Commissioner of Income Tax vs Maharana of Mewar Charitable Foundation

S.C. Agrawal, J.—This reference has been made by the Tribunal, Jaipur Bench, u/s 256(1) of the income tax Act, 1961 (''the Act''), at the instance of the revenue. The reference relates to the assessment year 1971-72 and the question which has been referred by the Tribunal for the opinion of this Court is as under:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in directing that the deficit of Rs. 59,770 arising out of excess of expenditure over income during the previous year relevant to the assessment year 1970-71 should be set off against the surplus of income over expenditure relating to the assessment year 1971-72 in computing the taxable income of the latter assessment year ?

The facts briefly stated as set out in the statement of the case are that the Maharaja of Mewar Charitable Foundation (''the assessee'') is a public Charitable Trust, constituted by the Maharaja of Mewar through a deed executed on 20-10-1969. The Maharaja of Mewar had donated a sum of Rs. 11 lakhs to the assessee which formed the corpus of the trust. During the previous year relevant to the assessment year 1970-71, the assessee spent a sum of Rs. 95,865 towards the aims and objects of the trust and the income of the assessee during the said year was Rs. 36,093 and, thus, a sum of Rs. 59,770 was spent in excess of the income during the period relevant to the assessment year 1970-71. In the previous year relevant to the assessment year 1971-72, the assessee claimed adjustments of the sum of Rs. 59,770 against the surplus of income over expenditure during the assessment year 1971-72. The ITO, Udaipur, disallowed the claim of the assessee. The AAC, Udaipur allowed the said claim of the assessee for the deduction of the amount of Rs. 59,770 out of the income of the assessment year 1971-72. The Tribunal, on appeal, affirmed the order of the AAC, whereupon the Commissioner moved the Tribunal for referring the question of law arisen out of the order passed by the Tribunal and the question mentioned above has been referred by the Tribunal for the opinion of this Court.

Shri Arora, the Learned Counsel for the revenue has urged that the deficit of Rs, 59,770 arising on account of the excess of expenditure over income in the previous year relevant to the assessment year 1970-71 could not be adjusted against the income for the assessment year 1971-72 and that the assessee could only claim exemption in respect of expenditure incurred for charitable purposes during the previous year relevant to the assessment year 1971-72. Since the expenditure of Rs. 59,770 had been incurred by the assessee during the previous year relevant to the assessment year 1970-71, the said expenditure could not be claimed as deduction from the income for the assessment year 1971-72. In support of the aforesaid contention, Shri Arora has placed reliance on the decision of the Calcutta High Court in COMMISSIONER OF Income Tax, WEST BENGAL Vs. SAMNUGGER JUTE FACTORY CO. LTD. AND ANOTHER., and the decision of the Mysore High Court in Siddaramanna Charities Trust Vs. Commissioner of Income Tax,

Shri Mehta, the Learned Counsel for the assessee, has on the other hand, supported the order passed by the Tribunals and has submitted that the claim of the assessee with regard to deduction of Rs. 59,770 has been rightly allowed by the AAC and the Tribunal since the said sum of Rs. 59,770 has been found to have been incurred by the assessee for charitable purposes and was, thus, applied for charitable purposes. Shri Mehta has placed reliance on the decision of the Andhra Pradesh High Court in CIT v. Trustees of H.E.H. The Nizam''s Charitable Trust 1981 Tax. LR 994.

The relevant provision which needs to be examined is that contained in section 11(1)(a) of the Act. Tee said provision as it stood during the relevant assessment year provided as under:

(1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

(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....

A perusal of the aforesaid provision would show that the 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 as to be excluded for the purposes of computing the income of the trust for the purposes of assesment. There are no words of limitation in this section requiring that the income should have been applied for charitable or religious purposes only in the year when the income had arisen.

Shri Arora has urged that the aforasaid provisions, as it stood at the relevant time provided that only that income would be excluded which was applied for charitable an d religious purposes during the relevant assessment year in which the income was earned and any expenditure incurred for religious and charitable purposes in the earlier year could not be adjusted against the in come of the succeeding year.

We are unable to accept the aforesaid contention of Shri Arora. In our view there is nothing in the language of section 11(1)(a) which lends support to the contention of Shri Arora that the expenditure incurred in the earlier year cannot be met out of the income of the subsequent year and utilisation of such income for meeting the expenditure of earliar year would not amount to such income being applied for charitable or religious purposes. In our opinion the words used in section 11(1)(a) must be given their natural meaning. The word ''applied'' as defined in the Chambers Dictionary means ''to put to use'' or ''to turn to use''. According to Oxford Dictionary the word ''applied'' means ''to make use, or ''to put to practical use''. When the income of trust is used or put to use to meet the expenses incurred for the religious or charitable pnrposes it is applied for charitable or religious purposes. The said application of the income for charitable or religious purposes takes place in the year in which the income is adjusted to meet the expenses incurred for charitable or religious purposes. In other words if the expenses for charitable and religious purposes have been incurred in the earlier year and the said expenses are adjusted against the income of a subsequent year, the income of that year can be said to be applied for charitable and religious purposes in the year in which the expenses incurred for charitable and religious purposes had been adjusted.

In this context, it may be mentioned that the CBDT has issued a Circular No. 101, dated 24-1-1973 [See Taxmann''s Direct Taxes Circulars, Vol. 1, 1985 edn., p. 23 wherein the CBDT has considered the question as to whether where a trust incurs a debt for the purpose of the trust, the repayment of the debt would amount to an application of income for the purposes of the trust. In the said circular, the CBDT has expressed the view that the repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. In other words, according to the said circular if the trust wants to spend more money on charitable and religious purposes then in a particular year it can take loan and the said loan can be repayed out of the income of the subsequent year and the payment of the said loan out of the income of the subsequent year would amount to application of income for charitable and religious purposes u/s 11(1)(a).

If the contention of Shri Arora is accepted, it would lead to an anomalous situation, namely, if the trust takes a loan for the purposes of incurring expenses for charitable and religious purposes in a particular year and the said loan is repaid out of the income of the Sub-sequent year and the said repayment would be entitled to exemption from tax u/s 11(1)(a). But if the trust, instead of taking a loan, incurs the expenditure for charitable and religious purposes out of the corpus of the trust and seeks to reimburse the said amount out of the income of the subsequent year, the trust would not be entitled to claim exemption in respect of such reimbursement u/s 11(1)(a). In our opinion a construction which leads to such an anomaly must be avoided,

We are, therefore, of the opinion that the adjustment of the expenses incurred by the Trust for charitable and religious purposes in the earlier year against the income earned by the trust in the sub-sequent year would amount to applying the income of the trust for charitable and religious purposes in the subsequent year in which such adjustment has been made and will have to be excluded from the income of the trust u/s 11(1)(a).

In the present case, it has not been found by the AAC that the amount of Rs. 59,770 was not incurred by the assessee for charitable purposes but was incurred for some purposes which have nothing to do with the objects of the trust. The Tribunal also observed that it is not the case of the department that the said expenditure of Rs. 59,770 was not incurred by the assessee for charitable purposes. In these circumstances, the Tribunal was right in holding that the sum of Rs. 59,770 adjusted against the income of the assessment year 1971-72 could be excluded from the income of the trust for the said assessment year for the purposes of assessment u/s 11(1)(a).

In Samnugger Jute Factory Co. Ltd.''s case (supra) the question was with regard to interpretation of section 15-B of the Indian income tax Act, 1922 (''the 1922 Act''). In that case exemption was being claimed by the assessee in respect of the contribution made to the Gandhi National Memorial Fund. The said contribution consisted partly of payment made from the income of the assessment year 1948-49 and partly out of the income for the assessment year 1949-50. Exemption was allowed only in respect of payment made out of the income for the assessment year 1949-50 and not for the payment made out of the income of the earlier assessment year 1948-49. The Calcutta High Court held that the words ''any sums'' in section 15-B(1) must be sums assessable in their nature, being parts of the assessable income of the relative accounting year and sums brought into the assessment and about to be brought to charge. Exemption u/s 15B could not be granted in respect of contribution to the Gandhi National Memorial Fund, if the sum representing the contribution is not a part of the income assessable for the year at all. In our opinion, the said decision is of no relevance to the question in controversy in the present case.

In Siddaramanna Charities Trust''s case (supra) the assessee was a charitable trust. It made a donation of a sum of Rs. 25,000 on the first day of the commencement of the accounting year and the assessee claimed that a sum of Rs. 25,000 could not be included in the total income of the previous year by virtue of section 11(1)(a). The said claim of the assessee was disallowed by the Tribunal as well as the income- tax authorities below on the ground that the said sum of Rs. 25,000 is from the funds of the assessee and not from the income of the relevant accounting year as on the first day of the accounting year there were no profits available from which the funds could be donated. The Mysore High Court decided the case in favour of assessee and held that the benefit of section 11(1)(a) was available provided the trust earned pro fits in the provious year relevant to the assessment year and the profits and loss account showed that the donation of Rs. 25,000 formed part of the profits for the year in which the payment was made. The said decision lends no assistance to the contention of Shri Arora. According to this decision in order to avail the benefit of section 11(1)(a) is necessary that the expenditure for charitable and religious purposes must be incurred out of the income of the trust. In the present case also the expenditure incurred for charitable and religious purposes is being claimed out of the income of the trust in the assessment year 1971-72.

Shri Arora has also relied upon the following passage in Chopra''s income tax Law & Practice, 3rd edn. dealing with the words ''applied or accumulated'':

Applied or accumulated. - The income derived from property held under trust wholly for charitable or religious purposes enjoys exemption under clause (a) of sub-section (1) under two circumstances, namely, when the same is applied or when the same is accumulated for the purposes described. Further, the exemption will be available under this clause only in that previous year in which the aforesaid income is either applied to such purposes or is accumulated for application to such purpose.

In our opinion, the said passage also does not help Shri Arora because as indicated above, in the present case the result of the adjustment of the sum of Rs. 59,770 incurred as expenditure for charitable purposes during the assessment year 1970-71 against the income for the assessment year 1971-72 is that the said income must be treated as applied for charitable or religious purposes in the current year 1971-72 and deduction of the said sum of Rs. 59,770 can be claimed in respect of the income of the assessment year 1971-72.

The aforesaid discussion leads to the conclusion that the Tribunal was right in directing that the deficit of Rs. 59,770 arising out of the excess of expenditure over income during the previous year relevant to the assessment year 1970-71 should be set off against the surplus of income over expenditure relating to the assessment year 1971-72 in computing the taxable income of the latter assessment year.

The question referred is, therefore, answered in the affirmative, i.e., against the revenue and in favour of the assessee. There will be no order as to costs.