Commissioner of Income Tax vs Apostolos Raptakos Trust

Dhanuka, J.—The Tribunal has referred the following question to this Court for its opinion u/s 256(1) of the income tax Act, 1961 (''the Act'') :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the entire income from the shares held under Trust was exempt u/s 11 of the income tax Act, 1961

The relevant facts are summarised hereunder.

One Apostolos Raptakos, a Greek National, who later on became a naturalised Indian and adopted India as his place of domicile, owned shares of Raptakos Brett & Co. Ltd. Apostakos Raptakos is hereinafter referred to as the ''Settlor''. The Settlor created three charitable trusts settling the shares of the said company on trust, being trust Nos. 207,217 and 307. The history of the said three trusts is correctly set out in detail in consolidated order dated 8-12-1972 passed by the Tribunal in IT Appeal Nos. 3529, 3539, 4092-4099/70-7 land judgment of this Court in reference arising therefrom in the case of Commissioner of Income Tax Vs. State Bank of India, . Both the learned counsels agree that the narration of the facts set out in the order of the Tribunal and the judgment of this Court referred to hereinabove may be considered for purpose of this reference. This reference pertains to Trust Nos. 307 and 217. This reference pertains to the assessment year 1973-74. The above-referred order dated 8-12-1972 was passed by the Tribunal in appeals relating to the assessment years 1965-66 to 1969-70. It is an accepted position now that the shares were held by the assessee-trusts wholly for charitable or religious purposes. The State Bank of India is the trustee of the assessee-trusts herein. The Trust No. 217 was created on 11-6-1947. The Trust No. 307 was created on 12-6-1953. The Settlor settled 6,000 ordinary shares of Raptakos Brett & Co. Ltd. on trust known as Trust No. 307. The settlor settled 6,000 ordinary shares of the said company on the trust known as Trust No. 217. The Trust received dividend income from the shares before the same were sold.

On 22-4-1964, the Settlor died leaving a will. The executors appointed under the will filed estate duty return. On 30-9-1969, the State Bank of India as trustee of the said two trusts filed estate duty returns at the instance of the Assistant Controller. The State Bank showed the value of the estate held by it as trustee at Rs. 45.78 lakhs. It claimed exemption from estate duty in respect of this estate. The Assistant Controller rejected the claim of the trustee for exemption on the ground that the trusts created by the deceased were settlements with reservation. On 10-6-1969, the Assistant Controller computed the estate at Rs. 81,16,093, Rs. 9,75,799 out of which formed free estate, while the balance amount of Rs. 71,40,294 formed trust properties. The estate duty payable by the concerned trusts was determined at Rs. 68,28,679. The concerned authorities issued a notice of demand for Rs. 57,76,691 after giving credit for part-payment made. Section 74(2) of the Estate Duty Act creates a statutory charge on the estate in respect of the estate duty payable. The State Bank had liquid funds of Rs. 10,46,791 only in the hands of all the three trusts, i.e., Trust Nos. 207, 217 and 307. In March 1970, the said amount was paid by the State Bank to the revenue. The State Bank decided to sell all its shares to pay off the estate duty. The State Bank entered into an agreement to sell the trust shares to Amichand Pyarelal. Disputes arose. Amichand Pyarelal filed a suit for specific performance. The State Bank was restrained from disposing of the shares. In March 1972, the suit was settled. Interim injunction was vacated by the Court. Soon thereafter the trust shares were sold to Bombay Oxygen Company. During the previous year (i.e., assessment year 1973-74), the concerned trusts paid a sum of Rs. 47 lakhs and odd towards estate duty by disposing of the corpus of the shares and utilising also the liquid funds available with the trust as more particularly set out in the judgment in State Bank of India''s case (supra). Thus, no income from dividend in respect of trust shares or otherwise whatsoever was actually available to the assessee-trusts during the previous year which could be applied to the charitable or religious purposes as contemplated u/s 11(1) (a) of the Act. During the assessment years 1965-66 to 1969-70 which were the subject-matter of reference decided by this Court by its judgment in State Bank of India''s case (supra), there was neither any enforceable demand in respect of estate duty payable by the trusts nor any actual payment. During the previous year the assessee-trusts have discharged estate duty liability as aforesaid.

Section 11(1) (a) reads as under:

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property;

There is no dispute between the parties that the shares in question from which income was derived during the relevant assessment year prior to sale of the shares were ''held under trust wholly for charitable purposes''. Section 11(1) (a) grants exemption of such income from income tax to the extent it was applied to such purposes in India and where it was accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart was not in excess of twenty-five per cent of the income from ''such property''. The learned counsel for the assessee contends that the income derived by the assessee as and by way of capital gain as well as dividend was required to be utilised for actual payment of estate duty and no income was, thus, available to the assessee-trusts for application thereof for charitable or religious purposes in India. The learned counsel for the assessee contends that in such a situation the entire income of the trust from whatever source must be treated as exempted from income tax u/s 11(1) (a). The learned counsel for the revenue disputes the correctness of the submission made by the learned counsel for the assessee. The learned counsel for the revenue relies on the decision of this Court in the case of State Bank of India (supra), and submits that almost an identical question, i.e., the question No. 3 in that case, was answered by the Court in favour of the revenue.

Having regard to the backdrop of the above-referred facts and the provisions contained in section 11(1) (a), let us set out some more facts having bearing on this reference.

In respect of Apostolos Raptakos Trust No. 7, the State Bank of India, in its capacity as trustee of the said trust filed its income tax return for the assessment year 1973-74 declaring a deficit income of Rs. 6,54,667. The assessee claimed that the income of the trust was totally exempt u/s 11 as the trust was a charitable trust, that the trust had not accumulated or set apart any income in excess of 25 per cent of the income and that the trust had no surplus or available income with it at all during the relevant year which could be applied to charitable or religious purposes and still not applied to such purposes in India. The ITO rejected the claim of the assessee for exemption of its income from income tax u/s 11. The ITO computed the dividend income at Rs. 1,01,160 and capital gains at Rs. 5,80,827. After providing for deduction u/s 80T of the Act, the ITO computed the taxable income of the said trust at Rs. 3,89,070. As regards, Apostolos Raptakos Trust No. 217 is concerned, the State Bank, in its capacity as trustee of the said trust filed its return for the assessment year 1973-74 declaring a deficit of Rs. 20,92,532. The assessee made a similar claim for exemption of its income u/s 11(1) (a). The ITO rejected the claim of the assessee for exemption and assessed total taxable income at Rs. 12,18,810. By a consolidated order dated 30-11-1977, the AAC directed the ITO to allow exemption on the entire income of the assessee in respect of both the trusts for the assessment year 1973-74. The AAC followed the consolidated order of the Tribunal dated 8-12-1972 passed by it while deciding the appeals in respect of the assessment years 1965-66 to 1969-70. The Tribunal dismissed the department''s appeal against the above-referred order of the AAC. We have gone through the copy of the Tribunal''s order dated 8-12-1972 referred to hereinabove and the judgment of the Court delivered in the State Bank of India''s case (supra) reference arising therefrom and considered all the facts and subsequent events summarised therein and the reasoning and conclusion of this Court in respect of Question No. 3 which is almost identical with the question referred to us in this reference and heard the learned counsels on both sides at some length.

In the first instance, it is necessary to analyse the ratio of the judgment of this Court in the case of State Bank of India (supra), pertaining to the same assessee in respect of the assessment years 1965-66 to 1969-70.

Question No. 3 referred by the Tribunal to this Court in that case reads as under:

(3) Whether, on the facts and in the circumstances of the case, the whole of the dividend income was exempt from assessment u/s 11(1) (a) of the income tax Act, 1961?

During the assessment years 1965-66 to 1969-70, the assessee-trusts had not paid any amount towards duty. The assessee-trust paid the necessary amounts towards estate duty to some extent in March 1970 and to a large extent during the previous year after March 1972. In the above-referred reference pertaining to previous years, it was argued on behalf of the assessee that the assessee was entitled to exemption from tax u/s 11(1) (a) as no income for application thereof to charitable or religious purposes was in fact available to the trust in view of the statutory change u/s 74(2) of the Estate Duty Act and pending proceedings before the estate duty authorities. The Court came to the conclusion that during the relevant assessment years there was no enforceable demand and no payment was in fact made towards estate duty. In the reference for earlier years, the Court reached further conclusion to the effect that dividend income continued to be factually available to the trust for application to charitable and religious purposes and the assessee-trust had failed to apply such income to the said purposes. Having regard to these facts, this Court held that the dividend income in question was not exempt from assessment u/s 11(1) (a). Applying the ratio of the same very judgment to this case, we have reached the conclusion that income of the assessee-trust during the assessment year 1973-74 was exempted from tax u/s 11(1) (a) in view of the obvious factual conclusion in the light of admitted fact that no income was factually available to the concerned trusts during the assessment year 1973-74 in view of discharge of liability to pay estate duty as aforesaid for discharge of which even the corpus of the trust, i.e., the trust shares, had to be disposed of. In State Bank of India''s case (supra), our High Court followed the principle and ratio of the judgment of the High Court of Madras in the case of Commissioner of Income Tax Vs. Janaki Ammal Ayya Nadar Trust, . In the Madras case referred to hereinabove, it was held by the High Court of Madras that for the purpose of determining as to whether the assessee was entitled to exemption u/s 11(1) (a) or as to whether the assessee had applied the income to charitable purpose or not, the Court must first find out as to whether the trust had available income with it during the relevant assessment year for being spent as charitable purpose. If it can be shown by the assessee that there was no available surplus in the hands of the trust for application thereof to charitable or religious purposes during the relevant year, income of the trust was entitled to exemption under the Act and it could not be taxed on the ground that the trust had failed to apply the income to charitable or religious purposes. In this case, the trust had no available or surplus income at all which could be applied to charitable or religious purposes. It is of considerable significance that the trusts could pay only a sum of Rs. 10,46,791 to the revenue towards the demand made for estate duty from the liquid funds and the trusts had to dispose of the shares for raising funds to pay the balance of estate duty. The outstanding liability in respect of estate duty was paid by the assessee-trust during the previous year leaving with the trust no amounts from the income for application to charitable or religious purposes and large deficits were reflected in the income tax returns filed by the State Bank of India for the assessment year 1973-74. In our opinion the claim of the assessee for exemption of income of the trust from income tax is supported by the principle and ratio of the above-referred judgment of the High Court of Madras in Janaki Animal Ayya Nadar Trust''s case (supra) and this Court in State Bank of India''s case (supra).

The learned counsel for the assessee is also supported by the judgment of the High Court of Gujarat in the case of Commissioner of Income Tax Vs. Ganga Charity Trust Fund, . In this case, Ahmadi, J. [as he then was] speaking for the Division Bench, observed as under:

Income derived from trust property must be determined on commercial principles and in doing so, all outgoings by way of income tax paid by the assessee-trust must be deducted and it is only from the surplus income in the hands of the trustees that the question of application or accumulation or setting apart of income can arise.

The High Court of Gujarat applied the ratio of the above-referred judgment of the High Court of Madras in the case of Janaki Ammal Ayya Nadar Trust (supra). The learned counsel for the assessee also rightly relied upon the judgment of the Andhra Pradesh High Court in the case of Commissioner of Income Tax Vs. Trustee of H.E.H. The Nizam''s Supplemental Religious Endowment Trust, .

Having regard to the undisputable facts of the case and interpretation of the relevant provisions of the Act referred to hereinabove in the light of the judgments of the High Courts of Madras, Gujarat, Andhra Pradesh and our own High Court in the above-referred cases, we have reached the conclusion that the question referred to us must be answered in the affirmative and in favour of the assessee. We, accordingly, answer the question in the affirmative and in favour of the assessee. Having regard to the facts and circumstances of the case, there shall be no order as to costs.