Principle of res judicata does not apply to income tax proceedings- SC
Charitable organization is a kind of institution or a business that falls under the category of NPO or non-profit organization and can be based on providing educational, religious or public interest activities. There are different kinds of activities of the charitable organizations. Some of them offer relief to the needy people who are in distress, poverty or are underprivileged. There are also some who are related to educational, scientific or religious affiliations. Some of the activities of charitable organization also include the creation of public building and monuments and take care of them. All these are done by the donations that a charitable organization gets. Due to their distinct organisation and objective entire income of such charitable or religious trusts are taxed as per the provisions of section 11-13 of the Income Tax Act, 1961, which provides for various tax benefits to them.
What benefit under income tax is provided to trusts?
Trust formed for charitable or religious purposes which are not intended to do commercial activities are allowed various benefits under the Income-Tax Act, inter-alia, exemption under section 11.
What do you mean by religious or charitable purpose?
The term religious purpose is not defined under the Income-Tax Act. Section 2(15) of the Income Tax Act defines “charitable purpose” to include relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility.
However, the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess, fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity, unless:
- such activity is undertaken in the course of carrying out of such advancement of any other object of general public utility and
- the aggregate receipts from such activity or activities during the previous year, do not exceed 20% of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year
How is income from property held for charitable or religious purposes by is trust, taxed?
According to Section 11 of the Income Tax Act, the following income from property held for charitable or religious purposes shall not be included in the total income of the previous year
- income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and
- where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 15% of the income from such property
In simple words,
15% of gross receipts from such trust property – Exempt
85% of gross receipt from such trust property
- Income Applied for Charitable Purposes in India – Exempt to the extent to which applied for the following purposes:
- Purchase of capital asset
- Repayment of loan for purchase of capital asset
- Revenue Expenditure
- Donation to trust registered u/s 12AA or u/s 10(23C)
- In case whole or part of income is not received during that year in which it is derived. Income deemed to be applied for charitable purpose in India and exempt shall be:
- Income is applied for charitable purpose in India in the year of receipt or in the immediate succeeding year.
- Assessee submits a declaration to the AO on or before the due date of filling of return as per section 139(1) that such income shall be applied for such purpose in the year of receipt or succeeding year.
- In any other case exempt income shall be:
- Such income is applied in above mentioned charitable purposes in the immediately succeeding year.
- Assessee submits a declaration to the AO on or before the due date of filling of return as per section 139(1) that such income shall be applied for such purpose in the immediate succeeding year.
Let us refer to the case of Radhasaomi Satsang v. CIT (1991), where the issue under consideration was whether, in the absence of any change in the circumstances, could the revenue reopen a question which had been decided upon in the earlier years?
Facts of the Case:
- The Assessee was a charitable trust established in 1861 and was claiming exemption under section 11.
- For assessment years 1937-38 and 1938-39, the Commissioner deleted additions holding that the offerings made to the trust were not used for personal benefit and such offerings were exempt under section 4(3)(i) of the 1922 Act.
- In assessment year 1939-40 the AO rejected the claim for exemption, but the same was allowed in appeal before the ACC.
- Until assessment year 1963-64, the refund applications made by the assessee were accepted on the basis that income was exempt and that tax had been deducted at source.
- For the first time claim for refund in the years 1964-65 to 1966-67 was not allowed and the assessee was treated as an AOP and taxed.
- For the assessment years 1966-67 to 1969-70 assessments were completed and the AO did not accept the assessee’s claim of exemption under section 11.
Order of the Tribunal
- While the Tribunal did not accept that the words ‘held under trust’ merely meant a consideration of the factual position and that if the income had been applied for religious purpose it was unnecessary to find out whether in law a trust had been created or not.
- But the Tribunal was of the opinion that the words legal obligation was much wider and the activities of the Satsang could be brought within the purview of that expression.
- It finally held that the assessee was entitled to the exemption claimed under section 11
Order of the High Court
- The High Court did not accept the conclusions of the Tribunal by heavily relying upon the revocability of the trust as clearly specified in the document and accepting the stand of the Revenue that exemption under section 11 was subject to the provisions of section 60 to 63 of the Act.
- On the finding that the trust was revocable it upheld the liability.
What is the principle of res-judicata?
- Res judicata (RJ), also known as claim preclusion, is the Latin term for “a matter decided” and refers to either of two concepts in both civil law and common law legal systems: a case in which there has been a final judgment and is no longer subject to appeal; and the legal doctrine meant to bar (or preclude) relitigating of a claim between the same parties.
- In the case of res judicata, the matter cannot be raised again, either in the same court or in a different court. A court will use res judicata to deny reconsideration of a matter
Observations of the Supreme Court (SC)
- The Judicial Committee found that the properties which were the subject matter of the suit were acquired with the moneys presented to the Sant Satguru in the form contributions by the followers of the Radhasoami faith.
- The Judicial Committee found that it was almost inconceivable that the followers of the faith when making their gifts to the Sant Satguru intended to create a trust within the meaning of the Act 14 of 1920 of which they, the donors and the worshippers, should be the beneficiaries.
- The Privy Council further also found that it could not be said that the donors of the gifts were the authors of the alleged public trust.
- The requirements of section 11 of the Income Tax Act are considerably different from what the Judicial Committee of the Privy Council was required to consider.
- Where the property was given to the Sant Satguru, it was intended for the common purpose of furthering the objects of the Sant Satguru and the Central Council had the authority to manage the property.
- Clause 9 of the document stipulated that the properties would vest in the trust and clause 25 provided that the trust shall be revocable at the discretion of the Council and the trustees shall hold office at its pleasure.
- Upon revocation, the property was not to go back to the Satguru and in place of the trust, the Central Council would exercise authority.
- It was on record that there was no Satguru long before the period of assessment under consideration.
- As a fact, therefore, the Tribunal was justified in holding that the property was subject to a legal liability of being used for the religious or charitable purpose of the Satsang. This aspect was not properly highlighted before the High Court.
- SC was aware of the fact that strictly speaking res judicata did not apply to income-tax proceedings.
- Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years was found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
- On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter and if there was not change it was in support of the assessee, SC did not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken.
SC, therefore, was of the view that the appeal should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12 of the Income Tax Act of 1961.