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Commissioner Of Income-Tax v. Bhoruka Public Welfare Trust.
Factual and Procedural Background
The assessee is a charitable trust which received donations amounting to Rs. 18,11,134 during the accounting year ending June 30, 1982. Among these donations were shares of Transport Corporation of India Limited valued at Rs. 14,00,000, donated by Shri Prabhu Dayal Agarwal and Chogmal Agarwal. The Income-tax Officer found that the donors had a substantial interest in the company under section 13(2)(h) of the Income-tax Act, 1961, and invoked section 13(4) to tax dividend income of Rs. 1,68,000 received by the trust. On appeal, the Commissioner of Income-tax (Appeals) and the Tribunal held that sections 13(1)(c) and 13(2)(h) were not attracted since the trust did not invest its own funds to acquire the shares. The Tribunal remitted the matter back to the Income-tax Officer to examine applicability of section 13(1)(d). The present reference application arises from these proceedings, seeking the court's opinion on two questions relating to the applicability of provisions under the Income-tax Act, specifically sections 13(1)(c), 13(2)(h), 13(1)(d), section 2(15), and section 11(1).
Legal Issues Presented
- Whether the Tribunal was correct in law in holding that the provisions of section 13(2) of the Income-tax Act, 1961, are not attracted to the assessee's income from shares donated by persons having substantial interest in the company under section 13(2)(h) read with section 13(1)(c)?
- Whether the Tribunal was correct in law in holding that depreciation claimed by the assessee in the accounts is an outgoing for the purpose of determination of income under section 11(1) of the Income-tax Act, 1961, thereby deleting the addition made by the Assessing Officer?
Arguments of the Parties
Revenue's Arguments
- The matter was rightly remitted to the Assessing Officer to examine applicability of section 13(1)(d), which was not previously considered.
- When the donation is subject to the condition that it forms part of the corpus, it amounts to an investment by the assessee.
Assessee's Arguments
- The assessee is a charitable trust and has not incurred any expense or investment in acquiring the donated shares; hence, section 13(1)(c) does not apply.
- Section 13(1)(d) provisions apply only from assessment year 1984-85 as per the Board's circular, and thus are not applicable for the year under consideration (1983-84); remitting the matter would serve no purpose.
- Depreciation claimed should be allowed as an outgoing in computing income under section 11(1), computed on a commercial basis as reflected in the books of account, and not strictly as per the Income-tax Act's provisions.
- Relied on several High Court decisions and Board circulars supporting the computation of income on a commercial basis and allowance of depreciation as an outgoing.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner Of Income-Tax v. Birla Charity Trust, [1988] 170 ITR 150 (Cal) | Shares received by way of donation do not amount to investment by the assessee under section 13(2)(h). | Court relied on this to hold no investment by the trust and that section 13(2)(h) read with section 13(1)(c) do not apply. |
| CWT v. Bharat Charity Trust, [1993] 199 ITR 420 (Cal) | Consideration of section 21A of the Wealth-tax Act analogous to section 13(1)(d) of Income-tax Act regarding investment by donation. | Confirmed that no investment by the trust in donated shares; thus, provisions of section 13(2)(h) not attracted. |
| Commissioner Of Income-Tax v. Deoria Public Charitable Trust, [1992] 196 ITR 110 (Cal) | Applicability of section 13(1)(d) from assessment year 1984-85 as per Board's circular. | Used to hold that section 13(1)(d) provisions do not apply for assessment year 1983-84 in this case. |
| CIT v. Society of the Sisters of St. Anne, [1984] 146 ITR 28 (Kar) | Depreciation claimed by charitable trust to be allowed as outgoing in income computation on commercial basis. | Tribunal's allowance of depreciation claim was upheld following this precedent. |
| Commissioner Of Income-Tax v. Raipur Pallottine Society, [1989] 180 ITR 579 (MP) | Similar principle on income computation of charitable trusts and allowance of depreciation. | Supported assessee's argument on commercial basis computation of income. |
| CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust, [1992] 198 ITR 598 (Guj) | Depreciation as allowable outgoing in charitable trust income computation. | Further supported the assessee's position on depreciation. |
| CIT v. Indian Jute Mills Association, [1982] 134 ITR 68 (Cal) | Depreciation is expenditure and allowable. | Referred to in support of depreciation claim being an outgoing. |
| CIT v. Jayashree Charity Trust, [1986] 159 ITR 280 (Cal) | Income of charitable trust to be computed on commercial basis. | Court followed this view but left issue open for future reconsideration. |
| CIT v. Rao Bahadur Calavala Cunnan Chetty Charities, [1982] 135 ITR 485 (Mad) | Income computation on commercial basis for charitable trusts. | Followed in Jayashree Charity Trust case, supporting commercial basis approach. |
Court's Reasoning and Analysis
The court examined whether the provisions of section 13(2)(h) read with section 13(1)(c) of the Income-tax Act apply to the dividend income of the trust from shares donated by persons having substantial interest in the company. It held that since the trust did not invest its own funds to acquire the shares, there was no investment within the meaning of these provisions, relying on precedents such as Birla Charity Trust and Bharat Charity Trust. Regarding section 13(1)(d), the court noted the Board's circular clarifying that this provision applies only from assessment year 1984-85 onwards, whereas the year under consideration is 1983-84. Therefore, remitting the matter to the Assessing Officer to examine section 13(1)(d) would serve no purpose.
On the issue of depreciation claimed by the trust, the court referred to multiple High Court decisions and Board circulars establishing that income of charitable trusts may be computed on a commercial basis as shown in books of accounts, allowing depreciation as an outgoing under section 11(1). However, the court also noted that the Act defines income in section 2(24) and that the commercial basis approach is not explicitly mandated by the Act, leaving the issue open for future consideration. Given the small tax effect and the age of the assessment year, the court declined to differ from the established view in Jayashree Charity Trust.
In conclusion, the court answered both referred questions affirmatively in favor of the assessee and against the Revenue.
Holding and Implications
The court held that:
- The provisions of section 13(2)(h) read with section 13(1)(c) of the Income-tax Act do not apply to the dividend income of the trust from donated shares since there was no investment by the trust.
- The provisions of section 13(1)(d) are not applicable for the assessment year 1983-84 and thus no remand to the Assessing Officer is necessary on that ground.
- The depreciation claimed by the assessee is allowable as an outgoing for income determination under section 11(1) as per the commercial basis approach, but the court left open the question for future reconsideration.
Implications: The decision directly benefits the assessee by confirming that the dividend income is not taxable under the challenged provisions and that depreciation is allowable as claimed. The court did not establish any new precedent but followed existing authorities, leaving some issues open for future cases. The matter is thus disposed of in favor of the assessee with no remand required.
The Judgment of the Court was delivered by
Y.R Meena, J.:— By this reference application, the Tribunal has referred the following two questions for our opinion:
“Question raised in R.A No. 21 (Cal) of 1988:
Whether, having regard to the fact that the assessee had income from the shares of a company in which the donor of the said shares had substantial interest within the meaning of section 13(2)(h) read with section 13(1)(c) of the Income-tax Act, 1961, the Tribunal was correct in law in holding the provisions of section 13(2) of the said Act were not attracted?
Question raised in R.A No. 22(Cal) of 1988:
Whether, on the facts and in the circumstances of the case and on a proper interpretation of section 2(15) of the Income-tax Act, 1961, the Tribunal is correct in law in holding that depreciation claimed in the accounts by the assessee was an outgoing for the purpose of determination of income in terms of section 11(1) of the Income-tax Act, 1961, and in that view deleted the addition so made in this regard?”
2. The assessee is a trust. The trust received donation to the extent of Rs. 18,11,134 during the accounting year ending June 30, 1982. Such donation includes shares of the face value of Rs. 14,00,000 of Transport Corporation of India Limited (1,40,000 equity shares of Rs. 10 each), received from Shri Prabhu Dayal Agarwal and Chogmal Agarwal on August 28, 1981. The Income-tax Officer found that the donors had substantial interest in Transport Corporation of India Limited within the meaning of section 13(2)(h) of the Income-tax Act. Therefore, the Income-tax Officer invoked the provisions of section 13(4) and brought to tax the dividend income derived by the trust of Rs. 1,68,000.
3. In appeal, the Commissioner of Income-tax (Appeals) found that the donation of shares does not amount to investment by the assessee for acquisition of shares. Therefore, the provisions of section 13(2)(h) of the Act are not attracted. In appeal before the Tribunal, the Tribunal has confirmed the view taken by the Commissioner of Income-tax (Appeals) that the provisions, of section 13(1)(c) read with section 13(2)(h) are not attracted in the case of this assessee. However, the Tribunal remitted the matter back to the Income-tax Officer to examine whether the provisions of section 13(1)(d) of the Act can be attracted or not.
4. Mr. Ham Chandra Prosad, learned counsel for the Revenue, placed reliance on the order of the Assessing Officer and submits that the matter has rightly been remitted back to the Assessing Officer since the Assessing Officer has not examined the applicability of section 13(1)(d). He further submits that when the donation is with a condition that it will form part of the corpus, it amounts to investment by the assessee.
5. Mr. N.K Poddar, learned counsel for the assessee, submits that the assessee is a charitable trust. When there was a donation of shares of the assessee, the assessee has not incurred any expense. There is no investment by the assessee in acquiring the shares in question. When there is no investment by the assessee, the provision of section 13(1)(c) is not attracted. For section 13(1)(d), he submits that in view of the Board's circular, the provisions of section 13(1)(d) are applicable with effect from the assessment year 1984-85 and not from the assessment year 1983-84. Therefore, when the provisions of section 13(1)(d) are not applicable in the year 1983-84, no purpose will be served, in case, the matter is remitted back to the Assessing Officer. For depreciation, he submits that in the case of a charitable trust, income will be taken on commercial basis as shown by the assessee in the books of account and it should not be computed as per the provisions of the Income-tax Act. He drew our attention to the definition of total income in section 2(45) of the Act. He further submits that even the provision of section 14 which provides heads of income is also not applicable. He placed reliance on the decision reported in Commissioner Of Income-Tax v. Birla Charity Trust., [1988] 170 ITR 150 (Cal) and CWT v. Bharat Charity Trust, [1993] 199 ITR 420 (Cal). For the application of the provisions of section 13(1)(d), he placed reliance on the decisions reported in Commissioner Of Income-Tax v. Deoria Public Charitable Trust., [1992] 196 ITR 110 (Cal) and Commissioner Of Income-Tax v. Savan Public Charitable Trust., [1993] 201 ITR 877 (Cal). For depreciation, he placed reliance on the decisions reported in CIT v. Society of the Sisters of St Anne, [1984] 146 ITR 28 (Kar); Commissioner Of Income-Tax v. Raipur Pallottine Society., [1989] 180 ITR 579 (MP) and CIT v. Sheth Mani-lal Ranchhoddas Vishram Bhavan Trust, [1992] 198 ITR 598 (Guj). He further submits that this court held that depreciation is expenditure in the case reported in CIT v. Indian Jute Mills Association, [1982] 134 ITR 68 (Cal). In the case of Commissioner Of Income-Tax v. Deoria Public Charitable Trust., [1992] 196 ITR 110 (Cal), this court has considered whether the provisions of section 13(1)(d) are applicable in the assessment year 1983-84. At page 115, this court has quoted the Board's circular. The relevant portion of the circular reads as under:
“The issue has been considered in the Board and it is decided that the provisions of section 13(1)(d) would be applicable from the assessment year 1984-85 and not from the assessment year 1983-84. It is also decided that appellate decisions on this issue, hitherto in favour of the assessee, may not be further contested, and pending appeals/references may be withdrawn by the Chief Commissioners of Income-tax, in exercise of the powers delegated to them.”
6. When the Board itself has clarified the position as to from which assessment year the provisions of section 13(1)(d) will be applicable, it was decided that the provisions of section 13(1)(d) will be applicable from the assessment year 1984-85. In this case, the year under consideration is 1983-84. In view of the Board's circular dated March 15, 1991, and the decision of this court in the case of Commissioner Of Income-Tax v. Deoria Public Charitable Trust., [1992] 196 ITR 110, in our view, no purpose will be served in case the matter is remitted back to the Assessing Officer to examine the applicability of the provisions of section 13(1)(d) of the Act.
7. The next issue relevant to question No. 1 is whether the provisions of section 13(1)(c) read with section 13(2)(h) are attracted to tax the dividend income in this case. There is no dispute that the shares from which the dividend income is derived are donated by Prabhu Dayal Agarwal and Chhogmal Agarwal. This court has considered a similar issue whether it can be taken that there was an investment by the assessee when he received shares free of charge.
8. In the case of Commissioner Of Income-Tax v. Birla Charity Trust., [1988] 170 ITR 150, this court held that the assessee received the shares of the company by way of donation. The assessee did not deal with or commit or lay out any part of its existing assets to acquire the said shares. In such a case, there was ho investment of the fund of the assessee within the meaning of section 13(2)(h) of the Act.
9. This court again has considered similar issue in the case of CWT v. Bharat Charity Trust, [1993] 199 ITR 420. This court has considered the corresponding section 21A of the Wealth-tax Act to section 13(1)(d) of the Income-tax Act and the issue before the court was whether when the assessee received the shares by way of donation it would amount to investment of the assessee.
10. This court held that when there was no investment of the fund of the assessee within the meaning of section 13(2)(h) and when there was no investment of the assessee in acquiring the shares the charitable trust did not fall within the provisions of the Wealth-tax Act, 1957.
11. When the shares are received there was no investment on the part of the assessee. The Tribunal is justified in holding that the assessee's income from shares is not hit by the provisions of section 13(2)(h) read with section 13(1)(c).
12. The question referred regarding depreciation, the issue whether the Tribunal is justified in holding that the depreciation claimed in the accounts by the assessee was an outgoing for the purpose of determination of income in terms of section 11(1) of the Income-tax Act, 1961? During the course of assessment, the assessee claimed depreciation worth Rs. 21,779 which has been disallowed by the Assessing Officer. In appeal before the Commissioner of Income-tax (Appeals), he did not allow the claim on the ground that when there is no business of the assessee he is not entitled for deduction on account of depreciation. The Tribunal has allowed the claim following the view taken by the Karnataka High Court in CIT v. Society of the Sisters of St. Anne, [1984] 146 ITR 28.
13. Learned counsel for the assessee submits that there are decisions of the various High Courts including this court, where the view has been taken that in the case of a charitable trust the income should be computed on commercial basis as shown in the books of the account of the assessee and not strictly as per the provisions of the Income-tax Act, 1961. He placed reliance on the decision reported in CIT v. Society of the Sisters of St. Anne, [1984] 146 ITR 28 (Kar); Commissioner Of Income-Tax v. Raipur Pallottine Society., [1989] 180 ITR 579 (MP) and CIT v. Sheth Manilal Ranchhoddas Vishram Bhavan Trust, [1992] 198 ITR 598 (Guj). In CIT v. Society of the Sisters of St. Anne, [1984] 146 ITR 28, the Karnataka High Court has considered how the income of the charitable trust should be computed and whether the amount of depreciation debited to the accounts of the charitable institution is to be deducted to arrive at the income available for application to charitable purposes. At page 33, the court has quoted part of the Circular No. 5-P(LXX-6) of 1968, dated July 19, 1968. The Board has clarified that “income” referred under section 11(1) should be understood in its commercial sense, i.e, book income, after adding back any appropriations or applications thereof towards the purpose of the trust or otherwise, and also after adding back any debits made in capital expenditure in regard thereto for the purpose 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.
14. Though there is a Board circular and some decisions of the various High Courts and even this High Court in CIT v. Jayashree Charity Trust [1986] 159 ITR 280 has followed the decision of the Madras High Court in CIT v. Rao Bahadur Calavala Cunnan Chetty Charities, [1982] 135 ITR 485 and held that while computing the income of the charitable trust, income to be arrived at in the commercial manner.
15. It is true that the view has been taken by various High Courts including this court in the cases referred to above that in the case of a charitable trust income should be computed and arrived at in the commercial manner but nowhere in the Act it prohibits to calculate or compute the income as per the provisions of the Act. Section 11(1) refers to income and not total income defined in section 2(45) but income itself has been defined in the Act in section 2(24) why the meaning of income given in section 2(24) should not be taken for income referred in section 11(1) of the Act. Therefore the decision referred to also requires reconsideration.
16. But in the case in hand the assessment year involved is 1983-84, even if we differ from the view taken by this court it will take another five years to conclude. The tax effect is only Rs. 7,000. Therefore, no purpose will be served to differ on this issue with the view taken by this court in Jayashree Charity Trust's case, [1986] 159 ITR 280 and we leave the issue open to consider this issue in the appropriate case in future. In the result, in view of these facts, we answer both the questions in the affirmative, i.e, in favour of the assessee and against the Revenue.
Ranjan Kumar Mazumdar, J.:— I agree.
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