ORDER
A. Satyanarayana, Accountant Member
1. These appeals filed by the assessee are against the separate orders of the Commissioner of Income-tax, Trivandrum dated 19-11-1984 and 11-3-1985 for the assessment years 1980-81 and 1981-82 for which the previous year ended on 31-3-1980 and 31-3-1981.
2. The assessment for the year 1980-81 was completed by the ITO Under Section 143(3) on 2-12-1982. The assessee has been granted exemption Under Section 11 of the IT Act, 1961. The Commissioner on a perusal of the records found that the assessment order granting exemption Under Section 11 was erroneous and prejudicial to the interests of revenue. He issued a notice dated 5-11-1984 Under Section 263 to the assessee-trust posting the case on 19-11-1984. In the said notice the reasons for coming to the said finding were given as under :-
S/Shri M. Mathew and Roy M. Mathew who are trustees of M/s. Muthoottu Charitable Trust have, within the meaning of Explanation 3 to Section 13 of the Income-tax Act, 1961, substantial interest in the firm M/s. Muthoottu Mini Chitty Fund Kozhen-cherry. In terms of Section 13(1)(c) r.w. Section 13(2)(b) of the IT Act, exemption Under Section 11 or 12 will not enure to a trust if its funds remain invested for any period during the previous year in any concern in which any trustee has substantial interest. The accounts of the assessee reveal that the entire amount received as contribution from M/s. Muthoottu Mini Chitty Fund during the previous year remained invested in the said chitty fund.
2. The income of the trust, contributed exclusively by M/s. Muthoottu Mini Chitty Fund, is used or applied during the previous year by the latter without charging adequate compensation and thereby violated Section 13(1)(c) r.w. Sections 13(2)(a), 13(2)(b) and 13(3)(b).
3. The conditions specified in Sub-clauses (i), (ii) and (iii) of Section 11(2)(b) are not also fulfilled.
4. In the above circumstances the order of the Income-tax Officer granting exemption Under Section 11 is erroneous and prejudicial to the interest of revenue and the assessment order requires suitable revision.
By the said notice the Commissioner called for the objections of the assessee. The assessee’s counsel filed a letter before the Commissioner stating that they had to gather particulars from the Trust whose accountant was on leave and that the matter may be adjourned to the second week of December, 1984. The Commissioner observed in his order Under Section 263 that it was not possible to grant any further adjournment because the assessment was made on 2-12-1982. Thus refusing the adjournment prayed for the Commissioner passed an order on 19-11-1984 setting aside the assessment order and directing the ITO to pass fresh orders in accordance with law as under :
On a perusal of the records I am convinced that the order of the Income-tax Officer is erroneous and is prejudicial to the interest of revenue. The assessment order is in the circumstances set aside and the Income-tax Officer is directed to pass fresh orders in accordance with law, after considering the provisions of Sections 11, 12 and 13.
3. For the assessment year 1981-82, the assessment was completed on 30-3-1983. For this year also the Commissioner found that the assessment order was erroneous and prejudicial to the interests of the revenue. So he issued notice dated 27-2-1985 Under Section 263 posting the case to 11-3-1985. In the notice the reasons for coming to the said finding were given as identical to the reasons given for the assessment year 1980-81. The assessee did not appear before the Commissioner. Instead the assessee’s counsel filed a letter dated 8-3-1985 objecting to the proposal of the Commissioner. In the said letter it was stated that the trust had not collected money from the Muthoottu Mini Chit Fund (hereinafter referred to as ‘MMCF’) but the subscribers had indirectly paid it to the trust. The Commissioner rejected the contentions of the assessee and by his order dated 11-3-1985 set aside the said assessment order and directed the ITO to recompute the income in accordance with law observing as under :-
I am unable to accept this proposition. As per agreement between Muthoottu Mini Chitty Fund and its subscribers, out of the amount foregone by the subscriber in bidding the chitty 25% is to be contributed to Muthoottu Charitable Trust after deducting 5% towards expenses. The balance is to be divided amongst subscribers as dividend. This does not mean that the money contributed to the Trust is in any way money over which the subscribers had any claim or any right of property. I have examined the records once again in the light of the letter filed on 11-3-1985. I am convinced that the assessment order as passed by the ITO is erroneous and is prejudicial to the interest of revenue. The assessment order is, therefore, set aside and the ITO is directed to recompute the income in accordance with law.
4. Against these orders the assessee filed the present appeals. At the time of hearing the assessee’s counsel filed photostat copies of the Commissioner’s notices dated 5-11-1984 and 27-2-1985, copy of the Trust Deed dated 16-8-1976, copy of the assessment orders dated 14-2-1983 for the asst. year 1980-81 and dated 29-9-1983 for the assessment year 1981-82 in the case of MMCF and copies of the orders of the Tribunal dated 27-12-1985 and 4-12-1986 in the case of MMCF for the assessment years 1979-80 and 1980-81, copy of the assessee’s letter dated 8-3-1985 filed before the Commissioner for the assessment year 1981-82, photostat copy of Pay-in-slip dated 25-4-1984 of the Federal Bank Ltd., Kozhencherry showing the payment into the account of Muthoottu Charitable Trust of Rs. 1,10,187 and copies of income and expenditure accounts of the assessee for the assessment years 1980-81 and 1981-82. His arguments were to the following effect : For the assessment year 1980-81 the Commissioner has not given sufficient opportunity to the assessee to represent its case. He was not justified in deciding the case in a haste. The firm M/s. MMCF consisted of 18 partners with equal shares i.e. less than 6% share each. Thus it cannot be said that two of the trustees of the trust, namely M. Mathew and Roy M. Mathew, had substantial interests in this firm as per Clause (ii) of Explanation 3 to Section 13 for the purposes of Section 13(3)(e). MMCF had not contributed any amounts to the assessee-trust. The subscribers in Chitty Nos. 74 and 79 of MMCF have contributed the amounts of Rs. 1,10,187 for the assessment year 1980-81 and Rs. 19,510 for the assessment year 1981-82 to the trust. This is evident from the details filed before the ITO as well as before the Tribunal. The Tribunal also upheld the contention of the MMCF that their subscribers contributed to the Trust. Hence Section 13(3)(b) has no application to the facts of the case. The trust had not lent any money to the firm of MMCF. Hence Section 13(2)(a) has no application to the facts of the case. There is nothing on record to show that land, building etc. of the assessee was used by the firm MMCF without rent. Thus Section 13(2)(b) had also no application. In the income and expenditure accounts for the years ended 31-3-1980 and 31-3-1981 filed before the ITO it was clearly shown that the amounts of Rs. 1,10,187 and Rs. 19,510 was only “contribution receivable”. This clearly shows that no money was received by the assessee by these two dates. In fact the said amounts were paid to the said trust on 25-4-1984 only i.e. long after the end of the relevant accounting years. As the moneys were not received by 31-3-1980 and 31-3-1981 the assessee filed Form No. 10 dated 25-8-1982 and 21-9-1982 for the assessment years 1980-81 and 1981-82 respectively seeking permission of the ITO to accumulate. The provisions of Clause (2) of Explanation to Section 11(1) clearly provides for filing Form No. 10 when the whole or part of the income has not been received by the assessee during the relevant accounting year. Thus the question of not investing the money so accumulated as provided in Section 11(2)(b)(i), (ii) and (iii) does not arise.
5. At the time of hearing the departmental representative filed type written copies of the reasons given by the Commissioner in his notices Under Section 263, constitution of the firm M/s MMCF showing the names of the partners and their relationship inter se, copies of the balance-sheets of the assessee-trust as on 31-3-1980 and 31-3-1981 and copies of form No. 10 filed by the assessee. His arguments were to the following effect : The trust was constituted on 16-8-1976 with effect from 1-4-1977. The authors of the trust were M. George, M. Mathew and Mathew M. Thomas. The assessment order for the assessment year 1980-81 was passed on 2-12-82. The Commissioner issued the notice dated 5-11-1984 and posted the case for hearing on 19-11-1984. Since the order Under Section 263 had to be passed by 1-12-1984 as per the time limit prescribed in Section 263(2) he refused the adjournment sought by the assessee. The refusal to grant adjournment would not amount to denial of reasonable opportunity to be heard. Please see the case of Nawab & Bros. v. CIT [1980] 124 ITR 307 (MP). The three trustees namely, M. Mathew, his wife Smt. Sesamma Mathew and Roy M. Mathew, along with their relatives (as defined in Explanation 1 to Section 13) were entitled to 66 2/3% of the profits of the firm MMCF. The relationship of the partners is given in page 3 of the paper book filed by the department. As per Explanation 3(ii) to Section 13 a person is deemed to have substantial interest in a concern if such person and one or more persons referred to in Sub-section (3) are entitled to not less than 20% of the profits of such concern in the aggregate at any time during the year. Each of the 18 partners in MMCF is entitled to 1/18th share in the firm. Thus the two trustees M. Mathew and Roy M. Mathew were having substantial interest in the firm MMCF. As per Section 13(1) (c) read with Section 13(2)(h) exemption Under Section 11 or Section 12 is not available to a trust if any funds of the trust are, or continue to remain, invested for any period during the previous year in any concern in which any author of the trust or trustee has substantial interest. As per the accounts of the trust the entire amount received as contribution from MMCF during the previous years relevant to assessment years 1980-81 and 1981-82 remained invested in the firm itself. Hence the trust is not entitled to exemption Under Section 11 or 12 for the years under appeal. The view taken by the ITO in the assessment of MMCF is that the amounts appropriated by it as contributions to the assessee are income liable to tax in its hands. This view has been upheld by the CIT (A) for the assessment year 1979-80. Thus the amount in question represented income earned by the MMCF which were later made over to the assessee as voluntary contribution. Hence the MMCF had made substantial contribution to the assessee trust and, therefore, is a person referred to in Section 13(3)(b). Since on the amounts which were due from the firm no interest had been charged by the assessee, the income of the trust should be deemed to have been used or applied for the benefit of a person referred to in Section 13(3) in view of the provisions of Section 13(2)(a). The capital of MMCF was only Rs. 18,000. The current accounts of the partners showed debit balances amounting to Rs. 6,94,324 as on 31-1-1980 and Rs. 17,48,046 as on 31-3-1981. Hence the funds of the trust which were lying with the firm exceeded 5% of the capital of MMCF. Therefore, the savings provisions contained in Section 13(4) do not apply to this case. The income earned by the assessee in the assessment years 1980-81 and 1981-82 was not applied for any charitable purposes, but was set apart or accumulated for application to such purposes later. The assessee had also given notice in the prescribed form regarding accumulation of income. However, the amounts in question which were set apart or accumulated were not invested in any specified investment or securities nor deposited in any banking company or units of a financial corporation or in any other prescribed mode. The firm MMCF does not come under any of the categories mentioned in Section 11(2)(b). Hence no exemption is available in respect of the income derived during the previous years relevant to the assessment year under appeal, which was accumulated. The Income-tax Officer had also stated that the information that the funds of the trust remained uninvested with the Chitty Fund was available on record at the time when the assessments were made. Hence the Commissioner did not need any fresh information before taking recourse to action under Section 263. M. Mathew and Roy M. Mathew, the two trustees have substantial interest in the firm MMCF within the meaning of the Explanation 3 to Section 13. In terms of Section 13(1)(c) read with Section 13 (2)(h), exemption under Section 11 or Section 12 will not enure to a trust if its funds remained invested for any period during the previous years in any concern in which any trustee has a substantial interest. The accounts of the firm revealed that the entire amount received as contribution from MMCF during the previous years remained invested in the said chitty fund. Although in the reasons given by the CIT in the notices issued under Section 263 the concerned section was mentioned as Section 13(2)(b), it was really Section 13(2)(h). By a typographical error instead of Section 13(2)(h), it was mentioned as Section 13(2)(b). The income of the trust contributed exclusively by MMOF was used or applied during the previous years by MMCF without charging adequate compensation and thereby violated Section 13(1)(c) read with Sections 130(2)(a), 13(2)(b) and 13(3)(b). The conditions specified in Sub-clauses (i), (ii) and (iii) of Section 11(2)(b) are not also fulfilled. The arguments of the assessee’s counsel that MMCF did not contribute anything to the trust and that what the firm made over to the trust is the contribution received by the firm from its subscribers to the chitties is contradicted by Clause (b) of the Thalavariyola extracted by the assessee itself in the reply dated 8-3-1985 to the Commissioner. There is no mention in this clause of any individual subscriber/subscribers to the chitty making any contribution to the trust. All it says is that out of the amount foregone by the subscriber in bidding a chitty 5 % will be deducted towards expenses and out of the balance 20% will be contributed to the trust and the balance will be distributed and divided among the subscribers as dividend. This makes the position quite clear that all contributions received by the trust are only from the firm and the chitty subscribers have no say in the contribution. According to the assessee, contributions to the trust came from chitty subscribers and often chitty subscriptions did not come in time. At the close of the year MMCF takes stock of the contributions so receivable and payable to the trust from the subscribers and a provision is made in its accounts for collection and payment to the trust. As and when the funds position permits, MMCF pays the contributions to the trust without waiting for the entire contribution to be collected from the subscribers. Hence it is not correct to say that MMCF utilised the contributions or collections for their benefits. As soon as the amounts are received by the trust, the same are deposited by the trust in their bank accounts and MMCF does not have any control over such funds. This argument also is not tenable. Prom Clause (b) of the bye-laws it is seen that out of the amount foregone by the bidding subscriber 20% is to be contributed to the trust after appropriating 5% towards expenses. Hence the moment a bidding subscriber foregoes certain amount, 25 % thereof is due to the Trust and that is the point of accrual of the income on the basis of which the trust has been offering its income in the income-tax returns. The audit report filed by the very same Chartered Accountant certifies that the accounts of the trust give a true and fair view of the gross income over expenses and also the state of affairs of the institution. Hence to argue now that no income arose to the trust till all the bidding subscribers had paid their subscriptions is quite futile and has to be rejected outright. The annexure to the audit report also shows the accumulated amount to be Rs. 3,18,587 and states further that the amount will be deposited in the manner laid down in Section 11(2)(b). Thus, without any income arising to the trust, there could be no accumulation. The default by certain subscribers in payment of subscriptions has nothing to do with the accrual of the income of the trust. Hence it is clear that it is the trust’s income which had remained invested with MMCF during the relevant previous years. Just as the dividend is credited to the subscriber’s account soon after the amount foregone by the bidding subscriber is ascertained, in the same way the contribution to the trust also becomes due soon after the amount foregone by the subscriber is ascertained.
6. The assessee’s counsel conceded that M. Mathew and Roy M. Mathew have to be treated as persons having substantial interest in the firm M/s MMCF for the purposes of Explanation 3 to Section 13.
7. We have considered the rival submissions. We find that the amounts of Rs. 1,10,187 and Rs. 19,510 were given by MMCF to the assessee-trust only on 25-4-1984, i.e. long after the end of the accounting years relevant to the assessment years under appeal. Section 13(2)(h) speaks of funds which ‘are invested’ or ‘continue to remain invested’ in any concern in which any person referred to in Sub-section (3) has a substantial interest. Now we have to see whether it can be said that the funds of the trust are invested or continued to remain invested in the relevant previous years. The Madras High Court in the case of CIT v. Nachimuthu Industrial Association [1982] 138 ITR 585 held that in order to constitute an investment, the moneys must be laid out in such a manner as to acquire some species of properties which would bring an income to the investor. Since the amounts referred to above have not been received by the assessee in the relevant accounting years, the question of the assessee investing them in the firm, MMCF, does not arise. It cannot be said that the said amounts had been invested by the assessee trust in the firm MMCF or continued to remain invested there, as understood in business parlance with a view to obtaining any profit. So, the application of Section 13(1)(c) read with Section 13(2)(h) to the facts of the case has to be ruled out. Section 13(2)(a) speaks of the income or property of the trust which ‘is lent’ or ‘continued to be lent’ to any person referred to in Sub-section (3) for any period during the previous year without either adequate security or adequate interest or both. Here also we have to see whether it can be said that the income or property of the trust is lent or continued to be lent. In the aforesaid decision it was also held that for an amount to fall within the mischief of Section 13(2)(a) of the IT Act, 1961, there must be a loan and to constitute a loan there must be a positive act of lending, coupled with an acceptance by the other side of the money as a loan and that the relationship of borrower and lender must come into existence by the act of the parties. As already stated above the amounts under consideration were received by the assessee trust only on 25-4-1984. The revenue has not brought any material on record to show that the assessee trust had physically lent the money to MMCF and that MMCF has accepted the amount as a loan and that the relationship of lender and borrower existed there. The only material relied on by the departmental representative was the balance-sheets of the assessee trust as on 31-3-1980 and 31-3-1981 wherein the name of MMCF was shown on the assets side of the balance-sheets. According to the departmental representative, MMCF is a sundry debtor to the assessee trust and so it should be treated as a debtor for moneys lent. In the absence of any evidence to show that there was an act of lending money by the trust to the MMCF and the acceptance by MMCF of the said money as loan, we are unable to agree with the submissions made by the departmental representative that the income or property of the trust was lent or continued to remain lent to MMCF. So the application of Section 13(1)(c) read with Section 13(2)(a) to the facts of the case has to be ruled out. Section 13(2)(b) refers to any immovable property of the trust which is, or continues to be, made available for the use of any person referred to in Sub-section (3) without charging adequate rent or other compensation. No material was brought on record by the revenue to show that any immovable property of the assessee trust was made available or continued to be made available to MMCF without receipt of adequate rent or other compensation. So the application of Section 13(1)(c) read with Section 13(2)(b) to the facts of the case has also to be ruled out. Section 13(3)(b) speaks of user of application of income or property of the trust for the benefit of any person who has made a substantial contribution to the trust, i.e. contribution exceeding Rs. 5,000. According to the departmental representative the abovesaid amounts of Rs. 1,10,187 and Rs. 19,510 were wholly contributed by MMCF. As already hold above, no part of the income or property of the trust, no immovable property of the trust, no funds of the trust were lent, made available or invested with MMCF. Thus, the application of Section 13(1)(c) read with Section 13(3)(b) to the facts of the case also has to be ruled out. Further, we have already held in our order dated 27-12-1985 in ITA Nos. 169 and 11 (Coch.) 83 that the subscribers imposed an obligation on MMCF, who conducted the chitties Nos. 74 and 79 that MMCF should pay the prescribed portion from the discount foregone by the prized subscribers to Muthoottu Charitable Trust. Following the reasoning given therein, we hold that it is not correct on the part of the department to say that MMCF had made a substantial contribution exceeding Its. 5,000 to the assessee-trust.
In the income and expenditure accounts for the years 31-3-1980 and 31-3-1981 filed before the Income-tax Officer, the assessee has clearly shown the amounts of Rs. 1,10,187 and Rs. 19,510 as ‘contribution receivable’. The departmental representative referred to Form No. 10 viz., the notices to the Income-tax Officer under Section 11(2) of the Income-tax Act, 1961 filed by the assessee for the two assessment years under consideration and urged that without any income arising to the trust there could be no accumulation. We notice that in the copies of the resolutions enclosed with the said Form No. 10, it is clearly mentioned as under :-
The Chairman informed that the working of the trust for the years 31-3-1980/31-3-1981 has resulted in a surplus of Rs. 1,10,187.42/Rs. 19,510.20 as excess of income over expenditure. The meeting authorised Shri M. Mathew to collect the same amounts from Muthoottu Mini Chitty Fund since the contribution to Muthoottu Charitable Trust from Chitty Nos. 74 and 79 are being collected by Muthoottu Mini Chitty Fund.
This clearly shows that the moneys referred to in Form No. 10 were not physically made available to the assessee as on 31-3-1980 and 31-3-1981. As we have already mentioned above, we found that the said amounts were paid by MMCF to the assessee trust only on 25-4-1984. So, under the circumstances, the question of non-investment of the said funds in the approved modes of investment as per Sub-clauses (i), (ii) and (iii) of Section 11(2)(b) does not arise. On the facts and circumstances of the case, we hold that the Commissioner of Income-tax is not justified in setting aside the assessment orders dated 2-12-1982 and 30-3-1983 for the assessment years 1980-81 and 1981-82 respectively and directing the Income-tax Officer to pass fresh orders in accordance with law. We set aside the impugned orders of the Commissioner of Income-tax.
8. In the result, the appeals are allowed.
