1962 (9) TMI 66 - HC - Income Tax

Trust fund income for religious & charitable purposes not tax exempt under Indian Income-tax Act, 1922

Nizam's Religious Endowment Trust Versus Commissioner of Income-tax

The court ruled that the income from the trust fund, settled for religious and charitable purposes, is not exempt from tax under section 4(3)(i) of the ... - Issues Involved:1. Whether the income arising from property settled upon trust under the deed of settlement, dated September 14, 1950, is exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922.Issue-wise Detailed Analysis:Issue 1: Whether the income arising from property settled upon trust under the deed of settlement, dated September 14, 1950, is exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922.Relevant Provisions and Trust Deed:The case revolves around the interpretation of section 4(3)(i) of the Indian Income-tax Act, 1922. The trust deed, dated September 14, 1950, created by H.E.H. the Nizam of Hyderabad, settled certain securities valued at Rs. 40,00,000 for religious and charitable purposes. The trust, named 'H.E.H. the Nizam's Religious Endowment Trust,' outlined specific religious and charitable objects, including offerings to sacred places outside India and maintenance of sacred buildings within India.Conditions for Exemption:To claim exemption under section 4(3)(i), the assessee must satisfy:1. The property is held under trust or other legal obligation.2. The property is wholly for religious and charitable purposes.3. The income is applied or accumulated for application to religious or charitable purposes within the taxable territories.4. If the property is held in part for such purposes, only the income applied or set apart for such purposes is exempt.Trust Deed Provisions:The trust deed specifies that during the settlor's lifetime, the income is to be accumulated and added to the corpus. After the settlor's death, the income is to be spent on specified religious and charitable objects, some of which are outside India (e.g., offerings to sacred places in Hedjaz, Iraq, Iran) and some within India (e.g., upkeep of sacred buildings, annual religious ceremonies).Arguments and Precedents:The trust claimed exemption for the assessment years 1952-53 and 1953-54, which was rejected by tax authorities. The primary contention was whether the income, accumulated during the settlor's lifetime, qualifies for exemption given that some purposes are outside taxable territories.The trust's counsel argued that since the income is accumulated during the settlor's lifetime, and trustees have discretion in applying the income, it cannot be presumed that the income will be spent outside India. Reliance was placed on the Bombay High Court's decision in Commissioner of Income-tax v. Walchand Diamond Jubilee Trust, which held that income accumulated for charitable purposes retains its exempt status.Court's Analysis:The court distinguished the present case from Walchand Diamond Jubilee Trust, emphasizing that the latter did not involve purposes outside taxable territories. The court held that accumulation of income for purposes outside taxable territories does not qualify for exemption under section 4(3)(i). The court cited precedents (e.g., Lokamanya Tilak Jubilee National Trust Fund, Mercantile Bank of India) establishing that if trustees can apply funds for non-charitable purposes, the entire trust fails to qualify as charitable.Conclusion:The court concluded that since the trust deed includes purposes outside taxable territories, the income does not clearly fall within the scope of section 4(3)(i). The court emphasized that accumulation must be for purposes within taxable territories to qualify for exemption. Therefore, the trust is not entitled to the claimed exemption.Judgment:The court answered the reference in the negative, ruling that the income from the trust fund is not exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922. The Commissioner of Income-tax, Hyderabad, was awarded costs of Rs. 250.