TMI Blog1972 (2) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ship by Hakim Abdul Hamid, his brother, Hakim Hafiz Mohd. Sayeed, and their mother, Rabea Begum. By a wakf deed dated August 28, 1948, the partners created a trust in respect of the movable properties of the Hamdard Dawakhana. Under the terms of the wakf deed the business income of the Hamdard Dawakhana of each year was divided into three portions, namely, (1) to be transferred to a reserve fund, (2) to be spent for charitable purposes, and (3) to be paid to the mutawallis. The portion which was to be spent for charitable purposes was termed as quami income and the portion which was to be paid to the mutawallis was termed the khandani income. Rabea Begum died on October 5, 1949, and Hakim Hafiz Mohd. Sayeed was declared an evacuee with effect from January 1, 1948. On September 6, 1950, Hakim Abdul Hamid purchased the share of the khandani income receivable by his evacuee brother out of the charitable funds of the wakf and this share was also earmarked for charitable objects by a declaration dated September 6, 1950, made by Hakim Abdul Hamid and after September 6, 1950, the profits of the wakf business were to be allocated in the following manner under the wakf deed: (a) One-eig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also that the entire income so transferred was liable to be assessed at the maximum rate under section 41(1) of the Act. The assessee preferred appeals before the Appellate Assistant Commissioner. In these appeals the assessee did not claim total exemption under section 4(3)(i) of the Act in respect of the entire amounts transferred to the reserve fund. The assessee merely contended that the amounts transferred to the reserve fund should be allocated between the khandani income and the quami income and that only the one-eighth part of the amount so transferred to the reserve fund should be assessed in the hands of the mutawalli, Hakim Abdul Hamid. This contention was, however, rejected by the Appellate Assistant Commissioner and the assessments made by the Income-tax Officer were confirmed. The assessee thereupon preferred further appeals before the Income-tax Appellate Tribunal and with the permission of the Tribunal raised the alternative contentions which had been raised before the Income-tax Officer, namely, that either the entire amount transferred to the reserve fund should be exempt under section 4(3)(i) of the Act or in the alternative this amount should be allocated be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 4(3)(i) of the Indian Income-tax Act, 1922? (ii) If the answer to question No. 1 above is wholly in the negative, whether the Tribunal was right in holding that the said one-eighth of the annual income of the wakf transferred to the reserve fund was liable to tax at the maximum rate within the meaning of the first proviso to sub-section (1) of section 41 of the Indian Income-tax Act, 1922?" Section 4(3)(i) of the Act under which the assessee claims exemption in respect of the whole or a portion of the amount transferred to the reserve fund in each year is as under: " 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) Subject to the provisions of clause (c) of sub-section (1) of section 16, 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, and in the case of property so held in part only for such purposes, the income applied or finall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wakf-business. The movable and immovable property acquired with the aid of the reserve fund shall also be treated as part of this wakf but it shall be capable of being transferred either by outright sale or by mortgage for the purposes of the wakf and the wakf-business mentioned in clause 35. The right to transfer the movable and immovable property relating to the reserve fund of the wakf shall vest in us, the two wakif-mutawallis jointly during our lifetime and to the survivor alone on the death of one of us and after the death of both of us in the majlis-e-ayan which shall be exercised by the said Majlis through the mutawalli or mutawallis of the wakf, by means of special resolutions passed by it in this behalf. 35. The cash or movable and immovable property belonging to the reserve fund of the wakf-business could only be used and transferred for the undermentioned purposes in the event of any wakf-business being in existence: (1) To set off the losses resulting from the wakf-business. (2) To save the wakf-business from anticipated certain or apprehended losses. (3) To make up temporarily the insufficiency of cash for payment of divisible profits. (4) To grant refundabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other cases. He added that the reserve fund was for the benefit and development of the business held under trust for charity and would bear the same character as that of the wakf business. He further argued that the reserve fund was for the benefit of only two beneficiaries in the trust deed and in their profit-sharing proportion. It is customary for every business or industry to store some funds for future exigencies. Therefore, the wakf has to keep something which may be used to set off the losses whenever they occur. Again, it cannot be guaranteed that sufficient money will always be available for payment of the divisible profits. The reserve fund is meant to meet such a contingency. It has to be noted that a seven-eighth of the divisible profits go to charity. If charity is to be sustained, if its sphere is to be expanded, if its activities are to be multiplied, then considerable amounts have to be invested. Such amounts will be available from the reserve fund for being ploughed back in the business. The reserve fund is thus used to expand and develop the wakf business and the profits which are yielded by such expanded and developed business again go to the charities to a large ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire cash and property movable and immovable belonging to the said reserve fund shall have the same character as the other non-business wakf property, all powers regarding expenditure or alienation of property, movable as well as immovable in relation to the reserve fund, vested in us the two wakif-mutawallis or in the majlis-e-ayan under clause 35 shall cease. Whatever net profit is realised from such properties belonging to the reserve fund, the same shall, in the absence of any other source of income, be treated as the total profits of the wakf or a portion of it as the case may be. 38. In the event of the trading character of the former business reserve fund coming to an end, the division of the net profits derived therefrom shall be subject to the same rules and conditions as have been laid down in clause 39 in regard to the distribution of the general net profits of this wakf. But the outside partner whose capital has not been included in this wakf shall have no right in or concern with the income and property belonging to the reserve fund. The 1/8th (one-eighth) share of the net profits which during the subsistence of the business of the wakf is required under claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of clause 38. A perusal of clauses 31, 37 and 38 would make it clear that even in the event of the wakf business running into losses or closing down, the essential character of the reserve fund is not changed. Clause 31 merely envisages a change in the nature of the wakf business. For instance, if the business of the Dawakhana does not yield any profit then it is open to the trustees to start some other kind of business which is likely to yield profits. But whatever the nature of the business might be, the income from such business is to be divided or utilised in the same manner as the business of the Hamdard Dawakhana. In other words, one-eighth portion of the income from such business had again to be transferred to the reserve fund and out of the balance, one-eighth has to be paid to the mutawalli and seven-eighths has to be spent for charitable purposes. Clause 37 envisages the contingency when it is no longer possible either to run the business of the Dawakhana or any other business. In such a case the wakf properties as well as the reserve fund merged together and the income realised from such properties will again be utilised in the same manner in which the net profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eficiaries or their shares. Both the beneficiaries are known and their shares are defined in the trust deed. The reserve fund was for the benefit of the wakf business and the business is for the benefit of charity. We find considerable force in these arguments. The learned Tribunal has relied on the judgment of the hon'ble Supreme Court in Commissioner of Income-tax v. Manilal Dhanji. The facts of that case are quite different from those of the instant case. That was a case of a private trust and there all the beneficiaries were private parties belonging to the same family and their shares were not defined. In the present case the principal beneficiary is the charity and the shares of the two beneficiaries are defined as 7/64 and 49/64. The other case cited by the learned Tribunal is Offcial Trustee of West Bengal v. Commissioner of Income-tax. That case has no application to the present case. It was also a private trust and not a charitable one, and the income was not receivable on behalf of any particular beneficiary. In the case of the petitioner-wakf the beneficiaries are known and the shares are defined. The income is received for the benefit of two beneficiaries in define ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om assessment then an equal portion of the reserve fund is also exempt from assessment. The learned Tribunal in our view did not pursue its finding to its logical conclusion. We are of the view that a seven-eighths portion of the amount transferred to the reserve fund in each year is applied or finally set apart for application for religious or charitable purposes and is, therefore, eligible for exemption under section 4(3)(i) of the Act. When a seven-eighths portion of the amount transferred to the reserve fund is thus exempt from assessment it is only in respect of the other portion of the said amount which is not exempt from assessment that the question of the applicability of the proviso to section 41(1) of the Act arises. If the beneficiary of this portion of the amount transferred to the reserve fund is not known or if the beneficiaries are more than one and their identity or their shares are not determinate then such portion of the amount is liable to be assessed in the hands of the trustees at the maximum rate under the proviso to section 41(1) of the Act. But, in this case, the beneficiary of this portion of the reserve fund is known and his share is also determinate. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies was exempt from assessment under section 4(3)(i) of the Act. These cases are, therefore, not applicable to the case before us where a portion of the income from the trust business was admittedly exempt from assessment. The cases cited at serial Nos. 4 and 9 are not at all relevant, the questions considered in the said cases being totally different from the questions that arise for determination in the present case. The cases cited at serial Nos. 2, 6 and 10 are no doubt cases of the trust being created for religious or charitable purposes. In the case at serial No. 2, namely, Income-tax Appellate Tribunal, Bombay v. Managing Trustee, Shri Radha Madho Trust, although the trust was created for religious and charitable purposes, the income from the trust properties was, however, not eligible for exemption under section 4(3)(i) of the Act by virtue of the application of clause (i)(a) of sub-section (3) of section 4 of the Act. The assessee's claim in that case for exemption from assessment under section 4(3)(i) of the Act was not considered by the High Court. Similarly, in the case at serial No. 6, namely, Bankim Ch. Datta v. Commissioner of Income-tax, although the trust was creat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before us in which a portion of the income received by the trustee was exempt from assessment and yet the proviso to section 41(1) of the Act was applied on the ground that the beneficiaries in respect of such portion of the income or their shares were not determinate. This case is, therefore, being decided on first principles. For the reasons already stated, the portion of the reserve fund set apart for application for religious or charitable purposes has to be excluded from the scope of section 41(1) of the Act and so far as the balance which is applied for the benefit of the mutawalli is concerned the proviso to section 41(1) of the Act cannot be invoked for the reason that both the beneficiary as well as his shares are determinate. We, therefore, answer the first question referred by the Tribunal as under: 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) of the Act. In view of our answer to the first question, the second question ref ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
