Commissioner of Income Tax, Gujarat-IV vs Bal Utkarsh Society

Divan, C.J.—In this case, at the instance of the revenue, the following question has been referred to us for our opinion :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that, since the donations made by the donor-

trust to the assessee-trust were towards the corpus or the capital fund of the assessee, such contributions cannot be treated as income of the

assessee-trus ?

The facts leading to this reference are as follows :

We are concerned with the assessment year 1970-71. The assessee before us is a charitable trust. It filed its return of income for the assessment

year under consideration showing a loss of Rs. 424. On scrutiny of the income and expenditure accounts, the ITO found that the said account was

credited with a sum of Rs. 2,100. He also noticed that the trust fund account was credited with a sum of Rs. 2,74,000. On being asked to furnish

the details of these items, the assessee explained that it had received by way of donations from one Uday Education Society, another charitable

trust, one thousand shares of Alembic Glass Industries Ltd. of the face value of Rs. 1,00,000 and five hundred shares of Alembic Chemical Works

Co. Ltd. of the face value of Rs. 50,000, aggregating to Rs. 1,50,000 of the face value of the shares and this amount of Rs. 1,50,000 was included

in the total credit of Rs. 2,74,000 as shown in the trust fund account. Over and above this amount of Rs. 2,74,000, donations in cash aggregating

to Rs. 2,000 were received and this was included in the total amount of Rs. 2,100 as shown in the income and expenditure account of the

assessee. The ITO too the view that donations in the form of shares which were received by the assessee-trust from Uday Education Society

constituted income in view of the provisions of s. 12(2) of the I. T. Act. 1961, as it stood before the amendment which came into effect from April

1, 1973. The ITO, accordingly, included the sum of Rs. 2,80,625 in the total income of the assessee for the assessment year under reference. He

determined the said figure by adopting the market rate of the shares of Alembic Glass Industries Ltd. at Rs. 195 per share and of the shares of

Alembic Chemical Works Co. Ltd., at Rs. 171.25 per share and evaluated the worth of the shares accordingly.

Against the decision of the ITO, the assessee-trust preferred an appeal and the AAC took the view that the provisions of s. 12(2) were not

applicable to the case of the assessee. He allowed the appeal accordingly.

Against the decision of the AAC, the revenue went in appeal to the Tribunal. The Tribunal considered the provisions contained in s. 12 of the

Act, both before the amendment and after the amendment which came into effect from April 1, 1973, and, relying on the decision of the Allahabad

High Court in Sri Dwarkadheesh Charitable Trust Vs. Income Tax Officer, ""C"" Ward, and applying the principle laid down in the said decision, the

Tribunal held that, in this particular case, the donations were made by the donor-trust to the donee-trust towards the corpus or the capital of the

trust and could not, therefore, be treated as income in the hands of the assessee-trust. Thereafter, at the instance of the assessee, the question

hereinabove set out has been referred to us for out opinion.

Section 12, as it stood prior to its amendment, was in these terms :

Income of trusts or institutions from voluntary contributions. - (1) Any income of a trust for charitable or religious purposes or of a charitable

or religious institution derived from voluntary contributions and applicable solely to charitable or religious purposes shall not be included in the total

income of the trustees or the institution, as the case may be.

(2) Notwithstanding anything contained in sub-section (1), Where any such contributions as are referred to in sub-section (1) are made to a trust

or a charitable or religious institution by a trust or a charitable or religious institution to which the provisions of section 11 apply, such contributions

shall, in the hands of the trust or institution receiving the contributions, be deemed to be income derived from property for the purposes of that

section and the provisions of that section shall apply accordingly.

We are not concerned with the provisions as they stand after the amendment because we are concerned with the assessment year 1970-71. It

must be pointed out that s. 12 finds its place in Chap. III of the I. T. Act, 1961. Chap. III deals with ""Incomes which do not form part of total

income"". Section 11 of the Act deals with ""Income from property held for charitable or religious purposes"", and under s. 12(1), as it stood before

the amendment, exemption was made in the case of income from voluntary contributions, though it may not be income from property held for

charitable or religious purposes. Under sub-s. (1) of s. 12, the heading was Income of trusts or institutions from voluntary contributions and if

income of a trust for charitable or religious purposes or of charitable or religious institution was derived from voluntary contributions and was

applicable solely to charitable or religious purposes, it was not to be included in the total income of the trustees or the institution, as the case might

be. Therefore, what was provided for under sub-s. (1) of s. 12 prior to the amendment was with reference to what may be called ""non-capital

voluntary contributions to the trust for charitable or religious purposes or a charitable or religious institution. It is such voluntary contributions as

were in the nature of income-contributions which were covered by this sub-s. (1) and it was provided that such income from voluntary

contributions was not included in the total income in the hands of the recipient institution or trust. Sub. s. (2) of s. 12 carved out an exception to

sub-s. (1) by providing that where any such contributions which were referred to in sub-s. (1) that, is, contributions of income nature or

contributions stamped with the character of income, were made by a charitable or religious institution to which the provisions of s. 11 apply and the

recipient institution was also a thrust of a charitable or religious nature or was a charitable or religious institution, then, they were deemed to be

income derived from property for the purposes of s. 11 and the provisions of s. 11 were to apply to such deemed income. In our opinion, the

words, ""any such contributions as are referred to in sub-section (1) in sub-s. (2) clearly indicate that it is only the voluntary contributions stamped

with the character of income which were otherwise exempt under sub-s. (1) which would lose that exemption for the limited purpose referred to in

sub-s. (2), if the contribution was received by the recipient trust or institution from a trust or a charitable or religious institution to which the

provisions of s. 11 were applicable. If the contributions received from a charitable or religious trust or a religious or charitable institution to which

the provisions of s. 11 apply were not stamped with the character of income and, therefore, were not ""any such contributions"" as were referred to

in sub-s. (1) of s. 12, it would be obvious that they would not be covered by sub-s. (2) at all and, therefore, all contributions not stamped with the

character of income from whatever source would not be governed either by sub-s. (1) or by sub.s (2)That, in our opinion, is clear from the

unamended provisions of s. 12. That which has to be culled out by a process of interpretation was made specific by the amendment carried out in

s. 12 by the Finance Act of 1972, with effect from April 1, 1973. Where, contributions made with a specific direction that they shall form part of

the corpus of the donee trust, they are exempted but, at the same time, the exemption which was contemplated by s. 12(1) is also taken away and

now, after the amendment, all voluntary contributions, received by the trust created for charitable or religious purposes or by an institution

established wholly for such purposes, other than the exempted category of contributions, shall, for the purposes of s. 11, be deemed to be income

derived from property held under trust wholly for charitable or religious purposes and the provisions of ss. 11 and 13 would apply accordingly.

The Tribunal is, therefore, right when it points out that that which was ambiguous or might require to be interpreted from the unamended provisions

of s. 12 has now been made specific by the amendment so far as the exempted category of voluntary contributions is concered.

We may also point out that with effect from April 1, 1973, the definition of ""income"" in sub-s. (24) of s. 2 has been amended and the definition

now includes ""voluntary contributions received by a trust created wholly or partly for charitbale or religious purposes or by an institution

established wholly or partly for such purposes, not being contributions made with a specific direction that they shall form part of the corpus of the

trust or institution, and for the purposes of this particular sub-clause,""trust"" includes any other legal obligation. Our conclusion, therefore, is that,

under sub-s. (2) of s. 12, as it stood prior to its amendment by the Finance Act of 1972, voluntary contributions not stamped with the character of

income were not deemed deemed to be income and, therefore, in the instant case, where, as found by the Tribunal, the shares were donated by

the donor trust to the donee trust (the assessee before us), with a specific direction that they should be used for the corpus or the trust fund of the

donee trust, the provisions of s. 12(2) could never be attracted and, to that extent, the conclusion of the Tribunal is correct.

In Sri Dwarkadheesh Charitable Trust Vs. Income Tax Officer, ""C"" Ward, , the Allahabad High Court has held :

Voluntary contributions made with a specific direction that they shall form part of the corpus of the donee-trust and accepted by the donee-trust

as such, are not voluntary contributions which constitute income within the meaning of s. 12(1) of the Income Tax Act, 1961, because the subject-

matter of the donation becomes part of the corpus or capital of the donee-trust and cannot constitute income of the receiving trust. Such

contributions will not, therefore, fall within the purview of sub-s. (2) of s. 12.

It may be pointed out that,in this particular case of the Allahabad High Court, leave to appeal to the Supreme Court appears to have been

rejected and, ultimately, as noted at page 287 of Volume I of the seventh edition of Kanga and Palkhivala''s book on The Law and Practice of

Income Tax, the application for special leave was rejected by the Supreme Court October 28, 1975. Therefore, the decision of the Allahabad

High Court has now become final so far as this particular aspect of the law is concerned. The view which the Allahabad High Court took is the

same as the view which we take but the process of reasoning which has appealed to us is slightly from a different angle from the reasoning which

appealed to the learned judges of the Allahabad High Court.

Under these circumstances, the question referred to us in answered in the affirmative, that is, in favour of the assessee and against the revenue.

The Commissioner will pay the costs of this reference to the assessee.