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The Tax Publishers 1981 TaxPub(DT) 0865 (AP-HC) : (1981) 131 ITR 0497 : (1981) 007 TAXMAN 0178

Commissioner of Income Tax, Andhra Pradesh-I v. Trustees of H.E.H. The Nizams Charitable Trust

Case Referred No. 142 of 1977 and Income-tax case No. 80 of 1979

Decided on January 21, 1981


Kuppuswami C.J.

The assessee is a public charitable trust created by the late Nizam by an indenture dated June 14, 1954, and is called "H. E. H. The Nizams Charitable Trust". The objects of the Trust are charitable in nature and the Trust is a public charitable trust.

The procedure adopted in making disbursements to several donees is as follows : The trustees pass resolutions sanctioning payments to various donees. As soon as the resolutions are passed, the money is earmarked specifically for a particular purpose and for a particular donee. But it often happens that it takes some time before the actual disbursements are made and though the resolutions are passed during the accounting year, the amount is disbursed after the accounting year (which is the financial year) and as soon as the resolutions are passed, they are debited to the income and expenditure account and credited to the outstanding payment account which contains the amounts due to the various donees as per the resolutions passed by the board. The amounts debited to the income and expenditure account but which are not actually disbursed, are shown as liabilities in the balance-sheet. At the time when the payment is made, the outstanding payment account is debited.

Under s. 11(1)(a) of the I.T. Act (hereinafter called "the Act"), the income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, shall not be included in the total income of the previous year of the person in receipt of the income. Where any such income is accumulated for application to such purposes in India, to the extent to which the income so accumulated is not in excess of twenty-five per cent. of the income from the property or rupees ten thousand, whichever is higher, shall also not be included in the total income of the person in receipt of the income.

For the assessment year 1969-70, it was claimed by the assessee that sums to the tune of Rs. 25,33,102 were spent on charitable purposes and since this amount was more than 75% of the total income, it was claimed that the provision of s. 11 of the Act are satisfied. The ITO accepted the claim and came to the conclusion that the assessee was entitled to a refund of Rs. 6,87,700. The Addl. Commissioner examined the record of the proceedings in exercise of his powers vested under s. 263 of the Act. He found that the sum of Rs. 25,33,102 said to have been applied for charitable purposes was not actually spent in full in he relevant year. The trustees were only providing for the expenditure for charitable purpose by passing necessary resolutions and debiting the same to the income and expenditure account without actually paying the said amount for the purposes for which they were earmarked. The amount actually spent was only Rs. 21,06,432 out of a total sum, of Rs. 25, 33,102. he also found that during the accounting year, the trustees had realised capital gains to the tune of Rs. 9,66,664 on sale of certain shares but the same was not taken into account in the income and expenditure statement filed by the trustees. If this was taken into account, the income actually spent for charitable purposes would be less than 75% of the income of the Trust and would not be exempt under s. 11 of the Act. Accordingly, he considered that the order passed by the ITO, allowing exemption for the whole income of the Trust and, consequently, granting refund of the entire amount of tax deducted at source, was erroneous. on this basis, he found that the shortfall in expenditure or unauthorised accumulation was Rs. 7,26,624. He, therefore, set aside the ITOs order granting refund of Rs. 6,87,700 and directed him to pass a fresh order according to law. Against the said order, the assessee preferred an appeal, I.T.A. No. 1584 [Hyderabad] 1973-74.

The ITO while making the assessments for the assessment years 1970-71 and 1971-72, adopted the reasoning of the Addl. Commissioner and consequently held in his assessment order for those two years that in all cases where only resolutions were passed during the accounting year and the disbursements were made to the donees subsequent to the accounting year, the assessee did not apply the income for charitable purposes within the meaning of s. 11(1)(a) of the Act. As against the said order, the appellant preferred an appeal to the AAC who held that the word "applied" should be understood in a practical sense and should not be equated with the word "spent". As against the orders of the AAC, the revenue preferred appeals, I.T.A. Nos. 383 and 384/1974-75, to the In