Bombay H.C : The entire expenditure and investments in Government securities during the years under reference should first be considered as having been made out of the assessable income of the assessee and only the balance should be treated as having been made out of the income such as subscription

Counsel Appeared

G.S. Jetley, Mrs. Manjula Singh & K.C. Sidhwa, for the Revenue : S.J. Mehta, I.M. Munim, for the Assessee

S.P. BHARUCHA, J.:

This reference, made under s. 256(1) of the IT Act, 1961, raises, at the instance of the Revenue, the following question : “Assuming that the assessee is entitled to claim exemption under s. 11 of the IT Act, 1961, whether the Tribunal was right in law in holding that the entire expenditure and investments in Government securities during the years under reference should first be considered as having been made out of the assessable income of the assessee and only the balance should be treated as having been made out of the income such as subscription?”

2. The reference relates to the asst. yrs. 1967-68 to 1970-71. The assessee is a company incorporated under the Indian Companies Act and it is now established by a judgment of this Court that it is a charitable institution entitled to exemption under s. 11 of the Act. This judgment was delivered in a reference relating to the asst. yr. 1967-68 for which year the Tribunal had so held. The ITO was then called upon the compute the assessee’s taxable income in accordance with the provisions of s. 11 for the asst. yr. 1967-68. He had to do so also for the asst. yrs. 1968-69 to 1970-71 in respect of which he had followed the Tribunal’s said order. For all the four years, the assessee had income derived from property held under trust. It had also received subscriptions and there is no dispute that the same were not taxable. The assessee incurred in all the four years expenditure on the objects of the trust. During the previous years relevant to the asst. yr. 1968-69 to 1970-71, it also invested in Government securities in terms of s. 11(2). There is no dispute that the expenditure on the objects of the trust and the investments in Government securities have to be deducted from the income derived from property held under trust for the purposes of determining the assessee’s taxable income. The ITO, however, found that the income from property held under trust as also the subscriptions had been credited in a common income and expenditure account. On the credit side, such income and subscriptions were credited and on the debit side, the expenditure on the objects of the trust as well as on investments in Government securities were debited. The ITO, therefore, treated the expenditure on the objects of the trust and the investments in Government securities to have been made on a pro rata basis out of the income derived from property of the trust and subscriptions and assessed the taxable income accordingly.

3. The AAC, in the assessee’s appeal, reversed the ITO’s order and the Tribunal agreed with the AAC. The Tribunal held that the expenditure for the purposes of the trust as well as the investments should be deemed to have come from the taxable income of the trust. Mr. Jetley, learned counsel for the Revenue, pointed out that the income from property of the trust and subscriptions had been credited into a common account. The expenditure on the objects of the trust and the investments in Government securities were met out of that account. In his submission, the expenditure and investment should, therefore, be regarded as having come pro rata from the income from property held under trust and the subscriptions.

4. Our attention was drawn by Mr. Jetley to the judgment of this Court in CST vs. Berar Oil Industries (1975) 36 STC473. This was a case under the Bombay ST Act, 1959, s. 14(3) of which casts upon the assessee the burden of establishing whether or not particular purchases made by him were liable to be included in his taxable turnover. The Court held that where the assessee had failed to discharge the burden, there was no room for drawing a presumption in his favour. The raising of such presumption would render nugatory the provisions of s. 14(3). It is nobody’s case that any provision of the IT Act, 1961, casts upon the assessee the burden of establishing where the expenditure made upon the objects of the trust and upon Government securities come from. This judgment, therefore, has no application to the case before us.

Mr. Jetley then drew our attention to the judgment of the Supreme Court in CIT vs. Girdhardas & Co. Pvt. Ltd. (1967) 63 ITR 300 (SC). This was a case which related to the distribution of funds in the course of the liquidation of a company. Each distribution was of a consolidated amount which represented both capital and accumulated profits and there was nothing in the concerned provision, it was held, which supported the view that whatever was brought to tax in a given year was dividend and the rest represented assets. The fund in the hands of the liquidator was one : when the fund or a part of it was distributed, the distribution was deemed to take place in the same proportion in which the capital and accumulated profits stood in the accounts of the company immediately before the winding up. This judgment, again, has no bearing upon the question before us.

We think that the question must be considered from the point of view of a prudent assessee with common sense. That this may be done is clear from the apposite observations of the Supreme Court in the case of Vazir Sultan Tobacco Co. Ltd. vs. CIT (1981) 25 CTR (SC) 186 : (1981) 132 ITR 559 (SC), which read thus: “It is also true that on transfer of a portion of current year’s profits to the general reserve, the augmented general reserve becomes a conglomerate fund but having regard to the natural course of human conduct of hard-headed men of business and commerce, it is not difficult to predicate that the dividends would ordinarily be paid out from the current income rather than from the past savings, unless the directors in their report expressly or specifically state that payment of dividends would be made from the past savings. From the commercial point of view, if any amount is required for incurring any expenditure or making any disbursement like distribution of dividends in a current year, then, ordinarily, the same will come out of the current income of the company if it is available and only if the same is insufficient, then the past savings will be resorted to for the purpose of incurring that expenditure or making that disbursement; such a course would be in accord with the commonsense point of view.” Looked at in this light, it seems to us that the common account notwithstanding, the expenditure for the purposes of the trust and the investment in Government securities was made from the taxable income of the trust so as to obtain the benefit of the exemption afforded by s. 11. We see no good reason to render the assessee liable to tax on the basis that it acted otherwise and imprudently.

Accordingly, we cannot hold that the assessee should be deemed to have made the expenditure on the objects of the trust and the investments in Government securities on a pro rata basis from out of the income derived from property held on trust and the subscriptions. We uphold the view taken by the Tribunal and answer the question in the affirmative and in favour of the assessee.

No order as to costs.

[Citation :182 ITR 38]