1. Vavilla Venkateswarlu Sastrulu was the proprietor of a printing and publishing house. He died on 9-2-1956. His widow Subbamrna succeeded to his business and other properties. With effect from 1-7-1956 she executed a registered trust deed where under she settled the business and most of her properties on a trust. By another settlement dated, she settled some immoveable properties in favour of some relatives. For the assessment year 1957-58, this lady submitted a return covering the period 1-4-1956 to 30-6-1955 and another for the period 1-7-1956 to 31-3-1957, making upto the whole of the previous year. In so far as the latter period was concerned, she claimed exemption from tax in respect of the income of the trust from the business and other properties. For the assessment year 1.958-59 also a return was made. Subbamtna died on 12-9-1958. The executor appointed by the will became the sole trustee and he was brought on record as the legal representative. It was this executor who filed the return relevant to the assessment year 1958-59.
2. The Income-tax Officer declined to grant -any exemption from tax in respect of the income for properties covered by the trust for the reason1 that the income had not been set apart or allocated. Appeals were taken to the Appellate Assistant Commissioner. It was contended that notwithstanding the failure to allocate, the income was still eligible for exemption, as it was derived from property held under trust for charitable purposes. The Appellate Assistant Commissioner held that Subbamma was in absolute possession of the entire property and that the terms of the trust deed could be given effect to only after the net income of the properties had been determined, and proceeded to confirm the assessments.
On further appeals to the Tribunal, it was urged that , the objects were wholly religious and charitable, that the trustee, though in exclusive possession of the income, had no authority to deviate from the objects of the trust and that the trust deed itself specified distinct percentages of the income ear-marked for the various charitable and religious purposes. Therefore, it was claimed that the entire income was accumulated wholly for religious or charitable purposes and could be applied only to such purposes. It was contended that the mere fact that no expenditure for these religious and charitable purposes was incurred in the two years in question would not prevent the conclusion that that income was so accumulated for the purposes. Alternatively it was pleaded that if a portion only of the income is regarded as specified in the trust deed for application, to religious and charitable objects, that portion at least should be exempted from tax. The Tribunal observed that the income derived from the business was not applied wholly for the objects of the trust and declined to accept the plea that since the trust deed specified 45 per cent of the income to !be applied for these objects, that feature should entitle the assess to exemption. The Tribunal pointed out that even this portion of the income had not been finally set apart for application for the charitable purposes. There had been no definite allocation or ear-marking. In the view of the Tribunal, the requirements of Section 4(3)(i) were not made out and the appeals were accordingly dismissed.
3. On the application of the assessee, the Tribunal was directed to refer the following question for the decision of this court :
'Whether, on the facts and circumstances of the case, the income derived from the properties held under the trust by the 'Vavilla Venkateswarlu Trust' amounting to Rs. 36697 or any other lesser sum for the period from 1-7-1956 to 31-3-1957 for the assessment year 1957.58, and Rs. 41603 or any other lesser sum for the period from 1-4-1957 to 31-34958, for the assessment year 1958-59, is not exempt under the provisions of Section 4(3)(i) of the Act?'
4. The short question that we have to consider is whether merely for the reason that the deed specifies that certain proportions of the net income should be spent for religious and charitable objects, that alone is sufficient to qualify for that exemption from tax under Section 4(3)(i) of the Act.
Clause 19 of the trust deed is in these terms:-
'The Trustees shall cause the accounts of the trust to be duly audited annually by the 31st March by a duly qualified auditor or auditors. As soon as the auditor furnishes his certificates and report, the trustees shall make due provisions from and out of the net profits for the following:- (a) 5 per cent for the parishad referred to (clause 14); (b) 5 per cent for the distribution of tuition fees etc for poor students (vide clause 15); (c) 10 per cent fund for the hall; (d) 15 per cent for reserve (vide clause 20); (e) 5 per cent for sinking fund (clause 21).'
What exactly are the religious and charitable objects is not very clear from the document. The earlier clauses of the trust deed vest the property in the trustees and make arrangements for the appointment of a trustee or a board of trustees. The disposal of business and the management of the properties by the trustees are also provided for. Clause 12 enjoins upon the trustees to carry on the business efficiently and to publish classical, devotional, religious and other works in several languages and to make them available to the public at a cheap price. The trustees are also directed to hold a Vidwat Parishad annually at which recitation competitions in Vedic recitals, essay competitions in Sanskrit and Telugu and oratorical contests in those languages were to be conducted. Cl. 15 directs the' trustees to help poor and deserving students. Under Cl. IB, the business building is directed to be reconstructed and renovated with the addition of a hall to serve as a cultural centre and for the holding of the annual parishad. The subsequent clauses direct the residual income, after meeting the expenditure referred to in clause 19, to be divided and distributed to certain persons, apparently relatives of the deceased Venkateswarlu Sastrulu. We shall assume without deciding that some at least of the purposes set out in Cl. 19 are charitable or religious objects. Even so, the question is Whether the requirements of Section 4(3) are satisfied.
5. At the outset, we may remark that the trust In this case is not wholly for religious and charitable objects. The property is undoubtedly held in part only for such purposes, for out of the residual income, be quests are directed to be made to certain specified persons. Section 4(3)(i) states that in the case of property so held in part only for such purposes, the income applied or finally set apart for application there to, shall not be included in the total income of the person receiving them. There is no claim that any part of the income has been applied for any of the charitable or religious objects indicated in lire trust deed. Nor is it the contention of Mr. Srinivasan, learned counsel for the petitioner, that in the account books of the trust or other relevant documents there has been a specification of any particular amounts as having been set apart for the performance of charitable or religious objects. In the balance sheet as on 31-3-1957, a copy of which forms part of the records, it is stated
'Net profits for they are as per profit and loss account to be appropriated in terms of the trust deed and the ascertainment of liability to income-tax and other dues payable'.
In the balance sheet for the succeeding year also, the following note finds place-
'Clause 19 of the trust deed has given directions as to how the net profits are to be utilised. Clause 23 directs the trustee to meet the estate duty from net profits. For the year ending 31-3-1957, a sum of Rs. 14319 has been levied towards income-tax. In view of the above the directions in cl. 19 could not be given effect to for the year.'
6. These records undoubtedly establish that the trustees found it impossible to give effect to those clauses of the trust deed directing expenditure upon charitable and religious objects by reason of the fact that a large amount was due to the Income-tax Department as estate duty and that claim could not be wholly discharged. In the view of the trustees, till these claims had been discharged, it was not possible to give effect to the objects of the trust. Not only is there a clear statement that no part of the income was in fact applied to charitable or religious objects but there is also a clear admission that no part of the income could also be set apart for application to those objects till the debts and the estate duty had been discharged in accordance with cl. 23 of the trust deed. Clause 23 states :-
'The Trustees shall make sufficient provisions from the net profits to discharge the debts and pay estate duty referred to in Schedule B hereunder.'
Schedule B to the trust deed states that the debts inclusive of the estate duty as revealed by the books of the firm of Vavilla Raimaswami Sastrulu and Sons as on 9-2-1956 Rs. 1,88,052. It follows that unless and until the trustees discharge these liabilities, which is a first charge, upon the estate, the trustees are not directed to embark upon the charitable or religious objects, and on their own showing as recorded in the balance-sheets, they have neither applied any portion of the income for those objects, nor have they been able to set apart any amounts for these objects.
7. At page 196 of Kanga's Income-tax Act, 4th Edn. the learned author observes:
'In the case of property so held in part only for religious or charitable purposes, the exemption is confined to income in fact applied or finally set apart for application to such purposes. 'Income finally set apart i for charitable purposes' means that it must be identified as appropriated exclusively to such purposes.'
The present case clearly does not fall within the scope of this principle.
Learned counsel for the assessee relies upon the commentary of) Mr. Sampath Aiyangar in his book, 4th Edn. at page 283, where the expression 'finally set apart' has been interpreted by the learned author to mean 'that the settlor has reserved to himself no power of adjusting or changing or varying the trust from time to time or revoking the same. The setting apart should have been done so as to take effect immediately and not from some future date.'
Reliance has been placed upon these observations in support of the claim that the setting apart has been done by the trust document itself and that is insufficient compliance with the terms of the section. We are unable to agree with this interpretation.
8. The result is that the question referred to us has to be answered in the affirmative and against the assessee. The, assessee will pay costs of the department. Counsel's fee Rs. 250.