1. By this reference under section 66(1) of the Indian Income-tax Act, 1922, the following three questions are referred for our determination :
'1. Whether, on the facts and in the circumstances of the case, the maternity homes and the Versova property named 'Abhay' were duly transferred by Dr. M. R. Divekar and his wife in favour of trustees under the indenture of the trust dated August 23, 1954
2. Whether, on the facts and in the circumstances of the case, the income from the running of the maternity homes was rightly assessed to tax in the hands of the trustees in the status of association of persons
3. Whether, on the facts and in the circumstances of the case, the salary of Rs. 7,500 paid by the assessee to Dr. Mrs. Nalini M. Divekar was allowable as an admissible deduction in the computation of the income of the assessee-A.O.P. ?'
2. These questions in this reference relate to the assessment year 1956-57 and they arise out of an indenture of trust created by Dr. Divekar and his wife, Dr. Mrs. Divekar. By an indenture of trust dated August 23, 1954, Dr. Divekar and his wife settled upon trust two maternity hospitals one at Shivaji Park, Dadar, and the other at King's Circle, Matunga, which were run by them and an immovable property known as 'Abhay' situate at Versova Road for the purposes and objects which are contained in the said indenture of trust. The assessees are the trustees under the said trust which is known as Dr. Divekar Charity Trust. The primary object of the trust was to carry on and promote the educational, health,cultural, literary, social and economic interest of the people, particularly of the backward and poorer classes, within the areas of Greater Bombay, Poona City and Kanara District in Bombay State.
3. For the assessment year 1956-57 the assessees contended before the Income- tax Officer that the income from the maternity homes was income from business which was settled upon trust and was exempt from payment of income-tax under section 4(3)(i) of the Indian Income-tax Act, 1922 (hereinafter referred as 'the Act'). Even though the Income-tax Officer accepted the contention of the assesses that the business was property within the meaning of the said section, he, however, took the view that its income was not exempt under the said section because it did not fulfill the requirement of proviso (b) thereto. This view was arrived at by him primarily because he took the view that the primary purpose in conducting or running the two maternity homes or hospitals was not to give free medical facilities but charge the patients and then to apply the income for certain objects which undoubtedly were laudable. Having regard to the provisions of the indenture of trust a sum of Rs. 7,500 was to be paid by way of salary to Dr. Mrs. Divekar. The said amount claimed as a deduction was disallowed by the Income-tax Officer on the ground that the same was paid by the association of persons to one of its own members. He also gave a finding in respect of the property income from building 'Abhay' but as we are not concerned with the same it is not necessary to refer thereto.
4. Aggrieved by the order of the Income-tax Officer the assessees preferred an appeal before the appellate assistant Commissioner. It was contended on behalf of the assessees before the Appellate Assistant Commissioner that the business of running the maternity homes itself was transferred to the trust, the income whereof was to be utilised for charitable purposes. Accordingly, the income itself was exempt from payment of tax under section 4(3)(i) of the Act. The Appellate Assistant Commissioner took the view that the immovable property, maternity homes, etc., transferred to the trustees were like transfer of business stocks to a trust and the transfer in the assessees' case was transfer of a business but not that of an institution and that the business could be transferred to a trust in Agency v. Commissioner of Income-tax : 38ITR392(Bom) . The Appellate Assistant Commissioner accepted the contention on behalf of the assessee and held that the income from the trust was exempt under section 4(3)(i) of the Act. He also pointed out that the mere fact that the income was not actually spent but was carried forward did not affect the assessees' claim for exemption. As regards the salary of Rs. 7,500 paid to Dr. Mrs. Divekar according to him it was an allowable deduction in computation of the assessees' income and accordingly he directed exclusion of the said amount from the total income computed.
5. Aggrieved by the order of the Appellate Assistant Commissioner, the Income- tax Officer filed an appeal which was hard by the Tribunal. At the time when the appeal was heard before the Tribunal, neither the assessees nor anybody else on their behalf appeared before it. Before the Tribunal it was urged on behalf of the representative of the revenue that the trust itself was not registered and was, therefore, not a valid trust. Such a contention was urged having regard to the fact that the copy which was filed in the record did not bear any endorsement of registration. According to the Tribunal the trust was not a valid trust. The Tribunal further took the view that there was no actual transfer of immovable properties to the trustees if regard be had to the language employed in the document. The Tribunal set aside the finding of the Appellate Assistant Commissioner that the maternity homes and the immovable properties were held in trust by the trustees. On the assumption that the properties were considered to have been managed on behalf of a charitable institution the Tribunal took the view that the conditions laid down in proviso (b) to section 4(3)(i) were not satisfied in the present case and the income was, therefore, not exempt from tax. The Tribunal also felt that no deduction should be made while assessing the association of persons in respect of the salary of Rs. 7,500 paid to Dr. Mrs. Divekar. After this order was passed an application for rectification was made by the assessee under section 35 of the Act, inter alia, bringing to the notice of the Tribunal that the indenture of trust was in fact duly registered under the Indian Registration Act. After hearing the representative on behalf of the revenue the Tribunal took the view that there was an error apparent on the fact of the record and the assessee was entitled to have the initial order passed by the Tribunal rectified. As a result of the rectification only minor alterations were made in the initial order that was passed by the Tribunal but the finding of the Appellate Assistant Commissioner that the maternity hospitals and immovable property were held in trust by the trustees was set aside. Even on the assumption that the trust properties were managed on behalf of a charitable institution the Tribunal reaffirmed the view that the other conditions in the proviso (b) to section 4(3)(i) of the Act were not fulfilled and the income from the trust was not exempt from tax. The Tribunal took the view that the salary of Rs. 7,500 paid to Dr. Mrs. Divekar was an admissible deduction on the computation of income from the business and the amount of the salary could not, therefore, be included in the assessment. The present reference arises out of the said orders of the Tribunal.
6. Mr. Joshi, on behalf of the revenue, contended that in order to constitute in law a valid trust in respect of immovable properties by an indenture of trust the properties ought to be transferred to the trustees and if the indenture of trust does not effect such transfer it will not be sufficient to create in law a trust within the meaning of the Indian Trusts Act. He submitted that in the present case there are no actual words of transfer, but on the other hand, there is a mere recital in the indenture of trust to the effect that Dr. Divekar and Dr. Mrs. Divekar did transfer the immovable properties referred to therein to the trustees. His submission was that the use of the past tense itself indicated that the transfer was not effected by the trust deed but it was merely a record of a past transaction and it was invalid in law in the absence of an instrument in writing duly registered. Secondly he submitted that even if upon construction of the provisions contained in the indenture of trust it is treated as a valid trust as understood in law, still the trust is not, inter alia, in respect of the business of the maternity hospitals but the trustees were expected to carry on the business by conducting hospitals and if that is so, the conditions laid down in proviso (b) to section 4(3)(i) of the Act ought to be fulfilled and as the said conditions are not fulfilled the income cannot be exempted from tax. So far as the payment of the salary of Rs. 7,500 was concerned, he submitted that the said salary was paid to one of the assessees and, therefore, cannot be permitted to be deducted in computing the income assessable for the relevant year. Mr. Munim, on the other hand, on behalf of the assessee, contended that in respect of document drafted by an advocate regard should be had to the substance of the deed and if that is done then there can be no doubt whatsoever that by the very indenture of trust the immovable properties mentioned therein are transferred to the trustees and a trust is declared by the trustees. Such a document, he submitted, is sufficient to constitute a valid trust under the Indian Trust Act. He further submitted that the trust was in respect of property known as 'Abhay' at Versova as well as the business of two maternity hospitals and when such is the position the question of complying with the conditions laid down in proviso (b) to section 4(3)(i) of the Act does not arise. So far as the payment of the salary of Rs. 7,500 to Dr. Mrs. Divekar was concerned, he submitted that it was authorised by the indenture of trust and was a permissible deduction.
7. At the outset it may stated that the indenture of trust is not drafted by an attorney but it is drafted by an advocate of this court. In construing the language of such an indenture of trust the substance of the matter should primarily be looked at and a too rigid and technical approach ought not to be encouraged. If upon scrutiny of all the relevant provisions of the indenture of trust it appears that a valid trust as contemplated by the Indian Trusts Act was created, then instead of giving too much importance to want of precise language the substance of the matter should be looked at. If that is done, then there can be no doubt in the present case that a valid and effective trust has been created by Dr. Divekar and his wife, Dr. Mrs. Nalini Divekar.
8. It will be relevant to point out the relevant provisions of the indenture of trust. The important recitals therein are as under :
'Whereas Dr. Mahabal Rudra Divekar of Bombay and Dr. Nalini Mahabal Divekar of Bombay decided to create a charity trust out of their immovable property (land and bungalow with outhouse) details are attached at the end situated on 54, Versova Beach Road, at Versova, on Municipal Plot No. K- 7127, in Greater Bombay and formerly known as 'Abhay' whose present value is Rs. 40,000 and also out of (1) the maternity hospital at Shivaji Park, Dadar, Bombay, and (2) the maternity hospital at King's Circle, Matunga, Bombay, owned and managed by them, including all the equipment, furniture, instruments and the motor car, together whose present value is Rs. 20,000 at both the hospitals, for the purposes of carrying out the objects herein mentioned;
And whereas it is further decided by Dr. M. R. Divekar and Dr. Nalini M. Divekar that the net annual income from the above mentioned hospitals and after deducting all the expenses for maintaining and running the hospitals and after deducting a sum of Rs. 750 per month which should be paid regularly to Dr. Nalini Mahabal Divekar for managing the said hospitals for and on behalf of the trust during her lifetime, should accrue to the trust from year to year.
And Whereas Dr. M. R. Divekar and Dr. Nalini M. Divekar did transfer the above mentioned Versova property and both the hospitals to the Trustees : ......
Now This Indenture Witnesseth and it is hereby agreed and declared as follows : - .......
The Trustees and the survivors of them and all persons hereafter becoming Trustees in succession to them (all of whom are hereinafter included in the expression 'the Trustees') shall hold all sums and properties that accrue to the Trust from time to time for the purpose of the Trust herein contained upon the terms, conditions and trust herein contained.....
To apply the monies and properties of the trust firstly in payment of the expenses of carrying out of this trust and then in carrying out the following objects :-
To carry out and promote the educational, health, cultural, literary, social and economic interest of the people particularly of the backward and poorer classes within the areas of Greater Bombay, Poona City and Kanara Districts in Bombay State......'
9. A valid indenture of trust can be created under the Indian Trusts Act, 1882, in the manner contemplated by section 5 and section 6 thereof. Section 5, inter alia, provides that no trust in relation to immovable property is valid unless declared by a non-testamentary instrument in writing signed by the author of the trust or of the trustee and registered, or by the will of the author of the trust or of the trustee. Section 6 deals with the ingredients which are necessary for creation of a trust and it provides : 'Subject to the provisions of section 5, a trust is created when the author of the trust indicates with reasonable certainty by any words or acts, (a) an intention on his part to create thereby a trust, (b) the purpose of the trust, (c) the beneficiary, and (d) the trust property, and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust-property to the trustee'.
10. What we have to consider in the present case is whether the ingredients contained in sections 5 and 6 above are substantially complied with. As the trust in the present case is in respect of, inter alia, an immovable property it has to be declared by a non-testamentary instrument in writing signed by the author of the trust or the trustee and duly registered. The indenture of trust is signed by all the four trustees including the two settlors who also are the trustees. It is admittedly duly registered as required by the provisions of the Indian Registration Act. So far as the ingredients therein laid down are fulfilled in the present case. There is a clear intention on the part of Dr. Divekar and Dr. Mrs. Divekar to create a trust. The purpose of the trust is clearly and explicitly indicated while reciting the objects of the trust. The names of the beneficiaries who are to get the benefit under the indenture of trust are clearly specified, namely, people particularly of the backward and poorer classes within the areas of greater Bombay, Poona City and Kanara Districts in Bombay State. The only question that remains to be considered is, are the trust properties duly transferred to the trustees It is undoubtedly true that in the above recitals there are no express words to the effect that Dr. Divekar and Dr. Mrs. Divekar 'hereby transfer the properties mentioned' therein, but one of the recitals makes it clear that both the settlors did transfer the properties mentioned therein to the trustees. What was really intended thereby was that by reason of the deed itself they transferred the said properties to the trustees and as the trust is duly registered it is effective in law to create a valid transfer both having regard to the provisions of the Indian Trusts Act as well as the Indian Registration Act. Further, the operative part of the indenture that the trustees shall hold all sums and properties, clearly indicates that they hold the same on the date of the indenture of trust and that clearly indicates that a valid transfer by the deed itself is created in their favour. As the deed is duly registered it is sufficient in law to effect such a transfer. In our opinion, the Tribunal took a very rigid approach in taking the view that by reason of use of the use of the past tense in one of the recitals there was no effective transfer by the deed itself. The substance of the indenture of trust itself is that all the trust properties are transferred by Dr. Divekar and his wife, Dr. Mrs. Divekar, to the trustees and the trustees made a declaration that they will hold the properties for the objects mentioned in the trust deed from the date of the deed. Accordingly, question No. 1 shall have to be answered in the affirmative and in favour of the assessees.
11. Question No. 2 depends upon the fact whether one of the properties settled upon trust under the indenture of trust is the business of running and conducting the two maternity homes. If that is the intention, then have regard to the settled position in law there can be no doubt that the assessees who are the trustees and who are assessed as association of persons are entitled to the benefit of the provisions of section 4(3)(i). By the indenture of trust the two settlors have settled upon trust the immovable property known as 'Abhay' situate at Versova and the business of conduction two maternity hospitals situate at Dadar and Matunga for the purposes therein set out. This is very clear from the recitals in the trust deed itself. The second recital above referred to clearly indicates that it is the business of conducting the two maternity homes that has been settled upon trust, because the net annual income which is to accrue to the trust from the above-mentioned hospitals is to be arrived at after deducting all the expenses for maintaining and running the hospitals and after making the payment to Dr. Mrs. Divekar as therein provided. Thus there can be no doubt upon a scrutiny of the indenture of trust that it is the business of conducting and running the two maternity homes which is, inter alia, the subject-matter of the trust.
12. Whether the income of the trust property is exempt from payment of tax or not will depend upon the provisions of section 4(3)(i) of the Act. They are as under :
'4. (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them :
(i) Subject to the provisions of clause (c) of sub-section (1) of section 16, any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto :
Provided that such income shall be included in the total income -.....
(b) in the case of income derived from business carried on on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes of the institution and either -
(i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or
(ii) the work in connection with the business in mainly carried on by beneficiaries of the institution.'
13. If the business of conducting a maternity hospital is settled upon trust, then it is well settled in view of the decision of the Supreme court that the case is covered by the provisions of clause (i) of section 4(3) and in such a case the conditions laid down in the proviso (b) are not attracted. Such was the view taken by the Supreme Court in the case of Commissioner of income-tax v. P. Krishan warriar : 53ITR176(SC) . In this case the testator, who was carrying on the business of making and selling ayurvedic medicines under the name of Arya Vaidya Sala, by his will, vested the business of trustees directing them to apply 60 per cent. of the income thereof to charitable purposes and 40 per cent. for the benefit of his family. The question was whether the 60 per cent. of the income which was to be applied for charitable purpose was liable to tax under proviso (b) to section 4(3)(i) of the Indian Income-tax Act, 1922, on the ground that the entire income was not applied for charitable purposes. The Supreme Court took the view that the business was 'Property' held in trust partly for charitable purposes within the meaning of the main part of section 4(3)(i). Clause (b) of the proviso did not apply to a business held in trust. Therefore, 60 per cent. of the income from the business was exempt from income-tax under section 4(3)(i). It is also pointed out that business is property and if a business is held in trust wholly or partly for religious or charitable purposes it falls clearly under the substantive part of section 4(3)(i) and in that event clause (b) of the proviso cannot be attracted as that clause applies only to a business not held in trust but carried on on behalf of religious or charitable institutions. Thus, it is quite clear that if the business of running and conducting the two maternity homes itself was, inter alia, settled upon trust then the case will be governed by section 4(3)(i) and the conditions laid down in clause (b) of the proviso will have no application whatsoever. In that view of the matter there is no controversy whatsoever that the conditions laid down in section 4(3)(i) are fulfilled and the income will be exempt from taxation. Accordingly, question No. 2 is answered in the negative and in favour of the assessee.
14. That takes us to the third question which relates to deduction of Rs. 7,500 paid to Dr. Mrs. Divekar in view of the provisions contained in the indenture of trust. The assessment in the present case is that of the trustees as association of persons. The trustees are in receipt of only such in income as remains after meeting the expenses for conducting and managing the two maternity hospitals. For conducting the maternity hospital the presence of a doctor is essential and Dr. Mrs. Divekar was to manage both the maternity hospitals on behalf of the trust during her lifetime. It was in lieu of rendering such services to the two maternity homes that a mum of Rs. 7,500 was to be paid to her. This a part of the normal expenditure of conducting and managing the maternity homes and it has be deducted before the income of the trust in the hands of the trustees can be arrived at. Accordingly, the sum of Rs. 7,500 which was paid to Dr. Mrs. Divekar having regard to the provisions of the indenture of trust was allowable as an admissible deduction of the computation of the income of the assessees as an association of persons. Accordingly, question No. 3 is answered in the affirmative and in favour of the assessees. Each party will bear its own costs.