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Judgment
Sethuraman, J.—The following is the question referred at the instance of the Commissioner, of income tax:
Whether, on the facts and in the circumstances of the case, the income of the assessee is exempt from tax u/s 11 of the income tax Act for the
assessment year 1970-71?
The assessee is a trust originally constituted by the late Sir M. Ct. Muthiah Chettiar, who set apart a sum of money for effecting and carrying out
Thiruppani, or repairs to old Hindu temples, building new ones, giving aid to or establishing hostels, educational or industrial institutions, and giving
relief to the poor or afflicted. The funds set apart were invested in the money-lending and banking business carried on by the family of Sir Muthiah
Chettiar. After his death, his son executed a declaration on 20th October, 1930, and got it registered at Rangoon. The said trust deed and
connected papers were lost during enemy action in Burmah. Consequently, the two grandsons of the original founder executed a deed declaration
of trust dated 20th February, 1969, for the purposes, which it is not in dispute, are charitable.
On 1st March, 1963, the trustees resolved that the income of the trust should be accumulated, for a period of 10 years commencing from 13th
April, 1961, for utilisation in the maintenance of temples, conduct of festivals, establishment of hostels, giving medical aid to the poor and starting
or aiding educational institutions, including granting of scholarships to deserving students. The establishment of an orphanage was also referred to
as one of the objects in the resolution.
A sum of Rs. 93,000, being 100% of the income of the trust earned during the year ended 13th April, 1963, was invested in Government
securities and an application was made to the income tax Officer to exempt the income of the trust from tax by giving notice in Form No. 10, in
pursuance of the said resolution. The income tax Officer granted the necessary permission, and in accordance with it, the assessee-trust invested a
sum of Rs. 7,31,017.97 in Government securities. The total income earned from 12th April, 1962, up to 12th April, 1969, came to Rs.
9,54,849.55. The tax deducted at source therefrom amounted to Rs. 2,23,831.58, and there was a balance of Rs. 7,31,017.97, which was the
amount invested in Government securities.
At this stage, the balance-sheet of the assessee for the years ended on 12th April, 1969, and 12th April, 1970, may be summarised.
Summarised balance-sheet as at 12-4-1969
Liabilities Rs. Assets Rs.
Capital fund 31,91,649.76 Investments in State and Central 5,78,021.28
Government securities
Sundry creditors 500.00 Investments in fully paid equity 8,22,500.00
shares of companies
Bank overdrafts 3,88,772.60 Advances to S. RM. M. CT. M. 19,32,962.85
Firm, Rangoon 7,82,792.44 To
Emcete & Sons (P.) Ltd.
11,50,170.41
income tax deducted at source 2,47,414.58
Cash on hand 23.65
35,80,922-36 35,80,922-36
Summarised balance-sheet as at 12-4-1970
Liabilities Rs. Assets Rs.
Capital fund 34,16,859.79 Investment in State and Central 7,29,273.50
Government securities
Sundry creditors 200.00 In fully paid equity shares of 8,22,500.00
companies
Bank Land 1,50,000.00
overdrafts 4,52,063.02 Buildings 8,00,000.00
Advances to Emcete & Sons (P.) 10,87,541.23
Ltd.
income tax deducted at source 2,78,529.37
Cash and bank balances 1,278.71
38,69,122.81 38,69,122.81
As regards the capital fund, which appeared at Rs. 31,91,649.76 as on 12th April, 1969, it has gone up to Rs. 34,16,859.79 as on 12th April,
1970. The increase is explainable as follows:
Rs.
As per last balance-sheet year 31,91,649.76
Add : Donation during the 61,000.00
32,52,649.76
Excess of income over expenditure 1,64,210.03
Total 34,16,859.79
It may be seen from the balance-sheet as on 12th April, 1970, that there is a purchase of land for Rs. 1,50,000 and buildings for Rs. 8,00,000.
As regards the buildings, it was taken over in recovery of a debt due from S.R.M. M. CT. M. Firm, Rangoon, amounting to Rs. 7,82,792.44,
which is shown in the balance-sheet as an asset in the nature of ""advance"", as on 12th April, 1969. The balance to make up the sum of Rs.
8,00,000 has been drawn from the advance made to Emcete & Sons (P.) Ltd., which as on 12th April, 1969, stood at Rs. 11,50,170-41 and
which after the withdrawal stood at Rs. 10,87,541-23 as on 12th April, 1970.
The sum of Rs. 1,64,210.03 was the excess of income over expenditure earned during the period from 13th April, 1969, to 13th April, 1970.
It would be usual to find a profit and loss appropriation account in the case of companies in order to disclose as to how the profit earned by the
company has been dealt with. In the case of companies, the amount would ordinarily be appropriated for, (a) making a provision for taxation, (b)
making a provision for dividends, and (c) the balance, if any, would be taken to the balance-sheet. In the present case, as the trust is exempt from
taxation and as the trust had also applied to the income tax Officer for accumulation of the income over the period contemplated by the provisions
of the Act, the total amount of the surplus of the income over expenditure, viz., Rs. 1,64,210.03, was taken over to the capital fund.
We are now concerned with the assessment year 1970-71, for which the previous year ended on 13th April, 1970. The assessee filed a return
showing Rs. 1,64,210, including the tax deducted at source of Rs. 31,115, as income. The assessee claimed full exemption u/s 11(1) of the Act. In
the letter accompanying the return the assessee contended that a sum of Rs. 8,00,000 had been applied in purchasing a building for the purpose of
the trust. Since the assessee had not invested the accumulation of profits in Government securities, the income tax Officer wrote a letter on 19th
January, 1973, asking for the reasons for non-investment of the accumulation in Government securities, as in earlier years, in accordance with the
option exercised u/s 11(2) of the Act. The assessee''s contention was that in view of the investment of the sum of Rs. 8,00,000 in the purchase of
the building, it was exempt and that there was no need to invest it in Government securities.
The income tax Officer found that the sum of Rs. 8,00,000 referred to as invested in the building represented the purchase of a property called
Rama Vilas"" in Luz Church Road on 25th March, 1970. The purchase consideration of Rs. 8,00,000 was discharged by adjustment of the debt
due from S. RM. C.T.M. Firm of which the two grandsons of the founder are the partners.
The chartered accountants representing the assessee wrote on 30th January, 1973, that if the income of the assessee was utilised for the
purpose of charity, then section 11 did not require that the income should be accumulated, and that what was basically required was that the
income should be utilised for the purpose of the trust. The income tax Officer rejected this contention and he brought a sum of Rs. 1,81,195
consisting of the following to tax:
Rs.
Excess of income over expenditure 1,64,210
Add : Expenses on agricultural lands disallowed 327
Registration fees, stamps, etc., in connection with the purchase of the 16,658
property (agricultural land)
1,81,195
It may be seen that the expenditure of a sum of Rs. 16,658 represents the stamp and registration charges on the acquisition of the agricultural
land, which is shown in the balance-sheet of the relevant year at Rs. 1,50,000. The result of the assessment was a tax demand of Rs. 83,940 after
giving credit for the tax deducted at source amounting to Rs. 31,109.
The assessee appealed to the AAC contending that the purchase of the building was itself utilisation of the fund for charitable purposes. The
AAC rejected this contention. There were two other contentions. It is not necessary for us to go into them here. The result was that the assessee
had to file an appeal before the Appellate Tribunal on the assessment so sustained.
There was a difference of opinion between the Accountant Member and the Judicial Member constituting the Bench. The Accountant Member
was of the opinion that the assessee was eligible for exemption even when it purchased property for the purposes of the charitable trust. The
Judicial Member was of the contrary opinion. In his view, no portion of the income derived by the assessee from the property held in trust during
the relevant year had been utilised in the purchase of the property and, therefore, the assessee was not eligible for exemption u/s 11. This
difference of opinion was referred to a third member as required by the provisions of the Act. The said member, who was then the Vice President
of the Tribunal, agreed with the Accountant Member and held that the assessee was eligible for the exemption. The result was that the assessee''s
case for exemption was accepted by the majority of the members of the Tribunal, who heard the case, and the appeal was accordingly allowed.
The Commissioner has brought this matter, on a reference, to this court.
The assessee''s claim for exemption has to be considered in the light of the provisions of section 11(1)(a) of the Act, as it was then in force.
The provision, as then in force, to the extent relevant, ran as follows:
Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in
receipt of the income -
(a) 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; and, where any such income is accumulated for application to such purposes in India, to the extent to which the income so
accumulated is not in excess of twenty-five percent, of the income from the property or rupees ten thousand, whichever is higher;....
Explanation.--For the purposes of clauses (a) and (b), in computing twenty-five percent, of the income from any such property as is referred to in
the said clauses for any previous year, the income from such property for the year immediately preceding the previous year may be adopted, if that
income is higher than the income for the previous year.
Clause (2) of section 11 provided:
Where the persons in receipt of the income have complied with the following conditions, the restriction specified in clause (a) or clause (b) of sub-
section (1) as respects accumulation or setting apart shall not apply for the period during which the said conditions remain complied with -
(a) such persons have, by notice in writing given to the income tax Officer in the prescribed manner, specified the purpose for which the income is
being accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years;
(b) the money so accumulated or set apart is invested in any Government security as defined in clause (2) of section 2 of the Public Debt Act,
1944 (18 of 1944), or in any other security which may be approved by the Central Government in this behalf.
Sub-section (2), on the basis of which the assessee was claiming exemption all these years, provided for two conditions being complied with :
(1) giving a notice in writing to the income tax Officer specifying the purpose for which the income was to be accumulated and the period for which
the income was to be accumulated, the period not exceeding ten years, and (2) the money so accumulated being invested in Government securities.
In the present case, as already seen, the assessee had given a notice to the income tax Officer for the accumulation of the income for a period of
ten years. The year under consideration falls within the said period of ten years. The second condition that had to be complied with by the assessee
was investment in Government securities. It was not the case of the assessee that it had invested the money accumulated in Government securities.
Thus, the assessee had not complied with the twin conditions of section 11(2). The assessee had thus to fall back upon section 11(1)(a). Under
that provision, the assessee had to apply the income for charitable purposes in India. It could without attracting tax liability accumulate to the extent
of twenty-five percent, thereof or Rs. 10,000, whichever was higher. The case of the assessee was that it had applied the income for charitable
purposes by investing the trust funds in purchasing the property known as ""Rama Vilas"". Right through, before all the authorities including the
Tribunal, the only case of the assessee was that because it had invested Rs. 8,00,000 in the purchase of this property, it had complied with the
provisions of section 11(1)(a).
Two decisions appeared to have been mainly relied on before the Tribunal in support of the contention of the assessee. In Satya Vijay Patel
Hindu Dharamshala Trust Vs. Commissioner of Income Tax, Gujarat I, ), the trust was created and certain immovable properties were transferred
to it to be administered as a Hindu Dharamshala. During the relevant previous years, the trustees spent the entire surplus income in constructing a
new dharamshala. It was held that the fact that the amount was spent for capital purposes was not relevant as, under the provision, what was
necessary was that the income had to be utilised for charitable purposes. The section did not require that the expenditure to be incurred should
only be on revenue account. The capital nature of the expenditure was thus considered to be irrelevant, so long as the income was spent on the
objects of the trust. We have in T.C. Nos. 461 of 1975, 231 and 232 of 1976 and 350 to 1977 in Commissioner of Income Tax Vs. Kannika
Parameswari Devasthanam and Charities, followed this decision in principle. These cases have absolutely no scope for any application to the facts
herein. In the Gujarat case, construction and maintenance of a dharamshala was an object of the trust. The expenditure was incurred on such an
object. Purchasing a property cannot be an object of the trust, much less a charitable object thereof. In the Madras case, the matter had to be
investigated.
The other decision referred to before the Tribunal was that of the Jammu and Kashmir High Court in Commissioner of Income Tax Vs. Shri
Krishen Chand Charitable Trust, . In that case the net profit for the relevant year was Rs. 1,89,640. The assessee wrote to a bank to purchase
Government securities for Rs. 2,00,000 and sent a bank draft for this purpose. The bank purchased securities for Rs. 1,87,778.62 and sent back
the balance. As the profit for the year amounted to Rs. 1,89,640, there was a shortfall of the investment to the extent of Rs. 1,861.67. The income
tax Officer did not, therefore, allow the exemption u/s 11(2). It was held that the assessee was eligible for the exemption, because the exemption
was available u/s 11(1)(a), as, under the said provisions, the assessee could accumulate twenty-five percent, of the income of the trust. The learned
judges held that a combined reading of section 11(1) and (2), showed that section 11(2), while enlarging the scope of the exemption, removed the
restriction imposed by section 11(1)(a) but that it did not take away the exemption allowed by section 11(1)(a), so that so long as the assessee
had not accumulated more than 25% of the income, it could get the exemption u/s 11(1)(a). In the present case, it is not suggested that the
assessee had invested any money in Government securities or that there is only a shortfall, which is less'' than 25% so as to apply that decision.
Thus, as these two decisions are not applicable, the matter has to be considered only in the light of a proper construction of section 11(1)(a). If
the contention, which found favour with the accountant member and also with the third member, is to be accepted, then in no case can a charitable
trust be taxed. The trust has to only go on purchasing properties year after year stating that it is doing so for charitable purposes, so that it is out of
the reach of the income tax authorities. A contention like this has only to be stated to be rejected. It is so obvious that it cannot countenance
acceptance in the scheme of the income tax Act as designed in section 11.
What has happened in the present case is that the assessee has recovered an outstanding due to it from its debtor. Where the assessee
recovers an outstanding, it cannot be stated that it has applied the income of the trust for charitable purposes. The asset, as it is sometimes called,
is ""in meal or in malt"". The change of its shape or form involves no application of the income for charitable purposes.
Before the Tribunal the assessee appears to have contended that it did not want to liquidate the Government securities for the purpose of
paying the vendor of the property in cash and that it, therefore, adopted the idea of squaring up the debt by purchase of the property. Even where
the assessee sells the Government securities and purchases another property, it would not certainly be complying with the provisions of the statute.
Conversion of one asset into another is not an application of the income for charitable purposes. If this position were to be accepted, even the
need to keep the income invested in Government securities envisaged by the section can be circumvented by purchasing other assets. The policy of
Parliament to canalise the trust income only in Government securities would be defeated, and the object behind the enactment of the section would
stand frustrated. Such an interpretation would have to be avoided.
Before the third member an attempt was made to show that this property was purchased for the purpose of construction of a hospital relying
on a resolution of 20th February, 1970. The departmental representative appearing before the Tribunal protested against any fresh evidence being
adduced by the assessee at that stage. The third Member also does not appear to have admitted the said evidence. In these circumstances, it is not
necessary to consider whether the purchase of this property is a step in the realisation of the objective of the provision of a hospital contemplated
as an object of the trust.
Learned counsel for the assessee contended on the strength of a passage from the judgment of the Gujarat High Court in Satya Vijay Patel
Hindu Dharamshala Trust Vs. Commissioner of Income Tax, Gujarat I, , that there is some presumption that the purchase has been made out of
the current year''s income. There is no need to draw on any presumption when the facts clearly stare one in the face and show that the asset was
acquired in realisation of an outstanding due; Further, in a case where the assessee claims an exemption, the burden is on him to establish the claim.
He cannot be said to have discharged his burden by merely relying on some rule of presumption for which there is no warrant in law. Further
acquisition of property per se does not serve the purpose of application. Even assuming that there is any scope for the play of any rule of
presumption, in the context of this case, such a presumption is of no avail.
Mr. C. Ramakrishna, the learned counsel appearing for the assessee before us, strenuously contended that a sum of Rs. 1,50,000 had been
utilised for the purchase of the agricultural land and that this at least must be taken into account in finding out whether the income of the trust was
utilised for charitable purposes. This contention had not been taken at any earlier stage. The only explanation given by the assessee for not
complying with the condition of section 11(2) was that it had purchased a property known as ""Rama Vilas"". This acquisition has now been found
to be irrelevant in the context of the provisions of the statute. Therefore, the assessee cannot be allowed to fall back upon the investment in
agricultural land at this stage. The result is that the question referred to us is answered in the negative and against the assessee. The learned counsel
for the assessee, however, contended that the authorities have not so far considered that to the extent of 25% of the income the assessee could
accumulate in accordance with section 11(1)(a). The question referred to us does not cover this aspect. Thus, we do not think it proper to go into
it and we would only leave it to the assessee to urge it, if necessary. There will be no order as to costs.