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Income Tax Appellate Tribunal, BENCH “C”, KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM]
Per Shri M.Balaganesh, AM
This appeal of the assessee arises out of the order of the Learned CITA in Appeal No. 306/CIT(A)-XXXVI/Kol/Cir.- 2. Hgl./11-12 dated 3.10.2012 against the order of assessment framed for the Asst Year 2009-10 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
The only issue to be decided in this appeal is as to whether the assessee is entitled for claiming exemption u/s 11 of the Act in the facts and circumstances of the case.
The brief facts of this issue are that the assessee is a society registered under the West Bengal Societies Act and is also registered u/s 12A of the Act with effect from 1.4.2003. Registration u/s 12AA of the Act was also granted on the application of the assessee vide order of the DIT (Exemptions ) Kolkata dated 7.10.2009 with retrospective effect from 1.4.2009 for various public charitable purposes as enumerated in the Memorandum and By-Laws of the Society. The assessee society is running St.Joseph’s Convent School, St. Anthony High School, St. Anthony Primary School, Nanette Nursery School, St.Mary’s Social Service Centre and St.Joseph’s
2 ITA No.1695/Kol/2012 St.Joseph’s Convent Chandannagar Education Society A.Yr.2009-10 Dispensary. The Learned AO during the course of assessment proceedings found that a sum of Rs. 6,76,132/- was received by the assessee society as donation from Society of St. Joseph of Cluny, Kolkata for building construction at Kanchrapara and the assessee society gave donation of Rs. 18,30,000/- to the said Society of St. Joseph of Cluny, Kolkata.
The Learned AO observed that the assessee had contravened the provisions of section 13(1)(c ) of the Act and accordingly brought the Excess of Income over Expenditure amounting to Rs. 77,39,624/- to tax. He also disallowed the donation paid by the assessee society to another society (St.Joseph of Cluny, Kolkata) in the sum of Rs. 18,30,000/- and determined the total income at Rs. 95,69,620/- and taxed the same at maximum marginal rate.
On first appeal, the Learned CITA held that donations made by the assessee trust to another registered trust is a transaction falling under the ambit of section 13(3)(b) of the Act. He held that according to section 13(3)(b) of the Act, any person who has made a substantial contribution to the trust or institution exceeding Rs 50,000/- in any previous year, would be treated as interested persons. Accordingly he also held that the assessee had violated the provisions of section 13(1)(c ) (ii) of the Act and upheld the order of the Learned AO in denying exemption u/s 11 of the Act on the entire surplus of the assessee and disallowing the donation paid of Rs. 18,30,000/- to another trust. Aggrieved, the assessee is in appeal before us on the following grounds :- “1. For that in the facts and circumstances of the case the appellate order passed was in violation of principals of natural justice hence is bad in law and be quashed. 02. For that in the facts and circumstances of the case the CIT (A) and Assessing Officer erred in adding Rs. 18,30,000/- as income of the assessee and in violation of Section 13 of the Act. The addition being uncalled for, the same be deleted. 3. For that in the facts and circumstances of the case the CIT (A) and Assessing officer erred in not allowing the benefit of section 11 of the IT Act 1961. 4. For that in the facts and circumstances of the case the CIT (A) and Assessing officer erred in not allowing the sum of Rs.3,94,40,936 being application u/s section 11 of the IT Act 1961. 5. The appellant craves leave to press new, additional grounds of appeal or modify, withdraw any of the above grounds at the time of hearing of the appeal.”
3 ITA No.1695/Kol/2012 St.Joseph’s Convent Chandannagar Education Society A.Yr.2009-10 5. We have heard the rival submissions and perused the materials available on record. We find that the assessee trust is a registered charitable trust enjoying registration u/s 12AA of the Act. It is not in dispute that the objects of the trust are charitable in nature. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. The following issues are to be adjudicated in this appeal :- (i) Whether the donation given by one trust to another trust could be considered as application of income; (ii) If such donation exceeds Rs 50,000/-, whether the same would fall within the ambit of provisions of section 13(1)(c )(ii) read with section 13(3)(b) of the Act ; and (iii) In any event, whether the assessee would lose exemption u/s 11 of the Act for the whole of its income or only to the extent of violation of section 13(1)(c ) of the Act. We proceed to answer the issues one by one. 5.1. First, the donation given by one trust to another trust is to be construed only as an application of income. The Charitable trust is constituted for charitable purposes with a philanthropic mind to give donation. The payment made for benevolent cause is always a charity. Inter-charity donation given will be treated as income applied for charitable or religious purposes and application within the meaning of section 11(1)(a) of the Act. In this regard, it would be relevant to get into the amendments in the provisions of section 11 of the Act by Finance Act 2002 and 2003 as below. The Finance Act 2002 has inserted an Explanation to sub-section (2) of section 11. This Explanation prohibits donations to other charitable organizations out of the accumulated funds. The new amendment puts restriction on donations to other charities only out of accumulated funds. In other words, funds once accumulated under section 11(2) of the Act can only be applied for charitable purposes directly by the concerned organization and any inter- organisational transfer would not be possible. 5.1.1. The Finance Act 2003 has inserted another proviso to sub-section (3A) of section 11 which provides that inter-charity donation out of accumulated funds will be permissible in case of dissolution of a charitable organization. This amendment has
4 ITA No.1695/Kol/2012 St.Joseph’s Convent Chandannagar Education Society A.Yr.2009-10 been made to reduce the hardship of charitable organizations on the brink of dissolution. 5.1.2. There is no apparent bar on payment or credit to such other organizations out of previous year’s income subject to the provisions of section 11(1) of the Act. In this regard, it would be pertinent to refer to the clarificatory Circular No. 8 dated 27.8.2002 issued by the CBDT . The relevant operative portion of the said circular is reproduced hereinbelow:- 21. Restriction on the application of accumulated income of the charitable or religious trusts. 21.1 Through Finance Act, 2002, an Explanation has been inserted below sub-section (2) of section 11 so as to provide that any amount paid or credited out of income from property held under trust referred to in clause (a) or clause (b) of sub-section (1), read with the Explanation to that sub-section, which is not applied, but is accumulated or set apart, to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, either during the period of accumulation or thereafter, shall not be treated as application of income for charitable or religious purposes. Thus, payment to other trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out of the accumulated income shall not be treated as application of income and will be taxed accordingly.
21.2 Through Finance Act, 2002, a new clause (d) has also been inserted in sub- section (3) of section 11 so as to provide that if any income referred to in sub-section (2) of the said section, is paid or credited to any trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub- clause (iv) or (v) or (vi) or (via) of clause (23C) of section 10, such payment or credit shall be deemed to be the income of the person making such payment or credit, of the previous year in which such payment or credit is made.
21.3 A proviso in sub-section (3A) has also been inserted so as to provide that the Assessing Officer shall not allow application of accumulated income by way of payment or credit made for the purposes referred to in clause (d)of sub-section (3) of section 11. This takes away the discretion of the Assessing Officer provided in sub- section (3A) to allow the trusts to apply the accumulated income for payment or credit to other charitable or religious trusts and institutions
5 ITA No.1695/Kol/2012 St.Joseph’s Convent Chandannagar Education Society A.Yr.2009-10 From the above, it could be safely concluded that the donation by one trust to another trust out of current year’s income is very much permissible as per section 11 of the Act. The following decisions also support the proposition laid down herein:-
(a) Decision of the Hon’ble Calcutta High Court in the case of CIT vs Hindustan Charity Trust reported in (1983) 139 ITR 913 (Cal) wherein it was held that :-
Donation having been made to another trust under belief that donee was charitable trust and the Tribunal found the donee trust to be charitable , assessee was entitled to exemption under section 4(3)(i) of the Income Tax Act, 1922.
(b) Decision of the Hon’ble Bombay High Court in the case of CIT vs Trustees of the Jadi Trust reported in (1982) 133 ITR 494 (Bom) “The Bombay High Court in this case made the following pertinent observations on the scope of s 11 of the Act with regard to inter-charity Donations: “So far as the provisions of s. 11 of the Act which was in force at the material time is concerned, we do not think that the legal positions is in any way different. As already pointed out when a trust which holds Property for charitable or religious purposes hands over a donation to another trust which is also a trust made for the application of its funds for charitable or religious purposes there can hardly be any doubt that it would amount to an application of income for charitable or religious purposes by the donor trust. As already pointed out it would be permissible for a trust either to directly apply the income for charitable purposes or to a charitable work in the field as put by Slade J., or the same funds or income could be utilised through the medium of another charitable institution which applies its funds or income to charitable purposes. The Tribunal is, in our view, right in holding that the assessee was entitled to relief under s. 11 (1) (a) of the 1. T. Act, but the propriety of the direction given by the Tribunal need not be dealt with in this reference.”
(c ) Decision of the Hon’ble Gujarat High Court in the case of CIT vs Sarladevi Sarabhai Trust No. 2 reported in (1988) 172 ITR 698 (Guj) “In this case, question came up if the payment made by donation is an application. The court held it as application. The observation of the court is as follows: "'The word 'applied' is not defined by the Act. The dictionary meaning of the term 'apply' as given in Chambers 20th Century Dictionary, amongst others is 'to put to use." In this context, court held that where the assessee trust had donated the amount to the donee trust towards corpus is an application of income.”
6 ITA No.1695/Kol/2012 St.Joseph’s Convent Chandannagar Education Society A.Yr.2009-10
5.2. Now we proceed to answer the second question raised hereinabove by us. For the sake of convenience, the provisions of section 13(1)(c ) (ii) are reproduced hereunder:- “13(1) – Nothing contained in section 11 or section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof – (a) -- -- -- -- - (b) -- -- -- -- - (c) In the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) -- -- -- - (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3).”
For the sake of convenience, the provisions of section 13(3) are reproduced hereunder:-
13(3) – The persons referred to in clause (c ) of sub-section (1) and sub-section (2) are the following, namely :- (a) The author of the trust or the founder of the institution ; (b) Any person who has made a substantial contribution to the trust or (c) Where such author, founder or person is a Hindu Undivided family, a institution, that is to say, any person whose total contribution upto the end of the relevant previous year exceeds fifty thousand rupees; member of the family ; (cc) any trustee of the trust or manager (by whatever name called) of the institution ; (d) any relative of any such author, founder , person, member, trustee or
7 ITA No.1695/Kol/2012 St.Joseph’s Convent Chandannagar Education Society A.Yr.2009-10 (e) any concern in which any of the persons referred to in clauses (a), (b) , (c ), (cc) and (d) has a substantial interest.
We find that the provisions of section 13(3)(b) of the Act refers to payment made by the assessee trust to any person who has contributed more than Rs 50,000/- (i.e substantial contribution) to the assessee trust. It does not refer to payment made by one trust exceeding Rs. 50,000/- to another registered charitable trust . In fact the payment made by one trust to another trust as donation does not fall in any of the categories mentioned in section 13(3) supra. We find that it only refers to payment made to any individuals or their relatives or to any concern in which they have substantial interest. Admittedly, the donee trust is a registered public charitable trust and there is no question of any individual holding substantial interest in the said trust. Hence the case does not fall in clause (e) of section 13(3) of the Act also.
We hold that when the donation given by one trust to another trust out of current year’s income is permitted in section 11 of the Act as an application of income, the same cannot be curtailed by another provision of the Act (i.e section 13(1)(c ) (ii) read with section 13(3) of the Act) as it would defeat the very purpose of such provision. It is not the case of the revenue that the funds of the trust have been applied /diverted for the private benefit of the trustees, settlors or any individuals /relatives. This is what is the true intention of section 13(1)(c ) of the Act. In the instant case, it is a case of simple donation by one public charitable trust to another public charitable trust, wherein no individual could hold any substantial interest. In view of the above findings, we hold that the payment of donation by assessee trust to another registered public charitable trust is not in violation of section 13(1)( c) of the Act as the said payment is not made for the benefit of any person either directly or indirectly referred to in section 13(3) of the Act.
5.3. The Learned AR argued that even assuming without conceding, that the donation paid by assessee trust to another trust is to be treated as violation of provisions of section 13(1)(c ) of the Act, he argued that still the income could be taxed at
8 ITA No.1695/Kol/2012 St.Joseph’s Convent Chandannagar Education Society A.Yr.2009-10 maximum marginal rate only to the extent of violation of section 13(1)(c ) as admittedly the said section in 13(1)(c )(ii) uses the expression ‘if any part of such income’ . According to him, the entire surplus cannot be brought to tax in any event. In support of this argument, he placed reliance on various judgments and circular no. 387 dt 6.7.1984. We find that the third question raised by us hereinabove need not be answered in view of our decision for second question wherein, we have held that there is no violation of provisions of section 13(1)(c ) of the Act in the facts of the instant case. Hence we refrain to give our opinion /findings for the third question raised hereinabove. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the court on 11.05.2016.
Sd/- Sd/- [N.V.Vasudevan] [M.Balaganesh] Judicial Member Accountant Member
Date: 11.05.2016. R.G.(.P.S.)
Copy of the order forwarded to:
St.Joseph’s Convent Chandannagar Eductional Society, C/o D.J.Shah & Co, Kalyan Bhawan, 2, Elgin Road, Kolkata-700020.
2 The J.C.I.T. (O.S.D.), Circle-2, Hooghly. 3. The CIT-XX, Kolkata. 4. The CIT(A)-XXXVI, Kolakta 5. DR, Kolkata Benches, Kolkata True Copy, By order,
Deputy /Asst. Registrar, ITAT, Kolkata Benches