N.N Desai Charitable Trust v. Commissioner Of Income-Tax

R. Balia, J.:— Rule. Service of rule is waived by learned counsel for the respondent.

2. Heard learned counsel for the parties. This petition is directed to quash the order of the Commissioner of Income-tax, Surat, dated February 18, 1999, by which application of the petitioner under section 80G(5) of the Income-tax Act, 1961; has been rejected. The petitioners are trustees of N.N Desai Charitable Trust. The said trust is a public charitable trust registered under the Bombay Public Trusts Act, 1950. The objects of the petitioner-trust are wholly charitable. The trust was also registered under section 12A of the Income-tax Act vide entry in register of applications at No. 110-931-N of 1997 dated November 28, 1991.

3. This being a wholly charitable trust was entitled to exemption from tax in respect of its income under sections 11 and 12 of the Act. Under section 11(1)(a), (b) and (c) of the Act, income from any property held for charitable purposes, and under clause (d) of section 11(1) of the Act, income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution are not liable to be included in the total income of the previous year of the person in receipt of the income. Under section 12 any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) are for the purposes of section 11 deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of section 11 as well as section 13 would apply. Section 12A of the Act envisages that the provi- sions under section 11 and section 12 making certain income of trust or institution, wholly for charitable or religious purposes, exempt from inclusion in the compu-tation of total taxable income would not apply unless an application for registration of the trust or institution in the prescribed form is made to the Chief Commissioner or the Commissioner, as the case may be. Section 13 enumerates conditions under which the provisions of sections 11 and 12, which would otherwise make income of the trust not liable to be included in the computation of the total taxable income not apply. These provisions deal with conditions subject to which income of such trust is exempt from tax and not liable to be included in the computation of the total income.

4. Section 80G, on the other hand, envisages where a donor can claim deduction in computing his total income in respect of the donations made by him to various funds or institutions mentioned in sub-section (2) of section 80G. The deduction which the donor can claim over such donations may be equal to the whole of such sum or 50 per cent, of the donations depending on the funds to which donations have been made and which have been classified for the purpose of allowing deduction in two classes. In one set of funds or institutions an amount equal to the whole of the sum is allowable as deduction in the assessment of the donor while in others a sum equal to 50 per cent, of the donation is allowed as deduction subject to a maximum limit prescribed in the Act. In the list of funds or institutions, ‘donation to which could qualify for deduction from the income of a donor is included a residuary clause in the form of clause (a)(iv) of sub-section (2) of section 80G which reads,

“sumspaid by the assessee in the previous year as donation to any other fund or institution to which this section applies.”

5. Sub-section (5) of section 80G provides donation to which fund or trust qualifies for deduction under sub-section (2)(a)(iv).

6. We are here concerned with an application made under sub-section (5) of section 80G in which clause (vi) was inserted with effect from October 1, 1991, by the Finance (No. 2) Act of 1991, which required that in-relation to donations made after the 31st day of March, 1992, the institution or fund for the time being is approved by the Commissioner in accordance with the rules made in this behalf. Simultaneously, rule 11AA was inserted in the Rules. The approval could be for more than one year at a time, up to five years, “and can be renewed from time to time. It may further be noticed that prior to the insertion of these provisions, as a general practice recognition certificate of an institution, donations to which qualify for deduction under section 80G, was being issued by the respondents.

7. In pursuance of these statutory provisions effective from October 1, 1991, the petitioner applied for the approval of the trust for the purposes of section 80G and it was granted to the petitioner, in the first instance, on January 10, 1992, which was valid up to March 31, 1993. Thereafter, the approval was renewed for a further period of five years extending up to March 31, 1998. The petitioner, on the expiry of the period of approval, applied for renewal. That application has been rejected by the respondent-Commissioner by the impugned order dated February 18, 1999. Before making the order, a notice was given to the petitioner on December 7, 1998, inviting clarifications of the petitioner on certain aspects of the matter. Ultimately, the only reason that prevailed with the Commissioner of Income-tax to deny the application for approval for a further period reads thus in the impugned order:

“I have considered the submissions made by the trustee. For grant of recognition under section 80G(5) certain conditions have to be satisfied. The first condition as provided in section 80G(5) reads as below:

‘(i) where the institution or fund derives any income, such income would not be liable to inclusion in its total income under the provisions of sections 11 and 12 or clause (22) or clause (22A) or clause (23). or clause (23AA) or clause (23C) of section 10.’

From the above, it is clear that the income of the trust should not be liable to inclusion in its total income under section 11 or 12 of the Income-tax Act. In the instant, case, the income of the trust is liable to be taxed because it has not been applied towards the objects of the trust to the extent of 75 per cent. The fact has also been admitted by the trustee. Hence, the trust does not fulfil the conditions laid down in section 80G(5)(i) of the Income-tax Act. Therefore, it is not possible for me to allow renewal of recognition under section 80G(5) of the Income-tax Act. The application of the trust for renewal of recognition under section 80G(5) is, therefore, rejected.”

8. From the aforesaid it appears that the sole ground that has prevailed with the Commissioner in refusing the application is that because in the past for some period the petitioner has not applied 75 percent, of the income of the trust for the purposes of the trust, therefore, the income of the assessee was liable to be included in the taxable income and the assessee did not fulfil the condition of section 80G(5)(i) of the Act;

9. It would be apposite here to reproduce the relevant provisions of section 80G(5)(i) of the Act.

“where the institution or fund derives any income, such income would not be liable to inclusion in its total income under the provisions of sections 11 and 12 or clause (22) or clause (22A) or clause (-23) or clause (23AA) or clause (23C) of section 10.”

10. Before embarking on analysing the provisions of sub-section (5) of section 80G, one must notice that section 80G does not relate to assessment of the trust or the institution whose incomes are not liable to be included in the computation of taxable income under various provisions of the Act referred therein. Primarily, section 80G is related to giving deduction in respect of the donations made by a person who, but for this provision, would not be eligible for such deduction because the donations are not ordinarily considered to be expenses incurred for the purpose of earning income and liable to be deducted therefrom. Since all donations generally are not treated as eligible for deduction, but only such donations as are made to funds or institutions named in sub-section (2) of section 80G are eligible for such deduction and as noticed by us above, it also includes a general clause “any fund or institution to which this section applies” a provision was needed to identify the trusts or funds or institutions not specifically named in the statute, but fell in that category. That object was achieved by enacting sub-section (5) of section 80G which helps identify the funds or institutions donation to which qualifies for deduction under section 80G. It provides that the funds or institutions referred to in subsection (2)(a)(iv) are such whose income would not be liable to be included in its total income under the provisions of sections 11 and 12 or clause (22) or clause (22A) or clause (23) or clause (23AA) or clause (23C) of section 10. Prior to the insertion of clause (vi), it being not a statutory requirement, even in the absence of a certificate under section 80G, it was possible for a donor to satisfy an Income-tax Officer independently about the eligibility of donation made by him for deduction. It was in order to keep a check on an inquiry into such details which may not be possible for every donor to harness and make good a claim which otherwise he is legitimately entitled to make, and also to relieve the Income-tax Officer to hold such enquiry in respect of the donations made to such institution at different levels and to avoid possibility of different conclusions reached by different officers in relation to donations made to the same fund or institution, to simplify the procedure). that provision was made for recognising, what was a prevailing practice by making a statutory provision in that regard. It is also to be noticed that whether the income of an institution or fund would ultimately be liable to inclusion in its total income at the close of the assessment year or not cannot be determined at the time of making of the donation. The eligibility of the donation for deduction has to be considered with reference to the point of time at which donation is made and not with respect to the time in future depending on assessments of the donee. That is where the use of the verb in future tense “would” has been used and not in present or past perfect tense so as to take into consideration the actual inclusion or exclusion or the extent of inclusion or exclusion. The direct nexus of clause (i) of sub-section (5) of section 80G, as appears to us, is to the eligibility of the institution or the fund to claim that its income is not liable to be included in the computation of the total income. The two are different concepts. First, whether an institution or fund is such whose income is not liable to be included in the computation of the total income depends on its status or character. The second is the actual assessment of income, which necessarily takes place in future after donation is received by the donee on fulfilment of other conditions about application of income by the eligible trusts, which in the very nature of things can operate only after receipt of income. The actual extent of exclusion from or inclusion in the computation of the total income, the receipts of such institution or fund, depends on fulfilment of further conditions which may or may not exist at the close of the year and has no direct relation to the purpose with which the provision is made. The latter falls in the realm of the assessment of the trust, institution or fund which derives income which is not ordinarily includible in its total income. The liability to assessment is not affected by issuance of recognition certificate or approval certificate issued under clause (vi) of sub-section (5) of section 80G nor it depends upon the fact whether the donor ultimately gets deduction in respect of such donation. It may be relevant to take cognisance that all donations are not in their entirety eligible for deduction. There exists a maximum limit also for such eligibility and donations beyond such limit by a person may not get deduction, even if it is to an approved institution under section 80G. Likewise, actual inclusion of any income in the assessment of the donee as taxable income, does not affect the entitlement of the donor to claim deduction under section 80G, if on the date when he made the donation the conditions were fulfilled. That was the law before the insertion of clause (vi) and apart from the fact that by introducing clause (vi) With rule 11AA, a method of proving the eligibility to claim deduction has been provided by the statute, there has been no alteration in the substantive provision, that is to say, entitlement of the donor to claim deduction depends on the eligibility of the donee to claim exemption of its income on the date when donation is made. Examining from this angle, we find that for applicability of sections 11 and 12, what is required is that such trust must have moved an application for registration under section 12A and registered for that purpose. Once a trust is registered under section 12A, its income from property, which includes donations whether covered under section 11(1)(d) or under section 12 such donations are deemed to be income from property, is not to be included in its total income under section 11 or section 12. The enquiry under section 80G(5) ‘cannot go beyond that.

11. A perusal of sections 11 and 12 would disclose that income from property held for charitable or religious purposes under a trust is not included in the total income of the previous year of the person in receipt of the income where any such income has 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 25 per cent, of the income from such property. In clause (d) of sub-section (1) of section 11 income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution, that is to say, donations made with directions that the donation shall form part of the corpus of the trust or institution are also not includible in the income of the trust. It may be further observed that merely because the accumulation of the income from property exceeds 25 per cent, it does not result in inclusion of the entire income in the taxable income of the assessee. The two conditions speak out, firstly, that income derived from property to the extent to which such income is applied to such purposes in India is not to be included in the computation of the total income and it is only where there is accumulation of income, such accumulation as exceeds 25 per cent, shall not be liable to be exempt from income-tax but in case the accumulation is restricted to 25 per cent, even accumulation is not to be included in the computation of total taxable income. That too is not in absolute terms. In that regard sub-section (2) of section 11 points out certain conditions and contingencies in which that limit is also relaxed. We need not dilate here in detail on this aspect. This we have noticed only for the purpose of showing, firstly, that as on the date when donation is made which is the relevant date for the purposes of claim of donor to deduction under section 80G it is not possible to point out what shall be the exact state of affairs that will exist at the close of the year nor is it possible for the person considering the application for approval, which requires to consider whether the income derived by such trust would not be liable to be included in its total income, to determine, as on the date of application whether the income which will henceforth be derived by the trust asking for approval, if it is otherwise eligible to claim exemption from the inclusion of such income in the taxable income, would in fact be entitled to sustain that claim to the fullest extent or not at the time of assessment. That is the jurisdiction and authority of the Assessing Officer to enquire into and make appropriate order at the time when assessment of the trust is being made. The authority examining the question whether a fund or institution is eligible to be certified for the purposes of section 80G is not to act as an Assessing. Officer and pronounce upon the pending assessments. The Commissioner, in examining this aspect, in respect of pending assessments, in our opinion; exceeded his jurisdiction while considering the application for approval. He, as a matter of fact, stepped into the jurisdiction of the Assessing Officer, decided upon the claim of the assessee in respect of its assessment of income then pending and acted as if he was the Assessing Officer deciding upon the assessment of the trust. While dwelling on the merits of pending assessment he failed to consider that up to March 31, 1998, the trust has already enjoyed approval and the donors who had already made donations to it would be entitled to such benefit notwithstanding the fate of the assessment of the trust. The actual assessment of the trust and its actual liability to tax in accordance with the provisions of sections 11 and 12 and 12A has no bearing on the claim of the donors for whose benefit approval is accorded. Explanation 2 to section 80G(5) which tells in no uncertain terms that a deduction to which the assessee is entitled in respect of the donation made to an institution or fund to which sub-section (5) applies shall not be denied merely on either or both of the following grounds, namely, that any part of the income of the institution or fund has become chargeable to tax due to non-compliance with any of the provisions under section 11, section 12 and/or section 12A and under clause (c) of sub-section (1) of section 13, the exemption under section 11 or 12 can be denied to an institution or fund in respect of the income accruing or arising to it from any investment referred to in clause (h) of sub-section (2) of section 13.

12. Likewise, the institution or fund whose income is not to be included in the taxable income of the recipient under the provisions of section 10, namely, clause (22) or clause (22A) or clause (23) or clause (23AA) or clause (23C) would go to show that these clauses identified different institutions for the purpose of granting exemptions, some of which require approval by publication in the Official Gazette, some of which require to bear a particular character or the like. Once that character or the condition is fulfilled, section 10 operates. For illustration, under clause (22), as it was in force up to March 31, 1999, any income of a university or other educational institution existing solely for educational purposes and not for purposes of profit was not to be included in total income. Now if an approval is sought by such institution, what the approving authority can seek to enquire is whether the applicant university or educational institution which is solely existing” for educational purposes, and whether its purpose is not to earn profit. Under clause (23) exemption is in respect of the income of an association or institution established in India which may be notified by the Central Government in the Official Gazette having regard to the fact that the association or institution has as its object the control, supervision, regulation or encouragement in India of the games of cricket, hockey, football, tennis or such other games or sports as the Central Government may, by notification in the Official Gazette, specify in this behalf. The application for approval in respect of any such institution, if it falls within clause (iv) of sub-section (2) of section 80G, an enquiry by the Commissioner could only extend to find out whether the association or institution is so notified under section 10(23). It cannot by itself examine the validity or correctness of the notification nor can it grant approval even if he concludes that such institution exists for the purposes mentioned in clause (23), if notification by the Central Government is not issued in that regard. That is demonstrative of the scope of enquiry by the Commissioner while enquiring the existence of condition under section 80G(5)(i). That extends to eligibility to exemption under various provisions of the Income-tax Act referred to in that sub-section, but not to actual assessment which depends on fulfilment of further conditions by the eligible institutions, trusts or funds. In none of these cases inquiry of the Commissioner under section 80G(5)(vi) extends to the actual computation of income under the assessment that is likely to be framed. We see no reason that such exercise can be taken in respect of a trust which is claiming exemption not under section 10 but under sections 11 and 12 of the Act, once the Commissioner finds that the person who is claiming approval is the assessee who claimed his income not liable to be included in the taxable income under section 11 or 12. The enquiry relates to whether it is registered, under section 12A, whether it is a trust wholly for charitable purposes or religious purposes, and whether income received by it is liable to be considered under section 11, but it does not go beyond that to examine as an Assessing Officer whether the income received by it at the close of any particular year or years was or was not actually included in the taxable income in the past. This consideration must be whether the income receivable by it will or will not be liable to be considered for exclusion under section 11. Such enquiry obviously cannot include an enquiry whether at the close of the previous year the donee will actually be able to sustain such claim because of non-fulfilment of some conditions by him as to the applicability or accumulation of income, as it is not possible to predicate that in praesenti when donation is made. As we have noticed above, that question would depend upon the facts existing at the close of the assessment year and at the time of considering the application it cannot be examined in the light of what is going to happen in pending assessments in respect, of which approval certificate was already existing and the assessment of which would not affect the donations made to the trust during that year.

13. Viewed from any angle, we are of view that the order of the Commissioner refusing approval is founded on wholly irrelevant considerations by trenching upon the field of the Assessing Officer by pronouncing on the taxability or non-taxability of any income in respect of the assessments for the past year which are yet to be completed, and does not relate to a period for which approval, if accorded, is to operate. As a result, we allow this special civil application, quash the impugned order and direct the Commissioner of Income-tax to make a fresh order in accordance; with law.

14. Rule is made absolute. There shall be no order as to costs.