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1997 Supreme(Mad) 537
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE ABDUL HADI AND THE HONOURABLE MR. JUSTICE N.V. BALASUBRAMANIAN
Commissioner of Income Tax and Another - Appellant
Versus
T. N. K. and V. Educational Trust and Others - Respondents
Tax Case Nos. 411 to 416 & 786 of 1984 & 1 to 54 of 1997
Decided On : 17 April 1997
A transfer of funds by a charitable trust to a family trust is invalid if the declaration of trust of the charitable trust does not authorize the transfer of funds to the family trust.
Headnote:
INCOME TAX - Transfer of funds by a charitable trust to ten family trusts - Validity of transfer - Whether the transfer amounted to application of income for charitable purposes - Whether the family trusts are entitled to exemption under section 11 of the Income Tax Act, 1961.
Fact of the Case:
T.N.K. & V. Educational Trust, a charitable trust, transferred Rs. 12,80,000 to ten family trusts. The family trusts were created by the trustees of the educational trust and their relatives. The objects of the family trusts included meeting the educational, maintenance, marriage, and other expenses of the author's major children, helping other relatives by making money grants, and making contributions for charitable, benevolent, or religious objects. The educational trust claimed that the transfer was valid and that the income from the investments made by the family trusts should be exempt from tax under section 11 of the Income Tax Act, 1961.
Finding of the Court:
The court held that the transfer of funds by the educational trust to the family trusts was invalid. The court reasoned that the declaration of trust of the educational trust did not authorize the transfer of funds to the family trusts. The court also held that the transfer did not amount to an application of income for charitable purposes within the meaning of section 11 of the Income Tax Act, 1961. The court further held that the family trusts were not entitled to exemption under section 11 of the Income Tax Act, 1961.
Issues: 1. Whether the transfer of funds by the educational trust to the family trusts was valid. 2. Whether the transfer amounted to an application of income for charitable purposes within the meaning of section 11 of the Income Tax Act, 1961. 3. Whether the family trusts were entitled to exemption under section 11 of the Income Tax Act, 1961.
Ratio Decidendi: 1. The court held that the transfer of funds by the educational trust to the family trusts was invalid because the declaration of trust of the educational trust did not authorize the transfer of funds to the family trusts. 2. The court held that the transfer did not amount to an application of income for charitable purposes within the meaning of section 11 of the Income Tax Act, 1961, because the family trusts were not charitable trusts. 3. The court held that the family trusts were not entitled to exemption under section 11 of the Income Tax Act, 1961, because they were not charitable trusts.
Final Decision: The court answered the questions of law referred to it in the negative and in favor of the Revenue. The court held that the transfer of funds by the educational trust to the family trusts was invalid, that the transfer did not amount to an application of income for charitable purposes within the meaning of section 11 of the Income Tax Act, 1961, and that the family trusts were not entitled to exemption under section 11 of the Income Tax Act, 1961.
ABDUL HADI, J.
All these tax case references preferred by the Revenue under s. 256 of the IT Act, 1961 (hereinafter referred to as 'the Act') are connected and hence they were heard together.
2. Out of the above cases, the following cases, which relate to the same respondent-assessee, viz., T.N.K. & V. Educational Trust, Madras, relate to the assessment years as shown below :
Case No. Asst. yr.
T.C. 786 of 1984 1970-71
T.C. 411 of 1984 1971-72
T.C. 412 of 1984 1972-73
T.C. 413 of 1984 1973-74
T.C. 414 of 1984 1974-75
T.C. 415 of 1984 1975-76
T.C. 416 of 1984 1976-77
(2) The respondents-assessees and the assessment years in respect of the rest of the cases are as follows :
Case No. Name of the respondents-assessees Asst. yr.
T.C. 1 of 1997 K. N. Varadarajan Family Trust 1988-89
T.C. 18 of 1997 -do- 1987-88
T.C. 2 of 1997 P. Natarajan Family Trust 1987-88
T.C. 3 of 1997 -do- 1988-89
T.C. 4 of 1997 Ramesh Family Trust 1987-88
T.C. 5 of 1997 -do- 1988-89
T.C. 6 of 1997 Chandrasekhar Family Trust 1987-88
T.C. 7 of 1997 -do- 1988-89
T.C. 21 to 37
of 1997 -do- 1973-74 to
1986-87 and
1989-90 to
1991-92
T.C. 8 of 1997 K. N. Gnanaprakasam Family 1987-88
Trust
T.C. 14 of 1997 -do- 1988-89
T.C. 9 of 1997 M. Sivaprakasam Family Trust 1988-89
T.C. 17 of 1997 -do- 1987-88
T.C. 10 of 1997 P. Srinivasan Family Trust 1987-88
T.C. 11 of 1997 -do- 1988-89
T.C. 38 to 54 of
1997 -do- 1973-74 to
1986-87 and
1989-90 to
1991-92
T.C. 12 of 1997 K. N. Mohanram Family Trust 1987-88
T.C. 13 of 1997 -do- 1988-89T.C. 15 of 1997 K. N. Krishnaswamy Family Trust 1987-88
T.C. 16 of 1997 -do- 1988-89
T.C. 19 of 1997 P. Gowrisankar Family Trust 1987-88
T.C. 20 of 1997 -do- 1988-89
(Thus there are these ten assessees who are respondents in T.C. Nos. 1 to 54 of 1997)
3. There is the undermentioned concession by learned counsel for the respondents-assessees in all the tax cases. However, all these tax cases are disposed of on their merits. (The concession is referred to in para. 21 and below.
4. Even before setting out the questions referred to us in the above tax cases, it would be better to state the relevant facts. The common assessees in T.C. Nos. 411 to 416 and 786 of 1984, viz., T.N.K. & V. Educational Trust, Madras, is a charitable trust constituted under a declaration of trust dt. 15th December, 1960. The author of the trust was T.N.K. Nanjappa Chettiar, the trustees being himself and five others, who are his relations. The object of the trust was particularly to establish and maintain educational institutions and hospitals for the public. On 1st August, 1969, the above referred to ten family trusts were constituted, the authors of each of them being related to one or the other of the above referred to trustees of the above referred to T.N.K. & V. Educational Trust. The objects of each of the abovesaid family trust are the following :-
"(a) to meet the educational, maintenance, marriage and other expenses of my (author's) major children" *
.
(b) to help my other relatives by making money grants and in other ways,
(d) to make the contributions if funds permit for any charitable benevolent or religious object or objects
".
5. The abovesaid declaration of Trust dt. 15th December, 1960 provided in cl. (12) therein that" *
if at any time the objects of the trust should become impossible of fulfilment, the properties and funds belonging to the trust shall be utilised for such charitable purposes as the trustees in office at that time may determine
".
6. On 13th August, 1969, the abovesaid T.N.K. & V. Educational Trust, out of its fund, parted with Rs. 12, 80, 000 representing the sum total of ten cheques of Rs. 1, 28, 000 in favour of each of the above referred to ten family trusts. The said sums were thus paid by cheques drawn in favour of the family trusts, but endorsed by the trustees of the family trusts in favour of Devi Films (P) Ltd. with which company, the sums in question remained deposited in their respective names. Devi Films (P) Ltd. was to pay interest of such deposits. The abovesaid Devi
