TaxTMI 
TaxTMI 
2012 (6) TMI 656
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....rendered in Mallick Somnath Charitable Trust v. CIT (1986) 160 ITR 3, the trust would be regarded as non-charitable. 1.1. Before us, the learned Sr. Counsel for the assessee submitted that the trust was formed in the year 1928 and is registered with Charity Commissioner. He referred to the trust deed contained at Pages-2 to 13 of the paper book. He submitted that in the trust deed, it is mentioned that the 5 Government of India stock 3½% of the face value of Rs. 2,00,000, under the certificate no. B0315, was transferred into the joint name of the parties mentioned in the indenture being Manockjee Cowasjee Petit and Nasserwanji Dady Dadyset, Furdunji Cowasji Petit, Bai Mithibai widow of Merwanji Dhunjibhoy Jeejeebhoy, Bai Virbaiji widow of Nusserwanji Muncherji Cama, Bai Soonubhai wife of Jehangirji Framji Batliboi and Cowasji Hormusji Petit. He further submitted that no benefit has ever been taken by settlor's family. Learned Sr. Counsel submitted that the first reason is that there was no transfer of asset to the trust. In this regard, learned Sr. Counsel submitted that the main objection was that the income was to be paid to the settlor. Learned Sr. Counsel in this ....
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.... with the issue that when you create a trust, property must be in existence. He submitted that, in the present case, the property was in existence as noted in the indenture itself. Further, he submitted that the judgment of Hon'ble Madras High Court relied upon by the Commissioner in CIT v. G.D. Naidu Industrial Education Trust (1942) 10 ITR 358 , deals with the issue whether the trust was charitable trust or not and not whether the trust was valid. He submitted that neither of the two cases referred to by the Commissioner support the reasoning given by the Commissioner. As regards the second reason given by the Commissioner, learned Sr. Counsel submitted that while granting registration, it is not relevant to examine whether the trust is a family trust or public trust. This aspect assumes importance at the time of assessment while allowing exemption under section 11. He submitted that, at the time of assessment, it is to be examined whether the amount was actually paid or not to the beneficiaries who are family members. Learned Sr. Counsel submitted that since it is a trust created in the year 1928, therefore, restrictions contained under section 13(l)(b) did not apply. Learne....
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....llick Somnath Charitable Trust (supra), is not applicable to the facts of the case inasmuch as the trustee spent the entire income of the trust for the support and maintenance of the relations of the settlor which were poor and indigent without exercising any preference. The poor relations of the settlor had been made direct recipients of the benefit of the trust. Thus, he submitted that the poor relatives are the only beneficiaries and not by way of preference. Learned Counsel further submitted that even other wise this benefit to relatives is outside the scope of registration. He submitted that the provisions of section 13(l)(c) can be examined only at the time of assessment and in case of non-compliance the income to that extent can be treated as income of the trust. Learned Counsel, therefore, submitted that the Commissioner be directed to grant registration from the date of application as it is not a case of family trust. 3. Learned Departmental Representative supported the order of the Commissioner and submitted that the property had not absolutely been transferred to the trust. He submitted that the direction in the trust deed regarding income to be given preferably to fa....
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....concerned, the Commissioner reached his conclusion after examining the indenture, wherein, at point no. 3, it is mentioned as under:- "3. Subject to the forgoing clause the said trustees shall pay the said interest and income to the Settlor for and during his life and down to his death." We do not find any substance in this reasoning. According to section 3 of Indian Trust Act, 1882, a trust is an obligation annexed to the ownership of the property and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him, for the benefit of another or of another and the owner. In the present case, the subject matter of the trust is Government of India subscribed stock of 3½% of the face value of Rs. 2,00,000, which were transferred into the joint names of the trustees. This is evident from Pages-1 and 2 of indenture. The interest from this stock was to be paid to the settlor during his life time and, thereafter, the amount was to be applied towards various charitable acts including relief or aid to poor or indigent or infer or helpless Parsee who may be in temporary monitory distress. Further, there are other clauses also for utilizing ....
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....nies, the deed did not create a trust only for charitable purpose. The idea that some day the institution contemplated by the deed might be founded was not sufficient compliance. We do not find any similarity in the facts with the present case. In view of the above discussion, we cannot subscribe to the view taken by the Commissioner. The second reason given by the Commissioner is that it is a case of private trust or family trust because preference is to be given to lineal descendent of Cowaji Depshawji Patel, and such lineal descendent to those connected with him in the direct male line and partly through female line or wholly through the female line and to those who may be more nearly related to him over those who may be more remotely so related. We find that this issue is squarely covered by the following judgments:- Trustees of Charity Fund v. CIT (1959) 36 ITR 513 (SC); CIT v. Trustees of Seth Meghji Mathuradas Charity Trust (1959) 37 ITR 419 (Bom.); and CIT v. Moosa Haji Ahmad (1964) 52 ITR 147 (Guj.). In all the above judgments, it has been held that mere preference to settlors family does not affect the public charitable nature of the trust. I....
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....r the Parsees or to any charitable institution or institutions for the Parsees having for its or their object the alleviation of physical or mental disease or suffering or the care maintenance protection or relief of old infirm blind or maimed or otherwise diseased members of the Parsee community or Parsee orphans to the intent and on condition however that every such donation or subscription or its income shall be used and shall be used and employed towards one or other of the objects aforesaid and no other purpose whatsoever. (d) In such other charitable acts and purposes for the Parsees generally as to the said trustees may seem fit having regard to them prevailing times and circumstances. Provided always that in the giving or distribution or allocation of any relief and the payment of any allowance or other sums towards any of the charitable purposes aforesaid preference shall be given in all competing cases to the lineal descendants of Cowasji Dinshawji Petit the father of the Settlor and amongst such lineal descendants to those connected with him in the direct male line over those connected with him partly through the male line over those connected with him ....
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.... Pal Rao (Judicial Member) On perusal of the order of the learned brother and after giving my deep thought on the issue involved reasoning and conclusion of the ld. AM, I find myself unable to concur and agree with the view and findings of the ld. AM. 2. Though, some of the facts of the case are discussed in the order of the ld. brother AM; however, the relevant facts are being reproduced hereunder wherever it is necessary for discussion of the issue. 3. At the time of registration u/s 12AA, the Commissioner has to satisfy himself about the genuineness of the activities of the Trust/institution and also about the objects of the trust/institution. On being satisfied about the genuineness of the activities of the trust/institution and also about the objects of the trust/institution, the Commissioner would either grant the certificate or would reject the prayer. It is settled proposition of law that Commissioner while considering the application for registration shall restrict the enquiry to the examination as to whether the assessee is actually in the activities which are genuine. The genuineness of the activities of the trust/institution has to be seen, keeping in mind the ....
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....ome towards and in the following charitable acts and purposes in such proportions and in such manner and subject to such conditions as the said trustees may in their absolute discretion think fit, namely: (a) In providing relief or aid to poor or indigent or maimed or infirm or helpless Parsis or who may be in temporary monetary distress or unable to maintain themselves or their family or children or in defraying the expenses of or in supplying medicine or medical aid or physical relief in any form to any poor or helpless Parsis Provided always that such relief may be given by supplying monetary aid or aid in kind or in any other shape or form of eleemosynary relief and either by monthly or other periodic allowances or in lum sums or by providing other means of relief and the same may be either continuous or interrupted. (b) In providing means or assistance for acquiring primary, secondary or higher education or technical or commercial or industrial education or in providing instruction in any particular business profession calling handicraft manufacture, manufacturing process or industry or art to poor or indigent Parsis or in placing or introducing them in any p....
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....gement of the said trust funds to the Settlor during his life without any interference or supervision on their part and shall not be liable in any way for any loss depreciation or damage that may occur or arise in consequence or during the course of such management." 5. The word 'charitable purpose' has been defined u/s 2(15) of IT Act as under: "Chartable purpose" includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or laces or objects of artistic or historic interest and the advancement of any other object of general public utility. Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or applicable, or retention, of the income from such activity. Provided further that the first proviso shall not apply of the aggregate value ....
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.... and down to his death. 11. Clause 4 talks about the utilization of the income of the trust after the death of the Settlor for providing relief or aid to poor or indigent or maimed or infirm or helpless Parsis. 12. Sub-clauses (b) & (c ) of clause 4 further provide the means or assistance and aid for which such relief has to be given but only for the person of Parsis's community. All these objects as contained in clause '4' are subject to the provision below clause 4 which set out the relief and the payment of any allowance with the preference to be given in all competing cases to the lineal descendants of the father of the Settlor. As per this proviso in the case of relief or assistance such lineal descendants to those connected with him in the direct male line shall be given preference over those connected with him partly through male line and partly through female line or wholly through female line. Thus, income/funds of the trust were available in the order of preference as provided in the proviso to clause 4. The trustee has discretion subject to the clauses 2, 3 & 4 and further subjected to clause 10 of the trust deed to the selection of persons deserving of....
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....the assessee for registration u/s 12A/12AA of the IT Act. REFERENCE UNDER SECTION 255(4) OF THE INCOME TAX ACT, 1961 There is a difference of opinion between the Hon'ble Members of the Bench on the following issue :- "Whether in the facts and circumstances of the case, Director of Income Tax (Exemption) (Mumbai) had erred in not registering the assessee's institution u/s. 12AA of the Income Tax Act, inter alia, on the ground that indenture of the assessee Trust is not charitable." The above issue is, therefore, referred u/s. 255(4) of the Income Tax Act, 1961 to the Hon'ble President of the Income Tax Appellate Tribunal for referring the case to a Third Member. THIRD MEMBER ORDER R. S. Syal (Accountant Member) (AS A Third Member) The following point of difference has been referred to me by the Hon'ble President u/s. 255(4) of the Income-tax Act, 1961 :- "Whether on the facts and circumstances of the case, Director of Income Tax (Exemption) (Mumbai) had erred in not registering the assessee's institution u/s 12AA of the Income Tax Act, inter alia, on the ground that indenture of the assessee Trust is not charitable?" 2. The ....
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.... to the trust and hence it could not be considered as a charitable trust. In order to evaluate the view point of the learned CIT it is imperative to note the relevant clauses of the trust deed, which read as under:- 1. The charitable trusts hereby constituted shall be always known by the name of "The Manockjee Cowasiee Petit Charities" and the funds for the time being subject to these presents shall always be designated "The Manockjee Cowasiee Petit Charity Funds". 2. The said Trustees shall (subject and without prejudice to clause ten hereof) collect and get in the interest dividends and other the income of the said trust funds and shall from and out of the same pay in the first place all the proper costs, charges and expenses of and incidental to the collection or realization thereof and the costs and expenses of the management and administration of the said trust funds and the said interest and income including the costs of appointment from time to time of new trustees of the said trust funds and of these presents as occasion may require. 3. Subject to the foregoing clause the said trustees shall pay the said interest and income to the Settlor for and ....
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....e used and employed towards one or other of the objects aforesaid and no other purposes whatsoever. (d) In such other charitable acts and purposes for the Parsis generally as to the said trustees may seem fit having regard to the then prevailing times and circumstances. Provided Always that in the giving or distribution or allocation of any relief and the payment of any allowance or other sums towards any of the charitable purposes aforesaid preference shall be given in all competing cases to the lineal descendants of Cowasji Dishawji Petit the father of the Settlor and amongst such lineal descendants to those connected with him in the direct male line over those connected with him partly through the male line and partly through the female line or wholly through the female line and to those who may be more nearly related to him over those who may be more remotely so related. 5. The said trustees shall subject as aforesaid have absolute discretion as to the selection of persons deserving of any relief support or assistance under any of the provisions hereof and as to the mode of distribution and application of such relief or assistance. 6. The sai....
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....damage that may occur or arise in consequence or during the course of such management. [Emphasis supplied] 4. The learned Departmental Representative vehemently argued that as per clause (3), the trustees were required to pay the interest and income to the Settlor during his life and down to his death. He further stated that by virtue of clause (10), the settlor continued to retain possession of ownership over the trust funds and income resulting there from during his life time. He mainly relied on clause (10) of the deed by which the settlor having the cap of managing trustee had the full power to collect interest income from the trust property and manage the trust funds without any intervention by the trustees. It was argued that clause (10) has an overriding effect on the other clauses including clause (4) of the trust deed, which in turn, deal with the charitable objects. It was therefore, argued that the settlor during his life time and thereafter his relatives were entitled to the benefits of trust and there was no effective divesting of the trust property. All these submissions were countered on behalf of the assessee. 5. Clause (1) of the trust deed refers to its name....
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....-tax Act, 1961 defines 'charitable purpose' as including 'relief of the poor, education, medical relief...., and advancement of any other object of general public utility'. Therefore, it becomes abundantly clear that during the lifetime of the settlor, there was nothing like a charitable trust because it was the settlor who was to receive the entire income either through trustees or himself directly and further there was no provision for the application of income for any charitable purpose. 7. Clause (4) of the trust deed indicates that 'after the death of the settlor' the trustees shall apply the trust income for charitable acts and purposes. Charitable purposes have been set out in sub-clauses (a) to (d) of clause (4), being providing relief to the poor or indigent or maimed or helpless Parsis in the shape of medical relief or education assistance or subscription to any educational institutions for the Parsis or any other charitable acts for the Parsis. Proviso to clause (4), which has become the bone of contention, states that "in all competing cases'" the preference shall be given to the lineal descendants of the father of the settlor and amongst ....
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....elp in respect of such defined charitable purpose, that he shall have preference over the general Parsis unrelated to the settlor. In my considered opinion, the learned Departmental Representative was not correct in inferring from clause (4) read with its proviso that only when the trust funds are utilized for the benefit of lineal descendants of the settlor that the amount, if any, remaining shall be distributed amongst the general poor Parsis. If this argument is taken to a logical conclusion that the trust income shall be applied for the benefit of lineal descendants of the settlor de hors the charitable purpose, then there will remain nothing with the trust for distributing amongst the general Parsis as the entire amount would be pocketed by such lineal descendants of the father of the settlor. The further contention of the learned Departmental Representative that clause (4) of the trust deed is also subject to clause (10) is also sans merit for the reason that it is only clause (2) which is subject to clause (10) and that too during the lifetime of the settlor. Clause (4) which contains the objects of the trust no where makes itself subordinate to clause (10). Further this hyp....
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....ust property. As the settlor had expired many decades ago and the trust property vested with and was being utilized for the advancement of the charitable objects by the trust, such a view is not capable of acceptance. 9. The other objection taken by the learned CIT for refusing the registration is that the assessee is a private or family trust. In reaching this conclusion he observed that clause (4) granted preference to the lineal descendants of the father of the settlor. In that view of the matter it was opined that the elements of public trust were missing. The ld. DR reiterated the view of the ld. CIT for bolstering his submission that it was a case of family trust. I am not impressed with this submission put forth on behalf of the Revenue. A family trust is a trust set up for the benefit of the members of the family of the settlor. In a family trust the beneficiaries normally include every member of the settlor's family including the possible future family members such as future grandchildren also. There is nothing like any public charitable activity done in family trusts as the very object of the family trust is to transfer the assets to the trust so that the trust hol....
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....s year of the person in receipt of income. Further, income in the form of corpus donations has also been mandated as not includible in the total income. Thus, whereas income derived from property held under trust has to be necessarily applied to charitable or religious purposes in India in the year of receipt or in the alternative to be accumulated as per limits, there is no such requirement in respect of corpus donations. Section 12 with the marginal note -Income of trusts or institution from contributions - provides that any voluntary contributions (other than corpus donations) received by a trust created wholly for charitable or religious purposes shall be deemed to be income derived from property held under trust as per section 11. Thus the non-corpus voluntary donations, by virtue of the deeming provision in section 12, assume the character of income derived from property to be applied in the year of receipt or accumulated as per the specified limit so as to qualify for exemption. These two sections therefore, enable an assessee to claim exemption in the given circumstances. On a conjoint reading of sections 11 and 12, it transpires that whereas corpus donations are exempt u/s....
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.... the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed. It is thus manifest that in order to claim exemption of income u/s 11 and 12 as reduced by that u/s 13, it is sine qua non that, inter alia, the trust must be registered u/s 12AA. The sequence of events is thus evident that the person claiming exemption must firstly apply for and get the trust or institution registered u/s 12AA, then return is filed for the relevant previous year and on the basis of such registration and other relevant factors, the AO considers the applicability or otherwise of sections 11, 12 and 13. 13. It can thus be seen that whereas the registration is granted by the Commissioner only once, which remains valid unless cancelled by the Commissioner under sub-section (3) of section 12AA, the act of granting actual exemption on year to year basis is done by the AO. The AO has no jurisdiction in the matter of granting or refusing registration. In the like manner, the Commissioner has no jurisdiction in granting exemption on year to year. 14. In the present appeal the issue is concern....
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....activities of the trust and after satisfying himself about the objects of the trust or institution and the genuineness of its activities shall grant registration. Only if he is not satisfied with the objects of the trust and the genuineness of its activities, he shall pass an order in writing refusing to register the trust. In order to grant registration, the CIT has to satisfy himself about two things viz., first, the objects of the trust and second, the genuineness of its activities. Obviously the objects of the trust can be gone examined from the trust deed and the decision as to the genuineness of its activities is possible only after consideration of the relevant documents or information or on making of needful inquiries in this regard. 16. The learned CIT has relied on the judgment of the Hon'ble Calcutta High in Mallick Somnath Charitable Trust (supra) to canvas the view that where a relative of a settlor obtains any benefit even by way of preference, the entire trust deed would be regarded as non-charitable. It can be seen from the facts of that case that the trustees therein were to spend the entire income of the trust for the support and maintenance of the relative....
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....nsfer entry in the books of account. In that case there was no divesting of the property in favour of trust in the year in question. It was under such circumstances that the Hon'ble Madras High Court held that mere credit to the donation reserve account was not sufficient for granting exemption u/s 11 as the actual application of income in the relevant previous year was necessary to claim relief u/s 11(1). Again this case is found to be of no assistance to the Revenue insofar as the facts of the present case are distinguishable. In the present case the settlor expired several decades ago and after his death, the trust property vested in the name of the trust and income there from was being continuously utilized for the benefit of general Parsis in need of help. This case is also, therefore, does not justify the refusal of registration. Similar is the position with the last case considered by the learned CIT in G.D. Naidu Industrial Educational Trust (supra ). In that case the deed provided that the contemplated institution was not to be brought into being immediately and that the companies in which the settlor was interested were to have the benefit of these assets set apart by....
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.... Hon'ble Bombay High Court in Trustees of Govardhandas Govindram Family Charity Trust (supra) that the said trust was considered as a private trust with the primary object of the settlor to benefit the members of the family. Thus it is clear that this case does not advance the view point of the learned Departmental Representative. 19. It is interesting to note the judgment of the Hon'ble jurisdictional High Court in Trustees of Seth Meghji Mathuradas Charity Trust (supra ) in which case trust was created for charitable purposes with a proviso that in carrying out the charitable intentions, the trustees shall always prefer the members of the settlor's caste and further preference to the members of his family and relatives. Exemption from income was denied on the ground that the relatives of the settlor were entitled to preference in carrying out the charitable intentions. Rejecting this view point, the Hon'ble Bombay High Court held that the property was held under trust wholly for religious or charitable purposes, and the income there from was exempt from taxation. Similar view has been taken in Moosa Haji Ahmed ( supra). In this case also the trust was created w....
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....ore him for the last three years, failed to point out any single instance in which the income of the trust was not utilized for the charitable purposes set out in the trust deed or the money was applied for the lineal descendants of the father of the settlor. Even if any amount is actually spent on the relatives of the settlors, then there is section 13(3) enabling the AO to refuse exemption u/s 11 read with section 13 to that extent and that too in the year in which such amount is spent. It cannot be a reason to refuse registration u/s 12AA. As such it is noticed that both the conditions u/s 12AA warranting the registration of the trust, are fully satisfied in the present case. In my considered opinion the learned CIT was not justified in refusing the registration from the assessment year immediately following the financial year in which such application was made. I, therefore, answer the question in affirmative by holding that the Director of Income Tax (Exemption) (Mumbai) erred in not registering the assessee's institution u/s 12AA of the Income Tax Act. 23. For the foregoing reasons I agree with the view expressed by the learned Accountant Member. The registry of the Tr....