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Jagdamba Charity Trust Vs. Commissioner of Income-tax, Delhi (Central) - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIncome-tax References Nos. 147 of 1976 and 183 of 1977
Judge
Reported in(1980)18CTR(Del)317; [1981]128ITR377(Delhi)
ActsIncome Tax Act, 1961 - Sections 2(15), 4(3), 11, 11(1), 12 and 164
AppellantJagdamba Charity Trust
RespondentCommissioner of Income-tax, Delhi (Central)
Cases Referred(Ch D) and Whiteside v. Whiteside
Excerpt:
direct taxation - exemption - sections 11 and 12 of income tax act, 1961 - amendment of trust deed with retrospective effect to delete objectionable clauses - revenue not entitled to deny claim of exemption on ground of objectionable clauses in old deed - assessed entitled for exemption for anything done in accordance with amended trust deed. - - (iii) to open, found, conduct, maintain or contribute to the opening and maintaining of such institutions where work at living wages can be provided to poor and deserving people or which are conducive to the benefit of the poor and the development of industries. the yogiraj charity trust as well as two of its trustees were made defendants to the suit. in the plaint it was stated that the plaintiff had been desirous of creating a charitable..........1980, in jaipur charitable trust v. cit (i.t.r. no. 55/72) : [1981]127itr620(delhi) , where the trust deeds were couched in similar words, a bench of this court (consisting of one of us) has held that the above objections would continue to stand in the way of availability of the corresponding exemption under s. 11(1) read with s. 2(15) of the i.t. act 1961. in the two cases presently under consideration, which relate to the assessment years 1966-67 and 1967-68, respectively, the assessed claimed that the original 'objectionable' trust deed had since been got 'rectified' with retrospective effect, by deletion of the offending clauses in appropriate proceedings and that, thereforee, there was no longer any justification to reject the assessed's claim for examption. this argument did not.....
Judgment:

S. Ranganathan, J.

1. Yogiraj Charity Trust (the applicant in I.T.R. 147/76) and Jagdemba Charity Trust (the applicant in I.T.R. 183/77) Which was formerly known as Dalmia Jain (Jind Estate) Charity Trust, were denied the exemption from income-tax claimed by them on the ground that they were not trusts for religious or charitable purposes. This was confirmed by the judgment of this court in CIT v. Jaipur Charitable Trust : [1971]81ITR1(Delhi) , which was also affirmed by the Supreme Court in the case Yogiraj Charity Trust v. CIT : [1976]103ITR777(SC) . Shortly put, the refusal of exemption was for the reason that, though many of the objects of the trust were religious or charitable in nature, at least one of them was not and since the objects were distinct and distributive and there was nothing to preclude the trustees from utilising the entire income on the non-charitable object(s), the assessed would not be entitled to the exemption envisaged in s. 4(3)(i) of the I.T. Act, 1961. In a recent decision rendered on April 14, 1980, in Jaipur Charitable Trust v. CIT (I.T.R. No. 55/72) : [1981]127ITR620(Delhi) , where the trust deeds were couched in similar words, a Bench of this court (consisting of one of us) has held that the above objections would continue to stand in the way of availability of the corresponding exemption under s. 11(1) read with s. 2(15) of the I.T. Act 1961. in the two cases presently under consideration, which relate to the assessment years 1966-67 and 1967-68, respectively, the assessed claimed that the original 'objectionable' trust deed had since been got 'rectified' with retrospective effect, by deletion of the offending clauses in appropriate proceedings and that, thereforee, there was no longer any justification to reject the assessed's claim for examption. This argument did not find favor with the AAC and the Appellate Tribunal. At the instance of the assessed, however, the Tribunal has referred the following question for our opinion in each of the two cases :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income of the trust was not exempt under sections 11 and 12 of the Income-tax Act, 1961, on the ground that the trust was not public charitable trust ?'

2. A few more facts are necessary to appreciate the background in which the question falls to be decided. As the facts in the two references are similar, with only minor and immaterial differences in the language of the relevant clauses and the relevant dates, we shall refer only to the material facts in the case of Yogiraj Charity Trust. The original trust deed in the case was a unilateral document executed by Ram Krishna Dalmia on March 9, 1949. The objects of the trust were set out in clause 5, which contained, inter alia, the following sub-clauses :

'(a) (1) ......

(ii) To open, found, establish, equip, finance, assist, maintain or contribute to religious, technical, industrial or commercial concerns, institutions, associations or bodies imparting any type of training or providing employment to persons.

(iii) To open, found, conduct, maintain or contribute to the opening and maintaining of such institutions where work at living wages can be provided to poor and deserving people or which are conducive to the benefit of the poor and the development of industries......'

3. Again by clause 5(b) the trustees were empowered for the purposes of carrying out the objects set out in clause 5(a) to purchase or otherwise acquire, start, establish, equip or close any business, undertaking or industry, to purchase, acquire or undertake the whole or any part of property and liabilities of any person, firm of company and to train person in any business or industry and grant them stipends, allowances, or bonuses as may be determined by the trustees from time to time. Clause 11 of the trust deed was in the following terms :

'The trustees shall have full power and discretion to acquire, hold, carry on and manage any trade or business or any part thereof and to employ the whole or any portion of the trust property or any funds of the trust in such trade or business or in running concerns or managing agencies, or in securities or shares and debentures of public or private limited companies or other investments, and realise or vary the same or any branch or portion thereof as they may deem proper from time to time, provided, however, that the income, profits and gains thereof shall be utilized and applied only for and on behalf of the trust as provided herein.

It was primarily with reference to a clause which had been similarly worded that the High Court and the Supreme Court had negatived that earlier claim of the trust to exemption. The judgment of the High Court was delivered on May 26, 1970. On January 11, 1972, the founder of trust, Ram Krishna Dalmia, field a suit for rectification of the trust deed under s. 26 of Specific Relief Act. The Yogiraj Charity Trust as well as two of its trustees were made defendants to the suit. In the plaint it was stated that the plaintiff had been desirous of creating a charitable trust for the amelioration of the public and that in order to satisfy his intention, will and understanding the trust had been founded by the deed executed on March 7, 1949. It was stated that the intention and belief of the plaintiff since the creation f the trust was to maintain the trust as a charitable trust for the well being of the public. However the judgment of the High Court had held the same due to provisions contained in certain clauses of the deed the same in non-charitable and the defendant trust was not entitled to the exemption claimed under the I.T. Act. The plaintiff stated that from the very beginning he was under the honest belief that the object clause of the trust deed aimed only at public charity and that some bona fide mistake and difference in interpretation seemed to have occurred in the trust deed as reflected in the judgment of the High court of Delhi. It was stated that since the decision of the High Court had created some doubts regarding the validity of some clauses of the trust deed, it had become expedient and necessary that the trust deed should be rectified by deletion of some clauses and words and clauses should be added to remove any doubt of its objects. It is not necessary to set out at length the various rectifications sought to be carried out and it will be sufficient to mention that sub-cls. (iii) and (iv) of clause 5(a), the offending portions of clause 5(b) and clause 11 of the trust deed, were sought to be deleted. Certain other rectification were also sought and it was prayed that it was expedient to allow the rectification since the inception of the trust. The plaint in the suit was presented on January 11, 1972. The plaintiff as well as the defendants were represented by counsel and on March 24, 1972, the sub-Judge, Delhi, granted a decree as prayed for by the petitioner and it was also stated that the rectification would have effect from the very inception of the trust. subsequently, Ram Krishna Dalmia also executed a deed of declaration referring to the rectification and declaring that the trust deed dated March, 7, 1949, as it stood amended after the order of the court, should be treated to be the original trust deed dated March 7, 1949. This declaration was executed on June 2, 1972.

Mr. G. C. Sharma, learned counsel for the assessed, contended that a perusal of the original trust deed dated March, 7, 1949, would clearly show that the dominant intention of the author of the trust was to create a religious and charitable trust for the benefit of the public. It was so stated in the preamble to the trust deed dated March 7, 1949, and it was also quite clear from the various clauses as well as the objects set out in clause 5 that it was the intention of the author to create a religious and charitable trust. Though there was a reference to commercial concerns in sub-clause (iii) of clause 5 and there was a clause empowering the trustees, if necessary, to carry on business, it was not the intention of the author of the trust that the trust should carry on any activity of profit. The context in which the reference to commercial concerns occurs in sub-clause (iii) of clause 5 would itself make this position clear. Under the 1922 Act it had been held in a series of decisions that there was no prohibition against a trust carrying on business and in fact even under the 1961 Act a trust entitled to exemption under s. 11 may derive income from a business held by it. The provisions of the trust deed was not to device any private profit out of the activities of the trust and though a casual reference was a made to commercial activities also, the intention of the author was only to create a religious and charitable trust. But due to some infelicitous words in the trust deed, counsel said, the court held, when the matter cam up for their consideration, that the clauses were widely worded and that on a proper construction of the clauses there was nothing to prevent the trustees from carrying on business and making profits and that this could not be said to be a charitable purpose. It was not the intention of the author, as already stated, that any business should be carried on. In fact also, Mr. Sharma stated, no business was in fact carried on and the trustees also understood the document only as creating a purely charitable trust. It was unfortunate that on account of some superfluous words used in drafting the deed, the clauses in the trust deed did not bring out the true intention of the author. In these circumstances, counsel said, the only remedy left to the author of the trust to make his meaning clear and unambiguous was to have resort to the provisions of s. 26 of the Specific Relief Act and have the trust deed amended properly. In the very nature of things, since the rectification was sought for on the ground that the document as drafted did not bring out the true intention of the parties, once this was recognised, any rectification that was ordered had to be retrospective. It was in these circumstances that an order of rectification was obtained after due notice to the trustees and Mr. Sharma contended that the I.T. Dept. was not justified in ignoring the order of rectification and in proceeding as if the original trust deed continued to be in force.

In our opinion there are two questions that fall to be considered in the present case. The first is whether the provisions of s. 26 of the Specific Relief Act can be invoked in the manner in which it has been done in the present case. The said section runs as follows :

'26. when instrument may be rectified-(1) When, through fraud or a mutual mistake of the parties, a contract or other instrument in writing (not being the articles of association of a company to which the Companies Act, 1956 (1 of 1956) applies), does not express their real intention, then -

(a) either party or his representative in interest may institute a suit to have the instrument rectified ; or

(b) the plaintiff may, in any suit in which any right arising under the instrument is in issue, claim in his pleading that instrument be rectified ; or

(c) a defendant in any such suit as is referred to in clause (b), may, in addition to any other defense open to him, ask for rectification of the instrument.

(2) If, in any suit in which a contract or other instrument is sought to be rectified under sub-section (1), the court finds that the instrument, through fraud or mistake, does not express the real intention of the parties, the court may, in its discretion, direct rectification of the instrument so as to express that intention, so far as this can be done without prejudice to rights acquired by third persons in good faith and for value.......'

4. A bare perusal of the section would show that several difficulties could arise in applying its provisions to a case of this type. Counsel for the respondent contended that it would apply only to contracts or other documents executed by at least two parties but not to a unilateral document like a trust deed. We do not, however, see much difficulty in holding that the rectification of a trust deed would be within the ambit of the above section. The word 'instrument' used in the section has a very wide meaning and includes every document by which any right or liability is, or is purported to be created, transferred, limited extended, extinguished or recorded. A decree, an award, a will, a promissory note and various other types of documents have been held to fall within the provisions of this section. There is, thereforee, no reason to exclude a trust deed from its purview. It also appears to us that the plea that the section will not apply because there is only one party to the original instrument in the present case, namely, Ram Krishna Dalmia' the author of the trust, is also untenable. A trust deed is a document which sets out the terms of an understanding between the author of the trust and the trustees. Though in form, the trustees are not signatories to the instrument as drawn up, they are parties to the instrument in a real sense, for, it is on the terms of the instrument that they accept office and proceed to administer the trust. The law obliges them to act upon the terms of the trust deed and they cannot commit a breach thereof. If a gift deed, sale deed or promissory note could be within the terms of the section, there is no reason why a trust deed cannot be rectified under s. 26. A simple illustration will perhaps convince one that the provisions of s. 26 should be capable of being invoked as appropriately for the rectification of a trust deed as that of any other instrument. Suppose A intends to create a trust with a nucleus of Rs. 20,000 which he hands over to trustees for carrying out certain specified objects of the trust and suppose that by some mistake the figure of Rs. 2.00,000 is typed in the document in place of the figure of Rs. 20,000. It seems fairly obvious that it should be open to the author as well as to the trustees to come to the court, point out the mistake and have the deed rectified to avoid unnecessary complications. We, thereforee, do not see much force in the objection of the respondent that a trust deed is not amenable to rectification under s. 26 of the Specific Relief Act.

5. We must confess, however, that we experiences considerable difficulty in bringing the terms of the relief sought for before the sub-court in the present case under the provisions of s. 26. The scope of the above provisions is very narrow and restricted. It can be invoked only in a case where the intention of the parties to the document is very plain and clear but, on account of fraud or a mutual mistake of the parties, the instrument, as drawn up in writing, has failed to express their real intention. In the present case Ram Krishna Dalmia has stated in his application to the court that his intention was to create a charitable trust but that, due to the powers conferred on the trustees under certain clauses, the Delhi High Court has held the trust to be non charitable and not entitled to exemption from the income-tax. It is to be remove the difficulties created by above interpretation that extensive amendments have been sought for which are listed in para. 10 of the application. We are unable to see how any 'mistake' ('fraud' being out of the picture) can be said to have been committed, while drafting the instrument, in bringing out the author's true intention, much less a 'mutual mistake' of the parties. At least, so far as the trustees are concerned they accepted of the office of trust only on the basis of the language of the document including the terms of clause (iii) and clause (iv) of the principal clause 5, and there was nothing placed before the court to show that their intention was to administer the trust without a power to start to carry on any business. Even so far as the author of the trust is concerned we do not see how it is said that the clauses now sought to be deleted or amended were included by-mistake and were contrary to the 'intention' of the author. All that can be said is that the author's intention was to establish a charitable trust, as understood by him. There is nothing to show that it was not the intention of the author to include as part of the objects of the trust the carrying out of commercial ventures. On the contrary it could be that the author did envisage that the trust should, on the terms of the deed indicated, have also powers to carry on businesses, as at the relevant time, income-tax exemption was not denied merely because a business was the property held in trust. In any event, it cannot be said that even at the time the trust was created it was the author's intention that its funds should not be invested or utilised or augmented by carrying on a business. Nor is it stated so in the application to the court. All that has happened is that the author executed what he considered to be a charitable trust to which income-tax exemption would be available but has found, to his dismay, that the document as executed by him will not enable him to secure exemption for tax purposes and, thereforee, required to be modified to secure that exemption. It has been pointed out that 'whatever an application is made for reforming an instrument, the question to be considered is not what the parties would have done had they been able to anticipate subsequent developments, but have done but what their intention was at the time the contract was executed ' (Story's Equity, s. 164). It seems that the best that could be said in the circumstances is that, had the parties anticipated the interpretation placed by the High Court, they may have drafted the deed differently so as to secure income-tax exemption ; it cannot be said to have been established that there was a mistake as a result of which the true intention of the author had not been brought out in the instrument. In Van der Linde [1947] 1 Ch 306 (Ch D) and Whiteside v. Whiteside [1949] 1 All ER 755 (Ch D), the court declined to direct a rectification of a private contract where there was no dispute or controversy between the parties as to the implementation of the agreement and the object of the application was more to obtain by way of a side wind a tax advantage which the party could have obtained but did not because of the phraseology employed in the instrument. The position in the present case is somewhat similar. We, thereforee, have grave doubts whether rectification under s. 26 of the Specific Relief Act was the appropriate procedure for the parties of the parties to remedy the situation.

6. However, we think, that for the purposes of the present case, what concerns us is not whether the provisions of s. 26 of the Specific Relief Act could have been properly invoked but the effect, vis-a-vis the I.T. dept., of the order which has been passed by the sub-court under that section. The author of the trust has filed a suit and, after giving notice to the trustees who have been administrating the trust, has obtained an order of rectification. Right or wrong, and, whether within the purview of s. 26 or not, there is an order of the sub-court which is binding on both the parties, namely, the author and the trustees. In the face of this order which is binding on both of them, neither the author of the trust nor the trustees could go contrary to the terms of the trust deed as amended. After the document has been amended by the court in the terms mentioned above, it will not be open to the trustees to ignore the amended document and to proceed to invest the trust funds in commercial concerns or to carry out business transactions. In this context, it appears to us that the failure to give notice to the department in the suit for rectification, as was done in Van der Linde's case [1947] 1 Ch 306 (Ch D) is also not quite relevant. It is not as if the I.T. Dept. is a party to, or bound by, the terms of the trust deed so that such failure would vitiate the rectifications or entitle the department to ignore the court's order of amendment. So far as the I.T. Dept. is concerned, its provide under s. 11 of the I.T. Act is to find out and give effect to the contract between the parties ; it is entitled to ask whether the trustees are holding the properties in question under a legal obligation wholly for religious or charitable purposes. There can be no doubt, having regard to the order of the court by which the trustees are bound, that they can administer the trust only in terms of the amendment directed by the court. The trustees are and must be deemed, from the beginning, to have under a legal obligations to hold the properties only for the objects and with the powers set out in the trust deed as amended. It, thereforee, appears to us that, whatever may be the correctness or otherwise of the order passed under s. 26, it is not open to the ITO to say that the trustees could administer the trust in accordance with the original deed and that the claim for the exemption will have to be dealt with on the basis of the old deed. Though we are concerned with the assessment years 1966-67 and 1967-68, since the amendment is fully retrospective, it is also not possible for the ITO to say that, in the relevant account years, the trustees held the property subject to the terms of the old deed and not under the terms of the amended deed.

7. The question that next arises is whether, on the terms of the amendment trust deed, the assessed is entitled to exemption under s. 11 and s. 12 of the I.T. Act, 1961. Previously, exemption was denied to the assessed only on the basis of certain clauses and these clauses now stand deleted or modified. Since the objectionable clauses have been removed and since none of the authorities have pointed out that the trust deed is defective in some respects vis-a-vis the claim for exemption even after amendment there should be no further objection to the recognition of the trust as a public charitable trust and the grant of exemption to the assessed. However, we think that our answer to the question referred, in the negative and in the favor of the assessed, should be subject to one important reservation. Under the Provisions of the 1961 the Act the exemption for purposes for income-tax depends not merely on the objects of the trust deed but also on the actual application of the income to religious and charitable purposes. In the present case some of the objects of the original trust did had been held to be non-charitable. During the accounting years relevant for the assessment years 1966-67 and 1967-68 the original trust deed was factually in operation and the trustees might have acted in accordance with the clauses of the original trust deed which included the power to start and run a business. Mr. Sharma, learned counsel, states that no business was ever carried on by the trustees. He may be correct. On the other hand, it could be that between the original date of trust deed, namely, March, 1949, and June 1972, when the order of amendment was passed by the sub-court and trustees might have acted on the footing of the original trust deed and might have embarked on certain activities under the clauses which had been held to be non-charitable by the High Court and the Supreme Court. If that were so the mere fact that the trust deed had been retrospectively amended would not save the trust from the denial of exemption. In other words, despite the amendment made to the trust deed, if, as a matter of fact, it is found that during the relevant accounting years some of the clauses of the original trust deed which were previously held objectionable were acted upon, then the income of the assessed may not be exempt merely on the basis of the amended trust deed, particularly in view of the embargo contained in s. 2(15) of the 1961 Act, again the exemption of any trust having for its objects any object involving the carrying on of an activity for profit. This aspect requires to be looked into by the authorities before the assessed's claim for exemption can succeed. We, thereforee, leave this aspect of the matter completely open for re-determination by the Tribunal either by the itself or by remand to the lower authorities.

8. We, thereforee, answer the question referred to us in each case by saying that the claim for exemption of the assesseds under ss. 11 and 12 of the 1961 Act has to be allowed in the light of the trust deed as amended by the court's order in each of these cases but that it is not possible for us to say to what extent the assessed is entitled to the above exemption because there is no material before us to show how the activities of the trust were being conducted between 1949 and 1972. The references are answered accordingly. There will be no order as to costs.


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