Madras H.C : Whether the Tribunal is right in law in holding that the assessee is entitled to exemption under s. 11 of the IT Act, 1961 ?

High Court Of Madras

CIT vs. Nagarathu Vaisiyargal Sangam

Sections 11, 13(1)(c)

Asst. Year 1982-83

R. Jayasimha Babu & Mrs. A Subbulakshmy, JJ.

Tax Case No. 1083 of 1990

19th August, 1998

Counsel AppearedC.V. Rajan, for the Revenue : None, for the Assessee

JUDGMENT

MRS. A. SUBBULAKSHMY, J. :

The assessee is a society registered under the Societies Registration Act, on 20th March, 1959, created before 1st April, 1962, that is, even before the commencement of the IT Act, 1961. The bye-laws of the society areregistered with Registrar. The objects of the society are to provide financial assistance to deserving students for educational purposes, medical relief, pension to widows, incurring funeral expenses and providing financial help for the poor for conducting marriages of their dependants without distinction of caste, creed or community. For the asst. yr. 1982-83, the assessee filed its return disclosing its status as that of AOP, declaring an excess of expenditure over income to the extent of Rs. 3,260. The assessee claimed exemption under ss. 11 to 13 of the IT Act, 1961. The ITO found that the assessee made certain payments to its office bearers, who were interested persons and so the provisions of s. 13(1)(c)(ii) are applicable. The assessee filed an appeal before the CIT. The assessee claimed that all the payments made were approved by the resolution passed by the board of directors and the executive committee and all the payments related to charity and the assessee incurred various expenditure for religious ceremonies and so, the assessee is entitled for exemption that was accepted by the CIT. The CIT was of the view that the assessee did not apply its income for non-charitable and non-religious purposes and the expenditure incurred by the assessee in the premises of various temples are all incidental to its objectives, which include performance of marriages and performance of other religious rites. The CIT had found that such acts of charity necessarily involve acts of religious ceremonies and as expenses were incurred in the temples in furtherance of the objects of the society for charitable purposes in order to render assistance to the poor people and accordingly granted exemption to the expenses incurred. The Tribunal confirmed the view of the CIT thus dismissing the appeal preferred by the Department. So, at the instance of the Revenue, this reference has been made.

2. The questions under reference are :

“(1) Whether the Tribunal is right in law in holding that the assessee is entitled to exemption under s. 11 of the IT Act, 1961 ?

(2) Whether the Tribunal is right in law in holding that the ITO was not correct in invoking the provisions of s. 13(1)(c) of the IT Act, 1961, in regard to payment of Rs.10,001 to Shri Thatha Chettiar, president of the society, and other payments and advances to interested persons as the same fall under the first proviso to s. 13(1)(c) of the IT Act, 1961 ?”

3. The assessee-society was registered under the Societies Registration Act on 20th March, 1959, and was registeredbefore 1st April, 1962. The assessee claims exemption under s. 11 of the Act. The assessee had made certain payments to its office bearers and the assessee had also incurred various expenses in education, medical relief, etc., in pursuance of the objects of the society. The assessee claims that it is entitled to exemption under s. 11 of the Act. The assessee claims that all the payments were approved and so the assessee is entitled to thebenefit of s. 13(1)(c), first proviso. As per s. 11 of the IT Act the following income shall not be included in the total 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 twenty-five per cent of the income from such property; (b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act; to the extent to which such income is applied to such purposes in India; and, where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent of the income from such property.” Sec. 13(1)(c) reads as follows : “Sec. 11 not to apply in certain cases.—(1) Nothing contained in s. 11 or s. 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof : (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof : (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-s. (3); Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-cl. (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-s. (3), if such use or application is by way of compliance with a mandatory terms of the trust or a mandatory rule governing the institution : Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-cl. (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in sub-s. (3), in so far as such use or application relates to any period the 1st June, 1970.”

The assessee claims exemption as it has incurred various expenses for religious ceremonies in temples, and also payment of honorarium and remuneration paid to the secretary, pongal allowance, sitting fees paid to the office bearers, allowing service pension, allowance to directors, etc. and the payments made to various office bearers were approved by the resolution passed by the board of directors. The assessee also made a presentation of Rs. 10,001 to Shri Thatha Chettiar, the present of the institution on his 68th birthday as retirement benefit. Clause 26 of the bye-laws provides that any bye-law can be altered through a special resolution. The CIT had found that there is a mandate for making certain payments and payments to interested persons in accordance with the rules governing the institution and the mandate itself was made after 1962, and the mandate may be contained in a resolution framed even after 1st April, 1962, and that the resolution is in accordance with the rules and the rules themselves were framed before 1st April, 1962, which view was confirmed by the Tribunal. The apex Court’s decision in CIT vs. Rattan Trust (1997) 141 CTR (SC) 304 : (1997) 227 ITR 356 (SC) TC 65R.838, S.23.2435, is relevant in the context. The headnote of this report may usefully be extracted and set out below : “Sec. 13 of the IT Act, 1961, provides for exigencies when the provisions of s.11 would not be applicable. Sec. 13 was amended by the Finance Act, 1970, w.e.f. 1st April, 1971. Sec. 13 of the IT Act was substituted by a new section by the Finance Act, 1970, w.e.f. 1st April, 1971. It was stated that ‘under one of proposed amendments, all charitable or religious trusts or institutions created or established after 31st March, 1962, will be denied the benefit of exemption from income-tax if any part of their income or property enures or is, during the previous year, applied, directly or indirectly, for the benefit of the author, founder, substantial contributor or relative aforesaid or for the benefit of any concern in which any such authority, founder, substantial contributor or relative has substantial interest. In the case of trust or institutions created or established before 1st April, 1962, the exemption from tax will be denied only if their income is applied for the benefit of the author, founder, etc. otherwise than in compliance with a mandatory terms of the trust or a mandatory rule governing the institution’. A similar provision was made in s. 21A of the WT Act, 1957.

The requirements of the first proviso to s. 13(1)(c)(ii) of the IT Act and the first proviso to s. 21A of the WT Act, 1957, are (1) the trust should have been created before 1st April, 1962, and (2) the trustees apply the funds of the trust in a concern in which they themselves are interested, if there was a mandatory provision in the trust deed for such a purpose. Such a mandate in the trust deed should have existed before 1st April, 1962, and could not have been brought in by amending the trust deed at a later stage after that crucial date, even if the trust deed authorised the trustees to amend the trust deed to bring in the mandatory condition or requirement for them to invest funds of the trust in a concern in which they might be interested. Any other interpretation would set at naught the proviso and would defeat the very purpose for which the provisos were added in s. 13 of the IT Act and s. 21A of the WT Act. The purport of the provisos is in no way obscure and the provisos would apply, only if the trust created before 1st April, 1962, mandated at that time, that the trustees could invest the funds of the trust in a concern in which they were interested being the persons referred to in cl. (c)(ii) of sub-s. (1) and sub-s. (2) by virtue of sub-s. (3) of s. 13 of the IT Act and s. 21A of the WT Act. The assessee was a trust created by a deed of trust dt. 28th March, 1942. Clause 41 of the trust deed provided for amendment to the provisions of the trust deed with regard to the conduct and management of the trust. Clause 39 as it originally stood did not make mandatory provisions regarding the investments of the funds of the trust in a concern in which the trustees-had an interest. Clause 39 as it originally stood required all monies to be invested in such banks or securities in such manner as may be approved by the trustees. The trustees were authorised to purchase even property, from the surplus funds in their hands. By virtue of the power conferred on the trustees by cl. 41 of the trust deed, cl. 39 was amended by resolution of the trustees dt. 14th March, 1971. Clause 39, as amended mandated the trustees to keep the funds of the trust with G in which company admittedly the trustees were interested. The assessee claimed exemption from income-tax and wealth-tax. The ITO denied the exemption but the Tribunal allowed the appeals of the assessee. On references both under the IT Act and the WT Act, the High Court affirmed the view taken by the Tribunal and decided the questions in favour of the assessee. On appeals by the Revenue to the Supreme Court : Held, reversing the decision of the High Court, (i) that the interest income of the assessee was not exempt from tax under s. 11 of the IT Act.” (ii) that the assessee trust was not entitled to exemption under s.21A of the WT Act 11

In this case the claim of the assessee is that all the resolutions passed by the directors and the committee members had been ratified at the annual general body meeting on 8th March, 1981, so far as payments to various office bearers are concerned, and this institution was created before 1st April, 1962, before the commencement of the IT Act, 1961.

In the instant case, the trust being created before 1st April, 1962, and the trust did not contain any mandatory provisions with regard to these payments and the mandate itself being made after 1st April, 1962, any amount of passing of any resolution after 1st April, 1962, will not come to the rescue of the assessee by applying the principles laid down in the decision of CIT vs. Rattan Trust (supra). Following the principles laid down by the apex Court in CIT vs. Rattan trust (supra) we hold that the ITO was correct in invoking the provisions of s. 13(1)(c) of the IT act, 1961, in regard to the payment of Rs. 10,001 to Sri Thatha Chettiar, president of the society, and other payments and advances to interested persons as the same falls under the provisions of s. 13(1)(c) of the IT Act, 1961, and denying the exemption to the assessee under s. 11 of the IT Act. So the Tribunal was not justified in holding that the assessee is entitled to exemption under s. 11 of the IT Act and the ITO was not correct in invoking s. 13(1)(c) of the IT Act. We answer both the questions of law against the assessee and in favour of the Revenue.

[Citation : 246 ITR 164]

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