1. Lady Hirabai Cowasji Jehangir by a trust deed dated 5th March, 1968, created the assessee-trust, called Jadi Trust and settled upon trust shares of certain companies of the face value of Rs. 9,27,800. The net income of the trust fund after providing for expenses of collection and other outgoing for the period up to March 31, 1983, was to be made over by way of gift or donation to another trust called H. C.J. Charitable Trust (hereinafter referred to as the HCJ Trust), so that the latter trust should utilise the net income in its hands for all or any one or more of the charitable purposes mentioned in the trust deed dated 29th March, 1963, under which the HCJ Trust was created.
2. It is not necessary to refer in detail to the charitable purposes for which the HCJ Trust was created because it has been disputed that the purposes referred to in the trust deed dated 29th March, 1963, viz., relief of the poor, advancement and propagation and learning, giving medical relief and the advancement of any other object general public utility were charitable purposes. THe trust deed of 29the March, 1963, also referred to certain other charitable purposes such as erecting or helping in the erection of building or otherwise providing housing accommodation to or for the benefit of the poor, making available to the poor including the lower middle class persons the benefit of sanatorium or health home or a home for rest and recreation at any place in India, giving scholarships or loans to students for prosecuting their studies and giving monetary aid or other help for relief from natural calamities like famine, floods, cyclone, tempest, earthquake or otherwise. The trust deed on 5th March, 1968, by which the assessee-trust was created reproduced in detail the relevant clauses 4,5 and 6 of the trust deed dated 29th March, 1963.
3. We are concerned in this reference with the assessment years 1969-70 and 1970-71 for the period 5th March, 1968, to 31st March, 1969. The assessee-trust derived dividend income of Rs. 32,867 out of which income to the extent of Rs. 25,000 was made over as donation to the HCJ Trust for utilisation for the purpose of relief to the poor, education, medical relief and advancement of any other object of general public utility in terms of the trust deed dated 5th March, 1968. Similarly, for the year ended march 31, 1970, out of the dividend income of Rs. 50,885 and interest income, income to the extent of Rs. 50,000 was made over as donation to the HCJ Trust also for utilisation for charitable purposes as aforesaid.
4. The assessee-trust made a claim under s. 237 of the I. T. Act, 1961 (hereinafter referred to as 'the Act'), for the two assessment years in question for a refund of the tax paid at source in regard to the dividends on the ground that the income of the trust was exempt under s. 11 of the I. T. Act, being income derived from the property held under trust wholly for charitable purposes. This claim was, however, rejected by the ITO holding that the income of the trust was not exempt under s. 11 of the Act on the ground that, (1) the settlor had not settled upon trust the corpus of the trust but had settled upon trust only the income arising from that trust fund so that the trust fund was not held on trust for charitable purposes, and (2) that the object of the trust should itself be charitable an the trust fund should be self-operative whereas the object of the assessee-trust was only to give a donation to another trust. In appeal by the assessee-trust, the finding of the ITO on the first ground was set aside and the AAC held that the corpus of the trust consisting of the shares of certain companies were settled upon the trust.
5. This part of the finding is not under challenge. However, so far as the second ground on which the ITO rejected the claim of the assessee trust was concerned, the AAC held that the assessee-trust should have itself utilised the income for charitable purposes and not through the medium of another trust. The AAC took the view that the donation of income made by the assessee-trust to HCJ Trust did not amount to an application of income charitable purposes and, therefore, the trust was not entitled to the exemption under s. 11 of the Act.
6. The assessee-trust challenged this view of the AAC before the Tribunal. The Tribunal found that the objects of the HCJ Trust admittedly constituted charitable purposes as contemplated under s. 2(15) and under s. 11 of the Act and that the present was a case of a trust within a trust holding that the trust deed dated March 5,1968, created twin trusts, viz., one requiring the trustees of the Jadi Trust to pay the income from the trust fund to the HCJ Trust and the second requiring the trustees of the HCJ Trust to spend the income on charitable purposes for the period up to January 31, 1983. The Tribunal took the view that for the period March 5, 1968, to March 31, 1983, the trust fund was settled upon trust for charitable purposes to be carried out through the medium of the HCJ Trust.
7. We are not in this reference concerned with the part of the deed of trust which creates from February 1, 1983 of the trust of which the beneficiaries would be the settlor's grandsons. Having found that in view of the directions contained in the trust deed dated 5th March, 1968, requiring the assessee-trust to make over the income of the trust fund to the HCJ Trust for spending on charity and to the latter trust to utilise such income for all or any one or more of the charitable purposes, the Tribunal found that the property of the assessee-trust could be said to be held wholly for charitable purposes and the exemption under s. 11 of the Act would be applicable to the assessee-trust. The Tribunal, therefore, directed the ITO to apply his mind to the problem for working out the extent of the exemption under s. 11 which would depend upon how much of such amount was actually applied to charitable purposes through the medium of the HCJ Trust or accumulated for an application to such purpose. In so far as the nature of assessment was concerned, the Tribunal took the view that the trustees of the assessee-trust were representatives assesses in terms of s. 160(1)(iv) of the Act, as the income was received by the trustees on behalf of or for the benefit of the HCJ Trust had the provisions of s. 161(1) would come into play. The Tribunal, therefore, held that the tax, if any, would be leviable upon the assessee in the like manner and to the same extent as it would be leviable upon the HCJ Trust, the income of which would be exempt from tax under s. 11 to the extent contemplated in s. 11 of the Act.
8. Arising out of this order of the Tribunal the following two questions have been referred under s. 256(1) of the I. T. Act, at the instance of the revenue :
'(1) Whether on the facts and in the circumstances of the case, the income derived by the assessee from property held under trust can be said to be applied wholly for charitable purposes as contemplated under section 11(1)(a) of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the provisions of section 16(1) of the Income-tax Act, 1961 would become applicable ?'
9. We may point out that it was not in dispute before us that so far as question No. 1 is concerned it arose out of the controversy with regard to the applicability of the provisions of s. 11(1)(a) of the Act and the controversy really was whether the income derived by the assessee form the property held under trust can be said to be applied wholly for charitable purposes as contemplated under s. 11(1)(a) of the Act. The word 'applied' appears to have been omitted from the question through oversight while framing it.
10. We shall deal with question No. 1 at the outset. The relevant visions of s. 11(1)(a) which were in force, at the material time, read as follows :
'11. (1) Subject to the provisions of section 60 to 63 the following income shall not be included in the total income of the previous year of the person in receipt of the income -
(a) 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 for application to such purposes in India, to the extent to which the income so accumulated is not in excess of twenty-five percent. of the income from the property of Rs. 10,000, whichever is higher.'
Now, as already pointed out, it has not been disputed throughout the proceedings that the HCJ Trust is a trust for charitable purposes. By cl. 4 of the trust deed dated 5th March, 1968, it was provided that 'the trustees shall ..... for the period ending on 31st January, 1983, pay, transfer and hand over as and by way of gift or donation the balance of such interest dividends and income of the trust fund (hereinafter called the net income of the trust fund') to the trustees of the said deed of trust created by the settlor bearing date the 29th day of March, 1963 and known by the name of HCJ Charitable Trust to the intent that the trustees of the said HCJ Charitable Trust shall pay or utilise the net income of the trust fund hereby settled and so gifted or donated to them as aforesaid for all or any one or more of the charitable purposes mentioned in the said deed of trust known by the name of the HCJ Charitable Trust...... and to the further intent that such net income of the trust fund so gifted or donated as aforesaid shall be applied or accumulated for application to such charitable purposes as relate to anything done or to be done within India without reference to caste or creed in the manner mentioned in the said deed of trust known by the name of HCJ Charitable Trust.....'
11. The recitals of the trust deed 5th March, 1968, thus made it obligatory on the trustees of the assessee-trust to hand over the net income of the trust fund to the trustees of the HCJ Trust. There as a further direction in the trust deed dated 5th March, 1968, that the trustees of the HCJ Trust shall utilise the net income of the trust so gifted or donated to the trustees for all or any one or more of the charitable purposes mentioned in the deed of trust of 29th March, 1963.
12. The learned counsel appearing on behalf of the revenue has contended before us that in order to claim the exemption under s. 11 of the Act, it was not enough for the trustees of the assessee-trust to have the income applied for charitable purposes through the medium of the HCJ Trust and that s. 11 of the Act contemplated that the income in respect of which exemption is sought must be applied directly by the trustees concerned to charitable purposes. The learned counsel wanted to emphasize that s. 11(1)(a) refers to 'such income is applied to such purposes in India'. He has contended that the application of the income to the trust must be by the trustees themselves and not through the medium of any other agency. It was not disputed that the agency was an institution of a charitable nature. Now, there can be no dispute that cl. (a) of s. 11(1) provides that the income derived from property held under trust wholly for charitable or religious purposes is not to be included in the total income of the assessee to the extent to which such income is applied for such charitable or religious purposes in India. The latter part of cl. (a) deals with the income derived from property held under trust wholly for charitable or religious purposes but which is not applied to such purposes but is accumulated for application and in such a case only the part of the accumulated income which is not in excess to twenty-five percent. of the income from property or Rs. 10,000 whichever is higher is to be excluded for the purpose of s. 11(1) from the total income of the assessee for the relevant previous year. We are really not concerned in this reference with the provisions relating to an accumulation and we need not, therefore, refer to the provisions of sub-s (2) of s. 11.
13. The real question which requires to be decided is whether it is possible to read the provisions of the first part of cl. (a) of s. 11(1) as requiring that, in order to avail of the benefit of s. 11(1)(a) the trustees who hold a property under trust wholly for charitable or religious purposes, must themselves conduct directly a charitable or religious activity or whether it is permissible for the trustees to donate that income to another trust which is established for a charitable or religious purpose and which applies its income from whatever sources received, for charitable or religious purposes. There is nothing in law to prevent a settlor from creating a trust wholly for charitable or religious purposes and directing that the income of the property settled upon the trust should be handed over to another institution whose income is utilised wholly for charitable or religious purposes. It is no doubt true that, in a given case, the trustees may themselves carry out a charitable or religious activity, but it may not be possible in a given case for the trustees for various reasons to themselves carry out the charitable or religious activities. One of the reasons may be that the property settled upon trust may not be so extensive as to yield income, which would be sufficient to undertake a charitable activity. That will not, however, frustrate the intention of the settlor and if the intention of the settlor is that the property must be held in trust only for charitable or religious purposes for passing on the income of the property held under the trust to another trust, which carries on a charitable or religious activity, the income could not cease to be applied to the charitable or religious purposes under s. 11(1)(a). It appears to us that there is intrinsic evidence in the Act itself which indicates the permissibility of the trustees of the trust for a charitable or religious purpose passing on the income of the trust to another trust which is conducting a charitable or religious activity. It is instructive to refer to the provisions of s. 12 of the Act as it stood prior to April 1, 1973. Section 12 runs as follows :
'12. Income of trusts or institutions from voluntary contributions. -
(1) Any income of a trust for charitable or religious purposes or of a charitable or religious institution derived from voluntary contributions and applicable solely to charitable or religious purposes shall not be included in the total income of the trustees or the institution, as the case may be.
(2) Notwithstanding anything contained in sub-section (1), where any such contributions as are referred to in sub-section (1) are made to a trust or a charitable or religious institution by a trust or a charitable or religious institution to which the provisions of section 11 apply, such contributions shall, in the hands of the trust or institution receiving the contributions, be deemed to be income derived from property for the purposes of that section and the provisions of that section shall apply accordingly.'
14. Under sub-s (1) any income of a trust for charitable or religious purposes or of a charitable or religious institution derived from voluntary contributions is not to be included in the total income of the trustees or the institution as the case may be, if the income is applicable solely to charitable or religious purposes. Sub-section (2) contemplates that when voluntary contributions are made to a trust for charitable or religious purposes, the income of which is applicable solely to charitable or religious purposes, and such contributions are made by a trust or a charitable or religious institutions to which the provisions of s. 11 apply, and sub-s. (2) further provides that the provisions of s. 11 of the Act shall apply accordingly to such a trust or institution receiving voluntary contributions. The effect of sub-s. (2) of s. 12, therefore, is that when a trust the income of which is derived from property held under trust wholly for charitable or religious purposes, makes a voluntary contributions to another trust or a charitable or religious institution to which the provisions of s. 11 apply then while directing that such voluntary contribution should be treated as income from property for the purpose of s. 11 in the hands of the trust or a charitable or religious institution which receives voluntary contributions the trust or religious or charitable institutions will be entitled to take the benefit of s. 11, if it satisfies the requirements of s. 11. There is thus a clear indication in s. 12 of the Act that the trust to which s. 11 applies can make a voluntary contribution to another to which also s. 11 is made applicable subject, of course to the satisfaction of the conditions in s. 11. It does not, therefore, appear to us that it was contemplated that the applicability of s. 11 of the Act should be restricted only to a trust which itself carries on a charitable or religious activity in respect of the income derived from the property held under trust wholly for charitable or religious purposes. The provisions of s. 11 can, in our view be equally availed of by a trust or the trustees who pass on the income to the trust to another trust or institution for charitable or religious purposes. It appears to us that the question whether the trust which gives the voluntary donation to another trust for charitable purposes, can avail of the provisions of s. 11, does not seem to depend on whether under the provisions contemplated be s. 12(2) the done-trust applies that income for charitable or religious purposes. This does not, however mean that even if in a given case it is found that through the medium of donation to the charitable institution funds are being diverted to non-charitable purposes, the donor-trust will still be entitled to claim the benefits of s. 11 of the Act.
15. It may be mentioned that Shri Dastur on behalf of the assessee has contended that for the purposes of the present case, it was enough to show that the assessee-trust had handed over the funds to the HCJ Trust and it may not be necessary for the purpose of the present case itself to consider the question as to whether the funds given by way of donation of the HCJ Trust by the assessee has been actually applied for charitable purposes, because, according to the learned counsel, the Tribunal had already given its direction in para. 11 of the appeal that as the exemption under s. 11 would depend upon how much of such income of the trust was actually applied to the charitable purposes through the medium of the HCJ Trust or accumulated for such purposes, and the ITO was directed to apply his mind to this aspect while giving effect to the decisions of the Tribunal. It is no doubt trust that so far as the present case is concerned, the ITO had been directed to ascertain as to how much of the income given by way of donation to the HCJ Trust had been applied through the medium of that trust to charitable purposes or accumulated for application to such purposes. But apart from the present case, it appears to us that for the purposes of s. 11 of the Act, it would be enough for the donor-trust to show that the donation of the income of the donor trust had been handed over to the done-trust which is itself created for charitable purposes, but, as already pointed out, a rider will have to be added to this that it may be necessary in a given case to ascertain whether the funds are deliberately being diverted to non-charitable purpose through the medium of the done-trust.
16. Our attention has been invited to a decision in IRC v. Helen Slater Charitable Trust Ltd.  1 AII ER 785;  3 WLR 157, where a similar question viz., whether it is permissible for a trust for charitable purposes to apply its income to charitable purposes through the medium of the other trust was concerned. In that case, a trust and a foundation were each incorporated as a company limited by guarantee. Both companies were registered charities and had been set up to work in tandem, the trust's main function being to raise funds for the foundation. In the year 1973 to 1975, out of its income and gains the trust made large donations to the foundation which, except for a small sum, were added by the foundation to its own capital. In respect of the income given by way of donation the trust claimed an exemption from tax under s. 360 (1) of the Income and Corporation Taxes Act, 1970, and s. 35 (1) of the Finance Act, 1965 on the ground that the income was paid to another charitable body, viz., ' the foundation', though the foundation had not itself distributed the said amount by the end year in which the payments were received. The claim for exemption was rejected by the Board of Inland Revenue but in appeal the Commissioners of the Special Purposes of the Income Tax Acts, accepted as a general proposition, that it was a proper application of a charity's income to make donations for the furtherance of another charity's work and it would be highly inconvenient, if in order to satisfy the requirements of s. 360, to donor charity had to follow its donation into the accounts of the recipient charity and produce evidence as to its application by that body. It was held by the commissioners that the mere fact of a donation to another charity will normally satisfy the requirements of the section. The commissioners referred to a modification that may be necessary to this general proposition in certain peculiar facts. This aspect was considered by the Commissioners in the following words : 'A general proposition of that kind may, no doubt, need to be modified in relation to particular facts. Circumstances could, we think, arise in which it would be proper to look beyond the immediate disposition of a charity income, as, for example, where income was knowingly channeled through as associated charitable company under common control to a non-charitable object. We doubt whether in such a case, the donor could reply on the separation of identity between the two bodies to establish a claim to exemption under section 60.'
17. The Commissioners further ordered that the case before them had to be decided on the basis that the trust's donations to the foundation will be used for the general furtherance of the foundation's authorised charitable objects and on that basis held that the sums in dispute were applied by the trust for charitable purposes only.
18. A case was stated for the opinion of the court at the instance of the Crown and the question of law for the opinion of the court was, whether, on the facts stated in the case, the commissioner's decision was erroneous in point of law. Slade J., who heard reference, referred to the meaning of the word 'applied' given by Lord Macnagthen in Williams v. Papworth  AC 563 in which Lord Macnagthen had observed that 'the word `applied' does not import a power of selection : it simply means `devoted to' or `employed for the special purpose of''. The learned judge then went on to observe as follows in the context of the question whether money has been 'applied for charitable purposes' for the purposes of s. 360 (1) of the Income and Corporation Taxes Act, 1970, and s. 35 (1) of the Finance Act, 1965 (pp. 164, 165 of  3 WLR) :
'In the light of authorities such as these, it becomes obvious that, in particular cases difficult borderline questions may arise as to whether money has been `applied for charitable purposes' within the meaning of the two subsections. Three points were, I think, more or less common ground in argument, though not perhaps covered by formal concessions on both sides. First, moneys which a charity has expended either on its proper running expenses or on exclusively charitable relief work `in the field', to use the Commissioners' phrase, must be ordinarily regarded as having been applied for charitable purposes. Secondly, one of the purposes of the phrase, `so far as the same are applied for charitable purposes,' as appearing in the two subsections,must be exclude from the relief thereby given any income which, though being that of a charity and applicable for charitable purposes, has in fact been applied for non-charitable purposes. The court of Appeal decision in Inland Revenue Commissioners v. Educational Grants Association Ltd.  2 All ER 893;  Ch 993 is one example where certain income did not qualify for the exemption because it had been applied for demonstrably non-charitable purposes. Thirdly, however, it is unlikely that the sole purpose of the legislature in including the relevant phrase in the two sub-sections was that to which I have last referred. Counsel submitted on behalf of the Crown, and counsel for the trust, I think, accepted, that the legislature, in using the affirmative phrase `so far as applied', etc., must have intended to impose an affirmative requirement that the income should have been dealt with in some way or the other. It was, I think, common ground that merely to receive income and do nothing with it would not amount to an `application' thereof.'
the learned judge referred to the accepted position on behalf of the Crown that (p 166 of  3 WLR) :
'If one charitable corporation, acting intra vires, transfers money applicable for charitable purposes to another corporation established exclusively for charitable purposes, whose management is as a matter of fact entirely separate and distinct from that of the transferor corporation the transfer will by itself amount to an `application 'of such money within the meaning of the two sub-sections, except in the case where the transferor hsa knowledge that the recipient intends to misapply it; ' and that the subject to this exception 'the transfer will entitle the transferor to claim relief under the two subsections without having to show what use the recipient charity has made of the money'. We may at this stage briefly reproduce the relevant part of s. 360 (1) of the 1970 Act (U. K.) and s. 35 (1) of the Finance Act, 1965 (U. K.) which fell for consideration before Slade J. Section 360 (1) (c) of 1970 Act so far as material provided as follows (p. 160);
'The following exemptions shall be granted on a claim in that behalf to the Board... (c) exemption-(i)from tax under schedule C in respect of any interest, annuities, dividends or shares of annuities, (ii) from tax under schedule D in respect of any yearly interest or other annual payments and (iii) from tax under Schedule F in respect of any distribution, where the income in question forms part of the income of a charity, or is, according to rules or regulations established by Act of Parliament, character, decree, deed of trust or will, applicable to charitable purposes only, and so far as it is applied to charitable purposes only....'
19. Section 35 (1) of the Finance Act, 1965, provides (p. 160) :
'Subject to subsection (2) of this section a gain shall not be a chargeable gain if it accrues to a charity and is applicable and applied for charitable purposes.'
20. On a construction of the above two provisions, the learned judge laid down the following proposition as being correct in law (p. 166) :
'Any charitable corporation which acting intra vires, makes an outright transfer of money applicable for charitable purposes to any other corporation established exclusively for charitable purposes, in such manner as to pass to the transferee full title to the money, must be said, by the transfer itself, to have `applied' such money for `charitable purposes', within the meaning of the two subsections, unless the transferor knows or ought to know that the money will be misapplied by the transferee. In such circumstances, and subject to the last mentioned exception, the transferor corporation is in my judgment entitled to claim exemption under the two subsections, without having to show how the money has been dealt with by the transferee.'
21. So far as the provisions of s. 11 of the Act which was in force at the material time is concerned, we do not think that the legal positions is in any way different. As already pointed out when a trust which holds property for charitable or religious purposes hands over a donation to another trust which is also a trust made for the application of its funds for charitable or religious purposes there can hardly be any doubt that it would amount to an application of income for charitable or religious purposes by the donor trust. As already pointed out it would be permissible for a trust either to directly apply the income for charitable purposes or to a charitable work in the field as put by Slade J., or the same funds or income could be utilised through the medium of another charitable institution which applies its funds or income to charitable purposes. The Tribunal is, in our view, right in holding that the assessee was entitled to relief under s. 11(1)(a) of the I. T. Act, but the propriety of the direction given by the Tribunal need not be dealt with in this reference.
22. However, it has been argued as contemplated by Shri Dastur that the trustees would be representative assesses as contemplated by s. 161(1)(iv) and, therefore, in view of the provisions of s. 161(1) the tax could be levied and recovered from the trustees 'in like manner and to the same extent as it would be leviable and recoverable' from the HCJ Trust, because according to the learned counsel, the income is recovered by the trustees of the assessee-trust for and on behalf of the HCJ Trust, because the amount has to be donated to the HCJ Trust for charitable purposes. The contention before us was that it has already been ascertained that the amounts given by way of donation to the HCJ Trust have been applied to charitable purposes by the HCJ Trust and, therefore, the HCJ Trust would itself be entitled to the exemption under s. 11 of the Act and consequently no income would be assessable to tax in the hands of the assessee-trust. It is, however, not possible to discuss this controversy at this stage of the reference finally though it cannot be disputed that the assessee-trust was receiving income for the benefit of the HCJ Trust and consequently the provisions of s. 161(1) would be attracted for the purposes of determining whether the assessee is liable to be assessed to any tax on the income by way of donation to the HCJ Trust.
23. In the view which we have taken, the question referred have to be answered as follows :
24. Question No 1. - In the affirmative and in favour of the assessee.
25. Question No 2. In the affirmative and in favour of the assessee.
26. The assessee to get the costs of this reference.