JUDGMENT R.K. Agrawal, J.
1. In the IT Ref. No. 7 of 1987 which arises under the Income-tax Act, 1961, hereinafter referred to as the IT Act, the Tribunal, Allahabad, has referred the following three questions of law under Section 256(1) of the IT Act, for opinion to this Court:
"1. Whether, on the facts and circumstances of the case, the Tribunal, Allahabad, was justified in holding that an investment of the value thereof received by a trust by way of donation cannot be treated as an investment within the meaning of Section 13 of the IT Act, 1961 ?
2. Whether, in the law and on the facts of the case, the Tribunal was justified in holding that the ITO was wrong in invoking the provisions of Section 13(1) (certiorari quashing the order dated) and Section 13(2)(h) of the IT Act, 1961, in this case ?
3. Whether, in law and on facts of the case, the Tribunal was justified in allowing exemption under Section 11 of the IT Act, 1961, to the trust ?"
2. Whereas in WT Ref. No. 11 of 1987, which arises under the WT Act, 1957, hereinafter referred to as the WT Act, the Tribunal, Allahabad, has referred the following three questions of law under Section 27(1) of the WT Act, for opinion to this Court:
"1. Whether, in law and in circumstances of the case, the Tribunal, Allahabad, was justified in holding that an investment of the value thereof received by the trust by way of donation cannot be treated as an investment within the meaning of Section 13 of the IT Act, 1961 ?
2. Whether, in law and on facts of the case, the Tribunal was justified in holding that ITO was wrong in invoking the provisions of Sections 13(1)(c) and 13(2)(h) of the IT Act, 1961, in this case ?
3. Whether, in law and on facts of the case, the Tribunal was justified in allowing exemption under Section 11 of the IT Act, 1961, to the trust ignoring the following facts :
(a) that M/s J.K. Synthetics Ltd. had made a substantial contribution, i.e., for Rs. 70,000 to the corpus of the assessee-trust and was prohibited person within the meaning of Section 13(3)(b) of the IT Act, 1961 ?
(b) That the assessee-trust was hit by provisions of Section 13(2)(h) of the IT Act, 1961, as the funds of the assessee-trust to the extent of Rs. 13,400 were invested in equity shares of M/s J.K. Synthetics Ltd. who was prohibited person within the meaning of Section 13(3)(b) of the IT Act, 1961 ?"
As both the references relate to Shri Radha Krishna Temple Trust, Kanpur, they are taken up for hearing together and are being decided by a common order.
3. The IT Ref. relates to the asst. yrs. 1973-74, 1976-77 and 1978-79 whereas the WT Ref. relates to the asst. yr. 1973-74.
4. Briefly stated the facts giving rise to the IT Ref. are as follows :
The respondent, Shri Radha Krishna Temple Trust, Kanpur, is a public religious trust and derives income from rent, dividend, interest, etc. It claimed exemption under Section 11 of the IT Act in respect of its income. The ITO did not allow the exemption under Section 11 of the Act on the ground that the trust was hit by the provisions of Sections 13(1)(c) and 13(2)(h) of the IT Act because the trust fund remained invested in concerns in which the trustees were substantially interested. The respondent preferred separate appeals before the AAC. The AAC had held that investment of the value thereof received by the trust by way of donation could not be treated as investment within the meaning of Section 13(2)(h) of the IT Act and, therefore, the trust was eligible for exemption under Section 11 of the IT Act. The Revenue's appeals before the Tribunal have failed.
5. Briefly stated the facts giving rise to the WT Reference are as follows :
The respondent-assessee, which is a trust created with the object of maintaining Sri Radha Krishna Temple, took the factory premises of M/s J.K. Ginning Factory on lease and let the same out on rent to various tenants. It also constructed certain shops and flats of its own and let the same out on rent. The rental income during the assessment year amounted to Rs. 1,11,472. The leasehold right was not settled on the trust by its founders. The activity of the trust of taking premises on lease on normal charges and letting the same out to tenants on higher rent and construction of shops and flats, which were never the object of the trust, was treated to be indulged in the activity of profit by the WTO. The funds of the trust continued to remain invested in M/s J.K. Synthetics Ltd., a concern in which person enumerated in Section 13(3) had substantial interest. The WTO, therefore, held that the trust was hit by Section 13(2)(h) of the IT Act. Taking recourse to the provisions of Section 21A of the WT Act which provided that such property of the trust which had been used for the benefit of any person referred to in Sub-section (3) of Section 13 is liable to wealth-tax, the WTO was of the opinion that provisions of Section 13(1)(c) r/w Section 13(2)(h) of the IT Act and Section 21A of the WT Act were applicable and accordingly refused to allow exemption under the Act. Feeling aggrieved, the respondent preferred appeal before the AAC which came into conclusion that the provisions of Sections 13(1)(c) and 13(2)(h) of the IT Act as also Section 21A of the WT Act are not applicable. The Revenue's appeal before the Tribunal has failed.
6. We have heard Sri Shambhoo Chopra, learned standing counsel for the Revenue and Sri R.S. Agarwal, learned counsel for the respondent.
7. The learned counsel for the Revenue submitted that the trustees of J.K. Charitable Trust are the executors of the trust. The trustees of J.K. Charitable Trust have substantial interest in M/s J.K. Synthetics Ltd. have substantial interest in M/s J.K. Synthetics Ltd. and their shareholdings in the company exceed 20 per cent. The trustees of the respondent-trust are also relatives of the trustees of J.K. Charitable Trust. In view of the shareholdings of the respondent-trust in J.K. Synthetics Ltd., the trust is not entitled to exemption under Section 11 of the IT Act. In support of his submission, he relied upon the following decisions :
1. CIT v. Jamnalal Bajaj Sewa Trust: (1988) 171 ITR 568 (Bom)
2. Director of IT v. Bharat Diamond Bourse, (2003) 259 TTR 280 (SC).
8. Sri R.S. Agarwal, learned counsel appearing for the respondent however, submitted that the respondent-trust had received shares of J.K. Synthetics Ltd. as donation and it had not invested any amount as an investment in the said company. Thus, there is no question of prohibition contained under Section 13(3)(b) of the IT Act in the present case and, therefore, the trust was eligible for exemption under Section 11 of the Act. In support of the aforesaid submission, he relied upon the following decisions :
1. CIT v. J.K. Charitable Trust (1992) 196 ITR 31 (All);
2. CIT v. Lalbhai Dalpatbhai Charity Trust : (1994) 209 ITR 865 (Guj);
3. CIT v. Sir Shri Ram Foundation : (2001) 250 ITR 55 (Del).
9. Having heard learned counsel for the parties, we find that the entire share holding/investment in J.K. Synthetics Ltd. was received by the trust by way of donation and the question of exemption under Section 11 of the Act has proceeded on that basis. Sri Shambhoo Chopra, learned counsel for the Revenue, however, disputed this position but as there is no specific question referred to us on this finding, we are proceeding on the basis that the shares of J.K. Synthetics Ltd. have been received by the trust by way of donation and the trust had not made any investment in the said company. Sections 13(1)(c) and 13(2)(h) of the IT Act are reproduced below :
"Section 13. Section 11 not to apply in certain cases. (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--
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(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income thereof--
(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or
(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) :
Provided that in the case of a trust or institution created or established before the commencement of this Act, the provisions of sub-Clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any person referred to in Sub-section (3), if such use or application is by way of compliance with a mandatory term of the trust or a mandatory rule governing the institution :
Provided further that in the case of a trust for religious purposes or a religious institution (whenever created or established) or a trust for charitable purposes or a charitable institution created or established before the commencement of this Act, the provisions of sub-Clause (ii) shall not apply to any use or application, whether directly or indirectly, of any part of such income or any property of the trust or institution for the benefit of any persons referred to in Sub-section (3) insofar as such use or application relates to any period before the 1st day of June, 1970;
(2) Without prejudice to the generality of the provisions of Clause (c) and Clause (d) of, Sub-section (1), the income of the property of the trust or institution or any part of such income or property shall, for the purposes of that clause, be deemed to have been used or applied for the benefit of a person referred to in Sub-section (3).
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(h) if any funds of the trust or institution are, or continue to remain, invested for any period during the previous year (not being a period before the 1st day of January, 1971) in any concern in which any person referred to in Sub-section (3) has a substantial interest."
10. From a reading of the aforesaid provisions, it will be seen that the provisions under Section 11 or 12 of the IT Act shall not apply where the income of the trust for charitable or religious purpose are used or applied directly or indirectly for the benefit of any person referred to in Sub-section (3) and/or if any funds of the trust or institution are invested for any period during the previous year and or continue to remain invested for any period during the previous year in any concern in which any person referred to in Sub-section (3) has a substantial interest.
11. In the case of Jamnalal Bajaj Sewa Trust (supra), the Bombay High Court was considering the question where a public charitable trust was holding shares in Bajaj Auto Ltd. It had sold some of the shares in December, 1970, and realised capital gains but in its return for the relevant assessment year, the trust did not include the said capital gains. The ITO held that the capital gains were taxable. However, the Tribunal accepted that the capital gains could not be considered as income within the meaning of Section 13(4) of the IT Act and deleted the addition. The Bombay High Court has held that the capital gain had to be considered to be income within the meaning of Section 13(4) of the IT Act and the trust was not entitled to exemption under Section 11 of the IT Act. The aforesaid decision is of no help to the Revenue as in the said case, the Bombay High Court was considering a case as to whether the capital gain has to be treated as income under Section 13(4) of the IT Act or not whereas the controversy involved in the present case is entirely different.
12. In the case of Bhaiat Diamond Bourse (supra), the apex Court has held that the expression 'founder of the institution' in Section 13(3)(a) of the IT Act means that the person concerned should be originator of the institution or at least one of the persons responsible for the coming into existence of the institution. Contribution of money is not an inexorable test of a person being a 'founder', though it might happen often that the person who originates an institution may often also fund it. The aforesaid decision is also not applicable in the present case as the controversy is entirely different.
13. In the case of J.K. Charitable Trust (supra), this Court has held that issuance of bonus shares cannot be treated as investment by the assessee-trust.
14. In the case of Lalbhai Dalpatbhai Charity Trust (supra), the Gujarat High Court has held that on a plain reading of Clause (h) of Sub-section (2) of Section 13 of the IT Act, it is clear that it covers investment of trust funds in any concern in which any of the persons specified in Sub-section (3) has substantial interest. In the present case, the dividends were on the shares which constituted in the initial corpus of the trust and, therefore, should not have been brought under the provisions of Section 13 of the Act and the Tribunal was right in holding that the provisions of Section 13(2)(h) of the IT Act will not be applicable to the facts and circumstances of the present case in view of the holding of the assessee-company.
15. In the case of Sir Shri Ram Foundation (supra), the Delhi High Court has held that in construing the provisions of Section 13(2) of the IT Act, the expression 'fund' has to be understood in the context of the provisions of Section 13(2)(h) of the IT Act, and not only with reference to dictionaries or to commercial parlance or to the principles of accountancy. The expression used is 'funds' and not 'fund'. 'Funds' means money in hand or cash according to some dictionaries. This would be the proper meaning to be attributed to the expression 'funds' as appearing in the provision. The fundamental requirement of Section 13(2)(h) is that there must be investment of funds of a trust. If any expanded meaning is given to include assets other than money in hand or cash or credit balance in a bank account, it is evident that they are not capable of being invested as such. Other assets of the trust apart from money in hand or cash or balance in bank will have to be converted into money or cash before the same can be invested. The expression 'invest' connotes a positive act on the part of the trust whereby the funds of the trust are laid out or committed in any particular property or business or transaction with the object of earning a profit or financial advantage or return. What is contemplated is the trust having assets in the form of money or cash or balance in a bank or any other form capable of being invested or by a positive act which, pursuant to a decision of the trust, is laid out or committed in a concern of a nature specified before it can be held that such an investment comes within the mischief of Section 13(2)(h) of the IT Act.
16. We are in respectful agreement with the principles laid down by the Delhi High Court in the aforesaid case that the words 'funds' and 'investment' have different meaning and the investment ought to be made by the trust out of its funds as per requirement under Section 13(2)(h) of the Act and not those investments which have already been made on the receipts by way of donation.
17. We also find that the Calcutta High Court in the cases of CIT v. Birla Chanty Trust : (1988) 170 ITR 150 (Cal) J.K. Trust v. CWT (1994) 205 ITR 524 (Cal), CIT v. Bhoruka Public Welfare Trust : (1999) 240 ITR 513 (Cal), the Gujarat High Court in the cases of CIT v. Insaniyat Trust, (1988) 173 ITR 248 (Guj), CIT v. Sahitya Trust, (1993) 203 ITR 349 (Guj), CIT v. Lalbhai Dalpatbhai Chanty Trust (supra), Sahabhai Foundation v. CIT, (1994) 209 ITR 390 (Guj), the Bombay High Court in the cases of Trustees of Mangaldas N. Verma Charitable Trust v. CIT : (1994) 207 ITR 332 (Bom), CIT v. Pittie Charitable Trust (1994) 207 ITR 1053 (Bom) have also taken the similar view. Thus, we are of the considered opinion that the value of the investment received by the trust by way of donation cannot be treated as investment within the meaning of Section 13(2)(h) of the IT Act. In the present case, the respondent-trust had received shares of M/s J.K. Synthetics Ltd. by way of donation, therefore, it cannot be treated that the trust has made investment on its funds in respect of the aforesaid donation.
18. In view of the conclusion arrived at that provisions of Sections 13(1)(c) and 13(2)(h) of the IT Act are not applicable, the Tribunal was justified in granting the exemption under the WT Act also.
19. In view of the foregoing discussions, we answer the questions referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue. However, there shall be no order as to costs.