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Commissioner Of Income-Tax v. Birla Janahit Trust.
Summary of the Opinion — Ajit K. Sengupta, J.
Factual and Procedural Background
This is a reference under section 256(1) of the Income-tax Act, 1961 for the assessment year 1977–78 in which two questions of law were referred to the court. The first question concerned whether the Tribunal was justified in holding that Raja Baldeodas Birla Santotikosh had made a legally valid transfer of shares in Jiyaji Rao Cotton Mills Ltd., that the assessee-trust was the rightful owner of those shares, that dividend income therefrom was assessable in the hands of the assessee-trust, and whether the assessee was entitled to tax credit under section 199 of the Income-tax Act.
The court noted an earlier decision in Income-tax Reference No. 51 of 1980 (CIT v. Birla Janhit Trust) for assessment year 1975–76 (judgment delivered August 7, 1990) and applied that decision to answer the first question: the transfer was voidable but until it is avoided the dividend income is assessable in the hands of the assessee-trust and the assessee is entitled to tax credit under section 199.
The second question related to whether, for the purposes of section 11, the net dividend should be considered and whether adjustment of establishment (administrative) expenses should be made before applying the 75% rule for application to charitable purposes. The facts before the court included that the Income-tax Officer (ITO) had deducted administrative expenses amounting to Rs. 13,459 from the gross income, treated the balance as trust income and applied the 75% rate to that balance. The assessee appealed to the Appellate Assistant Commissioner (AAC), which held that the administrative expenses should be treated as amounts spent for charitable purposes. The Revenue appealed to the Income-tax Appellate Tribunal, which dismissed the Department's appeal and upheld the AAC. The contentions before this court were those already urged before the Tribunal.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Raja Baldeodas Birla Santotikosh made a legally valid transfer of shares of Messrs. Jiyaji Rao Cotton Mills Ltd., and that the assessee-trust was the rightful owner thereof, such that dividend income from those shares was assessable in the hands of the assessee and the assessee was entitled to tax credit under section 199 of the Income-tax Act?
- Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that net dividend should be considered for the purpose of section 11 and that the adjustment of establishment (administrative) expenses should not be made in arriving at the figure of 75% of income to be applied for charitable purposes?
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Income-tax Reference No. 51 of 1980 — CIT v. Birla Janhit Trust (A.Y. 1975–76) | Where a transfer is voidable, until it is avoided the transferee may be treated as the owner for assessment and entitled to tax credit under section 199. | The court followed this decision to answer Question No. 1: the transfer was voidable but, until avoided, dividend income is assessable in the hands of the assessee-trust and the assessee is entitled to tax credit under section 199. |
| Deo Radha Madhava Lalji Genda Trust v. Property Tax Officer, [1980] 125 ITR 531 (MP) | Tax liability and other outgoings in respect of trust property are incidental expenses connected with the main charitable/religious objects; maintenance and expenses cannot be treated as preventing application of income to charitable purposes. | Used to support the proposition that expenses (maintenance, salaries, repairs, taxes, legal expenses) incidental to trust objects should not exclude the income from being regarded as applied to charitable purposes. |
| CIT v. Trustees of H.E.H the Nizam's Supplemental Religious Endowment Trust, [1981] 127 ITR 378 (AP) | Income of the trust must be taken as per the trust accounts; expenses like income-tax and wealth-tax are incidental to charitable purposes and are outgoings of the year. | Supported treating such incidental expenses as application for charitable purposes when considering what income is available. |
| CIT v. Estate of V.L. Ethiraj, [1982] 136 ITR 12 (Mad) | Income from properties should be determined in the normal commercial manner without reference to provisions attracted by section 14. | Supported the approach that 'income' for section 11 should be understood in a commercial (book-account) sense. |
| Commissioner of Income-Tax v. Janaki Ammal Ayya Nadar Trust, [1985] 153 ITR 159 (Mad) | Payment of tax is necessary to preserve trust property; expenditure by way of tax payment from current year's income is to be considered application for charitable purposes. | Reinforced that certain outgoings (like tax) paid out of current income are incidental to carrying out charitable objects and may be treated as application for charitable purposes. |
| CIT v. Jayashree Charity Trust, [1986] 159 ITR 280 (Cal) | The income to be considered is that available in the hands of the assessee in the commercial sense, subject to adjustment for any expenses extraneous to the trust. | Adopted as authority for treating trust-book income (commercial sense) as the basis for applying the 75% rule, allowing incidental management expenses to be treated as application for charitable purposes. |
| Central Board of Direct Taxes Circular No. 5-P(LXX-6) dated 19-6-1968 (referred in Jayashree case) | Explains that 'income' in section 11(1)(a) is to be understood in a commercial/book sense, with specified adjustments (adding back appropriations, debits for capital expenditure); amounts so added back may be charged under section 11(3) to the extent they represent outgoings for purposes other than the trust. | Quoted and relied on to justify reading 'income' commercially and to support the conclusion that deductions at source or other bookkeeping deductions do not defeat the exemption if, in commercial terms, the income has been applied to charitable purposes. |
Court's Reasoning and Analysis
The court addressed the two referred questions sequentially.
- Question 1 (transfer and entitlement to tax credit under section 199) — The court relied on the earlier decision in Income-tax Reference No. 51 of 1980 (CIT v. Birla Janhit Trust) and applied its principle: although the transfer in favour of the assessee-trust was voidable, until such transfer is avoided the transferee (the assessee-trust) must be treated as the owner for assessment purposes. Consequently, dividend income from the shares is assessable in the hands of the assessee-trust and the assessee is entitled to the tax credit under section 199. The court thus answered the first question in the assessee's favour on the basis of precedent.
- Question 2 (treatment of administrative/establishment expenses for section 11) — The factual matrix was that the ITO had deducted administrative expenses of Rs. 13,459 from gross income before applying the 75% rule; the AAC held those expenses should be treated as amounts spent for charitable purposes and the Tribunal upheld that finding. The court examined established authority and the CBDT circular emphasizing that 'income' for the purposes of section 11 is to be understood in a commercial or bookkeeping sense (book income), and that expenses incidental to carrying out the objects of the trust (including normal management expenses, taxes, maintenance, salaries) are to be treated as application of income for charitable purposes. Applying these principles, the court concluded that expenditures incurred for carrying out the objects of the trust (salaries and miscellaneous expenses) must be treated as application for charitable purposes and should not be excluded. However, because in the present case the trust's accounts did not separately allocate amounts spent for carrying out objects and amounts spent solely to earn dividend income, the court confined its ruling: the assessee is entitled to benefit only for those expenditures that were for carrying out the objects and purposes of the trust; any expenditure incurred solely for earning the dividend income does not qualify as application for charitable purposes.
The court noted there was no separate allocation of expenses between those incurred for charitable purposes and those incurred to earn income; that absence governed the limited nature of the relief granted. The order also records concurrence of Bhagabati Prasad Banerjee, J.
Holding and Implications
Holding — Question 1: The court held that, following the earlier decision in CIT v. Birla Janhit Trust, the transfer was voidable but until avoided the dividend income was assessable in the hands of the assessee-trust and the assessee was entitled to tax credit under section 199 of the Income-tax Act.
Holding — Question 2: The court held that the Tribunal was right in treating the administrative/salaries and miscellaneous expenses incurred for carrying out the objects and purposes of the trust as application for charitable purposes for the purposes of section 11; however, any expenditure incurred solely for earning the dividend income will not qualify as amounts spent for carrying out the objects and purposes of the trust. There will be no order as to costs.
Implications
- Direct effect on parties: the assessee-trust may be assessed on the dividend income (until the transfer is avoided) and is entitled to the section 199 tax credit; the assessee may treat management and other incidental expenses that are genuinely for carrying out trust objects as application of income for charitable purposes when applying section 11, subject to allocation between such expenses and expenses incurred solely to earn income.
- The decision applies existing precedents and the CBDT circular; the court did not purport to create a new principle beyond applying established authorities and confined relief where accounts did not segregate expenses.
Ajit K. Sengupta, J.:— In this reference under section 256(1) of the Income-tax Act, 1961, for the assessment year 1977–78, two questions of law have been referred to this court. The first question is as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that Raja Baldeodas Birla Santotikosh made a legally valid transfer of shares of Messrs. Jiyaji Rao Cotton Mills Ltd., and the assessee was the rightful owner thereof, being assessable on the dividend income arising from such shares and also entitled to tax credit under section 199 of the Income-tax Act?”
2. This question came up for consideration before us in Income-tax Reference No. 51 of 1980 (CIT v. Birla Janhit Trust) for the assessment year 1975–76, where the judgment was delivered on August 7, 1990. Following the said decision, we answer the question by saying that the transfer in favour of the assessee-trust was voidable but until it is avoided, and irrespective of the fact whether the assessee was the rightful owner of such shares, the income from dividend on those shares shall be assessed in the hands of the assessee-trust and, accordingly, the assessee is entitled to the benefit of tax credit under section 199 of the Income-tax Act, 1961. Let us now turn to question No. 2 which is as follows:
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the net dividend should be considered for the purpose of section 11 of the Income-tax Act and that the adjustment of establishment expenses should not be done to arrive at the figure of 75 per cent of the income to be applied for charitable purposes?”
3. The second question relates to the administrative expenses to the tune of Rs. 13,459 deducted by the Income-tax Officer from the gross income of the assessee. The Income-tax Officer took the balance as the income of the trust and applied the rate of 75 per cent to this balance in order to determine the amount that should be spent to enable the assessee to claim exemption under section 11 of the Income-tax Act. The assessee filed an appeal to the Appellate Assistant Commissioner contending that the administrative expenses should not have been deducted from the gross income. The Appellate Assistant Commissioner accepted the claim of the assessee and directed the Income-tax Officer to consider the administrative expenses as an amount spent for charitable purposes.
4. Being aggrieved, the Revenue filed an appeal to the Tribunal. The Income-tax Appellate Tribunal has observed that there is nothing in section 11 which says that the income of the assessee-trust should be taken at a figure after deducting administrative expenses from the gross income. The Tribunal upheld the decision of the Appellate Assistant Commissioner and dismissed the appeal of the Department.
5. Before us, the contentions urged before the Tribunal have been reiterated.
6. It appears from the order of the Appellate Assistant Commissioner that the assessee has incurred the expenditure on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust and not only to earn the income from dividend. It is now well-settled that in determining the portion of income applied or accumulated for charitable or religious purposes, regard should be had to the trust income in a commercial sense or according to the accounts of the trust and not the total income as computed under the provisions of the Income-tax Act. Our attention has been drawn to several decisions in this connection. In Deo Radha Madhava Lalji Genda Trust v. Property Tax Officer, [1980] 125 ITR 531 (MP), it has been observed that tax liability and other outgoings in respect of the trust property are all incidental expenses relating to and connected with the main objects of the trust, which are exclusively religious and charitable. If the trust property is not properly maintained and proper accounts are not kept, the very existence of the trust would be in jeopardy and its object and purpose would be lost. In this view of the matter, simply because a part of the rental income is spent in the maintenance, repairs, payment of salaries to employees, taxes and legal expenses, etc., it could not be said that the income derived from the trust property was not applied exclusively to religious or charitable purposes.
7. In CIT v. Trustees of H.E.H the Nizam's Supplemental Religious Endowment Trust, [1981] 127 ITR 378 (AP), it has been held that with regard to the income of the trust as such, it is the accounts of the trust alone that had to be taken into consideration. It was held that expenses incurred by way of payment of income-tax and wealth-tax during the relevant year were incidental to the carrying out of the charitable purposes of the trust. Such payments were outgoings in that particular year and were incidental to the carrying out of the objects of the trust.
8. In CIT v. Estate of V.L Ethiraj, [1982] 136 ITR 12 (Mad), it was held that income from properties would have to be arrived at in the normal commercial manner without reference to the provisions which were attracted by section 14.
9. In Commissioner Of Income-Tax v. Janaki Ammal Ayya Nadar Trust, [1985] 153 ITR 159 (Mad), it was held that payment of tax is necessary to preserve the property of the trust when a demand is lawfully made. Therefore, the expenditure incurred by way of payment of tax out of the current year's income has to be considered as application for charitable purposes.
10. In CIT v. Jayashree Charity Trust, [1986] 159 ITR 280, this court held that the income to be considered will be that which is arrived at in the context of what is available in the hands of the assessee subject to an adjustment of any expenses extraneous to the trust.
11. In our view, income applied to meet expenses, such as normal expenses of management may not, strictly speaking, be charitable but they are termed as incidental to the carrying out of charitable purposes. Such expenses should not be excluded from exemption. In Jayashree Charity Trust's case, [1986] 159 ITR 280 (Cal), a circular of the Central Board of Direct Taxes dated June 19, 1968 (Circular No. 5-P(LXX-6), was relied upon. It was, inter alia, laid down in the said circular as follows (at page 285) (see also [1969] Indian Tax Laws, Appx. II, p. lxxxv):
“Where the trust derives income from house property, interest on securities, capital gains, or other sources, the word ‘income’ should be understood in its commercial sense, i.e, book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income computed in the aforesaid manner should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).”
12. After quoting that circular, this court observed as follows (at page 286):
“This circular makes it clear that the word ‘income’ in section 11(1)(a) must be understood in a commercial sense. The entire income of the trust, in the commercial sense, has been spent for the purpose of charity. There is no reason to deny the benefit of exemption granted by section 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity.”
13. In our view, therefore, the expenditure on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust must be considered as application for charitable purposes. However, in this case the quantum of the expenditure for carrying out the objects and purposes of the trust and the expenditure made to earn the income had not been separately allocated or determined. We therefore, answer the second question by saying that the Tribunal was right in holding that the assessee will be entitled to the benefit of the expenditure made on salaries and miscellaneous expenses for the purpose of carrying out the objects and purposes of the trust only; but any expenditure incurred for earning the income from dividend will not qualify as amounts spent for carrying out the objects and purposes of the trust. There will be no order as to costs.
Bhagabati Prasad Banerjee, J.:— In agree.
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