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Judgment
CHANDER SINGH, A. M. :
This appeal by the assessee for asst. yr. 1986-87 has been directed against the order under s. 263 of the CIT.
The assessee was incorporated as a private limited company. The main objects of the company as per memorandum of association were charitable in nature.
While filing the return of income for the year under consideration, the assessee had claimed the deduction of Rs. 1,10,520 under s. 80M of the Act. The said deduction under s. 80M was allowed by the AO not only for the asst. yr. 1986-87 but for asst. yrs. 1987-88 and 1988-89 as well.
The CIT examined the Income Tax records for the asst. yr. 1986-87 and found that the assessee-company was not entitled to the deduction under s. 80M of Rs. 1,10,520. The CIT observed that under the memorandum of association and articles of association of the assessee-company, it was not authorised to distribute the income or the property of the income as dividend to its members. The assessee is an Indian company and in respect of its income liable to tax under the IT Act. The assessee had not made the prescribed arrangements for the declaration and payment within India of dividends payable out of such income. The assessee, in the opinion of the CIT, was not a domestic company within the meaning of s. 80B(2) of the Act. As the assessee was not a domestic company under s. 80B(2) and has not made the prescribed arrangement for declaration and payment within India of dividends payable out of its income, the assessee was not entitled to the deduction under s. 80M of the Act.
The CIT further noted that the assessee had applied on 18th Nov., 1983, under s. 12A of the Act for registration of its research foundation as a charitable institution. On the same day, the assessee had also applied for recognition to its trust under s. 80G of the Act. The Revenue has registered the assessee as a charitable institution under s. 12A on 26th Nov., 1983, at Registration No. 3709. The assessee was also granted certificate of recognition under s. 80G on 26th Nov., 1983, for the period upto 31st March, 1984. In view of these facts, the CIT was of the view that all the properties held by the assessee under the trust was governed by the provisions of ss. 11, 12, 12A and 13 of the Act. The CIT also found that for the accounting year relevant to assessment year under discussion, the assessee was holding in the previous year the shares of an Indian company in violation of provisions of s. 13(1)(d) of the Act. In view of these brief facts, the CIT was of the view that the assessee was not entitled to the deduction under s. 80M of the Act and, therefore, the order of the AO granting such deduction under s. 80M was erroneous as well as prejudicial to the interest of Revenue. The CIT after hearing the assessee directed the AO to
(a) assess the assessee-company in the status of a private limited company;
(b) to compute the income derived from the property held under trust wholly and exclusively for charitable purposes at Rs. 1,62,889;
(c) to include the said income in the total income of the assessee-company; and
(d) to determine the tax payable on the said income of Rs. 1,62,889 at the maximum marginal rate.
In other words, the CIT directed the AO to deny the deduction under s. 80M of the Act to the assessee-company and also to apply the provisions of s. 164(2) of the Act.
The assessee is in appeal against the order of the CIT.
The learned counsel Shri H. N. Shah, assailed the order of the CIT on various grounds. He pointed out that the assessee is a private limited company and within the meaning of s. 80B(2) of the Act is a domestic company. Being a domestic company, the learned counsel urged that the assessee is entitled to deduction under s. 80M of the Act in respect of inter-corporate dividend income received by the assessee. Though the assessee was registered under s. 12A of the Act as a charitable institution and though the assessee was granted recognition upto 31st March, 1984, under s. 80G of the Act, but the assessee had not sought renewal of recognition under s. 80G of the Act beyond 31st March, 1984, and also had not sought the exemption under s. 11 of the Act. In the opinion of the learned counsel ss. 11 to 13 are not charging sections. The said sections grant exemption in respect of income of a charitable institution if certain conditions are fulfilled. However, as the assessee has not fulfilled conditions laid down under ss. 11 to 13, the assessee was not entitled to exemption under s. 11 of the Act. As a matter of fact, for the year under consideration, the assessee did not claim any exemption under s. 11 of the Act and, therefore, its income was to be computed under the other heads as a result of which the deduction under s. 80M could not be denied to it. It is urged that once the exemption is lost under s. 11 the assessee will be liable to tax in a normal course under the other provisions of the Act. By drawing our attention to the decision of the Tribunal in the case of Saurashtra Trust vs. 7th ITO (1987) 28 TTJ (Bom) 205 : (1987) 21 ITD 62(Bom) he pointed out that the income of the assessee was to be computed under the other provisions of the Act and in fact, there was no application of the provisions of s. 164(2) of the Act.
The learned counsel has also drawn our attention to the decision of the Calcutta High Court in the case of Commissioner of Income Tax, Central-I Vs. Jayashree Charity Trust, and pointed out that on an identical facts the Honble High Court had allowed the deduction under s. 80K of the Act to the assessee before them. The facts of the assessees case are in pari materia with the facts before the Honble High Court and, therefore, there is no reason as to why the deduction under s. 80M should not be allowed to the assessee.
He further pointed out that ss. 11 to 13 are not charging sections and is not a code in itself. Secs. 11 to 13 are in the statute book for allowing the exemption in respect of income of a charitable institution if some conditions are fulfilled. These provisions have nothing to do with the computation of income in the cases where the exemption under s. 11 to 13 are not claimed by the assessee.
The learned counsel also pointed out that the assessee had filed the return of income in the status of a private limited company. The status as per the return of income could not have been changed by the Revenue in view of the Bombay High Court decision in the case of Commissioner of Income Tax, Vidarbha and Marathwada Vs. Associated Cement and Steel Agencies, . The assessee did not file the return in the status of a trust but claimed the status as that of a domestic company. The said status should have been accepted by the Revenue. If the status was accepted the assessee would have been assessed as such and s. 80M deduction would have been allowed to the assessee. Thus, there was no error in the order of the AO.
The order of the AO was also not prejudicial to the interest of Revenue, inasmuch as that if s. 164(2) was applicable the maximum marginal rate would work out to 50% plus applicable surcharge. The learned counsel pointed out that as against this, the assessee-company had been charged tax in the status of a company at 60% plus surcharge and, therefore, it cannot be said that the assessment order passed by the AO was erroneous or prejudicial to the interest of Revenue. The learned counsel asserted that even (sic - if) there was an error in the order of the AO the said error did not result to the detriment of the Revenue and, therefore, the assumption of revisional jurisdiction under s. 263 of the Act was not justified. The learned counsel thus prayed that the order of the CIT should be vacated.
The learned Senior Departmental Representative, Dr. Sunil Pathak, on the other hand, strongly supported the order of the CIT. He took us through the objects incidental or ancilliary to the attainment of the main objects. He pointed out that all the objects of the assessee-company are charitable in nature. As a matter of fact, the Revenue had accepted the charitable character of the assessee by according it the registration under s. 12A of the Act. As a matter of fact, there is no dispute that the assessee-company is a charitable institution and, therefore, it is in the nature of a trust. It is also clear from the perusal of the memorandum of association and the articles of association that there is no profit motive and the assessee has been carrying on the business with a view to earn the profit for charitable purposes. The entire income of the assessee was to be applied for charitable purposes and no dividend out of profit could have been distributed. The assets of the assessee were also incapable of distribution. Thus, the assessee was a charitable institution and was assessable as the trust.
The learned Departmental Representative continued and pointed out that though the assessee was incorporated as a company but in fact it is a charitable trust. In his opinion, for creating a trust, no technical words are necessary. A trust may be created by such words as shown as intention to create a charitable or a religious trust. Thus, in the case of the assessee, a trust was created and the profit of the assessee was to be applied for the charitable purposes.
The learned Departmental Representative also pointed out that ss. 11 to 13 is a separate scheme in itself. The profits of a business or the income from property held under trust can be computed with reference to ss. 11 to 13. For the computation of income, one need not go beyond ss. 11 to 13. In other words, ss. 11 to 13 are code in itself. In the case of the assessee, therefore, the income from inter-corporate dividend was to be assessed under ss. 11 to 13 and if exemption under s. 11 was not available to the assessee, the tax was to be charged at maximum marginal rate under s. 164(2) of the Act.
The learned Departmental Representative also pointed out that though the assessee is registered under s. 12A and was required to seek exemption under s. 11 but such an exemption should not be given to the said trust as the assessee has not fulfilled the conditions under s. 13 of the Act.
The learned Departmental Representative asserted that for the year under consideration, the assessee could not be subject to tax in the status of a company. The assessee is a trust and, therefore, has to be assessed as such under ss. 11 to 13 of the Act. By drawing our attention to the decision of the Allahabad High Court in the case of Pratap Chandra and Others Vs. Income Tax Officer and Others, the learned Departmental Representative pointed out that if a receiver is appointed on behalf of the HUF the income received by the receiver on behalf of the HUF has to be taxed in the hands of the HUF. The receiver cannot be taxed as an individual on the income belonging to the HUF. Similarly, in the case of the assessee, it cannot be taxed as the company when in fact, the income of the assessee belongs to a trust. There is no doubt whatsoever that the assessee had derived the income from property held under trust wholly for charitable purposes and, therefore, looking to the legal obligations of the assessee, the income was to be assessed in the hands of the trust and not in the status of the company. For this proposition, the learned Departmental Representative has relied on the following decisions :
(1) Commissioner of Income Tax Vs. Ootacamund Gymkhana Club, ;
(2) Dharmaposhanam Company Vs. Commissioner of Income Tax, Kerala, ;
(3) Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce, .
Regarding the assessees reliance on the case of Jayashree Charity Trust (supra), the learned Departmental Representative pointed out that the said decision of the Calcutta High Court has (sic - been) practically overruled by the same High Court in the case of Director of Income Tax (Exmp.) Vs. Girdharilal Shewnarain Tantia Trust, . The learned Departmental Representative has drawn our attention to the following paragraph of the said decision :
"Our attention has been drawn to the decision of this Court in Commissioner of Income Tax, Central-I Vs. Jayashree Charity Trust, where relief under s. 80K was allowed. There the Court proceeded on the footing that s. 80K would be applicable. It was recorded that there is no dispute that the assessee is entitled to deduction in respect of dividends attributable to profits and gains from industrial undertakings. The Division Bench of this Court had no occasion to consider the controversy raised before us as regards allowability of deduction under s. 80T. In our view, the decision in Jayshree Charity Trusts case is not an authority for the proposition that even if a part of the income is taxable because the benefit of accumulation is lost, all the statutory deductions allowable under the different heads of income would apply in dealing with such income. It has been specifically made clear that the income from the property held for charitable or religious purposes would be exempt subject to the provisions of ss. 60 to 63. The question is whether deduction can be allowed under s. 80T on the capital gains derived by the assessee-trust."
The learned Departmental Representative, therefore, contended that the same High Court had ruled out that on the facts and circumstances of the case, the deduction under s. 80T was not available. Following the ratio of the said decision, the learned Departmental Representative prayed that it should be held that assessee is not entitled to the deduction under s. 80M of the Act.
Regarding the decision of the Bombay High Court relied upon by the learned counsel for the assessee in Associated Cement & Steel Agencies (supra), the learned Departmental Representative pointed out that the facts of the case are distinguishable. In the said case, he pointed out that the AO had issued a notice under s. 143(2) to the firm and yet has completed the assessment as AOP. Under those circumstances, the Bombay High Court has held that this was not permissible. There is no such case in the case of the assessee. He further argued that there is no provision either in the IT Act or the rules providing that the AO proposes to make the assessment in a status different from the one in which the return is filed. A notice or a fresh notice as the case may be should be issued to the assessee. Such a requirement cannot also be inferred from the principles of natural justice. Thus, in the opinion of the learned Departmental Representative, the assessee should (sic - not) be assessed in a different status. The learned Departmental Representative drew support from the decision of the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. D. Seshagiri Rao, .
The learned Departmental Representative, therefore, asserted that the assessee is a charitable institution and, therefore, its income and the tax thereon has to be determined with reference to ss. 11 to 13 of the Act. Since ss. 11 to 13 are complete code in itself the assessee is not entitled to deduction under s. 80M of the Act. He pointed out that the computation of income should be in accordance with the provisions of the Act. Sec. 11(1) envisages the computation of income and, therefore, no other section should be imported into s. 11(1) of the Act for determining the income of the assessee and the tax thereon. In this regard, he has relied on the decision of the Madras High Court in the case of Commissioner of Income Tax Vs. Rao Bahadur Calavala Cunnan Chetty Charities, . He, therefore, concluded that the CIT was justified in invoking the provisions of s. 263 of the Act.
We have heard the rival submissions and the careful study of the judicial decisions brought to our notice. The main issue in this appeal before us is the deduction under s. 80M of the Act and determination of the status of the assessee. There is no doubt that the assessee was incorporated as a private limited company but its aims and objects were charitable in nature as defined under ss. 11 to 13 of the Act. As a matter of fact, the assessee-company had also been registered under s. 12A of the Act and for the purpose of s. 80G the recognition was also accorded to the assessee upto 31st March, 1984. Further, the assessee filed a return of income in the status of a company and claimed deduction under s. 80M of the Act on inter-corporate dividends. Sec. 80M of the Act provides that where the total gross income of a domestic company includes any income by way of dividends from a domestic company there shall be allowed in computing the total income of the domestic company deduction from such income by way of dividends of an amount equivalent to 60% of such income. This brings us to the term domestic company which has been defined under s. 80B(2) of the Act. According to the said section, the domestic company means an Indian company or any other company which, in respect of its income liable to tax has made the prescribed arrangements for declaration and payment of dividends within India. In other words, the definition of domestic company is made of two limbs viz., (1) it is an Indian company, and (2) it is any other company which in respect of its income liable to tax under the IT Act, has made the prescribed arrangement for declaration and payments within India, of dividends payable out of such income. In other words, if a company is an Indian company it will automatically be considered as a domestic company. In case of any other company, in order to become the domestic company, it is essential that the said other company may have made the prescribed arrangement for declaration and payments within India of dividends out of such income. The second limb of the definition of the domestic company may even apply to the foreign companies.
To make the matter more clear, we consider it essential to look into the definition of Indian company under s. 2(26) of the Act. Under the said section, an Indian company is a company formed and registered under the Companies Act, 1956. It also includes other corporations and associations which are recognised under s. 2(26) of the Act. A guarantee company formed and registered under the Companies Act, 1956, will, therefore, also be considered as the Indian company. As stated above, the domestic company is defined to mean an Indian company and, therefore, a guarantee company registered under s. 25 of the Companies Act is covered by the definition of domestic company. Once it is an Indian company it is not required to show that it has made the prescribed arrangements for declaration and payment of dividends within India. In other words, the condition regarding the arrangements to be made for declaration and payment of dividend in India is required to be fulfilled by companies other than the Indian companies. In the case before us, there is no doubt that the assessee before us is an Indian company incorporated under the Companies Act, 1956, and by virtue of its being an Indian company it need not specifically make the prescribed arrangement for declaration and payment within India of dividends. Since the assessee before us is a domestic company within the meaning of s. 80B(2), we are of the opinion that the deduction under s. 80M should not be denied to the assessee.
It is true that the assessee has been registered as a charitable institution under s. 12A of the Act. It is also true that it was granted recognition under s. 80G of the Act upto 31st March, 1984. Thereafter the assessee has not sought any recognition or renewal because the assessee did not fulfil the conditions laid down under ss. 11 to 13 of the Act. The assessee also did not claim exemption under s. 11 of the Act. In our view, the exemption under s. 11 of the Act cannot be thrust upon the assessee. The provisions of s. 164(2) can be applied in a case where the assessee has sought exemption under s. 11 but the exemption is denied to it on valid reasons or the assessee has not fulfilled the other conditions laid under the provisions of the Act or has violated the provisions of s. 13(1)(d) of the Act. In other words, s. 164(2) can be brought into play only when there is a claim of exemption by the assessee but the claim is held inadmissible on account of non-fulfilment of conditions. In the case before us, the assessee has not claimed exemption under s. 11 and, therefore, its income has to be computed under the other provisions of the Act. On a similar issue, the Tribunal in the case of Saurashtra Trust (supra) held as under :
"When in the instant case the income of the assessee-trust was held to be not entitled to exemption under any of the provisions of ss. 10 to 13 it automatically followed that the income from these sources would have to be worked out under the provisions of other sections. Thus, under s. 72(1) the assessee was entitled to set off the loss brought forward from the asst. yr. 1981-82 against the income from business for asst. yr. 1982-83 and the amount, if any, which could not be set off, should be carried forward to the following assessment years and so on and so forth upto the limit laid down in s. 72(1). The assessee would also be entitled to the claim of investment allowance if admissible under s. 32A. As the assessees claim was not entertained only on the ground that being a trust it was not entitled to the computation of income under the head profits and gains of business or profession, the ITO was directed to entertain the claim of the assessee and take a decision on merits.
Regarding the disallowance of the assessees claim for deduction in respect of the provision for contribution of the gratuity fund, since the gratuity fund had already been recognised by the CIT w.e.f. 12th Sept., 1979, and out of the total provision to the recognised gratuity fund only the payment in respect of one trustee had not been allowed and the provisions of s. 40A(7)(b)(i) clearly provided that the disallowance contemplated under s. 40A(7)(a) does not apply to any provision for the purpose of payment of any contribution towards such an approved gratuity fund, such amount on account of provision for contribution to the recognised gratuity fund should have been allowed as a deduction in working out business income for the asst. yr. 1981-82."
Though the learned Departmental Representative had made a streneous efforts to distinguish the said decision from the facts of the case before us, but we are of the view that the distinguishing features are more artificial than real. We are also of the view that ss. 11 to 13 are not charging sections. These sections grant exemption in respect of income of a charitable institution if certain conditions are fulfilled. If the assessee, by any chance, loses the exemption under s. 11 of the Act, its income should be computed in the normal rate. In other words, it is not correct to lay down that s. 11 to 13 provide a self-contained code for computing the income of a charitable trust which is not eligible for exemption under s. 11 of the Act. Secs. 11 to 13 fall under Chapter III which deals with income which does not form part of total income, that is, perhaps the reason why s. 11 starts with the words "subject to the provisions of ss. 60 to 63, the total income of the previous year of a person in receipt of the income". The various sub-clauses of s. 11(1) refer to income derived from property held in trust for charitable purposes. In our view, the reference to "income" in the various other clauses of s. 11(1) has to be considered in the context of the amount to be excluded from the total income. Therefore, one has to consider the various provisions of computing of total income in Chapter IV and if the exemption is allowable under s. 11(1) the amount of income which is otherwise includible in the total income has to be excluded. Sec. 11, in our view, is only for the purpose of determining the amount on which exemption can be claimed. In cases where the trust is not entitled to exemption for the reason that (i) its object do not comply with s. 2(15), (ii) it has utilised its funds for the benefit of persons listed in s. 13(3), (iii) it has invested the funds in a manner different from what is provided in s. 11(5), the question of determining the amount in a commercial sense will not arise. In such a case, the total income will be computed on the basis of various sections of the Act. We are, therefore, of the view that during the year as the assessee has not claimed the exemption under s. 11 of the Act, its total income cannot be computed with reference to ss. 11 to 13 of the Act. In other words, the exemption under s. 11 cannot be forcefully thrust upon the assessee. When the assessee has lost the benefit of exemption under s. 11 its income has to be computed with reference to the other provisions of the Act. As a result, the assessee will be entitled to the deduction under s. 80M of the Act. Thus, in our view, there was no error in the order of the AO which could be corrected by assumption of jurisdiction under s. 263 of the Act. We are, therefore, of the view that the CIT was wrong to apply s. 263 of the Act. We accordingly vacate his order.
With the result, the appeal is allowed.