M.S. MENON J. - This is a reference by the Income-tax Appellate Tribunal, Madras Bench 'A', under section 66(1) of the Indian Income-tax Act, 1922. The question referred is :
'Whether 60% of the income of the assessee applied to the development of Arya Vaidyasala and the conduct of the hospital and school aforesaid is not exempt under section 4(3)(i) having regard to clause (b) of the proviso to that sub-section ?'
Section 4 deals with the application of the Act. Sub-section (3) thereof directs that any income, profits or gains falling within the classes specified therein shall not be included in the total income of the person receiving them. The class of income specified in clause (i) of sub-section (3) is :
'... 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.'
The exclusion under clause (i) of sub-section (3) of section 4 is subject to clause (c) of sub-section (1) of section 16. We are not concerned with clause (c) of sub-section (1) of section 16.
There is a proviso to clause (i) of sub-section (3) of section 4. The portion of that proviso that arises for consideration in this case reads as follows :
'Provided that such income shall be included in the total income -
(b) in the case of income derived from business carried on on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes of the institution and either -
(i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or
(ii) the work in connection with the business is mainly carried on by beneficiaries of the institution.'
The Tribunal has held in paragraph 3 of its order that the Vaidyasala with which we are concerned is 'property held under trust' within the meaning of clause (i) of sub-section (3) of section 4, and that it is a business actually run and conducted by the trust and not one carried on behalf of the trust. On the basis of those findings there can be no doubt that its conclusion that the proviso to clause (i) of sub-section (3) of section 4 is inapplicable to this case is correct and has to be sustained.
It is settled law that a business itself can be held on trust for religious or charitable purposes and that the income derived from such a business will fall within the ambit of the exclusion granted by clause (i) of sub-section (3) of section 4. The only contention we are called upon to decide is the contention of the department that such an income can be governed by the proviso as well and thus brought back into the net of taxation. The Tribunal negative this contention, and as stated in the last preceding paragraph we are in agreement with the conclusion reached by the Tribunal.
Raghavachariar puts the matter thus :
'If the business itself is held under trust for religious or charitable purpose, then income is to be considered as falling under section 4(3)(i). But if the business is not itself the subject of the trust, but the business is carried on by an institution which is held under a trust, but the business itself does not form part of trust, then section 4(3)(i)(b) will apply.' (Volume I, page 254);
and Desai J. in Dharma Vijaya Agency v. Commissioner of Income-tax [ 38 I.T.R. 392, 412.] :
'On a fair reading of clause (i), it must be held, in my judgment, that there is nothing in proviso (b) to clause (i) of section 4(3) which in any manner touches the case of a business which is held under trust for religious or charitable purposes. The income derived from such business is not to be included in the total income of the person receiving it.'
In the light of what is stated above we agree with the Tribunal and hold that the income in controversy is exempt under section 4(3)(i) of the Indian Income-tax Act, 1922, and that it is not brought back into the net of taxation by clause (b) of the proviso to that sub-section. We answer the reference accordingly though in the circumstances of the case without any order as to costs.
A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Appellate Tribunal as required by section 66(5) of the Indian Income-tax Act, 1922.
Reference answered accordingly.