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TMI Blog1972 (2) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 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-eighth of the total business profit of the wakf business was to be transferred to the reserve fund; (b) Out of the balance, seven-eighths was to be spent on charities; and (c) One-eighth to be paid to the sole mutawalli, namely, Hakim Abdul Hamid. For the assessment years under reference, namely, 1956-57 and 1957-58, for which the relevant previous years are the calendar years ending December 31, 1955, and December 31, 1956, respectively, the assessee in the returns filed by it claimed exemption in respect of the portion of the income which was set apart for being spent for charitable purposes and offered that portion of the income which was termed as khandani income f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, 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 between the khandani income and the quami income in the proportion of one-eighth and seven-eighth and that the seven-eighth portion of the reserve fund should be exempt under section 4(3)(i) of the Act and only the one-eighth portion of the reserve fund should be assessed in the hands of the mutawalli, Hakim Abdul Hamid. The Tribunal did not accept either of the contentions raised by the assessee. According to the Tribunal the amounts transferred to the reserve fund did not fall either in the category of the quami income or in the category of khandani income and that the reserve fund accrued to the mutawalli as income from the wakf business. The Tribunal then posed for itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 finally set apart for application thereto :. . . . " In the present case the properties of the trust are not held wholly for religious or charitable purposes inasmuch as a portion of the income is payable to the mutawalli. This would, therefore, be a case of property held in part only for religious or charitable purposes. Therefore, in order to claim exemption in respect of the whole or a portion of the amount transferred to the reserve fund the assessee must show that such income was applied or finally set apart for application for religious or charitable purposes. The amount transferred to the reserve fund is part of the business income of the assessee and it is not eligible for exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 refundable loans to the beneficiaries entitled to receive money from the net profits in the event of net profits for any year being totally non-existing or being extraordinarily small. (5) To extend and develop the wakf-business in such a way as may contain a strong expectation of increase in the income of the said business. 36. Any amount received from the reserve fund of the business as a loan or for any of the objects specified in clause 35, in case those objects are of a temporary nature, shall be re-transferred to the reserve fund of the business as quickly as possible." Under clause 34, the amount transferred to the reserve fund has to be invested in such a way that it would be available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 extent and to the mutawalli to a small extent. From a perusal of the above clauses it would be clear that the reserve fund has to be applied primarily for either preserving the wakf business or for expanding and developing the said business and as such it retains the character of the wakf business itself. In the event of the wakf business running at a loss or coming to an end, the character and mode of utilisation of the reserve fund is governed by clauses 31, 37 and 38 of the wakf deed and they are reproduced below: " 31. If the wakf-business of Hamdard Dawakhana continues to run at a loss for three years in succession and there does not appear any prospect of sufficient profit thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion 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 clause 34 to be transferred to the business reserve fund, shall be transferred to a new reserve fund instead of the business reserve fund. The new reserve fund shall be called the Beneficiaries' reserve fund. The amounts transferred to the Beneficiaries' reserve fund and the income derived directly or indirectly from the amounts so transferred and the income from properties, movable and immovable, purchased from the Beneficiaries' reserve fund shall be treated as part of this wakf. But the same shall be capable of being transferred and used for the following purposes, with the authority of us the wakif-mutawallis or with the permission of the majlis-e-ayan accorded under a special resolution. (a) To m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the wakf business were being utilised. In other words, one eighth portion of such income will again be transferred to the new reserve fund called the Beneficiaries' reserve fund and out of the balance one-eighth will be paid to the mutawalli and the remaining seven-eighths will be spent on charities. This is the purport of clause 38. The creation of the reserve fund was necessary in the interest of the trust itself. If the trust business has to continue to yield profits which are to be utilised for the purposes for which the trust was created then it was necessary that a portion of the profit should be transferred to a reserve fund. The purpose of the reserve fund, therefore, is the same as the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 defined proportions and their ultimate destination is also for the benefit of the beneficiaries in the given proportions. There can be no doubt that at the point of time the amount in question is received by the mutawalli, it bears the character of business income of the trust, that is to say, the same character which the rest of the income of the wakf business bears. But, if the income in question after it is received by the mutawalli is applied or finally set apart for application for religions or charitable purposes then it would be exempt from assessment under section 4(3)(i) of the Act notwithstanding the fact that the said income had the character of business income at the time it was received by the mutawalli. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is only if the seventh-eighths portion of the reserve fund is subject to assessment, as for instance, if the religious or charitable purposes for which this portion is applied or set apart for application are of a communal character, then it can be said that the beneficiaries of this portion or their respective shares are not determinate. In such a case the proviso to section 41(1) of the Act would apply. But, when such portion of the reserve fund is entitled to exemption, the further question of the beneficiaries of this portion or their respective shares not being determinate does not arise. It follows that the proviso to section 41(1) of the Act cannot be invoked. Mr. G. C. Sharma, the learned counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 created to ensure due performance of certain religious ceremonies and pujas, no claim for exemption from assessment was made by the assessee in respect of such income and the only question for consideration before the High Court was regarding the assessment of such income at the maximum rate under section 41(1) of the Act. The case at serial No. 10, namely, Chintamani Ghosh Trust v. Commissioner of Wealth-tax, was a case under the Wealth-tax Act. The facts of this case are to a certain extent similar to the facts of the present case because a portion of the income from the trust properties was earmarked for religious and charitable purposes and the remaining portion was to be paid to private beneficiaries. The two judges ..... X X X X Extracts X X X X X X X X Extracts X X X X
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