G. K. MITTER J. - This is a reference under section 66(1) of the Indian Income-tax Act for the opinion of this court on the following question of law :
'1. Whether, on the facts and in the circumstances of the case, the 1/4th share of the income of firm Ganpatrai Sagarmal is exempt from income-tax under section 4(3) (i) ?
2. Whether the settlement resulted in the transfer directly or indirectly of the income of the settlers and as such bringing the income within the provisions of section 16(1) (c) and
3. If the answer to question No. 2 is in the affirmative, whether the assessment of the aforesaid income will be raised in the hands of the settlors ?'
The matter relates to the constructions of what has been described as a deed of trust in the proceedings before the revenue authorities. Two persons by the name of Sagarmal Lohariwalla and Rameshwarlal Lohariwalla were carrying on business in partnership under the name and style of Messrs. Ganpatrai Sagarmal since the beginning of the Dewali year 2001-02. The terms and conditions of the partnership said to be recorded in a deed bearing date January 10, 1946, is not before us. On the 21st October, 1949, a document was executed by these two persons as also by one Prithi Raj Thar and one Sm. Mahadei, wife of Sagarmal Lohariwalla, and this document is referred to as a trust deed. The partners are here described as parties of the first and second part and also referred to as the donors or settlors. After reciting that they have been carrying on business in partnership as mentioned the said donors or settlers go on to say :
'While carrying on business as aforesaid the parties hereto had decided among themselves that on and from Kartick Badi 15,2006, i.e., the beginning of the Dewali year 2006-07 the assets and liabilities of the said business as on Kartick Baby 14, Samvat 2006, i.e., the end of the Dewali year 2005-06, and stock-in-trade and goodwill, etc., that is, in other words, the entire property represented by the said business should fully vest in a body of persons consisting of Sree Prithi Raj of Monohardas Katra, Calcutta, Sreemati Mahadei, wife of the party hereto of the First and the Second Parts, hereinafter jointly to be referred to as the donees or the trustees and whereas it had further been decided that the business should accordingly continue to be carried on by the donees or trustees as aforesaid, under certain terms and conditions and in manner agreed to among the parties hereto and further that the income arising out of the business so carried on should be appropriated and applied or set apart partly for payment to the parties hereto and partly for religious and or charitable purposes according to certain terms and conditions and in manner also agreed to among the parties hereto and whereas it has been deemed expedient and proper that the terms and conditions and the manner already on among the parties hereto under and in which the business should be and is being carried on the income arising therefrom is to be appropriated, applied or set apart should, in order to avoid any doubt or ambiguity or differences thereabout be reduced in writing in the shape of these presents and now therefore these presents witnesseth the said terms and conditions.'
Clauses 1 to 18 specify the terms and conditions on which the business was to be carried on. The important clauses for the purposes of this reference are clauses 3, 5, 6, 7, 15, 16 and 18 which are set out below :
'3. That the donees or the trustees shall be competent to do all such deeds and things as they may think necessary for the management or improvement of the business and shall carry on the business, the actual management of the affairs thereof concerning the day-to-day transactions relating to the smooth and efficient and proper carrying on of the business being done by the settlers as before, subject to such alteration or modification thereof as may be suggested or directed by Sree Prithi Raj That and Sreemati Mahadei from time to time, and agreed to among the donees or the trustees themselves.
5. That three-fourths of the profits accruing each year shall be allocated or distributed equally, that is, at six annas each, to the accounts of the parties hereto of the First and Second Parts, and the remaining one-fourth shall be allocated or distributed to a charity account in the ledger to be applied or accumulated and thus set apart, as the case may be, for religious or charitable purposes in manner detailed hereinafter.
6. That in the event of the trading in any accounting year resulting in a loss after meeting the usual expenses for running the business the allocation to the charity account or fund should be nil and the loss shall equally be divided between the parties hereto of the First and the Second Parts.
7. That the parties hereto of the First and Second Parts reserve to themselves the right of augmenting the present working capital of the business aforesaid from time to time with interest at the rate of six per cent. per annum or such other rates as may be agreed on among the donees or trustees. The parties of the First and the Second Parts shall get interest at such rates also on the existing capital standing in their respective names in the books of account of the business.
15. That the purposes for which the charity fund is to be applied or set apart shall include the erection of a dharamsala, a charitable dispensary, on the premises at 8, Jadulal Mullick Road, Calcutta, which belongs to Sreemati Mahadei above-named, and other public charitable or religious objects involving relief or education of the poor and distressed and contributions to public religious or charitable societies or institutions.
16. That the mode and manner of application of the said charity fund shall be determined according to the decisions of the donees in terms set forth above and in the event of any deference among them regarding the matter the opinions of Sreemati Mahadei and Sree Prithi Raj That, if in agreement, shall prevail and be accepted. If they do not agree, they shall take the decision of any mediator nominated by them.
18. That this agreement shall be deemed to have come into force on and from the beginning of the Dewali year 2006-7, corresponding to the English date twenty-first day of October, 1949.'
The question before us is whether the income from business after the date mentioned in the document should be included in the total income of the two persons. Section 4(3) (i) of the Indian Income-tax Act provides as follows :
'Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them :
(i) 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 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.
We are not concerned with the proviso to this sub-section. The foremost question in this reference is whether the income which is said to be allocated to charitable or religious purposes is income derived from properties held under trust or other legal obligations wholly for religious or charitable purposes. In my opinion, no property was here held under trust or other similar obligations. Section 5 of the Indian Trusts Act provides as follows :
'No trust in relation to immoveable property is valid, unless declared by a non-testamentary instrument in writing signed by the author of the trust or the trustee and registered, or by the will of the author of the trustee.
No trust in relation to movable property is valid unless declared as aforesaid, or unless the ownership of the property is transferred to the trustee.
These rules do not apply where they would operate so a to effectuate a fraud.'
Under section 6 of the Trusts Act there must be a conveyance of the trust property to the trustee unless the settler himself is the trustee. Here the settlor was not the sole trustee.
There is no dispute that the Indian Trusts Act does not apply to a trust for religious or charitable purposes but again there can be no dispute that in order to constitute a gift to charity the ownership of the property must be transferred to the trustee unless the settler alone is the trustee. In this case there has been no such transfer. The document only shows that at some date in the past the two partners had agreed that the entire property represented by the business should be transferred to themselves along with others as trustees on a certain date. The deed does not record that any such transfer was ever effectuated. The document is in English and we must abide by the exact words used. The deed merely goes to show that as from the 21st October, 1949, the partners were carrying on the business under the supervision of the trustees and they were each to get six annas share of the income and profits of the business and four annas share thereof was to be allocated or distributed to charity account in the ledger of the business.
Mr. Meyer arguing for the revenue pointed out that it was not enough under section 4(3) (i) that the income from the property should be held for religious or charitable purposes but that the property itself should be held under a trust or other similar obligation for religious or charitable purposes. In my opinion, this contention must be upheld. This document so far as I can see merely shows that if and when there was any income or profit from business the same was not to go entirely to the erstwhile partners but was to be appropriated by them as regards 3/4th and the balance of 1/4th was to be allocated to charity. The answer to question No. 1 therefore is in the negative.
In this view of the matter there is really no need to answer the second question but because the matter has been argued I should like to indicate my views thereof. Section 4(3) (i) of the Indian Income-tax Act is subject to the provisions of section 16(1), sub-section (c) thereof, which provides as follows :
'In computing the total income of an assessee, all income arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settler or disponer, shall be deemed to be income of the settler or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor :
Provided further that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provisions for the re-transfer directly or indirectly of the income or assets to the settler, disponer or transferor, or in any way gives the settler, disponer or transferor a right to re-assume power directly or indirectly over the income or assets.'
It was argued by Mr. Meyer that the proviso mentioned above was attracted to the trust deed and that as the settlers were going to receive 3/4th of the income it should be deemed to be the income of the settlers. I do not think that the trust deed in this case comes within the mischief of this proviso. There does not seem to be any provision for re-transfer of the income directly or indirectly by the settlors. The trust deed provides that the trustees were to supervise the running of the business and 3/4th of the profit were to go the partners and 1/4th to charity. If the business had been transferred to the trustees with the condition that the trustees should pay 1/4th of the income to charity and 3/4th to others it could be said that there was a provision for re-transfer of the income of the assets to the settler. But this is not the position here. The parties had merely indicated their intention to set apart 1/4th of the income for charitable purposes. Nevertheless, the income was theirs. As the property remained the property of the settlers the income was chargeable in their hands. Questions Nos. 2 and 3 must be answered in the affirmative.
A further point was argued by Mr. Meyer that it is not enough that the trust deed should provide for a part of the income being allocated or distributed to a charity account in the ledger but that what was intended to be set apart for charity must be clearly and distinctly set apart and should not be the subject of a mere book entry, that is to say, it should not be in the power of anybody to use what was given to the charity in the business. Mr. Meyer drew our attention to several authorities on this point but I do not think it is necessary to go into the question in view of the answers given.
As the revenue has succeeded on the most vital question the assessee must pay the costs of this reference.
RAY J. - I agree.