TMI Blog1958 (3) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... (Amendment) Act, 1953. The material portion of the relevant section is as follows: 4. (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them: (i) Any income derived from property held under trust...wholly for...charitable purposes,... Having rejected the trustees' claim for exemption under section 4(3)(i), the Income-tax Officer, relying upon the first proviso to section 41(1), brought the income to tax at the maximum rate. When the matter came to the Tribunal, in appeal, the trustees inter alia raised two contentions, viz., (i) that the income derived from the trust property was exempt under section 4(3)(i); and (ii) that in the circumstances of the case, the provisions of section 41 were not applicable. The Tribunal accepted the first contention and in this view of the matter, it did not find it necessary to deal with the second contention. A copy of the Tribunal's order is marked annexure 'A' and forms part of the case. 3. The material facts having a bearing on the first of these two contentions are as follows: A trust was created under a deed of trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or for studies of the above nature abroad. (2) For medical reliefs of the nature and kind such as starting maternity homes, pre-natal clinics, free and charitable medical dispensaries for the benefit of the poor and needy people. (3) For giving monetary help to the poor and needy persons either free or on such terms and conditions as the trustees may deem expedient, and (4) For providing relief to the poor and distressed in time of famine cyclone, floods, earthquake or other unavoidable mishaps: PROVIDED NEVERTHELESS that in carrying out the above objects preference may be given to such persons as are eligible under the provisions hereinbefore contained who are at the time or have in the past been employees of the said Premier Construction Co. Ltd., and of the aforesaid associated companies and their relatives and dependants as the trustees may in their discretion think expedient and proper. It is not necessary to refer to other clauses of the trust deed. The said trust is registered under the Bombay Public Trusts Act, 1950. The income-tax authorities accepted that all the four objects set out in the substantive part of clause 4 of the trust deed fulfilled the defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... empt from tax on the ground that it falls within section 4(3)(i) of the Indian Income-tax Act. The trust in question was constituted on the Diamond Jubilee of Mr. Walchand Hirachand, a well-known industrialist of Bombay, and the trust deed which is dated 31st May, 1943, sets out the objects of the trust. The recitals clearly state how the trust came into existence, and the origin of the trust was the celebration of the 61st birthday of the settlor and a committee of the employees of the settlor presented to him a sum of ₹ 4,11,111 and the recital further points out that the settlor was anxious to strengthen the hands of the organisation which controlled the various companies in which the settlor had an interest and, therefore, he thought it necessary to maintain a uniform control over the management and working of the Premier Construction Co. Ltd., by centralising the voting power in the company in the hands of a certain definite body instead of having it spread over in individuals or small groups. Then we have the operative clause which provides that the trust fund shall be invested in the purchase of shares of any kind of the Premier Construction Co. Ltd. Clause 2 provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a trust which would fall within the ambit of section 4(3)(i). What is said is that there is no obligation with regard to these four objects until a lapse of 18 years; it is only after 18 years that there is an obligation upon the trustees to spend income on these four objects; and, therefore, at the relevant date what is in existence is not a trust for a charitable purpose, but a trust for an entirely different purpose. Now, this raises a rather important question. When you analyse the provisions of the trust deed, the scheme which emerges is clear. The settlor did not wish the trustees to spend the income of the trust on the charitable objects immediately. He wanted the trust fund to increase and expand, and after the trust fund had expanded, he wanted the income of that trust fund to be spent on the charitable objects. In other words, the trust deed contain a scheme for accumulation of income and for the accumulated income to form part of the trust fund; and there is also a provision for the accumulation to go on for a specific period of time and on the expiry of that time the income of the enlarged trust fund to be spent on the charitable objects. Can it be said that, because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht say so, contained in the trust deed which may deal with details like the accumulation of income, the investment of income, and so on. Mr. Joshi says that there would have been no objection if the settlor had given directions for the accumulation of income if ultimately the whole of that income was directed to be spent on charitable objects. But Mr. Joshi's quarrel is that, at the end of 18 years, the trust fund that is constituted is not merely the trust fund as originally set up, but the trust fund plus all the income which has arisen to that trust fund in the course of 18 years. In other words, the direction is to capitalise income for a period of 18 years. It is difficult to understand what possible objection in principle there can be to that direction in a trust deed. Illustrations will immediately come to mind of many charitable schemes which it may not be possible to give effect to immediately and where a settlor may well provide, having laid apart a certain amount for a charitable purpose, that the charitable purpose should only be carried out after a period of 10 or 20 years when the fund has grown sufficiently to make it possible for that scheme to be carried out. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounty is an aggregate of persons without public significance, then that aggregate of persons, however numerous, does not constitute a section of the public. Therefore, it cannot be disputed--and Mr. Palkhivala does not dispute it--that if the object of the trust was to benefit the employees of a particular concern or the children of the employees, then the trust would not be a charitable trust within the meaning of section 4(3)(i). But the question is whether on a fair reading of this trust it could be said that the objects of the settlor's bounty were only the employees of the Premier Construction Co. Ltd. In this connection Mr. Joshi puts emphasis upon the proviso which gives the power to the trustees to give preference to the employees of the Premier Construction Co. Ltd. Now, undoubtedly, we would have taken a different view of this trust if there was an obligation upon the trustees to prefer the employees. In other words, if the other members of the public were postponed to the employees of the Premier Construction Co. Ltd., then, looking to the other provisions of the deed, we might easily have taken the view that the main purpose of the trust was to benefit the employ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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