2014 (3) TMI 652 - SC - Income Tax

Claim for benefit of exemption u/s 11 and 12 r.w.s. 13 of the Act - determination of nature of trust - religious or charitable trust - Object and purpose of the trust - legal effects of the proven facts and documents - Income derived from property held by such public trust as well as voluntary contributions received by the said trust are the subject-matter of exemptions from the taxation under the Act - Meaning of expressions charitable purpose and religious purpose. HELD THAT - The objects reflect the intent of the trust as observance of the tenets of Islam but do not restrict the activities of the trust to religious obligations only and for the benefit of the members of the community. The Privy Council in Re The Tribune 7 ITR 415 has held that in judging whether a certain purpose is of public benefit or not the Courts must in general apply the standards of customary law and common opinion amongst the community to which the parties interested belong to. Therefore it is pertinent to analyse whether the customary law would restrict the charitable disposition of the intended activities in the objects. The provision of food to the public on religious days of the community as per object (a) and (b) the establishment of Madarsa and organizations for dissemination of religious education under object (d) and rendering assistance to the needy and poor for religious activities under object (e) would reflect the essence of charity. The objects (a) and (b) provide for arrangement for nyaz and majlis (lunch and dinner) on the religious occasion of the birth anniversary and Urs Mubarak of Awliya-e-Quiram (SA) and the Saints of the Dawoodji Bohra community and for arrangement of lunch and dinner on religious occasions and auspicious days of the Dawoodi Bohra community respectively. Nyaz refers to the food a person makes and offers to others on any particular occasion on the occasion of the death of a saint and Majhlis implies a place of gathering or meeting. The activity of providing for food on certain specific occasions and other religious and auspicious events of the Dawoodi Bohra community do not restrict the benefit to the members of the community. Neither the religious tenets nor the objects as expressed limit the service of food on the said occasions only to the members of the specific community. Thus the activity of Nyaz performed by the respondent- trust does not delineate a separate class but extends the benefit of free service of food to public at large irrespective of their religion caste or sect and thereby qualifies as a charitable purpose which would entail general public utility. Further establishment of Madarsa or institutions to impart religious education to the masses would qualify as a charitable purpose qualifying under the head of education under the provisions of Section 2(15) of the Act. The institutions established to spread religious awareness by means of education though established to promote and further religious thought could not be restricted to religious purposes. The House of Lords in Barralet v. IR 54 TC 446 has observed that the study and dissemination of ethical principles and the cultivation of rational religious sentiment would fall in the category of educational purposes. The Madarsa as a Mohommedan institution of teaching does not confine instruction to only dissipation of religious teachings but also contributes to the holistic education of an individual. Therefore it cannot be said that the object (d) would embody a restrictive purpose of religious activities only. Similarly assistance by the respondent-trust to the needy and poor for religious activities would not divest the trust of its altruist character. Therefore the objects of the trust exhibit the dual tenor of religious and charitable purposes and activities. Section 11 of the Act shelters such trust with composite objects to claim exemption from tax as a religious and charitable trust subject to provisions of Section 13. The activities of the trust under such objects would therefore be entitled to exemption accordingly. It becomes amply clear from the language employed in the provisions that Section 13 is in the nature of an exemption from applicability of Sections 11 or 12 and the examination of its applicability would only arise at the stage of claim under Sections 11 or 12. Thus where the income of a trust is eligible for exemption under section 11 the eligibility for claiming exemption ought to be tested on the touchstone of the provisions of section 13. In the instant case it being established that the respondent-trust is a public charitable and religious trust eligible for claiming exemption under Section 11 it becomes relevant to test it on the anvil of Section 13. Thus the objects of the respondent-trust are based on religious tenets under Quran according to religious faith of Islam. We have already noticed that the perusal of the objects and purposes of the respondent-trust would clearly demonstrate that the activities of the trust though both charitable and religious are not exclusively meant for a particular religious community. The objects as explained in the preceding paragraphs do not channel the benefits to any community if not the Dawoodi Bohra Community and thus would not fall under the provisions of Section 13(1)(b) of the Act. 50. In that view of the matter we are of the considered opinion that the respondent-trust is a charitable and religious trust which does not benefit any specific religious community and therefore it cannot be held that Section 13(1)(b) of the Act would be attracted to the respondent-trust and thereby it would be eligible to claim exemption under Section 11 of the Act. In the result the appeals are dismissed with no order as to costs.

Summary

The core legal questions considered in this judgment revolve around the nature and classification of the respondent-trust for income tax exemption purposes under the Income Tax Act, 1961. Specifically, the issues are:

1. Whether the respondent-trust is a public religious trust or a charitable trust, or a composite trust with both religious and charitable purposes.

2. Whether the provisions of Section 13(1)(b) of the Income Tax Act, which deny exemption to trusts created for the benefit of a particular religious community or caste, apply to the respondent-trust.

3. Whether the findings of fact by the Income Tax Appellate Tribunal regarding the nature of the trust are subject to interference by the High Court and the Supreme Court under Section 260-A of the Act.

4. The interpretation and application of relevant provisions of the Income Tax Act, namely Sections 11, 12, 12A, 12AA, and 13, in relation to the eligibility of the trust for exemption.

Issue-wise detailed analysis:

Issue 1: Classification of the Trust as Religious, Charitable, or Composite

The relevant legal framework includes the definitions and provisions under the Income Tax Act, particularly Sections 2(15), 11, 12, 12A, and 12AA. Section 2(15) defines "charitable purpose" inclusively, covering relief of the poor, education, medical relief, preservation of environment, monuments, and advancement of objects of general public utility, with certain exceptions related to commercial activities. "Religious purpose" is not statutorily defined but is understood in legal and dictionary terms as activities relating to religion, including propagation, observance of rituals, and religious education.

Precedents cited include various Supreme Court decisions interpreting charitable and religious purposes, such as CIT v. Surat Art Silk Cloth Manufacturers' Assn., Thiagarajar Charities v. CIT, and others establishing the "predominant purpose" test and the public benefit requirement.

The Court examined the objects of the respondent-trust as set out in the trust deed, which include arranging religious meals (nyaz and majlis) on religious occasions, providing religious education through Madarsa, assisting needy persons for religious activities, and carrying out religious activities according to Shariat-e-Mohammediyah for the Dawoodi Bohra community.

The Tribunal had found the trust to be a public religious trust, relying on references to the Holy Quran and religious tenets. The High Court accepted this finding as a factual conclusion and declined to interfere.

However, the Supreme Court emphasized that the classification of the trust is not a mere question of fact but involves the legal effect of the proven facts, i.e., the objects of the trust. The Court held that the objects reflect a dual tenor of religious and charitable purposes. For example, providing food on religious occasions is a charitable activity with public utility since it is not restricted to members of the Dawoodi Bohra community. Similarly, establishing Madarsa for religious education qualifies as charitable under education.

The Court distinguished purely religious objects (such as objects (c) and (f) related to religious obligations for the community) from charitable objects that benefit the public at large. It noted that the objects must be analyzed in light of customary law and community standards to determine whether the benefits are restricted to a particular community or are public.

Thus, the Court concluded that the respondent-trust is a composite trust with both charitable and religious objects, eligible for exemption under the Act subject to other provisions.

Issue 2: Applicability of Section 13(1)(b) of the Income Tax Act

Section 13(1)(b) excludes from exemption income of a trust created or established for the benefit of any particular religious community or caste. The provision applies to charitable trusts and denies exemption if the trust benefits only a particular community.

The Tribunal and High Court held that Section 13(1)(b) applies only to charitable trusts and not to religious trusts, and since the respondent-trust was held to be religious, the provision did not apply.

The Supreme Court disagreed with this narrow interpretation. It held that Section 13(1)(b) applies to trusts with charitable purposes, including composite trusts with both charitable and religious objects. The key question is whether the charitable purpose benefits a particular religious community or caste.

The Court referred to precedents such as Sole Trustee, Loka Shikshana Trust v. CIT and CIT v. Palghat Shadi Mahal Trust, which held that trusts restricting benefits to a particular community fall within Section 13(1)(b) and are not eligible for exemption.

In the present case, the Court found that although some objects are religious and relate to the Dawoodi Bohra community, the charitable objects (such as providing food and education) are not restricted to the community and serve the public at large. Therefore, the trust does not fall within the prohibition of Section 13(1)(b).

Issue 3: Interference with Tribunal's Findings of Fact under Section 260-A

The High Court declined to interfere with the Tribunal's factual finding that the respondent-trust is a public religious trust. The Supreme Court clarified the distinction between questions of fact and questions of law. While findings of fact by the last fact-finding authority are generally final, appellate courts must examine whether the issue involves the legal effect of the proven facts, which is a question of law.

The Court cited authoritative precedents including Wali Mohammad v. Mohammad Baksh, Sree Meenakshi Mills Ltd. v. CIT, and Dnyaneshwar Ranganath Bhandare v. Sadhu Dadu Shettigar, emphasizing that the legal effect of facts is a question of law and subject to appellate scrutiny.

Accordingly, the Court held that the classification of the trust based on its objects is a question of law requiring examination, and the High Court erred in refusing to consider the legal effect of the objects.

Issue 4: Interpretation of Relevant Provisions of the Income Tax Act

The Court analyzed the interplay of Sections 11, 12, 12A, 12AA, and 13. Sections 11 and 12 provide substantive exemptions for income derived from property held for charitable or religious purposes and from voluntary contributions. Sections 12A and 12AA prescribe procedural requirements for registration to claim exemption.

Section 13 enumerates circumstances where exemption is denied, including Section 13(1)(b) which denies exemption to charitable trusts benefiting particular religious communities or castes.

The Court emphasized that registration under Sections 12A and 12AA is a condition precedent for claiming exemption under Sections 11 and 12. The eligibility for exemption must be tested by reading Sections 11 and 12 in conjunction with Section 13.

Applying these provisions to the facts, the Court concluded that the respondent-trust, being a composite religious and charitable trust not restricted to a particular community for its charitable objects, is eligible for exemption under Section 11.

Competing arguments were addressed as follows: The Revenue contended that the trust's objects are not wholly religious but charitable and confined to the Dawoodi Bohra community, thus attracting Section 13(1)(b) and denying exemption. The respondent argued that the trust is a public religious trust and not subject to Section 13(1)(b). The Court rejected the Revenue's narrow view of the trust's objects and held that the charitable activities benefit the public at large and are not confined to the community, thus not falling under Section 13(1)(b).

Conclusions:

- The respondent-trust is a composite trust with both charitable and religious purposes.

- The charitable objects of the trust benefit the public at large and are not restricted to the Dawoodi Bohra community.

- Section 13(1)(b) applies only to charitable trusts benefiting a particular religious community or caste and does not exclude composite trusts whose charitable objects benefit the public.

- The findings of fact by the Tribunal regarding the nature of the trust involve legal effect and are subject to appellate scrutiny.

- The respondent-trust is eligible for registration under Sections 12A and 12AA and exemption under Section 11 of the Income Tax Act.

Significant holdings include the following verbatim excerpts:

"The proper legal effect of a proved fact is essentially a question of law... It is only the objects of a trust as declared in the trust deed which would govern its right of exemption under Section 11 or 12."

"The objects of the trust exhibit the dual tenor of religious and charitable purposes and activities... Section 11 of the Act shelters such trust with composite objects to claim exemption from tax as a religious and charitable trust subject to provisions of Section 13."

"Section 13(1)(b) applies to trusts established for charitable purposes for the benefit of any particular religious community or caste. Such trusts with composite objects would not be expelled out of the purview of Section 13(1)(b) per se. The section requires it to be examined whether such charitable purpose benefits a particular religious community or class or serves across the communities and for society at large."

"The objects... do not channel the benefits to any community if not the Dawoodi Bohra Community and thus, would not fall under the provisions of Section 13(1)(b) of the Act."

In final determination, the Court dismissed the appeals filed by the Revenue, holding that the respondent-trust is entitled to claim exemption under Section 11 of the Income Tax Act, being a public charitable and religious trust not restricted to a particular religious community for its charitable purposes.