IN THE ITAT DELHI BENCH ‘G’
Income-tax Officer (Exemption), Trust Ward – I
IT APPEAL NOs. 1854 & 2697 (DELHI) OF 2011 and 1327 (delhi) of 2012
[ASSESSMENT YEARs 2006-07 and 2007-08]
OCTOBER 12, 2012
S.V. Mehrotra, Accountant Member
This appeal filed on 19-04-2012 by the assessee is against the order dated 15-03-2011 of the Ld. CIT(A), New Delhi for AY 2006-07.
2. The assessee is a charitable institution formed under the Societies Registration Act, 1860 vide its Memorandum of Association dated 08.08.1966. The assessee trust is registered u/s 12A of the Income Tax Act, 1961 vide order no. DIT(E)/12A/2005-06/S-657628 dated 09.08.2006. The trust is also a notified trust u/s 80G of the Income Tax Act, 1961 vide order no. DIT(E)/2005-06/S-65/1052 dated 09.08.2006 valid for the period 03.05.2006 to 31.03.2008. The assessee trust had filed its return of income for AY 2006-07 declaring NIL income. The Assessing Officer noticed that the assessee had received shares of Mawana Sugar Ltd. and Siel Ltd. through Enterprise Trust and the same had been transferred to assessee towards his corpus fund. The Enterprise Trust had donated 1147110 equity shares of Mawana Sugar Ltd. and 201500 equity shares of Siel Ltd. on 13.04.2005. The Assessing Officer noted that the market value of equity shares of Mawana Sugar Ltd. on the date of transfer was Rs.68.40 per share and pf Siel Ltd. was at Rs. 31/- per share. The total value of these shares aggregated to Rs. 8,47,08,824/-.
3. The assessee had taken the shares at Rs. NIL in the balance sheet because the shares had been received as corpus donation. The Assessing Officer further noticed that the assessee had sold 308500 equity shares of Mawana Sugar Ltd. and 9837 equity shares of Siel Ltd for which the trust had received a sum of Rs. 3,65,36,184/- and the amount so received was credited to balance sheet as corpus fund. The Assessing Officer issued following show cause notice dated 16.12.2008 :-
“You have received shares from Mawana Sugar Ltd., Siel Ltd. as corpus donation. Please furnish the market value of shares on the date of donation received along with evidence to justify such value”.
As per section 2(24) of the Income Tax Act, 1961, any voluntary donation received by a Charitable or Religious Institution or Trust is an income. Please show cause why the market value of shares should not be treated as income in this year and assessed accordingly.
You have claimed shares to have been received as corpus donation. In view of violation of section 11 & 13(1)(d), your income is not exempt. Under these circumstances, please explain why donation of shares should be treated as corpus donation under section 11(1)(d) of the Income Tax Act, 1961.”
4. After considering the assessee’s submission, the Assessing Officer observed as under :-
“When the assessee received shares of the above companies it was treated by trust as corpus with specific direction at nil value, but at the same time when the same are sold the assessee credited corpus fund account and out of that corpus fund further donation was given to other charitable trust. Thus the assessee has misused the corpus fund by virtue of misapplication of corpus fund to give donation to other charitable trust.
In spite of repeated request vide order sheet entry dated 10.12.2008, 16.12.2008 & 26.12.2008 the assessee had not produced the minutes of book in original to prove that whether the above amount is general donation or corpus fund.”
5. The Assessing Officer made an addition of Rs. 8,47,08,824/-, treating the corpus donation as general donation in the current year for the following reasons:-
(i) The assessee was given registration u/s 12A subject to following additions :-
“(a) Accordingly registration u/s 12A r.w.s 12AA is hereby granted with effect from 03.05.2006 subject to the satisfaction of the following conditions and entered at S.No. 628 of the register maintained in this office.”
The one of the conditions vide item No. (vii) is reproduced as under :-
“No asset shall be transferred without the knowledge of the undersigned to anyone, including to any trust/society/non-profit company.”
Since the assessee had sold shares in current year and in 2007-08 without the permission of DIT(Exemption), therefore, he treated the entire market value of shares as assessee’s income.
(ii) In AY 2008-09, the assessee had further claimed donation out of corpus of Rs. 1,50,36,000/-. He pointed out that assessee had received corpus for specific purpose, therefore, it could not utilize same for further donation. Therefore, he denied assessee’s claim of deduction u/s 11(1)(d).
(iii) The assessee had misused the funds by giving a colourful device to avoid the tax.
(iv) The assessee cannot be allowed the credit of donation made against this corpus donation.
(v) The Assessing Officer relied on the decision of Hon’ble Supreme Court in the case of McDowell & Co. Ltd. v. Commercial Tax Officer 154 ITR 148 (SC) .
6. Before the Ld. CIT(A), it was, inter alia, submitted that in the year under consideration, the assessee’s foundation in-compliance to proviso (iia) to section 13(1)(d) of the Income Tax Act, 1961, sold 308500 shares of Mawana Sugar Ltd. and 9837 shares of Siel Limited and sales consideration had been transferred to the corpus fund. Remaining shares were sold during the next financial year and the consideration was credited to the corpus fund. It was further submitted that copy of the minute book of Enterprise Ltd. and Shera Foundation (assessee) were produced/submitted before the Assessing Officer as evidence to the effect that contributions received in the form of shares was towards to the corpus of the assessee foundation vide letters dated 05.11.2008 and 26.12.2008. It was further submitted that Assessing Officer had also relied on certain facts of subsequent years which could not be taken into consideration in order to determine the taxable income for the year under appeal. It was further stated that making of further donations to other charitable society is also in furtherance to the object of the assessee society and, therefore, it could not result in violation of any of the provisions of the Income Tax Act.
7. It was also brought to the notice of ld. CIT(A) that when proceedings for this assessment were going on before the Assessing Officer, proceedings were also going on before the Director of Income Tax (Exemption) in connection with approval/renewal of approval u/s 80G of the Act. The DIT(Exemption) had also raised queries specifically regarding the donation made to other charitable institutions towards corpus or scholarship funds etc. for the reason that the DIT(Exemption) was considering the activities of the assessee upto the date when he was granting the approval. The assessee trust had duly explained the position to DIT(E) in regard to each of the donation made by it. After considering full facts and circumstances and the donation made by it to other charitable societies, approval was granted u/s 80G of the Act by DIT(E) vide his order dated 06.03.2009. Copy of letter received from the office of DIT(E) had also been submitted in order to demonstrate out that the same issue had been raised by the DIT(E) also in connection with the approval u/s 80G of the Act. Thus, it was contended that since DIT(E) had also considered validity of donations made by trust to other charitable institutions, the Assessing Officer was not correct in taking adverse view in the order of assessment on the basis of donation made by it in subsequent years. The assessee had also relied upon certain case laws to the effect that donation could be made by a trust to corpus of other trust and such donation could be made out of its corpus also. As regards, observations made by the Assessing Officer to the effect that the approval of DIT(E) had not been taken for the disposal of the shares, it was submitted that since the shares had to be disposed off in terms of specific provisions of section 13(1)(d) of the Act, there was no question seeking approval as provided in the approval letter of DIT(E).
8. Further, it was submitted that object and the purpose of the condition provided in the registration certificate was that the trust should not divert its assets for non-charitable purposes without knowledge of DIT(E). The assessee further submitted that if this condition was taken to mean that no asset or fund could be given to anybody then it would imply that even genuine activities cannot be carried out by a charitable institutions by utilizing its corpus.
9. Before ld. CIT(A), the assessee had also taken an alternate ground regarding allowbility of statutory deduction of 15% in determination of taxable income.
10. Ld. CIT(A) while partly allowing the assessee’s appeal, upheld the AO’s order in making addition of Rs. 8,47,08,824/- and also denied the assessee’s claim of accumulation of 15% of income observing that since the AO had denied the claim of registration u/s 12A of the Income Tax Act, the assessee’s claim of section 11 does not stand.
11. Being aggrieved with the order of ld. CIT(A), the assessee is in appeal before us and has taken following grounds of appeal :-
1. That the CIT(A) erred in upholding the order of the Assessing Officer including amount of Rs. 8,47,08,824/- in the taxable income, being the value of shares received by the appellant as corpus donation on the ground that the appellant had violated provisions of Section 11 read with Section 13(1)(d) of the without appreciating the contentions of the appellant, particularly that observation of the Assessing Officer were vague and no specific violation was pointed out by him and the appellant had fully complied with the provisions of the Act and accordingly, it was entitled for exemption under section 11(1)(d) of the Act in respect of sale proceeds of shares received towards corpus.
2. That the CIT(A) erred in upholding the observation of the Assessing Officer that appellant had received shares towards corpus for specific purpose and the appellant could not utilized the same for contribution to other charitable trust ignoring the contention of the appellant and documents on record that there was no direction of the donor to utilize the contribution for a specific purpose and therefore, the appellant could utilize the fund for giving donation towards corpus of other charitable institution, which is also part of charitable activity as per accepted legal position, even in the case of appellant in earlier years vide decision of Hon’ble Delhi High Court reported in 269 ITR 35.
3. That the CIT(A) erred in not discussing and considering the facts and contentions of the appellant made before him and particularly, the contention that the appellant had fully complied with the provisions of law and the order passed by the Assessing Officer denying exemption u/s 11(1)(d) on the basis of utilization of funds for making donations to other charitable institutions in subsequent years was illegal, incorrect, unjustified, unreasonable and unwarranted.
4. That the CIT(A) also erred in not appreciating that Director of Income Tax (Exemption) had already considered the facts of the case of the Appellant during the course of proceedings for approval under section 80G of the Act and approval under section 80G had been duly granted vide letter dated 06.03.2009, thereby accepting full compliance of law by the Appellant and therefore, the order of the Assessing Officer dated 30.12.2008 taking a view that the Appellant had violated provisions of Income Tax Act could not be sustained.
5. That the CIT(A) erred in not even allowing statutory deduction of 15% of the amount of income determined by A.O, which is available under section 11 of the Act by wrongly observing that the A.O had denied the claim of registration u/s 12A of the Act without appreciating that A.O has no power to withdraw registration granted u/s 12A of the Act by the DIT(E).
6. That the CIT(A) also erred in not disposing Ground (f) of grounds of appeal before him regarding providing opportunity by A.O to the appellant for applying the income determined by Assessing Officer which ought to have been allowed by him in view of his holding to the effect that contribution received by the Foundation was in the nature of general contribution instead of contribution towards corpus.
7. That the CIT(A) also erred in upholding initiation of penalty proceedings u/s 271(1)(c) of the Income Tax Act in the case of the Appellant stating the same is premature.
8. The appellant company craves leave to alter, amend, vary and/cr add any of the grounds of appeal at any time hereinafter.
12. Ld. Counsel for the assessee reiterated the submissions made before lower revenue authorities. Ld. Counsel referred to page 60 of paper book wherein the Minutes of Board of Trustees meeting of Enterprise Trust held on 13.04.2005, are contained, to demonstrate that equity shares held by the Enterprise trust as investments were gifted to Shriram Memorial Foundation (SMF), the assessee for its corpus as under :-
|Investment held in||No. of shares||%age of issued capital|
|-Mawana Sugars Limited||11,47,110||2.7%|
13. Ld. Counsel further referred to page 23 of paper book wherein the balance sheet of assessee’s foundation, as on 31.03.2006, is contained, to demonstrate that the shares were taken at NIL value in the balance sheet and the part sale proceeds of shares amounting to Rs. 3,65,36,184/- had been credited to the corpus fund of assessee trust. He pointed out that this was done in view of the provisions contained in proviso (iia) to section 13(1)(d), according to which the assessee was required to convert the shares into the investment or deposit in any of the forms or modes specified in sub-section 5 of section 11within one year from the end of the previous year in which the shares were acquired. Ld. Counsel further, referred to page 25 of paper book wherein the schedule to balance sheet containing Notes to Account is contained in which the assessee had made following disclosures regarding its accounting policy:-
“During the year the Foundation received a Gift of Rs. 11,47,110 equity shares of Mawana Sugars Ltd. and 02,01,500 equity shares of Siel Ltd. towards the corpus of the Foundation. No entry has been passed at the time of receipt of the gifted shares. These shares can not be held by the Foundation and have to be sold to make investment to modes specified u/s 11(5) of the Act. Sum realized on sale of shares is to be credited to corpus fund. Accordingly, sale consideration of 3,08,500 equity shares of Mawana Sugars Ltd. and 9,837 equity shares of Siel Ltd. sold during the year have credited to the Corpus.”
14. Ld. Counsel further referred to page 77 of the paper book wherein the balance sheet as on 31.03.2007 is contained, to demonstrate that sale proceeds of shares were credited to corpus fund and the corpus fund became Rs. 8,74,81,291/-. Ld. Counsel submitted that this was done because as per proviso (iia) to section 13(1)(d), the shares had to be disposed off prior to 31.03.2007.
15. Ld. Counsel referred to para 5.1 page 7 of ld. CIT(A) order and pointed out that the observations to the effect that the assessee had received corpus with specific purpose, is not correct, as it is evident from page 60 of the paper book. Ld. Counsel further referred to page 153 to 154 of paper book wherein assessment order for AY 2008-09 is contained to demonstrate that AO had accepted the assessee’s return at NIL income though the donations to other charitable trusts were made in AYs 2008-09 and 2009-10.
16. Ld. Counsel relied on following case laws:-
(1) Director of Income Tax v. Shree Radha Krishnan Charitable Trust, 2011–TIOL-315- HC-Del-IT
Ld. Counsel relied on this decision for the proposition that under law, assessee could not hold shares beyond 31.03.2007 as per section 13(1)(d).
(2) Sh. Dwarkadheesh Charitable Trust v. ITO, 98 ITR 557 (All.)
Ld. Counsel relied on this decision for the proposition that corpus donation in form of shares could be received and also the proposition that when a donor trust which is itself a charitable and religious trust donates its income to another trust, the provisions of section 11(1)(a) can be said to have been met by such donor trust and the donor trust can be said to have applied its income for religious and charitable purposes with the fact that donation is subjected to any condition that the donee trust while treated the donations as its corpus and can only utilize the accumulative income from the donated corpus for religious and charitable purposes, and that the question with the gifted income is to be utilized by the donee trust fully for its charitable and religious purpose or donee trust had to keep a corpus of the donation and had to utilize only the income from its religious and charitable purpose, would not make the slightest difference so far as the entitlement of donor trust for exemption u/s 11(1) goes.
17. Ld. Counsel further referred to page 18A wherein instruction No 1132/CBDT dated 05.01.1978, is contained in which it is observed as under:-
“A question has been raised regarding the availability of exemption in the hands of Charitable Trusts of amounts paid as donations to the other Charitable Trusts.
2. The issue has been considered by the board and it has been decided that as the law stands at present the payment of a sum by one Charitable Trust to another for utilization by the donee trust towards its charitable objects is proper application of income for charitable purposes on the hands of the donor trust, and the donor trust will not lose exemption under section 11 of the donations during the year of receipt itself.”
18. Ld. Counsel further referred to the decision of ITAT, Delhi Bench in the case of Dharma Pratishtanam v. ITO , 11 ITD 40, Delhi, in order to advance the proposition that any amount received towards corpus can be spent for running expenses and if so spent it does not loose the exemption from the levy of tax. He referred to para 8 of Tribunal’s order which is reproduced here under :-
“That leaves us with the question whether any amount received towards corpus can be spent for running expenses and if so spent, whether it loses the exemption from the levy of tax. We have read the relevant sections carefully and we find nothing in those sections even remotely suggesting the above view. Section 2(24)(iia) when it provided that the voluntary contributions should be made with a specific direction that they shall form part of the corpus of the trust or institution, in order that it is not to be treated as income, it was laying emphasis on the wish, will and desire of the donor. The donor must grant it with a direction that it shall form part of the corpus. The section did not either by implication, or overtly or otherwise, enjoin upon the trust that the trustee shall retain it for ever as corpus, even if when an occasion arises that in order to keep the trust alive and to prevent it from failure, it should not spend any amount out of it. If a donor donates money with a specific direction that it shall form part of the corpus, the trustee is expected to honour the wish of the donor. But if the trustee utilizes it for a different purpose, then it is a simple case of breach of trust for which delinquency, the trustee can by proceeded against under the Indian Trusts Act, 1882, or other appropriate legislation but that is not to say that for the misbehaviour of the trustee, the trust loses exemption under the Act. This kind of inflexibility, as contended for by the revenue, is difficult to see or comprehend from the language of section 2(24)(iia) or section 12. The requirement of section 2(24)(iia) is that the voluntary contribution, when received, should contain a stipulation that it shall form part of corpus. The trustee cannot possibly influence the donor at that time, except that the trustee should act in accordance with the confidence reposed in him by the donor. Take an example, where A makes a voluntary contribution of Rs. 1 lakh to a trust created wholly for charitable or religious purposes and it has no other income. The object of the trust is to promote education or relief of poor. How can the trustee utilize this money without buying the books, if it is for the purpose of education, or necessary utensils or provisions, if it is for providing relief to the poor by way of providing food and if the money is spent out of the donation of Rs. 1 lakh for the purchase of books, utensils, etc. Would it mean that the sum of Rs. 1 lakh would become taxable as income of the trust? We do not think that this is the object of the legislation. In any case, this is contrary to what is recommended by the Direct Taxes Enquiry Committee, which was accepted by the Government. What is earmarked for corpus is not to be treated as income not because it is spent for the purpose of the trust but because that forms the fund of the trust. It is nowhere laid down that the funds of the trust should never be spent for the purposes of the trust unless it is a direction of the donor that the fund shall be invested in such a way as to produce income and only the income shall be spent for the purposes of the trust. Even, so if a departure is make by the trustee in the implementation of this wish of the donor, the trustee is to be penalized and not the trust. Looked at from any angle, we find it difficult to subscribe to the view so forcefully put forward before us by the learned departmental representative and so explained in the orders of the authorities below.”
19. Ld. Counsel further referred to the decision of ITAT, Delhi Bench in the case of Mahila Sidh Nirman Yojna (1994) 50 ITD 472 wherein it has been held that corpus donations can be utilized for meeting day to day obligation. In this case, Tribunal has followed the decision in the case of Dharma Pratishtanam (supra).
20. Ld. Counsel further relied on the decision of Hon’ble Delhi High Court, in HPS Social Welfare Foundation 329 ITR 310 (Del.) for the proposition that donations given to charitable institutions do not, in any manner, impinge upon the applicability of the 11 and 12 of the Income Tax Act.
21. Ld. DR has filed synopsis of his oral submissions which is reproduced here under :-
1. A received shares of Mawana Sugar Ltd. and Siel Ltd. towards Corpus fund. Market value of shares as on the date of transfer on 13.04.2005 when these were received as voluntary contribution towards corpus fund was Rs. 8,47,08,824/-. It was submitted by the assessee that transfer entry of the shares was taken at Nil because the shares had been received as corpus donation at Nil value. Part of these shares were sold for Rs. 3,65,36,184/- during the AY 2006-07 and the remaining shares were sold for Rs. 5,09,45,107/- during the AY 2007-08.
2. The sale of shares that were received with specific direction towards the corpus fund is a violation of Sec 11(1)(d). Page 45 of paper-book clearly shows that the fully paid up equity shares were gifted for its corpus. Being gifted for the corpus fund, the shares ought to be kept untouched. The donated shares to the corpus cannot be touched but only the accruing income there from can be utilized for the purposes of trust. By selling the shares, the assessee violated the provisions of Sec 11(1)(d). Sale of shares has made the contribution an ordinary voluntary contribution which is taxable as per sec. 2(24)(iia). In view of the violation of Sec 11(1)(d), the voluntary contribution received by the trust is income taxable as per section 2(24)(iia) under the Income Tax Act, 1961. Therefore, the A.O is justified in adding the corpus donation by treating the same as general donation in computation of income in page 4 of the order.
3. The assessee has sold shares fearing violation u/s 13(1)(d). But by selling the shares the assessee has violated sec. 11(1)(d) of the IT Act. In sec 13(1) the expression used is “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…..”. Therefore, section 13 will operate separately from that of sec 11 or sec 12. It is evident that sec 11 deals with exempt income of trusts or institution and sec. 12 deals with income from trust or institutions from contributions. Therefore, by using the expression “Nothing contained in section 11 or section 12” it is meant that even the incomes specified in sec. 11 and sec. 12, if happens to be of the nature specified in sec. 13, the same shall be treated as taxable income as per sec. 13. In other words provision of sec. 11 or sec. 12 shall apply independently and violation of any of the conditions of sec. 11 or sec. 12 shall face the consequences provided in the said section. Consequences of violation of sec 13 shall be in addition to the consequences of violation of sec 11 or 12.
4. Out of the sale proceeds of shares, the assessee had made, further donation. Therefore, the corpus donation received was not treated for the purpose, it was originally intended by the donor. By selling the corpus donation shares and by making further donation out of it, the assessee has misused the same, has violated sec 11(1)(d) and adopted colorable device to avoid tax. From the surrounding circumstances it is evident that the motive of the entire transaction is to a void the tax by adopting colorable device.
Reliance is placed on :-
(i) Mc Dowell & Co. Ltd. v. Commercial tax Officer, (SC) 154 ITR 148 JUDGEMENT
The following judgement of the Court was delivered by Reddy, J:
In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it.
It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of ’emerging’ techniques of interpretation was done in Ramsay, Burma Oil and Dawson, to expose the devices for what they really are and to refuse to give judicial benediction. We agree with Ranganath Misra, J. that the appeal should be dismissed.
The following judgment of the Court was delivered by Misra. J:-Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges.
(ii) CIT v. Durga Prasad Marg 82 ITR 540 (SC)
(iii) Sumati Dayal v. CIT 214 ITR 804 (SC)
5. The assessee has further sold the shares without the permission of DIT(Exemption), thereby violating the conditions for registration. The condition for registration violated by the assessee as pointed out by the A.O in page 4 of the order is that no asset shall be transferred without the knowledge of the DIT(Exemption) to anyone, including to any trust/society/non profit company. The violation being in AY 2006-07, the A.O is justified in assessing the assessee as AOP in AY 2006-07.
6. Further the decision relied on by the assessee are not applicable in the instant case of the following reasons:_
(i) DIT v. Shree Radha Krishan Charitable Trust ITA No. 383 of 2008 (High Court of Delhi): Not applicable in the instant case because the decision related to taxability of corpus donation shares not divested within the stipulated period u/s 13.
(ii) Sri Dwarkadheesh Charitable Trust v. ITO, 98 ITR 557 (Allahabad High Court): Not applicable in the instant case because the decision relates to taxability of voluntary contribution towards corpus of trust.
(iii) CIT v. Shri Ram Memorial Foundation 269 ITR 35 (Delhi High Court): Not applicable in the instant case because the decision relates to taxability of donation by donor trust towards the corpus of another trust.
(iv) Instruction No. 1132/CBDT, dated January 5, 1978: not applicable in the instant case because the instruction relates to taxability of general payment by donor trust to another trust.
(v) Dharma Pratishthanam v. ITO 1985-(011)-ITD-0040-TDEL; Not applicable in the instant case because the decision relates to use of corpus fund for day-to-day running expenses of the trust. But in the instant case the issue is misuse of corpus fund to avoid tax as colorable device.
(vi) Mahila Sidh Nirman Yojna v. Inspecting Assistant Commissioner 1994-(050)-ITD-0472-TDEL: Not applicable in the instant case because the decision relates to use of corpus fund for day-to-day running expenses of the trust. But in the instant case the issues is misuse of corpus fund to avoid tax as colorable device.
(vii) CIT v. HPS Social Welfare Foundation ITA No. 424 of 2010 (Delhi High Court): Not applicable in the instant case because the decision relates to taxability of donation for personal benefits of directors and genuineness of donation.
7. Further inspite of repeated opportunities the original minute book of Board of Trustees meeting was not produced before the A.O. Only extracts of minute book was produced. In the absence of original minute book the genuineness o the same is not proved.
8. The assessee has also referred to the assessment made in AY 2008-09. However, the corpus donation being received in the AY 2006-07, the action of the A.O in AY 2006-07 is justified.
|Dated 23.07.2012||Commissioner of Income Tax (DR)-VII|
|G-Bench, ITAT, New Delhi|
22. The submissions of ld. DR can be summed up as under :-
(a) The sale of shares that were received with specific directions towards the corpus fund is a violation of section 11(1)(d).
(b) The sale of shares had made the contribution an ordinary voluntary contribution which is taxable as per section 2(24)iia.
(c) Sections 11, 12 and 13 operate independently and violation of any of the conditions of section 11 or 12 shall face the consequences provided in the said section. The consequences of violation of section 13 shall be n addition to the consequences of violation of section 11 & 12.
(d) By selling the corpus donation whares and by making further donations out of it, the assessee had misused the same, foliated section 11(1)(d) and adopted colorable device to avoid tax.
23. We have considered the rival submissions and perused records of the case.
The dispute in the present appeals is twin fold. Firstly, whether the assessee violated section 11(1)(d) read with section 13(1)(d)(iii) and secondly whether the sale proceeds of shares received as corpus donation, when further given as donation to other charitable trusts towards corpus donation, violated the provision of section 11(1)(d) inasmuch as the corpus donation assumed character of voluntary donations.
24. Before we proceed further, we may clarify that in AY 2006-07, the Assessing Officer has recorded his findings after taking into consideration, the assessee’s conduct in AY 2007-08 and 2008-09. At the outset, we may observe that each year is to be considered separately and the taxability of various receipts is to be considered on the basis of facts obtaining in that particular year. Therefore, we will examine the facts in each year separately. In AY 2006-07, the assessee received 11,47,110 equity shares of Mawana Sugar Limited and 2,01,500 equity shares of Siel Ltd. from Enterprise trust on 13.04.2005. As per the minutes book, the extracts of which are contained at page 6 of paper book, it is evident that the shares were gifted towards corpus donation. The department has taxed the corpus donation as general donation by holding that assessee was adopting colourable device. The first objection of department is that since assessee trust could not hold investment in the form of shares in view of section 11(5), therefore, it should not have accepted these shares. In this regard, we may first refer to certain provisions of the Indian Trust Act, 1882. Section 15 of the Indian Trust Act, 1882 mandates trustee to deal with the trust property as carefully as man of ordinary prudence will deal with such property as if it were his own. Section 20 of the Indian Trust Act, 1882 mandates a trustee to invest the money in the specified securities which includes stock or debentures of companies. Section 23 of the Indian Trust Act, 1882 imposes a liability on a trustee for breach of trust and he is liable to make good loss which the trust property sustains. Section 36 of the Indian Trust Act authorizes a trustee to do all such acts which are reasonable and proper for the realization, protection or benefit of the trust property. Section 40 of the Indian Trust Act, 1882 gives power to a trustee to vary investments at his direction. Section 40 reads as under:-
“A trustee may at his direction, call in any trust property invested in any security and invest the same on any of the securities mentioned or referred to in section 20, and from time to time vary any such investments for others of the same nature:-
provided that, where there is a person competent to contract and entitled at the time of receive the income of the trust-property for his life, or for in greater estate, no such change of investment shall be made without his consent in writing.”
25. A conjoint reading of all these sections leads to inescapable conclusion that the primary object of the trustees is to protect the interest of the trust. In order to discharge this responsibility, the trustees are entitled to take appropriate decisions in the interest of trust. If the revenue’s contention is to be accepted then it would imply that since a charitable trust is bound to keep its investments in the securities specified u/s 11(5) then it should not have accepted the shares. In our opinion, too much deliberation is not required to reject this contention of the revenue. Therefore, this objection is devoid of any merit because there is no restriction on accepting shares by a charitable institution. The only restriction is to be found in section 13(1)(d) as per which the assessee charitable trust is required to hold its investments in the modes as prescribed u/s 11(5). The proviso (iia) to section 13(1)(d)(iii) entitles an assessee trust to hold the shares for a maximum period of one year before which it has to be converted into the modes of investment as prescribed in section 11(5).
26. The relevant provisions are reproduced hereunder for ready reference:-
Section 2(24) “income” includes-
|(i) and (ii)**||**||**|
(iia) voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes [or by an association or institution referred to in clause (21) or clause (23), or by a fund or trust or institution referred to in sub-clause (iv) or sub-clause (v) [or by any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (vi) or by any hospital or other institution referred to in sub-clause (iiiae) or sub-clause (via)] of clause (23C) of section 10 [or by an electoral trust]].
Explanation-For the purposes of this sub-clause, “trust” includes any other legal obligation;]
11. (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; 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 [fifteen] per cent of the income from such property;
(d) income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution.
[Explanation-For the purposes of clauses (a) and (b)-
(2) if, in the previous year, the income applied to charitable or religious purposes in India falls short of [eight-five] per cent of the income derived during that year from property held under trust, or, as the case may be, held under trust in part, by any amount-
(i) for the reasons that the whole or any part of the income has not been received during that year, or
(ii) for any other reason.
(a) in the case referred to in sub-clause (i), so much of the income applied to such purposes in India during the previous year in which the income is received or during the previous year immediately following as does not exceed the said amount, and
(b) in the case referred to in sub-clause (ii), so much of the income applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount,
may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under sub-section (1)[***] of section 139[***] for furnishing the return of income) be deemed to be income applied to such purposes during the previous year in which the income was derived; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (i), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and, in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income was derived.]
12. (1) Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly.
13. (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 persons in receipt thereof-
|(a), (b) and (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) and (ii)**||**||**|
(iii) any shares in a company, other than-
(A) shares in a public sector company;
(B) shares prescribed as a form or mode of investment under clause (xii) of sub-section (5) of section 11,
are held by the trust or institution after the 30th day of November, 1983:
Provided that nothing in this clause shall apply in relation to-
|(i) and (ii)**||**||**|
(iia) any asset, not being an investment or deposit in any of the forms or modes specified in sub-section (5) of section 11, where such asset is not held by the trust or institution, otherwise than in any of the forms or modes specified in sub-section (5) of section 11, after the expiry of one year from the end of the previous year in which such asset is acquired or the 31st day of March, , whichever is later.
27. In view of aforementioned provisions, we are not inclined to accept the revenue’s contention that assessee had adopted a colorable device by first accepting the shares and then selling these shares. The assessee’s conduct was well within statutory provisions and, therefore, cannot be branded as colrable device. The trustee is bound to conduct himself in the best interest of trust. Therefore, both the conducts viz receiving the shares as a gift from the private trust towards its corpus and its liquidation in terms proviso (iia) to sub-section 13(1)(d)(iii) was fully justified. We fail to appreciate how the conduct of assessee trust was for the purpose of tax avoidance. Ld. DR has submitted that by selling the shares, the assessee has violated section 11(1)(d) of the Income Tax Act. In our opinion, this argument suffers from the basic fallacy in not recognizing that by selling the shares, the assessee merely converted one form of investment into another viz. money only. The assessee only realized the market value of shares and, therefore, we fail to appreciate how there was any violation of section 11(1)(d) particularly when the donor, while gifting the shares as corpus donation, never imposed any condition that the shares could not be sold. Only the form of asset was changed from share to cash but the original corpus donation remained as it is in the hands of trust.
28. Ld. DR has further submitted that section 13 operates independently of section 11 or section 12. We are not inclined to accept this argument which goes against the very scheme of the Act itself. Chapter III of Income Tax Act deals with incomes which do not form part of total income. Section 11 exempts income from property held for charitable or religious purposes. This income is exempt subject to fulfillment of conditions prescribed in the said section. Section 11(5) prescribes the forms and modes of investing or depositing surplus money in various securities. In case, the assessee fails to comply with the provisions of Section 11(5) then it will loose the benefits of section 11(1). Section 12 exempts income of trust or institutions from voluntary contributions which are otherwise taxable as covered by definition of ‘income’ u/s 2(24)(iia). These voluntary contributions are deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of section 11 and 13 apply accordingly. Section 13 primarily prescribes exceptional circumstances in which the provisions of section 11 or 12 will not apply. Therefore, all these sections have to be read together and they are in the form of one code as they prescribe for substantive as well as procedural aspects. In AY 2006-07, no other action was taken and, therefore, in any view of the matter, relying on subsequent conduct of assessee, the Revenue Authorities were not justified in drawing an interference that there was a violation of Section 11(1)(d) and in holding that the corpus donation u/s 11(1)(d) was voluntary donation as contemplated u/s 2(24)(iia) of Income Tax Act.
29. One more objection of the Department is that assessee sold shares without obtaining prior permission of DIT(E) as was required in terms of registration granted u/s 12A of the Income Tax Act. The said clause reads as under:-
“No asset shall be transferred without the knowledge of the undersigned to anyone, including to any trust/society/Nonprofit Company etc.”
30. In our opinion, this objection is not sustainable in view of the specific provisions contained in proviso (iia) to section 13(1)(d) which requires a trust to dispose off its holdings in the form of shares within one year from the date of its acquisition. There cannot be any estoppel against law. The conditions prescribed in the registration certificate are only directory in nature for the relevant information being sent to the department but these conditions cannot override the provisions of the Act.
31. We, therefore, hold that the assessee was entitled for exemption of its income u/s 11 in AY 2006-07, as there was no violation of section 11(1)(d). Now we come to AY 2007-08 vide ITA NO.-1327/Del/2012. In this year, the assessee foundation sold the remaining shares i.e. 8,38,600 shares of Mawana Sugar Limited and 1,96,636 shares of SIEL Ltd. No other act was done. Therefore, for the reasons given in AY 2006-07, we hold that there was no violation of provisions of section 11(1)(d) of the Act.
32. As noted earlier, the Assessing Officer has primarily denied the benefit of section 11(1)(d) on the basis of assessee’s conduct in AYs 2008-09 and 2009-10. We have already held that this was not relevant for AYs 2006-07 and 2007-08. However, since Assessing Officer has considered these acts for denying benefit of section 11(1)(d), we proceed to consider the effect of same on the applicability of section 11(1)(d). The Assessing Officer has observed in the assessment order that in AY 2008-09, the assessee had shown an expenditure for scholarship contribution amounting to Rs. 1,98,28,750/- out of this Rs. 1,50,36,000/- was paid out of corpus. The assessee had given contribution towards corpus to MIT USA and to Charat Ram Shera Scholarship Fund. It is not disputed that both were charitable institutions. The objection of department is that assessee could not utilize corpus donation for giving donations to other charitable trust. The contention is that income from the corpus trust could be utilized towards the objects of charitable trust but the corpus per se had to be kept intact. In order to examine this proposition, it is necessary to consider as to what is meant by ‘corpus’ donation and how it is constituted. It is primarily capital of the trust which is initially given by the settlor of the trust and is normally reflected in the form of various Capital Assets given by settlor of trust or acquired from the capital funds.
33. As per section 11(1)(a), 85% of the income is essentially to be applied towards charitable activity and assessee can accumulate not more than 15% of the income from property held for charitable or religious purposes. Explanation (2) to section 11(2) prescribes conditions subject to which this accumulation is possible. These amounts along with other corpus donations also form part of corpus of the trust. There is no dispute that income of the corpus fund could be utilized towards the objects of the trust. The only objection is that corpus could not be depleted. This objection of department cannot be sustained particularly because the conditions contemplated u/s 11(1)(d) stand satisfied when a voluntary donation is received with a specific direction that they shall form part of the corpus of the trust. No further condition is prescribed in the Act on utilization of corpus fund. It may be a case of casus omissus but the Court cannot fill this gap. We find that this issue is squarely covered by the decision of Tribunal in the case of Dharma Pratisthanam (supra). Therefore, the assessee was well within its right to utilize the corpus fund for giving donation towards other corpus funds of charitable institutions.
34. Further, assessee has also pointed out that the assessee foundation had filed an application for renewal of approval of u/s 80G of the Act before the DIT(E) vide its letter dated 09.09.2008. The assessee had duly submitted the copies of the accounts of foundation for the AY 2007-08 and 2008-09. Ld. DIT(E) after fully examining the accounts, had raised queries regarding the contributions made towards scholarship and also in respect of donation of Rs. 2,50,36,000/-. The assessee had given its explanation to DIT(E). Ld. DIT(E) had also called for a report from the Assessing Officer for grant of registration u/s 80G. After considering the report of A.O, additional DIT(E) required the assessee foundation to explain why exemption should not be denied. The assessee filed its submissions vide letter dated 05.02.2009.
35. After considering all these aspects, Ld. DIT(E) granted registration u/s 80G. Therefore, the corpus donation could not be considered as general donation in AY 2006-07 and 2007-08, merely on the ground of its utilisation in AY 2008-09 for giving corpus donation to other charitable institutions. Further, as per instruction No. 1132/CBDT dated 05.01.1978, it has been clarified that the payment of a sum by one charitable trust to another for utilization by the donee trust towards its charitable objects is proper application of income for charitable purposes in the hands of the donor trust, and the donor trust will not loose exemption u/s 11.
In view of above discussion, it is held that the corpus donation received in the form of shares in AY 2006-07 and AY 2007-08 could not be treated as general donations.
36. Now, we come to department’s appeal vide ITA NO. 2697/Del/2012. Before Ld. CIT(A), the assessee had, inter alia, taken following grounds of appeal:-
“Ground (c): That the Assessing Officer erred in not granting exemption in respect of dividend income of Rs. 9,99,636/- under section 10(34) and 10(15) of the Act while determining taxable income and also charging interest u/s 234B of the Act in case of the appellant.”
37. Ld. CIT(A held in para 6 to 6.1 of his order at page 9 as under:-
“6. Ground (c) of the appeal is regarding not granting the exemption in respect of dividend income of Rs. 9,99,636/- and the interest of Rs. 1,60,940/- on UTI Tax Free Bonds aggregating to Rs. 11,60,575/-. The appellant has stated that above amounts of income were exempt under sections 10(34) and 10(15) of the Act. The A.O, however, in the assessment order has not granted exemption in respect of above amount of income. IN this regard the appellant has invited my attention to the statement of computation of taxable income submitted before the A.O wherein exemption had been claimed in respect of above income. The A.O, however, has not allowed the exemption. The appellant has submitted that above amounts of income are clearly exempt in terms of provisions of Sections 10(34) and 10(15) of the Income Tax Act and, therefore, the A.O has wrongly not considered the deduction while determining the taxable income.
6.1. I have gone through the finding of the A.O in the assessment order and written submission of the Ld. AR in this regard. I am inclined to accept the view of the Ld. AR that as per provisions of section 10(34) and 10(15) of the Income Tax Act, divided income and the interest are exempt. Therefore, ground (c) is allowed in favour of the appellant.”
38. Being aggrieved with the order of Ld. CIT, department is in appeal before us and has to be following grounds of appeal as under:-
“1. On the fact & in the circumstances of the case, the Ld. CIT(A) has erred in allowing exemption of divided income and the interest income u/s 10(34) and 10(15) of the Act, respectively as the assessee has failed to produce concrete evidences to substantiate its claim that the receipts are in the nature of dividend and/or the interest on bonds”.
39. We have considered the submissions of both the parties and have perused the records of the case. We have already held in the assessee’s appeal for AY 2006-07 that there was no violation of section 11(1)(d). Therefore, assessee was eligible for exemption of its income u/s 11. Further u/s 10(34) and 10(15), specific exemption has been provided in respect of dividend income and interest on tax free bonds, therefore, we do not find any reason to interfere with the order of Ld. CIT(A).
40. In the result, the department’s appeal is dismissed.
In the result, both the appeals of the assessee are allowed and revenues’s appeal is dismissed.
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