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Commissioner of Wealth-tax Vs. Trustees of H.E.H. the Nizam's Religious Endowment Trust (15.04.1975 - APHC) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 18 of 1974
Judge
Reported in[1977]108ITR229(AP)
ActsWealth Tax Act, 1957 - Sections 5(1); Income Tax Act
AppellantCommissioner of Wealth-tax
RespondentTrustees of H.E.H. the Nizam's Religious Endowment Trust
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateY.V. Anjaneyulu and ;V.V. Subba Rao, Advs.
Excerpt:
.....taxable territory - trustees decided to limit activities within taxable territory - whether such trust property exempted from taxation under section 5 (1) - exemption entitled under act in case as per trust deed trust activities confined within taxable territories - resolution of trustees to limit scope of activities within taxable territory did not make any difference for the purpose of section 5 (1) - held, trust property not entitled to get exemption under section 5 (1) as objects of trust contemplate scope of activities beyond taxable territory. - - it is well-settled that if there are several objects of the trust, some of which are charitable and some non-charitable, and the trustees have absolute discretion to applythe income to any of the objects, the non-charitable purpose..........a trust are not confined to india but extend beyond the taxable territories, then the whole of the trust property will get so infected as to deprive the assessee of the exemption under section 5(1)(i). this much is beyond dispute and, indeed, it was not disputed before us.6. sri y. v. anjaneyulu, learned counsel for the assessee, argued that the trustees were given absolute discretion to apply the income of the accumulated trust fund to any one or more of the four specified objects of the trust, the trustees had resolved to confine the trust to purposes within the taxable territories, and, therefore, the trustees must be said to be holding the property under trust for a purpose of a charitable or religious nature in india. sri anjaneyulu relied upon the observations of the supreme court.....
Judgment:

Chinnappa Repdy, J.

1. Late Nawab Sir Mir Osman Ali Khan Bahadur, Nizam of Hyderabad, by a deed dated September 14, 1950, created a trust known as 'Nizam's Religious Endowment Trust'. He settled securitiesof the value of Rs. 40 lakhs for carrying out the objects set out in the deed of trust. During the lifetime of the settlor the trustees were directed merely to accumulate the income from the trust fund (after meeting the expenses relating to the administration of the fund) and add the same to the corpus of the trust fund. On and after the death of the settlor the trustees were to hold the accumulated corpus of the trust fund upon trust to spend the income, in such shares and proportions and in such manner as the trustees deemed fit in their absolute discretion, for any one or more of certain specified religious and charitable objects. Two out of the four specified purposes required the application of the income outside the taxable territories and the other two purposes required the application of the income within the taxable territories. Though the settlor expressed a desire that, as far as possible, the income should be spent equally for the four specified objects, he did not oblige them to do so. Instead he gave them absolute discretion to spend the income 'in such shares and proportions and in such manner' as they deemed fit.

2. The settlor died in February, 1967, and the trust became effective. Soon thereafter the trustees resolved that the income from the trust would be utilised for the two purposes which required its application within the taxable territories only and that any balance left would be accumulated, also to be utilised for those two purposes only.

3. For the assessment year 1968-69, the Wealth-tax Officer assessed the trustees to wealth-tax overruling their claim to exemption under sec- Section 5(1)(i) of the Wealth-tax Act. The claim to exemption was, however, accepted by both the Appellate Assistant Commissioner and the Appellate Tribunal. At the instance of the revenue, the following question has been referred to us for our decision :

'Whether, on the facts and in the circumstances of the case, the property of the trust is exempt under Section 5(1)(i) of the Wealth-tax Act, 1957?'

4. Section 5(1)(i) of the Wealth-tax Act is as follows :

'5. Exemption in respect of certain assets.--(1) Subject to the provisions of Sub-section (1A), wealth-tax shall not be payable by an assessee in respect of the following assets, and such assets shall not be included in the net wealth of the assessee- (i) any property held by him under trust or other legal obligation for any public purpose of a charitable or religious nature in India.'

5. It is clear that in order to entitle any property held under trust for a charitable or religious purpose, such religious or charitable purpose must be confined in its scope to the taxable territories. It is well-settled that if there are several objects of the trust, some of which are charitable and some non-charitable, and the trustees have absolute discretion to applythe income to any of the objects, the non-charitable purpose will so infect the charitable purpose as to deprive the trust of tax exemption : vide Mohammed Ibrahim Riza v. Commissioner of Income-tax AIR 1930 PC 226 Oxford Group v. Inland Revenue Commissioners [1949] 2 All ER 537 and East India Industries Madras (P.) Ltd. v. Commissioner of Income-tax : [1967]65ITR611(SC) . Though the cases arose under the Income-tax Act, the same principle is clearly applicable to cases of wealth-tax also, on the language of Section 5(1)(i). On the same principle, it must follow that if some of the purposes of a trust are not confined to India but extend beyond the taxable territories, then the whole of the trust property will get so infected as to deprive the assessee of the exemption under Section 5(1)(i). This much is beyond dispute and, indeed, it was not disputed before us.

6. Sri Y. V. Anjaneyulu, learned counsel for the assessee, argued that the trustees were given absolute discretion to apply the income of the accumulated trust fund to any one or more of the four specified objects of the trust, the trustees had resolved to confine the trust to purposes within the taxable territories, and, therefore, the trustees must be said to be holding the property under trust for a purpose of a charitable or religious nature in India. Sri Anjaneyulu relied upon the observations of the Supreme Court in H. E. H. Nizam's Religious Endowment Trust v. Commissioner of Income-tax : [1966]59ITR582(SC) and Commissioner of Income-tax v. Smt. Kastur-bai Walchand Trust : [1967]63ITR656(SC) .

7. We find it difficult to accept the submissions of Sri Anjaneyulu. Now, a property can be said to be held under trust for the purposes for which the settlor has created the trust and not for the purposes for which the trustees may utilise or decide to utilise the income from the trust property. If the trustees in exercise of the absolute discretion given to them under the deed of trust decide to utilise the income for a few out of the many purposes for which the settlor created the trust, it does not mean that the trustees hold the trust property for those purposes only for which they have decided to utilise the income and that they have ceased to hold the trust property for the other purposes specified in the deed of trust. It only means that the trustees have, for the time being, circumscribed their activities in relation to the objects of the trust. It cannot mean that the objects of the trust are themselves circumscribed. It is not as if the discretion given to the trustees, once exercised, is irrevocably exercised. It is open to the trustees to change their minds at any time and decide to apply the income to the other specified purposes of the trust beyond the taxable territories. So long as the trustees have that freedom it can never be said that they hold the trust property for the purposes for which they have decided to utilise the income only and not for the other purposes for which the trust was created. For the purpose of levy ofwealth-tax we are concerned with the question whether the religious or charitable purposes of the trust are confined to India or whether they extend outside India. We are not concerned with the question as to how the trustees apply the income from the trust property. On the other hand under the Income-tax Act, once the trust is found to be for religious or charitable purposes, it matters not whether some of the purposes extend beyond the taxable territories but it matters whether the income is applied within or outside the taxable territories. Thus, while under the Wealth-tax Act, one is concerned with the question whether any of the purposes of the trust extends outside India, under the Income-tax Act one is concerned with the question whether any part of the income is applied outside India. This will be evident even from a cursory look at the relevant provisions of the Wealth-tax Act and the Income-tax Act. A comparative study of the relevant provisions of the two Acts, in our view, clarifies and puts the position beyond doubt. We have already extracted Section 5(1)(i) of the Wealth-tax Act. Section 4(3)(i) of the Indian Income-tax Act, 1922, to the extent that is relevant, was as follows :

'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 purpose, 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.'

8. Section 11(1)(a) and (b) of the Income-tax Act, 1961, is as follows:

'11. (1) Subject to the provisions of Sections 60 - 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 per cent. of the income from the property or rupees ten thousand, whichever is higher :

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India ; and where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is notin excess of twenty-five per cent. of the income from the property held under trust in part.'

9. It is clear from these provisions that in order to be eligible for exemption from the levy of income-tax, while it is immaterial whether the charitable or religious purposes for which the trust is created are confined to the taxable territories, or whether they extend outside the taxable territories it is essential that the income is applied or accumulated for application or set apart for application within the taxable territories. Area of application of the trust income is the decisive factor for claiming exemption from income-tax ; area of purpose of the trust is the decisive factor for claiming exemption from wealth-tax. We are, therefore, of the view that if the objects set out in the deed of trust contemplate an area beyond the taxable territories, it maks no difference, for the purpose of levy of wealth-tax, that the trustees resolve not to spend the income outside the taxable territories.

10. In H. E. H. Nizam's Religious and Endowment Trust v. Commissionerof Income-tax : [1966]59ITR582(SC) the Supreme Court was concerned with the very trust with which we are now concerned. The settlor wasalive at the time and, therefore, under the terms of the trust the incomefrom the trust fund was being accumulated. The question arose whether such income was exempt from income-tax. The argument on behalf of theassessee was that the occasion for the exercise of option by the trusteesregarding the application of the income had not yet arisen as the settlor was alive and, until such option was exercised, the accumulation must necessarily be considered to be for application within the taxable territories. The Supreme Court rejected the submission made on behalf of the assesses. The Supreme Court held that the purposes of the trust were mixed purposes and, therefore, the accumulation during the relevant accounting years could not be said to be necessarily for application within the taxable territories. They observed (page 589):

'In the present case, an option is given to the trustees to set apartthe income for the purposes within the taxable territories or without suchterritories and till a selection is made it is not equally possible to predicatethat the accumulation of income is for purposes within the taxable territories. Till the trustees set apart the accumulation for the purposes withinthe taxable territories, it cannot be said that the purposes are within thetaxable territories.'

11. Sri Anjaneyulu relied on the last sentence and argued, conversely, that ifthe trustees set apart the accumulation for the purposes within the taxableterritories it must be said that the purposes are within the taxable territories. The observations made by the Supreme Court were in connectionwith the levy of income-tax and they cannot have any application to thelevy of wealth-tax. We have alredy pointed out the distinction between the relevant provisions of the Wealth-tax and Income-tax Acts.

12. In Commissioner of Income-tax v. Smt. Kasturbai Walchand Trust : [1967]63ITR656(SC) the facts were : Seth Walchand created a trust under which the trustees were to pay the income from the trust properties to Bai Kasturbai during her lifetime and, thereafter, to apply the income to certain charities. Some time after the execution of the deed of trust Bai Kasturbai executed a deed surrendering to the trustees all her interest in the income of the trust fund so that the trustees might forthwith utilise the same for charitable purposes. Thus, the trust was accelerated and the question arose whether the income was exempt from tax under Section 4(3)(i) of the Indian Income-tax Act, 1922. The Supreme Court held that Bai Kasturbai having validly surrendered her right under the trust and her right having become extinguished, the income from the trust properties could only be applied or accumulated for charitable purposes and for no other purpose. Therefore, the income was exempt from tax. This case does not help the assessee since in that case the right of the intermediate beneficiary was validly and irrevocably extinguished, unlike the present case where the resolution of the trustees cannot extinguish the other objects of the trust.

13. The final submission of Sri Anjaneyulu was that courts should lean in favour of charity and prevent its extinction by the onslaughts of the revenue. He relied on the following passage from Tudor on Charities (6th edition, page 188) :

'In regard to the construction of charitable gifts the rule of widest application is that the court leans in favour of charity.

'There is no better rule' said Lord Loreburn, 'than that a benignant construction will be placed upon charitable bequests'.'

14. Where a bequest is capable of two constructions, one of which would make it void, and the other would make it effectual, that latter will be adopted.'It is better to effectuate than to destroy the intention'.

15. The passage quoted from Tudor is about the construction of trusts and not about the construction of taxing statutes. In regard to taxing statutes, we have no doubt that in a welfare State dedicated to the securing of social, economic and political justice to all its citizens, several of the old and narrow rules of construction must yield to new and objective rules of construction. We wish to say no more for the present. We only wish to add that there is no danger of the present trust becoming extinct. The reference is answered in favour of the revenue who will get the costs of the reference. Advocate's fee Rs. 250.


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