Commissioner of Income-Tax Kerala and Coimbatore
Vs. Krishna Warriar [1964] INSC 143 (29 April 1964)
29/04/1964 SUBBARAO, K.
SUBBARAO, K.
SHAH, J.C.
SIKRI, S.M.
CITATION: 1965 AIR 59 1964 SCR (8) 36
CITATOR INFO:
E 1976 SC1836 (20) RF 1977 SC2211 (10) R 1978
SC1443 (7) RF 1980 SC 387 (11,26)
ACT:
Income Tax-Exemption train taxation-Business
held in trustPart of profits to be utilised for religious or charitable
purpases37 Business, if property-Indian Income-tax Act, 1922 (11 of 1922), s.
4(3)(i).
HEADNOTE:
A testator was carrying on business in
Ayurvedic drugs under the name and style of Arya Vaidya Sala. Under his will
his properties, A including the business, were held under trust and the object
of the trust was to utilise 60 per cent of the profits of the business for 20
years and 85 per cent thereafter for religious and charitable purposes. The
assessment years in question fell within 20 years from the death of the
testator and the question was whether the 60 per cent of the income from the trust
properties was exempt from assessment to income-tax under s. 4(3)(1) of the
Indian Income-tax Act, 1922. The Income-tax authorities rejected the claim for
exemption and assesses. the entire income from the said properties, on the
ground that the substantive cl.
(i) of s. 4(3) was not applicable to the case
but only cl.
(b) of the proviso and that the conditions
laid down there under were not complied with.
HELD: (i) The business run under the name and
style of Arya Vaidya Sala was property within the meaning of s.
4(3)(i) of the Indian Income-tax Act, 1922,
and as the entire business was held in trust for utilising a part of its
profits for religious or charitable purposes, the said income was exempt from
assessment to income-tax under that section.
(ii) Cl. (b) of the proviso to s. 4(3)(i) was
applicable only to a business not held in trust but carried on on behalf of a
religious or charitable institution, (iii) A business held in trust wholly or
in part for religious or charitable purposes was not a business carried on
behalf of a religious or charitable institution.
(iv) The dichotomy between the two
expressions "wholly" and "in part" in s. 4(3)(i) was not
based upon the dedication of the whole or a fractional part of the property,
but between the dedication of the said property the income from which was to be
utilized wholly for religious or charitable purposes or in part for such
purposes.
(v) The expression "such income" in
the opening words of the proviso to s. 4(3)(i) meant "income accruing or
arising in favour of the trust".
CIVIL APPELLATE JURISDICTION: Civil Appeal,
Nos. 606-610 of 1963.
Appeals by special leave from the judgment
dated January 20, 1961 of the Kerala High Court in Income-tax Referred Case No.
16 of 1959.
K. N. Rajagopal Sastri and R. N. Sachthey,
for the appellant (in all the appeals).
38 S. T. Desai and Sardar Bahadur, for the
respondent (in all the appeals).
April 29, 1964. The Judgment of the Court was
delivered by SUBBA RAO J.-These appeals by special leave raise the question of
the construction of the provisions of s. 4(3) (i) of the Indian Income-tax Act,
1922, hereinafter called the Act, as am-ended by the Indian Income-tax
(Amendment) Act, 1953, hereinafter called the Amending Act.
The facts are as follows. One P. S. Warriar,
an eminent Ayurvedic physician, carried on business in Ayurvedic drugs under
the name and style of "Arya Vaidya Sala" and was also running a
hospital named "Arya Sikitsa Sala" and a school called "Arya
Vaidya Pata Sala". The said Warriar died on January 30, 1944, after
executing a will wherein he created a trust in respect of his properties,
including the Arya Vaidya Sala. He gave directions to the trustees appointed
under thesaid will to conduct the said business and to disburse theincome
therefrom in certain proportions to the Arya Vaidya Sala, Arya Sikitsa Sala and
Arya Vaidya Pata Sala and to his descendants. Broadly stated 60 per cent of the
income was directed to be spent on the said three institutions and 40 per cent
to be given to his descendants. Till the Amending Act came into force the
Incometax Department gave exemption from assessment for the 60 per cent of the
income under s. 4(3) (i) of the Act; but, after the Amending Act came into
force, which was given retrospective operation from April 1, 1952, the said
Department refused to give exemption from assessment even in regard to the 60
per cent of the income. For the assessment years 1954-55 and 1955-56 the
Income-tax Officer ,assessed the entire income from the said properties; and in
respect of the income pertaining to the assessment years 1952-53 and 1953-54,
which had already been assessed in the usual course giving exemption for the
said 60 per cent of the income, the Income-tax Officer issued notices under s.
34 of the Act and by two separate orders dated September 28, 1956, assessed the
said 60 per cent of the income on the basis of escaped assessment. On December
20, 1956, 39 for the assessment year 1956-57 the Income-tax Officer, in the
like manner, assessed the entire income from the said properties. The appeals
filed by the assessee against the said orders of assessment to the Appellate
Assistant Commissioner were dismissed. The appeals filed against the orders of
the Appellate Assistant Commissioner to the Income-tax Appellate Tribunal,
Madras, were consolidated and by its order dated February 28, 1958, the said
Tribunal allowed the appeals exempting 60 per cent of the said income from
assessment to income-tax under s. 4(3) (i) of the Act.
The references made to the High Court of
Kerala were dismissed. Hence the present appeals.
Mr. Rajagopala Sastri, learned counsel for
the Revenue, contends that under s. 4(3)(i) of the Act whereunder the said
income is given exemption from taxation, the property wherefrom the income is
derived shall have been held under trust wholly or in part for religious or
charitable purposes, that the business run under the name and style of Arya
Vaidya Sala was not capable of being held in trust, that even if it was capable
of being held under trust, it was not wholly or in part so held in trust for
religious or charitable purposes, as only a part of the income was directed to
be spent for religious or charitable purposes and that in the circumstances cl.
(b) of the proviso was attracted but the conditions laid down there under were
not complied with.
Learned counsel for the respondent, Mr. S. T.
Desa, contends that business is property within the meaning of s. 4(3) (i) of
the Act and that it is held in trust in part for religious and charitable
purposes and, therefore, the substantive part of the provision is attracted to
the facts of the case and hence the proviso is excluded.
Before we construe the relevant provisions of
the Act and consider the arguments advanced on either side, it would be
convenient at the outset to read the material part of the will and to ascertain
the scope of the bequest created there under. The will is marked as Annexure A2
in the case.
The relevant parts of the Will read:
"1. Will executed by Panniampalli
Warriath deceased Parvathi alias Kunkikutty Warassiar's 40 son Sri Sankunny
Warriar known as Vaidyaratnam Sri P. S. Warriar, residing at Puthan Warian in
Kottakkal Amsom and Desom of Ernad Taluk." "7. Apart from the
properties mentioned in Schedule B, C and D all other properties, movable as
well as immovable, belonging to me I hereby constitute into a trust to be
managed by the trustees as per the directions in the will.
They are described in Schedule E, and on my
demises those properties will vest in the trustees. It is MY intention that
except the properties mentioned in pares 4 and 5 (B, C & D Schedule), all
my properties are to be included in the Trust and therefore, even if some item
of property is left out by inadvertence, it is also to be deemed included in
the Trust and vested in the Trustees." "8. Provisions regarding the
Trust. I hereby nominate the following persons as the first Board of Trustees: "9.
The above Trust is to be managed and conducted according to the terms and
conditions detailed below:(A to F) ...........................
G. The primary and chief objects of the Trust
are to carry on forever the two institutions viz., the Arya Vaidya Sala and the
Arya Vaidya Hospital on the lines followed now with the object of enlarging and
increasing their scope and utility. The work of Arya Vaidya Sala now consists
of,
1. preparation of Ayurvedic medicines,
2. sale of the same,
3. treatment of . patients, receiving from
them compensation according to their capacity and means, 41
4. to conduct research into Arya Vaidyam with
a view to make it more and more useful to the public.
H. The following are the matters conducted in
the institution called the Arya Vaidya Hospital.
1. To examine poor patients free of charge,
to prescribe treatment for them and give medicines gratis (outpatient
Department).
2. To take in at least 12 poor patients at
any time, give them lodging and board and also free medicines and treatment
free (the in-patient Department) .
3. To carry out the said services with the
help of an Arya Vaidyan and necessary operations with the help of an Allopathi
doctor.
4. Give treatment and medicines to all
persons seeking them, receiving from such of them as are able such remuneration
as they can afford including cost of medicines.
The Arya Vaidya Hospital is now carried on
with the medicines supplied by and taken from the Arya Vaidya Sala and the
incidental expenses are now met from out of the funds of the Arya Vaidya Sala.
J. The trustees are to run the above
institutions according to the intentions expressed above with such
modifications as the circumstances may warrant.
K. In the Arya Vaidya Patasala run under the
auspices of the Arya Samajam, Aryavaidyam is taught in accordance with the
service of Ayurveda. I have been meeting the expenses of the said institutions,
not covered by its income. From out of the profits of Arya Vaidya Sala.
L. Out of the net profits of the Arya Vaidya
Sala 25 per cent is to be devoted to the development of the Arya Vaidya Sala,
25 per cent for meeting the expenses of the Arya Vaidya Hospital and 25 per
cent for division equally between the two tavazhies (this only for 25 years)
out of the remaining 25 per cent a sum not exceeding 10 per cent may be
according to requirements, utilised for the purposes of the Arya Vaidya
Patasala. The balance, if any, that may remain out of the 10 per cent after
disbursement to the Arya Vaidya Patasala, may be used for the Arya Vaidya Sala
itself. The balance 15 per cent .are to be deposited by the Trustees each year
in approved banks as a Reserve fund for the two tavazhies for a period of 20
years and the fund thus accumulated inclusive of interest is to be divided
equally among the two tavazhies equally i.e., in moiety and it will be the duty
of the Trustees to invest 'the same on the authority of immovable properties.
M. The Trustees are not bound to pay any
amount to the said two tavazhies after the expiry of 20 years. The 40 per cent
of the profit so earmarked for 20 years and so released after the expiry of 20
years are therefore to be utilised for the development of the Arya Vaidya Sala
and Arya Vaidya Hospital according to the discretion of the Trustees.
E Schedule: All remaining properties
constituted into the Trust.
will be seen from the said recitals of the
Will that the stator created a trust in respect of his entire properties, including
those mentioned in Schedules B, C and D and specifically vested them in the
trustees appointed thereunder. The properties so vested included the business
mrried on in the name and style of Arya Vaidya Sala. The main objects of the
trust were to carry on the said two institutions, namely, Arya Vaidya Sala and
Arya Vaidya Hospital 43 and also the other objects mentioned thereunder. Out of
the income from the business so vested in the trustees, he directed the
trustees to spend 25 per cent for the development of Arya Vaidya Sala, 25 per
cent to meet the expenses of the Arya Vaidya Hospital, not exceeding 10 per
cent for the Arya Vaidya Patasala, 25 per cent to be shared equally by the two
branches of the family of the testor for a period of 20 years and thereafter to
be utilized for the purpose of the Arya Vaidya Sala and Arya Vaidya Hospital
and 15 per cent to be given to the said branches; that is to say, 60 per cent
of the total properties for a period of 20 years from the demise of the
testator should be utilized for religious and charitable purposes and
thereafter 85 per cent to be utilized for the said purposes and the rest to be
spent on non-religious and non-charitable purposes.
Therefore, under the Will the E Schedule
properties, including the business, were held under trust and the object of the
trust was to utilize 60 per cent of the profits of the business for 20 years
and 85 per cent thereafter for religious and charitable purposes. The
assessment years in question fell within 20 years from the death of the
testator and, therefore, we are concerned only with 60 per cent of the income
from the trust properties. The question is whether the 60 per cent of the
income from the trust properties is exempt from assessment to income-tax under
s.
4(3) (i) of the Act. The relevant provisions
of the Act read:
Section 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
purposes, 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........................
(b) in the case of income derived from
business carried on behalf of a religious or charit44 ,able institutions,
unless the income is applied wholly for the purpose of the institution and
either(i) the business is carried on in the course of the actual carrying out
of a primary purpose of the institution, or (ii) the work in connection with
the business is mainly carried on by beneficiaries of the institution.
A brief history of the proviso may not be out
of place here.
Before the amendment of this clause by the
Amending Act of 1953 the proviso was in the form of a separate substantive
clause and was numbered as cl. (i-a). The said cl. (i-a) came under judicial
scrutiny. It was argued on behalf of the Revenue that though a business was
held under trust for religious or charitable purposes, it would fall under cl. (i-a)
and the income therefrom could not be exempted from income-tax unless the
conditions laid down in the said clause were complied with. In Charitable
Gadodia Swadeshi Stores v. Commissioner of Income-tax, Punjab (1). the Labore
High Court rejected that contention, and one of the reasons given for the
rejection was that if the &aid clause was intended to narrow down the scope
of cl. (i), the said clause would have been added as a proviso to the old
clause.
Presumably on the basis of this suggestion
the Amending Act of 1953 substituted cl. (i-a) by cl. (b) of the proviso.
But it is not an inflexible rule of
construction that a proviso in a statute should always be read as a limitation
upon the effect of the main enactment. Generally the natural presumption is
that but for the proviso the enacting part of the section would have included
the subject-matter of the proviso; but the clear language of the substantive
provision as well as the proviso may establish that the proviso is not a
qualifying clause of the main provisions, but is in itself a substantive
provision. In the words of Maxwell, "the true principle is that the sound
view of the enacting clause, the saving clause and the proviso taken and
construed together is to prevail".
So construed we find no difficulty, as we
will indicate later (1) (i944) 12 I.T.R. 385.
in our judgment, in holding that the said cl.
(b) of the proviso deals with a case of business which is not vested in trust
for religious or charitable purposes within the meaning of the substantive
clause of s. 4(3) (i).
With this introductory remarks we shall
proceed to construe the provisions of s. 4(3)(i) of the Act, along with cl. (b)
of the Proviso. Under cl. (i), so far as it is relevant to the question raised
before us, to earn the exemption the income shall have been derived from
property under trust wholly or in part held for religious or charitable
purposes.
Under cl. (b) of the proviso to that clause,
in the case of income derived from business carried on behalf of a religious or
charitable institution, unless the condition laid down there under are complied
with, the said income cannot be exempted. If business is property and is held
under trust ,wholly or partly for religious or charitable purposes, it falls
squarely under the substantive part of cl. (i) and in that *vent cl. (b) of the
proviso cannot be attracted, as under that clause of the proviso the business
mentioned therein is not held under trust but one carried on I behalf of a
religious or charitable institution. To take a business out of the substantive
cl. (i) of s. 4(3) and place it in cl. (b) of the proviso, it is suggested that
business is not property and that even if it is property the said property is
not wholly or partly held in trust for religious or charitable purposes. That
business is property is now well settled. The Privy Council in re Trustees of
the Tribune(') did not question the view expressed by the Bombay High Court
that business of running the newspaper Tribune was property held under trust
for charitable purposes. This Court in J. K. Trust, Bombay v. Commissioner of
Income-tax..Excess profits Tax Bombay(') endorsed the said view and held that
"property" is a term of the widest import and that business would
undoubtedly be property unless there was something to the contrary in the
enactment.
If business was property, it could be held
under trust for religious and charitable purposes. As the,business of running
the Arya Vaidya Sala vested under trust for religious and charitable purposes,
it would fall under (1) (1939) I.T.R. 415 (P.C.) (2) (1958) S.C.R. 65 46 cl.
(i), if the other conditions laid down therein were satisfied. The necessary
condition for the application of cl. (i) of s. 4(3) of the Act is that the said
property, namely, the business, shall have been wholly or in part held for
religious or charitable purposes. As 40 per cent of the profits in the business
would be given to purposes other than religious or charitable purposes it
cannot be said that the business was held wholly for religious or charitable
purposes. But as 60 per cent of the profits thereof would be spent for
religious or charitable purposes, the question is whether it can be held that
the business was held in trust in part for religious or charitable purposes.
The argument advanced on behalf of the Revenue is that the expression "in
part" in cl. (i) applies only to a case where an aliquot part of property
is vested in trust and that is not legally possible in the case of business. It
is said that a business is one and indivisible and, therefore, the
subject-matter of trust can only be the share of the profits payable to a
partner during the continuance of the partnership or after its dissolution.
Reliance is placed in support of the said proposition on the decisions in K. A.
Ramachar v. Commissioner of Income-tax, Madras('), David Burnet v. Charles P.
Leininger(2), Mohammad Ibrahim Riza v. Commissioner of Income-tax, Nagpur(3).
The first two decisions dealt with a different problem, viz., whether an
assessee is liable to tax on his share of profits in a firm after setting or
assigning the same in favour of a third party and the courts have held that the
profits accrued to the assessee before the assignments could operate on them
and he was liable to be assessed to tax on the said profits.
In the third decision, the Judicial Committee
held that there was no valid trust for charitable purposes, as the utilization
of the income to charitable or secular purposes was left to the absolute
discretion of the head of the community. None of the three decisions has any
bearing on the question whether a business could be held in trust wholly or in
part for religious or charitable purposes.
That question falls to be considered on
different considerations.
In our view, the expression "in
part" does not refer to an aliquot part; if half a house is held in trust
wholly for (1) [1961] 3 S.C.R. 380 (2) (1932) 76 L.Ed. 665.
(3) (1930) 57 T.A. 260 47 religious or
charitable purposes, it would be covered by the first part of the substantive
clause of cl. (i), for in that event the subject-matter of the trust is only
the said half of the house and that half is held wholly for religious or
charitable purposes. The expression "in part", therefore, must apply
to a case other than a property a part of which is wholly held for religious or
charitable purposes. In India there are a variety of trusts wherein there is no
complete dedication of the property but only a partial dedication. A property
may be dedicated entirely to a religious or charitable institution or to a
deity. This is an instance of complete dedication. A property may be dedicated
to a deity, subject to a charge that a part of the income shall be given to the
grantor's heirs. A property may be given to an individual subject to, or
burdened with, a charge in favour of are idol or a religious institution or for
charitable purposes. An owner of property may retain the property for himself
but carve out a beneficial interest therefrom in favour of the public by way of
easement or otherwise. There may be many other instance, where though there is
a trust, it involves only a partial dedication of the property held under trust
in the sense that only a Dart of the income of that property is utilized for
religious or charitable purposes. The dichotomy between the two expressions
"wholly" and "in part". is not based upon the dedication of
the whole or a fractional part of the property, but between the dedication of
the said property wholly for religious or charitable purposes or in part for
such purposes. If so understood, the two limbs of the substantive clause fall
into a piece. The first limb deals with a property or a part of it held in
trust wholly for religious or charitable purposes, and the second limb provides
for such a property held in trust partly for religious or charitable purposes.
On the said reading of the provision it follows that the entire business of
Arya Vaidya Sala is held in trust for utilizing 60 per cent of its profits
i.e., a part of the income, for religious or charitable purposes. The present
case, therefore, falls squarely within the scope of the substantive part of cl.
(i) of s. 4(3) of the Act.
Even so it is contended that cl. (b) of the
proviso imposes further limitations before the exemption can be 48 granted. But
the said clause of the proviso only applies to the case of income derived from
business carried on r behalf of a religious or charitable institution. A
business held in trust wholly or in part for religious or charitable purposes
is not a business carried on behalf of a religious or charitable institution,
for the business itself is held in trust. A few decisions cited at the Bar
bringing out the distinction between the substantive part of cl. (i) of s. 4(3)
and cl. (b) of the proviso may usefully be referred to at this stage. Where a
business was held in trust for charitable purposes, a Division Bench of the
Bombay High Court in Dharma Vijiya Agency v. Commissioner of Income-tax, Bombay
City(') held that it was not business which was carried on behalf of religious
or charitable institutions within the meaning of cl. (b) of the proviso.
Shah J., after considering the relevant
authorities and the provisions of the Act, observed:
"In our view, the business referred to
in cl. (b) of the proviso need not be business which is held for religious or
charitable purposes, provided it is business carried on behalf of a religious
or charitable institution." Desai J., stated thus:
with the scope of property consisting of
business held under trust wholly for religious or charitable purposes. It must
of necessity mean that we have in clause (i) a very wide category of business
which is trust property, and we have in proviso (b) a restricted and a lesser
category of business which is carried on by or on behalf of a religious or
charitable institution." A Division -Bench of the Kerala High Court in
Dharmodayam ,Co. v. Commissioner of Income-tax, Kerala(') expressed much to the
same effect. A Division Bench of the Madras !High Court, in Thiagesar Dharma
Vanikam v. Commissioner (1) (1960) 38 I.T.R. 392, 405-466, 410.
(2) (11962) 45 I.T.R. 478.
49 of Income-tax, Madras('), after
considering the decisions of the various High Courts and the relevant
provisions of the Act, observed:
A "When the trustee acts, it is only the
trust that acts, as the trustee fully represents the trust. A business carried
on behalf of a trust rather indicates a business which is not held in trust,
than a business of the trust run by the trustees." It concluded thus:
"In our opinion proviso (b) to section 4
(3) (i) does not restrict the operation of the main provision in section
4(3)(i). If a trust carried on business and the business it is held in trust
and the income from such business is applied or accumulated for application for
the purpose of the trust. which must of course be of a religious or a
charitable character, the conditions prescribed in section 4(3) (i) are
fulfilled and the income is exempt from taxation. This exemption cannot be
defeated even if the business were to be conducted by somebody else acting on
behalf of the trust. Proviso (b) to section 4(3) (i) has application only to
businesses which are not held in trust, and the field of its operation is,
therefore, distinct and separate from that covered by section 4(3)(i)."
Emphasis is laid upon the expression "such income" in the opening
words of the proviso and a contention is raised that the income dealt with in
the proviso is income derived from property held under trust. To state it
differently, the adjective "such" in the expression "such
income" refers back to the income in the substantive clause. There is some
plausibility in the contention, but if the interpretation be accepted, we will
be attributing an intention to the legislature to make a distinction between
business and other property though both of them are held under trust. There is
no acceptable reason for this distinction. That apart, the expression (1)
(1963) 50 IT.R. 798, 807, 809.
51 S. C.-4 50 "such" may as well
refer to the "income" in the opening sentence of sub-s. (3). The said
sub-section says that the incomes mentioned there under shall not be included
in the total income, but the proviso lifts the ban and says that such incomes
shall be included in the total income if the conditions laid down are
satisfied. We think that the expression "such income" only means the
income accruing or arising in favour of the trust.
The legal position may briefly be stated
thus. Clause (i) of s. 4(3) of the Act takes in every property or a fractional
part of it held in trust wholly for religious or charitable purposes. It also takes
in such property held only in part for such purposes. Business is also property
within the meaning of the said clause. Clause (b) of the proviso to s. 4(3) (i)
applies only to a business not held in trust but carried on behalf of religious
or charitable institutions.
For the foregoing reasons we hold that the
High Court has correctly answered the question referred to it.
In the result, the appeals fail and are
dismissed with costs. One set of hearing fees.
Appeal dismissed.
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