2014 (3) TMI 652 - SC - Income Tax

Trust with dual religious and charitable purposes qualifies for tax exemption under sections 11 and 12

The SC determined that a trust with dual religious and charitable purposes qualified for tax exemption under sections 11 and 12 of the Act. The trust's ... Claim for benefit of exemption u/s 11 and 12 r.w.s. 13 of the Act - determination of nature of trust - religious or charitable trust - Object and purpose of the trust - legal effects of the proven facts and documents - Income derived from property held by such public trust as well as voluntary contributions received by the said trust are the subject-matter of exemptions from the taxation under the Act - Meaning of expressions 'charitable purpose' and 'religious purpose. HELD THAT:- The objects reflect the intent of the trust as observance of the tenets of Islam, but do not restrict the activities of the trust to religious obligations only and for the benefit of the members of the community. The Privy Council in Re The Tribune, 7 ITR 415 has held that in judging whether a certain purpose is of public benefit or not, the Courts must in general apply the standards of customary law and common opinion amongst the community to which the parties interested belong to. Therefore, it is pertinent to analyse whether the customary law would restrict the charitable disposition of the intended activities in the objects. The provision of food to the public on religious days of the community as per object (a) and (b), the establishment of Madarsa and organizations for dissemination of religious education under object (d) and rendering assistance to the needy and poor for religious activities under object (e) would reflect the essence of charity. The objects (a) and (b) provide for arrangement for nyaz and majlis (lunch and dinner) on the religious occasion of the birth anniversary and Urs Mubarak of Awliya-e-Quiram (SA) and the Saints of the Dawoodji Bohra community and for arrangement of lunch and dinner on religious occasions and auspicious days of the Dawoodi Bohra community, respectively. Nyaz refers to the food a person makes and offers to others on any particular occasion on the occasion of the death of a saint and Majhlis implies a place of gathering or meeting. The activity of providing for food on certain specific occasions and other religious and auspicious events of the Dawoodi Bohra community do not restrict the benefit to the members of the community. Neither the religious tenets nor the objects as expressed limit the service of food on the said occasions only to the members of the specific community. Thus, the activity of Nyaz performed by the respondent- trust does not delineate a separate class but extends the benefit of free service of food to public at large irrespective of their religion, caste or sect and thereby qualifies as a charitable purpose which would entail general public utility. Further, establishment of Madarsa or institutions to impart religious education to the masses would qualify as a charitable purpose qualifying under the head of education under the provisions of Section 2(15) of the Act. The institutions established to spread religious awareness by means of education though established to promote and further religious thought could not be restricted to religious purposes. The House of Lords in Barralet v. IR, 54 TC 446, has observed that 'the study and dissemination of ethical principles and the cultivation of rational religious sentiment' would fall in the category of educational purposes. The Madarsa as a Mohommedan institution of teaching does not confine instruction to only dissipation of religious teachings but also contributes to the holistic education of an individual. Therefore, it cannot be said that the object (d) would embody a restrictive purpose of religious activities only. Similarly, assistance by the respondent-trust to the needy and poor for religious activities would not divest the trust of its altruist character. Therefore, the objects of the trust exhibit the dual tenor of religious and charitable purposes and activities. Section 11 of the Act shelters such trust with composite objects to claim exemption from tax as a religious and charitable trust subject to provisions of Section 13. The activities of the trust under such objects would therefore be entitled to exemption accordingly. It becomes amply clear from the language employed in the provisions that Section 13 is in the nature of an exemption from applicability of Sections 11 or 12 and the examination of its applicability would only arise at the stage of claim under Sections 11 or 12. Thus, where the income of a trust is eligible for exemption under section 11, the eligibility for claiming exemption ought to be tested on the touchstone of the provisions of section 13. In the instant case, it being established that the respondent-trust is a public charitable and religious trust eligible for claiming exemption under Section 11, it becomes relevant to test it on the anvil of Section 13. Thus, the objects of the respondent-trust are based on religious tenets under Quran according to religious faith of Islam. We have already noticed that the perusal of the objects and purposes of the respondent-trust would clearly demonstrate that the activities of the trust though both charitable and religious are not exclusively meant for a particular religious community. The objects, as explained in the preceding paragraphs, do not channel the benefits to any community if not the Dawoodi Bohra Community and thus, would not fall under the provisions of Section 13(1)(b) of the Act. 50. In that view of the matter, we are of the considered opinion that the respondent-trust is a charitable and religious trust which does not benefit any specific religious community and therefore, it cannot be held that Section 13(1)(b) of the Act would be attracted to the respondent-trust and thereby, it would be eligible to claim exemption under Section 11 of the Act. In the result, the appeals are dismissed with no order as to costs. Issues: (i) Whether the nature of the trust (religious, charitable or composite) is a question requiring examination of legal effect of proved facts and whether the respondent-trust is a public religious trust or a trust with both charitable and religious objects; (ii) Whether Section 13(1)(b) of the Income-tax Act, 1961 applies to the trust (i.e., whether the trust is created for the benefit of any particular religious community or caste) and consequently whether the trust is eligible for exemption under Section 11.Issue (i): Whether the trust is religious, charitable or both and whether that determination is a question of law (legal effect of proved facts) requiring appellate examination.Analysis: The declared objects in the trust deed were examined to determine their legal character. The distinction between a pure finding of fact and the legal effect of proved facts was applied; analysis focused on whether objects, read in their fiscal and legal context, demonstrate predominance of charitable purpose or are confined to purely religious purpose. The trust deed's objects concerning provision of food on religious occasions, establishment of madarsa and assistance to needy persons were analysed against the inclusive definition of 'charitable purpose' and recognized principles on predominant purpose and public benefit.Conclusion: The trust is one with composite objects encompassing both charitable and religious purposes; this conclusion is in favour of the assessee.Issue (ii): Whether Section 13(1)(b) applies because the trust is created for the benefit of a particular religious community or caste, thereby disqualifying it from exemption under Section 11.Analysis: The applicability of Section 13(1)(b) was tested by assessing whether the charitable elements of the trust operate for the benefit of a sufficiently defined class limited to a particular religious community. The objects were interpreted to determine whether benefits are restricted to members of a specific community or extend to public at large or an identifiable public section. Precedents and the statutory text were used to evaluate whether composite trusts are excluded per se or require specific proof of restriction to a particular community.Conclusion: Section 13(1)(b) is not attracted because the trust's objects do not restrict benefits exclusively to a particular religious community or caste; this conclusion is in favour of the assessee.Final Conclusion: The trust qualifies as a charitable and religious trust with composite objects and is not disqualified by Section 13(1)(b); consequently the trust is eligible to claim exemption under Section 11 subject to procedural compliance under Sections 12A and 12AA.Ratio Decidendi: determination of a trust's character (religious, charitable or composite) requires legal construction of the trust deed to ascertain the legal effect of its proved objects; a composite trust is not excluded from Section 11 exemption unless it is established that the charitable purpose benefits a particular religious community or caste within the meaning of Section 13(1)(b).