TaxTMI 
TaxTMI 
2012 (12) TMI 211
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....ITA No.722/2007 only question No.(a) has been framed. 3. The respondent - assessee in all these appeals is the Mehta Charitable Prajanalay Trust. It was created by a trust deed drawn up on 08.09.1971 by B. D. Mehta, partner of the firm M/s. Bishan Das Girdharilal and Raj Kumar Mehta, S/o. B. D. Mehta, partner of M/s. Raj Kumar & Sons Co. These are the two founder - trustees. They settled an amount of Rs. 2,200/- upon trust. Admittedly, this is the only property settled on the trust. The trust deed set out the objects of the trust which included the establishing and maintaining of schools, colleges and study circles, advancing education and research study on the modern and ancient Indian thought, providing for mental, moral and spiritual development, imparting real education, laying the foundations of high class character, inculcating the spirit of nationalism and patriotism, arranging for interpretation of ancient Hindu literature, preparing and publishing text books, providing food, clothing, shelter and medicines to needy persons, running of medical dispensaries, hospitals, etc. Clause 19 of the trust deed provided that the trust may "carry on any business for and on behalf or....
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.... exemption was not available. To this extent his view was the same as the view of his predecessor for the assessment year 1989-90. However, he proceeded to examine the case in the light of the judgment of the Madras High Court in the case of Thanthi Trust v. CBDT, [1995] 213 ITR 639 and held that the business was held under trust and therefore the provisions of Section 11(4) applied to the exclusion of Section 11(4A) of the Act. In short, he held that it was a case of property (i.e. the business undertaking) being held under trust in accordance with Section 11(4) of the Act. He accordingly directed the assessing officer to allow the exemption. 6. In respect of the assessment year 1992-93, which is the first assessment year with which we are concerned in the present batch of appeals, the assessee filed its income tax return on the same basis claiming exemption under Section 11 of the Act. In the assessment made under Section 143(3) of the Act, the assessing officer held, following his predecessor's view, that the business was carried on not by the assessee - trust, but by the Board of Directors of the company who are managing the business. He, therefore, held that the provisions ....
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....as per the trust deed were undoubtedly charitable, clauses 19 and 20 which permitted the trust to carry on any business and to borrow monies from banks, individuals, financial institutions and business houses are not really the objects, but were clauses stipulating the powers of the trustees. Having thus made a distinction between the objects and powers, the CIT (Appeals) proceeded to examine Section 11(4A) vis-à-vis Section 11(4) of the Act. He held that the amended provisions of Section 11(4A) would apply from the assessment year 1992-93 onwards, and the effect of the amendment was that the benefit of exemption under Section 11 of the Act was not available to the income arising from profits and gains of business unless the business is incidental to the attainment of the objects of the trust and separate books of accounts are maintained by the trust in respect of the business. He held that there was no dispute that separate accounts were maintained in regard to the business. With regard to the main contention of the assessee that the Section 11(4A) of the Act did not have any application to the assessee's case because the business itself was held under trust, the CIT (Appea....
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....an be said to be carried on for and on behalf of the trust in contrast to the business itself being held under trust. He noted that after the trust was created, the sister concerns in which the founder - trustees or their close relatives had substantial interest diverted funds in favour of the business and some borrowings were also made from the banks and the business was started. Within a year a manufacturing unit of Katha and cutch was set up and became functional; the business started earning profits and they were utilised to pay off the debts. In 1978 the unit was leased to M/s. Shankar Trading Co., a sister concern which had also contributed initially for the business and in which the trustees and their close relatives had substantial interest. The lease rent initially fixed was Rs. 25,000/- per month which was revised to Rs. 50,000/- per month from 01.04.1987 and to Rs. 1,00,000/- per month from 31.12.1991. The transactions of the business in its head office at Delhi were mostly with sister concerns. These facts, according to the CIT (Appeals), showed that the business was not settled upon trust and cannot be said to be a business held under trust. The source for the business....
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....he hands of the lessor. According to the CIT (Appeals), leasing out of the factory is only one mode of exploiting a commercial asset for gain and such gain falls to be considered as profits and gains of business. 11. Certain other contentions regarding the computation of the business income were taken before the CIT (Appeals) as an alternative arguments and these have been dealt with by him, partly in favour of the assessee and partly against it. This part of the case need not detain us. 12. The assessee preferred a further appeal to the Tribunal in ITA No.3633/Del/96. The Tribunal, following its decision for the assessment year 1989-90 in ITA No.3641/Del/94 by order dated 30.09.1996, held that the Katha business carried on by the assessee was incidental to the attainment of the objects of the trust, which were for charitable purposes. As regards the position in law, after the amendment made to Section 11(4A) of the Act w. e. f. 01.04.1992, the assessee placed reliance on the judgment of the Supreme Court in Assistant Commissioner of Income-tax v. Thanthi Trust, [2001] 247 ITR 785 (SC) in which the effect of the amendment was considered. It was held that the Supreme Court has....
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....y income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business." 16. The question whether sub-section (4A) would apply even to a case where a business was held under trust was answered in the negative in several authoritative pronouncements starting from the judgment of the Lahore High Court in Gadodia Swadeshi Stores v. Commissioner of Income Tax, Punjab, [1944] 12 ITR 385. The general provision under Section 4(3)(i) of the 1922 Act exempted income derived from property held under trust from taxation. However, section 4(3)(ia) provided that any income derived from a business carried on on behalf of a religious or charitable trust would be entitled to exemption only if the business was carried on in the course of carrying out of a primary purpose of the trust or the work in connection with the business is mainly carried on by the beneficiaries of the trust. The contention of the revenue in that case was that since clause (ia) was a special provisio....
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.... the said clause (b) of the proviso deals with a case of business which is not vested in trust for religious or charitable purposes within the meaning of the substantive clause of section 4(3)(i)." 17. Thus, if a property is held under trust, and such property is a business, the case would fall under Section 11(4) and not under Section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust. 18. In view of the above settled legal position, we are unable to accept the contention urged on behalf of the revenue before us that the provisions of Section 11(4A) are sweeping and would also take in a case of business held under trust. 19. The next question which we have to consider is whether, on the facts of the present case and having regard to the terms of the trust deed and the conduct of the trustees, it can be said that the Katha business was itself held under trust. There is a difference between a property or business held under trust and a business carried on by or on behalf of the trust. This distinction was recognised in Addl. Commissioner of Income Tax, Gujarat v. Surat Art Silk, [1998] 121 ITR 1, a decision of....
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....objects of a trust and the powers given to the trustees to effectuate the purposes of the trust. The CIT (Appeals) also held for the assessment year 1992-93 that while the objects of the trust were certainly charitable, clauses 19 and 20 are mere powers conferred upon the trustees to carry on business, the profits from which would feed the charitable objects. There is no settlement of the business in Katha upon trust for the simple reason that the business itself was not in existence at the time of formation of the trust. The property held under trust was merely a sum of Rs. 2,100/-, contributed more or less equally by the settlors at the time of creation of trust on 08.09.1971. The business in Katha came into existence in the year 1972 and the production unit in Mahesh Udyog, Himachal Pradesh started production on 08.02.1973. Thus the Katha business was not even in the contemplation of the settlors and, therefore, could not have been settled upon trust. 20. A few decisions may be noticed which are of relevance to the point. In the case of J. K Trust v. CIT (supra) one of the questions which arose was whether the office of managing agency which was an office of profit was in fac....
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....g the taking up and conducting of managing agency or selling agency of any company and may start such business and utilise the profits for all or any of the objects of the trust. Large powers were conferred on the trustees in the conduct of the business which included the power to raise and borrow money required for the purpose of trust. It may be seen that under the trust deed in the case of J. K. Trust (supra) the trustees were authorised to carry on business "with the help of the trust fund". It has also been noticed by the Supreme Court that the sum of Rs. 1,00,000/- was given as security by the trustees under Exhibit 'B' for the due performance of their obligations as managing agents. It was in the background of these facts that the Supreme Court held that the managing agency business, which was acquired with the help of the trust fund, could be considered as business held under trust and that the fact that the amount of Rs. 1,00,000/- which was settled upon trust was not utilised for the acquisition of the business, but was given merely as security deposit for the due performance of the duties of the managing agents, did not matter. The Court was, in the light of these facts ....
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....corresponds to Section 11(1) of the 1961 Act, confers an exemption from tax only where the property itself is held under a trust or other legal obligation; it does not apply to cases where a trust or legal obligation is not created on any property, but only the income derived from any particular property or source is set apart and charged for a charitable or religious purpose. In Commissioner of Income Tax. v. P.K. Barooah, Vice-President, Jorhat Races [1970] 77 ITR 967, the Assam and Nagaland High Court, referring to the judgment of the Patna High Court (supra) held that the surplus fund of a trust, which was claimed to be exempt on the footing that it was property held under trust within the meaning of Section 11(1) of the Act, was not property held under trust since the property from which the surplus was generated was itself not held under trust. Observing that the expression "legal obligation" cannot be separated from the word "property" appearing in Section 11(1), the Court expressed itself as under : "The expression "legal obligation" cannot be separated from the "property" itself which in the instant case is a horse-racing concern, inasmuch as law enjoins that such prope....
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....e objects. We are in agreement with the view taken by the CIT (Appeals) in his order for the assessment year 1992-93 that the application of the income generated by the business is not the relevant consideration and what is relevant is whether the activity is so inextricably connected or linked with the objects of the trust that it could be considered as incidental to those objectives. The examples, appositely given by the CIT (Appeals) in his order, clarify the position: the instance of a charitable trust established for providing medical relief running a nursing home in the process, or a trust for advancement of education running a publishing house or a newspaper. 23. It was contended on behalf of the assessee that the mere letting out of the factory on lease w. e. f. 01.01.1992 does not amount to carrying on of any business. We are unable to accept this contention. Initially the assessee carried on the business itself. The production unit was set up in 1972 and started production on 08.02.1973. For a period of five years the assessee was itself carrying on business. In the year 1978 it was given on lease to M/s. Shankar Trading Co. (P) Ltd., a sister concern in which the clos....
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....on imposed under Section 11(4A) of the Act should be held to be satisfied, entitling the trust to the tax exemption. 25. In our opinion these observations have to be understood in the light of the facts before the Supreme Court. Thanthi Trust carried on the business of a newspaper and that business itself was held under trust. The charitable object of the trust was the imparting of education which falls under Section 2(15) of the Act. The newspaper business was certainly incidental to the attainment of the object of the trust, namely that of imparting education. The observations were thus made having regard to the fact that the profits of the newspaper business were utilised by the trust for achieving the object, namely education. The type of nexus or connection which existed between the imparting of education and the carrying on of the business of a newspaper does not exist in the present case. There is no such nexus between the Katha business and the objects of the assessee - trust that can constitute the carrying on of the Katha business an activity incidental to the attainment of the objects, namely advancing of education, patriotism, Indian culture, running of hospitals and....