# COMMISSIONER OF INCOME TAX, WEST BENGAL v. TOLLYGUNGE CLUB LTD

- **Citation:** [1977] 3 S.C.R. 225
- **Court:** Supreme Court of India
- **Decided:** 1977-03-15
- **Bench:** P. N. Bhagwati, S. MURTAZA fAZAL ALI
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-west-bengal-v-tollygunge-club-ltd-7199
- **Pages:** 8

## Headnote

Income-tax Act.
1922-S.
15B-Diversion
of income
or
diversion
of
source-Charity su-rcharge whether inco1ne-Obligation in the nature of trust,
how to be created.
B
The assesGee was a Company limited by guarantee and owned a Social
~nd
Sports Club one of \vhose· activities consisted of conducting horse races \vith
C
amateur riders. It charged for admission into the enclosure of the club admission fee !o the guests introduced by the members of the club as \Yell as to the
members of the public.
It also charged a surcharge of eight annas solely
earmarked for local charities.
That was done pursuant to a resolution passed
at the meeting of the General Body providing that ,the surcha!'g<! of eight ann?.s
on the f'.:ntrance ticket should be earmarked for local charities.
The Income Tax Officer pdor to the assessment year 1960-61 did not treat
1he receipts on account of surcharge as trading receipts of the assessee and
bring them to tax as income of the· a~essee. While making the assessment for
the assessment year 1960-61, the Income Tax Officer took the vie\v that the
receipts on account of surcharge were revenue receipts in the hands of assessee
and they could not be excluded from the total income of the a~sessee merely on
the-ground that they were applied for charitable purposes. It \Vas common
ground that the amounts received by way of surcharge had in fact been disbursed to local charities.
The Income Tax Officer treated the receipts on
account of surcharge as income of the assessee: and allowed rebate under s. 15B
in respect of the amounts actually disbursed in favour of local charities.
The
.A.ppellate AssiStant Commissioner confirmed the order of th.e Income Tax Officer
on the ground that a person who wished to gain admission to the enclosure
of the club had to pay the surcharge whether he was willing to contribute to
the charity or not and the amount of the surcharge was therefore a part of the
price charged by the assessee for admission and it was accordingly a revenue
receipt in the hands of the assessee.
On further 3.ppeal, the Tribunal held that
the surcharge, \Vas levied on admission ticket for the purpose of charity and
hence the receipts in respect of the surcharge were not income of the assessee
at the point of time when they reached its hands and being earmarked
for
charity they never belonged to the assessee.
The High Court on a reference made by the Tribunal. agreed with the view
taken by the Tribunal holding that since the
surcharge \Vas charged by the
assessee an<l paid by the race goers for the specific purpose of being applied
to local chanties pursuant to the resoluti,-on passed by the general meeting of
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the· assessee, there was at the time of receipts of the amounts in respect of the
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surcharge, a legally enforcible obligation on the assessee to apply them to local
charities and those amounts accordingly did not reach assessee as its income
but were diverted to local charities before they reached the assessee.
Dismissing the appeal,
HELD : ( 1)
Income tax is a tax on income.
Every receipt by
the
assessee is not necessarily income in his hands.
It is only when it bears the
H
character of income at the time when it reaches the hands of the assessee that
it becomes exigible to tax. [228 El
Lo11don County Cou11cil v. Attorney General [1901] AC 26.
A
B
c
226
SUPREME COURT REPORTS
[1977J 3 S.C.R.
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(2) The assumptions of the Revenue that the surcharge was received· as
part of the price for admission 10 the club enclosure
and that there was no
legally enforcible obligation on the assessee to spend the amounts on charity
are erroneous.
The admission to the· enclosure was the occasion and not
the consideration for the surcharge taken from the race-goers.
It is not
a
correct analysis of the nature of the legal relationship to say that there v.:as
nothing rr.ore than a mere desire or intention on the part of the assessee
to apply the amounts received on account of surcharge to the local charities
\Vithout any

## Text

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225
COMMISSIONER OF INCOME TAX, WEST BENGAL
A
v.
TOLLYGUNGE CLUB LTD.
March 15, 1977
[P. N. BHAGWATI AND S. MURTAZA fAZAL ALI, JJ.]
Income-tax Act.
1922-S.
15B-Diversion
of income
or
diversion
of
source-Charity su-rcharge whether inco1ne-Obligation in the nature of trust,
how to be created.
B
The assesGee was a Company limited by guarantee and owned a Social
~nd
Sports Club one of \vhose· activities consisted of conducting horse races \vith
C
amateur riders. It charged for admission into the enclosure of the club admission fee !o the guests introduced by the members of the club as \Yell as to the
members of the public.
It also charged a surcharge of eight annas solely
earmarked for local charities.
That was done pursuant to a resolution passed
at the meeting of the General Body providing that ,the surcha!'g<! of eight ann?.s
on the f'.:ntrance ticket should be earmarked for local charities.
The Income Tax Officer pdor to the assessment year 1960-61 did not treat
1he receipts on account of surcharge as trading receipts of the assessee and
bring them to tax as income of the· a~essee. While making the assessment for
the assessment year 1960-61, the Income Tax Officer took the vie\v that the
receipts on account of surcharge were revenue receipts in the hands of assessee
and they could not be excluded from the total income of the a~sessee merely on
the-ground that they were applied for charitable purposes. It \Vas common
ground that the amounts received by way of surcharge had in fact been disbursed to local charities.
The Income Tax Officer treated the receipts on
account of surcharge as income of the assessee: and allowed rebate under s. 15B
in respect of the amounts actually disbursed in favour of local charities.
The
.A.ppellate AssiStant Commissioner confirmed the order of th.e Income Tax Officer
on the ground that a person who wished to gain admission to the enclosure
of the club had to pay the surcharge whether he was willing to contribute to
the charity or not and the amount of the surcharge was therefore a part of the
price charged by the assessee for admission and it was accordingly a revenue
receipt in the hands of the assessee.
On further 3.ppeal, the Tribunal held that
the surcharge, \Vas levied on admission ticket for the purpose of charity and
hence the receipts in respect of the surcharge were not income of the assessee
at the point of time when they reached its hands and being earmarked
for
charity they never belonged to the assessee.
The High Court on a reference made by the Tribunal. agreed with the view
taken by the Tribunal holding that since the
surcharge \Vas charged by the
assessee an<l paid by the race goers for the specific purpose of being applied
to local chanties pursuant to the resoluti,-on passed by the general meeting of
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the· assessee, there was at the time of receipts of the amounts in respect of the
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surcharge, a legally enforcible obligation on the assessee to apply them to local
charities and those amounts accordingly did not reach assessee as its income
but were diverted to local charities before they reached the assessee.
Dismissing the appeal,
HELD : ( 1)
Income tax is a tax on income.
Every receipt by
the
assessee is not necessarily income in his hands.
It is only when it bears the
H
character of income at the time when it reaches the hands of the assessee that
it becomes exigible to tax. [228 El
Lo11don County Cou11cil v. Attorney General [1901] AC 26.
A
B
c
226
SUPREME COURT REPORTS
[1977J 3 S.C.R.
-------
(2) The assumptions of the Revenue that the surcharge was received· as
part of the price for admission 10 the club enclosure
and that there was no
legally enforcible obligation on the assessee to spend the amounts on charity
are erroneous.
The admission to the· enclosure was the occasion and not
the consideration for the surcharge taken from the race-goers.
It is not
a
correct analysis of the nature of the legal relationship to say that there v.:as
nothing rr.ore than a mere desire or intention on the part of the assessee
to apply the amounts received on account of surcharge to the local charities
\Vithout any legally enforcible obligation.
The resolution was passed at the
general meeting of the assessee and pursuant to that resolution the surcharge
was paid by the race-goers and received by the assessee for the specific purpose
of being applied to local charities. The surcharge when paid was clearly
impressed with an obligation in the nature of trust for being applied for the
benefit of local charities.
A trust may be created by any language sufficient to
show the intention and no technical words are necessary. [228 H, 229 A, C,.
D & GJ
C.I.T v. Thakar Das Bhargava. 40 I.T.R. 301, followed.
(3) In the present case, the surcharge being impressed with an obligation
in the nature of trust for being applied to local charities was by this pbligation
diverted before it reached the hands of the assessee and at no stage 1t became
a part of the income of the assessee.
The amount of surcharge n.ever reached
the nssessec as parts of its income. [230 G-H]
C.I.T. v. Sitaldas TirathdaS, 41 I.T.R. 367, followed.
D
CML APPELLATE JURISDICATION :
Civil Appeal No. 578 of
1972.
, (From the Judgment and Order dated 17-4-1969 of the Calcutta
High Court in Income Tax Reference No. 71 /65)
S. C. Manchanda and R. N. Sachthey, for the appellant.
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Sukumar Mitra, Q. N. Mukherjee and N. R. Chaudhary, for the
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respondent.
The Judgment of the Court was delivered by
BHAGWATI, J.
This is an appeal on a certificate of fitness_ granted
by the High Court of Calcutta under section 66A, sub-section (2) of
the Indian Income-tax Act, 1922.
The facts giving rise to the appeal
are few and may ·be briefly stated as follows.
The asscssee is Tollygunge Club Ltd., a company limited
by
guarantee, and it owns a social and spm;ts club one of whose activities consists of conducting Gymkhana races, that is, horse races with
11mateur riders.
It charges for .admission into the enclosure of the
Club at the time of the races, admission fee to the guests introduced
by the members of the Club as well as to the members of the public.
There is no dispute between the parties that the admission fee received,
by the assessee constitutes trading receipt i_n the hands of the assessee
exigible to tax.
But it appears that on 28th February, 1945 a resolution was , passed at the meeting of the General Body of the Club for
levying a surcharge of eight annas over and above the admission fee,
the proceeds of which were to go to the Red Cross Fund. · This -
resolution was subsequently varied by another resolution dated 30th
January, 1950 and the new resolution provided that the surcharge
of eight annas on entrance ticket should be earmarked "for local
charities and not solely for the Indian Red Cross".
The assessee
.,,,.,
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COMMR. OF J.T. v. TOLLYGUNGE CLUB (Bhagwati;· J.) __ z_2_1
accordingly issued to every entrant to the enclosure on the race course
A
two tickets one an admission ticket for admission to the enclosure of
the Club a'nd the other, a separate ticket in respect of the surcharge
-0f eight annas for local charities.
The slip in respect of the surcharge
-0f eight annas was in the following term:
"Surcharge on admission to
The Tollygunge Gymkhana Races
for
Local Charities
Rs. 4/8 Enclosure
Surcharge
Rs. -181-"
The receipts from the surcharge were not credited to the profit and
loss account but they were carried directly to a separate account
styled 'Charity Account'.
These receipts on account of surcharge·
were not treated as tradil)g receipts of the assessee and were not
brought to tax as income of the assessee in the assessment years perior
to the as.essment year 1960-61.
But while making assessment for
the .assessment year
1960-61, the Income Tax Officer took
the
view that receipts on account of surcharge were revenue receipts in
the hands of the asscssee and they would not be excluded from the
total Income of the assessee merely on the ground that they
were
applied for charitable purposes. It may be pointed out· at this
stage that it was not disputed before the Revenue authorities that the
amounts realised by way of surcharge had been disbursed to local
charities and in fact a list was filed showing the local charities in
whose favour such disbursement had been made.
The Income Tax
Officer treated the disbursement of the amounts received on account
of surcharge as application of the income belonging to the assessee
and he accordingly included these receipts in the total income of the
assessee, but allowed rebate under section 15B on the amounts actually disbursed in favour of local charities during
the
accounting
year.
This view taken by the Income Tax Officer was affirmed on
appeal by. the Appellate Assistant Commissioner who held that
a
person who wished to gain admission to the enclosure of the aub
on any racing day ·had to pay the surcharge whether he was willii'ig
· to contributes to the charity or not and as such the amount of the
surcharge was a part of the price charged by the assessee for admission to the enclosure and it was, therefore, a· revenue receipt in the
hands of the assessee.
This was followed by a further appeal to the
Tribunal and this time the assessee was successful.
The Tribunal
held that the suichange. was levied on admission tickets for
the purpose of charity and hence the receipts in respect of the surcharge were not income of the assessee at the point · of time when
they reached its hands and being "earmarked for charity", they ... nevcr
belonged to the assessee" and were hence not includible in the taxable
income of the assessee.
The Tribunal accordingly directed that the
receipt of the surcharge credited to the charity account should be
deleted from the total income of the assessee.
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228
SUPREME COURT REPORTS
[1977] .J_s.C.R.
The Commissioner then moved the Tribunal for stating a case to
the High Court on the question of law which arose out of the order
of the Tribunal.
The Tribunal was of the opinion that a question
of law did arise out of its order. and hence it formulated a question
in the following terms:
"Whether, on the -facts and in - the circumstances of the
case, the Appellate Tribunal was right in holding that the
assessee's receipts from the surcharge levied on admission
tickets for purposes of charity could not be included in the
assessee's
taxable
income
for
the
assessment
year
1960-61?",
and referred it to the High Court for its opinion.
The High Court
agreed with the view taken by the Tribunal and held that since the
surcharge on admission tickets_ was charged by the assessee and
paid by the race-goers for the specific purpose of being applied lo
local charities pusuant to the resolution passed by the general meeting
of the assessee, there was, at the time of receipt of the amounts in
respect of the surcharge, a legally enforceable
obligation on
the
assessee to apply them to local charities and those amounts accordingly
did not reach the assessee as its income but were diverted to local
charities before they reached the assessee. The correctness of this
decision is questioned by the Commissioner in the present
appeal
under section_ 66A, sub-section (2) of the Act.
It is familiar learning and yet Lord Magnaughten had to draw
our attention to it in London County Council v. Attorney General(')
that income tax is a tax on income.
It is what reaches the· assessee as income that is intended to be
charged to tax under the Act.
Every receipt by the assessee is
not necessarily income in his hands. It is only when it bears the
character of income at the time when it reaches the hands of the
assessee that it becomes exigible _to tax. The quest on which, wherefore, arises for determination here is whether the amounts received
F
on account of surcharge reached . the hands of the assessee as its
income.
The argument- of the Revenue was that these
amounts
were received by the assessec as part of the price for admission into
the enclosure of the Club and merely because the assessee expressed
its desire or_ intention to apply them to local charities, they did not
cease to be the income of the assessee. _ This argument is based on
twG assumptions: first, that the amounts on account of surcharge
G - were received as part of the price for admission to the Club enclosure,
and secondly, that it was merely a voluntary desire on the part of
the assessee to use these amounts for private charities and there was
no legally enforceable obligation on the assessee to do so.
These
two assumptions are .in a ·way inter-related, each depending on and
to some extent supporting the other, but in our view neither of them
is well founded.
It is not correct to say that merely because surH
charge is levied from every race-goer, Vfho wants admission to the enclosur!' of the Club, it becomes a part of the price for admission.
The
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,
(I)
[1901] A.C.26.
"
.r-
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COMMR. OF I.T. v. TOLLYGUNGE CLUB (Bhagwati, J.)
229
test is not whether every race-goers seeking admittance to the enclosure of the Club is required to pay the surcharge but what is it for
which the surcharge is taken. Is it taken as part of the price for
admission, or for some other purpose, such as, benefit of local charities ? Suppose every race-goer seeking admittance to the Club
enclosure were told that in addition to the price of
the admission
ticket he would have to contribute a certain amount to a recognised
charity, could it be contended that the amount which he is required
to contribute to charity--{lnd we are deliberately using the word
'required' because otherwise he would not be able to secure admittance to the Club enclosure is part of the price for admission? the
surcharge is undoubtedly a payment which a race-goer is required
to make in addition to the price of admission ticket if he wants to
witness the race from the Club enclosure, but on that account it does
not become part of the price for admission.
The admission to the
enclosure is the occasion and not the consideration for the surcharge
taken from the race-goer. It is true that but for this insistence on
payment of the surcharge at the time of admission to the enclosure,
the race-goer might not have paid any amount for local charities.
But that does not render the payment of the surcharge involuntary,
because it is out of his own volition that he seeks admittance to the
enclosure and if he wants such admittance, he has to pay not only the
price of the admission ticket but also the surcharge for local charities.
The surcharge is clearly not a part of the price for admission
but it is a payment made for the specific purpose of being applied
to local charities.
Secondly, it is not a
correct analysis of
tho
nature of the legal relationship to say that there was nothing more
than mere desire or intention on the part of the assessee to apply
the amounts received on account of surcharge
to local charities,
without any legally enforceable obligation binding it to do so.
We
may straightaway concede that if nothing more had been done by
the assessee than merely passing a resolution deciding to utilise a
part of the admission fee received by it to charitable purposes, no
legal obligation would have been created obliging the assessee to
utilise this amount for the purpose of charity.
Such a resolution
would have left it open to the assessee to alter it or to rescind it and
it would have been nothing but an expression of the desire or intention of the assessee to apply the amount for charitable purposes. But
here a resolution was passed at the general meeting of the assessee
for levying the surcharge for local charities and pursuant to
this
resolution, the surcharge was paid by the race-goers
and received
by the assessee for the specific purpose of being applied to local charities.
The surcharge when paid was clearly impressed with an obligation in the nature of trust for being applied for the benefit of local
charities.
It is settled law, as observed, by this Court in C1.T. v.
Thakar Das Bhargava (') that a trust may be created by any
language sufficient to show the intention and no technical
words
are necessary and it may even be created by the use of words which
are primarily words of condition.
The only requisites which must
be satisfied are that there should be "purposes independent of the
donee to which the subject-matter of the gift is rquird to be applied
(2) 40 LT. Tl. 101.
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SUPREME COURT REPORTS
(J 977] 3 S.C.R.
and an obligation on the donee to satisfy those purposes".
When
the race-goers paid the surcharge to the assessee, they did so far a
specific purpose and thereby imposed an obligation on the assessee
to utilise it for local charities.
The question then arises whether this obligation to utilise the
surcharge for local charities was an obligation to apply the surcharge
to local charities after it reached the assessee as its income or it was
diverted for being applied to local charities before it was resolved
by the assessee.
Did it involve an application by the
assessec of
a part of its income to local charities, or was it rather an allocation
of a receipt for local charities before it became income in the hands of
the assessee ? The true test for determining this question is, to use the
words of Hidayatullah, J., in C.l.T. v. Sitaldas Tirathdas(') whether
the amount sought to be deducted, in truth, reaches the asscssee as his
income. The learned Judge proceeded to explain this test in the following words :
"In our opinion, the true test is whether the amount sought to
be deducted, in truth, never reached the assessce as nis
income. Obligations, no doubt, there are in every case, but il
is the nature of the obligation which is the decisive fact. There
is a difference between an amount which a person is obliged
to apply but of his income and an amount which by the nature
of the obligation cannot be said to be a part of the income
of the assessee.
Where by the obligation income is diverted before it reaches the assessee, it
is deductible
: but
where the income is required to be applied to discharge an
obligation after such income reaches the asscssee, the same
consequence, in the law, does not follow.
It is the first
kind of payment which can truly be excused and not the
second.
The second payment is merely an obligation to
pay another a portion of one's own income,
which
has
been received and is since applied.
The first is a case in
which the income never reaches the assessee, who even if
he were to collect it, does so, not as part of his income, but
for and on behalf of the person to whom it is payable. In
our opinion, the present case is one in which the wife and
children of the assessee who continued to be members of the
family\ received a portion of the income
of the asse~sec,
after the assessee had received the income as his own. The
case once is one of application of a portion of the income to
discharge an obligation and not a case in which by an overriding charge the assessee became only a collector of
another's income".
It is dear on the application of this test that in the present case,
the surcharge being impressed with an obligation in the nature of trust
for being applied to local charities was by this obligation diverted
before it reached the hands of the assessec and at no stage, it became a
part of the income of the assessee.
When the assessee received the
amounts on account of surcharge, they were impressed with a legal
(I) 411.T.R 367.
COMMR. OF J.T. v. TOLLYGUNGE CLUB (Bhagwati, J.)
231
obligation to be applied for the benefit of local charities and they
never reached the assessee as part of its income.
The case clearly
fell within the rule in Raja Bijoy Singh Dudhuria v. C./.T.(') and the
surcharge received by the assessee could not be regarded as income
assessable to tax.
Before we end the discussion of this question, we must refer to
the decision of this Court in Thakar Das Bhargava's case (supra) on
which strong reliance was placed on behalf of the Revenue.
The
assessee in this case was an advocate who agreed to defend certain
accused persons in a criminal trial on condition that he would be provided with a sum of Rs. 40,000/- for creating a public charitable trust.
When the trial was over, the assessee was paid a sum of Rs. 32,500/-
and he created a
trust of
that amount
by
executing a
trust
deed. The question arose whether this sum of Rs. 32,500/-
was liable to be taxed as part of the professional income of the assessee. This question was answered by the High Court in favour of the
assessee but the view taken by the High Court was reversed by this
Court on appeal. This Court pointed out that the findings of the Tribunal clearly showed "that the persons who paid the sum of Rs.
32,500/- did not use any words of an imperative nature creating a
trust or an obligation. They were anxious to have the services of the
assessee in Farrukhnagar case; the assessee was at first unwilling to give
his services and later he agreed, proposing that he would himself create
a charitable trust out of the money paid to him for defending the
accused persons in the Farrukhnagar case."
Considerable reliance
was placed by this Court on the recital in the trust deed where the
assessee had said "that he was receiving his professional income as
an advocate accruing after June 1944 for payment of taxes and charity
and accordingly when he received his professional income
in
the
F arrukhnagar case he created a charitable trust out of the money so
received." It was also emphasised by this Court that it was not stated
any where "that the persons who paid the money created a trust or
imposed a legally enforceable obligation on the assessee" and even in
the affidavit made by the assessee there was "no suggestion that the
persons who paid the money created the trust· or imposed any obligation on the assessee" and it was "the assessee's own voluntary desire
that he would create a trust out of the fees paid to him for defending
the accused persons in the Farrukhnagar case" and "such a voluntary
desire on the part of the assessee created no trust, nor did it give rise
to any legally enforceable obligation".
This Court accordingly held
that "the money when it was received by the assessee was his professional income, though the assessee had expressed a desire earlier to create
a charitable trust out of the money when received by him". It will
be seen from what is stated above that when the accused person
paid a sum of Rs. 32,500/- to the assessee, they paid it by way of
fees and they did not impose any obligation on the assessee that this
amount should be utilised only for the purpose of charity. It was
merely a voluntary desire on the part of the assessee that he would
create a trust m1t of the amount of fees paid to him and until ilie
(I) [193311 I.T.R. 135 A.LR. 1933 P.C. 145.
16--240SCI/77
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SUPREME COURT REPORTS
[1977] 3 S.C.R.
trust was created by the assessee, there was no legal obligation to
utilise that amount for charity. That is why this Court held that the
amount when received by the assessee was income in his hand and
the creation of trust was merely application of the amount after it
reached his hands as his income. This C9urt by approving the following observations of the Appellate Assistant Commissioner that "if
the accused persons bad themselves resolved to create a
charitable
trust in memory of the professional aid rendered to them by the appellant and had made the asscssee trustee for the money so paid to
him for that purpose, it could, perhaps, be argued that the money
paid was earmarked for charity ab initio but of this there was no
indication anywhere" clearly suggested that if the money paid by the
accused persons had been "earmarked for charity ab initio" it would
have been pqssible to say that they had made the assessee trustee
for the money so paid to him and in that event the conclusion would
have been that the money did not reach the hands of the assessee
as bis income.
Here, the surcharge paid by the race-goers was earmarked for local charities ab initio and the surcharge was received
by the assessee with a legal obligation to apply it to local charities.
The decision of this Court in Thakar Das Bhargava's case (supra),
therefore, far from militating against the contention of the assessee,
supports it.
We must accordingly hold that the High Court was right in answering the question referred to it in favour of the assessee and in this
view, the appeal must stand dismissed with costs.
P.H.P.
Appeal dismissed.