Commissioner of Income Tax vs Trustees of Kasturbai Scindia Commission Trust

Mrs. Sujata Manohar, J.—The above reference applications raise a common question of law relating to the interpretation of section 13(2)(h) of the income tax Act, 1901 (''the Act'') as in force at the relevant time. The assessment years concerned in all these references are from 1971-72 up to 1974-75. For the sake of convenience, we are setting out the facts only in respect of IT Reference No. 298 of 1978. The relevant facts in respect of the other references are similar. Some of these references are at the instance of the assessee while some are at the instance of the revenue. Facts in IT Reference No. 298 of 1978: The assessee is a public charitable trust. The trust was created on 18-1-1963 by an indenture of trust executed by late Shri Mangaldas N. Verma as a settlor, settling Rs. 1 lakh on trust for public charitable purposes. On 6-3-1964, the trust has received and accepted 3,000 fully paid equity shares of Rs. 100 each of Caprihans (India)(P.) Ltd. as a donation to the corpus of the trust. Again on 30-3-1965, the trust received and accepted another 800 fully paid-up equity shares of Rs. 100 each of Caprihans (India)(P.) Ltd. as a donation. On 30-3-1966, the trust received 3,800 bonus shares of Caprihans (India)(P.) Ltd. and on 21-3-1969, it received another lot of 3,800 bonus shares in the said company. It is an admitted position that the author of the trust has a substantial interest in Caprihans (India)(P.) Ltd.

The trust continued to hold these shares for the relevant previous year, in Caprihans (India)(P.) Ltd., a company in which the author of the trust had a substantial interest. The ITO subjected the entire total income of the trust amounting to Rs. 2,83,274 to tax by invoking the provisions of section 13(2)(h). This finding has been upheld by the AAC as well as the Tribunal. Hence, the following question of law has been referred to us u/s 256(1) of the Act:

Whether, on the facts and in the circumstances of the case, the provisions of section 13(2)(h) of the income tax Act, 1961, are attracted and the entire total income of Rs. 2,83,274 is liable to be assessed for the assessment year 1971-72

We are not setting out the questions raised in other references which are before us. Though differently worded, the question in each of these references is whether the provisions of section 13(2)(h) are attracted in cases where the trust received a donation in the form of shares in a company in which the original settlor had a substantial interest.

For the purpose of deciding this question, we must look to the relevant provisions of the Act. u/s 11 of the Act, income derived from property held under trust wholly for charitable or religious purposes is not to be included in the total income of the previous year of the person in receipt of the income to the extent and subject to the conditions which are set out in section 11. These are not relevant for our purpose. u/s 12 of the Act (introduced with effect from 1-4-1973) any voluntary contributions received by a trust created wholly for charitable or religious purpose shall, for the purposes of section 11, be deemed to be income derived from property held under trust wholly for charitable or religious purposes.

The material provisions of section 13 are as follows: It provides for certain cases to which sections 11 and 12 (with effect from 1-4-1973) are not attracted.

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-

(a) and (b) ******

(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof-

(i) and (ii) ******

directly or indirectly for the benefit of any person referred to in sub-section (3):

******

(2) Without prejudice to the generality of the provisions of clause (c) of sub-section (1), the income of the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in sub-section (3).-

(a) to (g) ******

(h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in sub-section (3) has a substantial interest.

(3) The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely:-

(a) the author of the trust or the founder of the institution;

As a result, the exemption from tax to income from the property held for charitable or religious purposes which is available under sections 11 and 12, is not available, inter alia, if any income of such a trust is used or applied directly or indirectly for the benefit of any person referred to in sub-section (3) of section 13. Sub-section (2) is a deeming provision dealing with cases where the income or property of such a trust is deemed to have been used or applied for the benefit of such a person. One such case arises - if any funds of the trust are invested or continue to remain invested in any concern in which such a person has a substantial interest.

The assessees before us contend that the provisions of clause (h) of section 13(2) will be attracted only in a case where the funds of the trust are invested or continue to remain invested in any concern in which such a person has a substantial interest. If the moneys belonging to the trust are not so invested by the trustees, or if the moneys belonging to the trust do not continue to remain invested in this fashion, the provisions of section 13(2)(h) are not attracted. They submit that, in the present case, no part of the trust fund has been either invested or continues to remain invested in such a company because this is a case where the trust has received a donation in the form of shares. Therefore, the trust funds are not invested in acquiring such shares. The shares have been donated to the trust. Hence, although, these shares are in a company in which the donor has a substantial interest, section 13(2)(h) will not be attracted. It is, however, the contention of the revenue that it makes no difference whether the trust receives money or shares. Both these are funds of the trust and if they are invested in a company in which the donor has a substantial interest, section 13(2)(h) would be attracted.

In order to decide this question, we will first look at the ordinary meaning of the term ''funds''. This has been discussed at length in Commissioner of Income Tax Vs. Birla Charity Trust, . The Calcutta High Court in that case, while examining an identical question, referred to the dictionary meaning of the term ''funds'' in Black''s Law Dictionary, 5th edition, as an asset or group of assets set aside for a specific purpose:

In the plural, this word has a variety of slightly different meanings, as follows: ''moneys and much more, such as notes, bills, cheques, drafts, stocks and bonds, and in broader meaning may include property of every kind... Money in hand, assets, cash, money available for the payment of a debt, legacy, etc. Corporate stocks or Government securities; in this sense usually spoken of as the ''funds''. Assets, securities, bonds or revenue of a State or Government appropriated for the discharge of its debts. Generally, working capital: some times used to refer to cash or to cash and marketable securities''. (p. 156)

The term ''funds'', therefore, has a wide import. We, however, have to see the meaning of this word in the context in which it is used. What section 13(2)(h) refers to is funds of the trust which are invested or which continued to be remained invested. It is, therefore, necessary also to look at the meaning of the term ''invest''. The Concise Oxford Dictionary, 5th edition defines ''invest'' as "to lay out money on - as in a car". Chambers'' Twentieth Century Dictionary, 1972 edition, defines ''invest'' as "... to lay out for profit as by buying property, shares, etc.". Therefore, investment connotes laying out money in order to earn a financial return. When, therefore, funds are invested, reference is clearly to money which is invested or money which is laid out in a manner which will secure financial returns. In this sense, other types of funds such as securities or shares cannot be invested. These will have to be first sold and the moneys so realised will have to be invested. Section 13(2)(h) has no reference to any such transaction. It deals with a situation where the moneys which form a part of the trust funds are invested in a company in which the donor has a substantial interest, or a situation where the moneys belonging to the trust continue to remain so invested. Unless, therefore, the trust utilises a part of its money in purchasing shares in a company in which the donor of the trust or any other person referred to in sub-section (3) is interested, section 13(2)(h) would not be attracted. In fact, this is what the Calcutta High Court has also held in the above case of Birla Charity Trust (supra). In the case before the Calcutta High Court also the trust received shares of such a company by way of a donation. The assessee did not deal with or commit or lay out any part of its existing assets to acquire the said shares. Apart from the acceptance by the assessee of such shares, there was no decision or action on the part of the assessee. The Calcutta High Court said that there was no investment of funds of the assessee within the meaning of section 13(2)(h).

A similar view has been taken by the Gujarat High Court in the case of Commissioner of Income Tax Vs. Insaniyat Trust (Now merged with Sarabhai Foundation), . The Gujarat High Court, after considering the provisions of section 13(2)(h), has said that the object of the above provisions is to discourage investment of trust funds in concerns in which specified persons have a substantial interest; and if an investment is already made in such concerns, to discourage continuance thereof after 31-12-1970. It is only if the funds of the trust itself are invested that it would result in forfeiture of exemption available u/s 11. The funds have to be such as are capable of investment. Therefore, in order to attract section 13(2)(h), it has to be established that funds of the trust which are capable of being invested have been utilized for making investment as provided therein. After considering the dictionary meaning of the term ''fund'' or ''funds'' and ''investment'', the Gujarat High Court also said that the context of the setting in which the expression ''trust funds'' is employed in section 13(2)(h), the meaning which should be attributed to that expression is actual or available money or cash resources such as money in hand and money in the bank. No other meaning of the expression ''fund'' is relevant for construing that expression employed in the section. In the case before the Gujarat High Court also, trust moneys had not been invested in purchasing shares of the companies. The trust had received a donation in the form of shares. The Gujarat High Court held that section 13(2)(h) would not apply to such a provision.

Mr. Jetly, the learned advocate for the revenue, sought to rely upon a decision of the Andhra Pradesh High Court in the case of Talaprolu Bapanaiah Vidya Dharma Nidhi Trust Vs. Commissioner of Income Tax, . In the case before the Andhra Pradesh High Court, however, the assessee had settled a sum of Rs. 20,000 on a trust for charitable purposes. The said sum was invested in a firm in which he had a substantial interest. It was held that in view of the provisions contained in section 13(2)(h), the assessee''s claim for an exemption u/s 11 was not maintainable. This judgment will have no application to the facts and the situation which is before us.

Mr. Jetly also sought to rely upon the statement of objects and reasons accompanying the Finance Bill, 1970 introducing these provisions in the Act and the memorandum explaining various clauses in that Bill [1970] 75 ITR (St.) 31 at pages 34, 70 and 87. We have gone through these. Neither the memorandum which explains the provisions in the Finance Bill, 1970 nor the statement of objects and reasons throws any light on the question which is before us. Looking to the context of section 13(2)(h), therefore, in our view, this section is not attracted in a case where trust moneys are not invested in the purchase of shares in a concern of the kind referred to in section 13(2)(h) ; or where trust moneys do not continue to remain so invested - the trust being merely a passive recipient of shares in such a company given to it as a donation. The question, therefore, which is before us is answered in the negative and in favour of the assessee. Similarly, in all the other references which are before us, the question is answered in accordance with our reasoning above to the same effect so that the provisions of section 13(2)(h) are not attracted in the case of assessees who have received donations in the form of shares in a company or concern in which one of the persons set out in sub-section (3) has a substantial interest when the trust moneys are not utilised for the acquisition of such shares. The questions are answered, accordingly, in favour of the assessee in all the references. No order as to costs.