TMI Blog1965 (10) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... MR K. SUBBA RAO., J. C. SHAH. AND S. M. SIKRI JUDGMENT The judgment of the court was delivered by SUBBA RAO J.- This appeal by special leave raises the question of the true construction of the provisions of section 4(3)(i) of the Indian Income-tax Act, 1922, hereinafter called the Act. The relevant facts may be briefly stated. By an indenture dated September 14, 1950, H. E. H. the Nizam of Hyderabad created a trust known as H. E. H. Nizam's Religious Endowment Trust , hereinafter referred to as the trust, under which he settled certain securities of the face value of ₹ 40 lakhs for implementing the objects described in the trust deed. Under the trust deed three trustees were appointed, including the settlor. It will be convenient at this stage to read the relevant provisions of the trust deed. Clause 3 : The trustees shall hold and stand possessed of the trust fund upon trust : (a) To manage the trust fund and to recover the interest and other income thereof . . . (c) During the lifetime of the settlor the balance of the income shall be accumulated and shall be added to the corpus of the trust fund. (d) On and after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fetime of the settlor be decided according to the opinion of the settlor and after his death according to the opinion of the trustee most senior in age for the time being. Briefly stated, under the deed the trust fund was to be accumulated during the lifetime of the settlor, and, after his death, the trustees should hold the said fund upon trust to spend the income therefrom for one or more of the four religious and charitable objects mentioned therein. Two of the said objects were for religious and charitable purposes within the taxable territories and the other two for purposes outside the taxable territories. It is important to notice that under the deed no power was conferred on the trustees during the lifetime of the settlor to set apart and allocate the accumulated income or a part of it from the trust properties for any one or more of the objects mentioned therein : that could be done only by the trustees after the death of the settlor. The said settlor is still alive. For the assessment years 1952-53 and 1953-54, the trustees were assessed to income-tax on the income during the relevant previous years arising from the said trust property. The trustees claimed exemption u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come for the said purposes, the assessee could not claim any exemption thereunder. Let us now scrutinize the validity of the rival contentions. Section 4(3)(i) of the Act reads : 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 : Provided that such income shall be included in the total income --- (a) if it is applied to religious or charitable purposes without the taxable territories, but in the following cases, namely : --- (i) where the property is held under trust or other legal obligation created before the commencement of the Indian Income-tax (Amendment) Act, 1953 (25 of 1953), and the income therefrom is applied to such purposes without the taxable territories ; and (ii) where the property is held under trust o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -second part, the income from the property so held in part shall have been applied or finally set apart for application to the said purposes. A comparative study of the two parts clarifies the scope of the provision. The expression used in the first part is applied or accumulated for application and the expression used in the second part is applied or finally set apart for application . The words applied or finally set apart for application in the second part indicate that unless the income from the said property is applied or finally set apart for the purposes within the taxable territories, the said income does not earn the exemption. There cannot be any reason why a different meaning should be given to the expression applied or accumulated for application in the first part of the clause, for, on principle, there cannot be any possible distinction between such income from the property wholly held under trust or a part of the property held in trust. The words applied and accumulated , therefore, must mean applied or finally set apart . Applied means that the income is actually applied for the said purposes in the taxable territories ; and accumulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble territories are not the same as mixed purposes. At best the amounts are kept under a suspense account with an option to the trustees to set apart at a later date for purposes within or without the taxable territories. Howsoever the option is exercised at a later stage, it is not an accumulation during the relevant accounting year for purposes within the taxable territories. Some of the cases cited at the Bar may not be of direct application, but the principle laid down therein may be helpful in construing the terms of the present trust deed. The Judicial Committee in Mohammad Ibrahim Riza v. Income-tax Commissioner, Nagpur held that where the purposes of a trust were not wholly charitable or religious and no portion of the property had been set aside for those purposes, the income from the trust could not be identified as appropriated exclusively thereto. The principle underlying this decision is, where a trust is for mixed purposes, some religious and others secular, with an option to the trustee to select one or other of the purposes, it is not possible to predicate till the selection is made that the object is for religious or charitable purposes. In the present case, an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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