JUDGMENT
Satish Chandra, J.
1. These two writ petitions raise common questions and can conveniently be disposed of together.
2. The petitioner in each case is a public charitable trust, created under deeds of trust dated August 27, 1970. Each of the petitioners was granted a certificate under Section 80G of the Income-tax Act, 1961, by the Commissioner of income-tax, Kanpur, stating that the donations made to them will be exempt from tax in the hands of the donors.
3. In December, 1970, and August, 1971, the J.K. Charitable Trust, Kanpur, made donations to each of the two petitioners of shares held by it in various limited companies worth Rs. 19,000. The donation was made on the condition that the donated properties which formed part of the corpus of the donor trust, shall form part of the corpus of the donee-trusts. The petitioner-trusts, by resolutions passed soon after, accepted the donations made by the J. K. Charitable Trust subject to the condition that the shares will constitute part of the corpus of the petitioner-trusts.
4. Oa 25th July, 1972, each of the petitioner-trusts filed its return of income for the assessment year 1972-73. They claimed refund of the tax paid at source on the dividend income of the shares received by the petitioner-trusts by way of donations. On 25th August, 1973, the Income-tax Officer required the petitioners to supply him the names and addresses of the donors of the shares and to inform him whether the donors were charitable trusts or institutions. In reply the petitioners informed the officer that all the shares were received by them by way of donations from the J. K. Charitable Trust and that the income of those shares by way of dividend was exempt under Section 11 of the Income-tax Act, 1961.
5. The Income-tax Officer felt that the donations as such were covered by Section 12(2) of the Income-tax Act, 1961, and so were liable to be dealt with under Section 11 of the Act. He required the petitioners to show cause why they should not be so dealt with. The petitioners filed written explanations stating that the donations received by them constituted the corpus of the petitioner-trusts and that they were not income in their hands but capital receipt, and as such they were outside the purview of Section 12(2) of the Act.
6. The petitioners state that they came to know that the Central Board of Direct Taxes has, under Section 119 of the Income-tax Act, 196J, issued general instructions to the Income-tax Officers to assess such donations as income under Section 12(2) of the Act.
7. It appears that the Secretary-General, Indian Chamber of Commerce, Calcutta, had addressed a letter dated 6th August, 1971, to the Chairman, Central Board of Direct Taxes, In reply the Secretary of the Central Board of Direct Taxes, on 3rd February, 1972, intimated to the Chamber of Commerce as follows :
“I am directed to invite a reference to your letter No. 3326, dated the 6th August, 1971, addressed to the Chairman, Central Board of Direct Taxes, and to say that the matter has been carefully considered. Having regard to the scheme of Section 12 of the Income-tax Act, 1961, the provisions of Sub-section (2) thereof should be taken as not limited only to voluntary contributions constituting the income of the receiving trust. An endowment or capital donation which is intended to be held by the receiving trust as an accretion to the corpus of the trust would, therefore, fall within the purview of Section 12(2) and the receiving trust would be liable to tax on those donations unless the conditions of exemption laid down in Section 11 (including the restriction, of accumulation) are fulfilled.”
8. Feeling that the Income-tax Officer was bound to give effect to the instructions issued by the Central Board of Direct Taxes, the petitioners have come to this court under Article 226 of the Constitution with a prayer that the Income-tax Officer be directed not to take into consideration the aforesaid instructions and not to include the value of the shares received by way of donation towards the corpus of the petitioner-trusts as income of the petitioner-trusts.
9. The question that requires consideration is whether the donations made to the petitioners are covered by Section 12(2) of the Act.
10. Chapter III of the Income-tax Act, 1961, deals with income which do not form part of total income. Section 10 enumerates the various categories of such incomes. Section 11 deals with incomes from property held for charitable or religious purposes, while Section 12 provides for income of trusts or institutions from voluntary contributions. Section 13, which is the last section in this Chapter, makes Section 11 inapplicable to certain cases specified in it.
11. Section 11 exempts 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. It permits accumulation of such income to the extent of 25 per cent. or Rs. 10,000, whichever is higher, on pain of the excess being brought to tax. The restriction against accumulation contained in Sub-section (1) is relieved by Sub-section (2), provided the conditions mentioned in it are fulfilled.
12. Section 12 deals with income of trusts or institutions from voluntary contributions. It states:
“12. (1) Any income of a trust for charitable or religious purposes or of a charitable or religious institution derived from voluntary contributions and applicable solely to charitable or religious purposes shall not be included in the total income of the trustees or the institution, as the case may be.
(2) Notwithstanding anything contained in Sub-section (1) where any such contributions as are referred to in Sub-section (1) are made to a trust or a charitable or religious institution by a trust or a charitable or religious institution to which the provisions of Section 11 apply, such contributions shall, in the hands of the trust or institution receiving the contributions, be deemed to be income derived from property for the purposes of that section and the provisions of that section shall apply accordingly,”
13. Sub-section (2) of Section 12 is in the nature of a proviso to Sub-section (1). It deems the contributions mentioned in it to be income derived from property for purposes of Section 11. The contributions dealt with by it are “such contributions as are referred to in Sub-section (1)”. The other condition for its applicability is that such contributions as are referred to in Sub-section (1) are made by a trust or institution to a trust or institution.
14. Sub-section (2) is thus confined in its application to ” such contributions as are referred to in Sub-section (1) “.
15. Sub-section (1) deals with “income ….. derived from voluntary contributions and applicable solely to charitable or religious purposes “. In our opinion, Section 12(1) contemplates voluntary contributions which will constitute or be deemed to be income in the hands of the receiving trust. If a donation becomes income in the hands of a trust, the donation itself is within the purview of Section 12(1). Section 12(1) is, therefore, confined to contributions which are made voluntarily and which constitute the income of the receiving trust. This category of contributions alone being the subject-matter of Sub-section (1), they alone will constitute “such contributions as are referred to in Sub-section (1)” within the meaning of Sub-section (2). In other words, if a voluntary contribution does not constitute income of the receiving trust, it will be outside the purview of Sub-section (1) and so also of Sub-section (2), because, as already noticed, Sub-section (2) deals with such contributions only as are covered by Sub-section (1).
16. In tax jurisdiction there is a well-settled and well-known distinction between “income” and “capital”. Generally speaking, the income-tax Act does not tax capital; it is confined to income. Capital is dealt with by the Wealth-tax Act.
17. If in law a voluntary contribution constitutes or is deemed to be capital in the hands of the receiving trust, it will not be a voluntary contribution which is income in its hands. Such a contribution will not be covered by Sub-section (1) of Section 12, and so also not by Sub-section (2).
18. Normally, if a charitable trust mikes a gift of property which constitutes its own capital or corpus, it will be income in the hands of the receiving trust. The receiving trust will be free to apply or spend the property which is the subject-matter of gift for any of the purposes for which it can spend money or property; though the property was capital in the hands of the donor trust, it will be deemed to be income in the hands of the receiving trust. But, if the donor trust makes the gift on the express condition that the subject-matter will constitute capital or corpus of the receiving trust, and the donee-trust accepts the gift or donation subject to the condition that it will form part of the capital or corpus of the donee-trust, the subject-matter of the donation becomes part of the corpus or capital of the donee-trust. In such, a case the subject-matter of the donation will not constitute, or be deemed to be, the income of the receiving trust. There is no law which prohibits such a transaction. A bilateral contract to that effect is perfectly valid and enforceable. If, in spite of it, the receiving trust spends the donation as if it were its income, the receiving trust would be guilty of misapplication of its assets and could be restrained in suitable proceedings from committing breach of trust.
19. The fact that a contribution made with a specific direction that it shall form part of the corpus of the donee-trust is valid in law, is corroborated by the amendments made by Parliament to Section 12 by the Finance Act 16 of 1972, whereby Parliament expressly excluded contributions “made with a specific direction that they shall form part of the corpus of a trust or institution ” from being deemed to be income derived from property for purposes of Section 11.
20. In this view, voluntary contributions made with a specific direction that they shall form part of the corpus of the donee-trust and accepted by the donee-trust as such, are not voluntary contributions which constitute income within the meaning of Section 12(1) and such contributions are not within the purview of Sub-section (2).
21. In the present case the J.K. Charitable Trust made the donations to both the petitioner-trusts with the specific direction that they shall constitute part of the corpus of the donee-trust, and the petitioners accepted the donations subject to that condition. These donations were hence outside the purview of Section 12(2) and could not themselves be deemed to be income from property held under trust within the meaning of Section 11.
22. For the revenue it was urged that Section 12(1) of the Act, when it refers to “any income derived from voluntary contributions” refers to income earned from property which was the subject-matter of the voluntary contribution, and not to that property itself. Now, voluntary contributions to be of any use to Section 11 or 12 of the Act must have money value ; they will either be of money or money’s worth in the shape of shares, securities, movable or immovable properties. If the legislative intent was to exempt income earned from property received by a trust in the form of voluntary contributions, there was no point in enacting Section 12(1), because income from such property held by a trust would be income from property held under trust within the meaning of Section 11 and would be liable to be dealt with thereunder. Income from property held under trust is exempt under Section 11(1) only to the extent to which it is applied for charitable or religious purposes, except to the limited extent to which accumulation is permitted by that section. Reading Section 12(1) to deal with the same kind of income, namely, income from property held under trust, would nullify the conditions and limitations placed by Section 11, because under Section 12(1) such income is unconditionally exempt from being included in the total income. This will create an impasse in the working of the Act. A construction which creates serious difficulties and anomalies in the working of inter-linked provisions of a statute is to be avoided.
23. The fact that Section 12(1) is confined to voluntary contributions only does not advance the argument, because in the case of a charitable trust the constitution of its endowment or initial corpus is also from voluntary contributions. When a charitable or religious trust is created, the properties which constitute its initial corpus come by way of voluntary contributions from the settlors. The income of all such properties is already within the purview of Section 11.
24. The construction placed by us on Section 12 of the Act is in consonance with the scheme underlying Chapter III of the Act, Section 4(3)(i) and (ii) of the Indian Income-tax Act, 1922, exempted income from property of charitable and religious trusts without any restriction upon accumulation of income. The Act of 1961 engrafted restrictions upon accumulation of income. Section 11(1) granted exemption to such income as was actually applied or utilised for religious or charitable purposes. Accumulation was permitted to a limited extent on certain conditions. In order to prevent evasion by a trust of the restrictions upon accumulation, by instead of actually applying its income to religious or charitable purpose, it making a voluntary contribution of its income to other similar trusts, Section 12(2) was enacted. Without it, a trust, by making voluntary contribution to a charitable or religious trust, could claim exemption under Section 11(1) by saying that it had actually applied its income for religious and charitable purposes though that income remained accumulated in the hands of the receiving trust. The receiving trust, although accumulating the income so received, would claim exemption under Section 12(1) on the ground that it was derived from a voluntary contribution. To defeat this device for accumulating income, Section 12(2) provided that contributions constituting income will be deemed to be income from property within the meaning of Section 11, so that such contributions may become subject to the purview of Section 11. The idea was to catch accumulations of income. Section 12(2) did not seek to convert a capital receipt into an income receipt. It has no application where what is received is, in its true nature and character, capital in the hands of the receiving trust. Sub-section (2) of Section 12 speaks of contributions, and deems the contributions themselves to be income from property under Section 11. In other words, what was income in the shape of voluntary contributions under Section 12(1) is converted by Sub-section (2) into income from property for purposes of Section 11.
25. In our opinion, the contributions made by the J. K. Charitable Trust to the petitioner-trusts formed part of the petitioners’ capital or corpus. They did not constitute income in the hands of the petitioners within the meaning of Section 12(1). These contributions were not covered by Section 12(2), and could not themselves be dealt with as if they were income from property held under trust for purposes of Section 11. Of course, the income that the petitioners may earn or derive from the properties which constituted these contributions would be income from property held under trust and would be directly governed by Section 11. The dividend income received by the petitioner-trust on the shares initially donated by the J. K. Charitable Trust to the petitioners would be governed by Section 11 of the Act.
26. In the result both the petitions succeed and are allowed. The respondent, Income-tax Officer, is directed not to include the value of the shares, etc., mentioned above, received by the petitioners by way of donations from the J. K. Charitable Trust as petitioners’ income, but to treat the dividend income as governed by Section 11 of the Act. The petitioners will be entitled to costs.
