COMMISSIONER OF INCOME TAX Vs. SARLADEVI SARABHAI TRUST NO 2
LAWS(GJH)-1988-3-17
HIGH COURT OF GUJARAT
Decided on March 29,1988

COMMISSIONER OF INCOME TAX Appellant
VERSUS
Sarladevi Sarabhai Trust No 2 Respondents




JUDGEMENT

S.B.MAJMUDAR, J. - (1.)FOUR questions have been referred for our opinion by the Income -tax Appellate Tribunal at the instance of the Revenue. These questions read as under :
'1. Whether, on the facts and in the circumstances of the case, the Income -tax Appellate Tribunal has been right in law in setting aside the order of the Commissioner of Income -tax made under section 263 of the Income -tax Act, 1961 ? 2. Whether, on the facts and in the circumstances of the case, the Income -tax Appellate Tribunal has been right in law in holding that the provisions of section 11 of the Act, do not come in the way of the assessee as the funds were applied to charitable purposes and that application was completed when the funds were donated to other charitable trusts ? 3. Whether, on the facts and in the circumstances of the case, the Income -tax Appellate Tribunal has been right in law in holding that the provisions of section 13(2)(h) of the Act were not applicable in the instant case ? 4. Whether the Appellate Tribunal has been right in law in not considering the contention of the Revenue that the income of the trust was utilised directly or indirectly for the benefit of prohibited categories under section 13(2)(h) read with section 13(3) and Explanation thereto and, hence, the assessee was not entitled to exemption under section 11 in vies of section 13(2)(h) of the Income -tax Act, 1961 ?'

(2.)IT will be necessary to have a quick glance at the factual backdrop for understanding the controversy reflected by these questions.
The assessee in a public charitable trust. The relevant year of assessment in 1975 -76. In the original assessment, the Income -tax Officer held that the assessee was entitled to exemption in view of section 11 of the Income -tax Act, 1961 ('the Act' for short), as applicable at the relevant time. The Commissioner of Income -tax, however, felt otherwise and issue a notice under section 263 of the Act as he noted that the income of the trust was utilised directly or indirectly for the benefit of the prohibited categories of persons as mentioned in section 13(2)(h) of the Act read with section 13(3) thereof and the Explanation thereto. The fact found by the Commissioner of Income -tax in connection with the dealings of the assessee -trust was to the effect that the trust had given donation to another public charitable rust which amounted to nothing else but defeating the basic provisions and intentions of the Act, the Truss Act and the settlor's or author's wishes. The Commissioner of Income -tax observed that the assessee had donated a particular amount to the Nehru Foundation. These trusts were created by the same group of persons. Consequently, the income was no actually applied and spent on the charitable purposes. Hence, exemption under section 11 of the Act was not available to the assessee. The Commissioner also held that the funds or the trusts were also utilised by persons in the prohibited categories under section 13(3) of the Act and hence in view of section 13(2)(h), the assessee was not entitled to exemption. The Commissioner of Income -tax subsequently held that the income of the assessee was no entitled to exemption.

(3.)THE assessee along with other various truss similarly situated as the present assessee, filed appeals before the Income -tax Appellate Tribunal. The Tribunal passed a consolidated order in the case of the respondent -trusts, being Sarladevi Sarabhai trust No. 2, and also many companion cases of Sarladevi Sarabhai rusts Nos. 3 to 8 and 10. After hearing the parties, the Tribunal came o the conclusion that the finding of the Commissioner of Income -tax that the assessee was not entitled to exemption under section 11 of the Act was not justified. The Tribunal held that the Commissioner of Income -tax had based his decision on two aspects, viz., (i) donations to other trusts with a condition that donations should from a part of the corpus of the trusts or otherwise did not amount o actual spending by the assessee, and (ii) the affairs were arranged in such a way that the funds remained intact and that no single pie in fact was spent. However, referring to the Board Circular F. No. 176/89/77 -II(AT), the Tribunal pointed out that, according to that circular, the payment of a sum by one charitable trust to another would amount to utilisation by the donor trust and merely because the donee trust does not spend the amount donated during the year of receipt itself, exemption under section 11 was not lost. The Tribunal further held that in view of the circular, when the assessee -trust donated funds to other trusts towards the corpus or without such conditions, utilisation under section 11 in the hands of the assessee was complete and an inquiry into further utilisation by the donee rust was not contemplated under section 11. So far as the second aspect of the matter was concerned, the Tribunal noted the fact that the Commissioner of Income -tax has based his order exclusively on section 13(2)(h) read with section 13(3); hence, it would not be proper for the Tribunal to enquire into the point whether the Commissioner of Income -tax should have passed an order by applying section 13(2)(a). Referring to the Board Circulation and the decisions referred to by learned counsel for the assessee, the Tribunal noted that section 13(2)(h) is apparently not applicable as it applied only when the funds were invested in other concern. The Tribunal Held that there was a clear distinction between investments and loans. When the assessee deposited is funds in another concern (a) without right of participation in profits with that concern, (b) at a fixed rate of interest, and (c) the value of investments did not fluctuate, it did not invest funds and as such section 13(2)(h) had no application. The transactions were, therefore, loans. The Tribunal concluded that section 13(2)(h) had no application. It was accordingly held by the Tribunal that the Commissioner was not justified in applying the provisions of section 263 of the Act for the reasons mentioned by him and it was not brought out that the order passed by the Income -tax Officer were erroneous in so far as they were Prejudicial to the interests of the Revenue. Accordingly, the assessee's appeal was allowed.
;


Click here to view full judgement.
Copyright © Regent Computronics Pvt.Ltd.