income of the assessee was not exempt from tax under Section 11 of the Income-tax Act.
(ii) that the assessee-trust was not entitled to exemption under Section 21A of the Wealth tax Act".
6. In this case the claim of the assessee is that all the resolutions passed by the directors and the committee members had been ratified at the annual general body meeting on March 8, 1981, so far as payments to various office bearers are concerned, and this institution was created before April 1, 1962, before the commencement of the Income-tax Act, 1961.
7. In the instant case, the trust being created before April 1, 1962, and the trust did not contain any mandatory provisions with regard to these payments and the mandate itself being made after April 1, 1962, any amount of passing of any resolution after April 1, 1962, will not come to the rescue of the assessee by applying the principles laid down in the decision of CIT v. Rattan Trust . Following the principles laid down by the apex court in CIT v. Rattan Trust [1997] 227 ITR 556 we hold that the Income-tax Officer was correct in invoking the provisions of Section 13(1)(c) of the Income-tax Act, 1961, in regard to the payment of Rs. 10,001 to Sri Thatha Chettiar, president of the society, and other payments and advances to interested persons as the same falls under the provisions of Section 13(1)(c) of the Income-tax Act, 1961, and denying the exemption to the assessee under Section 11 of the Income-tax Act. So the Tribunal was not justified in holding that the assessee is entitled to exemption under Section 11 of the Income-tax Act and the Income-tax Officer was not correct in invoking Section 13(1)(c) of the Income-tax Act.
8. We answer both the questions of law against the assessee and in favour of the Revenue.