1986 PLP 507 (PTD)

RATNAM, J.‑‑This reference under section 256(1), Income‑tax Act 1961 (hereinafter referred to as the Act) at the instance of the Revenue, raises for our decision, the following question of law‑‑"Whether the donation made by Swadharma Swarajya Sangha to the assessee trust constitutes income in the hands of the assessee under section 12(2) of the Income‑tax Act 1961?" To lay bare the question to be decided and to highlight the limited controversy, the minimal facts may be noticed. The assessee, a charitable trust, received a donation from out of the capital funds of another charitable trust of the name of Swadharma Swarajya Sangha. In the course of the assessment proceedings for the year 1972‑73 (for the accounting year‑ending on 31‑12‑1971), with reference to this donation received by the assessee, the Income‑tax Officer thought that though the amount was received towards corpus, yet it had to be treated as income under section 12(2) of the Act and proceeded to grant an exemption. Before the Appellate Assistant Commissioner, the assessee took the stand that the amount received from Swadharma Swarajya Sangha as donation towards corpus cannot be treated as income and would also not form part of the accumulated funds of the trust. Accepting the stand of the assessee, the Appellate Assistant Commissioner concluded that the donation received by the assessee from Swadharma Swarajya Sangha was towards the corpus of the assessee trust and not income and, therefore, that amount should be deleted from the assessment. On further appeal, the Tribunal found that the donation to the assessee was made by the Swadharma Swarajya Sangha for the specific purpose that amount should form part of the corpus or capital of the assessee trust and that such a donation cannot be income of the assessee trust within the meaning of section 12(1) of the Act, and, therefore, it would be outside section 12(2) of the Act as well,

2. The main contention urged by the counsel for Revenue is that any donation made by one charitable trust to another even if it be towards corpus, has to be regarded for tax treatment in the hands of the donee, as income falling under the provisions of section 12(2) of the Act. To appreciate this contention, it becomes necessary to briefly refer to the Scheme of the Act and the relevant provisions therein, as they stood at the material time.

3. Income .not forming part of the total income is dealt with under Chapter III of the Act. Section 10 proceeds to enumerate the different kinds of such income. Income from property held for charitable or religious purposes is dealt with by section 11 of the Act. Section 12 of the Act deals with income of trusts or institutions from voluntary contributions. Under section 13 of the Act, in respect of the class of cases mentioned therein, section 11 or 12 of the Act has been made inapplicable. Under section 1l of the Act, in respect of income derived from property held under trust wholly for charitable or religious purposes, the benefit of exemption to such income to the extent to which such income is applied for such purposes is made available. A twenty‑five per cent accumulation of such income or Rs.10,000 whichever is higher is also permitted subject to the excess being brought to flax. The restriction as respects accumulation or setting apart under section 11(1) of the Act is relieved by section 11(2) of the Act, subject to certain conditions mentioned therein being fulfilled. Section 12 of the Act, as it stood at the material times, was as under:‑‑ "12. (1) Any income of a trust for charitable or religious purpose 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 subsection (1), where any such contributions as are referred to in subsection (1) are made to a trust or a charitable or religious institution by a trust or a charitable or religious institution to which 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 the property for purposes of that section and the provisions of that section apply accordingly."

4. What is contemplated by section 12(1) of the Act is that income of a charity which is 'derived' from voluntary contributions and applicable to purposes of charity exclusively should not be included in the total income of the trustee of the institution. The phrasing of section 12(1) of the Act and the result to which an ordinary understanding of that section, as it stood prior to 1‑4‑1973, leads a Court of construction, may now be adverted to. The use of the expression Income ........... derived from voluntary contributions is significant. The word 'derived' connotes obtaining or drawing or taking or receiving from a source. When something is stated to be derived from something else, the latter is a source, while the former is that which flows from that source. R voluntary contribution understood that way is not by itself income. It is that from which income flows. By implication, therefore, voluntary contributions may be regarded as non‑income without anything more indicated in section 12(1) of the Act. The question whether it is plausible) to view voluntary contributions received by a charity as its income may also be touched upon. A charity can live by donations done. What it lives on may be regarded as a revenue receipt because it flows in and that sustains the charity and goes to meet its daily needs as well as current expenses. Merely looking at that aspect of donation, it may be plausible to say that donations bear an income character. Section 12(1) of the Act indicates an implication contra. What is dealt with thereunder is income 'derived' from voluntary contributions and the language employed makes it clear that the voluntary contributions cannot bear an income character and it, therefore, does not matter for the non‑income character of the voluntary contributions that they are applied or expended or appropriated to defray the current expenses of the charity.

5. We may notice yet another aspect arising out of the use of the phraseology "income . . . . . . . derived from voluntary contributions". Normally, no income flows or is obtained or secured from voluntary contributions as such. If donations are received by a charity it receives the money all right, but if the money is kept as such, then it cannot yield any income. The recipient of the donations or voluntary contributions in order to be able to get income from such donations or voluntary contributions, must make capital investments of them. It may be that the charity can invest the donations or contributions in shares, securities, land, house property and the like. So, income derived from voluntary contributions would mean income derived from an investment made out of the proceeds of voluntary contributions. This perhaps may give a slender handle to the argument that voluntary contributions are per se income. It may be said that periodical returns from investments made from voluntary contributions can also be income. It may even be said that there is nothing wrong in treating contributions and income from contributions as income. For instance, salary is income and an investment made out of salary (or what is left out of it after meeting the expenses) may also yield income. In other words, because the return arising out of an investment made out of savings from salary is income, salary itself cannot be deemed as non‑income. The income from voluntary contributions cannot detract from the voluntary contributions themselves being income. Income may come out of income may be the line of argument and this logic may also hold good in theory up to a point. However, we do not speak of income derived from salary for salary itself is income. But when Parliament speaks of income derived from voluntary contributions and voluntary contributions are ordinarily windfalls, is it not a legitimate implication to be read into the statute that voluntary contributions per se are not regarded as income at all?

6. The matter may be looked from the point of view of the charity as well. It may be that a charity lives on voluntary contributions and public donations. In most cases, the charities may have to wait too long to obtain the donations or voluntary contributions. The charity may also have to look everywhere. Even heavenward for contributions and donations of money and windfalls. There is no exercise of control over windfalls in the sense that one cannot say that some more is expected or would come in or that enough had already been secured. The essence, therefore, of a windfall or voluntary contributions as opposed to income is that it is unexpected. The characteristic of income is that it is a periodical monetary return coming in with regularity or at least expected regularity. So, voluntary contributions per se are not dealt with by section 12(1) of the Act. They need not be in order to stand outside the field of taxation because they are windfalls and hence the very antithesis of income, and, therefore, there is no need to exempt them or to exclude them from the total income. They stay out on account of their innate character as non‑income. What section 12(1), meant before its amendment in 1972 was that while voluntary contributions are non‑income, even what is undoubtedly income of charities, is not to be charged to tax, if the source of such income is traceable to voluntary contributions. To put it differently Parliament was Extremely charitable to charities. That was the liberality of section 12(1) of the Act. as it stood prior to 1‑4‑1973. The liberality imbedded in section 12(1), as it stood prior to 1‑4‑1973, that voluntary contributions are non‑income and even income derived from such contributions are exempt from tax in certain circumstances went unnoticed and was lost sight of Added to this, section 12(1) had also been interpreted in such a manner and in a slanting fashion as well, with the result that advantage was taken of it to put down in the statute book the receipt theory about voluntary contributions Under the present section, the expression "income derived from voluntary contributions" has been avoided and voluntary contributions are straightway deemed to be income. This shows that but for the deeming those would not be taxable as income. The present section gives out only one concession, a small gesture of parliamentary alms giving to charities. The section now keeps out only voluntary contributions tied up with a direction that the charity must use it as part of the trust corpus. For the rest, what is undoubtedly non‑income is, now deemed to be income on the basis of precedents, which the Parliament had taken advantage of to cut down the amplitude of exemption from taxation enjoyed by the charities.

7. Section 12(2) of the Act, as it stood is really in the nature of a proviso to subsection (1) which deems contributions as are referred to in subsection (1) to be income derived from the property held by a trust for purposes of section 11 and its applicability. The use of the expression 'such contributions as are referred to in subsection (1)' and subsection (2) of section 12 of the Act would indicate that it is the income of the receiving trust that is dealt with thereunder. To state it differently, if the receipt of property or money by way of voluntary contribution cannot constitute income or even be deemed to be the income of the receiving trust, it will be outside the sweep of Section 12(1) as well as section 12(2) of the Act. The aforesaid construction is also in consonance with the underlying scheme of Chapter 111 of the Act. In addition, the underlying purpose for enacting section 12(2) of the Act appears to be this. Under section 11(1) of the Act by making a voluntary contribution to another charitable or religious trust, exemption could be claimed by a trust by stating that it had actually applied its income for religious or charitable purposes, though in the hands of the receiving trust such amount had remained unspent or accumulated. Likewise, while accumulating the amount so received, the receiving trust would also be able to claim exemption on the footing that what was received is a voluntary contribution or income therefrom. With a view to discourage resort to accumulation of income in this manner by defeating the provisions of the Act. Section 12(2) provides that contributions constituting income will be taken to be income from property in the hands of receiving trust or institution within the meaning of section 11 and subjected to its provisions. The avowed object of section 12(2) is not to convert what is received as capital into income and has, therefore, no application where what is received is only capital. The income of the trust under section 12(1) of the Act is what is dealt with under section 12(2) of the Act and deemed to be income from property for purposes of application of section 11 of the Act. The amendments made to section 2(24)(ii) and section 12 of the Act by the Finance Act, 16 of 1972 including voluntary contributions received by a trust or institution established wholly or partly for charitable or religious purposes within the definition of income in section 2(24) of the Act, but expressly excluding contributions made with a specific direction that they shall form part of corpus or capital of a trust or institution from the scope of deemed income for the purpose of applicability of section 11 of the Act have already been noticed. In this case, as seen already, the Tribunal has clearly recorded a finding that the assessee received the donation from Swadharma Swarajya Sangha for the specific purpose that it shall be held as part of the corpus or capital of the assessee. In the light of the aforesaid discussion regarding the scope of section 12(1) and (2) of the Act donations received by, the assessee would fall outside section 12(2) of the Act.

8. We may now notice a few of the decisions to which our attention was drawn, though we do not find that any of those decisions have approached the question in the perspective indicated earlier. In Sri 1?warkadheesh Charitable Trust v. Income‑tax Officer (1975) 98 1 T R 557; 1975 T L R 503 (All.) the assessee received a donation of shares held by J.K. Charitable Trust Kanpur, as its corpus and the donation was made on condition that the donated properties shall form part of the corpus of the donee trust. The donee trust accepted the donations made subject to the condition The Income‑tax Officer was of the view that the donation would be covered by section 12(2) of the Act and were, therefore, liable to be dealt with under section 11 and required the donee trust to show cause why it should not be so dealt with. The trust claimed that the donations received constituted the corpus and was not income and was, therefore, outside the purview of section 12(2) of the Act. Apprehending that the Income‑tax Officer would give effect to the instructions given by the Central Board of Direct Taxes to the Income‑tax Officers to assess such donations as income under the provisions of section, 12(2) of the Act, the trust in a writ petition prayed that the Income‑tax Officer should be directed not to take into consideration the instructions of the Central Board and that he should also not include the value of the shares received towards corpus as income of the trust. In dealing with the question whether the donations are covered by section 12(2) of the Act, the Allahabad High Court held that 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(l) of the Act, as the subject‑matter of the donation becomes part of the corpus or capital and cannot constitute income of the receiving trust and such contributions will not, therefore, fall within the purview of subsection (2) of section 12 of the Act. In so holding, the Court pointed out that section 12(1) did not deal with the same kind of income, namely, income from property held under trust, as that would nullify the conditions and limitations placed by section 11 of the Act, and under section 12(1) of the Act, such incomes are exempt from the total income. It was also noticed how do impasse in the working of the Act would result if the position were otherwise, and it was held that income in the shape of voluntary contributions under section 12(1) of the Act alone is converted by subsection (2) into income from property for purposes of application of section 11 of the Act. On this interpretation of section 12(2) of the Act, the Income‑tax Officer was directed not to include the value of the shares etc. received by way of donation from J.K. Charitable Trust as income of the petitioner therein. This decision was taken on appeal to the Supreme Court but the application for special leave to appeal was rejected on 28‑10‑1975.

9. Commissioner of Income‑tax v. Bal Utkarsh Society (1979) 119 I T R 137; 1980 T L R NOC 120 (Guj.) dealt with a similar situation. Therein also, the donor trust had donated shares to the donee trust towards the corpus of the capital of that trust and in the course of the assessment proceedings, the Income‑tax Officer was of the view that the donations in the form of shares constituted income in view of the provisions of section 12(2) of the Act, as it stood prior to the amendment. The Appellate Assistant Commissioner and the Tribunal held that the donations being of shares made towards the corpus of the trust could not be treated as income in the hands of the assessee. In answering the reference, the Gujrat High Court was of the view that the contributions received from a religious trust or religious charitable institution were not stamped with the character of income and, therefore, would not fall within the scope of either subsection (1) or subsection (2) of section 12 of the Act. In Commissioner of Income‑tax v. Vanchi Trusts (1981) 127 I T R 277; 1981 Tax L R 479 the Kerala High Court had again occasion to consider this question. There also, the donation was received by the trust towards its corpus and the question arose whether such contribution can be deemed to be income derived by on 'tae assessee trust from property by virtue of the application of section 12(2) of the Act. It was held that a contribution given and accepted with a specific stipulation that it shall be treated as corpus of the receiving trust and not as income would be outside the scope of section 12(2) of the Act and that a voluntary contribution so made will not a15o be taken in by the expression such contribution as are referred to in subsection (1), contained in subsection (2) of section 12 of the Act In so holding the Kerala High Court relied upon the decisions of the Allahabad High Court and Gujrat High Court referred to earlier. In Commissioner of Income‑tax v. Eternal Science of Man's Society (1981) 128 I T R 456; (1981) Tax L R 758 the Delhi High Court had to consider the tax treatment of a donation of shares given by a charitable trust with the express condition that they shall be held as corpus by the recipient society and accepted as such. Referring to the provisions of the Act, and the decision of the Allahabad High Court in Sri Dwarkadeesh Charitable Trust v : Income‑tax Officer (1975) 58 I T R 557; 1975 Tax L R 503, the Delhi High Court held that the voluntary contributions of capital assets have to be excluded from the taxable income. It is thus seen that the interpretation put upon section 12(1) and (2) of the Act is also to the effect that such voluntary contributions directed to be held as part of the corpus of the donee, cannot be held to be income for purposes of applying section 12(2) of the Act.

10. For the aforesaid reasons, we answer the question referred to us in the negative and against the revenue. The assessee will have its costs of this reference; counsel's fee Rs.500. M. B. A. Answer in the negative.