COMMISSIONER OF INCOME-TAX VS NAGI REDDI CHARITIES, 2001 PTD-MADRAS-HIGH-COURT-INDIA 3782 (1998)

Income‑tax‑‑‑

‑‑‑‑Exemption‑‑‑Charitable purpose‑‑‑Charitable trust‑‑‑Copyrights in films assigned to trust subject to distribution arrangements made by donors prior to such assignment ‑‑‑Monies received by trust under assignment directed specifically to be held as donations forming part of corpus for construction of hospital‑‑‑Trust did not do business of film distribution‑‑‑Specific direction that monies shall form part of corpus‑‑‑Monies received from distributors under assignment not income of trust‑‑‑Indian Income Tax Act, 1961, Ss.2(24), 11, 12 & 13(1)(bb).

The assessee was a trust, whose objects as set out in the deed were medical relief, education and relief to the poor including construction, maintaining cholutries, public halls, kalyana mandaparn for the benefit of the public free of charge, medical relief to the sick and suffering irrespective of caste, creed and community, constructing and maintenance of hospitals, dispensaries, maternity and children homes; and education of the public by establishing schools and other educational institutions. The assessee‑trust received donations by way of assignment of the copyrights of several movies produced by film producers. The author of the trust was a producer of films and a member of the family which owned a film studio in a portion of which a hospital was to be built by the trust. While making assignment of the copyrights, the respective donors had informed the trust that the assignment of the copyrights of the films was subject to the distribution arrangement already made with several distributors, details of which were made known to the trust. The monies payable to the donor under these distribution arrangements were thereafter to be paid to the trust and those monies were required to be held by the trust as donations by the donor for acquiring or establishing or supporting a hospital. The donors specifically stated that monies so made available to the trust shall form part of the corpus of the trust. The assessee received various sums from the distributors who had been given the right to exploit four movies. The Income‑tax Officer brought these sums to tax as income of the trust, on the ground that the assessee‑trust was carrying on business in film distribution which was not directly connected with the carrying out of the objects of the trust and, therefore, under section 13(1)(bb) of the Income Tax Act, 1961, those amounts could not be excluded from the total income of the assessee. The Tribunal held that the copyrights in the films as also the amounts received from the distributors and exhibitors formed part of the corpus of the trust; that the trust did not carry on any business and that even if it could be held that it did carry on business such business was in the course of actual carrying out of a primary purpose of the trust. On a reference:

Held, that the trust was not directed by the donor to enter into Business. The donor himself had entered into distribution agreements and assigned the donor's rights thereunder to the trust. The agreements executed by the trust after the assignment was only by way of substitution and not by way of entering into the business of distribution or exhibition of the movies. The amounts received by the trust for these years thus were the amounts which were payable by the distributors or exhibitors who had acquired the right to exploit the movies, copyrights in which had been assigned to the trust, before such assignment from the donor. The monies payable under those agreements were, after the assignment made payable to the trust and trust was given permission to utilise the monies in the trust as part of the corpus till such time as those monies were used for constructing the hospitals by the trust or through another trust. Thus, the amounts realised were for the specific purpose of carrying out the objects of the trust. The amounts so received were also the amounts which formed part of the corpus of the trust. Imposition of such conditions was not in any way contrary to law. The amounts received by the assessee from the distribution and exhibition of the Movies with whom arrangements had been made by the donor himself could be said to be income derived from a business and it could also not be said pat the assessee was engaged in the business of film distribution. The come realised by the assessee‑trust by exploitation of, the film distribution rights was part of the corpus of the trust and not "income" under section 2(24) of the Income Tax Act, 1961. Section 13(1)(bb) was not applicable.

C.V. Rajan for the Commissioner.

Uttan Reddy for the Assessee.

JUDGMENT

R. JAYASIMHA BABU, J.‑‑‑The question referred to us at the instance of the Revenue‑are:

"(1) ???? Whether, on the facts and in the circumstances of the case, the Income‑tax Appellate Tribunal has rightly held that the activity of the assessee relating to the exploitation of film distribution rights and realisation of income therefrom is not 'business activity'?

(2)??????? Whether, on the facts and in the circumstances of the case, the Income‑tax Appellate Tribunal has rightly held that the activity of the trust relating to the exploitation of film distribution rights and realisation, of income therefrom is a business carried on by the assessee‑trust in the course of actual carrying out of the primary purpose of the trust, and so the provisions of section 13(1)(bb) of the Income Tax Act, 1961, are not applicable to the case?

(3)??????? Whether, on the facts and in the circumstances of the case, the Income‑tax Appellate Tribunal has rightly held that the income realised by the assessee‑trust by exploitation of the film distribution rights is part of the corpus of the trust and not 'income' under section 2(24) of the Income Tax Act, 1961?"

The assessment year's are 1977‑78, 1978‑79 and 1979‑80.

The assessee is a trust constituted under a deed of trust, dated November 29, 1972. The trust is named as Nagi Reddi Charities. The objects of the trust as set out in the deed are medical relief, education and relief to the poor including construction, maintaining choultries, public halls, kalyana mandapam for the benefit of the public free of charge, medical relief to the sick and suffering irrespective of caste, creed and community, constructing and maintenance of hospitals, dispensaries, maternity and children homes and education of the public by establishing schools and other educational institutions without any restriction as to any caste, community or creed and granting scholarships or subsidies to poor students.

The assessee received donation by way of assignment of the copyrights of several movies produced by the film producers. The author of the trust being a producer of films and members of the family which owned a film studios in a portion of which a hospital was to be built by While making assignment of the copyrights, the respective donors had informed the trust that the assignment of the copyrights of the "firms was subject to the distribution arrangement already made with several distributors, details of which were made known to the payable to the donor under these distribution arrangements were thereafter to be paid to the trust and those monies were required to be held by the trust as donations by the donor for "acquiring or establishing or supporting a hospital as soon as possible either by 'yourselves' or any other trust or institution which has for the object the provision of medical relief". It was further stated in that letter that monies made available to the trust "shall form part of the corpus of your trust".

The assessee received various sums from the distributors who had been given the right to exploit the four movies; Ram and Shyarr., Manha Earisha, Julie and Prem Nagar. The Income‑tax Officer sought to tax the amounts so received on the ground that the assessee was carrying on business in firm distribution which was not directly connected with the carrying out of the objects of the trust and, therefore, under section 13(1)(bb) of the Act, those amounts could not be excluded from the total income of the assessee. That statutory provision relied on by the Income‑tax Officer provides that in the case of charitable trust or institution for the relief of the poor, education or medical relief, which carries on any business, any income derived from such business, unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution, is to be included in the total income of the previous year of the trust which received such donation. Section 11 of the Act exempts income from property held for charitable or religious purpose subject to the conditions set out in the section from being included in the total income of a religious or charitable trust. That exemption is withdrawn if such income falls within the provisions of section 13 of the Act.

Section 12 of the Act is material in the light of the submission that was made for the assessee. That section is titled "income of trusts or institution from contributions". It reads thus:

"12. Any voluntary contributions received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes (not being contributions made with a specific direction that they shall form part of the corpus of the trust or institution) shall for the purposes of section 11 be deemed to be income derived from property held under trust wholly for charitable or religious purposes and the provisions of that section and section 13 shall apply accordingly."

Contributions made with a specific direction that' they shall form part of the corpus of the trust are not to be treated by section 12 as income of the trust. Such contributions to the corpus do not constitute taxable income. All other contributions are deemed as income derived from property held for the purpose of the trust for the purpose of section 11 and section 13.

If the amounts received by the assessee pursuant to the donations by way of assignment of copyrights are part of the corpus, such amounts not being income of the trust are not subject to the limitations and restrictions set out in section 11 and section 13.

The Tribunal on appeal from the order of the appellate authority who had affirmed the Income‑tax Officer's order, held that the copyrights in the films as also the amounts received from the distributors and exhibitors formed part of the corpus of the trust; that the trust did not carry on any business and that even if it could be held that it did carry on business, such business was in the course of actual carrying out of a primary purpose of the trust.

Learned counsel for the Revenue submitted that only the copyright assigned to the trust could form part of the corpus but that income derived from the exploitation of the distribution and exhibition rights could not form part of the corpus of the trust. Counsel also submitted that exploitation of the copyright constituted a business and that such business has to be regarded as having been carried on by the trust.

Counsel for the assessee relied on section 12 of the Act and submitted that the intention of the donors as evidenced in their letters was decisive that the donation was to form part of the corpus and what was donated was copyright as also the amounts otherwise payable to the donor, by the distributors and exhibitors of the films. It was further submitted that the assessee did not enter into any fresh arrangements with any of the exhibitors or distributors in these assessment years and that the agreement referred to by the Income‑tax Officer was merely by way of substitution of the assessee in the place of the original donor.

Copyright in a film is undoubtedly property. Under the provisions of the Copyright Act, a copyright can be assigned and when the assignment had been made without valuable consideration, it is open to the donor to impose conditions subject to which the assignment is made. It is for the assignee to accept or reject these conditions. The copyrights in the movies for the exploitation of which the assessee‑trust received amounts were assigned to the trust subject to the express condition that the amounts realised from the exercise of the rights of ownership of the copyrights would be utilised only for the purpose of constructing the hospital or making the sums available to the that would construct hospitals or dispensaries as also to the further condition that the amounts realised from the exploitation of the copyright in the movies, were to be held as part of the corpus of the trust till such time they were utilised for constructing the hospital either by the trust or by making the sums available to another trust which would erect such hospital.

The effect of the conditions so imposed was to direct the trust to receive the monies from those exhibiting and distributing the movies and treat the sums so received as contribution to the corpus of the trust. Instead of the donor collecting these amounts from the exhibitors and distributors and thereafter donating the amounts, the donor achieved the same object by enabling the trust to receive the monies directly from the exhibitors and distributors, and hold the same as part of the corpus of the trust for the specific purpose of fulfilling its object of providing medical relief. The trust was not directed by the donor to enter into the business. The donor himself had entered into such agreements and assigned the donor's rights thereunder to the trust.

As submitted by counsel for the assessee, the agreement executed by the trust after the assignment was only by way of substitution and not by way of entering into the business of distribution or exhibition of the movies. The amounts received by the trust for these years thus were the amounts which were payable by the distributors or exhibitors who had acquired the right to exploit the movies the copyright which had been assigned to tile trust, before such assignment from the donor. The monies payable under those agreements were after the assignment made payable to the trust and there trust was given permission to utilise the monies in the trust as part of the corpus till such time as those monies were used for constructing the hospitals by the trust or through another trust. Thus the amounts realised were for the specific purpose of carrying out the objects of the trust. The amounts so received were also the amounts which form part of the corpus of the trust.

The view taken by the Assessing Officer and the Appellate Assistant Commissioner that the donor had no right to give directions regarding the manner in which the amounts realised from the distribution and exhibition of the movies, is based on a misconception. Imposition of such conditions was not in any way contrary to law.

The amounts received by the assessee from the distribution and exhibition of the movies with whom arrangements had been made by the donor himself cannot be said to be income derived from a business and it could also not be said that the assessee was engaged in the business of film distribution.

Our answer to the questions referred to us, therefore, in so far as the first question is concerned, is in the affirmative. So far as the second question is concerned, our answer is that section 13(1)(bb) of the Act is not attracted on the facts of this case. Our answer to the third question also is in the affirmative. All the questions are answered in favour of the assessee and venue.

MBA./680/FC???????????????????????????????????????????????????????????????????????????????????? Reference answered.