1981 (1) TMI 26 - HC - Income Tax

Trust entitled to tax exemption for charitable purposes; actual spending required, not just book entries.

The court affirmed that the trust was entitled to exemption under Section 11 for income applied to charitable purposes, subject to specified conditions. ... Charitable Purpose Issues Involved:1. Validity and scope of the original trust deed and supplementary deed.2. Binding nature of the decree in C.S. No. 90 of 1961 on the Revenue.3. Application of income for charitable purposes under Section 11 of the Income-tax Act, 1961.4. Whether mere crediting of income amounts to application under Section 11.5. Timeliness of the application of income for claiming exemption under Section 11.6. Specific exemption entitlement for the assessment year 1968-69.Issue-wise Detailed Analysis:1. Validity and Scope of the Original Trust Deed and Supplementary Deed:The original trust deed dated March 1, 1954, established the Thanthi Trust with purposes including establishing the Dina Thanthi newspaper, disseminating news, and maintaining the newspaper in an efficient condition. Clause 3(j) allowed the founder to confer additional powers for proper administration, while Clause 3(k) provided for the use of trust properties for charitable purposes if the newspaper ceased publication. The supplementary deed dated June 28, 1961, directed surplus income towards educational and charitable purposes. The Tribunal held that the founder had no power to modify the trust objects under general trust law, but the decree in C.S. No. 90 of 1961 created a legal obligation to spend surplus income on charitable objects.2. Binding Nature of the Decree in C.S. No. 90 of 1961 on the Revenue:The Tribunal found that the decree in C.S. No. 90 of 1961, which mandated the trustees to use surplus income for specified charitable purposes, created a legal obligation. The Revenue contested the binding nature of this decree, arguing it was rendered in a friendly action and was not binding on them. However, the court concluded that the decree was a judgment in rem, binding on all parties, including the Revenue, as it involved the administration of a public charitable trust.3. Application of Income for Charitable Purposes under Section 11:Section 11 of the Income-tax Act, 1961, exempts income from property held under trust for charitable purposes. The Tribunal held that the entire business was held in trust for the charitable objects mentioned in the schedule to the decree in C.S. No. 90 of 1961. The Supreme Court's decision in Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association was cited, emphasizing that carrying on a business for charitable purposes does not disqualify a trust from exemption under Section 11.4. Whether Mere Crediting of Income Amounts to Application under Section 11:The Tribunal held that mere crediting of amounts in the trust's books in favor of the Adityanar College of Arts and Science did not amount to application of income for charitable purposes under Section 11. The court emphasized that actual application or spending of income is required for exemption. However, if the credited amounts were withdrawn and utilized by the college, it could be considered proper application.5. Timeliness of the Application of Income for Claiming Exemption under Section 11:The Tribunal ruled that the application of funds for charitable purposes must occur within the relevant accounting year if the assessee maintains accounts on a cash basis. The court agreed with this interpretation, emphasizing that timely application of income is necessary for claiming exemption under Section 11.6. Specific Exemption Entitlement for the Assessment Year 1968-69:For the assessment year 1968-69, the Tribunal found that Rs. 3,04,035 had been actually paid to the Adityanar Educational Institution and should be treated as exempt from tax. The court upheld this finding, concluding that the trust was entitled to exemption for the amount actually spent on charitable purposes during the relevant year.Conclusion:The court affirmed the Tribunal's findings that the trust was entitled to exemption under Section 11 for income applied for charitable purposes, subject to the conditions and limitations specified. The mere crediting of amounts in the trust's books did not constitute application unless followed by actual spending. The decree in C.S. No. 90 of 1961 created a binding legal obligation on the trustees to utilize surplus income for specified charitable purposes.