1971 (12) TMI 8 - HC - Income Tax

Trust's Other Property Income Qualifies for Tax Exemption

The court held that income from properties other than the original dharamshala property and 25% of trust property qualified for tax exemption under ... Trust – object of the trust was establishment of Hindu dharamshala - the use of the trust money in the construction of the new dharamshala – immovable properties acquired out of the accumulated income - it was not an investment of trust fund but it was expenditure in furtherance of the trust objective - whole of the net surplus income of the trust properties was, therefore, clearly applied to the charitable purposes for which the trust properties were held by the trustees and was accordingly exempt from tax under section 11, sub-section (1), clause (a) Issues Involved:1. Whether the income from property other than the original dharamshala property and 25% of trust property in general qualified for exemption under section 4(3)(i) of the Indian Income-tax Act, 1922.2. Whether the use of trust money in the construction of a new dharamshala is an investment of trust fund or its expenditure in furtherance of the trust objective.3. Whether the assessee is entitled to any exemption under section 11 of its income earned during the accounting period relevant to assessment years 1962-63 and 1963-64.Issue-wise Detailed Analysis:Issue 1: Exemption of Income from Property Other than Original Dharamshala Property and 25% of Trust PropertyIt was determined that the dominant object of the trust was to establish a dharamshala for Hindus. The trust property, including the dharamshala, was held wholly for charitable purposes. The trustees accumulated a significant portion of the net income and invested it in immovable properties. These properties were considered part of the trust and were held for charitable purposes. Therefore, the income from these properties was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922. Furthermore, clause 7 of the trust declaration mandated that 25% of the net income be deposited or invested as a reserve fund for emergencies related to the trust's main object. The court rejected the revenue's argument that this clause allowed for non-charitable use, affirming that the emergency referred to was connected to the trust's charitable purposes. Consequently, 25% of the net income was also exempt from tax.Issue 2: Use of Trust Money in Construction of New DharamshalaThe court examined whether the expenditure on constructing a new dharamshala was an investment or an application of income for charitable purposes. The Tribunal had previously held that this expenditure was an investment. However, the court rejected this view, stating that the construction of a new dharamshala was a charitable purpose in line with the trust's objectives. The court emphasized that the application of income for charitable purposes could include capital expenditure if it furthered the trust's charitable objects. Therefore, the use of trust money for constructing the new dharamshala was deemed expenditure in furtherance of the trust objective, not an investment.Issue 3: Entitlement to Exemption under Section 11 for Assessment Years 1962-63 and 1963-64Section 11(1)(a) of the new Income-tax Act exempts income derived from property held under trust for charitable purposes, provided it is applied to such purposes. The trustees argued that the surplus income was used to construct the new dharamshala, thus applying it to charitable purposes. The Tribunal initially found that the new dharamshala was built from past income accumulations, not the income of the relevant years. The court, however, concluded that the entire net surplus income of the relevant years was indeed used for the construction, based on the balance sheets and the absence of any contrary evidence. The court also dismissed the revenue's argument that only 25% of the net income could be used for construction, noting the dominant charitable intent of the trust. Thus, the entire net surplus income applied to the construction was exempt from tax under section 11(1)(a).Conclusion:1. Income from property other than the original dharamshala property and 25% of trust property in general qualified for exemption under section 4(3)(i) of the Indian Income-tax Act, 1922.2. The use of trust money in constructing the new dharamshala was expenditure in furtherance of the trust objective, not an investment.3. The assessee was entitled to exemption under section 11 for the income earned during the relevant assessment years.