ITA. NO. 6090/KB OF 1991-92 VS ITA. NO. 6090/KB OF 1991-92, 1994 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 1294 (1994)

(a) Income Tax Ordinance (XXXI of 1979)---

---Second Sched., Cl. (93) [as amended by Finance Act (V of 1989)-- Charitable trust---Exemption---Charitable trust which is doing business would not be entitled to get benefit of exemption under Cl. (93) of the Second Schedule of the Income Tax Ordinance, 1979 but it may get exemption for any income from house property held under the trust, provided that the income so earned is actually applied or finally set apart from charitable purposes.

Due to amendment in Cl. 93 in Second Schedule brought in 1989, any charitable trust deriving any income from business, would not get an exemption on that portion of income and also that the property' income would mean income from house property. From this amendment, it is apparent that intention of legislature was to curtail the misuse of trust for the purpose of earning income from business. Therefore, the question would be that any trust which is earning any income from business, would still be in a position to get exemption in any other clauses to frustrate the amendment brought in by the legislature. By this amendment, it has been categorically stated that those charitable trusts which are doing business would now not be entitled to get benefit of exemption under clause (93), but they may get exemption for any income from house property held under trust. Of course, the other condition would be that the income so earned is actually applied or finally set apart from charitable purposes.

(b) Income Tax Ordinance (XXXI of 1979)---

----Second Sched., Cl. (86)---Charitable trust---Exemption---Trust running schools on no profit no loss basis being an "educational institution" was entitled to exemption under Second Sched., Cl. (86), Income Tax Ordinance, 1979---Mere fact that certain surplus arose from trust operation would not mean that trust or institution was being run for purposes of profit so long as no person or individual was entitled to any portion of the said profit and said profit was utilized of the purpose and for the promotion of the objects of the institution.

CIT v. Sindhu Vidaya Mandal Trust (1983) 143 ITR 633 and CIT v. Doon Foundation (1985) 154 ITR 208 ref.

(c) Income Tax Ordinance (XXXI of 1979)---

----Second Sched., Cls. (86) & (93)---Charitable trust---Exemption---Maxim "generalibus specialia derogant"---Application---Trust running schools on, no profit no loss basis---Nothing was available on record to show that any surplus arising out of running schools had been distributed amongst the trustees or had been misused by the management ---Assessee in the past, was claiming exemption under Cl. (93) of the Second Sched. of Income Tax Ordinance, 1979 and after the amendment in said Cl. (93) brought in by Finance Act, 1989, assessee claimed exemption under Cl. (86) of the Second Sched. of Income Tax Ordinance, 1979---Validity---Held, there was no legal bar whereby an assessee could not change his plea of claim of exemption, if the assessee was in a position to satisfy conditions prescribed in any specific clause---Maxim: Generalibus specialia derogant, was not applicable in such a case in so far it was an established principle that the assessee was entitled to a relief which was permissible under the law if the same was not claimed by it---Trust, therefore, could claim exemption under Cl.(86) of the Second Sched. of the Income Tax Ordinance, 1979 of any surplus arising out of running of schools within the scope of trust.

(d) Income Tax Ordinance (XXXI of 1979)---

----Second Sched. Cls. (86) & (93)---Charitable trust---Exemption---Trust running schools on no profit no loss basis---Activities beyond the scope of exemption clause---Taxability.

It is possibly that trust may be doing various activities and it is also possible that one or some of the activities may fall in exemption clauses. A trust or an assessee would not be disallowed any exemption if it is available to him under any of the clauses on the basis that some of the activities or line of business are not exempt. The nature of income or line of business is necessary to determine the taxability of a person. If any income is received from the activities which are treated exempt under any clause of the Income Tax Ordinance, then the assessee would not be deprived of that benefit. In the present case, it has been proved that the main purpose of the trust is to run schools, but in doing so some activities are undertaken by trust, which are beyond the scope of exemption clauses, then only those activities would be subjected to tax. If an assessee is permitted to do various lines of business, then the trust would not be deprived of such benefits.

(e) Income Tax Ordinance (XXXI of 1979)---

----Second Sched., Cl. (93)---Charitable trust---Exemption---Trust running schools on no profit no loss basis---Income from other sources---Some open trust space of the house property of trust was rented out to some advertising company where they had fixed neon signs---Trust also deriving income from dividends---Receipts from neon signs and dividends though not distributed amongst trustees or other persons, yet would be termed as "income from other sources" and were not exempted.

Muhammad Fariq for Appellant.

Khalid Siddiqui, D.R. for Respondent.

Date of hearing: 3rd January, 1994.

ORDER

SYED KABIRUL HASAN, (JUDICIAL MEMBER).---This appeal relating to assessment year 1989-90 is directed against the order of learned CIT(A), Zone-III, Karachi, dated 27-12-1992.

2. The brief facts necessary for the disposal of this appeal are that the assessee is a charitable trust and runs various schools. During this assessment year, the assessee besides income/surplus from running of schools also received some income from renting of neon signs, dividends, donations and profits on Khas Deposit Certificates. The assessee-trust upto assessment year 1988-89 was enjoying exemption under clauses (93) and (94) of the Second Schedule to the Income Tax Ordinance, 1979. But in Finance Act, 1989. Clause (93) of the Second Schedule was amended and thereby the income from house property was granted exemption and other income by trust was brought into the clutches of Income-tax. The ITO, therefore, charged tax on income of the trust. The order of ITO was upheld by the learned CIT(A).

3. In support of this appeal, Mr. Muhammad Farid, learned counsel for the assessee has firstly submitted that the amendment which was introduced by Finance Act, 1989, was prospective and was applicable from the assessment year 1990-91 and secondly he has submitted that no doubt, the exemption of trust has been taken away, yet on similar facts the assessee-trust is entitled to exemption under Clause (86) of the Second Schedule to the Income Tax Ordinance. In support of his second contention, he has relied on a book titled `Indian Taxation; Volume 3 to support the view that if an assessee satisfies all the conditions laid down in different provisions relating to exemption then he may claim exemption under any of the sections or provisions:

In reply the learned D.R. has submitted that prior to 1989-90, the assessee-trust was enjoying exemption under Clauses (93) and (94) of the Second Schedule to the Ordinance, only when the exemption on income of trust was withdrawn, then the assessee-trust invoked the provision of Clause (86). He has, therefore, contended that the action of assessee-trust are not bona fide, as the trust had the choice to claim exemption in either of the clause but he chose to claim exemption under clauses (93) and (94) of the Second Schedule, therefore, the question of choice is not applicable in case of assessee-trust as the maxim "Generaliabus Specialia Derogant" would come in the way of assessee-trust.

4. In order to understand this factual controversy, it would be proper to have a glance at the provisions contained in Clause (93) before the amendment and after the amendment mentioned above.

Clause (931 before amendment:

"(93) Any income which is derived from property (or business) held under trust or other legal obligation wholly, or in part only, for religious and charitable purposes and is actually or finally set apart for application thereto:

Provided that in the case of business, this clause shall not apply unless the business, itself is the subject of and is carried on behalf of such trust or a religious or charitable institution and the income derived from such business is applied solely for religious or charitable purposes of the trust or the institution and either--

(i) the business is carried on in the course of carrying out of the religious or charitable purposes of the trust or the institution; or

(ii) the work in connection with the business is mainly carried on by toe beneficiaries of the trust or the institution:

Provided further that if any sum out of the amount to set apart is expended outside Pakistan, it shall be included in the total income of the income year in which it is so expended or of the year in which it was set apart, whichever is the greater, and the provisions of subsection (3) of section 65 shall not apply to any assessment made or to be made in pursuance of this proviso.

Explanation.---Notwithstanding any provision contained in the instrument of , or relating to the trust or the institution, if any amount is set apart, expended or disbursed for the maintenance and support wholly or partially of the family, children or descendents of the author of the trust or the donor of the maker of the institution or for his own maintenance and support during his lifetime or payment to himself or his family, children, relations or descendent payment of his or their debts out of the income, profits and gains of the properly dedicated, or if any expenditure is made other than for charitable purposes,, in each case such expenditure, provision, setting apart, payment or disbursement shall not be deemed, for the purposes of this clause, to be for religious or charitable purposes."

Clause (93.) after amendment:

"(93) Any income which is derived from (house property) held under trust or other legal obligations wholly, or in part only, for religious and charitable purposes and is actually applied or finally set apart for application thereto:

Provided that nothing in this clause shall apply to so much of the income as is not expended within Pakistan:

Provided further that if any sum of the amount so set apart is expended outside Pakistan, it shall be included in the total income of the income year in which it is so expended or of the year in which it was set apart, whichever is the greater, and the provisions of subsection (3) of section 65 shall not apply to any assessment made or to be made in pursuance of this proviso.

Explanation.---Notwithstanding anything contained in the Mussalman Wakf Validating Act, 1913 (VI of 1913), or any other law for the time being in force or in the instrument relating to the trust or the institution, if any amount is set apart expended or disbursed for the maintenance and support wholly or partially of the family, children or descendents of the author of the trust or the donor or the maker of the institution or for his own maintenance and support during his life time or payment to himself or his family, children, relations or descendents or for the payment of his or their debts out of the income from house property dedicated, or if any expenditure is made other than for charitable purposes, in each case such a -penditure provision, setting apart, payment or disbursement shall not be deemed, for the purposes of this clause, to be for religious or charitable purposes".

From the careful reading of above provisions, it would appear, that due to, amendment brought in 1989, any charitable trust deriving any income from business, would not get an exemption on that portion of income and it was also mentioned that property income would mean income from house property. From this amendment, it is apparent that intention of legislature was to curtail the misuse of trust for the purpose of earning income from business. Therefore, the question would be that any trust which is earning any income from business; would still be in a position to get exemption in any other clauses to frustrate the amendment brought in by the legislature. In our opinion, by this amendment, it has been categorically stated that those charitable trusts which are doing business would now not be entitled to get benefit of exemption under Clause (93), but they may get exemption for any income from house property held under trust. Of course, the other condition would be that the income so earned is actually applied or finally set apart for charitable purposes.

5. Now we analyse the provision of clause (86) of the Second Schedule to the Income Tax Ordinance and which is reproduced as under:--

"(86) Any income of any university or other educational institution established solely for educational purpose and not for purposes of profit."

In order to claim exemption under this clause, an assessee has to satisfy the following two conditions:--

(a) that assessee is a university or other educational institution which is established solely for educational purpose; and

(b) that such university or educational institution is not for the purposes of profit.

6. From the facts stated before us and also apparent from the assessment order, this fact is not disputed that the assessee is a charitable trust land running schools; namely:

(i) Aisha Bawany Nursery, K.G. & Cambridge School;

(ii) Aisha Bawany Girls Primary School;

(iii) Aisha Bawany Girls Secondary School;

(iv) Aisha Bawany Boys Secondary School; and

(v) Aisha Bawany Boys Primary School.

This fact is also admitted that the schools are being run on no-profit and no loss basis. Now the question for consideration would be whether the trust could fall within the definition of university or other education institution. It can be straightaway said that the assessee-trust is not a university but let us examine whether it is an educational institution. The word `education institution has

been defined in an Indian Gujarat High Court case reported as (1983) 143 ITR 633 CIT v. Sindhu Vidya Mandal Trust on page 636:--

"The term `education institution' or `institution' is not defined under the Act. In the Oxford English Dictionary, Vol. V, at p. 354, the word `institution' is defined to mean `an establishment, organisation, or association instituted for the promotion of some object, especially one of public or general utility, religious, charitable, education, etc." There are several other meanings also of the word `institution' but they are not relevant for the purpose of this reference. The question is whether the assessee trust can be described as an establishment, organisation or association instituted for the promotion of some object. In our opinion, the answer to this question has to be in the affirmative. The assessee-trust can be described as an organisation or association and its object indisputably is promotion of education. Trust is an association of persons, the trustees. It can also be described as body of individuals, namely trustees. It is a body, which carries on orgnaised activities enumerated in the trustee deed which creates it. In that sense it can also be described as an-organisation. Therefore, if we were to resolve the controversy before us with reference to the dictionary meaning of the word `institution', it must, be held that the assessee trust is an educational institution:'

The facts of this cited case are similar to the facts of this case. The trust mentioned in the citation was also running primary and secondary schools.

7. The similar question was considered by Calcutta High Court in Court in case reported as (1985) 154 ITR 208 CIT v. Doon Foundation where in the term "educational institution" was defined on the same pattern as the definition was given by Gujarat High Court in Sindhu Vidya Mandal Trust case (Supra).

8. The above definition has been referred for the purpose of reference only. Whereas in this case, this fact is not disputed that the assessee is running schools and the facts that the schools are being run on no-profit and no-loss basis is also not disputed. Therefore, both the conditions mentioned in Clause (86), have been satisfied by the assessee-trust. No doubt, the trust has a separate entity or existence, but as we have already explained that the purpose of trust is to run schools, therefore, it can be termed as educational institution and the fact that merely because of the fact that certain surplus arose from trust operation, it cannot be held that the trust, or institution was run for purposes of profit so long as no person or individual was entitled to any portion of the said, profit and the said profit was utilized for the purpose and for the promotion of the objects of the institution. Nothing to the contrary has been brought on record but on the contrary, the assessing officer has admitted that the schools are being run on no-profit and no-loss basis. In view of this, we are of the view that the assessee-trust has satisfied the two conditions necessary for claiming exemption under clause (86) of the Second Schedule to the Ordinance.

9. Now we take up whether the assessee can be allowed to claim exemption in clause (86) of the Second Schedule, when in the past, the assessee-trust was claiming exemption under clause (93) of the Second Schedule and more so this change in claim of exemption was made after the amendment brought in 1989 in clause (93). In our opinion, there is no bar in Income Tax Ordinance whereby an assessee can change his plea of claim of exemption, if the assessee is in a position to satisfy conditions prescribed in any specific clause. The maxim Generalibus Specialia Derogant' is not applicable in this case in so far as it is an established principle of law that the assessee is entitled to a relief which is permissible, under the law even if the same is not claimed by him. In this case, this fact is not disputed that the assessee-trust is only running schools and running of schools is also one of the charitable purposes. This fact is also not denied that the assessee is running these schools on no-profit and no-loss basis. Nothing on record has been brought in by the assessing officer to prove that any surplus arising out of running of schools has been distributed amongst the trustees or have been misused by the management. Therefore, in the absence of any evidence to the contrary, the trust would not loose the benefit of exemption under clause (86) available to it.

10. This matter can be looked from different angle. Say for example, the trust establishes an industrial undertaking in an area, which is enjoying exemption, therefore, in such a situation, the income earned from such industrial undertaking would be exempt even the same is earned by a trust. Therefore, it is possible that trust may be doing various activities and it is also possible that one or few of the activities may fall in exemption clauses. In our view, a trust or an assessee would not be disallowed any exemption if it is available to him under any of the clauses on the basis that some of the activities or line of business are not exempt. In our view, the nature of income or line of business is necessary to determine the taxability of a person. If any income is received from the activities which are treated exempt under any clauses of the Income Tax Ordinance, then the assessee would not be deprived of that benefit. In this case, it has been proved that the main purpose of the trust is to run schools, but in doing so some activities are undertaken by trust, which are beyond the scope of exemption clauses, then only those activities would be subjected to tax. In our opinion, if an assessee is permitted to do various line of business, then the trust would not be deprived of such benefits.

11. In view of above, we hold that the assessee may claim exemption under clause (86) of the Second Schedule to the Income Tax Ordinance of any surplus arising out of running of schools within the scope of assessee-trust.

12. The learned counsel for the assessee has not pressed his first ground though it is mentioned in grounds of appeal.

13. We find that in addition to above, the assessee has also earned some income from neon signs amounting to Rs.3,15,000 and some income from dividends amounting to Rs.17,500. As regard to income from neon signs, the learned counsel for the assessee has stated that this income is covered under clauses (93) of the Second Schedule to the Income Tax Ordinance, as some open space of the house property of the assessee was rented out to some advertising company, therefore, income so earned was incidental and relatable to house property. This contention of learned counsel for the assessee on the face of it, is misconceived. If his contention is accepted, then any income earned from factory premises or running an office in a building would be termed as income from property. The meaning of income from property would be restricted to any income from letting or renting out of house property and that is the income which is recognized by the. Ordinance as income from property within the meaning of clause (93). In our opinion, the nature of receipts from neon signs would qualify them to be termed as income from other sources.

14. Nothing has been said about the income from dividend and definitely this income is not relatable to any activity of the trust which could be termed as exempt.

15. We are mindful of the fact that the income earned from dividend and neon signs is also being utilised by assessee-trust for charitable purposes and nothing has been brought on record to show that this income was distributed amongst the trustees or any other persons, but unfortunately, while considering the exemption provisions, Court is required to follow restricted interpretation and the person who is claiming exemption is required to prove his case. No doubt, the income is being utilised for the charitable purposes but the fact is that this income cannot be treated exempt under any clauses of the Second Schedule to the Ordinance, therefore, the claim in respect of income from neon signs and income from dividend cannot be entertained.

16. The upshot of the above discussion would be that surplus income from schools would be treated as exempt under clause (86) of the Second Schedule to the Income Tax Ordinance and other income from neon signs and dividends would be subjected to tax.

17. This' appeal is, therefore, disposed of in the manner as indicated above.

M.BA./51/T.T.Order accordingly.