J. K. Trust, Bombay Vs. The
Commissioner of Income-Tax/Excess Profits Tax, Bombay  INSC 51 (22 May
AIYYAR, T.L. VENKATARAMA BHAGWATI, NATWARLAL
CITATION: 1957 AIR 846 1958 SCR 65
Income Tax-Trust-Exemption from
taxation-Trustees conducting business of Managing Agency for the
Trust-Business, whether "Property"-Income from Managing Agency,
whether income derived from Property held on trust-Indian Income-tax Act, 1922
(XI Of 1922), S. 4(3)(i) and (ia).
A deed of trust whereby a sum of Rs. 1 lac
was settled on various charities specified therein provided for the acquisition
of the business of managing agency on behalf of the trust and with the help of
the trust fund. The trustees of the said trust (appellant) became the managing
agents of a public company. The agreement for the agency provided, inter alia,
that the agency was for a period of twenty years but that it was open to the
trustees to give up the agency on giving three months' notice and that the
managing agents were to get a remuneration of 10 per cent.' of the net annual
profits subject to a minimum of Rs. 50000 and an office allowance of Rs. 1,000
per mensem. The appellant claimed that the income derived from the managing
agency was income from property held under trust to be applied wholly for
charitable purposes, and was, in consequence, exempt from taxation under S.
4(3)(i) of the Indian Income-tax Act, 1922. It was contended on behalf of the
Income-tax authorities (1) that the income in question was remuneration for
services rendered and was not derived from any property, as a managing agency
could -not be considered to be property, and that, therefore, it did not fall
4(3)(i) of the Act, (2) that on the terms of
the deed of trust the managing agency could not be property held on trust, as
no part of the sum of Rs. 1 lac was utilised in the acquisition of the business
so as to impress it with the character of accretion, and (3) that even if the
managing agency business could be regarded as property within S. 4(3)(i), it
was governed by the special provision contained in S. 4(3)(ia), and as the
conditions laid down therein had not been satisfied, no exemption could be
Held: (1) A managing agency is business which
would be property within s. 4(3)(i) of the Act.
Lakshminarayan Ram Gopal and Son Ltd. v. The
Government of Hyderabad, (1955) I.S.C.R. 393, followed.
All India Spinners' Association v.
Commissioner of Income- tax,, Bombay  12 I.T.R. 482, relied on, 66
(2)Though the office of managing agency carries with it certain obligations, in
law there can be no objection to creating a trust over property burdened with
obligations, though, if it is onerous by reason of such obligations, the trustee
may be entitled to disclaim it.
(3)When trustees carry on business with the
aid of trust fund the position in law is the same as if they actually employed
it in the business, though, in fact, it be not actually invested therein and,
taking the provisions of the deed of trust and the agreement of agency
together, the managing agency must be held to be property held on trust.
Rocke v. Hart, (1805) 32 E.R. 1009 and Moons
v. De Bernales, (1826) 38 E.R. 117, relied on.
The case was remanded to the High Court for a
decision on the question whether profits from business would be exempt from
taxation under S. 4(3)(i) of the Act when the conditions laid down in S.
4(3)(ia) were not satisfied.
CIVIL APPELLATE JURISDICTION: Civil Appeal
No. 246 of 1954.
Appeal by special leave from the judgment an
order dated October 6, 1952, of the Bombay High Court in Income-tax Reference
No. 1 of 1952.
N. A. Palkhivala, J. B. Dadachanji, S. N.
Andley Rameshwar Nath and P. L. Vohra, for the appellant.
O. N. Joshi and R. H. Dhebar, for the
1957. May 22. The Judgment of the Court was
delivered by VENKATARAMA AIYAR J.-'This is an appeal by special leave against
the judgment of the Bombay High Court passed in a reference under s. 66(1) of
the Indian Income-tax Act, 1922 (hereinafter referred to as the Act) and ss. 21
and 19 of the Excess Profits Tax Act, 1940, and of the Business Profits Tax
Act, 1947, respectively read with s. 66(1) of the Act. The dispute between the
parties relates to the assessment of income-tax for the assessment years
1946-47, 1947-48 and 1948-49 and of excess profits tax for the chargeable
accounting periods, September 3, 1945, to March 31, 1946, April 1, 1946, to
March 31, 1947 and April 1, 1947, to March 31, 1948, and it arises out of the
same facts and involves the same points for determination, 67 On June 15, 1945,
three brothers Sir Padampat Singhania, Lala Kailashpat Singhania and Lala
Lakshmipat Singhania who were carrying on business under the name of Juggilal
Kamlapat, executed a deed of trust, Ex. A, whereby they settled a sum of Rs.
1,00,000 on various charities specified therein and called the J. K. Trust,
Bombay, and appointed themselves and two other persons Lala Ramdeo Podar and
Sir Chunnilal Mehta as its trustees. The trust deed provided inter alia that
"the trustees may with the help of the trust fund, for and on behalf of
and for the benefit of the trust, carry on such business including the taking
up and conducting the managing agency or selling agency of any company in such
name or names as they in their absolute discretion may think fit and proper and
may close and re- start such business and utilise the profits for all or any of
the objects aforesaid.". Large powers were conferred on them in the
conduct of the business, and they were also authorised to "raise or borrow
money required for the purpose of the trust".
At this time, Messrs. E. D. Sassoon and Co.,
Ltd. were the managing agents of a public Company called the Raymond Woollen
Mills Ltd. The firm of Juggilal Kamlapat of which the three Singhania brothers
were the partners, acquired a controlling interest in the said Mills by
purchase of the shares of Messrs. E. D. Sassoon and Co. therein; and following
on this, the shareholders passed a special resolution on September 3, 1945,
appointing the trustees of the J. K. Trust as managing agents of the Company in
the place of Messrs. E. D. Sassoon and Co', Lid., who resigned.
On September 10, 1945, a memorandum of
agreement, Ex. B, was duly executed by the Company constituting the trustees of
the J. K. Trust, Bombay, as its managing agents on the terms and conditions set
out therein. It is to be noted that the five persons named as trustees under
Ex. A were appointed as managing agents in their character as trustees, and it
is expressly provided therein that the expression 'managing agents',
"unless excluded by or repugnant to the context shall include the Trustees
for the time being of the said Trust or 68 any other Trust with which the same
may be amalgamated".
The agency was to be for a period of 20
years; but it was open to the trustees to throw it up on giving three months'
notice. The managing agents were to get a remuneration of 10 per cent. of the
net annual profits subject to a minimum of Rs. 50,000 and an office allowance of
Rs. 1,000 per mensem. Clause 7 of the agreement provided that, " During
the continuance of this agreement, the Managing Agents shall maintain with the
Company a deposit of Rs.
1,00,000 (Rupees one lack only) in cash by
way of security for due fulfilment of their obligations as specified therein
and shall be entitled to charge interest at 3 1/2 per cent.
per annum on the amount of such deposit in
addition to their remuneration." Clause 8 laid an obligation on the
managing agents "to arrange loans and advances to the Company as and when
required up to and not exceeding Rs. 10 lacs at any time and if necessary to
guarantee such loans or advances from time to time". Under el. 14,
"Notwithstanding anything herein contained, all the terms and conditions
of this Agreement including the period of appointment of the Managing Agents
may be varied or abrogated by mutual agreement." The trustees entered on
their duties as managing agents under this agreement, and by an agreement dated
May 14, 1946, they appointed one Tej Narain Khaitan, son-in-law of one of the
three Singhania brothers as their representative to carry on the managing
agency work on a remuneration of 30 per cent. of the annual income which would
be payable to them under Ex. B. Before the Income-tax authorities, the
appellant claimed that the income derived from the managing agency was income
derived from property held under trust to be applied wholly for charitable
purposes, and was, in consequence, exempt from taxation under s. 4 (3) (i) of
the Act. The Income-tax authorities held that the income in question was
remuneration for services rendered, and was not derived from any property, and
that, therefore, it did not fall within s. 4 (3) (i) of the Act. They further
held 69 that even if the managing agency business could be regarded as property
within s. 4 (3) (i), it was governed by the special provision contained in s. 4
(3) (ia), and as the conditions laid down therein had not been satisfied, no
exemption could be claimed. In this view, they allowed a sum of Rs. 30,000 per
annum for remuneration of Mr. Khaitan as a deduction under s. 10 (2) (x) of the
Act, and held that the balance of the income, Rs. 23,287 in 1946-47, Rs. 36,786
in 1947-48 and Rs. 2,16,460 in 1948-49 was liable to be taxed under the provisions
of the taxing statutes.
On applications made by the assessee under a.
66(1) of the Act and the corresponding provisions in the Excess Profits Tax Act
and the Business Profits Tax Act, the Tribunal referred the following questions
for the decision of the High Court of Bombay:
1. " Whether on the facts of the case
the commission earned by the managing agents for managing. the Raymond Woollen
Mills was income earned by the managing agents for services rendered and not
income derived from property held under trust or for other legal obligations
and therefore not exempt under s. 4 (3) (i) of the Income-tax Act?
2. Whether on the facts of the case the
business carried on by the Trustees falls to be considered under s. 4 (3) (i)
or s. 4 (3) (ia) of the Income-tax Act?" The reference was heard by
Chagla, C.J., and Tendolkar, J., who held that no part of the sum of Rs.
1,00,000 which was the only property settled on trust under Ex. A was actually
invested in the managing agency business, which could not, therefore, be
regarded as trust property, and that the income received from that business was
'not within the exemption enacted in s. 4 (3) (i). They accordingly answered
the first question against the appellant. As regards the second question, the
learned Judges held that it was unnecessary to express any opinion thereon, as
it was common ground that even if s. 4 (3) (ia) applied, neither of the
conditions laid down in sub-cl. (a) or (b) had been fulfilled, and that
accordingly no relief could be granted there under.
70 The points that arise for determination in
this appeal are (1) whether the income received by the trustees of J.K. Trust,
Bombay, as managing agents of Raymond Woollen Mills, Ltd., is income derived
from property held on trust or on an obligation in the nature of trust; and (2)
whether the claim for exemption in respect of such income is to be determined
under s. 4 (3) (i) or s. 4 (3) (ia).
With reference to the first question, the
contention of Mr. Palkhivala is that managing agency is business and therefore
it is property, and that it is property held on trust because it is conducted
by the trustees on behalf of the trust with the help of trust properties and in
accordance with the directions contained in the trust deed. He also contends that
even if the business is not held on trust, it is at least held, on the
principle laid down in s. 88 of the Trusts Act, on an obligation in the nature
of trust, and that s. 4 (3) (ii) is, in consequence, attracted. For the
respondent, Mr. Joshi does not dispute that managing agency is to be regarded
as business, but he contends that there can be no trust of such agency, because
it really involves rendering of services and cannot be said to be property in
respect of which alone trust can be created, and further because managing
agency is an office, and that again is not property. He also contends that, in
any event, ,the managing agency created under Ex. B could not be held to be
trust property, because it could be terminated at any time, if the trustees so
desired, on three months' notice and that there could be no trust of' such a
precarious, ephemeral or evanescent kind of property, if indeed it could be
held to be property. He also contends that s. 88 was inapplicable, as there was
no property which was held on an obligation in the nature of a trust.
Whether a managing agency could be regarded
as business was considered by this Court in Lakshminarayan Ram Gopal and Son
Ltd. v. The Government of Hyderabad (1), where the question arose with
reference to assessment of excess profits tax on the remuneration received by
managing agents, tax being leviable under (1)  11 S.C.R. 393.
71 that Act only on business income and it
was held that it was business, and that the profits there from were rightly
assessed to tax under the Act. The law must therefore be taken to be settled
beyond controversy that managing agency is itself business.
Then the question is whether that business
can be held to be property within s. 4(3)(i) of the Act. Now 'property' is a term
of the widest import, and subject to any limitation or qualification which the
context might require, it signifies every possible interest which a person can
acquire, hold and enjoy. Business would undoubtedly be property, unless there
is something to the contrary in the enactment. Section 4(3)(i) of the Act under
which exemption is claimed runs as follows:
"4. (3) Any income, profits or gains
falling within the following classes shall not be included in the total income
of the person receiving them- (i) any income derived from property held under
trust or other legal obligation wholly for religious or charitable purpose, and
in the case of property so held in part only for such purposes, the income
applied, or finally set apart for application thereto." Now, confining
ourselves solely to the language of s. 4 (3)(i), there is nothing- in it which
restricts in any manner the normal and accepted meaning of the word property',
and excludes business from its connotation.
There is also authority in support of the
view that business is property within the intendment of s. 4(3)(i). In In re
The Tribune (1), the question was whether a trust created over the Tribune
press and newspaper was for a charitable purpose as defined in s. 4 (3) (i) of
the Act. The majoritv of the learned Judges of the High Court took the view
that the object of the trust was not wholly religious or charitable, and that
accordingly the exemption under that section could not be claimed. This
decision was taken in appeal to the Privy Council, which held reversing the
judgment of the High Court that the object of the trust was in its entirety
charitable and that it came within the exemption enacted in s. 4 (3) (i). Vide
In re The Trustees of the Tribune (2). That is a question with (1) [ 1035] 3
I.T. R. 246. (2)  7 I.T.R. 415; L.R. 66 I.A.
72 which we are not concerned in this appeal,
and the actual decision of the Privy Council does not bear on the present
controversy. What is relevant to our purposes is that before the High Court, a
contention was raised that the word 'property' must bear the same meaning both
in ss. 9 and 4 (3) (i), that in s. 9 it was used in contradistinction to
business which was dealt with under s. 10, and that therefore 'property' in s.
4 (3)(i) could not include business. This contention was repelled by the High
Court, which held that the meaning of the word 'property' in s. 4 (3) (i) could
not be controlled by the connotation of that word in s. 9. Vide In re The
Tribune (1). Before the Privy Council, however, the question whether business
of the Tribune press and newspaper was property was not raised, the Board
merely observing that in the letter of reference there was "no suggestion
that the income under assessment is not derived from property held under trust
declared in the 20th and 21st paragraphs of the will".
The point, however, arose directly for
decision in All India Spinners' Association v. Commissioner of Income-tax,
Bombay (2). There, the assessee was an unregistered association called the All
India Spinners' Association, and it was formed for the purpose of development
of the village industries of handspinning and handweaving. -The Association
collected subscriptions from its members and also donations and invested them
in the purchase of raw cotton which was supplied to poor labourers for being
spun into yarn, the yarn being. then supplied to them for being woven into
cloth, which was then sold and the sale proceeds appropriated to the funds of
the Association for the purposes aforesaid. The assessee claimed exemption
under s. 4(3) (i) on the ground that its income was derived from property held
under trust. The High Court was of the opinion that the yarn and the cloth the
sale of which yielded the income, could not be regarded as property held in
trust, and that, in consequence, s. 4(3) (i) did not apply. In reversing this
judgment, the Privy Council held that "the property consisted of the
Organisation and the undertaking as well as in the (1)  3 I.T.R. 246.
(2)  12 I.T.R. 482; L.R. 71 I.A. 159,
73 fluctuating stock of yarn and cloth", and that the exemption in s.
4(3)(i) applied. This is direct authority in support of the contention of the
As against these authorities, the respondent
relied on the decision in Eggar v. Commissioner of Incometax (1). There, a
certain professor agreed to hand over the remuneration which would be payable
to him by the University for lectures to be delivered by him, for certain
charitable purposes, but, in fact, no deed of trust was executed. The question
was whether the amounts actually paid to him by the University were exempt from
taxation, and it was held that they were not, and that the income in question
was at the time of the receipt the private property of the assessee being
remuneration for services rendered by him. There could be no question in this
case of any source of income being dedicated to trust, and the decision
accordingly has no bearing on the point, which falls to 'be decided here.
The weight of authority is therefore clearly
in favour of the view that business would be 'property' for purposes of s.
4(3)(i) of the Act.
It is next contended for the respondent that
even if business could in general be held to be property within s.
4(3) (i), managing agency cannot be so
regarded, because having regard to ss. 2(9A), 87A and 87B of the Indian
Companies Act, it is merely an office which consists in the performance of
services and discharge of certain obligations, and that that could not be
regarded as property, which could be the subject-matter of trust. We are unable
to accede to this contention. In Angurbala Mullick v. Debabrata Mullick (2),
and The Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra
Thirtha Swamiar of Sri Shirur MUtt (3), even an office of trusteeship was held
to be property especially when emoluments were attached to it, and that must a
fortiori be the position in the case of office of managing agency, which is
clearly one of profit and even alienable under certain circumstances. The
office requires no doubt the performance of services; but there is no
antithesis between service (1) (1926) 2 I.T.C. 286.
(2) [195I] S.C.R. 1125.
(3)  S.C.R. 1005, 1019.
10 74 and business, as there are several
kinds of business, which involve the performance of services, such as insurance
and commission agency. The true test is whether the services are a regular
source of income. And if managing agency is business, as was held in
Lakshminarayan Ram Gopal and Son Ltd. v. The Government of Hyderabad (1), then
there is no reason why it should not be property for purposes of s. 4(3)(i) of
the Act. Nor is it an accurate statement of the true position to describe trust
of the managing agency as a trust of an obligation. It is in truth a trust of
property, which carries with it certain obligations, and in law, there is no
objection to creating a trust over property burdened with obligations, though,
if it is onerous by reason of such obligations, the trustee may be entitled to
It is then contended that even if managing
agency could be the subject of trust, the managing agency created by Ex. B must
be held to be incapable of being held on trust because it is of the essence of
public, as distinguished from private, charity that it must be permanent and
incapable of being revoked or put an end to at the option of the trustee,
whereas the managing agency created by Ex. B could be terminated by the
trustees by giving three months' notice.
This is to confuse charity with properties
devoted to charity. It is true that a public charity is perpetual in character,
and that means that it is capable of enforcement, so long as there is any
property left which can be appropriated for its objects. And even if some or
all of the objects become incapable of fulfillment, the trust properties will
be devoted to the performance of similar or allied charitable purposes on the
doctrine of cy pres. But so far as the trust properties themselves are
concerned, they will be held only on the incidents to which they are subject
under the law. Thus, if the property is a leasehold interest, it must cease on
the termination of the lease.
Likewise, if trust property is alienated
under circumstances binding on the trust, it will go out of the trust. But that
does not operate (1)  I S.C.R. 393. 75 as an extinction of the trust,
unless there is no property at all left, with which the trust could be carried
That is the principle enacted in s. 77(c) of
the Indian Trusts Act, 1882, which in terms, however, applies only to private
trusts. We must therefore hold that the fact that the trustees have the option
at any. time to throw up the managing agency is no legal' impediment to its
being property which could be held on trust.
Lastly, it is contended that on the terms of
Ex. A, the properties which the trustees are " to hold and stand possessed
of " are " the sum of Rupees One Lao and any donations or contributions
received by the Trustees and all accretions thereto and thereof and the
investments in securities for the time being and from time to time representing
the same ", that on the terms aforesaid, the managing agency cannot be
held to be property held in trust, as no part of the sum of Rs. 1,00,000 was
utilised in the acquisition of the business so as to impress it with the
character of accretion. It is argued that though the sum of Rs. 1,00,000 was
given as security by the trustees under Ex.
B, that was only for the due performance of
their obligations as managing agents, and that the amount itself was not
actually thrown into the business. But it is to be observed that cl. 3 of the
trust deed expressly provides for the acquisition of the business of managing
agency on behalf of the trust and " with the help of the trust fund",
and that precisely is what has happened and indeed, reading together Exs. A and
B, it is impossible to resist the conclusion that both the documents formed
part of an integral scheme, and that what the settlors had in view in cl. 3 of
Ex. A is the very managing agency, which was acquired under Ex. B. There is
considerable authority in England that when trustees carry on business with the
aid of trust fund, the position in law is the same as if they actually employed
it in the business, though, in fact, it be not actually invested therein. Thus,
in Rocke v. Hart (1), Sir William Grant observed:
(1) (1805) 11 Ves. Jun, 58 ; 32 E.R. 1009,
76 a trader lodges money at his banker's, he
has in effect a benefit from that. As he must generally keep a balance in his
banker's, it answers the purpose of his credit; as if it was his own money; and
I should hold that to be employment in his trade." There are similar
observations by Lord Gifford, in Moons v. De Bernales (1).
In the result, we are of opinion that the
word I property' in s. 4(3)(i) of the Act is of sufficient amplitude to
comprehend 'business', and if the question fell to be decided solely on the
terms of that sub-section, the managing agency constituted under Ex. B must be
treated as property held on trust within s. 4(3)(i) of the Act.
This conclusion, however, is not sufficient
to dispose of the appeal in favour of the appellant, because there is still the
question raised by the respondent that even if under the general law, the word
I property' is wide enough in its significance to include business, in its
context in s. 4(3)(i) read along with s. 4(3)(ia) it bears a more restricted
sense as meaning only property other than business. And it is this contention
that forms the subject- matter of the second question under reference. In order
to understand this question, it is necessary to state that in the Act as
originally passed, the only provision for exemption from taxation of income
derived from property dedicated to religious or, charitable trust was contained
in s. 4(3)(i). On this section, the question arose whether when a business was
carried on for and on behalf of a trust, the profits derived therefrom were
exempt from taxation. It was held in Commissioner of Income-tax, Madras v. Arunachalam
Chettiar (2), following a decision of the House of Lords in Coman v. Governors
of the Rotunda Hospital, Dublin(3), that they were not. That was also the view
taken by the Allahabad High Court in Lachhman Das Narain Das, In re (4). Then
came the decision in In re The Tribune (5) already referred to, wherein the
Lahore High Court held that 'property' in s. 4(3)(i) was (1) (1826) 1 Russ. 301
; 38 E.R. 117. (3)  A.C. 1.
(2) I.L.R. (1926) 49 Mad. 833. (4) I.L.R.
(1925) 47 All.
(5)  3 I.T.R. 246.
77 sufficiently comprehensive to include
business, and that profits from business carried on by trustees would be exempt
from taxation. As already stated, though the matter was taken in appeal to the
Privy Council this question was not raised. It was in this state of the law
that the Legislature intervened, and enacted a new provision, s. 4(3)(ia),
which is as follows:
" 4(3) Any income, profits or gains
falling within the following classes shall not be included in the total income
of the person receiving them:
(ia) Any income derived from business carried
on behalf of a religious or charitable institution when the income is applied
solely to the purposes of the institution and- (a) the business is carried on
in the course of the carrying out of a primary purpose of the institution, or
(b) the work in connection with the business is mainly carried on by
beneficiaries of the institution." Under this provision, the profits of
business would be exempt only if the conditions laid down therein are
satisfied. It is the contention of the Department that as this is a special
provision dealing with the topic of exemption in respect of business carried on
for and on behalf of a trust, any claim for exemption as regards profits
derived from any such business can be made only under that provision, and when
the conditions laid down therein are not satisfied, it is not open to the
assessee to fall back upon the general provision contained in s. 4(3)(i) and
claim exemption thereunder on the ground that business is property. The basis
of this contention is the well-known maxim, Generalia specialibus non derogant.
In Charitable Gadodia Swadeshi Stores v. Commissioner of Income-tax, Punjab(1),
this question came up for consideration before the Lahore High Court. It was
held by the learned Judges that the fact that the business failed to satisfy
the two conditions laid down in s. 4(3)(ia) was no reason why it should not be
exempt from taxation if it fell within 1)  12 I.T. R. 385.
78 s. 4(3) (i), and the main ground of the
decision was that the two categories mentioned in s. 4(3) (i) and s. 4(3)
(i)(a) having been enacted as two different clauses, it must be taken that the
one did not exclude the other.
It was this decision that was relied upon by
the appellant before the Tribunal, which, however, considered it
distinguishable. A reading of its order, however, shows that it was not really
satisfied about its correctness.
Accordingly, when the appellant applied for
reference under- s. 66 (1) of the Act, the Tribunal referred the second
question also for the decision of the High Court. But in the view which the
learned Judges of the Bombay High Court took that business was not property within
s. 4(3)(i), it became unnecessary for them to express an opinion on that
question. Now that we have held that the word property in s. 4 (3) (i),
standing by itself, is susceptible of a wider connotation so as to include
business, it becomes necessary to consider the second question under reference.
Learned counsel on both sides agree that it would be more satisfactory that
this question should be remitted to the High Court for determination.
In the result, we remand the case to the High
Court of Bombay for a fresh disposal of the reference on a consideration of the
second question. As for costs, we direct that the respondent do pay the
appellant the costs of this appeal as also the costs of the hearing before the
High Court. The costs of the further hearing which we have directed will be
dealt with by the High Court on remand.
Appeal allowed. Case remanded.