Rastogi Foundation vs Assistant Commissioner Of Income ...
1992 Latest Caselaw 474 Del

ORDER

CH. G. KRISHNAMURTHY, PRESIDENT :

The issue in this appeal filed by the trustees of M/s. Rastogi Foundation is whether the Dy. Commissioner(A) was right in holding that the trust deed, under which the Foundation was constituted, was not legally genuine and that the donations received by it were spurious. This is the gist of the grounds of appeal.

2. The relevant facts are : The trust was created by late Shri R. N. Rastogi, the settlor under a trust deed dt. 31st Jan., 1986 registered on 11th Feb., 1986 settling a sum of Rs. 1,000 as a public charitable trust, the objects of the trust being promotion of education, relief of the poor and advancement of any other charitable object of general public utility not involving any activity for profit. These appear to be the words adopted from the definition given to the "charitable purpose" in S. 2(15) of the IT Act as it stood before it was amended w.e.f. 1st April, 1984. The settlors sister Smt. Meena Rastogi and her husband Shri D. C. Rastogi were constituted as the trustees. At about the same time the settlor created two other trusts in the names of M/s. Vaisid Foundation and M/s. L. P. Rastogi Memorial Trust. In addition four other private family trusts were created on the same date 31st Jan., 1986 in the names of Pradip Family Welfare Trust, Sidharath Family Welfare Trust, Vaishali Family Welfare Trust and Shefali Family Welfare Trust. The trustees of all these trusts are the settlors sister and her husband Shri D. C. Rastogi as in the case of the assessed trust. It appears that the assessments of these four private family welfare trusts for the asst. yrs. 1986-87 and 1987-88 were completed holding the same to be bogus trusts. The conclusion that these private family trusts were bogus was reached on the examination of Shri R. N. Rastogi the settlor wherein he was not able to remember the name of any family trust or the amount settled on the trust or even the beneficiaries. He did not even remember that he was a trustee of any of the trusts. The Assessing Officer spent considerable time and space of the assessment order in describing how the donations received by those four private family trusts were treated as not genuine donations and how the money of Shri D. C. Rastogi was channelled by way of donations into these family trusts. The donations in those four family trusts was not accepted as genuine. The amounts donated appear to have been assessed under S. 68 of the IT Act as the income from undisclosed sources of the respective assesseds clubbing it with their other incomes on protective basis. Then the ITO discussed about the facts of the assesseds case and found that there were donations to the extent of Rs. 65,501 received from 17 individuals of which Rs. 52,501 received from the four parties named below were not genuine :

Rs.

Rs.

2,500

Shri R.N. Kathuria, New Delhi

20,000

M/s. Rajdhani Charitable Trust, New Delhi

10,000

Shri I.S. Malik, New Delhi

20,001

Shri K.P. Madan, New Delhi.

The ITO having become suspicious of the genuineness of these donations required the assessed to produce the relevant donors for examination. The assessed stated in reply that what was available with it was already produced before the ITO and no further evidence was available for production. Thereafter summons under S. 131 of the IT Act were issued to all the four persons named above. Except in the case of Shri R. N. Kathuria where the summons were received back unserved, the summons were served on the other three parties. They admitted having given the donations to the assessed trust but in personal examination Shri Malik appeared to have said that he did not know the address of the Foundation nor was he aware of the activities of the trust nor was he shown any literature about the activities of the trust while making the donations but he admitted that he donated the sum in question only at the suggestion of Shri D. C. Rastogi without making any enquiries thereafter. He admitted that he did not know the meaning of the word corpus. On behalf of Rajdhani Charitable Trust, one Madhukar Goel appeared and admitted having given the donations but when he was asked to produce the trustees for confirmation, though he had promised to produce them before the ITO, did not keep up his promise. The ITO then went on discussing about the facts of other trusts but not about the facts of this trust and eventually arrived at the conclusion that the assessed trust was not a genuine charitable trust nor the donations were genuine. He also noted that the amounts received by way of donations were not applied for any charitable purpose. He also found that the accounts of the assessed trust were not audited as required by S. 12A of the IT Act, and therefore, even if the trust could be held to be a genuine trust, the provisions of Ss. 11 and 12 of the IT Act could not be applied to the extent the exemption of its income from the levy of tax. He held that the income of the assessed trust was assessable in the hands of Shri D. C. Rastogi but made the assessment in the hands of the assessed also on a protective basis without giving exemption to the income. The entire assessment order running into 9 pages was spent to discuss the facts of the other trusts, how they were held to be bogus and the conclusions reached therein were imported into the assesseds case to hold that this trust also likewise was a bogus trust. Likewise he imported the conclusion reached therein that the donations were bogus to hold that the donors also were bogus. But he held that the income of the assessed trust was assessable on protective basis in the hands of Shri D. C. Rastogi for which the reasons given were not in any manner related to the facts of the assessed trust but the facts obtaining in the other cases.

A reading of the order of the ITO would show that he was influenced more by the facts obtaining in the other private family trusts to come to the conclusion that the assessed trust was a bogus trust and the donations also were bogus rather than the facts obtaining in the assesseds case, which are : (i) the assessed family trust was registered under S. 12A of the IT Act by the IT Act by the CIT (ii) a declaration under S. 80G of the IT Act was also issued by CIT stating that the donations made to this trust were exempt from the levy of income-tax subject to the limits provided in S. 80G (iii) that the trust was created under a deed of trust duly executed and registered as a public trust and that (iv) nothing was said as to how a trust created as a public charitable trust under a deed of trust by the settlor settling the sum of Rs. 1,000 on the trust could be declared to be a bogus trust without showing that the formalities required under the law to create a genuine public charitable trust were not observed.

3. On appeal the Dy. Commissioner (A) confirmed the view taken by the ITO in the following words :

"In the above circumstances the Assessing Officer was right in holding the trust as non-genuine trust. In view of the circumstantial evidence gathered by him during the course of assessment proceedings, in respect of the assessment being made on protective basis there being no genuine grievance, the same is dismissed. The Assessing Officer was also right in holding that an amount of Rs. 52,501 supposed to have been received as a corpus donation to be non-corpus donation and treated it thereby the income of the appellant. The person or persons supposed to have made the corpus donation do not know the meaning of the word corpus, therefore, donation received by the trust could not have been treated as corpus donation.

However, since the appellant claims that the trust has received funds from whatever source it will be treated as ordinary donation and, therefore, the income of the appellant trust. The finding that it is a protective assessment is not being disturbed."

4. It is against this finding given by the Dy. Commissioner(A) that the present appeal is filed before us urging that neither the Assessing Officer nor the Dy. Commissioner(A) was right in their conclusions and both have failed to appreciate the correct legal position and were demonstratively carried away by the findings given elsewhere to come to the above conclusions, which are totally irrelevant unless they are shown to exist in the case of the assessed also, which exercise was not attempted at all. When the donors have admitted that they donated the funds by way of donations and the amounts were received by account payee cheques, so far as the trustees are concerned, it was immaterial for them as to wherefrom the donor received the money; whether the donated money was tainted in the hands of the donor is not a relevant consideration in so far as the trust is concerned to say that the donation is a valid donation or a bogus donation. A donation can be said to be a bogus when no money was in fact received. But that is not the case here because the money is received by the assessed by way of account payee cheques. Had there been a misuse of the trust funds, it would only amount to a breach of trust and that would not impinge upon the validity of the trust. What is to be seen in a case of this nature is whether the trust is validly created and whether all the legal formalities are complied with. Once a finding to that effect is given the trust is conclusive as to its legality. Secondly when a CIT under S. 12A of the IT Act is required to register a trust for the purpose of granting exemption from the levy of tax under S. 11 of the IT Act, the purpose behind the requirement of registration is only to see that the trusts are validly created. Therefore when a certificate of registration was issued by the CIT under S. 12A of the IT Act, it cannot any more be said that the trust is non-genuine at all nor in fact any legal infirmity was shown either in the formation of the trust or in the grant of certificate of registration by the CIT. Although the ITO had referred to these facts in his order, he fails to grasp the significance of the registration and so also the Dy. Commissioner(A). Moreover this trust has also been issued a certificate under S. 80G of the IT Act, which also strengthens the fact that the trust is validly created. If the trust is not validly created, the Commissioner would not grant the certificate under S. 80G. If in a case where a trust is bogus and the certificate under S. 80G is issued, the donations to that bogus trust would earn exemption from the levy of income-tax and would result in loss of public revenue. A CIT could not be heard to say that the was a party to the loss of public revenue. Therefore, the view taken by the authorities below was totally erroneous. The bogus or non-genuine nature of the donations would not impinge upon the validity of the trust. The authorities below have tried to hold that the trust was non-genuine via the non-genuine nature of the donations, which is totally opposed to law. The learned Departmental Representative, on the other hand, relying very heavily upon the orders of the authorities below supported the view taken by the Department.

5. We are unable to support the view taken by the Department. For the reasons given by the learned advocate for the assessed, with which we are in entire agreement, there is absolutely no ground to say that the trust was not genuine at all merely because there was in their minds a doubt about the genuineness of donations by the donors. A donor may be suspect for a variety of reasons but the trust in the case is beyond pale of any doubt. All the formalities that are necessary to constitute a valid public trust have been performed and there was no infirmity whatsoever in that area. There was a regular trust deed executed and was registered as a public charitable trust. A valid public trust once created is irrevocable by any subsequent act of the author of the trust. The public trust can be created either in writing or oral also. The trust deed clearly pointed out that the trust was an irrevocable trust. If there is any deviation either by the founder of the trust or the trustees from the declared purpose of the trust, that would amount only to a breach of trust and would not detract from the validity or the declaration of the trust and hence the subsequent conduct either of the founder or of the trustees in dealing with the funds of the trust after its creation would not put an end to the trust itself. A trust thus created becomes irrevocable and nothing would nullify it thereafter. This is the law as declared by the Calcutta High Court in the case of Manindra Nath Mukherjee vs. ACED (1983) 140 ITR 476 (Cal). When the original deed of trust was valid, the Calcutta High Court held in this case that supplementary deeds executed granting other benefits to the settlor and his sons would not be effective. Therefore, in this case since the Department had not found the trust deed to be suffering from any infirmity in law, it must be held to be valid and we hold it to be so.

6. In the case of CIT vs. Promod Jain Trust (1971) 81 ITR 604 (Del), the Delhi High Court held that no formal document or other writing was necessary to create a charitable and religious trust. Such a trust could be create by words of mouth as showing an intention to create a charitable or religious trust. If that intention was accompanied with or followed by a formal divesting of ownership of property on the part of the donor and vesting of the same in any other person or even to the donor himself as trustee, the dedication is complete. In this case the settlor had validly created a trust by a document duly registered, which declared his intention very clearly in unequivocal terms and the trust property was settled on the trust and was handed over to the trustees and the trust was made irrevocable, the objects were clearly charitable in nature and, therefore, applying the rule laid down by the Delhi High Court, the assessed trust cannot be said to be a non-genuine trust. In the case before the Delhi High Court the trust was created by a letter. The question arose whether such a trust could be validly created. The Delhi High Court answered the question in the affirmative. The present case before us is much stronger than the case before the Delhi High Court.

7. The Madras High Court in the case of Thanthi Trust vs. ITO (1973) 91 ITR 261 (Mad) held that if a valid and complete dedication to a trust had taken place, there would be no power left in the founder to revoke and no assertion on his part or the subsequent conduct of himself or his descendants contrary to such dedication would have the effect of nullifying it. If the trust had been validly and really created any deviation by the founder of the trust or the trustees from the declared purpose would amount only to a breach of trust and would not detract from the declaration of the trust and hence the subsequent conduct of the founder in dealing with the funds of the trust long after its creation may not put an end to the trust itself. Thus the law on the subject is well settled that a trust validly created and where the dedication is complete, that becomes an irrevocable trust and any act done by the founder or the trustees thereafter would not nullify the effect of the trust but only would amount to a breach of trust and, therefore, even if the donations are held to be non-genuine, spurious or fictitious, that would not make the trust which is validly created and irrevocable, a non-genuine trust. The view taken by the authorities below is therefore, erroneous. We, therefore, hold that the trust is validly created. As we have pointed out the ITO was carried away by what happened elsewhere, which has no relevance to the facts of the issue. The ITO should have discussed the facts relevant to the issue instead of digressing to the facts in other cases all because the trustees happened to be the trustees there also. A misdeed committed by a trustee elsewhere all be it in another trust having the same objects cannot mean that the same was effected here also. Each has to be decided on its own independent facts. It was that confusion that led the ITO to hold that this trust is non-genuine whereas in fact it was not so.

8. As regards the donations it is difficult to say that these donations were not genuine donations because undisputedly they were received by account payee cheques. As rightly urged on behalf of the assessed the fact that those sums were tainted, if at all they are tainted, would not mean that the donations were not received by the trust. Once they are received by the trust, they formed part of the trust fund and no one else has got the power to dispose them of except the trustees in accordance with the objects of the trust. Any deviation in the disposal of those funds would be a breach of trust. Since the ITO was led away by the facts obtaining in other cases, it cannot be said that the donations received by account payee cheques were not genuine and only fictitious. The donors have admitted that they have donated the sums. Merely because the donors were not aware of the objects of the trust or were unable to explain the meaning of the word "corpus" as a student of law would be expected to do, a conclusion that he did not give the donation cannot be reached in the face of his admission that he donated the funds. But there are other provisions of the IT Act to bring those sums to tax, namely, voluntary contributions received by a trust other than trust corpus are liable to be treated as the income of the trust. This is clear from the definition of the word "income" in S. 2(24)(iia), wherein it is held :

"voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association or institution referred to in cl. (21) or cl. (23), or by a fund or trust or institution referred to in sub-cl. (iv) or sub-cl. (v) of cl. (23C) of S. 10.

Explanation. - For the purposes of this sub-clause trust includes any other legal obligation."

Since this condition does not seem to have been satisfied in this case, the contributions can be brought to tax by applying this provisions. That apart the other provisions of S. 12A, namely furnishing to audit report, application of money for the objects of the trust do not seem to have been complied with in this case. Therefore, the voluntary contributions cannot earn exemption unless these requirements of law, which appeared to be mandatory, we satisfied. We, therefore, hold that while the trust is genuine, the donations are genuine, the other conditions laid down in the IT Act to grant exemption to these donations from the levy of tax are not complied with, the donations cannot be exempted from the levy of tax.

9. In the result, the appeal is allowed in part.