Auditor Dasaradha Rami Reddy Charities vs Commissioner of Income Tax

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 profits. Immediately after the registration the Society applied to the 1st respondent herein for registration u/s 12A of the income tax Act, 1961 (''the Act'') for the grant of exemption u/s 80G of the Act. By proceedings in C. No. 1146-III (145) of 1985 , dated 30-12-1985, the Society was registered as No. 130(111) of 1985 and by proceedings No. 1146-III (146) of 1985 dated 30-12-1985, the petitioner was granted exemption u/s 80G by the first respondent for donations received by the Society and such exemption initially granted was valid for the period up to 30-9-1987. In that proceeding, it was also provided that the Society can apply to the ITO having jurisdiction over the case for renewal of the exemption as and when necessary. On 31-12-1985, 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 31-12-1985. Since the Society is a charitable one holding a certificate u/s 80G, 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 4-9-1986 and 2-10-1986, one V.V.S.R. Govinda Krishna Yachendra likewise donated seven 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 promisors 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 a specified period as per an understanding or arrangement with the original promisors 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 promisors 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 promisors 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 interests 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 donated, as there were no sufficient funds with the Society and the Society adopted the course of realising the funds from the debtors and as and when funds were realised, the Society invested those amounts in the approved securities u/s 11(5) of the Act. The certificate of exemption initially granted to the Society u/s 80G was about to expire on 30-9-1987 and on 28-7-1987, the Society applied to the 1st respondent for a renewal of the exemption and this was also followed up by another communication as well as memoranda. The 1st respondent, by a communication dated 27-11-1987, rejected the application of the Society dated 28-7-1987 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 issue of a writ of certiorari or mandamus or other appropriate writ or direction to quash the aforesaid order and directing the 1st respondent to renew the certificate u/s 80G granted to the petitioner in its communication dated 30-12-1985.

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 28-2-1983 in any form or mode other than what is prescribed in section 11(5). 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 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, so the Society challenged the refusal of the renewal of exemption u/s 80G.

In the common counter affidavit filed by respondents 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) 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) 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 amounts immediately and investing them in specified securities u/s 11(5), 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). The respondents thus attempted to sustain the refusal of the renewal of exemption u/s 80G.

In the reply affidavit filed by the Society, it reiterated that no loans as such were lent 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 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 outstandings with a view to earn more income, proceeded on surmises ignoring the factual position.

In support of this writ petition, Mr. T. Raghavan, the learned counsel for the Society, referring to sections 11 to 13 of the Act, and in particular, to section 13(1)(d)(i), 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, therefore, there was no question of violation of section 13(1)(d) justifying the refusal of renewal of exemption u/s 80G. Reliance in this connection was placed by the 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, the learned counsel for the respondents submitted that the expressions ''funds'' and ''invested'' occurring in section 13(1)(d)(i), should be understood and interpreted not in a narrow and restricted manner, but considering their meanings 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) and the Society was rightly refused the benefit of exemption.

Though from the impugned order dated 27-11-1987, it is difficult to gather the particular sub-clause u/s 13(1)(d), under which the Society had been denied the benefit of exemption u/s 80G it is now common ground that the refusal of the renewal of exemption u/s 80G 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). It is not in dispute that the Society came into being only on 18-12-1985. No question, therefore, of investment of the trust funds or deposit of such funds before 1-3-1983 otherwise than in approved securities u/s 11(5) of their being continued to remain so deposited or invested after 30-11-1983 would arise and this would render inapplicable section 13(1)(d)(ii). Likewise, the Society did not hold after 30-11-1983 any share in a company and this would take the case out of section 13(1)(d)(iii). We are, therefore, left with section 13(1)(d)(i), which runs as follows :

Section 11 not to apply in certain cases. --(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--

(a) to (c) * * *

(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 28th day of February, 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) 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 on funds belonging to the trust or institution, invested or deposited after 28-2-1983 in a mode not specified u/s 11(5). In this case, the Society received by way of donation several promissory notes and u/s 4 of the Negotiable Instruments Act, 1881 a promissory note is an instrument in writing (not being a bank note or 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 bank capable of being drawn upon and dealt with in a manner as desired by the person entitled 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 it and kept them intact. There was no investment of the funds of the trust in pronotes 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 contemplates that monies belonging to the trust or institution, should be invested or deposited by an unequivocal positive act on behalf of the trust or institution, for the purpose of earning income and if such investment is not in the modes specified u/s 11(5), 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), the money available to the trust either in its hands or at its disposal, should have been invested or deposited by a definite positive act on its part, otherwise than in the modes specified in section 11(5). 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 it 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). We are unable to accept the submission of the 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 of other properties, movable as well as immovable, and by no stretch of imagination such donations could be comprehended within the expression ''funds'' for purposes of section 13(1)(d)(i) though such properties may generally form part of the assets of 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 and 12 to dispose them of, convert the same into cash and invest the proceeds in the modes specified u/s 11(5). To recognise that would be to destroy trusts holding properties, movable and immovable, and to annihilate philanthropy and generosity of donors as well.

We may now refer to the decisions relied on by the learned counsel for the petitioner-Society. In Nachimuthu Industrial Association''s case (supra) 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, which was rejected by the ITO but accepted by the AAC and affirmed by the Tribunal. In 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 to have been lent or invested within the meaning of section 13(2)(a) and (h). Interpreting the expression ''invested'' occurring in section 13(2)(h), this Court pointed out that in order to constitute an investment, money must be laid out in such a manner as to acquire some specie of properties, which would bring an 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), 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 Birla Charity Trust''s case (supra) the interpretation of the words ''funds'' and ''invested'' occurring in section 13(2)(h) 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 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 the 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). We are of the view that the principle laid down in this decision, though with reference to section 13(2)(h), would be applicable to this case as well. Insaniyat Trust''s case (supra) lays down that in the context of the setting in which the expression ''trust funds'' is employed in section 13(2)(h), 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). 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 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). 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 investment 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 to the petitioner cannot be sustained. Consequently, the writ petition is allowed and the rule nisi is made absolute and the order of the first respondent dated 27-11-1987 is quashed and the first respondent is directed to renew the certificate u/s 80G granted to the petitioner by his communication dated 30-12-1985. There will be, however, no order as to costs.