V.V Kamat, J.:— These two references relate to the situation of reopening of the assessment of the assessee-trust—Chandrika Educational Trust. The assessment year is 1973-74 in both the references. The assessee has brought the following questions in I.T.R No. 31 of 1990:
“(1) Was the Appellate Tribunal justified in holding that section 13(2)(h) and 13(3) of the Act are applicable to the instant case? Is not the decision of this Tribunal in I.T.A No. 2/(Coch) of 1980 in the case of Sree Narayana Chandrika Trust, Irinjalakuda, in favour of the assessee? Is not the reasoning of the Appellate Tribunal to hold so illegal and unjustified?
(2) Was the Appellate Tribunal justified in holding that the assessee-appellant is not entitled to the exemption under section 11 of the Income-tax Act, 1961, in the instant case?
(3) Was the Appellate Tribunal right in holding that in the case of the assessee a partner in the firm there is investment of funds by the assessee in a concern within the meaning of section 13(2)(h) and section 13(3) of the Income-tax Act, 1961?”
2. In addition the following two questions in I.T.R No. 145 of 1994 as a result of the judgment dated September 3, 1994, in O.P No. 7038 of 1990 of this court are also brought before us. They are:
“1. Was the Appellate Tribunal justified in holding that the assessee has not furnished the primary materials in this case?
2. Was the Appellate Tribunal justified in holding that the reopening of the assessment is valid?”
3. The undisputed position is that the object of the trust is to provide general and vocational education to boys and girls. It is also seen that the assessee-trust in addition to its activities of the trust is a partner in two firms or rather enterprises, namely, Lathika Enterprises and Chandrika Enterprises. Initially, for the assessment year in question, exemption was granted under section 11 of the Income-tax Act. This was subsequently reopened by the Income-tax Officer with reference to the completion which took place on October 16, 1975, adopting the total annual income at Rs. 19,340. The reopening was on the ground of revealing that the funds of the trust continued with some concerns named above, where close relatives of the trustees were not only partners, but the trustees also have substantial interest which was a violation of the provisions of section 13(1)(c) of the Act rendering the trust ineligible for exemption under section 11 of the Act. Initiation of proceedings under section 148 of the Act required the assessee to file a revised return. The assessee challenged this basic power of reopening.
4. In regard thereto the Income-tax Officer held that the provisions of section 13(1)(c)(ii) and section 13(2)(h) read with section 13(3) are applicable, taking out the case for exemption under section 11 of the Act. It is further held that the situation came to light only during the assessment proceedings for the assessment year 1976-77. It was further held that the audit report filed in Form No. 10B did not also contain correct information as required therein, especially mention of close relationship of the partners of the two firms was conspicuous by its absence in the audit report.
5. On facts, the Income-tax Officer observed that the accounts revealed that the trust had not applied its income in the previous year itself to be eligible for exemption under section 11 of the Act. It is further observed that the other partners of these two firms are none other than the close relatives of Sri C.R Kesavan Vaidyar, the managing trustee, attracting the provisions of section 13 stated hereinbefore. As the total funds of the assessee-trust remaining invested in these firms during the previous year exceeded five per cent, of the capital of these concerns, the situation, held the officer, took up the matter with regard to exemption under section 11 of the Act.
6. The proceedings came up before the Income-tax Appellate Tribunal as the first appellate authority confirmed the above conclusions. With regard to the question under consideration, the Tribunal in paragraph 11 of its order (annexure “C”, page 53) has observed that during the accounting year the assessee had a current account balance of Rs. 3,158 with Chandrika Enterprises, on the one hand, and Rs. 6,140 with Lathika Enterprises, on the other. The Tribunal has endorsed the finding that the trustees are interested and the amounts remained invested in the concern, and therefore, concluded that the provisions of section 13(2)(h) and 13(3) would be applicable. In support, the Tribunal relied on its own earlier decision with regard to the same assessee and accordingly reopening was justified and endorsed.
7. It must be said that learned counsel brought to our notice the decision of this court to which one of us (Kamat J.) was a partner in I.T.R No. 161 of 1991 decided on May 29, 1996 (CIT v. Chandrika Educational Trust, [1997] 224 ITR 449) in the case of the same assessee—Chandrika Educational Trust—with regard to the assessment year 1974-75 dealing with the situation of reopening and consequent reassessment and in regard thereto, the question to be answered was as to whether the reopening and consequent reassessment could be justifiable. Certain facts appear with regard to the same assessee to show that even for the assessment year 1976-77, a wrong assessment was required to be opened on the ground of escapement of assessment in view of application of the provisions of section 13(1)(c)(ii) and section 13(2)(h) read with section 13(3). The situation also spoke about the assessee-trust being one of the partners of the two partnership firms, Lathika Enterprises and Chandrika Enterprises. In regard to the above assessment years also it is seen that the information was available to the Income-tax Officer not at the time of completing the original assessment, but from the audit reports even not placing the situation of relationship fairly on record.
8. The material on record in the present proceedings also show that the situation came to light during the course of the assessment proceedings for the subsequent assessment year 1976-77.
9. Learned counsel for the assessee referred to the decision of this court in CIT v. Chandrika Educational Trust, [1994] 207 ITR 108 again in the matter of the same assessee, for the assessment years 1975-76 and 1976-77. It must be stated that this court also did not extend the benefit of exemption under section 11 of the Act to the assessee in question and that too on the ground that the contribution of the trust exceeded five per cent, in relation to the capital of the firm where the money was allowed to remain, may be collection of profit from the partnership-firm.
10. Section 11 of the Income-tax Act speaks of the situations relating to the incomes not to be included in the total income of the previous year of the person in receipt of the income in question. In regard thereto the provisions of section 11(1A) enact that if the income is derived from the property held under trust wholly for charitable or religious purposes and to the extent to which such income is applied to such purposes in India, such income is not to be included in the total income of the previous year under the benefit offered by section 11 of the Act. This is not the be all and end all of the situation because the statutory provisions of section 11 of the Act are required to be understood in the context of situations of exception provided under section 13(1) of the Act. In fact the said statutory provision (section 13) enumerates situations in regard to which it can be said that those situations would take out the items of income covered thereby from the benefit provided by section 11 of the Act. Illustratively section 13(1)(c) provides one such situation. The said provision enacts that any income of a trust for charitable and religious purposes will not get the benefit of section 11 if such income is found directly or indirectly for the benefit of any person referred to in section 13(3) of the Act. In other words, if the concerned income in regard to which exemption is sought for under section 11 of the Act is seen to have any connection direct or indirect for the benefit of any person referred to under section 13(3) of the Act, with regard to that income no benefit under section 11 of the Act would be available. In this connection, section 13(3) of the Act specifies who such persons would be. It is obvious that such person is not only the author of the trust or the founder of the institution, but also any person who has made a substantial contribution to the trust or institution, one whose total contribution during the relevant previous assessment year exceeds Rs. 5,000, but also includes any relative of such author, founder, person, member, trustee or manager of the concern asking for the benefit.
11. In addition thereto, section 13(2) of the Act introduces deeming situations and this is apart from the generality of the provisions of section 13(1)(c) of the Act. The provision enacts that such income or property has to be deemed to have been used or applied for the benefit of a person who could be the one specified in section 13(3) of the Act. The provisions of section 13(2)(h) is one such illustrative situation. The said provision, if reproduced, is as follows:
“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.”
12. It would be seen that the benefit of section 11 of the Act would not be available to a situation which is deemed to have been statutorily stated to be used or applied for the benefit of such person, if the income continues to remain invested for any period during the previous year in question in any concern in which any person referred to in section 13(3) has a substantial interest. Therefore, the provisions of section 13(2)(h) are also required to be understood as an additional situation deemed to have been considered statutorily as taking out the situation for the purpose of benefit under section 11 of the Act.
13. The factual matrix which is undisputed shows that as far as the assessee-trust is concerned, independently and separately Rs. 3,158 and Rs. 6,140 were in the current account balance of the two partnership concerns, Chandrika Enterprises and Lathika Enterprises, respectively. For the purpose of considering the situation of benefit under section 11 of the Act together with the situations of exceptions provided by the statutory provision of section 13 of the Act, what is essential meaningfully is the character of the income that the income sought to be deducted must be seen to have been applied to charitable and religious purposes by the trust in question because it is the trust who is the assessee asking for the benefit under section 11. In our judgment, the character of the income in regard to which benefit under section 11 is made for the purpose of non-inclusion in the total income of the trust, it is the character of the income with regard to its use that assumes vital concern. If it is found during the assessment year in question that the income in regard to which claim for benefit is sought has no connection whatsoever with regard to the charitable and religious purposes in connection with its use and if it is found that the income is allowed to be retained with a partnership having connections with the trust as specified by the provisions of section 13, there is no doubt that there cannot be any contemplation of a claim for deduction of the benefit under section 11 of the Act. In our judgment, the claim for benefit under section 11 of the Act has to be understood and appreciated in the meaningful way from the provisions of the above sections and in that process only that income cannot be included in the total income of the previous year of the trust in question who is the assessee, if that income has any kind of connection with the charitable and religious purposes in regard to its use. If it is found that the income is allowed to be with the partnership in the process of the enterprise activity, then surely the benefit of section 11 of the Act cannot be contemplated to be extended with regard to the income in question. The mere character of the assessee that it is a charitable and educational trust would not be enough for claiming deduction with regard to the income which may be the income of the trust for deduction, the income should be connected with regard to the charitable and religious purposes in the matter of its use for claiming benefit under section 11 of the Act. For the above reasons, we answer the questions as follows:
I.T.R No. 31 of 1990: Question No. 1 need not be answered and we decline to do so. Question No. 2 is answered in the affirmative, in favour of the Revenue and against the assessee. Question No. 3 also is answered in the affirmative, in favour of the Revenue and against the assessee.
I.T.R No. 145 of 1994: Both the questions are answered in the affirmative, in favour of the Revenue and against the assessee.
14. A copy of this judgment under the seal of the court and the signature of the Registrar shall be forwarded to the Income-tax Appellate Tribunal, Cochin Bench, as required by law.
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