1974 (7) TMI 29 - HC - Income Tax

Trustees' income from licence fees not exempt under Indian Income-tax Act; non-charitable provisions render trust ineligible.

ZENITH TIN WORKS CHARITABLE TRUST Versus Commissioner Of Income-Tax, Bombay City I

The court held that the income received by the trustees through licence fees was not exempt under section 4(3)(i) of the Indian Income-tax Act, 1922. The ... Charitable Purpose, Charitable Trust Issues Involved:1. Whether the income received by the trustees by way of licence fees in the assessment year 1960-61 was exempt under section 4(3)(i) of the Indian Income-tax Act, 1922.2. Competence of the Appellate Assistant Commissioner and the Tribunal to reject the claim of the assessee on grounds not initially taken by the Income-tax Officer.Issue-wise Detailed Analysis:1. Exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922:The primary issue revolves around whether the income received by the trustees in the form of licence fees was exempt under section 4(3)(i) of the Indian Income-tax Act, 1922. The trust was established by two Muslim gentlemen with a sum of Rs. 5,000 for various charitable purposes as outlined in the indenture dated June 12, 1959. The objects of the trust included establishing and maintaining institutions for public charitable purposes, aiding educational institutions, providing scholarships, and donating to institutions promoting education or public utility. However, clause 4(1)(iv) of the deed provided for the welfare of the employees of the trust or any institutions conducted by the trust, which was not regarded as a charitable object. Clause 4(2) allowed the trustees to use the corpus or income of the trust property for any of the objects mentioned in clause 4(1) at their discretion.The Tribunal and the Appellate Assistant Commissioner rejected the claim for exemption on the basis that the trust was not created wholly for charitable purposes due to the inclusion of a non-charitable object in clause 4(1)(iv). The court observed that the trustees had absolute discretion to spend the entire income or corpus on non-charitable objects without breaching the terms of the trust. Citing the Privy Council's decision in Mohammed Ibrahim Riza Malak v. Commissioner of Income-tax, it was held that if any part of the trust property could be used for non-charitable purposes, the entire income of the trust is assessable to income-tax.Mr. Patil, representing the assessee, argued that the dominant intention of the settlors was to carry out public charity and that clause 4(1)(iv) should be seen as incidental or ancillary. However, the court found no indication in the deed that clause 4(1)(iv) was incidental or ancillary. Clause 4(2) elevated all objects in clause 4(1) to the same level, allowing trustees to spend the entire corpus on any object, including non-charitable ones. The court rejected the argument that clause 4(1)(iv) was merely for management expenses, noting that clause 4(1) separately provided for such expenses.The court distinguished this case from Commissioner of Income-tax v. Breach Candy Swimming Bath Trust and Bai Hirbai Rahim Aloo Paroo v. Commissioner of Income-tax, where the dominant intention was clear and non-charitable provisions were incidental. The Delhi High Court's decision in Commissioner of Income-tax v. Jaipur Charitable Trust was cited, emphasizing that if any object of the trust is non-charitable, the trust cannot be considered wholly for charitable purposes.2. Competence of Appellate Assistant Commissioner and Tribunal:The second issue was whether the Appellate Assistant Commissioner and the Tribunal were competent to reject the assessee's claim on grounds not initially taken by the Income-tax Officer. The Income-tax Officer had rejected the claim solely on the basis that the property was not held under a trust. The Appellate Assistant Commissioner, however, rejected the claim on the grounds that the trust was not created wholly for charitable purposes due to certain provisions in the deed. Mr. Patil argued that it was not open to the Appellate Assistant Commissioner to shift the ground under section 31 of the Act.However, this issue was not pressed by Mr. Patil during the hearing, and the court did not provide a detailed analysis on this point. The focus remained on the first issue regarding the exemption under section 4(3)(i).Conclusion:The court concluded that the trust could not be regarded as one created wholly for charitable purposes due to the inclusion of a non-charitable object in clause 4(1)(iv) and the absolute discretion given to trustees under clause 4(2). Therefore, the income received by the trustees by way of licence fees was not exempt under section 4(3)(i) of the Indian Income-tax Act, 1922. The first question was answered in the negative and against the assessee, who was ordered to pay the costs of the reference to the department.