SECTION 11 l income from property
held for charity

162. Repayment of debt incurred for purposes of trust/loans advanced by educational trusts to students for higher studies - Whether amounts to application of income

1. Section 11 requires 100 per cent of the income of a charitable and religious trust to be applied for religious and charitable purposes to be entitled to the exemption under the said section. Two questions have been considered regarding the application of income :

1. Where a trust incurs a debt for the purposes of the trust, whether the repayment of the debt would amount to an application of the income for the purposes of the trust ; and

2. Whether loans advanced by an educational trust to students for higher studies would be treated as application of income for charitable purposes.

2. The Board has decided that repayment of the loan originally taken to fulfil one of the objects of the trust will amount to an application of the income for charitable and religious purposes. As regards the loans advanced for higher studies, if the only object of the trust is to give interest-bearing loans for higher studies, it will amount to carrying on of money-lending business. If, however, the object of the trust is advancement of education and granting of scholarship loans as only one of the activities carried on for the fulfilment of the objectives of the trust, granting of loans, even if interest-bearing, will amount to the application of income for charitable purposes. As and when the loan is returned to the trust, it will be treated as income of that year.

Circular : No. 100 [F. No. 195/1/72-IT(A-I)], dated 24-1-1973.

JUDICIAL ANALYSIS

Explained in - In CIT v. Cutchi Memon Union [1985] 155 ITR 51 (Kar.), it was held that under the provisions of section 11, only the income spent on charitable or religious purposes is excluded from the total income of a trust. That exemption from taxation is given not because it is expenditure of the trust or any other outgoing. It is exempted as income to the extent applied for charitable or religious purposes. When that amount is returned by the beneficiaries of the trust, the receipt in the hands of the trust can only be its income of the years in which it is received. It cannot have any different character. This is also the tenor of the CBDT Circular No. 100, dated January 24, 1973.

Explained in - In CIT v. Ramchandra Poddar Charitable Trust [1987] 164 ITR 666 (Cal.), the above circular was explained with the following observations:

“. . . An assessee may borrow money and spend it for charitable object. The circular merely recognises that in such a case, application of income for repayment of a loan taken for charitable purpose will amount to application of income for charitable purpose. The circular, however, does not permit an assessee to accumulate more than 25 per cent of its income or Rs. 10,000, whichever is higher (for the purpose of charity). The wording of section 11 is clear and unambiguous. The relief is limited to the amount of income of a charitable trust actually applied for charitable purpose. Accumulation of income is permitted only to the extent and subject to the conditions laid down in that section. An assessee can accumulate or set apart only 25 per cent of the income of the trust or Rs. 10,000, whichever is higher, in a given year. The circular does not seek to and cannot enlarge the scope of the section.” (p. 673)

Explained in - In ITO v. K. Ravindranathan Nair [1992] 41 ITD 462 (Coch.-Trib.), the Tribunal took aid of this Circular of the Board of Direct Taxes though it was in the context of section 11 only for the limited purposes of the treatment to be accorded to the loans and advances when given and the recovery of the same when received.

163. Delay in filing application in Form No. 10 - Board’s order under section 119(2)(b) authorising Commissioner to admit belated applications

1. Charitable and religious trusts are entitled to exemption from income-tax under section 11 after they fulfil the requirements enumerated in sections 11 to 13. These trusts are allowed to accumulate or set apart income derived by them from property held under trust provided they fulfil the conditions spelt out in section 11(2) read with rule 11 of the Income-tax Rules and Form No. 10.

2. Very often trusts are not able to file the application in Form No. 10 within the time allowed under section 139(1)/139(2) as extended by the Income-tax Officer. The Board is then approached by these trusts for condoning the delay for filing applications. The Board by virtue of the powers vested in it under section 119(2)(b) has been condoning the delay in individual cases after satisfying itself that certain conditions are satisfied.

3. With a view to expediting the disposal of applications filed by trusts for condoning the delay, the Board has passed a general order under section 119(2)(b) by which the Commissioners have been authorised to admit belated applications under section 11(2) read with rule 17. A copy of this order is enclosed. All applications for condoning the delay under section 11(2) will, henceforth, be disposed of by the Commissioner in terms of the enclosed Order No. 120/57/80-IT(A-I), dated 3-6-1980 [Annex].

Circular : No. 273 [F. No. 180/57/80-IT(A-I)], dated 3-6-1980.

ANNEX - ORDER DATED 3-6-1980 REFERRED TO IN CLARIFICATION

In exercise of the powers conferred under section 119(2)(b) of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby authorise the Commissioners to admit applications under section 11(2) read with rule 17 of the Income-tax Rules, 1962 from persons deriving income from property held under trust wholly for charitable or religious purposes for accumulation of such income to be applied for such purposes in India when the aforementioned applications are filed beyond the time stipulated. The Commissioners will, while entertaining such applications, satisfy themselves that the following conditions are fulfilled:

(a)  that the genuineness of the trust is not in doubt;

(b)  that the failure to give notice to the Income-tax Officer under section 11(2) of the Act and investment of the money in the prescribed securities was due only to oversight;

  (c)  that the trustees or the settlor have not been benefited by such failure directly or indirectly;

(d)  that the trust agrees to deposit its funds in the prescribed securities prior to the issue of the Government sanction extending the time under section 11(2); and

  (e)  that the accumulation or setting apart of income was necessary for carrying out the objects of the trust.

Judicial analysis

Applied in - The above circular was applied in CIT v. Anjuman Moinia Fakharia [1994] 208 ITR 568 (Raj.), with the following observations :

“From the circular issued by the Department dated June 3, 1980, and the judgment of the apex court referred to above, it can be considered that the requirement to prescribe (sic) the time-limit is only directory and not mandatory. Non-compliance within the stipulated time should not disentitle an assessee from the exemption to which he is otherwise entitled. . . .” (p. 572)

164. Capital gain arising to charitable trust - Whether it could be regarded as having been applied to charitable purposes if trust invests amount received from sale of capital asset in acquiring another capital asset for trust - Section 11(1) as amended by the Finance Act, 1970

Under section 11(1), as amended by the Finance Act, 1970, income derived from property held under trust for charitable or religious purposes is exempt from income-tax only to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As “income” includes “capital gains” a charitable or religious trust will forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the period referred to above. In this connection, a question has been raised whether the capital gains arising to a charitable or religious trust from the sale of capital assets belonging to it would be regarded as having been applied to charitable or religious purposes, if the trust invests the amount received from the sale of the capital asset, including the capital gains realised, in acquiring another capital asset for the trust. This question was earlier examined by the Board in 1963 and instructions were issued vide Circular No. 2-P(LXX-5), dated 15-5-1963 [Annex] to the effect that where a charitable or religious trust transfers a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust, and utilises the capital gains arising from the transaction in acquiring the new capital asset, the amount of capital gains so utilised would be regarded as having been applied to the charitable or religious purposes of the trust within the meaning of section 11(1). The Board have decided that the above instructions should continue to be operative notwithstanding the changes made in the scheme of tax exemption of charitable or religious trusts through the Finance Act, 1970.

Circular : No. 52 [F. No. 152(55) 70-TPL], dated 30-12-1970.

ANNEX - CIRCULAR, DATED 15-5-1963 REFERRED TO IN CLArifiCATION

1. Under section 11(1), a religious or charitable trust which accumulates its income in excess of 25 per cent of its total income or Rs. 10,000, whichever is higher, is liable to pay tax on the income accumulated by it in excess of the said limit. In other words, such a trust has to apply at least 75 per cent of its total income, including any capital gains forming part of it during the relevant previous year, in order to be entitled to exemption on the entire amount of its income. In this connection, a question was raised during the third meeting on the Direct Taxes Advisory Committee whether the capital gains arising to a trust from the sale of a capital asset belonging to it would be regarded as having been applied for the purposes of the trust, if the trust invested the amount received from the sale of the capital asset, including the capital gains realised, in acquiring another capital asset for the trust. This point has been considered and it has been decided that where a religious or charitable trust transfers a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilises the capital gains arising from the transaction in acquiring the new capital asset, the amount of capital gain so utilised should be regarded as having been applied for the religious or charitable purposes of the trust within the meaning of section 11(1).

2. Under sub-section (2) of section 11, a trust, which desires to accumulate its income in excess of the limit specified in sub-section (1) for subsequent application to the purposes of the trust, is entitled to do so on giving a notice to the Income-tax Officer in this behalf in the prescribed form and investing the money so accumulated in certain securities of the Government. Under rule 17 of the Income-tax Rules, 1962, the notice of accumulation is required to be given in Form No. 10 of the Income-tax Rules, 1962. According to para 2 of this Form, the accumulated money has to be invested in specified securities before the expiry of one month commencing from the end of the relevant previous year and, according to para 3 to the Form, copies of the annual accounts of the trust along with details of investment and utilisation, if any, of the money so accumulated or set apart, have to be furnished to the Income-tax Officer before April 30 every year. It was pointed out during the third meeting of the Direct Taxes Advisory Committee that it may not always be possible for the trustees to ascertain the income of the trust within one month of the end of the previous year and they may not, therefore, be able to comply with the requirements referred to above. In respect of the assessment year 1962-63, instructions were issued in the Board’s Circular No. 17(LXX-4), dated 2-6-1962 [Clarification 6 to Sl. No. 165 ] that the first requirement should be regarded as having been fulfilled if the accumulated money were invested in the specified securities before September 30,1962, and similarly the second requirement should be regarded as having been fulfilled if copies of the relevant accounts along with details of investment and utilisation of the accumulated money were furnished to the Income-tax Officer concerned before September 30,1962. Having regard to the difficulty mentioned above, it has now been decided that in respect of subsequent assessment years, trustees should be allowed to invest the accumulated income in specified securities within an extended period of four months commencing from the end of the relevant previous year. Similarly, with regard to the second requirement of furnishing copies of accounts, etc., it has been decided that trustees may be allowed to do so within a period of four months from the end of the relevant previous year or before April 30 of the assessment year, whichever is later.

1165. Application of income to charitable purposes and restriction of accumulation of trust income in terms of sub-sections (1) and (2) as they stood between 1-4-1962 to 31-3-1971 (prior to the amendments made by the Finance Act, 1970) - Taxability of income under sub-sections (1) and (2) - Legal position on issues pertaining thereto explained

CLARIFICATION 1

1. Attention is invited to the Board’s Circular Nos. 5-P(LXX-6) of 1968 and 12-P(LXX-7) of 1968 [Clarification 2] which had been duly endorsed to all Chambers of Commerce. References are still being received from the public seeking clarifications regarding the taxability of income under the provisions of section 11(1) and 11(2).

2. The legal position is clarified as under :

  u  Under section 11(1)(a), a trust claiming exemption is allowed to accumulate 25 per cent of its income or Rs. 10,000, whichever is higher. Thus, if a trust accumulates a larger income than the limits prescribed for exemption, what would be chargeable to tax is the excess over the exempted limit, and not the entire accumulation including the exempted portion.

  u  Section 11(2), however, provides that if the conditions laid down in the sub-section are satisfied, restrictions as regards accumulation or setting apart of income shall not apply for the period during which the conditions prescribed therein remain satisfied. To avoid taxation under section 11(1)(a), investment in Government securities as prescribed in section 11(2), has to be made, not only in respect of excess amount which is chargeable under section 11(1)(a) but of the entire unspent balance including the exempted portion.

  u  Subsequently, if it is found that the provisions of section 11(2) have been violated and the income has been applied to purposes other than charitable or religious, or the amounts cease to be accumulated or set apart, the entire accumulation covered by section 11(2) will be subjected to tax under section 11(3).

3. Thus, while under section 11(1)(a), the tax will be levied in the year to which the income relates, under section 11(3) the income would be chargeable in the year in which the amounts cease to be accumulated for the specific purpose mentioned. Thus, when the amounts are taxed under section 11(3), the benefit which would have been available to a trust in respect of 25 per cent of its income or Rs. 10,000 under section 11(1)(a) would also be lost.

Circular : No. 29 [F. No. 20/22/69-IT(A-I)], dated 23-8-1969.

CLARIFICATION 2

Attention is invited to the Board’s Circular No. 5-P(LXX-6), dated 19-6-1968 (Clarification 3), on the above mentioned subject.

It has been brought to the Board’s notice that para 5 of the above circular creates the impression that where a trust accumulates more than 25 per cent of its income, only the excess over 25 per cent will be taxable under section 11(1). It is hereby clarified that the correct position in this regard is that if a trust desires to accumulate income in excess of the limits laid down in section 11(1), the conditions specified in section 11(2) have to be fulfilled in respect of the entire accumulation and not merely in respect of the accumulation in excess of 25 per cent of the income. Further, if the trust does not comply with the conditions laid down in section 12(2), the amount which becomes liable to assessment under section 11(3) is the entire income accumulated and not merely the income accumulated in excess of the limits specified in section 11(1). In other words, such an assessee loses benefit of the accumulation permitted under section 11(1).

Circular : No. 12-P [LXX-7 of 1968], dated 26-11-1968.

Judicial analysis

The above circular was quoted and relied on, in M.CT.M. Chidambaram Chettiar Foundation v. ITO [1991] 39 TTJ (Mad.) 82, 87.

Note : The above view cannot be construed as correct, in view of the preponderant judicial view expressed in the cases of CIT v. C.M. Kothari Charitable Trust [1984] 149 ITR 573 (Mad.); CIT v. H.H. Marthanda Varma Elayaraja of Travancore Trust [1981] 129 ITR 191 (Ker.); Mohanlal Hargovinddas Public Charitable Trust v. CIT [1980] 122 ITR 130 (MP); CIT v. Shri Krishen Chand Charitable Trust [1975] 98 ITR 387 (J & K) and CIT v. Trustees of Bhat Family Research Foundation [1990] 185 ITR 532 (Bom.) and Addl. CIT v. A.L.N. Rao Charitable Trust [1976] 103 ITR 44 (Kar.), which has since been approved by the Supreme Court in the case of Addl. CIT v. A.L.N. Rao Charitable Trust [1995] 216 ITR 697 (SC).

clarification 3

1. In Board’s Circular No. 2-P(LXX-5), dated 15-5-1963, it was explained that a religious or charitable trust, claiming exemption under section 11(1), must spend at least 75 per cent of its total income for religious or charitable purposes. In other words, it was not permitted to accumulate more than 25 per cent of its total income. The question has been reconsidered by the Board and the correct legal position is explained below.

2. Section 11(1) provides that subject to the provisions of sections 60 to 63, “the following income shall not be included in the total income of the previous year. . . .” The reference in clause (a) is invariably to “Income” and not to “total income”. The expression “total income” has been specifically defined in section 2(45) as “the total amount of income computed in the manner laid down in this Act”. It would, accordingly, be incorrect to assign to the word “income”, used in section 11(1)(a), the same meaning as has been specifically assigned to the expression “total income” vide section 2(45).

3. In the case of a business undertaking, held under trust, its “income” will be the income as shown in the accounts of the undertaking. Under section 11(4), any income of the business undertaking determined by the ITO, in accordance with the provisions of the Act, which is in excess of the income as shown in its accounts, is to be deemed to have been applied to purposes other than charitable or religious, and hence it will be charged to tax under sub-section (3). As only the income disclosed in the account will be eligible for exemption under section 11(1), the permitted accumulation of 25 per cent will also be calculated with reference to this income.

4. Where the trust derives income from house property interest on securities, capital gains, or other sources, the word “income” should be understood in its commercial sense, i.e., book income, after adding back any appropriations or applications thereof towards the purposes of the trust or otherwise, and also after adding back any debits made for capital expenditure incurred for the purposes of the trust or otherwise. It should be noted, in this connection, that the amounts so added back will become chargeable to tax under section 11(3) to the extent that they represent outgoings for purposes other than those of the trust. The amounts spent or applied for the purposes of the trust from out of the income, computed in the aforesaid manner, should be not less than 75 per cent of the latter, if the trust is to get the full benefit of the exemption under section 11(1).

5. To sum up the business income of the trust, as disclosed by the accounts plus its other income computed as above, will be the “income” of the trust for the purposes of section 11(1). Further, the trust must spend at least 75 per cent of this income and not accumulate more than 25 per cent thereof. The excess accumulation, if any, will become taxable under section 11(1).

Circular : No. 5-P(LXX-6) of 1968, dated 19-6-1968.

Judicial analysis

Explained in - The above circular was explained in CIT v. Programme for Community Organi-sation [1997] 228 ITR 620 (Ker.), with the following observations :

“Reading of the circular dated June 19, 1968, it would be a condition by way of a clarification. The circular relates to the subject in the context.

It contains instructions regarding ‘income’ required to be applied for charitable purposes. Even the Board of Revenue has understood that it would be incorrect to assign to the word ‘income’ used in section 11(1)(a) of the Act, the same situation of understanding as is available from the expression ‘total income’ which is used in section 2(45) of the Act. It is specified that in the case of a business undertaking held under a trust, its income disclosed by the account will be eligible for exemption under section 11(1) and the permitted accumulation of 25 per cent will also be calculated with reference to this income.

Learned senior tax counsel submitted that the last paragraph of the circular makes out a different situation and, therefore, the circular as a whole will have to be read and taken into consideration in the context....” (pp. 623-624)

“The above paragraph, if fully read, does not alter the situation in any way. As seen from the above, when the trust derives income, it says that the word “income” should be understood in its commercial sense, i.e., book income. In other words, the Department requires its officer to understand the income of the trust with reference to the book income, after adding back the items stated therein. It is thereafter that we see that whatever may be the position, the amount spent or applied for the purposes, it is clarified, should not be less than 75 per cent of the latter if the trust is to get the full benefit of the exemption under section 11(1). In our judgment, the statutory provision makes it abundantly clear that in regard to a trust which is entitled to get the full benefit of exemption of section 11(1) of the Act, its income with reference to the head under consideration would have to be understood only at 75 per cent thereof, leaving 25 per cent altogether at that stage itself. In this sense of the situation, the Central Board of Revenue also has understood the situation in the context of the statutory language of section 11(1)(a) of the Act and not otherwise. This means that when the situation is established that the trust is entitled to the full benefit of exemption under section 11(1), the said trust is to get the benefit of 25 per cent and this 25 per cent has to be understood as that of the income of the trust under the relevant head of section 11(1)(a) of the Act.” (pp. 624-625)

Explained in - In CIT v. Jayashree Charity Trust [1986] 159 ITR 280 (Cal.), it was observed that this circular makes it clear that the word ‘income’ in section 11(1)(a) must be understood in a commercial sense. The entire income of the trust, in the commercial sense, has been spent for the purpose of charity. There is no reason to deny the benefit of exemption granted by section 11 to that portion of the income which has been taken away by deduction at source on the ground that the amount has not been spent or accumulated for the purpose of charity.

clarification 4

It was clarified that section 11(1)(a) required that where income derived from property held under trust was accumulated for future application to charitable purposes in India, the extent of such accumulation should not exceed 25 per cent of the income from the property or Rs. 10,000, whichever is higher. Thus, where a charitable trust donated, for charitable purposes, not out of its income but out of its corpus, movable or immovable property, equivalent to, or more in value than 75 per cent of the trust income for the year, the trust could not be regarded to have satisfied the requirement of section 11(1)(a).

Source : Relevant extracts from official minutes of twelfth meeting of Direct Taxes Advisory Committee (Central) held in New Delhi on 17-8-1968.

clarification 5

1. There appears to be certain amount of misconception in the minds of some Income-tax Officers regarding the provisions against the accumulation of income in excess of 25 per cent, contained in section 11(1). It may be clarified that the provisions in section 11(1), prohibiting accumulation of income in excess of 25 per cent, apply only to the income derived from property held under trust, but such restrictions are not applicable to capital receipts. The donations received by a charitable trust from the members of the public, being capital receipts, cannot be regarded as income of the trust. Accordingly, the donations received by the trust should be excluded from the income of the trust for the purpose of calculating the accumulation limit of 25 per cent except in cases covered by section 12(2).

2. The above position will also be clear from section 12(2), which specifically provides that contributions made to a charitable trust by another trust, to which the provisions of section 11 apply, should, in the hands of the trustee, be deemed to be income derived from property for the purposes of section 11. Such contributions should, of course, be included in the total income of the receiving trust for the purpose of applying the limit of 25 per cent under section 11(1).

Letter : F. No. 20/10/67-IT(A-I), dated 1-5-1967.

Judicial Analysis

Explained in - R.B. Shreeram Religious & Charitable Trust v. CIT [1998] 99 Taxman 318 (SC) with the observation that the CBDT Circular No. 20/10/67-IT(A-I), dated 1-5-1967 deals with the application of section 11(1). It does not deal with section 12. The Board Circular, therefore, must be read only as interpreting section 11(1) and not as interpreting section 12(1) which was not the subject-matter of the Board Circular.

clarification 6

1. Under section 11(2), if a trust wants to accumulate income beyond the limit specified in clause (a) or clause (b) of section 11(1), it has to give a notice to the Income-tax Officer concerned in Form No. 10 prescribed under rule 17 of the Rules.

2. According to para 2 of the said Form, the accumulated money has to be invested in specified securities before the expiry of one month commencing from the end of the relevant previous year and according to para 3 thereof, copies of the annual accounts of the trust along with details of investment and utilisation, if any, of the money so accumulated, have to be furnished to the Income-tax Officer before April 30, every year.

3. It is hereby clarified that as far as proceedings for the assessment year 1962-63 are concerned, the first requirement referred to in the previous paragraph will be regarded as having been fulfilled if the accumulated money is invested in the specified securities before September 30, 1962. Similarly, the second requirement referred to in the previous paragraph shall be regarded as having been fulfilled if copies of the relevant accounts along with details of investment and utilisation of the accumulated money are furnished to the Income-tax Officer concerned before September 30, 1962.

Circular : No. 17(LXX-4), dated 2-6-1962.

166. ‘Another capital asset’, scope of expression

1. Section 11(1A) of the Act provides that where a capital asset being property held under trust wholly for charitable or religious is transferred and the whole or any part of the net consideration is utilised for acquiring another capital asset to be so held, then the capital gain arising from the transfer shall be deemed to have been applied to charitable or religious purpose to the extent specified therein.

2. The Board had occasion to examine whether investment of the net consideration in fixed deposit with a bank would be regarded as utilisation of the amount of the net consideration for acquiring ‘another capital asset’ within the meaning of section 11(1A) of the Income-tax Act, 1961. The Board has been advised that investment of the net consideration in fixed deposit with a Bank for a period of 6 months or above would be regarded as utilisation of the net consideration for acquisition of ‘another capital asset’ within the meaning of section 11(1A).

Instruction : No. 883, dated 24-9-1975 [Extracted from CIT v. Hindustan Welfare Trusts [1993] 70 Taxman 93 (Cal.)/CIT v. East India Charitable Trust [1994] 73 Taxman 880 (Cal.)].

JUDICIAL ANALYSIS

Explained in - In Hindusthan Welfare Trusts [1993] 70 Taxman 93, it was observed that insofar as Board’s Instruction No. 883, dated 24-9-1975 is concerned, it also accepted the fundamentals of the relation between the banker and its customer as that of creditor and debtor and the banker’s property in the shape of the money of the depositor. However, the circular is not consistent with the general principles of law and cannot hold field. The restrictive stipulation of a minimum period of six months for a deposit to qualify as an asset for the purpose of section 11(1A), imposed in the said instruction, has the effect of mutilating the concept of asset as obtaining under the Act and its cognate Act, viz., Wealth-tax Act. In fact the said circular can be called an acknowledgement of a deposit in bank as a capital asset for the purpose of sub-section (1A) of section 11. No minimum duration of the deposit can be set forth as the determinative criterion to decide whether a deposit in bank takes on the colour of an asset of a specie separate from cash fund from the sale of an asset.

Consequently, the net consideration of the sale of any capital asset results in the conversion of the consideration into an asset when deposited in bank and a new asset within the meannig of section 11(1A).

Explained in - The above instruction was explained in CIT v. East India Charitable Trust [1994] 206 ITR 152 (Cal.), with the following observations :

“In this connection, the Revenue relied on an instruction of the Central Board of Direct Taxes dated September 24, 1975, which declares that fixed deposits with a bank for a period of six months or above would be regarded as utilisation of the net consideration in acquiring a new capital asset within the meaning of section 11(1A) of the Act. In CIT v. Hindusthan Welfare Trust [1994] 206 ITR 138 (Income-tax Reference No. 64 of 1989), where the judgment was delivered by this Bench on September 25, 1991, we have had occasion to go into the legality of the said circular of the Central Board of Direct Taxes particularly with regard to the stipulation of the minimum duration of such fixed deposits. According to the Board, an investment of the net consideration in fixed deposit with a bank for a period of six months or above is to be regarded as utilisation of the net consideration in acquiring another asset. But that point is not germane to the present situation. Here, the question is whether the Board’s instruction could be read as exclusive of other investments, i.e., investment by fixed deposit otherwise than with banks and even if it be so, whether the Board could, by executive fiat, add on to the legislation. One argument could be that the Board was merely concerned with the investment of the net consideration in fixed deposit with banks and, therefore, its observation could not be construed as an embargo against deposits with non-banking entities. The said instruction is reproduced :

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We have to consider the issue against the backdrop of various Direct Taxes Acts, the Wealth-tax Act, 1957, in particular, as also in the perspective of sections 11 to 13 of the Income-tax Act.

Sub-section (5) of section 11, in our view, is the keynote to the solution of the problem. The said section sets forth the various forms and modes in investing or depositing the fund of a trust for charitable or public religious purposes. The said sub-section (5) of section 11 reads as follows :

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It may be observed that the investment or deposit in any public sector company appears as one of the permitted forms or modes of investment or deposit. Now, the very expression ‘investment or deposit’ can be very well argued to be a capital asset.

The expression ‘capital asset’ is defined in clause (14) of section 2 and the definition goes in the widest terms possible except for the specific exclusions. The said definition so far as is material is reproduced below :

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Thus, capital asset includes property of any kind held by an assessee. ‘Deposits or investments’ are a kind of property and they do not fall in the exclusionary limb of the said definition.

The definition, when pitted against the definition of assets in section 2(e) of the Wealth-tax Act, 1957, makes it absolutely clear that the very term ‘investments and deposits’ is to be accepted as capital assets. Wealth-tax is a tax on the capital value of assets. Therefore, whatever is brought in the net of wealth-tax as an asset is to be ordinarily taken as a capital asset for income-tax assessment unless excluded by its definition in section 2(14). Under section 2(e) of the Wealth-tax Act, the expression ‘assets’ includes property of every description, movable or immovable, excepting those specifically excluded, e.g., agricultural land, farm house, animals, etc.

The Wealth-tax Act defines ‘asset’ in a similar vein as the Income-tax Act defines ‘capital assets’. The assets both for Wealth-tax and the Income-tax Acts, barring the specified exclusions, include property of every description, movable or immovable. The Wealth-tax Act has also an exclusionary part, but the exclusions stated therein like the exclusions in the definition of capital assets do not touch any investments or deposits. On the other hand, the investments and deposits are, in the first instance, brought within the initial charge of wealth-tax and, afterwards, by special provisions, namely, section 5, excludes from the charge of tax certain deposits and investments as enumerated in that section. References may be made in this connection to clauses (xv), (xvi), (xxva), (xxvb), (xxvi), (xxvii), (xxviia), (xxviib), (xxviic), (xxviid), (xxix) of section 5(1) of the Wealth-tax Act. Thus, it is clear that whatever comes within the definition of assets under the Wealth-tax Act in its section 2(e) should likewise come under the definition of capital assets unless specifically excluded. The fixed deposit either with banks or with a public sector company is not an excluded asset under either of the two definitions, viz., the definition of ‘capital assets’ under section 2(14) of the Income-tax Act, 1961, and ‘assets’ under section 2(e) of the Wealth-tax Act, 1957.

What reinforces the assessee’s case is the special mention in sub-section (5) of section 11 of deposits with public sector companies. This only shows that an investment or deposit in a public sector company is firstly an asset and secondly a capital asset and thirdly a permitted capital asset under the special law relating to the assessment of charitable or public religious trusts. Therefore, the contention of the Revenue that the investment by way of deposit in a public sector company cannot be treated as a new asset acquired with the net consideration in terms of section 11(1A) is not tenable.” (pp. 160-164)

167. Availability of exemption in hands of charitable trusts of amounts paid as donation to other charitable trusts

A question has been raised regarding the availability of exemption in the hands of charitable trusts of amounts paid as donation to other charitable trusts.

The issue has been considered by the Board and it has been decided that as the law stands at present, the payment of a sum by one charitable trust to another for utilisation by the donee trust towards its charitable objects is proper application of income for charitable purpose in the hands of the donee trust; and the donor trust will not lose exemption under section 11 of the Income-tax Act, 1961, merely because the donee trust did not spend the donation during the year of receipt itself.

The above position may kindly be brought to the notice of all officers working in your charge.

CBDT Instruction : No. 1132, dated 5-1-1978. [Extracted from CIT v. Sarladevi Sarabhai Trust (No. 2) [1988] 172 ITR 698 (Guj.), at p. 709].

JUDICIAL ANALYSIS

EXPLAINED IN - In CIT v. Sarladevi Sarabhai Trust (No. 2) [1988] 172 ITR 698 (Guj.), the above instruction was explained with the following observations :

“This instruction shows that apart from the legal position that may be emanating from various provisions of the Act, the Central Board of Direct Taxes itself has issued a clear-cut guideline to all the Commissioners of Income-tax that a charitable trust will not lose exemption under section 11 of the Act if it passes a sum of money to another charitable trust for utilisation by the donee trust towards its charitable purposes and that it shall be proper utilisation of money by the donor trust for a charitable purpose.

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Mr. Soparkar, for the Revenue, submitted that the aforesaid instruction will not apply to the facts of the present case as the circular nowhere contemplates a donation wherein the donee trust is not allowed to spend the donated amount the whole hog for its charitable or religious purpose but has to keep it intact as corpus and has to utilise only the income thereof. It is not possible to agree with the aforesaid fine distinction sought to be drawn by the learned advocate for the Revenue in the light of the wording of instruction No. 1132. Even the last sentence of para 2 indicates that whether in the given year, the donee trust has spent the donation or not, would be a totally irrelevant consideration. What the donor trust does is the only relevant matter. Utilisation by the donee trust in any year would not be relevant for the purpose of deciding whether the donor trusts gets exemption under section 11 of the Act or not. This is an additional aspect of the matter, therefore, which enables the assessee to succeed. These instructions are binding on all the officers under the Act and, therefore, even apart from the legal position which we have discussed earlier, the first contention canvassed by the Revenue will have to be held to have been squarely covered against it by instruction No. 1132 itself.” (pp. 709-710)

168. Clarification regarding investment in ‘Kisan Vikas Patra’ and ‘Indira Vikas Patra’

1. Sub-section (5) of section 11 of the Income-tax Act, 1961 specifies the forms and modes of investment or deposit or surplus money by public charitable or religious trusts and institutions as referred to in section 11(2)(b) of the Act. Clause (i) of the said sub-section (5) specifies one of the forms of investment as investment in savings certificates as defined in clause (c) of section 2 of the Government Savings Certificates Act, 1959, and any other securities or certificates issued by the Central Government under the Small Savings Scheme.

2. Representations have been received seeking clarification whether investments in ‘Indira Vikas Patra’ and ‘Kisan Vikas Patra’ are covered by the form or mode of investment specified in the aforesaid clause (i) of sub-section (5) of section 11.

3. Section 2(c) of the Government Savings Certificates Act, 1959, defines ‘savings certificates’ as certificates to which that Act applies. Section 12 of the said Act empowers the Central Government to make rules to carry out the purposes of that Act. The Indira Vikas Patra Rules, 1986, and the Kisan Vikas Patra Rules, 1988, have been notified by the Central Government in exercise of the powers conferred by the aforesaid section 12 of the Government Savings Certificates Act, 1959. Thus, both these Patras are savings certificates to which the aforesaid Government Savings Certificates Act, 1959 applies. These are, therefore, covered by section 11(5)(i) of the Income-tax Act read with section 2(c) of the Government Savings Certificates Act.

4. It is, therefore, clarified that the investments in ‘Indira Vikas Patra’ and ‘Kisan Vikas Patra’ are in accordance with the norms and modes specified in section 11(5) of the Income-tax Act.

Circular : No. 566, dated 17-7-1990.