Indian Kanoon - Search engine for Indian Law

8. The essential conditions which enable an assessee to earn exemption are: (i) the property from which the income is derived should be held under trust or other legal obligation ; (ii) the property should be held for religious or charitable purposes; (iii) then where the property is held wholly for religious or charitable purposes the exemption will be available if the income is, in fact, applied or accumulated for application to such purposes; and (iv) where property is held in part only for religious or charitable purposes the exemption is confined to income in fact applied or finally set apart for application for such purposes. There is no difficulty in dealing with the cases where the property is wholly set apart for charitable or religious purposes. In that event the actual application or accumulation for that purpose alone has to be established to qualify for exemption. Again there is no difficulty when any portion of a property is clearly set apart and then the portion so set apart will be deemed to be one unit and that much property will be said to be wholly set apart. There may again be no difficulty when any particular portion of the income of a property is required to be spent over the charitable purposes. A difficulty arises when charitable objects and non-charitable objects for which the property or the income thereof could be utilised are mixed up and a discretion is left to the trustees to utilise the property or the income thereof for any of the objects of the trust. Mr. Bhargava, learned counsel for the assessee, adopts the line of reasoning that prevailed with the Appellate Assistant Commissioner and contends that where the charitable object and the so called non-charitable object co-exist in a deed of trust then the dominant intention of the settlor has to be found out and where the dominant intention is one of charity, in general, the trust will still be held to be wholly charitable in character and will qualify for exemption. He placed reliance on Commissioner of Income-tax v. Walchand Diamond Jubilee Trust, [1958] 34 I.T.R. 228, Trustees of the Charity Fund v. Commissioner of Income-tax, [1959] 36 I.T.R. 513 (S.C.), Commissioner of Income-tax v. Sardar Bahadur Sardar Indra Singh Trust, [1956] 29 I.T.R. 781, Commissioner of Income-tax v. P. Krishna Warriar, [1964] 53 I.T.R. 176 (SC), Commissioner of Income-tax v. Andhra Chamber of Commerce, [1965] 55 I.T R. 722 (S.C.) and in In re Koettgen's Will Trusts; Westminster Bank Ltd. v. Family Welfare Association Trustees Ltd., [1954] 1 All E.R. 581.

17. Their Lordships, in construing the trust deed, observed that Sir Sassoon David, Bart., did not figure as direct recipient of any benefits under sub- Clauses (b) to (f) and the circumstance that in selecting the beneficiaries under Sub-clause (a) preference had to be given to the relations or members of the settlor could not affect the charitable character of the trust and, consequently, it was held that that trust satisfied the requirements of Section 4(3)(i) of the Act, This case, in our view, is clearly distinguishable from the present case. In that case it was clearly laid down that the benefit was intended for the poor and indigent relations or members of the family of Jewish origin. There the ambit of the benefit was not only limited to such members of the family, but primarily it was intended for the benefit of the much larger circle of Jewish community, though within the framework of this purpose preference was to be shown to members of the settlor's family. If we contrast the purpose of that trust with that of clause 2(vi) of the trust deed executed by Laxmi Narain Lath, it will be clear that in this trust aid may be given to any member of the family irrespective of the fact whether he is affluent or poor. We are unable to accept the argument advanced by Mr. Bhargava that the use of the word "aid" implies that as it will be for the needy members of the family this provision will still fall within the ambit of the dominant intention of the settlor. We have to construe the provision as it is, according to its language and not on the basis of what might have been at the back of the mind of the settlor. Aid may be given not only to the poor, but even to those who are not poor, for example, for starting a business or say by advancing an interest free loan for going abroad for higher studies. The object may be philanthropic but all the same one cannot say that aid is always charity. A loan on easy terms may be as good aid as a free gift, but while the latter in certain circumstances may be considered charitable, the former may not be so construed to be coming within the purview of the term " charity " ; for example, if a country is accepting economic aid from foreign countries that is not charity. In this light we are unable to construe that clause 2(vi) envisages a charitable purpose in tune with the other charitable purposes contained in that clause. Mr. Bhargava then drew our attention to Commissioner of Income-tax V. Walchand Diamond Jubilee Trust. The recital in the trust deed that fell for consideration in this case was that the settlor was anxious to strengthen the hands of the organisation which controlled the companies in which he had an interest and considered it necessary to maintain a uniform control over one of the companies by centralising the voting power in the company in the hands of a certain definite body instead of having it spread over individuals or small groups. The trust fund was to be invested in the purchase of shares of a particular company and for 18 years the income was to be invested in the shares of that company. After the expiry of 18 years the income from investment was to be utilised for certain charitable objects like giving scholarships to deserving students, medical relief, monetary help to the poor and the needy and for relief of the poor and distressed in times of lamine, cyclone, floods, earthquakes, etc. The question that fell for consideration was whether, in the circumstances, exemption under Section 4(3)(i) was permissible. It was held that the anxiety of the settlor to control the voting power of the company was not relevant for seeing whether Section 4(3)(i) of the Act applied. It was also held that the purpose of the trust was charitable, though for 18 years there was to be accumulation of income. It was contended that, as the object of the trust was to benefit the employees of a particular concern or their children, it was not a charitable trust within the meaning of Section 4(3)(i). The learned judges did clearly observe that, if the object of the trust was to benefit the employees of a particular concern or their children only, the trust would not be a charitable trust within the meaning of Section 4(3)(i). But, as in that case there was no obligation cast upon the trustees to prefer the employees of the company and they were not bound to select such employees, the trust was one which fell within the ambit of Section 4(3)(i). The reasoning of the learned judges will be clear from the following passage:

19. Mr. Bhargava also placed reliance on Commissioner of Income-tax v. Sardar Bahadur Indra Singh Trust and argued that a trust for charitable purpose does not become invalid, if the choice of the specific charitable objects to be benefited is left to the trustees. This case, to our mind, is wholly inapplicable. We are not considering the validity of the trust. The trustees may certainly be entitled to spend on any of the objects set out in the trust. The point here is whether the exemption under Section 4(3)(i) will be admissible when charitable and non-charitable objects are mixed up without clear demarcation. He also referred to In re Koettgen's Will Trusts : Westminster Bank Ltd. v. Family Welfare Association Trustees Ltd. There was no question of exemption being granted from income-tax in that case. The learned judge had to consider the question whether the trust can be said to be of public nature. A fund was created by the settlor for promotion and furtherance of commercial education and prescribed rules for the administration of the funds where the prescribed persons eligible as beneficiaries were British-born subjects of either sex and it was laid down that in selecting beneficiaries the trustees shall give preference to any employees of a particular company or members of their families. It was laid down by the learned judge that this was a public trust inasmuch as the primary class of persons eligible for the benefit was sufficiently wide though in making the selection the trustees had to give some priorities. The present is not a case of this type.

" Where a trust is created for charitable and non-charitable objects and gives an unfettered discretion to the trustees to utilise the whole of the income of the trust to objects which are non-charitable, the property in respect of which the trust is created cannot be deemed to be held in trust wholly for charitable or religious purposes, and the trust would not be eligible to the exemption contemplated by Section 4(3)(i) of the Income-tax Act, 1922. It would also follow that any donation made to such a trust is not entitled to exemption from tax under Section 15B of the Act."