TMI Blog1977 (7) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares, patents, inventions and designs and other properties referred to therein for the objects therein specified. The relevant part of the trust deed provided as under : " 1. That the trustees shall hold the said shares, patents, inventions and designs and all the patents, inventions and designs that may hereafter be donated to the trustees and all other donations, contributions, additions, profits, royalties, income, dividend, interest, accumulations and accretions thereon and/or any conversion or conversions thereof and/or any investment or investments in which the said donations, contributions, additions, accumulations or accretions may from time to time be invested, hereinafter called the 'Trust Assets' upon the following trusts and subject to the following powers, agreements, declarations, terms and conditions, namely:--" In sub-clause (2) thereof several objects were set out and it is common ground that they are of a charitable nature. A few days after the execution of the trust, Chaudary donated on August 22, 1955, the following inventions to the trust for their exploitation: 1. A process for manufacturing sizing softener (olein). 2. A process for manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is traceable directly to the patent or invention, s. 4(3)(i) of the Indian I.T. Act, 1922, would apply. The interposition of a business is only a mechanism for exploitation of the patent and the business is not such as to dissociate the income from the property held under trust. According to the Tribunal consequently the provisions of s. 4(3)(i) were attracted. It also pointed out that the business is incidental to the exploitation of the patents and inventions and what is incidental is a part of the trust. If the patents and inventions are taken out, there would be no business left. According to him the business itself is, therefore, held under trust. The Tribunal went further and held that even assuming that the business was not held under an express trust, the embarking by the trustees with the trust assets gave rise to a trust and the business can in such a case be taken as held under trust as the trustees cannot set up a title adverse to the trust and claim the business as their own. The business, therefore, is that of the trust. On introduction of cl. 2(j) which was added by the amendment made on October 22, 1958, according to the Tribunal it was only with reference to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of cl. 2(j) it is quite apparent that in no sense of the term the business carried on by the trustees for exploitation of the invention or patent can be regarded as income derived from property held under trust. For the assessment years 1960-61 and 1961-62, which were governed by the provisions of the Indian I.T. Act, 1922, his submission is that so far as these two years are concerned, a distinction should be made between income derived from property held under trust and income derived not from property held under trust but from business which the trustees were authorised to carry on under the enabling power contained in the indenture of trust. If such distinction is borne in mind, his submission is that any income derived from business which the trustees are authorised to carry on after the introduction of cl. 2(j), cannot be regarded as income derived from property held under trust. In short his submission is that to determine the property held under trust regard should be had to the operative part of the indenture of trust and reference can only be made to those properties which are settled upon trust. What the trustees may be permitted to do under the enabling provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rust estate, there will be a constructive trust in respect of the business so carried on as well as the income derived from such business. Even looked at from that point of view, irrespective of the fact whether cl. 2(j) was introduced or not for all the relevant years, as the business was carried on by the trustees the income that had been brought to tax is income derived from property held under trust and is, therefore, exempt under s. 4(3)(i) of the Indian I.T. Act, 1922, for the assessment years 1958-59 to 1961-62, and under s. 11(1) of the I.T. Act, 1961, for the assessment years 1962-63 and 1963-64. He also submitted that for determining the scope of the expression " property held under trust " one has not to merely look at the actual trust estate which has been settled upon trust. His submission is that even if under the enabling powers conferred by the trust deed the trustees are authorised to carry on business with the use of any of its assets, like patents and inventions in the present case then naturally such business will automatically be property held under trust and the benefit of the exemption both under s. 4(3)(i) and s. 11(1) of the relevant I.T. Acts would be avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derived ". At page 151 (of 23 ITR) this court pointed out : " Reference might also be usefully made to the definition of the expression ' derived ' given by the Privy Council in Commissioner of Income-tax v. Kamakhya Narayan Singh [1948] 16 ITR 325. It is true that their Lordships were there considering the question of agricultural income, but the interpretation placed upon the expression 'derived' by their Lordships is not without assistance for interpreting the same expression in section 4(3)(i). The expression used in this section is 'any income derived from property held under trust', and to put upon it the interpretation put by the Privy Council, the property must be the effective source from which the income arises. It is not sufficient that the property should be indirectly responsible for the income. The income must directly and substantially arise from the property held under trust ........" As prior to the introduction of cl. 2(j) in the trust deed the trustees had no authority to carry on business of manufacturing and marketing products with the use of patents and inventions, ordinarily any income derived from such business cannot be regarded as income derived from p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e accountable to make good the profits to the trust. Business can only be regarded as property held under trust if even the losses incurred in such a business, though carried on unauthorisedly, could have been reimbursed by the trustees out of the trust estate but such a thing is not permissible when the carrying on of the business was in breach of trust. Simply because in a case of breach, the trustee is held liable to make good the profits, be made to the trust, it cannot be said that the activity indulged in or the business carried on was the property held under trust. Thus, prior to the amendment of the trust deed dated July 12, 1955, by the introduction of cl. 2(j), when the trustees carried on business in the relevant years corresponding to the assessment years 1958-59 and 1959-60, the income derived from such business cannot be regarded as income derived from property held under trust within the meaning of s. 4(3)(i) of the Indian I.T. Act, 1922. Thus, in our opinion, the income for these two years will not be exempted from tax under the provisions of s. 4(3)(i) of the Indian I.T. Act, 1922. That takes us to the two years 1960-61 and 1961-62, which are governed by the Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... griculture ". Simply because the word " and " is used in the last three words " science and education ", it cannot be said that unless all the three activities are carried on conjunctively the act done will not be within the ambit of sub-cl. (2)(a). Any one of these activities is within the ambit of the object clauses and if the trustees utilise the trust property for carrying on any one of these objects it is used for purposes permitted by the trust. The question then arises, simply because under cl. 2(j) the trustees are authorised to manufacture and market products with the use of patents and inventions settled upon trust, does it mean that such activities of manufacturing and marketing the products can be regarded as property held under trust. More than one reason exists why such business can be regarded as property held under trust. Even on a plain reading of cl. 2(j) the trustees were clothed with the power of manufacturing and marketing products with the use of the patents and inventions settled upon trust and that was to be done with the idea of raising funds for the fulfilment of the aims and objects of the trust. When such activity is done by the trustees, then it is qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nversions thereof, and 5. Any investment or investments in which the said donations, contributions, additions, accumulations or accretions may from time to time be invested. After the trust deed was executed, on August 22, 1955, Chaudary donated the following inventions to the trust for their exploitation : 1. A process for manufacturing sizing softener (olein). 2. A process for manufacturing sizing antiseptic (microlin). It is the second of these processes that has been utilised for the manufacturing business carried on by the trust. Since the property settled upon trust includes patents donated thereafter and also conversions and investments thereof it is quite clear that if business to manufacture and market products with a view to carry out the aims and objects of the trust was carried on by the trustees after they were clothed with the power under cl. 2(j) such business will in any event fall within the various properties which are settled upon trust as indicated in cl. 1. Thus, for the two years 1960-61 and 1961-62, it is quite clear that when the case was governed by the Indian I.T. Act, 1922, the income derived from the business was fully exempt under s. 4(3)(i) b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts by using the patents and inventions is to make profit so as to raise funds for the fulfilment of the aims and objects of the trust. If that is so, such an activity cannot be regarded as a charitable purpose in view of the definition of that expression in s. 2(15) of the I.T. Act, 1961. As under s. 11(1) as it then existed, only income derived from property held under trust wholly for charitable or religious purposes has to be excluded from computation of total income of the previous year, the trustees will not be able to get the benefit of this provision for the assessment years 1962-63 and 1963-64, because the carrying on of the business is an activity for profit. It was urged by Mr. Patil that the whole of cl. 2(j) should not be regarded as the object clause but should be split up into two parts, namely, to conduct researches in all branches of science and to develop processes and products which according to him should be regarded as the object while the latter part, namely, to manufacture and market them (products), to raise funds for the fulfilment of the aims and objects of the trust should be regarded as an enabling power. Such a construction is not permissible if re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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