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Judgment
Ratnam, J.—The petitioner in this writ petition is a society registered under the Tamil Nadu Societies Registration Act, 1975, as S.L. No.
357 of 1985 and the objects of the society are purely charitable in nature, as may be seen from the memorandum of association of the society,
according to which, the income from the properties of the society should be applied solely for fulfilling the objects of the society and no portion
thereof can either be directly or indirectly paid to its members either by way of dividend or by way of profits. Immediately after the registration.
The society applied to the first respondent herein for registration u/s 12A of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), for
the grant of exemption u/s 80G of the Act. By proceedings in C. No. 1146-III (145) of 1985 dated December 30, 1985, the society was
registered as No. 130/III of 1985 and by proceedings No. 1146-III (145) of 1985 dated December 30, 1985, the petitioner was granted
exemption u/s 80G of the Act by the first respondent for donations received by the society and such exemption initially granted was valid for the
period up to September 30, 1987. In that proceeding, it was also provided that the society can apply to the Income Tax Officer having jurisdiction
over the case for renewal of the exemption as and when necessary. On December 31, 1985, the society received donations in the shape of six
promissory notes from a partnership firm, viz., Sree Shyam Sayee Corporation. The promissory notes had been executed by various parties in
favour of the donor-firm and those promissory notes had been endorsed in favour of the society and delivered to it under cover of a letter of the
donor dated December 31, 1985, since the society is a charitable one holding a certificate u/s 80G of the Act, u/s 197 of the Act, a certificate was
also issued by the second respondent to the effect that the interest payable on the promissory notes donated to the society could be paid without
deduction of tax. On September 4, 1986, and October 2, 1986, one V. V. S. R. Govinda Krishna Yachendra likewise donated even promissory
notes executed in his favour by various persons by endorsing and delivering them to the society and with reference to these promissory notes also,
the second respondent issued certificates permitting the makers of the promissory notes to pay the interest to the society without deduction of tax.
After receiving the donations in the shape of the promissory notes, the society addressed communications to the promissors requesting them to pay
the amounts covered by the promissory notes. However, the makers of the promissory notes donated to the society informed the society that the
amounts covered by the promissory notes were payable only after specified period as per an understanding or arrangement with the original
promises and they were, therefore, unable to pay the amounts covered by the promissory notes. As they had programmed their finances in such a
way that they were then hard pressed for funds. It was also stated by the promissors that if the society returned the entire interest paid to the donor
before the donation of the promissory notes to the society as well as the interest paid to the society subsequently, they may consider the return of
the loans treating the loans as interest-free ones and that request was not complied with by the society. The promissors also informed the society
that they would be inclined to pay interest at a higher rate till the payment of the debts inasmuch as the petitioner is a charitable organisation.
Thereupon, on a consideration of the offer made by the debtors, the society decided that the return of the interest on the promissory notes already
paid would not be in the interest of the society and not possible as well and that it was also not possible to initiate proceedings for the recovery of
the amounts due under the promissory notes donates. As there were not sufficient funds with the society and the society adopted the course of
realising the funds from the debtors and, as and when funds were revised, the society invested those amounts in securities approved u/s 11(5) of
the Act. The certificate of exemption initially granted to the society u/s 80G of the Act was about to expire on September 30, 1987, and on July
28, 1987, the society applied to the first respondent for a renewal of the exemption and this was also followed up by another communication as
well as a memoranda. The first respondent, by a communication dated November 27, 1987, rejected the application of the society dated July 28,
1987, for the renewal of exemption and that order ran as follows:
In connection with your above application. I am directed by the Commissioner of Income Tax to inform you that your request for renewal of
exemption u/s 80G of the Income Tax Act is not entertainable. As there is contravention of the provisions of section 13(1)(d) of the Income Tax
Act on the part of the trust. Your above application is, therefore, rejected.
The society has prayed for the issued of a writ of certiorarified mandamus or other appropriate writ or direction to quash the aforesaid order
and directing the first respondent to renew the certificate u/s 80G of the Act granted to the petitioner in its communication dated December 30,
1985.
In the affidavit filed in support of the writ petition, the society maintained that the promissory notes received by it by way of donation did not
constitute ""funds"" of the society and that it had not invested or deposited any of its funds after February 28, 1983, in any form or mode other than
what is prescribed in section 11(5) of the Act. Reiterating that to constitute an investment of funds as contemplated u/s 13(1)(d) of the Act, monies
belonging to the society either at its disposal or control must be laid out in such a manner as to acquire some property which would fetch some
income and that that had not been done by the society, but that the society had merely received the donations in the shape of promissory notes.
Which could not be treated either as funds or funds invested by the society pursuant to a positive act on its part, the society challenged the refusal
to renew the exemption u/s 80G of the Act.
In the common counter-affidavit filed by respondents Nos. 1 and 2, while admitting most of the facts as stated in the affidavit filed by the society
in support of the writ petition. It was contended that monies due under the promissory notes donated to the society will fall within the meaning of
the word ""funds"" u/s 13(1)(d) of the Act and that the society had lent to private parties and that amounted to investment in non-approved securities
in violation of section 13(1)(d) of the Act and, therefore, the refusal of exemption was quite in order. It was also contended that the society had an
opportunity to change the investment by recovering the amount immediately and investing them in specified securities u/s 11(5) of the Act, but that
the society did not do so with a view to earn more income and had thus allowed the funds to remain in the hands of private parties violating the
provisions of section 13(1)(d) of the Act. The respondents thus attempted to sustain the refusal of the renewal of exemption u/s 80G of the Act.
In the reply affidavit filed by the society, it reiterated that no loans as such were given by the society to any of the third parties and there was no
positive act of deposit or investment by the society and the promissory notes donated would only be in the nature of actionable claims and not
funds and that such amounts. As were realised, had been immediately invested in the approved securities. The lending of the amounts, according to
the society, was done by the donors and there was no investment of funds by the society nor any loan transaction brought about by the society and
that the society also did not have any opportunity to change the investment of its funds resulting in the amounts being allowed to remain as loans for
the purpose of earning higher interest. Reiterating the reasons set out in the affidavit filed in support of the writ petition for not recovering the money
due under the promissory notes donated to the society, the petitioner society contended that there was no opportunity for changing the investment
for the purpose of investing the amount in specified securities and that the allegation that the society had allowed the promissory notes to be
outstanding with a view to earn more income, proceeded on surmises ignoring the factual position.
In support of this writ petition, Mr. T. Raghavan, learned counsel for the society, referring to sections 11 to 13 of the Act, and, in particular, to
section 13(1)(d)(i) of the Act, contended that the society had received the promissory notes qua promissory notes by way of donation and such
promissory notes could not be regarded as ""funds"" utilised for making any investment by any positive act by the society and that, therefore, there
was no question of violation of section 13(1)(d) of the Act justifying the refusal of renewal of exemption u/s 80G of the Act. Reliance in this
connection was placed by learned counsel upon the decisions in Commissioner of Income Tax, Coimbatore Vs. Nachimuthu Industrial
Association, ; Commissioner of Income Tax Vs. Birla Charity Trust, and Commissioner of Income Tax Vs. Insaniyat Trust (Now merged with
Sarabhai Foundation), . On the other hand, learned counsel for the respondents submitted that the expressions ""funds"" and ""invested"", occurring in
section 13(1)(d)(i) of the Act, should be understood and interpreted not in a narrow and restricted manner, but considering their meaning as
understood commercially and generally and from the accountancy point of view as well and. If so understood, the promissory notes donated to the
society constituted funds in the hands of the society, which had remained uninvested in approved or specified securities u/s 11(5) of the Act and
that the society was rightly refused the benefit of exemption.
Though from the impugned order dated November 27, 1987, it is difficult to gather the particular sub-clause u/s 13(1)(d) of the Act under
which the society had been denied the benefit of exemption u/s 80G of the Act, it is now common ground that the refusal of the renewal of
exemption u/s 80G of the Act, if at all, could be brought only u/s 13(1)(d)(i) and not under sub-clause (ii) or (iii) of section 13(1)(d) of the Act. It
is not in dispute that the society came into being only on December 18, 1985. No question, therefore, of investment of the trust funds or deposit of
such funds before March 1, 1983, otherwise than in approved securities u/s 11(5) of the Act or of their continuing to remain so deposited or
invested after November 30, 1983, would arise and this would render inapplicable section 13(1)(d)(ii) of the Act. Likewise. The society did not
hold after November 30, 1983, any share in a company and this would take the case out of section 13(1)(d)(iii) of the Act. We are, therefore, left
with section 13(1)(d)(i) of the Act, which runs as follows:
(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 - .........
(d) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof, if for any period during the
previous year -
(i) any funds of the trust or institution are invested or deposited after the February 28, 1983, otherwise than in any one or more of the forms or
modes specified in sub-section (5) of section 11; or...
The construction to be put upon the expressions ""funds"" and ""invested or deposited"" occurring in section 13(1)(d)(i) of the Act has to be
determined in the context of the section, which is designed to deny to a trust, the benefit of exclusion from the total income of the previous year, of
the income received by a trust for charitable or religious purposes or a charitable or religious institution, on funds belonging to the trust or
institution, invested or deposited after February 28, 1983, in a mode not specified u/s 11(5) of the Act. In this case, the society received by way of
donation several promissory notes and u/s 4 of the Negotiable Instruments Act, a promissory note is an instrument in writing (not being a bank note
or a currency note), containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or to the order of, a
certain person, or to the bearer of the instrument. Implicit in this definition is the exclusion of cash or money, as normally understood, with
reference to the donations received by the society. The expression ""funds"" normally and ordinarily means cash on hand or in the bank capable of
being drawn upon and dealt with in a manner as desired by the person entitle or authorised to do so. A promissory note cannot be equated to
funds. But at best could only be an actionable claim and it is extremely difficult to conceive of an investment of an actionable claim. The society
received the promissory notes donated to is and kept them intact. There was no investment of the funds of the trust in promotes by a person
authorised to do so on its behalf, but the promissory notes received by way of donation had been retained in specie. The use of the words ""funds
of the trust or institution are invested or deposited"" clearly contemplate that monies belonging to the trust or institution should be invested or
deposited by an equivocal positive act on behalf of the trust or institution for the purpose of earning income and if such investment is not the modes
specified u/s 11(5) of the Act, only then. The benefit of exclusion of such income from the total income would be unavailable to the trust.
Therefore, to deny the benefit of exclusion under sections 11 and 12 and of exemption u/s 80G of the Act by applying section 13(1)(d)(i) of the
Act. The money available to the trust either in its hands ar at its disposal, should have been invested or deposited by definite positive act on its part,
otherwise than in the modes specified in section 11(5) of the Act. In this case, after receiving the promissory notes by way of donation, the society
did not deal with or in any manner commit or lay out any part of its funds to secure the promissory notes, the society did not, by any act on its part,
bring about the relationship of creditor and debtor between itself and the promisors. The only act attributable to the society is the acceptance of the
promissory notes donated to is and after such acceptance, the society has merely held on to the donated promissory notes and it had not done
anything towards an investment or deposit of the amounts covered by the donated pronotes, except to later invest the subsequent realisations from
the debtors, in the modes specified u/s 11(5) of the Act. We are unable to accept the submission of learned counsel for the respondents that even
the promissory notes received by donation would constitute funds in the hands of the society. Donations made out of a sense of philanthropy and
generosity need not always take the shape of cash or money donations. Such donations could also comprise other properties, movable as well as
immovable, and by no stretch of imagination could such donations be comprehended within the expression ""funds"" for purposes of section 13(1)(d)
(i) of the Act, though such properties may generally from part of the assets of the trust constituting its corpus. Nor can it be accepted that even in
cases of donation of property, movable or immovable, it is incumbent on the part of the recipient-trust, in order to claim the benefit of sections 11
of 12 of the Act, to dispose of them, covert the same into cash and invest the proceeds in the modes specified u/s 11(5) of the Act. To recognise
that would amount to destroying trusts holding properties, movable and immovable, as their corpus and to annihilate the philanthropy and
generosity of donors as well.
We may now refer to the decisions relied on by learned counsel for the petitioner-society. In Commissioner of Income Tax, Coimbatore Vs.
Nachimuthu Industrial Association, , the assessee, a private limited company, founded with the object of promoting charitable objects, settled the
income from the properties as well as the business in trust for carrying out charitable objects as per the deed of trust. The assessee was a partner in
several firms and had retired from the partnerships and as the firms did not have adequate resources to pay the amounts due to the assessee who
had retired, either towards capital or towards share of profits. Those amounts were transferred to the current account of the firm and shown as
outstanding and in respect of the relevant assessment year, the assessee claimed exemption u/s 11 of the Act which was rejected by the Income
Tax Officer. But accepted by the Appellate Assistant Commissioner and affirmed by the Tribunal. On a reference, the question debated before
and decided by this court was whether the amounts due from the partnership firms to the assessee could be said have been lent or invested within
the meaning of section 13(2)(a) and (h) of the Act. Interpreting the expression ""invested"" occurring in section 13(2)(h) of the Act, this court pointed
out that in order to constitute an investment, money must be laid out in such a manner as to acquire some species of property which would bring
income to the investor and it was held that there was no investment by the assessee with the firms as understood in business parlance, though this
decision was rendered with reference to section 13(2)(h) of the Act, we do not see how the interpretation of the expression ""invested"" occurring in
section 13(1)(d)(i) could not bear a similar or like interpretation. In Commissioner of Income Tax Vs. Birla Charity Trust, , the interpretation of the
words ""funds"" and ""invested"" occurring in section 13(2)(h) of the Act arose for decision and in that context, it was pointed out that the expression
funds"" cannot be so construed as to include assets other than money in hand or cash or a credit balance in a bank account, as they are not
capable of being invested as such and other assets, apart from money in hand, will have to be converted into money or cash before the same could
be invested and further that the expression ""invested"" in section 13(2)(h) contemplates a positive act on the part of trust laying out the funds of the
trust or committing the funds with reference to any particular property or business with the object of earning profit or financial advantage or return.
It was also further pointed out that the assessee in that case merely received shares by way of donation and did not deal with or commit or lay out
any part of its existing assets to acquire the said shares and there was no such decision or action on the part of the assessee and there was,
therefore, no investment of the funds by the assessee within the meaning of section 13(2)(h) of the Act. We are of the view that the principle laid
down in this decision. Though with reference to section 13(2)(h) of the Act, would be applicable to this case as well. Commissioner of Income Tax
Vs. Insaniyat Trust (Now merged with Sarabhai Foundation), , lays down that in the context of the setting in which the expression ""trust funds"" ins
employed in section 13(2)(h) of the Act, the meaning attributable to that expression is ""the actual or available money or cash resources, such as
money in hand and money in the bank"" and no other and if the funds of the trust are not capable of being invested, such funds would not come
within the purview of section 13(2)(h) of the Act. It was also further held that it was the donor who had purchased the shares and not the
assessee-trust by investing its funds and by the mere fact that the trust continued to hold the shares donated, it could not be said that there was an
investment made out of the funds of the trust or that it was continued, the principle laid down in the aforesaid decisions would be applicable in
respect of the interpretation to be put upon the expression ""funds of the trust or institution are invested or deposited"" occurring in section 13(1)(d)
(i) of the Act. On the facts of the case, we are clearly of the opinion that the society merely received the promissory notes donated to it and did not
lay out its funds on any investments or lend its money to debtors, by any positive or definite act on its part for the purpose of earning income. We,
therefore, hold that the order of the first respondent declining to grant renewal of exemption u/s 80G of the Act to the petitioner cannot be
sustained. Consequently. The writ petition is allowed and the rule Nazi is made absolute and the order of the first respondent dated November 27,
1987, is quashed and the first respondent is directed to renew the certificate u/s 80G of the Act granted to the petitioner by his communication
dated December 30, 1985. There will be, however, no order as to costs.