1981 (4) TMI 75 - HC - Income Tax

Trust income used for charity qualifies under Income-tax Act; trustees as representative assessees. Assessee awarded costs.

The High Court held that the income derived by the assessee from property held under trust was applied wholly for charitable purposes under section ... Section 11(1)(a) exemption for income derived from property held under trust wholly for charitable purposes - Application of income for charitable purposes through donation to another charitable trust - Permissibility of donor-trust transferring income to donee charitable institution - Section 12(2) - treatment of voluntary contributions between charitable trusts as indicating parliamentary recognition of transfers between charities - Representative assessee liability under section 161(1)Section 11(1)(a) exemption for income derived from property held under trust wholly for charitable purposes - Application of income for charitable purposes through donation to another charitable trust - Section 12(2) - treatment of voluntary contributions between charitable trusts - Whether income of the assessee-trust which is handed over by way of donation to another trust established for charitable purposes can be regarded as 'applied' for charitable purposes so as to attract exemption under section 11(1)(a). - HELD THAT: - The Court held that a trust which holds property wholly for charitable purposes may either apply the income directly to charitable objects or donate that income to another trust or institution established for charitable purposes, and such a donation will, as a general rule, constitute an 'application' of the income for charitable purposes within the meaning of section 11(1)(a). The Court noted that nothing in the statute or its scheme requires the trustees to themselves carry out charitable activities; the settlor may direct that income be passed to another charitable body. Section 12(2) was invoked as statutory indication that transfers between charitable trusts are contemplated and treated for the purposes of section 11, subject to the safeguard that relief will not be available where the donor-trust knows or ought to know that the recipient will misapply the funds. The Court also relied on the reasoning in IRC v. Helen Slater Charitable Trust Ltd. to the effect that an intra vires outright transfer of money applicable for charitable purposes to another distinct charitable body will normally amount to an application by the donor, unless there is knowledge of misapplication. The Tribunal's finding that the assessee had, for the relevant period, an obligation to hand over net income to the HCJ Trust and that the HCJ Trust's objects were charitable supported the conclusion that the income was applied for charitable purposes so as to attract exemption under section 11(1)(a), subject to the ITO's directed verification of actual application or accumulation by the HCJ Trust.Income handed over by the assessee-trust to another trust established for charitable purposes is, as a general rule, an application of income for charitable purposes and qualifies for exemption under section 11(1)(a), subject to inquiry if misapplication is suspected.Representative assessee liability under section 161(1) - Liability to assessment 'in like manner and to the same extent' as the beneficial trust - Whether the trustees of the assessee-trust are liable as representative assessees under section 161(1) in respect of income received for the benefit of the HCJ Trust. - HELD THAT: - The Court held that the facts show the assessee-trust was receiving income for the benefit of the HCJ Trust and that the trustees of the assessee-trust fell within the scope of representative assessees envisaged by section 161(1). Consequently, for the purposes of determining any liability to tax, the provisions of section 161(1) would be attracted so that tax, if any, could be levied and recovered from the trustees 'in like manner and to the same extent' as it would be leviable on the HCJ Trust. The Court observed that this question of representative assessment and the actual extent of tax liability would depend on the ascertainment of how much of the income was applied or accumulated for charitable purposes by the HCJ Trust, a matter the Tribunal had directed the ITO to verify.The trustees of the assessee-trust are liable as representative assessees under section 161(1) and tax may be levied upon them in like manner and to the same extent as it would be leviable upon the HCJ Trust.Final Conclusion: Both questions referred were answered in favour of the assessee: (i) donations of income by a trust holding property wholly for charitable purposes to another trust established for charitable purposes will, as a general rule, constitute application of income for charitable purposes and attract exemption under section 11(1)(a) (subject to safeguarding against known misapplication); and (ii) the trustees are liable as representative assessees under section 161(1), so that any tax liability is to be determined and enforced in the manner provided by that provision. The assessee was awarded costs. Issues Involved:1. Whether the income derived by the assessee from property held under trust can be said to be applied wholly for charitable purposes as contemplated under section 11(1)(a) of the Income-tax Act, 1961.2. Whether the provisions of section 161(1) of the Income-tax Act, 1961, would become applicable.Issue-wise Detailed Analysis:Issue 1: Application of Income for Charitable Purposes under Section 11(1)(a)The primary question was whether the income derived by the assessee from the property held under trust can be said to be applied wholly for charitable purposes as contemplated under section 11(1)(a) of the Income-tax Act, 1961. The relevant provision of section 11(1)(a) states that income derived from property held under trust wholly for charitable or religious purposes is exempt from tax to the extent it is applied to such purposes in India. The key term 'applied' means devoted to or employed for the special purpose of charitable activities.The assessee-trust, Jadi Trust, created by a trust deed dated 5th March 1968, settled shares of certain companies upon trust. The net income of the trust was to be made over to the HCJ Charitable Trust for utilization in charitable purposes. For the assessment years 1969-70 and 1970-71, the assessee-trust made donations to the HCJ Trust, which was undisputedly a charitable trust.The Income Tax Officer (ITO) rejected the claim for exemption under section 11, arguing that the income was not applied directly by the assessee-trust for charitable purposes but was instead given to another trust. The Appellate Assistant Commissioner (AAC) upheld this view, stating that the donation did not amount to an application of income for charitable purposes.The Tribunal, however, found that the objects of the HCJ Trust constituted charitable purposes under section 2(15) and section 11 of the Act. It held that the trust deed created twin trusts: one requiring the trustees of the Jadi Trust to pay the income to the HCJ Trust and the other requiring the HCJ Trust to spend the income on charitable purposes. The Tribunal concluded that the property of the assessee-trust was held wholly for charitable purposes and directed the ITO to ascertain how much of the income was applied to charitable purposes through the HCJ Trust.The High Court agreed with the Tribunal, emphasizing that there is nothing in law preventing a trust from donating its income to another trust for charitable purposes. The Court referenced section 12 of the Act, which indicates that a trust can make voluntary contributions to another trust, and such contributions would be treated as income derived from property for the purposes of section 11. The Court also cited the case of IRC v. Helen Slater Charitable Trust Ltd., which supported the view that transferring funds to another charitable trust amounts to an application of income for charitable purposes.Thus, the Court held that the income derived by the assessee from property held under trust was applied wholly for charitable purposes as required by section 11(1)(a).Issue 2: Applicability of Section 161(1)The second issue was whether the provisions of section 161(1) of the Income-tax Act, 1961, would become applicable. Section 161(1) provides that the tax shall be levied upon and recoverable from the representative assessee in like manner and to the same extent as it would be leviable upon the person represented.The Tribunal had held that the trustees of the assessee-trust were representative assessees under section 160(1)(iv) because the income was received by the trustees on behalf of the HCJ Trust. Consequently, the provisions of section 161(1) would apply, meaning the tax, if any, would be leviable upon the assessee in the same manner and to the same extent as it would be upon the HCJ Trust.The High Court concurred with this view, stating that the assessee-trust was receiving income for the benefit of the HCJ Trust, thus attracting the provisions of section 161(1). The Court noted that the ITO was directed to ascertain whether the income given as a donation to the HCJ Trust was applied to charitable purposes, which would determine the extent of the exemption under section 11.Conclusion:The High Court answered both questions in the affirmative and in favor of the assessee. The income derived by the assessee from property held under trust was applied wholly for charitable purposes under section 11(1)(a), and the provisions of section 161(1) were applicable. The assessee was entitled to the costs of the reference.