Vildirect: IncomeTax-caselaws-1991-VIL-115-ITAT-

1991-VIL-115-ITAT-

Equivalent Citation: [1991] 38 ITD 70

Income Tax Appellate Tribunal BOMBAY

IT APPEAL NO. 6884 (BOM.) OF 1987

Date: 29.01.1991

SMT. CHANDRAKALA SOMANI CHARITABLE TRUST.

SEVENTH INCOME-TAX OFFICER.

BENCH

Member(s) : R. D. AGRAWALA., M. A. AJINKYA.

JUDGMENT

Agrawala, JM --- This is an appeal by the assessee, a charitable trust, wherein a short though interesting issue has arisen as to whether a donation made by the assessee-trust to another charitable trust in the name and style of Shree Hazarimal Somani Charitable Trust attracted the provisions of section 13(1)(c)(ii) of the Income-tax Act, 1961 (hereinafter referred to as 'Act ' for brief) or not. As per the grounds taken by the assessee, the learned AAC erred in holding that the donation did attract the aforesaid provisions of law. Similarly, the first appellate authority also erred in treating the donee trust as a ' person ' as envisaged by section 2(31) and section 13(3) of the Act inasmuch as the amount donated had been applied for charitable purposes within the objects of the appellant-trust.

2. At the outset we may point out that the assessee moved a petition praying that the case be referred to a Special Bench, inter alia, on the ground that exemption to the appellant-trust under section 11 was denied by the authorities below on the strength of a decision of the Tribunal in the case of Champa Charitable Trust [IT Appeal Nos. 936 & 937 (Bom.) of 1987] placed on record and the legislative intention had not been clearly brought in this decision. After a careful consideration this Bench takes the view that there is no necessity for such a reference and as such, the appeal is proceeded with on merits.

3. On facts, assessee-trust received a donation during 1977-78 of a sum of Rs. 3,50,000 from Shree Hazarimal Somani Charitable Trust (hereinafter referred to as " HS MT "). This HS MT was donated a sum of Rs. 85,000 by the appellant trust during the year. Shortly, on these facts, the question arises as to whether the appellant-trust loses the exemption under section 13(1)(c)(ii) read with section 13(3)(b) of the Act. In view of the Assessing Officer, by making the donation of Rs. 85,000, the appellant-trust applied its income and property for the benefit of HSMT ; thus, attracting the provisions of section 13(1)(c)(ii) and consequently lost exemption under section 11 of the Act. The A.O. further took the view that the donation of Rs. 85,000 cannot be treated as the proper application towards the objects of the trust inasmuch as it will amount to " freezing " income of the trust which was meant to be applied to charitable objects.

4. When the matter was taken in appeal, the learned AAC took the view that the donation of Rs. 85,000 has to be considered as the application of the appellant's income for the benefit of HS MT resulting in the violation of the mandate of section 13(1)(c)(ii) of the Act. The AAC also approved the Assessing Officer's action in following the ratio of the ITAT decision in Champa Charitable Trust's case.

5. We have considered the matter carefully, after hearing learned Representatives of both the sides at length. The relevant provisions of section 13(1)(c)(ii) run as under :

" 13(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----

(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 sub-section (3) "

6. Proceeding further, for ascertaining the persons referred to in sub-section (3) of section 13, the relevant provision runs as under :

" 13(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 ;

(b) any person who has made a substantial contribution to the trust or institution (that is to say, any person whose total contribution up to the end of the relevant previous year exceeds twenty-five thousand rupees) ;

(cc) any trustee of the trust or manager (by whatever name called) of the institution ;

(d) any relative of any such author, founder, person (member, trustee or manager) as aforesaid ;

(e) any concern in which any of the persons referred to in clauses (a), (b), (c), (cc) and (d) has a substantial interest."

7. The learned counsel for the assessee strenuously contended that it will not be correct to say that HSMT is a " person " and that if a donation has been made by one charitable trust to another and if it could be proved to the satisfaction of the concerned authorities that it is not for the benefit of the donee-trust or for its beneficiary, there is no infraction of the provisions of section 13 and consequently the donor-trust cannot be visited with any adverse consequences. As against this, the learned Departmental Representative submitted that the donee-trust is very much covered by the definition of the term " person ", as is evident by sub-section (31) of section 2 of the Act.

8. This definition of the term " person " runs as under :

" 2.(31) ' person ' includes----

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses ;"

9. Elaborating it has been contended on behalf of the assessee that if we carefully go through the provisions of sub-section (3) of section 13, more particularly its clause (d), it is amply clear that the person must be capable of having a relative. Since, a trust cannot have a relative by necessary implication it has to be held that the term " person " for the purpose of section 13 could mean an individual alone, that it is not the trust which could be treated as a " person " ; only the trustees could be. In support of this plea reliance has been placed on a decision of the Madhya Pradesh High Court in Shrigopal Rameshwardas v. Addl. CIT [1979] 119 ITR 980. It, however, appears appropriate to us to say on this point itself that the ratio of this case does not strengthen assessee's submission ; since in this case it was the word " assessee " which was to be interpreted and as defined by sub-section (7) of section 2 of the Act this definition itself means a person by whom any tax or any other sum of money is payable under the Act, etc., etc. . . .

10. We may now refer to the view taken by the Tribunal in Champa Charitable Trust's case, on which strong reliance has been placed on behalf of the department. The facts of this case are similar to the one in hand except that in that case the ITO had not denied the exemption under section 11 though his action subjected to section 263 proceedings wherein the learned Commissioner took the view that by making a donation to the assessee-trust,the donee-trust became a person who made a substantial contribution to the assessee-trust within the meaning of section 13(3)(b) and by making donation to that trust in the relevant previous year, the assessee-trust applied its income and property for the benefit of the trust which had earlier made donation to the assessee-trust thereby attracting the wrath of section 13(1)(c)(ii). The argument advanced in Champa Charitable Trust that the donee-trust was not a person within the meaning of section 13(3) did not go home with the Tribunal. We give below a small passage from the Tribunal's order on this particular aspect of the matter :

" as long as the term ' person ' occurring in clause (b) is not confined to individuals but also covers juridical persons, it will not be possible for us to hold that the term will not cover a charitable trust. We, therefore, agree with the view taken by the Commissioner that the L U Trust will be a person who made a substantial contribution to the assessee trust within the meaning of clause (b) of sub-section (3) and that sub-section (1)(c)(ii) of section 13 will be attracted in the case of the assessee."

11. Assailing the view taken by the Tribunal, the learned counsel for assessee contended that since the provisions of section 13(3)(d) were not particularly taken into consideration, the view taken is not binding for the other case. A substantial difference, it was contended, did arise as unless an impracticable situation is upheld it could not be said that a trust could have relatives. Only the trustees were possible to have relatives as envisaged by section 13(3)(d). It was also vehemently submitted that the mandate of section 13(1)(c)(ii) clearly postulates that the income should be used or applied for the benefit of any person, patent thrust made for individual or individuals. To lend support to this plea our attention was also invited to the provisions of section 40(c) where too the term " person " has been applied in relation to an expenditure which resulted directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person as a substantial interest in the company or to a relative of the director or of such person, meaning that the person meant and referred to only a human being capable of having relatives. Reference was also made to a decision of the Tribunal in ITO v. Ralliwolf Ltd. [IT Appeal No. 1143 (Bom.) of 1979, dated 24-9-1980] holding that the payment under section 40(c) of the Act did not apply to the payments to artificial persons, as considering the wordings of this provision the conclusion drawn could be that section 40(c) was meant only for a natural person, an artificial person being incapable of having a relative. The learned counsel for the assessee thereafter spelling out the objects of sections 11 to 13 of the Act submitted that in plain terms it was to arrest the abuse of charity. In this respect reliance was first placed on the speech of the Hon'ble Finance Minister during the budget for 1970-71 reported at page 17 of 175 ITR (Statutes) which, inter alia, suggested that the exemption from tax, in the case of charitable and religious trust, would be allowed only in respect of income actually applied to the purpose of trust and that steps were being taken to curb indirect benefit being enjoyed by the authors of the trust, which naturally referred to the large number of family trusts appearing on the scene. Reference was also made to the Supreme Court decision in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 as per which the consequences of a suggested construction though cannot alter the meaning of a statutory provision whether such meaning is plain and unambiguous, but they can certainly help to fix its meaning in case of doubt or ambiguity. Applying this dictum it was contended that the meaning assigned to the word " person " on behalf of the assessee must be accepted.

12. It was thereafter contended that the term " used or applied directly or indirectly for the benefit of any person " appearing in section 13(1)(c)(ii) clearly had the effect of excluding the trust as it is not a person an assessment could be made only on a trust or the beneficiaries. It was also submitted that use and application meant beneficially received or beneficially used, which in this case meant that the benefit of the school run by the donee-trust and not for the trust. Section 3 of the Indian Trusts Act also envisages that such benefit could flow only to the beneficiaries and not to the trust.

13. Referring to the term " benefit " it was contended that as per Black 4th Editi on page 200, it meant no advantage or profit to the donee-trustees. Therefore, when the donation was made by one charitable trust to another, by its very nature it does not result into in an advantage to any one. Further, benefit envisaged by section 13 should not be abstract or notional. In this connection reliance was placed on a decision of the Madras High Court in Manickavasagam Chettiar v. CIT [1964] 53 ITR 292 wherein it has been held that the characteristic of the benefit is that it is real and not notional, concrete and not abstract, certain and not conjectural.

14. As against this the learned Departmental Representative also made several submissions to say that the impugned order did not call for any interference. He, inter alia, contended that the interpretation of the term " person " appearing in section 40(c) of the Act relates back to the definition of " person who has a substantial interest in the company ", as appearing in sub-section (32) of section 2 and not sub-section (31) of section 2 of the Act and had, therefore, no direct bearing on the issue ; that for the purpose of section 54 relating to the computation of capital gains a Hindu undivided family has also be held to be includible by the Bombay Benches of the Tribunal ; the speech of the Finance Minister had no direct relevance ; that the issue before us was well settled by the decision of the Tribunal in Champa Charitable Trust's case that when assessee's case fell within clause (b) of sub-section (3) of section 13 why should we go to clause (d) and the construction of the statute should be made as it stands. It was also contended that once an issue had been settled, it need not be reopened, for which submission reliance was placed on a decision of the Madras High Court in CIT v. L. G. Ramamurthi [1977] 110 ITR 453 and lastly that section 13(3)(d) had also explanation which made the things clearer.

15. We have considered the matter at great length. No doubt for the purpose of section 40(c) " person who has a substantial interest in the company " is defined in section 2(32) of the Act, yet, this definition as well the definition of the term " person " cannot be taken into isolation. The interpretation of the term " person who has a substantial interest in the company " can be canvassed for arriving at the true meaning of the definition of the other term " person " alone. In any case, it is only a submission made on behalf of the assessee to strengthen its plea that the term " person " referred only to individuals.

16. As far as the inclusion of the H.U.F. for the purposes of section 54, in the first instance no specific decisions were cited. Secondly, and more importantly section 54 of the Act significantly does not refer to a person and refers only to an assessee. So, the revenue cannot get any advantage out of this submission.

17. Regarding the speech of the Hon'ble Finance Minister also it could be said that once there was some doubt about the true meaning of the particular provision, to gather the legislative intention it could be referred to. As regards the ratio of the Champa Charitable Trust's case is concerned, no doubt the Tribunal has taken a view in favour of the revenue but the same is sought to be distinguished by the learned counsel for the assessee that a particular aspect of it, viz., the provisions of section 13(3)(d) were not particularly taken into consideration.

18. As regard the construction of Statute is concerned, no doubt the Statute should be construed as they appeared to be and if one particular clause applies to a given statute, we may not go to the other clause but if a case falls within the ambit of two clauses simultaneously, a harmonious construction by a Judicial/quasi-judicial authority is called for. We shall now go to the specific submission made by the learned Departmental Representative that the case of the assessee falls within clause (b) of section 13(3) of the Act. This clause, as has been reproduced in para 6 aforesaid, says that among the various persons referred to in clause (c) of sub-section (1) and sub-section (2), one of them is any person who has made a substantial contribution to the trust or institution, which has been put exceeding Rs. 25,000 calculated up to the end of the relevant previous year. Patently the case of assessee falls within this clause as HSMT made the donation of Rs. 3,50,000 to the assesseetrust yet, to consider as to what was really meant by the term " person " appearing in sub-section (3) of section 13, in our opinion, assessee can legitimately hop to the context of the same term used in this very sub-section exclusively and this is what has been attempted to be done by the assessee.

19. In the result, we are of the considered view that in the facts and circumstances of the case there is no infraction of the provisions of section 13 as the transaction in question cannot be said to be for the benefit of donee-trust or for its beneficiaries and, therefore, the appellant could not be visited with the adverse consequences as held by the learned AAC. The appellant-trust continued to be entitled to the exemption envisaged by section 11 of the Income-tax Act.

20. The appeal is allowed.

Per Shri M.A. Ajinkya, Accountant Member :

21. I have perused the order passed by the learned Judicial Member and I am in full agreement with the conclusions reached by him. I would, however, like to make the following observations.

22. The short question for consideration is whether the provisions of section 13(1)(c)(ii) read with section 13(3)(b) can be invoked on the facts of the present case to deny exemption granted to the appellant-trust. The facts have been stated at length by my learned Brother and they need not be repeated. The relevant provisions of law have also been extracted. The substantial point for consideration is whether the appellant-trust, which had received a donation of Rs. 3,50,000 towards its corpus from Shree Hazarimal Somani Charity Trust and which had given a donation of Rs. 85,000 to the same Trust during the year of account, can be said to have applied its income and property for the benefit of Shree Hazarimal Somani Charity Trust and thereby attracting the provisions of section 13(1)(c)(ii) and, consequently, whether the appellant trust can be denied the exemption granted to it under section 11 of the Act. For deciding this issue, we have to consider whether Shree Hazarimal Somani Charity Trust is a person and whether the donation can be said to have been used or applied for the benefit of such person. It has been argued before us by Shri Dastur, and, in our opinion, rightly, that the word ' person ' must be construed as a human entity. ' Person ', in the context of section 13(3), must mean a human-being, particularly in the context of the provisions of section 13(3)(d). Sub-section (3) of section 13 provides that the persons referred to in clause (ii) of sub-section (1) and sub-section (2) are those mentioned in sub-clauses (a) to (e) of that section. Clause (a) speaks of author of the trust, clause (b) speaks of a person who has made substantial contribution to the trust, clause (c) speaks of a member of the family where the author or founder is it member of the HUF, clause (cc) speaks of trustee of the trust and clause (d) speaks of a relation of such author, founder, person, member, trustee or manager. In view of these provisions, we cannot visualize charitable trust ' as a ' person ' contemplated within the various clauses of sub-section (3) of section 13 for the simple reason that there cannot be a relative of a charitable trust. At best, there can be relatives of trustees of such trust. Therefore, the expression " used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3) ", which is used in sub-clause (ii) of clause (c) of section 13(1), has to be interpreted to mean that the expression refers to a person who is a human-being and not a person as it is defined under the Income-tax Act. Now, the word ' benefit ' has to be interpreted as an advantage, profit, fruit or privilege and, in the context in which it is used in the present section it has to be treated as an advantage of a pecuniary nature. Such advantage does not seem to have been derived by the Trust to whom the donation has been made. The Madras High Court in Manickavasagam Chettiar's case had observed that the characteristic of a benefit was that it was real and not notional, concrete and not abstract, certain and not conjectural. In normal and popular conception, an advance of loan on commercial terms would not amount to a conferment of benefit. In the present case, apart from the fact that the Trust is not a human-being it has not, in our opinion, derived any benefit by receipt of a loan and the aforementioned decision of the Madras High Court would appear to substantially support the case of Shri Dastur. The further question for consideration in the present case is whether the donation can be said to have been used or applied for the benefit of any specific person. The Gujarat High Court in CWT v. Kum. Manna G. Sarabhai [1972] 86 ITR 153 was called upon to interpret the expression " belonging to ". It observed that this expression had been the subject matter of judicial interpretation in a number of decisions but referred to a decision of House of Lords in Heritable Reversionary Co. Ltd. v. Miller [1982] AC 598, 621 and quoted the following observations of Lord Macnaghten at page 174 :

" The words ' property ' and ' belonging to ' are not technical words in the law of Scotland. They are to be understood, I think, in their ordinary signification. They are in fact convertible terms ; you can hardly explain the one except by using the other. A man's property is that which is his own, that which belongs to him. What belongs to him is his property. No one in ordinary parlance would speak of land or funds held only in trust for another as the property of the trustee. Land or funds so held are not the trustee's property in any real sense any more than a bankrupt's sequestered estate is the property of the trustee in bankruptcy. It is true that in a strict legal view the right of the beneficiaries was only a personal claim against the trustee. But for all that the bankrupt could not have applied the property to his own purposes or used it for his own benefit without committing a fraud for which he might have been made criminally responsible. The beneficiaries were the true owners all along." This decision of the Gujarat High Court has been approved by the Supreme Court in the case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) trust [1977] 108 ITR 555 at page 591 of the report. Therefore, the moot question in the present case is whether the donation given by the appellant to Shree Hazarimal Somani Charity Trust can be said to have been used or applied for the benefit of any person. In our opinion, it has not been so used. Nothing is used in the present case for the benefit of any individual person or for the benefit of Shree Hazarimal Somani Charity Trust itself or its Trustees and it has not been established that any person has received the payment beneficially. There is no evidence of any direct, limited or beneficial enjoyment of the amount donated by any person as such.

23. There are several High Court decisions where the Courts have held, though in a different context, that the term ' person ' has to be considered as an animate being or a human being. For example, in Shrigopal Rameshwardas's case, the Madhya Pradesh High Court held that the exemption under section 54 is available only to a living person and not available to property owned by HUF. Similar view was expressed by the Karnataka High Court in South Kanara Central Co-op. Wholesale Stores v. CIT [1978] 114 ITR 298 where the Karnataka High Court held that section 54 of the Income-tax Act which deals with profit on sale of property used for residence by its very terms, speaks of the residence of an individual or his parent. The object of section 54, it held, is to relieve the rigour of taxation in respect of residential houses occupied by individuals and, therefore, a co-operative society, which sold a building and purchased another one within one year from the date of sale, cannot claim the benefit under section 54. Therefore, I agree with Shri Dastur that the term ' person ' cannot in all circumstances be treated as the person defined in section 2(31) of the Act. In the present context, i.e., in the context of section 13(3), the term ' person ' has to mean a human being and not any institution like a charitable trust. In the course of arguments, reference was made to the Budget Speech of the Finance Minister for 1970-71 reported in 75 ITR 17 (Statutes). The observations of the Finance Minister relevant for our purpose are as follows :

" In the case of charitable and religious trusts, exemption from tax would be allowed only in respect of income actually applied to the purposes of the trust in the same year, or within three months of the close of the year. Further, the exemption will be forfeited altogether if the trust funds constituting its corpus or income, are invested in a concern in which the author or founder of the trust or any of his relatives is substantially interested and the amount of the investment exceeds 5 per cent of the capital of that concern. These provisions will curb the use of the funds of charitable and religious trusts to acquire control over industry and business."

The Notes on Clauses of Finance Bill, 1970, are to be seen at pages 70 and 71 (Statutes) of the same ITR. The relevant Notes read as under :

" The effect of the proposed amendments is to widen the scope of the existing sub-clause (ii) of clause (b) of section 13 of the Income-tax Act under which the benefit of exemption from income-tax provided under section 11 of the Act is denied to charitable trust or a charitable institution established after the 31st March, 1962, if any part of its income or property enures or is, during the previous year, used or applied, directly or indirectly, for the benefit of the author or founder of the trust or the institution or any person who has made a substantial contribution to such trust or institution or any relative of such author, founder or person.

Under one of the proposed, amendments, all charitable or religious trusts or institutions created or established after the 31st March, 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 the 1st April, 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."

These Notes would amply clarify the position that the exemption was to be denied only if the income was applied for the benefit of the author, founder, substantial contributor or relative or for the benefit of any concern in which such author, founder, substantial contributor or relative has substantial interest. None of the kind has been established in the present case. We are not prepared to accept the argument of the Departmental Representative that when we are considering section 13(3)(b), we need not consider section 13(3)(d), and the decision of the Bombay High Court in CIT v. Trustees of Mrs. Kasturbai Walchand [1990] 181 ITR 47 would appear to meet this argument of the Departmental Representative.

24. For these reasons, I am in agreement with the conclusions of my learned Brother and would agree that the benefit of exemption under section 11 cannot be denied to the appellant trust. The appeal has to be allowed

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