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First Income-tax Vs. Gangabai Charities Trust - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1983)5ITD176(Mad.)
AppellantFirst Income-tax
RespondentGangabai Charities Trust
Excerpt:
.....because there was no specification of objects for which the trust was brought into effect and the trust income was, therefore, not exempt from income-tax. in the light of this judgment, the view taken by the commissioner (appeals) cannot be said to be correct. the trust income is, therefore, not exempt from the levy of income-tax and that view has to be reversed. we direct accordingly.3. however, the learned advocate for the assessee, shri padmanabhan, argued that the matter is entirely different with reference to wealth-tax assessments. he pointed out that the wealth-tax act did not contain a definition of 'charitable purpose' similar to the one found in section 2(15) of the 1961 act and consequently, the decision given by the high court which turned upon the definition of 'charitable.....
Judgment:
1. These are the appeals filed by the revenue against the orders of the Commissioner (Appeals), by which he held that the assessee is entitled to the exemption provided for in Section 11 of the Income-tax Act, 1961 ('the 1961 Act') and that the value of the assets was also exempt from the levy of wealth-tax under Section 5(1) of the Wealth-tax Act, 1957 ('the Act').

2. The Commissioner (Appeals) in allowing the appeals of the assessee, followed a decision of the Tribunal in the assessee's own case for the assessment years 1963-64 to 1969-70 in IT Appeal Nos. 768 and 769 (Mad.) of 1970-71 and 1344 to 1348 (Mad.) of 1971-72, dated 23-1-1973.

Now we find that the Madras High Court, on a reference application filed by the Commissioner, held vide its judgment dated 17-12-1980 in Tax Case No. 261 of 1974 and Tax Case Nos. 9 and 10 of 1977 that the trust was not constituted for charitable, or religious purposes within the meaning of Section 11 read with Section 2(75) of the 1961 Act because there was no specification of objects for which the trust was brought into effect and the trust income was, therefore, not exempt from income-tax. In the light of this judgment, the view taken by the Commissioner (Appeals) cannot be said to be correct. The trust income is, therefore, not exempt from the levy of income-tax and that view has to be reversed. We direct accordingly.

3. However, the learned advocate for the assessee, Shri Padmanabhan, argued that the matter is entirely different with reference to wealth-tax assessments. He pointed out that the Wealth-tax Act did not contain a definition of 'charitable purpose' similar to the one found in Section 2(15) of the 1961 Act and consequently, the decision given by the High Court which turned upon the definition of 'charitable purpose' cannot apply to wealth-tax purposes. He also submitted that Section 5(1)(i) of the Act stated that if any property was held under trust or other legal obligations for any public or charitable purpose, the net wealth of such a trust would earn exemption because unlike in the 1961 Act, in the Wealth-tax Act, there was no question of applying the income wholly for a charitable or religious purpose, to earn the exemption.

4. The departmental representative countered these arguments placing strong reliance upon the High Court judgment that when the High Court found that the trust was not exempt from the levy of income-tax, the same trust could not be held to be exempt from the levy of wealth-tax particularly when the definition providing for the exemption is more or less the same.

5. It is, therefore, to be seen whether under the terms of the trust deed as explained in the decision of the Madras High Court, the assets in question could be said to be held on trust for any charitable or religious purpose qualifying for exemption under Section 5(1)(i) Section 5(1)(i) provided that :'(i) any property held by him under trust or other legal obligation for any public purpose of a charitable or religious nature in India' shall be exempt from the levy of wealth-tax. The significance of this definition can be understood only when we refer to the reasoning adopted by the High Court in the income-tax proceedings.

6. Under Section 11 of the 1961 Act, income derived from property held in trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India, is exempt from income-tax. Section 2(75) of the 1961 Act defines 'charitable purpose' to include relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. The High Court had occasion to consider whether the income of the assessee-trust was entitled to exemption in the light of these provisions. The trust deed dated 13-9-1968, recited that the settlor has long cherished desire to construct and provide a building in Purasawalkam, Madras, for the benefit of the public to be used by them far religious, charitable and other cultural and social purposes, to secure religious benefits for herself and satisfy a long felt need of the public in this part of the city and declared that a plot of land mentioned in the trust deed was purchased for the express purpose of constructing a building thereon and dedicating the same for use by the public, inter alia, for religious, charitable and cultural purposes and an irrevocable trust was created therefor. It was further mentioned in the trust deed that the trust property shall be used for religious, charitable, social, cultural and other allied purposes. By the judgment, dated 17-12-1980, the High Court observed that the effect of the statutory definition of charitable purpose' in the 1961 Act was that there must always be an enquiry whether any given object of general public utility does or does not involve carrying on of any activity for profit and since the expression 'charitable purpose' employed in the trust deed included within its fold not only the three named heads of charity, namely, relief of the poor, education and medical relief, but also the residuary objects of general public utility, there will have to be an enquiry outside the trust deed relating to the activities of the trust and the earning and application of income in any given year because the crux of the statutory exemption was not only earning but also actual application of the funds. On that reasoning, the High Court came to the conclusion that since the trust deed failed to particularise the object with respect to which it could be examined whether it involved any activity for profit, the Court was satisfied that, on a proper construction of the trust deed, the objects avowed by the founder do not meet the requirements of the statutory definition of the expression 'charitable purpose' and they do not certainly fulfil the conditions required for exemption under Section 11. The Court further observed that the same result flowed if the argument of the revenue that the objects expressed in the trust deed were not so much the objects of the trust as the purposes defined by the founder, but the objects of those who would be allowed to put the trust property to use, were to be accepted, It was held that the intention of the founder was that while the public should have the use of the building, they should only use the building for religious, charitable, cultural and social purposes.

The High Court further held that though the reference to religious purpose was not bad for uncertainty, the founder had endowed the property with a complete discretion to the trustees to put the trust property either to religious or to charitable or to social or to cultural and to other allied purposes and this introduced uncertainty with respect to the 'charitable purpose' and it stood in the way of granting exemption under the Income-tax Act, even though the religious purposes were capable of being correctly and clearly understood. The Court thus answered the question referred to it by stating that the trust was not entitled to exemption under Section 11.

7. The question before us is whether the trust is entitled to exemption under Section 5(1)(i), which is in the following terms : Any property held by an assessee under trust or other legal obligation for any public purpose of a charitable or religious nature in India shall not be included in the net wealth of the assessee. It may at once be stated that there is no definition of the word 'charitable' in the Wealth-tax Act similar to the definition of the expression 'charitable purpose, occurring in Section 11 read with Section 2(15). It would, therefore, be necessary to consider whether a trust which is not entitled to exemption under Section 11 because it does not satisfy the definition under Section 2(15), would yet be entitled to the exemption under Section 5(1)(i). In our opinion, on the facts of this case, the assessee-trust would be exempt under the Wealth-tax Act for more than one reason. Firstly, the High Court held that the trust was not entitled to exemption under Section 11 only because it did not satisfy the definition in Section 2(75) and since such a definition is not present in the Wealth-tax Act the claim for exemption has to be considered de hors that definition. Secondly, there was a significant observation in the judgment of the High Court that it was absolutely essential to scrutinise the objects of the trust particularly after the statute has eschewed any kind of activity for private profit as a charitable object. Since such criterion is absent for the purpose of Wealth-tax Act, the particularisation of the object to see whether there is an activity for profit is not essential and it would be sufficient if the general object of the trus. is charitable or religious. Thirdly, the High Court held that the charitable object expressed in the trust deed may in fact refer to the purpose or the users of the property and not the trust itself and, may not, therefore, indicate the particular nature of the trust, though the religious object was capable of being correctly and clearly understood. Under the Wealth-tax Act, property held in trust for a public purpose of a charitable of religious nature, would be exempt, because the purposes are disjunctive even if the charitable purpose was not clear. The fact that the religious purpose has been found to be clear would then be sufficient.

8. At this juncture, it is very relevant to notice the judgment of the Bombay High Court in the case of Trustees of K.B.H.M. Bhiwandiwalla Trust v. CWT [1977] 106 ITR 709. Contrasting the language used in the Indian Income-tax Act, 1922 ('the 1922 Act'), with the later enactment, the Wealth-tax Act, the Bombay High Court pointed out that under Section 4(3)0) of the 1922 Act, to earn exemption, income should have been derived from the property held under trust wholly or in part for religious or charitable purposes. If property is held wholly for religious or charitable purposes, the whole of the income is exempt from the levy of tax. In case the property is held partly for such purposes, the income applied or finally set apart for application thereto is exempt. In the Wealth-tax Act., the word 'wholly' in Section 5(1)(i) has been omitted and there is no provision for exempting only part of property held for religious or charitable purposes. The reason for it is that in the case of income arising from property held on trust partly for charitable purposes and partly for other purposes, apportionment is possible. Such apportionment is not possible in respect of the corpus of the property. The intention of the Legislature in omitting the word 'wholly' in Section 5(1)(i) as a qualifying word as regards the requirements concerning the object of the trust is, that if it can be said that primarily or predominantly the objects of a trust are of a public charitable nature, the corpus would qualify for exemption under Section 5(1)(i). Then the Bombay High Court considered that if in a trust some of the objects are of charitable and religious purposes and some objects are not of charitable and religious purposes, exemption would still be available under Section 5(1)(i). Dealing with this aspect, the High Court observed that under Section 5(1)(i), "11 the objects need not fall within the expression 'public purpose of a charitable or religious nature in India'. It would be sufficient if the objects of the trust considered as a whole could be regarded to be within the said expression. In that case, out of five objects of the trust, only four fell within Section 5(1)(i) and yet the High Court held that the trust was entitled to exemption from the levy of wealth-tax under Section 5(1)(i). Applying this principle to the facts before us, we have to find out whether there are any objects which fell within the definition of Section 5(1)(i). It may be remembered that when a property is held in trust for several objects, for the benefit of the public, any member of the public would be entitled to compel the trustees to utilise the properties for those objects and the discretion granted to the trustees by the trust deed would not be so absolute as to enable the trustees to abandon any one of the objects stated in the trust deed. The Madras High Court, in the present case made the following observations ; On the terms of the original trust deed, we are satisfied that the reference to religious purposes is not bad for uncertainty nor can its scope be restricted when there is no condition in that deed derogating from the generality of the religious purpose. However notwithstanding this finding of ours on the validity of the religious object, since the founder, under the terms of the deed, had endowed the property with a complete discretion to the trustees to put the trust property either to religious or to charitable purposes, the fact that religious purposes are capable of being correctly and clearly understood will not set right the defect in the definition of the trust object, created by the inclusion of such vague phrases as 'cultural', 'social' and 'allied' purposes.

Since the High Court had clearly stated that the trust in the present case is for religious purposes, it must be accepted that the property is held in trust for a public purpose of a religious nature qualifying for exemption under Section 5(1)(i) because under this section, a purpose can be either religious or charitable, so long as it is a public purpose. We may also state that it was pointed out by the Supreme Court in Yogiraj Charity Trust v. CIT [1976] 103 ITR 777 that if the trustees could validly spend the entire income on a non-charitable object and exclude the other objects, it would not be treated as held wholly for charitable purposes and would not be eligible for exemption. The mandate to the trustees in the present case is that the property 'shall be used for religious, charitable, social, cultural and other allied purposes' and the 'trustees shall not use the trust fund for purposes other than the purposes of the trust'. This gives a discretion to apply the income for different purposes but does not give any discretion to exclude religious purpose altogether. As we have pointed out in the earlier portion of the order, the Madras High Court found that the reference to religious purpose was not bad for uncertainty and that by itself would not have stood in the way of granting exemption even under the Income-tax Act, but for the fact that the objects also provided that the trust property could be put to other vague purposes like cultural, social and allied purposes, the trust property in this case must be held to be exempt under Section 5(1)(i).

That is to say, the very High Court judgment which is now sought to be used against the assessee for wealth-tax purposes, in our view, helps the assessee's case. We are, therefore, of the opinion that the trust property is exempt from the levy of wealth-tax under Section 5(1)(i).

Therefore, we endorse the view taken by the Commissioner (Appeals) insofar as wealth-tax is concerned.

9. In the result, IT Appeal No. 1651 (Mad.) of 1980 is allowed and WT Appeal Nos. 714 and 70 (Mad.) of 1981 are dismissed.


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