TMI Blog1971 (12) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... a certain immovable property known as Shri Satya Vijay Patel Hindu Dharamshala and the objects for which the trust property was to be held were set out as follows in clauses 2, 6, 7 and 8 of the declaration of trust: "2. The object of the trust is to use the trust property as a 'dharamshala' for Hindus and all Hindus shall have a right to use it as such on such terms and conditions as may be decided upon from time to time by the trustees. 6. After defraying all necessary expenses incurred in the realisation of the income of the subject-matter of trust and incurred in the maintenance of the trust property at the end of each Hindu year ending Asho Vad Amas, 75 per cent. of the balance of the income will be spent by the trustees as under:- (a) The trustees shall use a maund and a quarter (a maund equal to 40 kacha seers) of the juwar daily in feeding the pigeons on the terrace of the trust property, but shall not use more than a maund and a quarter for the same purpose on a single day. (b) If any balance remains out of the balance of the 75 per cent. of the balance net income after the amount spent in feeding the pigeons as above-mentioned, it will be spent by the trustees on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e trustees were fortunately enlightened persons, conscious, of their social responsibility and, therefore, instead of spending the entire 75 per cent. of the net income of the trust in such socially and economically futile activities as feeding pigeons, cows and dogs, they wisely and prudently expended only a part of the net income on these objects and accumulated the balance of the net income exceeding 25 per cent., and out of it, purchased certain immovable properties by way of investment. The trustees took the view that all these immovable properties including the dharamshala property originally settled upon trust were held under trust wholly for charitable purposes and the entire income of the trust was, therefore, exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922 (hereinafter referred to as "the old Act"), and they accordingly did not file any return of income for the assessment years 1955-56 to 1961-62. The Income-tax Officer while assessing the trustees for the assessment years 1962-63 and 1963-64 was, prima facie, of the view that the income from the immovable properties purchased by the trustees was not exempt from tax since "that income is not from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the dharamshala property which was originally settled on trust and it was, therefore, entitled to exemption under section 4(3)(i) and so far as 25 per cent. of the income from the dharamshala property was concerned, it was also exempt from tax under the same provision, since, under clause 7, it could be spent only for a purpose consistent with the object of the trust and such purpose would be clearly a charitable purpose. The Tribunal accordingly upheld the claim for exemption made by the trustees in respect of both categories of income for the assessment years 1955-56 to 1961-62. The Commissioner was obviously dissatisfied with this decision of the Tribunal and he accordingly applied for a reference and on his application, the Tribunal referred the following question of law for the opinion of this court: "(1) Whether the income from property other than the original dharamshala property and 25% of trust property in general qualified for exemption under section 4(3)(i) of the Income-tax Act of 1922 so far as the assessment years 1955-56 to 1961-62 are concerned?" This was the controversy between the parties in regard to the assessments for the assessment years 1955-56 to 196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st accordingly be regarded as exempted from tax under section 11, sub-section (1), clause (a). This contention was negatived by the Income-tax Officer and, in appeal, also by the Appellate Assistant Commissioner. The trustees carried the matter in second appeal to the Tribunal but the Tribunal also rejected this contention. The Tribunal gave a three-fold reason for refusing to accept the claim of exemption made on behalf of the trustees. The Tribunal held that it was clear from the income and expenditure accounts for Samvat years 2017 and 2018 that the income of the trust for the two Samvat years was not utilised for construction of the new dharamshala but it was constructed from accumulations of past income and the condition of section 11, sub-section (1), clause (a), which requires that income in respect of which exemption from tax is claimed should have been applied to the charitable purposes for which the trust property is held under trust was not satisfied. The Tribunal also pointed out, and that was the second reason given by the Tribunal, that even if the income of the trust for Samvat years 2017 and 2018 was utilised for the construction of the new dharamshala, it represent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itled to use it as dharamshala on such terms and, conditions as may be decided upon from time to time by the trustees. It was anticipated that there would be income from "the subject-matter of the trust" and the settlors, therefore, made provision in clauses 6, 7 and 8 for application of such income. The net income of the trust, after defraying necessary expenses, is to be applied as to 75 per cent. in the purposes set out in clause 6 and as to 25 per cent. in the purposes set out in clauses 7 and 8. Clause 6 consists of two sub-clauses (a) and (b). Sub-clause (a) of clause 6 provides that the trustees shall use one and a quarter maunds of juwar daily in feeding pigeons but at the same time carries an injunction that on no account more than a maund and a quarter shall be used on a single day. It would, therefore, be apparent that if the net income arising from "the subject-matter of the trust" is fairly large, 75 per cent. of the net income would not be exhausted in carrying out the charitable purpose set out in sub-clause (a) of clause 6 and a large part of it would remain for being utilised for carrying out the charitable purpose set out in sub-clause (b) of clause 6. Now the cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corollary that if the dharamshala property was held on trust wholly for charitable purposes, these immovable properties must also likewise be regarded as held on trust wholly for charitable purposes and the income arising from them must be held to be exempt from tax under section 4(3)(i) of the old Act. That takes us to the next question whether clause 7 imposes any legal obligation on the trustees to apply 25 per cent. of the net income of the trust properties to charitable purposes. Now what is enjoined by clause 7 is that 25 per cent. of the net income of the trust properties shall be deposited in a scheduled bank or invested in a Government security "as reserve fund to be utilised in case of emergency in accordance with the unanimous opinion of the trustees expressed in the joint meeting of the trustees or as may be directed by the court". The argument of the revenue was that the purpose specified in clause 7 is vague and indefinite and it permits the trustees to utilise 25 per cent. of the net income of the trust properties for non-charitable purpose; there is nothing in clause 7 or in any other clause of the declaration of trust to show precisely as to what is the kind of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontemplated in this clause is emergency in relation to carrying out the main object of the trust. If an emergent situation arises which would impede or frustrate the carrying out of the main object of the trust, it would be an emergency within the meaning of clause 7. Take, for example, a case where the dharmashala collapses and it is not possible to use it as a dharmashala without carrying out extensive repairs to it. The trustees may, in such a case, utilise 25 per cent. of the net income to meet the situation arising out of this emergency, in order to enable the trustees to properly and effectually carry out the main object of the trust. Clause 7 contains an ancillary or subsidiary provision intended to be utilised in furtherance of the main object of the trust and it does not, therefore, contemplate any and every kind of emergency but merely emergency which has some connection or relation to the carrying out of the main object of the trust. The words "as may be directed by the court" are also very significant. These words indicate that the emergency contemplated in clause 7 is not something shadowy or indefinite, but it is a concept recognizable and identifiable by the court as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und favour with the Tribunal, that the construction of the new dharamshala represented investment of surplus trust funds because the new dharmashala was a capital asset, and expenditure incurred by the trustees in acquiring a capital asset could not be regarded as expenditure for carrying out the charitable objects of the trust. But this contention is wholly unsustainable and must be rejected. It seeks to limit the scope and ambit of the exempting provision contained in section 11, sub-section (1), clause (a), by reading words which are not there. The only requirement of section 11, sub-section (1), clause (a), is that the income of the trust must be applied to the charitable purposes for which the properties are held on trust by the trustees. It does not say that the application of the income should be such that it necessarily results in revenue expenditure. The charitable purpose may, in a given case, require for its fulfilment, purchase of a capital asset and where income is applied for purchase of such a capital asset, it would still be application of income to the charitable purpose. Take, for example, a case where there is a trust for maintenance of a hospital and the trustee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the income of the trust properties or rupees ten thousand, whichever is higher. The trustees may, therefore, choose not to spend up to 25 per cent. of the income from the trust properties and accumulate it for application to the charitable or religious purposes of the trust at a later date, without incurring forfeiture of the benefit of the exemption given under this statutory provision. Now the case of the trustees was that out of the net income of the trust properties, they expended moneys for carrying out the charitable purposes set out in clause 6 and whatever surplus remained-which was carried to the "liabilities" side of the balance-sheet-was spent by them in the construction of the new dharamshala and, therefore, the whole of the income of the trust properties was applied to the charitable purposes for which the trust properties were held by the trustees and it was accordingly exempt from tax under section 11, sub-section (1), clause (a). The revenue sought to repel the applicability of section 11, sub-section (1), clause (a), by putting forward a two-fold contention. One contention was that no part of the income of the trust properties for the relevant previous years was ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustees, the trustees could in no case have been held to be entitled to exemption under section 11, sub-section (1), clause (a), in respect of any part of the trust income and the reference of the third question would have been an empty formality. The Tribunal could never have intended to make a reference which was futile. The reference of the third question assumes meaning and significance only on the hypothesis that it comprises the controversy in regard to the question whether the surplus income of the trust properties for the relevant previous years was applied in constructing the new dharamshala. This question must, therefore, be held to be implicit in the broad framework of the third question. It may also be noted that the language in which the third question is framed is of sufficient width and amplitude to cover all questions bearing on the applicability of section 11, sub-section (1), clause (a). It is, therefore, open to us to consider whether the surplus net income of the trust properties for the relevant previous years was applied in constructing the new dharamshala or the new dharamshala was constructed out of accumulations of past income. The finding reached by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Tribunal was, therefore, clearly in error in taking the view that because the expenditure incurred in constructing the new dharamshala was not debited to the profit and loss account, it could not have come out of the net income of the trust properties for the relevant previous years. We think that, in the absence of any strong and cogent circumstance indicating that the new dharamshala was constructed out of the accumulations of past income, the normal presumption would be that the expenditure on the construction of the new dharamshala was made out of the net income of the relevant previous years except of course to the extent to which such expenditure was in excess of the net income. The revenue has not been able to point out any countervailing circumstance which would offset the weight of this presumption. The balance-sheets of the trust in fact show that the expenditure on the construction of the new dharamshala in Samvat years 2017 and 2018, being the relevant previous years, could not have come wholly out of the accumulations of past income and that the entire net surplus income of the trust properties for those Samvat years was utilised in constructing the new dharamshala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be spent for construction of the new dharamshala and, therefore, the net surplus income of the trust properties utilised in constructing the new dharamshala, to the extent to which it exceeded twenty-five per cent. of the net income of the trust properties, could not be said to be applied to the charitable purposes for which the trust properties were held by the trustees and was accordingly not exempt from tax under section 11, sub-section (1), clause (a). We do not think this argument is well founded. It is no doubt true that clauses 7 and 8 of the declaration of trust contemplate application of only twenty-five per cent. of the net income of the trust properties in the construction of a new dharamshala but it must be remembered, and we have already adverted to this fact earlier, that the dominant object of the settlors in creating the trust was to establish dharamshala for the benefit of Hindus and that being the overriding charitable. intention manifest in the declaration of trust, the utilisation of net surplus income of the trust properties in the construction of the new dharamshala, even if it exceeded twenty-five per cent. of the net income of the trust properties, could not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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