JUDGMENT
1. As three reference applications relating to the assessment years 1969-70, 1970-71 and 1971-72 have been referred for disposal by this court in which identical questions of law arise. The office is directed to register the reference application for the assessment year 1969-70, as 8 of 1976, for the assessment years 1970-71 as 8(a) of 1976 and for the assessment year 1971-72 as 8(b) of 1976. All the three reference applications are disposed of by a single order.
2. The following questions of law have been referred by the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur :
“1. Whether, on the facts and in the circumstances of the case, the assessee-trust was entitled to exemption from tax under Section 11 read with Section 2(15) of the Income-tax Act, 1961, as being a trust wholly for charitable purposes ?
2. If the answer to question No. 1 be in the affirmative, then whether the income of the trust from hedging transactions was or was not exempt from tax as being de hors the trust deed ?
3. If the answer to question No. 1 and/or question No. 2 be in the negative, then whether the trust is entitled to deduction under Section 80G of the Income-tax Act, 1961, in respect of donations made to charitable institutions in the application of the objects of the trust ?”
3. These questions of law relate to the assessment years 1969-70, 1970-71 and 1971-72. The. Income-tax Reference No. 8 of 1976 will relate to the assessment year 1969-70 and 8(a) and 8(b) of 1976 shall relate to assessment years 1970-71 and 1971-72, respectively. As the above mentioned identical questions of law arise in respect of all assessment years, the same are disposed of by one single order.
4. Brief facts of the case as mentioned in the statement of the case are that M/s. Rajasthan Charity Trust, Jaipur (hereinafter referred to as “the assessee”), is a trust created under the indenture dated April 23, 1956. Initially, the property settled upon trust consisted of 20,000 shares of Gwalior Webbing Co. Ltd. of Rs. 10 each fully paid up. The objectives of the trust have been enumerated in Clause 3 of the said indenture and which are also mentioned in detail in the statement of the case and we do not consider it necessary to repeat the same. In course of time, the shares originally settled upon the trust were sold and the cash realised therefrom was invested with some other concerns. Fresh donations were also received from several parties. Thus, the trust fund grew larger and the income therefrom was applied for the objectives of the trust. The Commissioner of Income-tax, Delhi and Rajasthan, by his order dated April 22, 1963, held that donations made to the assessee will be exempt under Section 88 (now Section 80G) of the Act in the hands of the donors subject to limits and conditions prescribed in the said section. This order of the Commissioner helped the trust to collect more donations in order to augment its funds. After examining the various terms of the trust deed and other documentary evidence, the Income-tax Officer held that the trust fulfilled all the conditions laid down under the Act to qualify itself for exemption from income-tax. In March, 1968, the assessee received as donations from Shri Mahadeoji Loyalka 11,500 shares of Indian Iron and Steel Co. Ltd. which were taken in the books of the trust at their market value of Rs. 1,88,140 at Rs. 16’36 per share. A further donation of 3,500 shares of Indian Iron and Steel Co. Ltd. was received in May, 1968, from Smt. Amrita Loyalka and these shares were taken in the books of the trust at their market value of Rs. 60,200 at Rs. 17.20 per share. Soon after getting the first lot of the shares of Indian Iron and Steel Co. Ltd., the trustees were apprehensive that the price of these shares might go down because of manipulative transactions carried out by some powerful groups. The trustees, therefore, started making forward sales of the shares of Indian Iron and Steel Co. Ltd. held by them right from the beginning of the accounting year relevant to the assessment year 1969-70. The trustees, however, did not part with these shares but purchased them again on the delivery date by paying the difference. Thus, during the course of the period covered by three accounting years relevant to the assessment years, the trustees carried out hedging transactions with respect to the shares in question. As apprehended by the trustees, the prices of these shares went down during the relevant period and this resulted in profits of Rs. 33,090, Rs. 35,100 and Rs. 52,500 in share hedging transactions for the assessment years in question.
5. During the assessment proceedings, the Income-tax Officer found that business operations were conducted by the assessee in share hedging transactions from which the abovementioned profits were credited in respect of the relevant assessment years, in the profit and loss account. The Income-tax Officer, vide his order sheet entry, required the assessee to show as to why the said transactions may not be taken as business transactions and it was further required to show cause as to why the entire income may not be subjected to tax.
6. In response to the notices, one of the trustees certified that the profit in shares hedging account was only in the nature of income of the trust from transactions entered in the hedge contract against the trust’s shareholding of Indian Iron and Steel Co, Ltd. to safeguard against any loss through price fluctuations and that the trustees never entered into purchase or sale transactions in any kind of shares during the respective years.
7. The Income-tax Officer, in respect of all the assessment years, held that the hedging transactions entered into by the trust constituted a business activity which did not come within the definition of “Charitable purpose” given under Section 2(15) of the Indian Income-tax Act (hereinafter referred to as “the Act”), as including relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. The Income-tax Officer as such rejected the assessee’s claim for exemption not only in respect of the profits in shares hedging account but also in respect of interest on its other investments which had been treated as exempt for the assessment year 1968-69. The Income-tax Officer computed the total income of the assessee at Rs. 1,86,257, Rs. 2,22,608 and Rs. 2,01,208 in respect of the three assessment years respectively.
8. Thereafter, on an application moved by the assessee for recover (sic) the amount were reduced with which we are not concerned.
9. Aggrieved against the order of the Income-tax Officer, the assessee filed an appeal before the Appellate Assistant Commissioner in respect of the three assessment years. The Appellate Assistant Commissioner decided the appeals partly in favour of the Department and partly in favour of the assessee. Aggrieved against the orders of the learned Appellate Assistant Commissioner, both the assessee and the Department filed appeals before the Tribunal. On behalf of the assessee, it was submitted that the entire income should be treated as exempted income. On the other hand, on behalf of the Department, it was submitted that the trust was not entitled to any exemption under Section 11(1)(a) of the Act due to its involvement in hedging transactions which were the activities carried on for profit within the meaning of Section 2(15) of the Act, The Tribunal, after considering the contentions of the parties and scrutinising the terms of the trust deed, held that none of the items mentioned in Clause 3 of the trust deed militates against the concept of charitable purpose. The Tribunal further observed that items No. 9, 10 and 11 of Clause 3 speak only of acts useful to the public and by its very terms, falls within the definition. The Tribunal also took the view that when the object of the trust is to do acts beneficial to the community, it is plainly an object of general public utility. The Tribunal, after referring to proviso (b) of Section 43(5) of the Act, also took the view that the transactions entered into by the trustees with a view to guard against the loss in the holdings of stocks and shares are not “speculative transactions” within the meaning of Sub-section (5) of Section 43 of the Act. The Tribunal did not accept the contention of the Revenue and held that the hedging transactions were entered into by the trustees to safeguard against the loss due to fluctuations in the prices. The case of CIT v. P. Krishna Warrier [1972] 84 ITR 119 (Ker) was relied on by the Revenue before the Tribunal. The Tribunal held that the facts of that case were not at all applicable to the facts of the present case. In the result, the Tribunal allowed the appeals filed by the assessee but dismissed the appeals filed by the Department. On an application moved by the Department, the questions mentioned above have been referred by the Tribunal for the opinion of this court.
10. So far as question No. 1 mentioned above is concerned, Mr. Surolia, learned counsel for the Revenue, was unable to show any mistake committed by the Tribunal. It may be further observed that the Income-tax Officer himself had stated in the assessment order for the assessment year 1968-69 that the trust satisfied all the essential conditions for exemption under the Act and the Income-tax Officer actually allowed such exemption for the assessment year 1968-69. There can be no manner of doubt that the assessee-trust was entitled to be exempt from tax under Section 11 read with Section 2(15) of the Act as this was a trust wholly for “charitable purposes”. The question No. 1 is, therefore, answered in the affirmative and in favour of the assessee. As regards question No. 2, Mr. Surolia, learned counsel for the Revenue, in this regard, submitted that the objects of the trust did not permit the assessee to make hedging transactions and such transactions were de hors the trust deed. It was also submitted that the hedging transactions done in the present case by the assessee were with a motive of profit and the same being business transactions, the assessee was liable for tax on such transactions.
11. On the other hand, Mr. Mehta, learned counsel for the assessee, submitted that the hedging transactions were done in order to protect the trust from possible loss due to fluctuations in the share market. The transactions were made in order to protect the trust from possible loss. It was further submitted that the predominant object in making such transactions was not to make profit, but to safeguard the trust from loss. Reliance, in support of the above contention, was placed on CIT v. Andhra Pradesh State Road Transport Corporation [1986] 159 ITR 1 (SC). It was further submitted by Mr. Mehta that the case of CIT v. P. Krishna Warriar [1972] 84 ITR 119, on which reliance was placed by the Revenue before the Tribunal, has itself been overruled by the Full Bench of the same High Court in P. Krishna Warriar v. CIT [1981] 127 ITR 192.
12. We have given our thoughtful consideration to the arguments advanced by learned counsel for both the parties. The very purpose and object of hedging transaction is to protect the trust from possible loss. In such transactions, the person undertakes the risk in order to reduce the loss. It cannot be said in the kind of transactions made in the present case that the object of the assessee was to earn profits. It is the duty of the trustee to take care as an ordinary prudent man to make any transaction which may be beneficial to the objects of the trust. In the present case, it has been proved on record that the charitable trust was not a dealer in shares and securities but was merely an investor in shares. The hedging transactions were made to guard against the loss in the holding of shares on account of the price fluctuations in the shares. In our view, the Tribunal was right in holding that the transactions were entered into by the trustees with a view to guard against the loss in the holding of stocks and shares and such transactions cannot be termed as speculative transactions within the meaning of Sub-section (5) of Section 43 of the Act. We did not find any force in the argument of learned counsel for the Revenue that the transactions in share hedging constituted an activity which was not permitted by the trust deed. It may also be mentioned that the assessee had submitted before the Tribunal that Rs. 31,000 were spent on education and Rs. 80,000 were given as donation to Pilani Agricultural Institute during the accounting period relevant to the assessment year 1969-70. It was also pointed out by the assessee before the Tribunal that Rs. 40,000, Rs. 60,000 and Rs. 23,000 were given as donations to Pilani Agricultural Research Institute, Hindi Shale, Bombay, and U.P. Vidya Mandir, respectively, during the accounting period relevant to the assessment year 1970-71. The Income-tax Officer was not able to point out any item of income which might have been applied by the assessee for non-charitable purposes during any one of the assessment years under consideration. Thus, we are clearly of the view that the income from hedging transactions in the present case are also exempt from tax. Question No. 2 is answered accordingly, in favour of the assessee and against the Revenue.
13. In view of the answers to the abovementioned two questions in the affirmative as indicated above, question No. 3 is automatically answered, in favour of the assessee and against the Revenue.
14. In the facts and circumstances of the case, parties shall bear their own costs.