1972 (2) TMI 14 - HC - Income Tax

Court Rules on Tax Exemption for Reserve Fund Income

The court held that seven-eighths of the annual income transferred to the reserve fund is exempt under section 4(3)(i) of the Indian Income-tax Act, 1922, ... Assessee in this case is the Hamdard Dawakhana (wakf) represented by its mutawalli, Hakim Abdul Hamind - A seven-eighths portion of the annual income of the wakf which is transferred to the reserve fund is exempt from assessment under section 4(3)(i) of the Act and the remaining one-eighth portion of the income transferred to the reserve fund is not exempt from assessment under section 4(3)(i) - The one-eighth portion of the income transferred to the reserve fund is not chargeable to tax at the maximum rate under the first proviso to section 41(1) of the Act. Since seven-eighths of the amount of the share of charity is exempt, the one-eighth share of the private beneficiary is taxable in his hands at the ordinary rates Issues Involved:1. Exemption under section 4(3)(i) of the Indian Income-tax Act, 1922, for the income transferred to the reserve fund.2. Applicability of the maximum rate of tax under the first proviso to section 41(1) of the Indian Income-tax Act, 1922, for the income transferred to the reserve fund.Detailed Analysis:1. Exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922:The primary issue was whether the income transferred to the reserve fund was exempt from tax under section 4(3)(i) of the Act. The court examined the wakf deed and concluded that the reserve fund retained the character of the wakf business. The wakf deed outlined that the reserve fund should be applied primarily for preserving or expanding the wakf business, which ultimately benefits the community and the mutawalli. The court noted that the reserve fund is an inalienable part of the wakf and cannot be used for personal benefit by the mutawalli. The court emphasized that the reserve fund is for the benefit of the wakf business and, by extension, for charitable purposes.The court further examined the clauses of the wakf deed, which specified that in the event of the wakf business running at a loss or closing down, the reserve fund would still be utilized in a manner consistent with the purposes of the trust. The court concluded that the reserve fund's purpose aligns with the trust's dual purpose: benefiting the community and maintaining the mutawalli's family. Therefore, seven-eighths of the reserve fund, which is ultimately applied for charitable purposes, is exempt from assessment under section 4(3)(i) of the Act.2. Applicability of the Maximum Rate of Tax under Section 41(1):The second issue was whether the income transferred to the reserve fund was liable to tax at the maximum rate under the first proviso to section 41(1) of the Act. The court noted that the proviso to section 41(1) applies when the beneficiaries or their shares are indeterminate. However, in this case, the beneficiaries and their shares were determinate. The court emphasized that the ultimate destination of the reserve fund is known: seven-eighths for charitable purposes and one-eighth for the mutawalli.The court rejected the Tribunal's reliance on cases involving private trusts where beneficiaries' shares were not defined. The court distinguished the present case by noting that the principal beneficiary is the charity, and the shares are defined. The court concluded that since seven-eighths of the reserve fund is exempt from assessment, the one-eighth portion for the mutawalli is taxable at ordinary rates, not at the maximum rate under section 41(1).Conclusion:The court answered the first question by stating that a seven-eighths portion of the annual income transferred to the reserve fund is exempt under section 4(3)(i) of the Act, while the remaining one-eighth portion is not exempt. For the second question, the court concluded that the one-eighth portion of the income transferred to the reserve fund is not chargeable to tax at the maximum rate under section 41(1), but is taxable at ordinary rates in the hands of the mutawalli. The assessee was awarded costs, and the counsel's fee was fixed at Rs. 250.