TMI Blog1959 (6) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... tions were accepted by the firm. By the first condition of the letter the firm was to act as the principal agent on behalf of the insurance company and was at all times to be the holder of a certificate from the Controller of Insurance to act as principal agent. By condition No. 6 the appointment was subject to termination at the will of either party by one party giving to the other one month's notice in writing. By the seventh condition the company invited the attention of the firm to sections 41 and 102(1) of the Insurance Act, 1938. On February 17, 1951, Kilachand brothers styling themselves as the founders executed a deed of trust of the business carried on by them in the name of Dharma Vijaya Agency as principal agents of the New Great Insurance Co., of Indian Ltd. It was recited by the first paragraph of the deed that the founders so long as they shall respectively remain trustees of the deed and all persons thereafter becomings trustees held and shall hold the business of principal agency and all the benefits and profits to arise from the said business and the realisation and proceeds thereof and all us of money thereafter received by the trustees and all investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugust, 1951, with the Bank of Baroda Ltd., authorising any one of the four attorneys to operate was opened by Kilachand brothers as insurance agents and not on behalf of a religious or charitable institution. Against the order refusing to grant to the income earned in the business of the Dharma Vijaya Agency exemption under section 4(3)(i) of the Income- tax Act Dharma VIjaya Agency preferred an appeal to the Appellate Assistant Commissioner. That officer held that in the first instance no valid trust was created, but because the insurance company had ratified the trust it must be regarded as valid. He further observed that the Controller of Insurance had been duly informed that the business of Dharma Vijaya Agency was settled upon trust and no objection had been raised by the Controller in that behalf. He finally observed that if certain property was held under trust or a legal obligation wholly for religious or charitable purposes, all that was required for exemption under section 4(3)(i) was that the income should be applied or accumulated for application to such religious or charitable purposes: and in the case before him that condition was fulfilled, and the order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessees. After the partnership agreement the assessees were appointed by deed, dated 28th September, 1950, principal agents of the New Great Insurance Co., of India Ltd. and this business conducted by the assessees as principal agents was settled on trust by the deed, dated 17th February, 1951. It is now not disputed that within the meaning of the Income-tax Act the expression property is a term of the widest import and, subject to any limitation or qualification which the context might require, signifies every possible interest which a person can acquire, hold and enjoy. By the terms of appointment of the assessees as principal agents for conducting the business of the principal agency, remuneration was to be paid. In J.K. Trust v. Commissioner of Income-tax [1957] 32 I.T.R. 535, their Lordships of the Supreme Court observed that business will be property unless there is something to the contrary in the enactment. Mr. Joshi, who appears on behalf of the Department, contends that principal agency is nothing but a right of service conferred by an agreement by the insurance company upon a set of persons, and it cannot be regarded as a business. Mr. Joshi also contends that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the principal agent failing to comply with the requirements of clause 2 in any two successive calendar years, the contract shall, without prejudice to the provision of clause 3, terminate on the 31st day of March immediately following the second calendar year. Under clause 3 the agency is also liable to be forfeited in the events set out in sub-clauses (i) and (ii) thereof. By claused 5 certain restrictions are placed upon the principal agent. But on account of these provisions, which impose certain restrictive conditions upon the principal agent, we are unable to hold that the appointment of a principal agent gives rise to a bare service agreement and that the remuneration paid is not for the conduct of a business but for performance of personal service. The circumstance that the appointment was liable to be terminated at short notice and the agency was not permanent and was liable to be forfeited in the events set out hereinbefore will not, in our judgment, affect the character of the agency as business. We are also unable having regard to the definition of principal agent to agree with the contention for the Revenue that in the case of a principal agent there is no organis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erty itself may be destroyed by reason of operation of law, and that the circumstance that the trustees had the option at any time to throw up the agency was not a legal impediment to its being property which could be held on trust. Following the observations made by their Lordships off the Supreme Court in J.K. Trust's case [1957] 32 I.T.R. 535, we are of the view that the principal agency conducted by the assesses was a business and, therefore, property within the meaning of section 4(3)(i) of the Income-tax Act. Being property which is capable of being settled upon trust, by the deed of trust, dated 17th February, 1951, it was lawfully settled upon trust for charitable purposes. But Mr. Joshi for the Revenue contends that by the agreement dated 28th September, 1950, the partnership of Kilachand brothers was appointed the principal agents, and that at some time after the appointment of Kilachand brothers as principal agents there was a change in the constitution of the fair Dharma Vijaya Agency and certain partners dropped out of the management of the principal agency business and certain other persons entered the agency, and that in the basece of any evidence to show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icate, intimation was given to the authorities concerned about the alteration in the constitution of the agency. But evidently neither the company or the Assistant Controller of Insurance raised any objection to the conduct of the trust business of principal agents by the Dharma Vijaya Agency from which some of the original trustees has ceased to function and in which another trustee was introduced. Even assuming that these arose some irregularity by the alteration in the constitution of the Dharma Vijaya Agency, we are unable to hold that this circumstance affects the character of the income received as remuneration for conducting the business of the agency as income received from property held for a public charitable trust. The taxing authorities are primarily concerned with the question whether the income sought to be taxed is income from property which is held on trust for a religious or charitable purpose. If the business of the principal agency was transferred to the trustees under a deed of settlement, and from that business income was received, the income will fall with in section 4(3)(i) of the Act and be exempt from tax in the hands of the trustees. We are, therefore, of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or charitable institutions whichever not held under trust and not to such business as was itself held under trust or was conducted or on behalf of such charitable or religious institutions as were held under trust. These observations were approved of by this court in J.K. Trust's case [1958] 53 I.T.R. 32, after it was remanded by the Supreme Court. The income from the trust in the present case clearly falls within the terms of clause (i) of section 4(3) before it was amended by act 25 of 1953, and it was, therefore exempt from payment of tax. By Act 25 of 1953, section 4(3)(i) was substantially altered. In so far as it is material, that section (as if stands now) provides: 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 or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to to such religious or charitable purposes as relate to anything done within the taxable territories..... Provided that such income shall be included in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egory. Mr. Joshi says that where property held under trust is a business, the income derived from that business is exempt from tax only if the business is carried on on behalf of a religious or charitable institution and the income thereof is applied wholly for the purposes of the institution and one of the two conditions prescribed by clause (b) of the proviso is fulfilled. In asking us to accept this interpretation, Mr. Joshi is asking us substantially to re-write the material provision. The Legislature has attempted to carve out certain categories of income from the operative part of the exception and has made them liable to tax despite the fact that they are derived from property held under a trust created for religious or charitable purposes. Mr. Joshi's argument is that if business is property within the meaning of section 4(3)(i), and that business is held on trust, the business in clause (b) of the proviso must also be held on trust, and if it is not so held on trust the income thereof will not be exempted as income derived from property held under a trust for religious or charittable purposes. But we do not think that there is any warrant for this submission on the pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the operative part of section 4(3)(i). On that view of the case, the answer to the question submitted by the Tribunal will be in the affirmative in respect of all the four assessment years. The Commissioner of Income-tax to pay the costs of the assessee. S.T. DESAI, J.--A question of construction, rather fine and not without some difficulty, arises for our determination in this reference. The facts leading up to this reference have been stated by my learned brother and I need not refer to the same. The question submitted to us has invited rather elaborate arguments on either side, and the arguments rally fall to be considered under two heads: firstly, whether the insurance agency business which was carried on y the assessee firm and in respect of which a charitable trust was created is property within the meaning of that expression to be found n section 4(3)(i) of the Income-tax Act; and secondly, what is the exclusion in respect of income derived from property held under trust wholly for religious or charitable purposes enacted by the Legislature in section 4(3)(i)? The first head need not detain me at any length. A Division bench of this court had to interpret clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the passage just quoted by me. The distinction sought to be drawn was rather fine and not permissible in the context of the expression business and property which have a very wide connotation in income-tax law. Therefore, the conclusion seems in escapable to me that the business of insurance agency carried on by the assessee-firm is property within the meaning of that expression in the relevant provision before us. To turn to the other head on which considerable arguments have been urged before us on either side. It will be convenient to set out the relevant and material part of sub-section (3) of section 4. Section 4(3) of the Income-tax Act, as amended by Act 25 of 1953, provides, in so far as it is material: 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 or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories,..... Provided that suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch follows upon section 3 (which is the charging section) and itself defines the gamut of total income, shows that its arrangement is not logical and its provisions have no lucidity of expression. It was for this reason that we permitted ourselves to be taken to the history of the legislation contained in sub- section (3), tough I propose to be very brief in examining it. Before, however, I do so, I should prefer to examine the language of the sections it stands today. It is now established law that business itself may be held on trust. If a business itself may be held on trust, as, for instance, in the present case, where a trust is created of property which consists of business, it is abundantly clear and not now disputable that income derived from property consisting of business held on trust for religious or charitable purposes is within the ambit of the exclusion contained in clauses (i) of section 4(3). As I have already pointed out, the decision of their Lordships of the Supreme Court leads to the in escapable conclusion that an insurance agency business must be treated as a business within the ambit of this section. Therefore, the short question that remains for consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, is the plain reading of clause (i) of section 4(3) read with the proviso: and if this be the position, it is extremely difficult to accede to the argument pressed before us on behalf of the Department that although the insurance agency business, of which a trust was created, is within the operation of clause (i) of section 4(3), it is yet hit by the initial words of proviso (b) to clause (i). I have stated that the observations which I have made from follow from a plain reading of section 4(3)(i) read with the relevant proviso. I have also mentioned that there was an amendment in section 4(3)(i) in 1953, and it is on the language of section 4(3)(i) as it stood before the amendment that the learned counsel for the Department has very strongly relied. Learned counsel has also relied on a decision of Lahore High Court in a case to which I shall presently refer. He has also relied on certain observations in J.K. Trust v. Commissioner of Income-tax [1958] 33 I.T.R. 32, to which I was a party. Now, I must confess that there are some observations in that judgment which do not lend some support to some part of the argument urged before us by Mr. Joshi: but, as I shall presently point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ia) as it stands cannot in any way derogate or subtract anything from clause (i). It rather adds to the list of exceptions and provides immunity for a certain kind of business which in the view of the Legislature had not already been provided for. A new clause inserted by the Legislature cannot be presumed to be inconsistent with or repugnant to a foregoing clause in the same sub-section unless it is so expressly provided. Viewed in its proper perspective, therefore, clause (ia) can be taken to apply only to such business as is carried on on behalf of religious or charitable institutions which were not held under trust and not to such business as was itself held under trust or was conducted by or on behalf of the such charitable or religious institutions as were held under trust. If it was intended to narrow down the scope of the clause (i) so as to withdrawn the exemption enjoyed by a business held in trust or conducted by or on behalf of a religious or charitable trust, the new clause should have been added as proviso to the old clause. It would then have mentioned that the scope of the original clause was being restricted to that extent. But this not being the case here, it can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s sought to be drawn by Mr. Joshi to the statement of objects and reasons when amendments were made in section 4(3) in 1953. It is not permissible to us to look at the same. It is rather difficult to see the reason or the object of permitting income derived from property consisting of business held under trust wholly for religious or charitable purposes being excluded from the total income of the person receiving it as enacted in clause (i) of section 4(3) and not permitting such exclusion if the business is carried on on behalf of a religious or charitable institution and it does not satisfy the requirements which are inserted in the latter part of proviso (b) to clause (i). It does appear that income derived from business carried on on behalf of a religious or charitable institution can very well be income of a business which is itself the subject-matter of a religious or charitable trust; but it is not for us to enter into this enquiry or allow ourselves to speculate on the reasons. The construction of the relevant provisions must be as already mentioned by me, and on that view the answer to the question referred to us will be in the affirmative. Question answered in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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