Commissioner of Income Tax vs St. George Forana Church

K.S. Paripoornan, J.—The following two questions of law have been referred by the Income Tax Appellate Tribunal for the decision of this court:

"1. Whether, on the facts and in the circumstances of the case, construction of building would amount to application of income u/s 11 of the Income Tax Act ?

Whether, on the facts and in the circumstances of the case, the assessee has income to be assessed ?"

The respondent is a religious trust. Its income is exempt u/s 11 of the Income Tax Act. The dispute in this case relates to the assessment year 1974-75. The controversy is whether the assessee had "applied" the income for one of the objects of the institution. The assessee is a religious institution. The profit and loss account showed that there was a surplus of Rs. 1,20,601 for this year. Out of the said amount, a sum of Rs. 51,396 was spent for construction of certain additions to its buildings. The buildings had been let out. The income by way of rent from those buildings was used for religious purposes. On August 15, 1968, the general body of the institution resolved to demolish an old building belonging to the church and in its place construct a new building. The parishioners were authorised to take necessary action by a resolution dated September 8, 1968. The Bishop gave approval by order dated September 13, 1968. The additions to the buildings were made with the intention of letting them out. The Income Tax Officer took the stand that the amount of Rs. 51,396 cannot be considered as an "application" of the income for the purpose of Section 11(1) of the Act. On appeal, the Appellate Assistant Commissioner held that the amount of Rs. 51,396 spent on the construction of the building constituted an application of the income within the meaning of Section 11(1) of the Act. The Revenue filed an appeal before the Appellate Tribunal. The Appellate Tribunal, on an evaluation of the facts and circumstances of the case, held that the assessee''s institution had applied the sum of Rs. 51,396 for religious and charitable purposes. The plea of the assessee was accepted. The Revenue filed an application u/s 256(1) of the Income Tax Act for referring certain questions of law for the decision of this court. It was declined. Thereafter, the Revenue moved this court by O.P. No. 769 of 1979 and this court directed the two questions of law, mentioned herein-above, to be referred to this court for its decision.

We heard counsel for the Revenue, Mr. P. K. R. Menon, and counsel for the assessee, Mr. V. M. Kurien. Mr. Menon contended that the construction of a building cannot be an application of the income within the meaning of Section 11(1) of the Income Tax Act. In other words, it was argued that it is not an amount applied for religious or charitable purposes of the trust. Section 11(1) of the Income Tax Act exempts the income derived from property held under trust for charitable or religious purposes, to the extent to which the income is applied for those purposes. The only question is whether the sum of Rs. 51,396 spent on the construction of additions to the buildings owned by the religious institution, which were let out, and the income wherefrom was used for religious purposes, can be said to be an application of the income for religious or charitable purposes? Section 11(1) envisages that income should be "applied" to such purposes. The Appellate Tribunal, in paragraph 5 of its order, drew a distinction between the word "applied" and "expended", and held that the scope of the word "applied" is wider than the word "expenditure". On this basis, it held that the construction of the building is for the purpose of getting some income by way of rent and such income would be applied to the charitable or religious purposes. This, according to the Tribunal, will be sufficient for the purpose of Section 11(1) of the Act.

The word "applied" is wider in import than the word "expenditure". As per Webster''s Third New International Dictionary, Vol. I, the word "applied" means :

"to put to practical use; engaged in for a utilitarian or contributory purpose ; employed in the decoration, design or execution of useful objects."

The word "expenditure" means "disbursement". "Expend" means "to pay out or distribute ; to spend". The Supreme Court in the decision in Indian Molasses Co. (Private) Ltd. Vs. Commissioner of Income Tax, West Bengal, held that the word "expenditure", means "pay out or away ; spending something which is gone out irretrievably." Considering these two words, we should state that the word "applied" is of a wider import. The money or amount will not go out irretrievably, when it is "applied" to a purpose. Relying upon the decision in Satya Vijay Patel Hindu Dharamshala Trust Vs. Commissioner of Income Tax, Gujarat I, , in Sampath Iyengar''s Law of Income Tax, 7th edn., Vol. 1, page 883, it is stated as follows :

"The word ''applied'' in the text means ''actually applied or actually expended''. Such application may be by adding to the corpus of the fund and not merely in the form of revenue expenditure for implementing the purposes of the trust."

The decision in Satya Vijay Patel Hindu Dharamshala Trust Vs. Commissioner of Income Tax, Gujarat I, was accepted in principle by the Madras High Court in Commissioner of Income Tax Vs. Kannika Parameswari Devasthanam and Charities, . We concur with the said two decisions and the statement of the law contained in Sampath Iyengar''s Law of Income Tax, Vol. 1, p. 883. In the light of the above, we are of the view that the Appellate Tribunal was justified in holding that the sum of Rs. 51,396 was applied by the respondent (assessee) for religious or charitable purposes and the reasoning and conclusion of the Appellate Tribunal are valid and justified in law.

Counsel for the Revenue, Mr. Menon, submitted that any amount spent for the augmentation cannot be considered as an application of the income for religious or charitable purposes. Reliance was placed on the decision of the Supreme Court in Abdul Sathar Haji Moosa Sait Dharmastapanam Vs. Commissioner of Agricultural Income Tax, Kerala, . The broad proposition put forward before us was not in issue nor mooted, nor decided in the said decision. The said decision was one rendered in appeal from the decision of this court in COMMISSIONER OF AGRICULTURAL Income Tax, KERALA Vs. ABDUL SATHAR HAJI MOOSA SAIT., . The decision was one rendered under a different enactment. Under the will of the testator in that case, 1/4th of the total properties alone was exclusively reserved for public charitable purposes. One-half was reserved for giving assistance to poor relations of the testator and one-fourth (1/4) earmarked for augmentation of the corpus. The income from investment from properties acquired by utilising 1/4th earmarked for investment was to be again divided in similar terms--into different parts--and utilised in the same way as the income from the corpus. The question before the High Court was whether the trust is a wholly charitable trust. It was held that only 1/4th of the trust could be considered to be so and the balance of 3/4ths did not constitute a public charitable trust within the meaning of Section 4(b) of the Kerala Agricultural Income Tax Act. This decision was affirmed by the Supreme Court. In the said case, it was clear that 1/2 of the income of the trust properties was by way of provision to the descendants of the settlor; it was held to be only a "private trust" regarding the income applied to the said half. Further, investments (i.e., investments made by applying the 1/4th income of each year) itself was again to be applied substantially and essentially to benefit the descendants of the settlor, since half of it will again go by way of provision to the settlor''s descendants and when a substantial portion of the income from the augmentation (investments) should again go to the benefit of the descendants, it was clear that the application of income by way of augmentation of corpus really benefited only the descendants and took the character of a private trust. The ratio of the said decision has absolutely no application herein. So, we answer question No. 1 referred to us in the affirmative and in favour of the assessee and against the Revenue. The answer to question No. 2 depends upon actual calculation and quantification by the Income Tax Officer.

A copy of this judgment under the seal of this court and the signature of the Registrar may be sent to the Income Tax Appellate Tribunal, Cochin Bench.