High Court Of Madras
CIT vs. M.CT. Muthiah Chettiar Family Trust & Ors.
Sections 11(2), 11(3)
Asst. Year 1972-73
N.V. Balasubramanian & P. Thangavel, JJ.
Tax Case Nos. 305 to 307 of 1984
30th November, 1999
Counsel Appeared
J. Jayaraman for C.V. Rajan, for the Applicant : C. Ramakrishna with P.P.S. Janarthana Raja for S.L. Dudharsanam, for the Respondent
JUDGMENT
N.V. BALASUBRAMANIAN. J. :
There are three assessees viz. M. Ct. Muthiah Chettiar Family Trust, M.Ct. Trust and S.RM.M.Ct.M. Thiruppani Trust. The assessment years involved in all the three cases is the same viz., 1972-73. It would be sufficient to notice the facts in the case of M.Ct. Trust (hereinafter referred to as ‘the assessee’) as the facts in other cases are more or less similar and other cases raise identical disputes.
2. The assessee is a public charitable trust eligible for exemption from income-tax in accordance with the provisions of s. 11 of the IT Act, 1961 (hereinafter to be referred to as ‘the Act’). The assessee in instant case, for the assessment years commencing from 1962-63 and ending on 1971-72, had been accumulating income of the trust as declared in the notice in Form 10. The income so accumulated should have been utilised for the purposes for which it was accumulated before 1st April, 1972. The purposes for which the accumulation was sought are stated as follows: “(i). to establish and maintain and manage hospitals, clinics, laboratories and medical research centres and to provide the poor with medical relief, surgical advice and aid. (ii) to acquire or take over any hospital, clinics, laboratories or research centres and to maintain and manage them. (iii) to establish maintain and manage educational institutions or libraries for imparting technical knowledge or scientific knowledge, or knowledge in any subject or language. (iv) to award scholarship or stipends to students to enable them to prosecute their studies in India or in foreign countries and to award prizes to students for proficiency in any subject or language. (v) to render substantial financial aid to any existing hospital or educational institutions. (vi) to give substantial donations to any relief fund by way of charity.”
As earlier stated, the entire income of the assessee for the previous year relevant to the asst. yr. 1961-62 and nine subsequent previous years till the previous year ending 1971-72 were accumulated and no part of the income whatsoever of any such previous years was in fact applied to any specified purpose till 27th Dec., 1971. On 27th Dec., 1971, the assessee handed over the entire investment representing the accumulated income for the concerned previous years to a new charitable trust known as “M. Ct. Muthiah Chettiar Foundation’ for the purpose of carrying out certain charitable purposes.
The ITO in the assessment made for the asst. yr. 1972-73 included not only the income of the relevant previous year relevant on 13th April, 1972, but also the income of the previous year relevant to the assessment year as not having been utilised within the time allowed and therefore, having become the income taxable within the meaning of s. 11(3) of the Act.
The CIT in exercise of the powers of revision found that the assessee has not spent any part of the accumulated income during the years 1962-63 to 1971-72 under s. 11(2) of the Act as stipulated in the notice and he was of the opinion that the order of the ITO including in the assessment for the asst. yr. 1972-73, only the unspent income of the year 1962-63 attracting the provisions of s. 11(3) of the Act and not of the subsequent assessment years was erroneous and prejudicial to the interests of the Revenue. The CIT initiated the proceedings under s. 263 of the Act and revised the assessment by enhancing the income of the assets so as to include the income accumulated in all 10 years. Consequently, he recomputed the income of the assessee at Rs. 13,39,316 as against Rs. 3,34,250 assessed by the ITO.
4.1. The assessee challenged the order of the CIT(A) by filing an appeal before the Tribunal. The Tribunal held that by handing over of charitable trust income to another charitable trust having similar and other objects of charity it would amount to application of income to charitable purposes. The Tribunal relied upon a decision in IRC vs. Helen Slater Charitable Trust Ltd. (1980) 3 W.L.R. 157 : 1 All ER 785 and the decision of this Court in the case of CIT vs. Thanthi Trust (1981) 23 CTR (Mad) 155 : (1982) 137 ITR 735 (Mad) : TC 23R.737 and held that the assessee was entitled and authorised to apply its income to charitable purposes and handing over of accumulated income to another charitable trust was within the powers of the assessee-trust and it would amount to application of its income. The Tribunal further held that the assessee was specifically authorised to make over the accumulated income to another charitable trust to carry out other objects of the said charitable trust. The Tribunal held that there is no difference between the employment of the expression ‘utilised’ in cl. (c) and the expression, ‘used’ in cl. (a) of s. (3) of the Act. According to the Tribunal, as the assessee had taken steps for forming M. Ct. Muthiah Foundation for the specific purpose of acquiring or establishing certain educational institutions, hospitals and maintaining them, the assessee handed over the accumulated income to it for implementing the objects, and the assessee had utilised the income for the purposes stated by it in the notice given to the ITO under s. 11(2) of the Act. The Tribunal held that the assessee had completely divested of its ownership over the accumulated income by handing it over and put it beyond its control and it would amount to utilisation for which the notice was given. The Tribunal, therefore, held that the CIT was not justified in holding that the accumulated income of the trust was not applied or utilised for the charitable purposes within the period specified in Form 10 notice or in the year immediately following the expiry thereof. The Tribunal also held that the CIT was not justified in taking 100 per cent of the income each year even assuming that the assessee had not applied the accumulated income for charitable purposes within the period provided in s. 11(3) of the Act. The Tribunal, in this view of the matter, allowed the appeal preferred by the assessee.
5. The CIT filed an application to refer as many as eight questions of law arising out of the order of the Tribunal. But the Tribunal has stated a case and referred the following two questions of law for our consideration under s. 256(1) of the Act :
“1. Whether the Tribunal was justified in law in holding that the accumulated income of the trust for the years concerned was applied to charitable purposes within the period specified in the notice or in the year immediately following thereof and, therefore, the order of the CIT to the contrary was not justified?
2. If answer to question No. 1 is in the negative, whether the Tribunal was justified in law in holding that the CIT was not justified in taking 100 per cent of the income of each year for bringing into charge even assuming that in the facts of the case it cannot be held that the assessee had applied accumulated income to charitable purposes within the period provided in s. 11(3) of the Act and that only 75 per cent of the same could be so taken?”
6. We may straightaway say that the first question as framed by the Tribunal does not bring out the realcontroversy between the parties. The case of the Revenue was that by handing over the accumulated income to a trust having similar objects, it would not amount to utilisation of the accumulated income for the purpose for which it was accumulated. The Tribunal, however, framed the question as if whether, it would amount to application of income. Therefore, the question as framed by the Tribunal, in our opinion, should be reframed and the first question is reframed as under :
“Whether the Tribunal was justified in law in holding that the accumulated income of the trust for the years concerned was utilised for the purpose for which it was accumulated or set apart and, therefore, it should not be deemed to be the income of the assessee for the relevant assessment year?
7. Mr. J. Jayaraman, learned senior counsel appearing for the Revenue, submitted that exemption under s. 11 is granted on application of income for charitable or religious purpose and if the trust applies 75 per cent of its income, then, an exemption of 100 per cent is granted under s. 11 of the Act. He submitted that in case the trust decides to accumulate its income, the accumulation can be done subject to certain conditions and the income should be accumulated for the purposes specified in the notice given to the ITO. He also submitted that the accumulated income should be utilised by the assessee for the purpose for which the income was accumulated and by handing over of the accumulated income to another trust the assessee had not utilised the income for the purpose of accumulation and it would not qualify for exemption under s. 11(3)(c) of the Act. He submitted that the assessee had not utilised its income and the assessee had failed to fulfil the statutory obligations undertaken by it under the provisions of s. 11(2) of the Act. His further submission was that a more repetition of the objects of the trust would not be sufficient and s. 11 (2) requires that the assessee must specify the purpose and there is a violation of s. 11(2)(b) of the Act. According to the learned senior counsel, the legislature has used the expression, ‘application’ in s. 11, and the expression, ‘accumulation’ in s. 11(2), but in s. 11(3), the legislature has made a departure and used the expression, ‘utilisation’ and there is a violation of s. 11(3)(c) of the Act. According to him, the trust either should utilise the income, and the mere handing over of the accumulated income to another trust having similar objects would not amount to utilisation of its income. He submitted that the cases wherein the Courts have taken the view that mere handing over of the trust money to another trust having similar objects would amount to application of income are not applicable to the case of utilisation and those cases dealt with application of current year’s income and he also submitted that in some of the cases, money had been handed over to an existing institution. According to him, the latter part of s. 11(3)(c) would apply to the consequences of non- utilisation of the income. In other words, according to the learned counsel, ss. 11(2) and 11(3) should be read together and the principles which are applicable to the case of application cannot be extended to the case of accumulation of income or utilisation of income.
8. Mr. C. Ramakrishna, learned counsel appearing for the assessee, on the other hand, submitted that moneys were invested in Government securities as defined in s. 11(2)(c) of the Act. According to him, the money received were neither misappropriated nor there was any misuse on receipt of the moneys. He submitted that the object behind, the s. 11(3) is that the income should be applied and utilised for charity before the end of the accounting year or in the year immediately after the expiry of the period mentioned in ss. 11(3)(c) of the Act. Learned counsel also submitted that no private individuals or company had any control over the moneys and the purpose behind the ss. 11 (2) and 11(3) is to prevent the misuse of the moneys and the assessee had lost the control over the moneys. He submitted that the provisions should be construed in a reasonable manner and according to him, the expression, ‘utilised’ in s. 11(3)(c) would also include ‘applied’ and the legislature has not employed the expression ‘spent’. He, therefore, submitted that it is not necessary that the accumulated income should be handed over to an existing institution. Learned counsel strongly placed reliance on a decision of the Gujarat High Court in the case of CIT vs. Sarladevi Sarabhai Trust No. 2 (1988) 70 CTR (Guj) 185 : (1988) 172 ITR 698 (Guj) : TC 23R.1236 and the Circular of the Board referred to therein and submitted that the utilisation does not mean that the amount should be spent forthwith. According to the learned counsel for the assessee, the assessee had lost its complete control and it had completely divested of its ownership over the moneys by handing over the moneys to another trust and, therefore, it is not necessary that the money should be handed over to an existing institution. He placed stress on the expression, ‘utilisation’ and submitted that the accumulated funds were applied for bona fide purposes in furtherance of the objects mentioned in Form No. 10 and there was no non-use or misuse of the funds and the moneys were utilised for the purpose for which they were accumulated. He submitted that s. 11 should be construed in a way for which it was enacted and the moneys of the trust had been sterilised and invested in Government securities and according to him, since the trust in question was unable to spend the moneys for itself before the expiry of 10 years, it handed over the same to another trust having similar objects and the assessee-trust cannot be taxed. According to him, the assessee-trust has not violated the conditions specified in cl. (a) or in cl. (b) or in cl.(c) of s. 11(3) of the Act, since the entire income had been handed over to another trust. He further submitted that the consequences of non-utilisation are not provided for in s. 11(3)(c) of the Act. He submitted that this Court should not interfere with the finding of fact and there was no infraction of cl. (c) of s. 11(3) of the Act. He also submitted that the Form No. 10 does not say anything about the spending or application of income and the taxing statute should be construed in a reasonable manner and the taxing statute should be explicit and the words cannot be construed on the basis of mere conjectures and the beneficial construction should be given to the words found in s. 11(3)(c) of the Act. He, therefore, submitted that the assessee has complied with the provisions of s. 11(3) of the Act and the trust has utilised the moneys by handing over the same to another trust having similar objects. The submission of the learned counsel for the assessee was that the handing over of the accumulated income to another trust with a view to carry out the purposes for which the moneys were accumulated would amount to utilisation of income and there is no difference between the word ‘application’ and ‘utilisation.’
9. We have set out the facts of the case earlier. Before considering the point that arises in the tax cases, it is necessary to notice certain further facts also. The trustees of the assessee-trust viz., M.Ct. Trust, S. Rm.M.Ct.M. Thiruppani Trust and M.Ct. Muthiah Chettiar Family Trust made over the accumulated income to one M. Ct. M. Chidambram Chettiar Foundation. The said new trust was formed on 28th Dec., 1971. The three assessee-trusts were desirous to establish and maintain a hospital and a school to be constructed in the property known as ‘Rama Vilas’ situated at Luz Church Road, Mylapore, Chennai, which was purchased by Thiruppani Trust and to repair, renovate, reconstruct and to expand the M.Ct. Muthiah Chettiar High School, Lady Muthiah Chettiar Girls High School, and M.Cr.M. Chidambaram Chettiar Memorial Boys Hostel, all situate at Madras and M.Ct.M. Chidambaram Chettiar Memorial Higher Elementary School at Kanadukathan. The trustees felt that in view of the magnitude of the scheme and in order to expeditiously construct the hospital and the school, a separate trust should be formed appointing a competent and independent body of persons as board of trustees. Accordingly, the foundation trust was created by transfer of a sum of Rs. 5,000 by each of the settlor-trusts and the funds or assets of the institutions, transferred by settlors or other persons including the income and accumulation thereof are required to be applied for the following purposes:
(a) to construct a hospital in the premises belonging to Thirupani Trust and known as ‘Rama Vilas’ situated in Luz Church Road, Mylapore, Madras, and maintaining and managing the said hospital, and for such purpose to prepare a scheme and carry it out as expeditiously as possible.
(b) to repair, renovate, reconstruct and/or expand Sir M.Ct. Muthiah Chettiar High School, Lady Muthiah Chettiar Girls High School and M.Ct.M. Chidambaram Chettiar Memorial Boys’ Hostel all situated in Madras and expand M.Ct.M. Chidambaram Chettiar Memorial Higher Elementary School, Eanadukakthan.
(c) to meet all expenses necessary and incidental for carrying out the aforesaid purposes and for management of the trust hereby constituted :
(d) subject to availability of funds after providing for the aforesaid objects, to construct a school for education in ‘Rama Vilas’ property and maintain and manage the school. Clauses 4 and 5 of the Foundation Trust deed read as under :
“4. The Rama Vilas property will continue to be the property of the Thirupani Trust. The Board of trustees, are however, authorised to enter the premises, construct the hospital and school as aforesaid and manage the hospital and school. The property tax and other outgoings in respect of the Rama Vilas property shall be paid by the board of trustees out of the funds available with them.
5. The Board of trustees hereby undertake to act diligently, promptly and expeditiously in carrying out the aforesaid objects and utilise the said funds only for the said objects and not utilise them for any other purposes whatsoever.” It is in the light of the above facts, the question whether there was utilisation of the accumulated income of the trust has to be considered.
10. The scheme of s. 11 of the Act was examined by the apex Court in S.RM.M.CT.M. Tiruppani Trust vs. CIT (1998) 145 CTR (SC) 176 : (1998) 230 ITR 636 at p. 640 (SC) : TC S23.2416 as under : “Under s. 11(1)(a), income derived from property held under trust for charity, to the extent that such income is applied for charitable or religious purposes will be exempt from income-tax. Where the income or the entire income is not so spent, but is accumulation, it will be exempt to the extent of 25 per cent of its total income or Rs. 10,000 whichever is higher. Under s. 11(2), if the trust desires to accumulate more than 25 per cent, of its income and wants to claim exemption from income-tax it has to comply with the conditions which are laid down in s. 11(2)(a) and (b). The first condition is that a notice in writing should be given to the ITO in the prescribed manner specifying the purpose for which the income is being accumulated and the period for which the income is to be accumulated. The period should not exceed ten years. Rule 17 of the IT Rules 1962, prescribes that the notice which is required to be given under s. 11(2)(a) should be in Form No. 10. The second condition is that the amount so accumulated has to be invested in any Government security as specified in s. 11(2)(b).”
The trust is allowed to accumulate its income for a maximum period of ten years. The condition is that the trust should specify in the prescribed form the purpose for which the income is accumulated or set apart. It is not enough for the trustees to repeat the objects of the trust, but must specify a particular purpose for which the income is being accumulated. We are in agreement with the view of the Calcutta High Court in Director of IT vs. Singhania Charitable Trust (1993) 199 ITR 819 (Cal) : TC 23R.1317 wherein the Calcutta High Court held that the long-term accumulation should be for a definite and concrete purpose or purposes and the charitable trust cannot use its objects as the purposes for the accumulation of the income under s. 11(2) of the Act. It is only by mentioning the purposes specifically, it will be possible for the ITO to monitor the situation whether the trust has applied its accumulated income for the purposes mentioned in Form No. 10. Therefore, it is essential that the trust should specify its purposes and the requirement is that the purposes must have some individuality and mere repetition of the objects of the trust would not meet the requirements of s. 11(2) of the Act. However, on the facts of the case, it is seen that the assessee-trust had merely repeated its objects when it filed the necessary Form No. 10 furnished by the assessee, allowed its income to be accumulated for a period of ten years and that it is too late in the date to question the purposes mentioned in Form No. 10 and learned senior counsel for the Revenue in his fairness has not disputed that the Department is not in a position how to challenge that the Form No. 10 filed is invalid.
Learned senior counsel for the Revenue also has not disputed that insofar as the application of income of the trust under s. 11(1)(a) of the Act is concerned, the payment of a sum from one charitable trust to another charitable trust for utilisation by the latter trust towards its charitable objects would amount to application of income for charitable purposes. The above proposition is well settled by a decision of this Court in the case of CIT vs. Thanthi Trust (supra). In that case, this Court referred to a Chancery decision in IRC vs. Helen Siater Charitable Trust Ltd. (supra) wherein the Court construed the expression, ‘applied for charitable purposes’ as making transfer of funds outright to another charitable institution which was exclusively for charitable objects and the transfer of assets by one institution in favour of another institution in such a manner as to pass whole right to the transferee must be said to have applied such assets for charitable purposes.
The above view is uniformly taken by several High Courts [vide : CIT vs. Sarladevi Sarabhai Trust No. 2 (supra), CIT vs. Trustees of the Jadi Trust (1982) 133 ITR 494 (Bom) : TC 23R.865, CIT vs. Hindusthan Charity Trust (1982) 29 CTR (Cal) 43 : (1983) 139 ITR 913 (Cal) : TC 23R.1246, CIT vs. J.K. Charitable Trust (1992) 196 ITR 31 (All) : TC 23R.1523 and CIT vs. Nizam’s Charitable Trust (1981) 131 ITR 497 (AP) : TC 23R.1202]. The Board has also reiterated the same provision of law and issued a Circular dt. 5th Jan., 1978 [Instruction No. 1132 dt. 5th Jan., 1978— Ed.], wherein the Board has stated that the payment of a sum by one charitable trust to another for utilisation by the donee trust towards its charitable objects is proper application of income for charitable purpose in the hands of the donee trust. Recently, the Supreme Court in the case of S.RM.M.CT.M. Tiruppani Trust vs. CIT (supra) has also taken the view that the money spent for purchase of a building which is to be utilised as a hospital would amount to application of income under s. 11(1) of the Act.
The contention of Mr. C. Ramakrishna, learned counsel for the assessee was that the assessee had invested in Government securities for a period of 10 years and the assessee had lost the complete control over the money and before the expiry of the period mentioned in s. 11(3)(c) of the Act, the trustees have utilised the income for the purpose for which it was accumulated. He referred to the decision in Short vs. Poole Corporation (1926) 1 Ch. 66 at p. 91 and submitted that the act of a public body, though performed in good faith and without taint of corruption was clearly founded on alien and irrelevant grounds as to be outside the authority conferred upon the body, and, therefore, inoperative. He also referred to the decision of the Court of Appeal in the case of Associated Provincial Picture Houses Ltd. vs. Wednesbury Corporation (1948) 1 K.B. 223 and submitted that the Court is entitled to investigate the action of the local authority with a view to see whether they have taken into account matters which they ought not to take into account, or conversely, have refused to take into account or neglected to take into account matters which they ought to take into account. He also referred to the decision of Court of Appeal in the case of REG vs. Home Secretary, Ex. P. Phansopkar (1976) 1 Q.B. 606 at p. 621. He also referred to the decision of Calcutta High Court in the case of Santi Swarup Sarkar vs. Pradip Kumar Sarkar AIR 1997 Cal 197 wherein the learned Judge held that any interpretation of the statute would obviate purposeless proliferation of litigation, without whittling down the effectiveness of the protection for the parties sought to be helped by the legislation should be preferred to any literal, pedantic, legalistic or technically correct alternative. It is relevant to state that the learned Judge referred to the decision of the Supreme Court in the case of B. Banerjee vs. Smt. Anita Pan AIR 1975 SC 146. Learned counsel for the assessee also referred to the decision of the Supreme Court in the case of M.V. Javali vs. Mahajan Borewell & Co. & Ors. (1997) 143 CTR (SC) 320 : (1997) 8 SCC 72 : TC S48.3900 relating to the principle of interpretation of the stature. There can be no quarrel over the proposition of law submitted by the learned counsel for the assessee relating to the interpretation of the statute.
14. The House of Lords in the case of IRC vs. Willoughby (1997) 4 All ER 65 observed that one of the traditional functions of the tax system is to permit socially desirable objectives by providing a favourable tax regime for those who pursue them and individuals who make provision for their retirement or for greater financial security are a familiar examples of those who have received such fiscal encouragement in various forms over the years. It is only with the above objectives, s. 11 of the Act has to be interpreted. The House of Lords in the above decision made a distinction between tax avoidance and tax mitigation schemes and the relevant passage reads as under : “Tax avoidance was to be distinguished from tax mitigation. The hallmark of tax avoidance is that the taxpayer reduces his liability to tax without incurring the economic consequences that Parliament intended to be suffered by any taxpayer qualifying for such reduction in his tax liability. The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation, and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option. Where the taxpayer’s chosen course is seen upon examination to involve tax avoidance (as opposed to tax mitigation), it follows that tax avoidance must be at least one of the taxpayer’s purposes in adopting that course whether or not the taxpayer has formed the subjective motive of avoiding tax.”
We are of the opinion, the assessee trust by filing the requisite form and accumulating its income during the course of ten years, had adopted the tax mitigation scheme and the assessee had enjoyed the total freedom of tax during the period of accumulation of income. The question that arises is whether the assessee had contravened s. 11(3)(c) of the Act.
15. The key words in s. 11(3)(c) of the Act are “not utilised for the purposes for which it was so accumulated”. In our opinion, cls. (a), (b) and (c) of s. 11(3) of the Act have to be read together in a harmonious manner. Sec.
11(3)(a) of the Act, inter alia, provides that if the income referred to in sub-s. (2) is applied to the purposes other than charitable or religious purposes, or ceased to be accumulated or set apart for application, then it is deemed to be the income of the trust. Similarly, s. 11(3)(b) deals with a case of income ceased to remain in Government securities or ceased to be deposited in the deposit referred to in s. 11(2) of the Act and in those cases, the income is deemed to be the income of the assessee-trust. In both the situations, the provisions of s. 11(3)(a) and (b) of the Act contemplate a positive act on the part of the trustees in applying income for the purposes other than a charitable purpose or ceasing to hold or convert the Government security or deposit. On the other hand, cl. (c) of s. 11(3) deals with both positive and negative acts of the trustees, namely, (i) for the inaction on the part of the trustees to utilise the accumulated income for the purposes for which it was accumulated during the period referred to in s.
11(2) or in the immediately following year, and (ii) a positive act on the part of the trustees in applying the income for a purpose other than the purpose for which the income was accumulated. It is, no doubt, true that the accumulated income should be utilised for the purposes for which it was accumulated and the words, and the expression, ‘not utilised’ in s. 11(3)(c) have to be read in conjunction with the words that follow the expression, namely, ‘for the purpose for which it was so accumulated’. Though the word, ‘utilised’ has different shades of meaning, in the context of s. 11 (3)(c) of the Act, in our opinion, it means application of income, that is, where the trustees had not applied the income for the purposes for which it was so accumulated. The later amendment in s. 11 (3A) of the Act, which was introduced by the Taxation Laws (Amendment) Act, 1975, w.e.f. 1st April, 1976, also gives a clue that the word, ‘utilisation’ in s. 11(3)(c) should be interpreted to mean ‘application’, as under s.11(3A) of the Act, it is permissible for the ITO to change the purpose of application of income, if the trustees state before the ITO that the income accumulated cannot be applied for the purposes due to the reasons mentioned therein. Though the word, ‘utilisation’ in normal connotation would connote spending of money for the purposes for which the income was accumulated, in the context of s. 11(3)(c), the more appropriate meaning that can be assigned is that the expression ‘utilisation’ would mean application of income. As seen earlier, s. 11 (3), in our opinion, is so designed to take care of different situations; where the trust applies its income for a non-charitable purpose or where the trust converts its securities or deposits before the expiry of the period or where the trust had not applied the amount for the purposes for which it was so accumulated. The section deals with three successive stages in the application of the accumulated income. The first stage is non-application of income and the second stage is, conversion of the approved Government Securities or deposits, before the period mentioned in s. 11(2) and the third stage is the non-utilisation or utilisation of the accumulated income for some other purposes either during or after the expiry of the period mentioned in s. 11(2) of the Act. We have seen that the purposes for which the income should be accumulated should be specific and within the scope of the objects of the trust, and even where the trust applies its accumulated income for any of its charitable purposes, not mentioned in the notice for accumulation, though within its objects, it would amount to violation of the provisions of s. 11(3)(c) of the Act.
16. The intention of the legislature is to curtail the practices of applying the accumulated income for non-charitable purposes or for retention of the money even after the period mentioned in s. 11 (2) of the Act, but however, where the trust applies its income for the purposes for which it was accumulated, it cannot be said that there is a violation of s. 11(3)(c) of the Act. The emphasis given under the provisions of ss. 11(1) and 11(2) is ‘application of income’ for charitable or religious purposes and it is only in this context, the Courts have taken the view that the handing over the money by one trust to another trust having similar objects would amount to application of income. There are no weighty reasons to give a different meaning to the expression ‘utilised as ‘spent’ in s. 11(3)(c) of the Act and it cannot be assumed that the legislature has postulated a different test for utilisation of the accumulated income. As observed by the Gujarat High Court in the case of CIT vs. Sarladevi Sarabhai Trust No. 2 (supra) the expression, ‘utilisation’ does not mean that the entire amount has to be spent forthwith. We agree with the above observation of the Gujarat High Court. That apart, the assessee-trust by handing over the money to M.Ct. M. Chidamabaram Foundation has completely lost its title and dominion over the accumulated money in question. Further, the donee trust is also a public trust and it is also under the judicial supervision of the High Court and to ascribe the meaning to the expression ‘utilised’ as ‘applied’ in s. 11(3)(c) of the Act is also in consonance with the subsequent amendment in s. 11(3A) of the Act. We have seen, by the judicial development, the expression ‘applied’ has been construed to include cases of handing over the money by one trust to another public charitable trust. Further, the argument that the view we have taken would encourage tax avoidance by the public trust permitting the trust to hand over the accumulated income to another trust which may hold it for 10 years and then transfer to a third trust with an endless, unbroken chain of passing on the money from one trust to another without actual utilisation of the money is unacceptable. That cannot be a ground to give a normal meaning of the word, ‘utilised’. The benefit of accumulation of income is expressly provided by the legislature as a tax mitigation scheme and when in the view of the legislature it is not a tax avoidance, it is not possible for the Court to hold that it will encourage tax avoidance. Further, it is not the case of the Revenue that the transfer is not a real and a sham transfer or the donee trust is not a genuine or real trust. However, the question that has to be examined in each of the cases is whether the trust income was applied for the purposes for which it was accumulated.
The trust, in our opinion, would be fulfilling the conditions prescribed in s. 11(3)(c) of the Act, either by directly applying or spending the income for the purpose for which the income was accumulated or by handing over the same to an existing institution to be utilised for the same purpose. But, the s. 11(3)(c) of the Act cannot be limited to the above two situations. In our opinion, the words in s. 11(3)(c) are also apt to cover cases of handing over the accumulated income to another trust having its objects similar to the purposes for which the income was accumulated with directions by the donor trust that the accumulated income should be applied to the purposes for which the income was accumulated. We have seen from the order of the ITO, the purposes for which the assessee- trust had been allowed to accumulate its income and we find that the objects of the newly formed M.Ct. M.Chidambaram Foundation would fall within the scope of the purposes for which the income was accumulated.
The Supreme Court in the case of S.RM. M.CT.M.Tiruppani Trust vs. CIT (supra) held that the amount spent for purchase of a property by the trust would amount to application of income as the building was used for charitable purposes. Applying the same ratio, the assessee-trust by handing over the money to donee trust has directed the donee trust to apply the accumulated income for the purposes for which the income was accumulated. As a matter of fact, the purposes mentioned include establishment, maintenance and management of hospital, educational institutions, etc. It also includes rendering financial aid to any existing institution or educational institutions. It is seen that on the facts of the case, the educational institutions are existing institutions. The site for the hospital had been purchased by one of the assessee-trusts. Similarly, one of the purposes is to give substantial donation to any relief fund by way of charity and by handing over the accumulated money to the newly created trust, and it cannot be said that the assessee has not utilised the accumulated income for a purpose other than the one for which the income was accumulated, in effect, all the three trusts have pooled their reserves and handed over the entire accumulated income to the donee trust so that the donee can carry out the purpose for which the income was accumulated during the course of ten years in an effective manner. Therefore, we are of the opinion that the assessee by this process, has not contravened any of the provisions of s. 11(3) of the Act and the CIT was not justified in directing the office to levy the tax on the entire accumulated income as well as the income of the assessee in the assessment year in question. We are of the view that the Tribunal was justified in cancelling the order of the CIT.
Accordingly, we answer the first question of law, as reframed by us, in the affirmative and against the Revenue. In view of our answer to the first question, it is not necessary to render any answer to the second question, though the issue raised in the said question is concluded against the Revenue by the decisions of the Supreme Court in Addl. CIT vs. A.L.N. Rao Charitable Trust (1995) 129 CTR (SC) 205 : (1995) 216 ITR 697 (SC) : TC S23.2440 and S.RM.M.CT.M. Tiruppani Trust vs. CIT (supra). However, in the circumstances of the case, there will be no order as to costs.
[Citation : 245 ITR 400]
