1942 (5) TMI 2 - HC - Income Tax

Trust income not exempt from tax; not wholly charitable, lacks public benefit. Court rules against trust.

Mercantile Bank of India (Agency) Ltd., In re,

Mercantile Bank of India (Agency) Ltd., In re, - [1942] 10 ITR 512 (Calcutta) Issues Involved:1. Whether the income derived from the property held under the Trust Deed and the supplemental Trust Deed is exempt from taxation under Section 4(3)(i) of the Income-tax Act.2. Whether the trust is wholly for charitable purposes within the meaning of Section 4(3)(i) of the Income-tax Act.3. Whether the trust has a public purpose or benefits a well-defined section of the community.Detailed Analysis:Issue 1: Tax Exemption under Section 4(3)(i) of the Income-tax ActThe primary question referred to the court was whether the income derived from the property held under the Trust Deed of 18th August 1937 and the supplemental Trust Deed of 30th October 1939 is exempt from taxation by reason of Section 4(3)(i) of the Income-tax Act. Section 4(3)(i) states that 'income derived from property held under trust or other legal obligation wholly for religious or charitable purposes' is exempt from taxation. The trustees contended that the income is held under trust wholly for 'charitable purposes' as per the provisions of the deeds. However, the court found that the administrators had the discretion to apply the fund for the benefit of employees of Andrew Yule & Co., Ltd., and their dependents, which could include rewarding services rendered to the company. This discretion implies that the trust is not wholly for charitable purposes, thus disqualifying it from tax exemption under Section 4(3)(i).Issue 2: Charitable Purposes under Section 4(3)(i)The court examined whether the trust qualifies as being wholly for charitable purposes. The explanation to Section 4(3)(i) includes 'relief of the poor, education, medical relief, and the advancement of any other object of general public utility' as charitable purposes. The court noted that the administrators could use the fund to relieve indigence, ill-health, or other necessitous circumstances, but also to reward services rendered to the company. This dual purpose means the trust is not solely for charitable purposes. The court referenced Lord Macnaghten's classification of charitable trusts in Pemsel's case, which includes trusts for the relief of poverty, advancement of education, advancement of religion, and other purposes beneficial to the community. The court concluded that the trust did not fit neatly into any of these categories, particularly because it could benefit employees based on their service to the company rather than solely on charitable grounds.Issue 3: Public Purpose or Well-defined Section of the CommunityThe court also addressed whether the trust serves a public purpose or benefits a well-defined section of the community. Chitty, J., in In re Foveaux, stated that 'to be a charity there must be some public purpose-something tending to the benefit of the community.' The court found that the trust was for the benefit of employees of Andrew Yule & Co., Ltd., and their subsidiaries, which could include a wide range of individuals from highly paid executives to low-wage workers. The court cited Verge v. Somerville, where it was held that a valid charitable trust must benefit the community or an appreciably important class of the community, not just private individuals or a fluctuating body of private individuals. The court concluded that the trust did not meet this criterion, as it was intended for the benefit of employees of a private company, making it a private trust rather than a public charity.ConclusionThe court concluded that the income from the trust is not exempt from taxation under Section 4(3)(i) of the Income-tax Act. The trust was not considered wholly for charitable purposes, as it allowed for the possibility of rewarding services to the company. Additionally, the trust did not serve a public purpose or benefit a well-defined section of the community, further disqualifying it from being considered a charitable trust. The answer to the reference was 'No,' and no order was made as to costs in this reference.