TITLE: S. 2(47)/ 54: If an agreement to sell is entered into within the prescribed period, there is a transfer of some rights in favour of the vendee. Fact that sale deed could not be executed within the time limit owing to supervening problem is not a bar for s. 54 exemption CASE: Sanjeev Lal vs. CIT (Hon’ble Supreme Court)

TITLE: S. 2(47)/ 54: If an agreement to sell is entered into within the prescribed period, there is a transfer of some rights in favour of the vendee. Fact that sale deed could not be executed within the time limit owing to supervening problem is not a bar for s. 54 exemption

CASE: Sanjeev Lal vs. CIT (Hon’ble Supreme Court) 

Consequences of execution of the agreement to sell are very clear and they are to the effect that the appellants could not have sold the property to someone else. In practical life, there are events when a person, even after executing an agreement to sell an immoveable property in favour of one person, tries to sell the property to another.

In our opinion, such an act would not be in accordance with law because once an agreement to sell is executed in favour of one person, the said person gets a right to get the property transferred in his favour by filing a suit for specific performance and therefore, without hesitation we can say that some right, in respect of the said property, belonging to the appellants had been extinguished and some right had been created in favour of the vendee/transferee, when the agreement to sell had been executed. A right in respect of the capital asset, viz. the property in question had been transferred by the appellants in favour of the vendee/transferee on 27.12.2002.

The sale deed could not be executed for the reason that the appellants had been prevented from dealing with the residential house by an order of a competent court, which they could not have violated.

As held in Oxford University Press vs. CIT [(2001) 3 SCC 359] a purposive interpretation of the provisions of the Act should be given while considering a claim for exemption from tax and one can very well interpret the provisions of Section 54 read with Section 2(47) of the Act, i.e. definition of “transfer”, which would enable the appellants to get the benefit under Section 54 of the Act.

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TITLE: Important principles of law on taxation of discretionary & specific trusts explained CASE: CWT vs. Estate of Late HMM Vikramsinghji of Gondal (Hon’ble Supreme Court)

TITLE: Important principles of law on taxation of discretionary & specific trusts explained

CASE: CWT vs. Estate of Late HMM Vikramsinghji of Gondal (Hon’ble Supreme Court)

The ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in the USA & UK. These trusts were created for the benefit of (a) the Settlor, (b) the children and remoter issue for the time being in existence of the Settlor and (c) any person for the time being in existence who is the wife or widow of the Settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the Settlor. During his life time, the settlor, Shri Vikramsinhji, was including the whole of the income arising from these trusts in his returns of income.

The said income was also included in the two returns filed by his son Jyotendrasinhiji for the AY 1970-71. Thereafter, the assessee took the stand that the income from these trusts is not includible in his income. Jyotendrasinhiji also took the stand that inclusion of the said income in the returns submitted by his father for the AYs 1964-65 to 1969-70 and by himself for the assessment year 1970-71 was under a mistake. Clause 3 of the deeds of settlement executed in U.K. leaves at the discretion of the trustees to disburse benefits to the beneficiaries.

 The endorsement made in the returns, as noted above, shows that income was retained by the trustees and not disbursed. The Tribunal while considering clause 3(2) and Clause 4 of the U.K. Trust Deeds observed that if the trusts were really intended to be discretionary, the trustees had a duty cast on them to ascertain the relative needs and personal circumstances of all the beneficiaries and to allocate the income of the trusts, among them from time to time, according to the objects of the trusts, however, the tell tale facts bring out the intention of the settlor to treat the trust property as his own.

The settlor and after his death his son have been showing the income of foreign trusts in the returns of income filed from time to time. Had the trust deeds been really understood by the trustees and the beneficiaries as discretionary by virtue of the operation of clause 3, one would have expected the state of affairs to have been different. Consequently, the Tribunal held that due to failure on the part of the Maharaja to appoint discretion exercisers as per clause 3(2), clause 4 has become operative and the U.K. trusts have to be held to be specific trusts. The High court did not agree with the Tribunal’s view and held that on interpretation of the relevant clauses of the deeds of settlement executed in U.K., character of the trusts was discretionary and not specific.

On appeal by the department to the Supreme Court HELD dismissing the appeal:

A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit.

The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future.

The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. Having regard to the above legal position about the discretionary trust which is also applied by by this Court in the earlier judgment and the fact that the income has been retained and not disbursed to the beneficiaries, the view taken by the High Court cannot be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts does not get altered. The two U.K. trusts continued to be ‘discretionary trust’ for the subject assessment years.

The High Court has taken a correct view that the value of the assets cannot be assessed on the estate of the deceased Settlor (Snell’s Principles of Equity, 28th Edition, Page 138 followed)

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TITLE: Important principles of law on taxation of discretionary & specific trusts explained CASE: CWT vs. Estate of Late HMM Vikramsinghji of Gondal (Supreme Court)

TITLE:  Important principles of law on taxation of discretionary & specific trusts explained

CASE:  CWT vs. Estate of Late HMM Vikramsinghji of Gondal (Supreme Court)      

The ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in the USA & UK. These trusts were created for the benefit of (a) the Settlor, (b) the children and remoter issue for the time being in existence of the Settlor and (c) any person for the time being in existence who is the wife or widow of the Settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the Settlor. During his life time, the settlor, Shri Vikramsinhji, was including the whole of the income arising from these trusts in his returns of income. The said income was also included in the two returns filed by his son Jyotendrasinhiji for the AY 1970-71. Thereafter, the assessee took the stand that the income from these trusts is not includible in his income. Jyotendrasinhiji also took the stand that inclusion of the said income in the returns submitted by his father for the AYs 1964-65 to 1969-70 and by himself for the assessment year 1970-71 was under a mistake.

Clause 3 of the deeds of settlement executed in U.K. leaves at the discretion of the trustees to disburse benefits to the beneficiaries. The endorsement made in the returns, as noted above, shows that income was retained by the trustees and not disbursed. The Tribunal while considering clause 3(2) and Clause 4 of the U.K. Trust Deeds observed that if the trusts were really intended to be discretionary, the trustees had a duty cast on them to ascertain the relative needs and personal circumstances of all the beneficiaries and to allocate the income of the trusts, among them from time to time, according to the objects of the trusts, however, the tell tale facts bring out the intention of the settlor to treat the trust property as his own.

The settlor and after his death his son have been showing the income of foreign trusts in the returns of income filed from time to time. Had the trust deeds been really understood by the trustees and the beneficiaries as discretionary by virtue of the operation of clause 3, one would have expected the state of affairs to have been different. Consequently, the Tribunal held that due to failure on the part of the Maharaja to appoint discretion exercisers as per clause 3(2), clause 4 has become operative and the U.K. trusts have to be held to be specific trusts.

The High court did not agree with the Tribunal’s view and held that on interpretation of the relevant clauses of the deeds of settlement executed in U.K., character of the trusts was discretionary and not specific.

On appeal by the department to the Supreme Court HELD dismissing the appeal:

“A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit.

The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future.

The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. Having regard to the above legal position about the discretionary trust which is also applied by by this Court in the earlier judgment and the fact that the income has been retained and not disbursed to the beneficiaries, the view taken by the High Court cannot be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts does not get altered. The two U.K. trusts continued to be ‘discretionary trust’ for the subject assessment years.

The High Court has taken a correct view that the value of the assets cannot be assessed on the estate of the deceased Settlor (Snell’s Principles of Equity, 28th Edition, Page 138 followed)”

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Important principles of law on taxation of discretionary & specific trusts explained CASE: CWT vs. Estate of Late HMM Vikramsinghji of Gondal (Supreme Court)

The ex-Ruler of Gondal Shri Vikramsinhji executed three deeds of settlements (trust deeds) in the USA & UK. These trusts were created for the benefit of (a) the Settlor, (b) the children and remoter issue for the time being in existence of the Settlor and (c) any person for the time being in existence who is the wife or widow of the Settlor or the wife or widow or husband or widower of any of them, the children and remoter issue of the Settlor.

During his life time, the settlor, Shri Vikramsinhji, was including the whole of the income arising from these trusts in his returns of income. The said income was also included in the two returns filed by his son Jyotendrasinhiji for the AY 1970-71. Thereafter, the assessee took the stand that the income from these trusts is not includible in his income. Jyotendrasinhiji also took the stand that inclusion of the said income in the returns submitted by his father for the AYs 1964-65 to 1969-70 and by himself for the assessment year 1970-71 was under a mistake.

Clause 3 of the deeds of settlement executed in U.K. leaves at the discretion of the trustees to disburse benefits to the beneficiaries. The endorsement made in the returns, as noted above, shows that income was retained by the trustees and not disbursed.

The Tribunal while considering clause 3(2) and Clause 4 of the U.K. Trust Deeds observed that if the trusts were really intended to be discretionary, the trustees had a duty cast on them to ascertain the relative needs and personal circumstances of all the beneficiaries and to allocate the income of the trusts, among them from time to time, according to the objects of the trusts, however, the tell tale facts bring out the intention of the settlor to treat the trust property as his own.

The settlor and after his death his son have been showing the income of foreign trusts in the returns of income filed from time to time. Had the trust deeds been really understood by the trustees and the beneficiaries as discretionary by virtue of the operation of clause 3, one would have expected the state of affairs to have been different. Consequently, the Tribunal held that due to failure on the part of the Maharaja to appoint discretion exercisers as per clause 3(2), clause 4 has become operative and the U.K. trusts have to be held to be specific trusts.

The High court did not agree with the Tribunal’s view and held that on interpretation of the relevant clauses of the deeds of settlement executed in U.K., character of the trusts was discretionary and not specific.

On appeal by the department to the Supreme Court HELD dismissing the appeal:

A discretionary trust is one which gives a beneficiary no right to any part of the income of the trust property, but vests in the trustees a discretionary power to pay him, or apply for his benefit, such part of the income as they think fit. The trustees must exercise their discretion as and when the income becomes available, but if they fail to distribute in due time, the power is not extinguished so that they can distribute later. They have no power to bind themselves for the future.

The beneficiary thus has no more than a hope that the discretion will be exercised in his favour. Having regard to the above legal position about the discretionary trust which is also applied by by this Court in the earlier judgment and the fact that the income has been retained and not disbursed to the beneficiaries, the view taken by the High Court cannot be said to be legally flawed. Merely because the Settlor and after his death, his son did not exercise their power to appoint the discretion exercisers, the character of the subject trusts does not get altered.

The two U.K. trusts continued to be ‘discretionary trust’ for the subject assessment years. The High Court has taken a correct view that the value of the assets cannot be assessed on the estate of the deceased Settlor (Snell’s Principles of Equity, 28th Edition, Page 138 followed)

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Despite pronouncement of verdict in open court & signing of draft judgement, Judge entitled to alter verdict until judgement is signed & sealed CASE: Kushalbhai Ratanbhai Rohit vs. State of Gujarat (Supreme Court)

TITLE:  Despite pronouncement of verdict in open court & signing of draft judgement, Judge entitled to alter verdict until judgement is signed & sealed

CASE:  Kushalbhai Ratanbhai Rohit vs. State of Gujarat (Supreme Court)      

In a case relating to the prosecution of police personnel for alleged dereliction of duty, the High Court dictated an order in open Court in which it held that in the absence of sanction of the State Government u/s 197 of the CrPC, the prosecution was not permissible and the Petitioner had to be acquitted. However, later, the said order was recalled by the court suo moto on the ground that the issue required to be examined further. 

The Petitioner challenged the order of recall on the ground that once the order had been dictated in open court, a review or recall is not permissible in view of s. 362 CrP.C which provides that a judgment or order passed in a criminal case cannot be reviewed or recalled once it has been pronounced and signed. 

HELD by the Supreme Court dismissing the appeal:

Up to the moment the judgment is delivered Judges have the right to change their mind. There is a sort of ‘locus paenitentiae’ and indeed last minute alterations often do occur. Therefore, however much a draft judgment may have been signed beforehand, it is nothing but a draft till formally delivered as the judgment of the Court. Only then does it crystallise into a full fledged judgment and become operative. It follows that the Judge who “delivers” the judgment, or causes it to be delivered by a brother Judge, must be in existence as a member of the Court at the moment of delivery so that he can, if necessary, stop delivery and say that he has changed his mind. 

There is no need for him to be physically present in court but he must be in existence as a member of the Court and be in a position to stop delivery and effect an alteration should there be any last minute change of mind on his part. If he hands in a draft and signs it and indicates that he intends that to be the final expository of his views it can be assumed that those are still his views at the moment of delivery if he is alive and in a position to change his mind but takes no steps to arrest delivery. But one cannot assume that he would not have changed his mind if he is no longer in a position to do so. 

A Judge’s responsibility is heavy and when a man’s life and liberty hang upon his decision nothing can be left to chance or doubt or conjecture; also, a question of public policy is involved. As we have indicated, it is frequently the practice to send a draft, sometimes a signed draft, to a brother Judge who also heard the case. This may be merely for his information, or for consideration and criticism. 

The mere signing of the draft does not necessarily indicate a closed mind. We feel it would be against public policy to leave the door open for an investigation whether a draft sent by a Judge was intended to embody his final and unalterable opinion or was only intended to be a tentative draft sent with an unwritten understanding that he is free to change his mind should fresh light drawn upon him before the delivery of judgment. 

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Meaning of the word “turnover” CASE: CIT vs. Punjab Stainless Steel Industries (Supreme Court)

TITLE: Meaning of the word “turnover” in s. 80HHC explained. Sale proceeds of scrap is not “turnover” for s. 80HHC. Revenue should encourage assessees to bring in foreign exchange

CASE: CIT vs. Punjab Stainless Steel Industries (Supreme Court

(i) The word “turnover” means only the amount of sale proceeds received in respect of the goods in which an assessee is dealing in. So far as the scrap is concerned, the sale proceeds from the scrap may either be shown separately in the Profit and Loss Account or may be deducted from the amount spent by the manufacturing unit on the raw material. When such scrap is sold the sale proceeds of the scrap cannot be included in the term ‘turnover’ for the reason that the unit is engaged primarily in the manufacturing and selling of steel utensils and not scrap of steel. Therefore, the proceeds of such scrap would not be included in ‘sales’ in the Profit and Loss Account of the assessee (The situation would be different in the case of a person who is primarily dealing in scrap);

(ii) The intention behind enactment of s. 80HHC was to encourage export so as to earn more foreign exchange. For the said purpose the Government wanted to encourage businessmen, traders and manufacturers to increase the export so as to bring more foreign exchange in our country. If the purpose is to bring more foreign exchange and to encourage export, we are of the view that the legislature would surely like to give more benefit to persons who are making an effort to help our nation in the process of bringing more foreign exchange. If a trader or a manufacturer is trying his best to increase his exports, even at the cost of his business in a local market, we are sure that the Government would like to encourage such a person. In our opinion, once the Government decides to give some benefit to someone who is helping the nation in bringing foreign exchange, the Revenue should also make all possible efforts to encourage such traders or manufacturers by giving such business units more benefits as contemplated under the provisions of law.

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TITLE: S. 244A: Deductor entitled to interest on refund of excess TDS from date of payment CASE: UOI vs. Tata Chemicals Ltd (Supreme Court)

TITLE:  S. 244A: Deductor entitled to interest on refund of excess TDS from date of payment

CASE: UOI vs. Tata Chemicals Ltd (Supreme Court)

The assessee made an application u/s 195(2) for permission to remit technical service charges and reimbursement of expenses to a foreign company without deduction of tax at source. The AO passed an order directing the assessee to deduct TDS at the rate of 20% before making remittance. The assessee effected the deduction and filed an appeal before the CIT(A) in which it claimed that the said remittance was not subject to TDS.

The CIT(A) upheld the claim with regard to the reimbursement of expenses with the result that the TDS thereon was refunded to the assessee. However, the AO declined to grant interest u/s 244A on the said interest by relying on Circular Nos 769 dated 06.08.1998 and 790 dated 20.4.2000 issued by the CBDT. The CIT(A) upheld the AO’s stand though the Tribunal and High Court upheld the assessee’s stand.

On appeal by the department to the Supreme Court HELD dismissing the appeal:

(i) A “tax refund” is a refund of taxes when the tax liability is less than the tax paid. When the said amount is refunded it should carry interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and retention of the money collected unauthorizedly by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of Section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There is no reason to restrict the same to an assessee only without extending the similar benefit to a deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/ foreign company;

(ii) Providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing Statute. Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors’ lawful monies with the accrued interest for the period of undue retention of such monies. The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex ae quo et bono ought to be refunded, the right to interest follows, as a matter of course;

(iii) The said interest has to be calculated from the date of payment of such tax.

RELATED JUDGEMENTS

1.      CIT vs. Gujarat Flouro Chemicals (Supreme Court)

2.      CIT vs. Gujarat Flouro Chemicals (Supreme Court)

3.       Chironjilal Sharma HUF vs. UOI (Supreme Court)

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TITLE: S. 158BC/ 158BD: Law on how & when “satisfaction” has to be recorded by AO to attain jurisdiction over non-searched person explained CASE: CIT vs. Calcutta Knitwears (Supreme Court)

A search u/s 132 was carried out in the premises of the Bhatia Group on 05.02.2003 and certain incriminating documents pertaining to the assessee firm were found. The assessment on the Bhatia group was completed on 30.03.2005. Thereafter, on 15.07.2005, the AO recorded his “satisfaction” that the seized papers revealed the undisclosed income of the assessee and the said papers were passed on to the AO of the assessee for making an assessment u/s 158BC read with s. 158BD. The assessee argued that the proceedings initiated again him were invalid as the said “satisfaction note” was prepared after the proceedings in the case of the searched party were completed.

The AO and CIT(A) rejected the assessee’s claim though the Tribunal and the High Court upheld it. The Tribunal & High Court held that as the recording of satisfaction by the AO as contemplated u/s 158BD was on a date subsequent to the framing of assessment u/s 158BC in case of the searched person, that is, beyond the period prescribed u/s 158BE(1)(b), the notice issued u/s 158BD was belated and consequently the assumption of jurisdiction by the AO in the block assessment was invalid.

On appeal by the department to the Supreme Court HELD by the Supreme Court allowing the appeal:

(i) While it is true that before initiating proceedings u/s 158BD, the AO who has initiated proceedings for completion of the assessments u/s 158BC should be satisfied, on the basis of cogent and demonstrative material, that the seized documents belong to a person other than the searched person, the said satisfaction note could be prepared by the AO either at the time of initiating proceedings for completion of assessment of a searched person u/s 158BC or during the stage of the assessment proceedings. It does not mean that after completion of the assessment, the AO cannot prepare the satisfaction note to the effect that there exists income tax belonging to any person other than the searched person. The language of the provision is clear and unambiguous. The legislature has not imposed any embargo on the AO in respect of the stage of proceedings during which the satisfaction is to be reached and recorded in respect of the person other than the searched person. Further, s. 158BE(2)(b) only provides for the period of limitation for completion of block assessment u/s 158BD in case of the person other than the searched person as two years from the end of the month in which the notice under this Chapter was served on such other person in respect of search carried on after 01.01.1997. The said section does neither provides for nor imposes any restrictions or conditions on the period of limitation for preparation the satisfaction note u/s 158BD and consequent issuance of notice to the other person;

(ii) The result is that for the purpose of s. 158BD a satisfaction note is sine qua non and must be prepared by the AO before he transmits the records to the other AO who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages: (a) at the time of or along with the initiation of proceedings against the searched person u/s 158BC of the Act; (b) along with the assessment proceedings u/s 158BC of the Act; and (c) immediately after the assessment proceedings are completed u/s 158BC of the Act of the searched person.

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Prosecution for offence u/s 276CC for failure to file ROI can be initiated during the pendency of assessment proceedings. CASE: Sasi Enterprises vs. ACIT (Supreme Court)

TITLE:  Prosecution for offence u/s 276CC for failure to file ROI can be initiated during the pendency of assessment proceedings. The statement in the individual returns of the partners that the firm has not filed a ROI as its’ accounts are not finalized does not absolve the firm of prosecution for non-filing of ROI

CASE: Sasi Enterprises vs. ACIT (Supreme Court)

The assessee, a registered partnership firm, of which Ms. J. Jayalalitha and Mrs. N. Sasikala are partners, did not furnish returns of income despite several opportunities. The AO made a best judgement assessment u/s 144 and filed a complaint with the Megistrate against the assessee for committing offences punishable u/s 276CC. The assessee challenged the filing of the complaint on the ground that as the assessment had not attained finality no offence had taken place and so the complaint was pre-mature. It was also pointed out that in the individual returns of the partners it was stated that as the accounts of the assessee-firm had not been finalized, its return of income could not be filed. The Magistrate and High Court dismissed the challenge to the complaint.

On appeal by the assessee to the Supreme Court, HELD dismissing the appeal:

“(i) The offence u/s 276CC is attracted on failure to comply with the provisions of s. 139(1) or failure to respond to the notice issued u/s 142 or s. 148 within the time limit specified therein. The contention that pendency of the appellate proceedings is a relevant factor for not initiating prosecution proceedings u/s 276CC is not acceptable. S. 276CC contemplates that an offence is committed on the non-filing of the return and it is totally unrelated to the pendency of assessment proceedings except for second part of the offence for determination of the sentence of the offence, the department may resort to best judgment assessment or otherwise to past years to determine the extent of the breach. The language of s. 276CC is clear so also the legislative intention. If it was the intention of the legislature to hold up the prosecution proceedings till the assessment proceedings are completed by way of appeal or otherwise the same would have been provided in s. 276CC itself. Therefore, the contention that no prosecution could be initiated till the culmination of assessment proceedings, especially in a case where the appellant had not filed the return as per s. 139(1) of the Act or following the notices issued u/s 142 or s. 148 does not arise;

(ii) The declaration or statement made in the individual returns by partners that the accounts of the firm are not finalized, hence no return has been filed by the firm, will not absolve the firm in filing the statutory return u/s 139(1) of the Act. The firm is independently required to file the return and merely because there has been a best judgment assessment u/s 144 would not nullify the liability of the firm to file the return as per s. 139(1) of the Act. The contention that since they had in their individual returns indicated that the firm’s accounts had not been finalized, hence no returns were filed would mean that failure to file return was not willful, cannot be accepted;

(iii) S. 278E deals with the presumption as to culpable mental state. The question is on whom the burden lies, either on the prosecution or the assessee u/s 278E to prove whether the assessee has or has not committed willful default in filing the returns. Court in a prosecution of offence, like s. 276CC has to presume the existence of mens rea and it is for the accused to prove the contrary and that too beyond reasonable doubt. Resultantly, the appellants have to prove the circumstances which prevented them from filing the returns as per s. 139(1) or in response to notices u/s 142 and 148 of the Act;

(iv) The details of the various proceedings reveal the dilatory tactics adopted in these cases. Courts must be guarded against those persons who prefer to see it as a medium for stalling all legal processes. The Criminal Court is directed to complete the trial within four months from the date of receipt of this Judgment.”

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A charitable and religious trust which is not hit by S. 13(1)(b) & is eligible to claim exemption u/s 11

TITLE: A charitable and religious trust which does not benefit any specific religious community is not hit by s. 13(1)(b) & is eligible to claim exemption u/s 11

CASE: CIT vs. M/s Dawoodi Bohara Jamat (Supreme Court)

The assessee filed an application for registration before the CIT for registration u/s 12A/ 12AA to avail exemption u/s 11. The CIT held that though the assessee was a charitable trust, since its object and purpose was confined only to a particular religious community (Dawoodi Bohra), the bar in s. 13(1)(b) was attracted. On appeal, the Tribunal held that as the objects of the trust are wholly religious in nature, the provisions of s. 13(1)(b) which are otherwise applicable to charitable trusts was not applicable. The assessee was held entitled to claim registration u/s 12A & 12AA. On appeal by the department, the High Court declined to entertain the appeal on the ground that the Tribunal had given a finding of fact that the assessee was a religious trust. On further appeal by the department the Supreme Court had to consider (i) whether the issue as to whether the assessee was a charitable/ religious trust was a finding of fact & (ii) whether the assessee was hit by the bar in s. 13(1)(b).

HELD by the Supreme Court:

(i) Normally a finding of fact as decided by the last fact finding authority is final and ought not to be lightly interfered by the High Court in an appeal. The exceptions to the said rule have been well delineated by this Court and for the present case do not require to be noticed. The appellate Courts however ought to be cautious while weeding out such questions and should the question in examination involve examination of finding of fact, ex cautela abundanti the appellate Courts would require to examine that whether the question involves merely the finding of fact or the legal effect of such proven facts or documents in appeal. While the former would be a question of fact which may or may not be interfered with, the latter is necessarily the question of law which would require consideration. It is often that the questions of law and fact are intricately entwined, sometimes to the extent of blurring the domains in which they ought to be considered and therefore, require cautious consideration. The question where the legal effect of proven facts is intrinsically in appeal has to be differentiated from the question where a finding of fact is only assailed;

(ii) The legal effect of proved facts and documents is a question of law. The determination of nature of trust as wholly religious or wholly charitable or both charitable and religious under the Act is not a question of fact. It is but a question which requires examination of legal effects of the proven facts and documents, that is, the legal implication of the objects of the trust as contained in the trust deed. It is only the objects of a trust as declared in the trust deed which would govern its right of exemption u/s 11 or 12. It is the analysis of these objects in the backdrop of fiscal jurisprudence which would illuminate the purpose behind creation or establishment of the trust for either religious or charitable or both religious and charitable purpose. Therefore, the High Court has erred in refusing to interfere with the observations of the Tribunal in respect of the character of the trust;

(iii) In certain cases, the activities of a trust may contain elements of both: religious and charitable and thus, both the purposes may be over lapping. More so when the religious activity carried on by a particular section of people would be a charitable activity for or towards other members of the community and also public at large;

(iv) On facts, the objects of the assessee are not indicative of a wholly religious purpose but are collectively indicative of both charitable and religious purposes. The fact that the said objects trace their source to the Holy Quran and resolve to abide by the path of godliness shown by Allah would not be sufficient to conclude that the entire purpose and activities of the trust would be purely religious in color. The objects reflect the intent of the trust as observance of the tenets of Islam, but do not restrict the activities of the trust to religious obligations only and for the benefit of the members of the community. In judging whether a certain purpose is of public benefit or not, the Courts must in general apply the standards of customary law and common opinion amongst the community to which the parties interested belong to. Customary law does not restrict the charitable disposition of the intended activities in the objects. Neither the religious tenets nor the objects as expressed limit the service of food on religious occasions only to the members of the specific community. The activity of Nyaz performed by the assessee does not delineate a separate class but extends the benefit of free service of food to public at large irrespective of their religion, caste or sect and thereby qualifies as a charitable purpose which would entail general public utility. Even the establishment of Madarsa or institutions to impart religious education to the masses would qualify as a charitable purpose qualifying under the head of education u/s 2(15). The institutions established to spread religious awareness by means of education though established to promote and further religious thought could not be restricted to religious purposes. The assessee is consequently a public charitable and religious trust eligible for claiming exemption u/s 11;

(v) The interpretation of the Tribunal & High Court that s. 13(1)(b) would only be applicable in case of income of a trust for charitable (& not religious) purpose established for benefit of a particular religious community is not correct. S. 13(1)(b) applies also to composite trusts set up for both religious and charitable purposes if it is established for the benefit of any particular religious community or caste.

(vi) On facts, though the objects of the assessee-trust are based on religious tenets under Quran according to religious faith of Islam, the perusal of the objects and purposes of the assessee would clearly demonstrate that the activities of the trust are both charitable and religious and are not exclusively meant for a particular religious community. The objects do not channel the benefits to any community if not the Dawoodi Bohra Community and thus, would not fall under the provisions of s. 13(1)(b).

 

Related Judgements

1. Shiv Mandir Devsttan Panch Committee Sanstan vs. CIT (ITAT Nagpur)

                2. Vanita Vishram Trust vs. CCIT (Bombay High Court)

3. Himachal Pradesh Environment vs. CIT (ITAT Chandigarh)

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S. 244A: Deductor entitled to interest on refund of excess TDS from date of payment [ UOI vs. Tata Chemicals Ltd (Supreme Court)

TITLE: S. 244A: Deductor entitled to interest on refund of excess TDS from date of payment

CASE: UOI vs. Tata Chemicals Ltd (Supreme Court)

The assessee made an application u/s 195(2) for permission to remit technical service charges and reimbursement of expenses to a foreign company without deduction of tax at source. The AO passed an order directing the assessee to deduct TDS at the rate of 20% before making remittance. The assessee effected the deduction and filed an appeal before the CIT(A) in which it claimed that the said remittance was not subject to TDS. The CIT(A) upheld the claim with regard to the reimbursement of expenses with the result that the TDS thereon was refunded to the assessee. However, the AO declined to grant interest u/s 244A on the said interest by relying on Circular Nos 769 dated 06.08.1998 and 790 dated 20.4.2000 issued by the CBDT. The CIT(A) upheld the AO’s stand though the Tribunal and High Court upheld the assessee’s stand.

On appeal by the department to the Supreme Court HELD dismissing the appeal:

“(i) A “tax refund” is a refund of taxes when the tax liability is less than the tax paid. When the said amount is refunded it should carry interest in the matter of course. As held by the Courts while awarding interest, it is a kind of compensation of use and retention of the money collected unauthorizedly by the Department. When the collection is illegal, there is corresponding obligation on the revenue to refund such amount with interest in as much as they have retained and enjoyed the money deposited. Even the Department has understood the object behind insertion of Section 244A, as that, an assessee is entitled to payment of interest for money remaining with the Government which would be refunded. There is no reason to restrict the same to an assessee only without extending the similar benefit to a deductor who has deducted tax at source and deposited the same before remitting the amount payable to a non-resident/ foreign company;

(ii) Providing for payment of interest in case of refund of amounts paid as tax or deemed tax or advance tax is a method now statutorily adopted by fiscal legislation to ensure that the aforesaid amount of tax which has been duly paid in prescribed time and provisions in that behalf form part of the recovery machinery provided in a taxing Statute. Refund due and payable to the assessee is debt-owed and payable by the Revenue. The Government, there being no express statutory provision for payment of interest on the refund of excess amount/tax collected by the Revenue, cannot shrug off its apparent obligation to reimburse the deductors’ lawful monies with the accrued interest for the period of undue retention of such monies. The State having received the money without right, and having retained and used it, is bound to make the party good, just as an individual would be under like circumstances. The obligation to refund money received and retained without right implies and carries with it the right to interest. Whenever money has been received by a party which ex ae quo et bono ought to be refunded, the right to interest follows, as a matter of course;

(iii) The said interest has to be calculated from the date of payment of such tax.”

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