Bombay H.C : Whether, on the facts and in the circumstances of the case, and having regard to the relevant provisions of the IT Act, the voluntary contributions aggregating to Rs. 55,000 received by the assessee towards its corpus was income liable to be taxed under the IT Act 1961 ?

Counsel Appeared

C.J. Thakkar & N.J. Thakkar, S.S. Dwiwedi & R.A. Shah, for the Assessee : J.S. Jetly, Miss S.S. Shah, A. Shelat & S.G. Aney, for the Revenue

V.A. MOHTA, J.:

At the instance of the assessee, the following five questions have been referred under s. 256 of the IT Act, 1961 :

“(1) Whether, on the facts and in the circumstances of the case, and having regard to the relevant provisions of the IT Act, the voluntary contributions aggregating to Rs. 55,000 received by the assessee towards its corpus was income liable to be taxed under the IT Act 1961 ?

(2) Whether, on the facts and in the circumstances of the case, and having regard to the relevant provisions of the IT Act, voluntary contributions aggregating to Rs. 4,00,000 received by the assessee towards its corpus was income liable to be taxed under the IT Act, 1961 ?

(3) Whether, on the facts and in the circumstances of the case, voluntary contributions aggregating to Rs. 55,000 and Rs. 4,00,000 were exempt under s. 12(1) of the IT Act, 1961 ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal misdirected itself in holding that mere discharge of debt, whether existing or new during the year from out of voluntary contributions of Rs. 55,000 and Rs. 4,00,000 does not render it a solely charitable purpose admissible to exemption ?

(5) Whether, on the facts and in the circumstances of the case, the levy of interest under ss. 139 and 215 of the IT Act, 1961, was justified in law ?”

2. Basic background can be stated thus : The assessee is a registered public trust. Relevant assessment year is 1966-67. The assessee follows the mercantile system and the previous year is the year for the assessment year ended on 31st March, 1966. In the return, the assessee disclosed a deficit of Rs. 32,126. The ITO determined the income at Rs. 4.92 lakhs. A sum of Rs. 4,55,000 which was credited in the books of account of the assessee as voluntary contributions was added as part of the income. The details of the credit entries are as follows : . Rs. 25,000 From Saraf Mor and Company Private Limited on 2nd Nov., 1965. 10,000 From Ferro Alloys Corporation Limited on 22nd Nov., 1965. 20,000 From R.B. Shreeram Durgaprasad and Fatechand Narsingdas on 19th Nov., 1966 2,50,000 From M/s R.B. Shreeram Durgaprasad and Fatechand Narsingdas (Export firm) on 11th April, 1965. 1,50,000 From M/s R.B. Shreeram Durgaprasad and Fatechand Narsingdas (Export firm) on 30th Nov., 1965.

3. The assessee had a loan account with M/s R.B. Shreeram Durgaprasad (Mining Firm). The assessee owed to the said firm at the beginning of the year a sum of Rs. 7.65 lakhs. A sum of Rs. 4 lakhs was shown in the balance-sheet as debited to the account of the donor, the export firm. Later on, the amount was transferred by debiting the account of the mining firm and crediting the account of the export firm. By the transfer of the amount to the mining firm, the liabilities of the trust were reduced. There was a credit balance in the sum of Rs. 7.06 lakhs in the year 1961-62 which was increased to Rs. 8.05 lakhs in the year 1962-63. The investment in dharamshala was Rs. 9 lakhs in 1962-63. For the asst. yr. 1966-67, the advances were Rs. 4.81 lakhs and on Rs. 2.51 lakhs, out of them interest was not charged. The amount received as loan from the mining firm did not necessarily go in the construction of dharamshala. The balance-sheet for 1959-60 would show that, before the operation of the new Act, the assessee used to transfer a substantial part of its income to an account called “Dharamshala and other building fund.” Thus, the loan to the mining firm could easily have been wiped off from the dharamshala funds account itself. The fund was not only never reduced but was allowed to grow side by side with the loans from the mining firm.

The ITO added both the sums, namely, (A) Rs. 55,000 and (B) Rs. 4,00,000, to the income of the trust for the relevant year holding that, under the circumstances, it can be said that the voluntary contributions were not solely applicable to charitable and religious purposes and were not actually applied as such. Aggrieved by the order of the ITO, an appeal was carried to the AAC, who was of the view that Rs. 4 lakhs could not be treated as income derived from voluntary contributions and once there was no such income, the question of application to charitable purpose did not arise. So far as the sum of Rs. 55,000 was concerned, the AAC agreed with the ITO. The Revenue as well as the assessee were both dissatisfied with the order of the AAC and hence they filed appeals before the Tribunal. The Tribunal allowed the appeal filed by the Revenue and dismissed the appeal filed by the assessee and thus in effect the order of the ITO was restored. Shri Thakkar, learned counsel for the assessee, firstly contended that s. 12(1) of the IT Act, 1961, as it stood at the material time (before amendment by the Finance Act, 1972) referred only to income derived from the voluntary contributions and not to the voluntary contributions themselves, and as a result, Rs. 4.55 lakhs could not be held to be “income”. That the new section includes within its purview the voluntary contributions themselves is not disputed. Originally s. 12 (1) and (2) read thus : “12. 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 of the trustee or the institution, as the case may be. (2) Notwithstanding anything contained in sub-s. (1), where any such contributions as are referred to in sub-s. (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 s. 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.” By the Finance Act, 1972, which is brought into effect from 1st April, 1973, the old section has been substituted by the new one which reads thus : “Income of trust or institutions from contributions.—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 s. 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 s. 13 shall apply accordingly.”

6. We find it difficult to accept the submission firstly on the basis of the plain and unambiguous language used in s. 12 read as a whole. Sec. 12(2) used the expressions “such contributions as are referred to in sub-s. (1)” and “be deemed to be income derived from property for the purpose of that section”. Sub-s. (2) confines its application to “such contributions as are referred to in sub-s. (1)”. This would not be the position if contributions as such were excluded from the operation of sub-s. (1). In order that sub-s. (2) should get attracted to a case, a contribution of the nature referred to in sub-s. (1) should have been made. Sub-s. (2) appears to be in the nature of a proviso to sub-s. (1) and it looks plain to us that s. 12(1) does contemplate voluntary contributions which will constitute or be deemed to be income in the hands of the recipient trust. That if such contributions are made with a specific direction that they shall form part of the corpus of the recipient trust and are accepted as such, they shall not form part of the income of the trust is an altogether different aspect of the matter. In the matter on hand it is nobody’s case that contributions of Rs. 55,000 and/or Rs. 4,00,000 were made specifically with a view to form the corpus of the assessee and were accepted as such.

7. Shri Jetly, learned counsel for the Revenue, has invited our attention to a long line of decisions taking the view that s. 12(1) was intended to cover not only income derived from voluntary contributions but the very contribution itself. We may in the first place refer to the case of Sri Dwarkadheesh Charitable Trust vs. ITO (1975) 98 ITR 557 (All). It is observed : “In our opinion, s. 12(1) contemplates voluntary contributions which will constitute or be deemed to be income in the hands of the receiving trust. If a donation becomes income in the hands of a trust, the donation itself is within the purview of s. 12(1). Sec. 12(1) is, therefore, confined to contributions which are made voluntarily and which constitute the income of the receiving trust. This category of contributions alone being the subject-matter of sub-s. (1), they alone will constitute ‘such contributions as are referred to in sub-s. (1) within the meaning of sub-s. (2).”

8. It appears that the above decision was challenged in the Supreme Court but leave to appeal was rejected on 28th Oct., 1975, as noticed at page 287 of Volume I of Seventh Edition of Kanga and Palkhivala’s Book on the Law and Practice of Income-tax. The ratio of this decision is followed in several cases such as CIT vs. Bal Utkarsh Society (1979) 10 CTR (Guj) 54 : (1979) 119 ITR 137 (Guj) : TC23R.1429, CIT vs. Vanchi Trust (1981) 20 CTR (Ker) 26 : (1981) 127 ITR 227 (Ker) : TC23R.1431 and CIT vs. Eternal Science of Man’s Society (1980) 19 CTR (Del) 384 : (1981) 128 ITR 456 (Del) : TC23R.1432.

9. We see considerable force in the submission of Mr. Jetly that in the legislative intent of the old and the new s. 12 there is no difference. All that has been done is to make specific what required a process of interpretation. In this connection, it is significant to notice that the marginal note has remained unaltered. The language used therein is significant and clear. Not that the marginal notes are decisive in interpreting a substantive provision but, in case of doubt, they can be relied upon as one of the aids for construction. In this connection, we may usefully quote the following passage from the case of K.P. Varghese vs. ITO (1981) 24 CTR (SC) 358 : (1981) 131 ITR 597 (SC) (at p. 609) : “The marginal note to a section cannot be referred to for the purpose of constructing the section but it can certainly be relied upon as indicating the drift of the section or to show what the section is dealing with. It cannot control the interpretation of the words of a section particularly when the language of the section is clear and unambiguous but, being part of the statute, it prima facie furnishes some clue as to the meaning and purpose of the section.”

10. Our attention was invited to the fact that the definition of the term “income” was amended by the Finance Act, 1972, by specifically including voluntary contributions s. 2(24)(iia) and it was contended that this gives a clear indication that before this amendment, the legislative intention was not to treat voluntary contributions as “income”. We find it difficult to accept this submission for, in our view, the legislative intent behind the amendment of s. 12 was merely to make the concept more specific, leaving no scope for debate. Our attention was also invited to the memo explaining the provisions in the Finance Bill, 1972, especially para 24. Apart from the fact that the statement in the memo will be of no use where the language employed in the provision is clear, we do not see any definite statement either to the effect that voluntary contributions were never treated as income before this Bill was introduced. Circular No. F. No. 20/10/67-IT(A-1), dt. 1st May, 1967 was also relied upon to support the interpretation put on s. 12(1). This circular has been issued in the context of accumulation of income in excess of 25 per cent under s. 11(1) vis-a-vis donations received from the public. In this context, it is said : “The donations received by a charitable trust from the members of the public, being capital receipts, cannot be regarded as income of the trust. Accordingly, the donations received by the trust should be excluded from the income of the trust for the purpose of calculating the accumulation limit of 25 per cent except in cases covered by s. 12(2).”

11. It seems to us that the said circular cannot be read out of context. Its gist seems to be that donations specifically received towards capital receipts cannot be regarded as income of the trust and such donations received by the trust should be excluded from the income of the trust for the purposes of calculating the accumulation limit of 25 per cent except in cases covered by s. 12(2). The circular does not at all deal with the controversy raised before us. Our attention was also invited on behalf of the assessee to the case of Rev. Father Prior, Sacred Heart’s Monastery vs. ITO (1956) 30 ITR 451 (Trav- Cochin) : TC23R.1423. This decision was cited also before the Tribunal which has rightly distinguished it on basic facts. The said decision interprets the Cochin IT Act in general and s. 5(3) in particular. The language employed in the said exemption clause is entirely different and it is on that basis that the said decision was rendered holding in the first place that the donation specifically made for the purposes of the corpus of the trust is not income and also that no voluntary contribution could form part of the income as per provisions of the said Act.

12. The case of CIT vs. Trustees of Visha Nima Charity Trust (1982) 28 CTR (Bom) 227 : (1982) 138 ITR 564 (Bom) : TC23R.1417 to which our attention was drawn on behalf of the assessee is entirely different. The point was whether contributions received from sale of tickets and advertisements in a souvenir were voluntary contributions meant for purposes of charity. It was held that the contributions received by the assessee formed part of its capital as they were specifically intended to be the corpus of the trust and hence the provisions of ss. 11 and

12 did not apply. We see nothing in the said decision as laying down a ration to the effect that only the income from voluntary contributions and not the contributions themselves can form part of the income. On the contrary, a close reading of the judgment will indicate that it suggests the contrary. Our attention was invited also to the case of CIT vs. Shri Billeswara Charitable Trust (1983) 35 CTR (Mad) 136 : (1984) 145 ITR 295 (Mad) :TC23R.1422. The said decision to some extent does support the contention of the assessee. It mainly deals with the terminology “derived from” used in s. 12(1). In our judgment, the matter stands concluded by the Supreme Court in view of the rejection of the special leave petition against the judgment of the Allahabad High Court in the case of Sri Dwarkadheesh Charitable Trust (supra). All that remains to be considered is the case of CIT vs. Maharana of Mewar Charitable Foundation (IT Ref. No. 15 of 1977 decided on 23rd July, 1986, decided by Rajasthan High Court)—(1987) 60 CTR (Raj) 40 : (1987) 164 ITR 439 (Raj) : TC23R.1198. This judgment has also been relied upon for the view it has taken on Circular No. 101, dt. 24th Jan., 1973. We have perused the said judgment as well as the circular. The judgment is in the context of s. 11(1) of the IT Act 1961. It only lays down that in the said section there are no words of limitation requiring that the income should have been applied for charitable or religious purposes only in the year when the income had arisen. We see nothing in the said decision or in the said circular which supports the submission of Shri Thakkar on the interpretation of s. 12(1) and (2). All that circular says is that even in a case 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. This will have no application to the matter at hand. Even on the facts it is materially different. When the donation was made, no statement even to this effect was made.

Under these circumstances, there is no escape from the conclusion that the voluntary contributions themselves could form part of the “income” of the trust even under the old s. 12(1) and that a sum of Rs. 4.55 lakhs was rightly added as such.

This takes us to the second point about the applicability of the exemption provision in s. 12(1). For s. 12 to be attracted there are three pre-requisites : (a) there has to be a trust for charitable or religious purposes, (b) income derived must be from voluntary contributions, and (c) the said contributions are applicable solely to charitable or religious purposes. What is most relevant is the third condition. It is implied that there has to be a specific directive for applying the donation solely to charitable or religious purposes. It cannot be said that this condition has been fulfilled in the present case. Indeed, it is nobody’s case that there was any such specific directive when the donation was made. On facts found, the finding recorded by the ITO and confirmed by the Tribunal is that the voluntary contributions “were not solely applicable to charitable or religious purposes and were not actually applied as such”. It seems to us that the conclusion is absolutely right.

We come now to the frame of questions Nos. (1) and (2). They state that the sums of Rs. 55,000 and Rs. 4,00,000 were received by the assessee towards its corpus. It is not the finding of the Tribunal that these sums were received by the assessee towards its corpus and this is agreed to between counsel before us. Accordingly, we reframe questions Nos. (1) and (2) so as to exclude the words “towards its corpus” in each.

In the result, we answer question No. (1) in the affirmative and against the assessee, question No. (2) in the affirmative and against the assessee, question No. (3) in the negative and against the assessee and question No. (4) in the negative and against the assessee. As far as question No. (5) is concerned, it does not appear to arise from the order of the Tribunal and is, therefore, not pressed. Under the circumstances, there shall be no order as to costs.

[Citation : 172 ITR 373]