- (1.) AJIT K. SENGUPTA, J.: In this reference under s. 256(2) of the IT Act, 1961, the following questions of law have been referred by the Tribunal: "1. Whether, on the facts and in the circumstances of the case and on a true and correct interpretation of the relevant provisions of the IT Act, 1961, the Tribunal was legally justified in holding that the assessee is not entitled to the exemption under s. 11 of the IT Act, 1961? 2. Whether, on the facts and in the circumstances of the case and on a true and correct interpretation of the relevant provisions of the Act, the Tribunal was justified in holding that the assessee is not entitled to the exemption under s. 11 of the IT Act, 1961, on the ground of subsequent grant of registration under s. 12A of the IT Act, 1961? 3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the provision of s. 13(1)(c) of the IT Act, 1961, is applicable to the facts of the present case and as such the assessee is not entitled to get exemption under s. 11 of the IT Act, 1961? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the sum of Rs. 1,29,966 being the legal expenses incurred by the assessee for defending Marga Guru, the president of the association and other members of the association against criminal charges is not allowable as a permissible expenditure while computing the income of the assessee? 5. Whether the Tribunal was justified in law in holding that the legal expenses incurred by the assessee for defending criminal charges arising out of the personal civil rights and unconnected with the aims and objects of the assessee organisation as such are not allowable deduction?"
(2.) THE facts as found by the Tribunal are as follows: ''The assessee is the Ananda Marga Pracharaka Sangha. The assessment year involved is 1979- 80. The assessee claimed to be a charitable institution entitled to exemption under s. 11 of the IT Act, 1961. The AO denied the benefit of s. 11 to the assessee and further made disallowances in respect of the following items : On appeal by the assessee, the CIT(A) held that the assessee was entitled to the benefit of s. 11 of the Act. He further restricted the disallowance of Rs. 30,000 out of travelling expenses to Rs. 10,000. He maintained the disallowances of Rs. 1,32,016 on account of legal expenses and Rs. 6,668 on account of Marga Guru's quarters expenses. He deleted the disallowances in respect of items (4) to (8) above. Further, in respect of disallowances of Rs. 99,636 on account of . Rs. (1) Legal expenses 1,32,016 (2) Travelling expenses 30,000 (3) Marga Guru's quarters expenses 6,668 (4) Dharma Mahachakra expenses 5,100 (5) Women welfare expenses 590 (6) Children home expenses 1,500 (7) Relief expenses 400 (8) Donation 211 (9) Depreciation 99,636 depreciation by the AO, he directed the AO to examine the claim in the light of the provisions of the Act. Aggrieved by the aforesaid order of the CIT(A), the Department came up in appeal before the Tribunal on the points that the assessee is not entitled to the benefit of s. 11 of the Act and is also not entitled to deductions in respect of items (4) to (8) above. The assessee filed a cross-objection thereto in respect of the items not allowed by the CIT(A), that is to say, Rs. 10,000 on account of travelling expenses, Rs. 1,32,016 on account of legal expenses, Rs. 6,668 on account of Marga Guru's quarters expenses, and also in respect of depreciation. The Tribunal considered the facts and circumstances of the case and held that the assessee was not entitled to exemption under s. 11 of the Act. It also deleted certain disallowances with the following observations: "5. The issues as to allowability of Rs. 1,32,016 on account of legal expenses and benefit of s. 11 of the Act are inter-related. We, therefore, proceed to discuss the question of allowability of Rs. 1,32,016. 6. In the constitution of the assessee, the following aims and objects have been mentioned: 1. To propagate the ideals and the philosophy of 'Ananda Marga' through discourses, open addresses, personal contact and through the medium of literature in the shape of books, pamphlets and periodicals, etc., and/or art. e.g., visual displays, and other media. 2. To arrange meetings, to instill knowledge amongst the people. To take up the following for the welfare of the human race: (a) Literacy drive, (b) Social reforms, (c) Relief work, (d) Anti-corruption and anti-rowdyism, (e) Encouragement of literary faculties, (f) Encouragement of moral and cultural aspects, (g) Economic, physical, mental and spiritual development. 4. To exert and expand all its resources for the cause of peace, social security and universal world fraternity. 5. To collect and raise funds from wordly sources such as charity donations from members of the society for promoting causes beneficial to mankind irrespective of distinctions like caste, creed, colour or nationality and to help the Government of the country, State or municipality in all its constructive programmes. 6. It is stated by learned counsel for the assessee that the aforesaid expenditure of Rs. 1,32,016 was incurred in respect of the following: (i) Marga Guru Ananda Murtiji and his disciples and the saints of the assessee-Sangha were convicted by the Court of Sessions Judge, Patna, on a charge of murder and appeal from the said conviction was filed before the High Court of Patna on which Rs. 99,120 were spent for payment to the advocates. (ii) Proceedings were initiated in the Judge Court at Alipore, Calcutta, for deportation of one Amitabha, a U.S.A. national and worker of the Sangha, Rs. 7,339 were paid to advocates for that proceeding. (iii) Manindra Deba and other workers of the Sangha were prosecuted under s. 307 of the IPC and also under the Explosives Act in the Court of Sessions at Patna and Rs. 723.50 were spent in defending that case. (iv) A case was instituted against some workers of the Sangha under s. 307 of the IPC and also under the Explosives Act on the charge of attempting on the life of the then Chief Justice of India and in defending that case, Rs. 6,000 were spent. (v) Some workers of the Sangha were involved in the case of murder of Shri L.N. Mishra, the then Minister of the Central Government, and Rs. 7,000 were spent for defending these cases. (vi) Rs. 6,000 were spent in instituting suit in the Court of Sub-Judge, Ranchi, for damages for malicious prosecution. (vii) Rs. 2,300 were spent in instituting suit for damages for assault by the police on some of the workers when they were in police custody. (viii) Rs. 1,483.65 were spent for travelling and obtaining certified copies and stationery for the said litigation. (ix) Rs. 2,050 were paid to advocates in Ananda Nagar land acquisition case for getting injunction from the High Court at Calcutta. 7. The contention of learned counsel for the assessee is that false complaints were made by the rival group against the Marga Guru, the saints and the workers of the Sangha and on the basis of these false complaints they were involved in the criminal cases relating to the charges of murder and attempting to commit murder and also under the Explosives Act. In order to protect the good name of the institution and to prove the innocence of the Marga Guru and the other members of the Sangha, it was necessary to defend them and as such the expenditure was incurred for the purpose of protecting the members of the Sangha. Thus, according to him, this expenditure should have been allowed by the ITO and the CIT(A). He in support placed reliance upon the following authorities: Parshva Properties Ltd. vs. CIT (1976) 104 ITR 631 (Cal) : TC 17R.999, CIT vs. Ahmedabad Controlled Iron and Steel Reg. Stockholders Association (P) Ltd. (1975) 99 ITR 567 (Guj) : TC 17R.291, Lakshmiji Sugar Mills Co. (P) Ltd. vs. CIT (1975) 98 ITR 568 (Del) : TC 17R.291, Iron Traders (P) Ltd. vs. CIT (1974) 97 ITR 606 (Del) : TC 17R.1252, Rohtas Industries Ltd. vs. CIT (1968) 67 ITR 361 (Pat) : TC 17R.436 and J.B. Advani and Co. Ltd. vs. CIT (1950) 18 ITR 557 (Bom) : TC 17R.388. 8. The learned Departmental Representative, on the other hand, contended that litigation expenses for defending Marga Guru and the members of their association cannot be allowed as expenses out of the income of the assessee. According to him, the income of the assessee has been improperly spent for the benefit of these persons who were responsible for their personal acts and omissions. 9. We have minutely considered the respective submissions of the parties and all the case-laws referred to by learned counsel for the assessee. The case-laws touching the subject-matter in issue discuss the principles laid down by the Supreme Court in the case, viz., CIT vs. H. Hirjee (1953) 23 ITR 427 (SC) : TC 17R. 391 and CIT vs. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544 (SC) : TC 17R. 286. In the case of Dhanrajgirji Raja Narasingirji (supra), the Supreme Court observed as under: "That provision does not make any distinction between civil litigation and criminal litigation. In fact, expenses incurred in connection with litigation are not separately dealt with under that provision. In our opinion, it makes no difference whether the proceedings are civil or criminal. All that the Court has to see is whether the legal expenses were incurred by the assessee in his character as a trader, in other words, whether the transaction in respect of which proceedings are taken arose out of and was incidental to the assessee's business. Further, we have to see whether the expenditure in question was bona fide incurred wholly and exclusively for the purpose of business [CIT vs. Birla Cotton Spinning and Weaving Mills Ltd. (1971) 82 ITR 166 (SC) : TC 16R.375]. It is true that in some of the cases, this Court has held that an expenditure incurred by an accused assessee to defend himself against a criminal charge did not fall within the scope of s. 10(2)(xv). These decisions were rendered on the facts of those cases. 10. It is, thus, apparent that the test of allowability of litigation expenses incurred in litigation is not based upon the final outcome of the litigation and as also whether litigation is criminal or civil-- what is essential for allowability of the expenditure is whether the expenditure has been incurred in relation to the business income which is under computation. 11. Applying the aforesaid test to the facts of the instant case, what is necessary to be seen is as to whether the litigation expenses were incurred for the purpose of the assessee which claims its aims and objects as religious, philosophical and beneficial to mankind. A charge of murder or attempt to commit murder cannot by any stretch of imagination be said to be incidental to such aims and objects of the assessee. It also cannot be imagined that such fallacious charges can ever arise during the course of service to mankind within the aims and objects exhibited in the constitution of the assessee. Such charges cannot be correlated even remotely to the aims and objects of the assessee. They are obviously personal to the Marga Guru and the members of his association. No amount of income of the assessee can be spent on defending such charges though the accused are members of the assessee. In the case of Smt. Saraswati Dalmia vs. CIT (1981) 7 Taxman 186, before the Delhi High Court, the facts were that the assessee was the chairman of an insurance company. She was prosecuted for misappropriation of certain securities of the said insurance company. The Delhi High Court maintained the disallowance of legal expenses spent in defending the assessee since the expenditure was not incurred for an act having emanated in the ordinary course of the business. The High Court considered the cases of Ahmedabad Stockholders Association (supra) and Lakshmiji Sugar Mills vs. CIT (supra), and distinguished them on facts. It is, thus, abundantly clear that expenses, incurred for defending criminal charges arising out of the personal acts and omissions and for vindicating personal civil rights unconnected with the aims and objects of the assessee-organisation are not allowable deductions. The tax authorities below, therefore, rightly disallowed the expenses incurred in that regard. 12. However, it appears that the claim of Rs. 2,050 out of the total claim of Rs. 1,32,016 was not separately considered by the tax authorities below. The said expenditure is said to have been incurred for getting injunction order from the High Court at Calcutta in connection with the acquisition of land. Full facts in respect thereof are not before us. This point is, therefore, remitted to the ITO who shall consider the claim of Rs. 2,050 afresh. If it was incurred in litigation for the protection of the property of the assessee, it is allowable... 20. Now, we come to the crucial point as to whether the assessee-organisation is entitled to exemption under s. 11 of the IT Act, 1961. It is to be noticed that the assessee has been registered under s. 12A by the CIT on 18th Jan., 1982. However, we do not subscribe to the argument of learned counsel for the assessee that the said registration must be taken as retrospective. Sec. 12A begins with the sentence 'the provisions of ss. 11 and 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled.' Thus, by the mere fact of grant of registration in the subsequent years it cannot be assumed that the requirement of s. 12A is fulfilled for the instant assessment year. The assessee failed to establish that the requirements of s. 12A were fulfilled for the instant assessment year and, therefore, subsequent grant of registration is of no avail to the assessee. 21. Next, it is to be seen that according to s. 13, s. 11 does not apply in certain cases. One of such cases mentioned in clause (c) of sub-s. (1) of s. 13 is that any income of a charitable or religious trust or institution has been used or applied directly or indirectly for the benefit of any person referred to in sub-s. (3). Marga Guru and other saints of the organisation undisputedly came within such persons referred to in sub-s. (3). The assessee spent Rs. 1,29,966 Rs. 1,32,016 - Rs. 2,050 directly for the benefit of these persons in defending them against serious criminal charges and in vindicating their personal civil rights, as has been held above. In this view, the assessee cannot get exemption under s. 11. The finding of the CIT(A), on this point is contradictory to his own finding that the assessee is not entitled to deduction of Rs. 1,32,016. It is, therefore, held that the assessee is not entitled to exemption under s. 11." 3. At the hearing before us, learned counsel for the assessee directed his submission to the question of the assessee's entitlement to exemption under s. 11 in the context of its objects. The ITO was of the opinion that the assessee organisation is a social as well as spiritual organisation having political overtones not conforming with the definition of charitable purpose in s. 2(15) of the Act and is not, therefore, entitled to exemption under cl. 11. The AO has denied exemption firstly on this ground, but in order to fortify the denial he has further observed that the assessee even if accepted as a charitable institution, attracts the vice of s. 13(1)(c) of the Act in so far as the Marga Guru and the executive members of the organisation have personally derived benefit by having their defence in the criminal proceedings at the expense of the funds of the assessee. Therefore, the legal expenses incurred by the assessee could not be said to be for a charitable purpose in nature within the meaning of the provisions of s. 2(15). The assessee society also attracted the disqualification under s. 13(1)(c), for benefit having thereby accrued to the founder, the Marga Guru, as well as the executive members who stand in a position similar to that of the trustees of a trust. These are the two main contentions on which the assessee was denied the benefit of exemption as a charitable institution. The CIT(A), however, found that the contention of the AO that the assessee is not a charitable or public religious trust is untenable since the CIT has duly registered the institution as a charitable one under s. 12A of the Act. He also went through the objects of the assessee as have been set out in the foregoing paragraph. A reading of the objects does not convince that any of them could be said to have any political colour. Learned counsel has submitted that the assessment has been guided by a general bias and, therefore, the same has influenced the consideration of the matter in a partial manner having the vitiating effect on the totality of the findings against the assessee. It has been urged that the basic object of the assessee organisation is to disseminate universal, moral and spiritual ideals among all sections of society at large to enable them to find the true meaning and purpose of human life. So, this object can have social as well as spiritual import and content but is totally divorced from any political purpose since by such aim the assessee does not seek ascendancy to State control or Governmental powers nor does it aspire to mould the shape of things to come in the affairs of the Government and governance of the people of the country. As for the violation of s. 13(1)(c), the only matter that has been turned against the assessee is the fact that the assessee had to spend funds in defending its Guru as well as some of its executive members against certain criminal charges brought against them in criminal proceedings. Learned counsel emphasised that these criminal proceedings were the outcome of malicious implication of the Marga Guru and the executive members so as to bring the society into disrepute and discredit the assessee before the public. The CIT(A) was convinced by the argument that the defence of the said Marga Guru and the executive members was essential for the self-preservation of the assessee because failure to provide a fitting defence against the criminal proceedings, which were as alleged by the assessee brought with the sole purpose of maligning the assessee, would bring the society into disrepute. But for such defence, the Marga Guru or the executive members would have been defenceless as they have no means of their own to arrange for their defence by reason of complete devotion to the work of the assessee-society, it is submitted. The Tribunal has taken the view that as in the case of allowability of litigation expenses in either civil or criminal proceedings in a trade, in this case also the crucial factor for consideration is whether the assessee can be regarded as having incurred the liability to spend for the litigation in its capacity as a charitable institution or whether the expenditure has been incurred in relation to the carrying on of its charitable activity. The Tribunal's answer was that the assessee which claims its aims and objects as religious, philosophical and humanitarian objects must be above all suspicion and cannot give rise to any occasion where the devotees of such objects could be accused of high crime like murder. According to the Tribunal, it is unimaginable that such grave criminal charges can ever arise during the course of service to mankind within the aims and objects exhibited in the constitution of the assessee. Such charges cannot be correlated in the view of the Tribunal, even remotely, to the aims and objects of the assessee. Thus, the Tribunal comes to a conclusion that such criminal charges must be considered as personal to the Marga Guru and the members of his association and the assessee as a charitable organisation is not entitled to spend on defending such charges, immaterial that the accused are members of the assessee. Learned counsel for the assessee submitted that such a view cannot be realistic and lacks in perception of the social realities. The Tribunal's assumption that any organisation which engages itself in humanitarian work and for social and spiritual uplift of the people cannot get involved in criminal charges is described by learned counsel as a subjective expression of opinion not stemming from experience. Any public organisation which has as its aim the eradication of illiteracy, social and spiritual uplift of the people and service to the humanity, more often than not, has to face fierce and rutheless resistance from various groups influential in the community who wage war against social change. Therefore, the vanguard of such selfless work always runs the risk of incurring the wrath of influential men and very often lands up in criminal courts in framed-up proceedings. Such reality cannot be brushed aside. Learned counsel for the assessee then referred to the decision of the Gujarat High Court in CIT vs. Ahmedabad Controlled Iron & Steel Reg. Stockholders Association (P) Ltd. (supra), where the said High Court held that the consideration of admissibility of the expenditure for defence in criminal prosecution requires a distinction of such criminal proceedings. There may be a criminal proceeding where the assessee defends himself or his employees against charges arising in the course of carrying on the business. The other class of cases are those where the assessee defends either himself or a third person unrelated to the carrying on of the business. The expenditure in that case is not allowable as expenditure of the business. Even where the expenditure is partly for the purposes of the business and partly for defending himself not as a trader but as an ordinary person from punishment likely to be imposed on conclusion of the prosecution, the expenses cannot be allowed. But, the position becomes different in the first situation. For example, where the assessee incurs expenditure in defending his employee the assessee would be protecting his own business interest by defending the employee. The expenditure in such a situation shall be wholly and exclusively incurred for the purposes of the business. In the case cited the assessee was a private limited company and was a partner in a firm represented by its managing directors. There was an FIR against the firm as also against the individual partners that they had committed an offence under the Essential Commodities Act. The assessee incurred expenditure in defending its managing director. The Court held that the managing director of the assessee-company stood in the same position as the agent or employee of an assessee to the limited extent to which the allegations contained in the FIR were against him. According to the Gujarat High Court, in trying to defend its managing director, the assessee was defending its own name as an upright business organisation. Therefore, the amounts spent were allowed. Similarly, in Lakshmiji Sugar Mills Co. (P) Ltd. vs. CIT (supra), the expenditure was incurred by the assessee- company for the defence of its director and its employees against the criminal charges of offering bribe. The amount so spent was held to have been incurred to protect the good name of the business because the prosecution has emanated from an act which took place in the ordinary course of business. Lastly, the assessee's learned counsel relied on the judgment of this Court in Parshva Properties Ltd. vs. CIT (supra).
(3.) LEARNED counsel for the Revenue heavily relied upon the Tribunal's observation. It is submitted that the society, despite its high objectives is, in fact, a cult organisation and is also known as such. It was emphasised that the circumstances in which the Marga Guru and the executive members face trial in the criminal Court per se show that there was something essentially wrong with the course of activities and the manner of functioning of the society. Therefore, the Tribunal was not incorrect in saying that in the context of the high precepts of social and philosophical morality for which the society avowedly exists, the occasion for criminal prosecution in such circumstances cannot arise. Therefore, it cannot be said that the prosecutions were merely coincidental to the course of the assessee's functioning for the noble purposes for which it purports to exist. Therefore, the expenditure incurred by the society is nothing but for the personal benefit of the Marga Guru and his prominent aides who also stand in the position of trustees. The true nature of the expenditure incurred is an aberration of the proclaimed objects of the assessee- society and is disallowable on that ground; it also attracts the mischief of s. 13(1)(c) disqualifying the society from the exemption in its entirety. According to learned counsel for the Revenue, the principles in the decisions cited could have applied if it could have been shown that the criminal proceedings arose or emanated directly from the course of carrying out the objects of the trust. It is also pointed out that the FIR showed that there was internal dissension in the organisation of the society. It is undeniable that some of the disciples defected and proved to be rebels against Marga Guru and the self-same dissenters happened to be the victims of the crime. The charge of murder emanating from such circumstances cannot be said to be either prima facie groundless or a direct incident of the assessee's course of the activity for the noble purpose of social and moral uplift of the people and society at large.;