SESHACHELAPATHI J. - This is a case referred to the High Court under section 66(1) of the Indian Income-tax Act (Xl of 1922). The question formulated for decision is :
'Whether the income arising from property settled upon trust under the deed of settlement, dated September 14, 1950, or any part thereof is exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922 ?'
By an indenture made at Hyderabad on September 14, 1950, H. E. H. the Nizam of Hyderabad settled upon two trustees, Nawab Zain Yar Jung and Shavax Ardshir Lal, certain securities of the value of Rs. 40,00,000, more particularly described in the first schedule annexed thereto upon trust for applying the income thereof for religious and charitable purposes and objects, in the manner appearing in the instrument of trust and settlement. In schedule 2 annexed to the indenture, the particulars of the sacred buildings which are directed to be maintained, are set out. The provisions of the indenture relevant for the present case are as follows :
'2. This trust shall be called H. E. H. the Nizams Religious Endowment Trust.
3. The trustees shall hold and stand possessed of the trust fund UPON TRUST -
(a) To manage the trust fund and to recover the interest and other income thereof.
(b) To pay and discharge out of the income of the trust fund all expenses and charges for collecting and recovering the income of the trust fund and all other costs, charges, expenses and outgoings of and incidental to the administration thereof.
(c) During the lifetime of the settlor the balance of the income shall be accumulated and shall be added to the corpus of the trust fund.
(d) On and after the death of the settlor the trustees shall hold the accumulated corpus of the trust fund upon trust to spend the income thereof for any one or more of the following religious or charitable objects in such shares and proportions and in such manner as the trustees shall in their absolute discretion deem proper.
(i) For annual religious offerings to the sacred places of the Muslims outside India, in Hedjaz and Iraq, viz., Mecca, Madina, Najaf, Karbala, Kazamain, Sirraman Raa and Mashad (in Iran) and Baghdad and Basra.
(ii) For help, either in lump sum or by way of monthly allowances, to the Khuddam or the servants who are looking after the sacred shrines, and also by way of charity to pious people residing at these holy places.
(iii) For the upkeep of the sacred buildings constructed in the lifetime of the settlor, such as, Masjids (mosques), Azakhana (mourning house built to commemorate the name of His Exalted Highness late mother), two Ashurkhanas (where the Alam sits inside the City Palace during Moharram and Ramzan), and the Maqbaras (tombs) and particularly mentioned in the second schedule hereunder written.
(iv) For the annual expenditure during the mourning period of Moharram and Safar and also during other religious months, when different kinds of ceremonies, religious discourses (Tazreers) Id Taqreebs, etc., are performed, including the annual religious offerings to the sacred Shrines at Ajmer and Gulbarga.
(v) It is the desire of the settlor that the income of the trust shall, as far as possible, be spent equally for the above-mentioned four religious and charitable objects and purposes and in the event of there being any surplus then the same may be spent by the trustees for any other religious and charitable objects for the benefit of Sunni Mohammedans with liberty to the trustees in their absolute discretion to accumulate the surplus, if any, for any year or years and utilize the same for the purposes in this clause provided for any subsequent year or years.'
For the assessment years 1952-53 and 1953-54 the 'H. E. H. the Nizams religious trust fund 'claimed that the income arising from the properties settled upon trust in and by the indenture dated September 14, 1950, was exempt from tax under section 4(3)(i) of the Indian Income-tax Act. That claim was rejected by the Assessing Officer, the Appellate Assistant Commissioner and, eventually, by the Income-tax Appellate Tribunal (Hyderabad Bench).
The question we have to decide in this reference is whether the income from the trust fund is entitled to exemption under section 4(3)(i) of the Act. The relevant portion of the section 4(3)(i) of the Act reads as follows :
'Any income, profits or gains falling within the following clauses 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 -
(a) if it is applied to religious or charitable purposes without the taxable territories, but in the following cases, namely :
(i) where the property is held under trust or other legal obligation created before the commencement of the Indian Income-tax (Amendment) Act, 1953 (XXV of 1953), and the income therefrom is applied to such purposes without the taxable territories; and
(ii) where the property is held under trust or other legal obligation created after such commencement, and the income therefrom is applied without the taxable territories to charitable purposes which tend to promote international welfare in which India is interested, the Central Board of Revenue may, be general or special order, direct that it shall not be included in the total income.'
The present clause (i) of section 4(3) of the Act was introduced by the Indian Income-tax (Amendment) Act (XXV of 1953), which is deemed to have come into force on 1st April, 1952. The assessments for the two years in question, i.e., 1952-53 and 1953-54 are governed by the amended provision, which is above extracted.
Section 3 of the Act is the charging section. It provides that income-tax shall be levied on individual, Hindu undivided family company, etc., on the total income at the rates prescribed by the Finance Act every year. Section 4 defines and limits the nature of the income that may be included in the total income of the previous year. Section 4(3) provides for the exclusion of certain classes of income from the total income, as defined in section 2(15) of the Act, liable to the charge of the income-tax. Certain categories of income are totally exempt.
There is a clear and well-marked distinction between cases where income is absolutely exempt from income-tax and where such an exemption can be claimed and allowed only if certain conditions are satisfied. In Commissioner of Income-tax v. S. L. Mathias the Judicial Committee of the Privy Council observed that there is a distinction between exempting a class of income in some events and exempting it in all events. For example, in the case of agricultural income, section 4(3)(viii), as pointed out by Lord Macmillan in Commissioner of Income-tax v. Maharajadhiraja of Dharbhanga :
'The exemption is conferred, and conferred indelibly on a particular kind of income and does not depend on the character of the Recipient.....'
But, immunity from tax in respect of income arising from properties impressed with the trust or other legal obligation for the effectuation of religious or charitable purposes is not absolute, but conditional upon the fulfilment of the requirements of the statutory provisions. It is elementary that in cases where an assessee claims exemption, the onus is on him to make good the claim.
In order to successfully claim exemption under section 4(3)(i) of the Act, the assessee must show that the following conditions are satisfied :
(1) that the property from which the income is derived is impressed with and held under a trust or other legal obligation,
(2) that the property so held is wholly for the effectuation of religious and charitable purposes,
(3) that the income from the properties so held is applied or accumulated for application to religious or charitable objects as relate to anything done within the taxable territories, and
(4) that in the case of property held under trust or other legal obligation in part only for religious or charitable purposes, the exemption is confined only to the income so applied or finally set apart for application thereto.
We are not concerned here with the last condition, as the securities referred to in the schedule to the instrument of trust, are wholly for religious and charitable purposes. There is no question of the properties being held in part only for such religious and charitable purposes. Nor are we concerned with the terms of sub-clauses (i) and (ii) of clause (a) of the proviso to section 4(3)(i) of the Act, as they refer only to a case where the income is in fact applied for charitable and religious objects outside the taxable territories.
We are primarily concerned with the first three conditions set out supra as emerging from the language of section 4(3)(i) of the Act. The terms of the indenture of trust dated September 14, 1950, clearly constitute a trust with respect to the securities described in schedule I attached thereto. The first condition, therefore, is satisfied. As regards the second condition, there can be no controversy - and in fact there has been none before us-that the purposes and objects enumerated in sub-clauses (i), (ii), (iii) and (iv) of clause (d) of paragraph (3) of the indenture are religious and charitable in character. It is not also in dispute that the religious charities referred to in sub-clauses (i) and (ii) of clause (d) of paragraph (3) of the indenture have to be effectuated in sacred places of the Muslims outside India and, therefore, without the taxable territories. Sub-clauses (iii) and (iv) alone provide for the expenditure of income on religious and charitable objects, within the taxable territories.
The controversy in this case centres round the question whether, in view of the provisions in the trust deed for the expenditure of income, from the trust fund for religious and charitable purposes, admittedly outside the taxable territories, the assessee can claim the benefit of the exemption from tax.
In the course of an able argument, Mr. Anwarulla Pasha, the learned counsel for the trust fund, contended that under the terms of the trust deed, the trustees have to accumulate the income of the trust fund during the lifetime of the settlor, and that, therefore, the question of its application to one or more of the four religious objects enumerated in the trust deed, two of which are admittedly to be effectuated outside the taxable territories, can arise only on and from the death of the settlor. It is further contended that, even when the time for application of the income arrives, inasmuch as the trustees have been given absolute discretion to apply the income to one or more of the four categories of religious purposes, it cannot be predicated that they (the trustees) will expend moneys, at all, for religious and charitable purposes outside India. Upon the premises, it is argued that the income of the trust fund, which is now being accumulated, for purposes which are clearly religious and charitable in character, is entitled to the exemption under section 4(3)(i) of the Act.
In support of the contention, the learned counsel placed strong reliance upon the decision of the Bombay High Court in Commissioner of Income-tax v. Walchand Diamond Jubilee Trust. The facts of that case are briefly these : An industrialist of Bombay created a trust in a sum of over Rs. 4,11,111 for certain charitable objects, and providing, inter alia, that the trust fund should be invested in the Premier Construction Company Ltd., and that on the expiry of a period of eighteen years from the date of the indenture, the income should be applied for giving scholarships, medical relief, monetary help to the poor and the needy and relief of the poor and distressed in times of famines, cyclones, floods, earthquakes, etc. There was a direction in the deed of trust that, in giving the bounty, the trustees may give preference to the employees of the Premier Construction Company Ltd., past and present. The question for decision was whether the income for the assessment year 1949-50, which fell within the period of accumulation as directed by the maker of the trust, was entitled to exemption from tax under section 4(3)(i) of the Indian Income-tax Act. Chagla C.J. who spoke for the Division Bench, held, firstly, that during the period of accumulation, the fund continues to be charitable in character and, therefore, exempt from tax; and, secondly, that, even though there was a direction to prefer the employees of the Premier Construction Company Ltd., inasmuch as the trustees were not bound to do so in the exercise of their discretion, the trust fell within the ambit of section 4(3)(i) of the Act.
In support of his contention that, during the period of accumulation, the income of the trust fund is entitled to exemption from income-tax, Mr. Anwarulla Pasha, the learned counsel, placed particular reliance on a passage in the judgment of Chagla C.J., which is as follows :
'So long as the income from the trust property is not spent on any non-charitable object and it is saved, as it were, or set apart or accumulated for the ultimate object of carrying out the charitable purpose, then even in the intervening period the trust continues to be a charitable trust, the property is held on a charitable trust and the income from the trust is exempt from tax.'
We are of opinion that the above observations of the learned Chief Justice do not really advance the case of the learned counsel. In the case cited above, there was no question at all of any of the charitable purposes having to be effectuated outside the taxable territories. The question we have to decide in this case is not whether accumulation of the income, with a view to its ultimate expenditure for religious and charitable purposes, is exempt from tax. But, what we have to decide is whether if some of the purposes for which the income is being accumulated are admittedly to be applied for religious and charitable purpose outside the taxable territories, the income can nevertheless be exempted from tax. Upon that point, the decision of Chagla C.J. has no bearing.
It is next contended by the learned counsel that, even though two of the four charities have to be effectuated outside the taxable territories, the trustees are not bound to apply the income for such purpose, and, therefore, it cannot be said that the income is now being accumulated for the effectuation of the purpose outside the taxable territories.
In support of that contention, reliance was placed upon some observations of Chagla C.J. in the case cited above. In that case, the trustees were empowered to give preference to the employees of the Premier Construction Company Ltd. It was contended for the revenue that that provision was a device really to help the employees of the Premier Construction Company Ltd., in which case, of course, the trust would not be a charitable trust within the meaning of section 4(3)(i). That argument was not accepted by Chagla C.J. upon the ground that the trustees were not bound to select the employees in preference to the general class of beneficiaries and, therefore, it cannot be said that the trust was not a charitable trust. In the trust deed, which fell to be construed in that case, the employees of the Premier Construction Company Ltd. were not the direct recipients of the bounty. All that was provided for was, in giving benefit to the four classes enumerated, preference may be given to the employees. In such a situation, it cannot be said that the direction to give preference to the employees of the Premier Construction Company Ltd. affects its character as a charitable trust. In a recent case in The Trustees of the Charity Fund v. Income-tax their Lordship of the Supreme Court held that where the charitable gift is to benefit a primary class, which would constitute a religious and charitable purpose, the fact that the trustees, in their discretion, have been given a power to select the objects of bounty from that primary class, would not render the trust any the less charitable in character. The decision of Chagla C.J., therefore, is, if we may say so respectfully, correct on the that case.
There is nothing in the judgment of the learned Chief justice, however, to lend support to the contention of Mr. Anwarulla Pasha that, even though one of the purposes of the trust is clearly not religious or charitable in character, nevertheless, the entire income is entitled to exemption because the trustees, in their discretion, may or may not employ the income for purposes which are not religious or charitable. Such a view, in our judgment, is opposed to principle and authority.
In Lokamanya Tilak Jubilee National Trust Fund, Bombay, In re : a trust was created for effectuating the four purposes. It was held therein :
'That the objects specified in the sub-clauses (of the trust deed) being distributive (in their character). the whole of the trust fund could be applied for any one or more of the objects specified, and if any of those objects did not fall within the definition of charity, the trust could not be regarded as a good charitable trust.'
In Mercantile Bank of India (Agency) Ltd., In re it was held that where one of the objects was not clearly a charitable purpose, the trust cannot be said to be wholly a charitable trust. These two cases establish the principle that if there is plurality of objects, and the trustees are given the unfettered discretion to apply fund for an object which is not a charitable purpose, then the entire fund is outside the scope of section 4(3)(i) of the Act. Applying that principle to the present case, it must be held that so long as there is a possibility of the trustees, in their discretion, applying the fund for purposes outside the taxable territories, the income does not fall clearly within the scope of section 4(3)(i) of the Act.
In cases where the income is actually expended outside the taxable territories, there can be no question of exemptions except in circumstances and to the extent referred to in proviso to section 4(3). We are not concerned in this case with proviso, for the stage of application of the income had not yet been reached. We are concerned only with accumulation of income. In our view, the words 'to such religious or charitable purposes as relate to anything done within the taxable territories' occurring in section 4(3)(i) must govern both the actual application of the income and accumulation thereof for its eventual application. The same considerations, as relate to the application of the income, must also govern its accumulation.
Accumulation is a process ancillary to the application. It is a mode of investment. It is not an end. It is a means to an end, the end being its application to religious and charitable objects within the taxable territories. So long as it cannot be predicated with certainty that the income is wholly to be applied for religious or charitable purposes within the taxable territories, the accumulation of the income for such application cannot fall within the ambit of section 4(3)(i) of the Act.
It is then contended that in construing a fiscal enactment, in all cases of doubt, that construction should be preferred, which is favourable to the assessee. In Inland Revenue Commissioners v. Bladnoch Distillery Company Ltd. Lord Thankerton observed :
'... counsel are apt to use the adjective penal in describing the harsh consequences of taxing provision, but, if the meaning of the provision is reasonably clear, the court have no jurisdiction to mitigate such harshness. On the other hand, if the provision is reasonably capable of two alternative meanings the courts will prefer the meaning more favourable to the subject.'
In C. A. Abraham v. Income-tax Officer, Kottayam their Lordships of the Supreme Court have observed :
'In interpreting a fiscal statute, the court cannot proceed to make good deficiencies, if there be any; the court must interpret the statute as it stands and in case of doubt in a manner favourable to the taxpayer.'
This proposition of law is, no doubt, well settled. But the invocation of this principle can arise, only in cases where there is an ambiguity in the language of the statutory provision. We cannot agree that there is any ambiguity in the language of the section.
We have reached the conclusion that, on the terms of section 4(3)(i) of the Indian Income-tax Act, the trust is not entitled to the exemption. It is unnecessary to refer to the decision cited by the learned counsel for the revenue that in cases of immunity from taxation, the statute must be strictly construed, a proposition which, it is only fair to add, Mr. Anwarulla Pasha does not contest.
We, therefore, answer the question submitted to us in the negative. The Commissioner of Income-tax, Hyderabad, will have his costs. Advocates fee Rs. 250.
Question answered in the negative.