The East India Industries (Madras)
Private Ltd. & ANR Vs. The Commissioner of Income Tax, Madras  INSC 86
(3 April 1967)
03/04/1967 RAMASWAMI, V.
CITATION: 1967 AIR 1554 1967 SCR (3) 359
D 1976 SC 10 (43) F 1976 SC1836 (16) R 1977
SC1548 (3) RF 1977 SC2211 (11) R 1978 SC1443 (9) R 1980 SC 387 (5)
Indian Income-tax Act, 1922 (Act 11 of 1922),
Ss. 4(3) (1) and 15B-Donation to Trust-One object not charitable in nature, and
income to be utilised for any one of the objects-If exempted.
The assessee claimed exemption from tax under
s. 14-B of the Incometax Act, 1922 for a sum donated to a Trust, whose most of
the objects were charitable and religious in nature, but one was not, and it
was open to the trustees to utilise the income of any one of the objects to the
exclusion of all other objects. The Revenue rejected the claim for exemption ,
but the Appellate Tribunal allowed it as it had in relation to the previous
assessment year held that the Trust was a public trust. On reference, the High
Court answered the question against the assessee.In appeal to this Court, the
assessee contended that (i) this particular object must not be read isolated
from the other object.-, of the trust but having regard to the immediately
preceding object which was to run hospitals and dispensaries, the impugned
object, viz., the manufacture of pharmaceutical and medicinal preparations must
be deemed to be for the purpose of carrying out the earlier object, and (ii)
the High Court acted in excess of jurisdiction in raising a new question which
was not raised by the Appellate Tribunal, namely, whether the trust itself was
constituted for wholly religious or charitable purposes within the meaning of
s. 4 (3) (i) of the Act.
HELD :-The appeal must fail.
(i)There was no connection between the two
objects of the trust and upon an interpretation of the document as a whole, it
could not be said that the earlier object was the dominant object of the trust
and the latter was a subsidiary object. In view of the absolute power of
selection ,ranted to the trustees to select between charitable and noncharitable
objects, the provision of s. 4 (3) (i) of the Act could not be ipplied to the
Trust and no exemption could be granted to the assessce under s. of the; Act.
[360D-E, G] Mohammad Ibrahim Riza v. Commissioner of Income-tax, Nagpur, 57
I.A. 260; Oxford Group v. Inland Revenue Commissioner  2 All. E.R. 537
and Keren Kayemeyh Le jisroel. Ltd.
v. lnland Revenue Comrs. 17 T.C. 27, 40
(i)The High Court was within its jurisdiction
in examining the question whether the Trust was eligible for exemption from
income-tax under s. 4(3) (i) of the Act. Even where a question of law was not
raised before the Tribunal but the Tribunal deals with it, it must be deemed to
be one arising out of its order. [364B-D] Commissioner of Income-tax, Bombay v.
Scindia Steam Co.
Ltd. 42 T.T.R. 589, followed.
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 1399 of 1966.
357 Appeal by special leave from the judgment
and order dated October 25, 1961 of the Madras High Court in Tax Case No.
62 of 1958 (Reference No. 37 of 1958).
S. Swaminathan and R. Gopalkrishnan, for the
Veda Vyasa, S. K. Aiyar, S. P. Nayyar and R.
N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought, by special leave, from the judgment of
the Madras High Court dated October 25, 1961 in T.C. No. 62 of 1958.
The assessee, the East India Industries
Limited, paid a donation of Rs. 7,500 to a trust called "the Agastyar
Trust" and claimed exemption from tax under S. 14-B of the Incometax Act,
1922, hereinafter called the 'Act'. The trust had been created by the partners
of a business firm, K.
Rajagopal and Company. This firm had been
carrying on business in Waste paper. Under the terms of the partnership it was
setting apart 80 per cent of the profits for charitable and religious purposes.
On July 1, 1944, a trust deed was executed by Venkatarama Chetti. The claim of
the assessee to exemption from tax was rejected by the Income Tax Officer on
the ground that the trust did not fulfill the conditions laid down under S.
15-B of the Act. The Appellate Assistant Commissioner to whom an appeal was
preferred took the same view. The matter was taken up in further appeal to the
Income tax Appellate Tribunal which observed that in relation to the previous
assessment year, it had held that the Agastyar Trust was a public trust and
that any donation made to that trust was an allowable deduction under s. 15-B.
At the instance of the Commissioner of Income-tax the Tribunal referred the
following question of law for the determination of the High Court under s.
66(1) of the Act:
"Whether on the facts and in the circumstances
of the case the assessee is entitled to claim deduction under Section 15-B in
respect of the donation paid to the Agastyar Trust ?" The High Court
answered the question against the assesee who has brought the present appeal to
this Court by special leave.
Section 15-B of the Act provides for
exemption from tax in respect of any sums paid by the assessee as donations to
any institution or fund to which the section applies. Subsection (2) reads as
follows "(2) This section applies to any institution or fund established
in the taxtble territories for a charitable purpose358 (i)the income whereof is
exempt under clause (i) of sub-section (3) of section 4;
Section 4(3)(i) of the Act states as follows
"(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)Subject to the provisions of clause (c) of
subsection (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 anythincg 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 :
Paragraph 2 of the trust deed dated July 1,
1944 sets out the objects of the 'Agastyar Trust' as follows "(a) to
establish, conduct and maintain residential schools, colleges, workshops and
other institutions for imparting general, technical, vocational, professional,
industrial or other kind of education and training for the utility and welfare
of the general public;
(b)to make pecuniary grants by way of
scholarship, donation, subscription, allowance, gratuity, guarantee or otherwise
to and for the benefit of students, scholars and other persons,-, c)to
establish,, maintain and conduct hospitals, clinics, dispensaries, maternity
houses and other institutions for affording treatment, cure, rest, recuperation
and other reliefs;
(d)to manufacture, buy, sell and distribute
pharmaceutical, medicinal, chemical, and other preparations and articles such
as medicines, drugs, medical and surgical articles, preparations and restoratives
(e)to establish and maintain choultries and
rest-houses to provide food, clothes, medicines and other articles of necessity
free or at concessional rates and to make money grants to the poor, needy for
celebration of marriages or ceremonies of, for other purposes, floods, famine,
pestilence, and other causes;
359 (f)to collect, encourage, conduct
research in, interpret and popularise Nadis (ancient manuscripts inscribed on
palm leaves in Indian languages with authorship ascribed to Devas, rishis,
saints, sages and seers);
(g)to promote and encourage the study of and
research in religion and to propagate religious principles;
(h)to buy, print, publish, sell for profit or
distribute free or at concessional rate such literature as may be thought
beneficial for the objects of the trust;
(i)to conduct worship and festivals in
temples, shrinesand other places of worship, to build, maintain administer and
manage temples, shrines and other places of worship;
(j)to do all such other things as may be
necessary, incidental conducive or convenient to the attainment of the above
objects or any of them and the decision of the trustees that any particular
thing is necessary, incidental, conducive or convenient to the attainment of
the above objects or any of them shall be conclusive." The other clauses
of the trust deed provide for the appointment of additional trustees, the
administration and management of schools, colleges, etc., that may be set up,
investment of the moneys, the power conferred on the trustees to alter the form
of the properties and re-invest the funds, to grant leases, to borrow, and
lastly to conduct or carry on any business or undertaking alone or in partnership
with any other person for the benefit of the trust.
The question to be considered is whether the
property from which the income of the Agastyar trust is derived is held under
trust or other legal obligation wholly for religious or charitable purposes
within the meaning of S. 4(3)(i) of the Act. In the present case, it appears
from the deed of trust that one of the objects of the trust, namely item 4, is
not for charitable or religious purposes. Item No. 4 is "to manufacture,
buy, sell and distribute pharmaceutical, medicinal, chemical, and other
preparations and articles such as medicines, drugs, medical and surgical
articles, preparations and restoratives of food". It may be that most of
the other objects of the trust are religious and charitable in nature but if
item 4 is not charitable, then the conditions envisaged by S. 4(3) (i) of the
Act are not fulfilled and the exemption conferred by s.15 -B of the Act cannot
be applied. Clause 5 (i) of the trust deed states that "the trustee shall
have power to apply the whole of any part of the trust property or fund whether
capital or income in or towards payment of the expenses of the trust or for or
towards all or any of the purposes of the trust provided any property or money
held in special trust shall be applied only for that purpose and not
otherwise". In the present case, there is no special trust, 360 that is to
say, no particular item of property has been burdened with the performance of
any specific object of the trust. It is therefore manifest that under cl. 5(i)
of the trust deed it is open to the trustees to utilise the income for any one
of the objects of the trust to the exclusion of all other objects. In other
words, it would not be a violation of the trust if the trustees devoted the
entire income to the carrying on of a business of manufacture, sale and
distribution of pharmaceutical, medicinal and other preparations. In our
opinion, this particular object of the trust is neither charitable nor
religious in character. If the trustees can, under a trust held validly, spend
the entire income of the trust on this non-charitable object, it is difficult
to hold that the trust property is held under a trust or other legal obligation
wholly for religious or charitable purposes within the meaning of s. 4(3)(i) of
It was argued by Mr. Swaminathan on behalf of
the appellant that this particular object must not be read isolated from the
other objects of the trust but having regard to the immediately preceding
object which is to run hospitals and dispensaries, the impugned object, viz.,
the manufacture of pharmaceutical and medicinal preparations must be deemed to
be for the purpose of carrying out the earlier object, viz., running of
hospitals and dispensaries. We are unable to hold that there is any connection
between the two objects of the trust and upon an interpretation of the document
taken as a whole, it is impossible to accept the appellant's contention that
cl. 2(c) is the dominant object of the trust and cl. 2(d) is a subsidiary
object. The argument of the appellants is, in fact, contradictory of the last
clause of para 2 of the trust deed which states that the objects shall be
independent of each other, notwithstanding that any of the objects shall be
void for any reason whatsoever, the trust shall be valid and operative with
respect to the other objects. This clause expressly provides that the trustees
shall have discretion "to apply the property of the trust in carrying out
all or any of such objects of the trust as the trustees may deem fit".
Having regard to the language of paragraph 2 of the trust deed in the context
of other paragraphs of the document, we are of opinion that the trust deed, on
a proper interpretation, gives an absolute power of selection to the trustees
to choose between charitable and non-charitable objects of the trust for
spending the entire income of the trust properties. It follows that the
Agastyar trust does not fulfil the conditions imposed by s. 4(3)(i) of the Act
and the donation made by the assessee to the Agastyar trust cannot therefore be
exempted under s. 15B of the Act.
The view that we have expressed is borne out
by the decision of the Judicial Committee in Mohammad Ibrahim Riza v. Commissioner
of Income-,tax, Nagpur(1) in which it was held that if there (1)57 I.A. 260.
361 are several objects of the trust, some of
which are charitabel and some non-charitable, and the trustees have unfettered
discretion to apply the income to any of the object, the whole trust would fail
and no part of the income would be exempt from tax. The same view has been
expressed by the Court of Appeal in Oxford Group v. lnland Revenue
Commissioners(1). In that case, the memorandum of association of the Oxford
Group, a company limited by guarantee, set out the following as the objects of
the -company "3(A) The advancement of the Christian religion, and, in
particular, by the means and in accordance with the principles of the Oxford
Group Movement, founded in or about the year 1921 by Frank Nathan Daniel
Buchman. (B) The maintenance, support, development and assistance of the Oxford
Group Movement in every way...... (C) (9) To establish and support or aid in
the establishment and support of any charitable or benevolent associations or
institutions, and to subscribe or guarantee money for charitable or benevolent
purposes in any way connected with the purposes of the association or
calculated to further its objects. (10) To do all such other things as are
incidental, or the association may think conducive, to the attainment of the
above objects or any of them." The Oxford Group sought exemption from income
tax on the ground that it was a body of persons established for charitable
purposes only. It was admitted by the Crown that, if object A of the objects
clause of the company's memorandum of association stood alone, the company
would be established for charitable purposes only. It was, however, held by the
Court of Appeal that the words in cl. 3(B) of the memorandum of association,
"the maintenance, support, development and assistance of the Oxford Group
Movement in every way," extended beyond purely religious activities,
permitted the company to engage in secular activities, and authorised the
expenditure of its funds on matters which were not charitable, and, therefore,
the company could not be said to be formed for charitable purposes only. It was
also observed that although a religious body might, without losing its
religious character, engage in a number of subsidiary activities which were not
-purely religious, a trust which was so worded as to permit the expenditure of
income by such a body in such subsidiary activities was not a good charitable
trust. It was further held that the objects set forth in cl. 3(C), paras (9),
(10), of the memorandum of association were not merely ancillary to the main
objects expressed in sub-cls. (A) and (B), but themselves conferred powers on
the company which were so wide that they could not be regarded as charitable.
The primi(1) 2 All. E.R. 537.
362 ciple has been clearly expressed by
Lawrence, L.J. in Keren Kayemeth Le Jisroel, Ltd. v. Inland Revenue Comrs. (1) as
follows "The instrument with which this case is concerned consists of the
memorandum of association of the company and it is essential to bear in mind
that in order to obtain exemption from income tax under the section it is not
enough that the purposes described in the memorandum should include charitable
purposes, the memorandum must be confined to those purposes so that any
application by the company of its funds to non-charitable purposes would be
ultra vires .... The extensive powers conferred on the company by sub-cls. (2)
to (22) (to some of which I have referred in order to indicate their
character), although purporting to be secondary to the object mentioned in
(2), are nevertheless objects for which the
company is established. The company can exercise any or all of these powers
whenever in its opinion such an exercise would be conducive to the attainment
of the so-called primary object which, from a practical point of view, means
that it can exercise them whenever it is minded to do so, and whether such
exercise is in fact conducive to the attainment of that object or not, as
neither the court nor any one else can control the company's opinion, or
otherwise interfere with the manner in which it chooses to carry out its
objects. It would be difficult in any case to determine whether any particular
enterprise undertaken by the company under its wide powers was or was not in
fact conducive to the attainment of the primary object, but when the question
of whether it is or is not so conducive is left to the decision of the company
itself, I cannot avoid the conclusion that the objects mentioned in sub-cls.
(2) to (22) can be carried out by the company just as freely as the object
mentioned in sub-cl. (I ) and that there is no substantial difference in degree
between them." As we have already stated, on a proper interpretation of
the terms of the trust deed in the Present case we are satisfied that paragraph
2(d) is not subsidiary in character to paragraph 2(c) and the trustees have
been expressly granted the discretion to apply the income of the trust wholly
to a non-charitable object to the exclusion of charitable objects. It follows
therefore that in view of the absolute power of selection granted to the
trustees to select between charitable and non-charitable objects, the
provisions of s.
4(3)(i) of the Act cannot be applied to the
Agastyar trust and no exemption can be granted to the assessee under S. 15B of
the Act. We (1) 17 T. C. 27, 40.
363 accordingly hold that the High Court
rightly answered the question of law against the assessee and in favour of the
Commissioner of Income-tax.
It was, however, contended by Mr. Swaminathan
on behalf of the assessee that the High Court had no jurisdiction to go into
the question whether the Agastyar trust was held for a wholly religious or
charitable purpose under s. 4(3)(i) of the Act. It was pointed out that the
only question of law arising from the order of the Tribunal was with respect to
the examination of the eligibility of the Agastyar trust for exemption under S.
4(3)(i)(b) of the Act. It was contended that the scope of the appeal from the
order of the Tribunal was confined to the question whether the income from the
business owned by the trust was entitled to exemption under s. 4(3)(i)(b) of the
Act and whether the conditions of that proviso were satisfied. It was submitted
that the High Court acted in excess of jurisdiction in raising a new question
which was not raised by the Appellate Tribunal, namely, whether the trust
itself was constituted for wholly religious or charitable purposes within the
meaning of S.
4(3)(i) of the Act. We are unable to accept
the argument put forward on behalf of the appellants as correct. It appears
that before the Appellate Tribunal there was no detailed examination of the
question of law. The Tribunal merely referred to an earlier case it had dealt
with regarding the same assessee. The Tribunal apparently took the view in the
earlier case that even if the income which the trust earned in business was not
exempt from tax, the income derived from donations which was utilised for
charitable purposes would be eligible for exemption. So far as the assessment
for the year 1955-56 is concerned, the question was not considered by the
Appellate Tribunal at any length. But the Income Tax Officer held that the
trust did not fulfil the conditions laid down by S. 15-B of the Act.
The Assistant Commissioner, however, in
appeal specifically stated that one of the conditions was that the income of
the institution or fund should be exempt under cl. (1) of sub-s.
(3) of S. 4 and dealt with the argument
relating to the business carried on by the trust and observed " Property'
as used in section 4(3)(i) includes business also and unless the business also
is exempt, donation to such an institution will not be eligible for concession
given in Section 15-B." The question therefore before the Tribunal was
whether the trust income was exempt under S. 4(3)(i) of the Act. In the course
of its order dated July 27, 1957 for the assessment year 1.955-56 the Appellate
Tribunal stated as follows :
"With reference to the first contention,
we have held in I.T.A. No. 5707 of 1955-56 that the Agastyar Trust was a public
trust and hence any donation made to the 364 said trust is an allowable concession
under Section 15-B. Therefore, the claim of the assessee is allowed on this
contention." We are therefore unable to accept the contention of the
appellants that the question whether S. 4(3)(i) of the Act applies to the
Agastyar trust was not within the scope of the question referred to the High
Court by the Appellate Tribunal or that the High Court went beyond its
jurisdiction in answering that question. In Commissioner of Income-tax, Bombay
v. Scindia Steam Navigation Co. Ltd.(1) this Court examined the scope of the
jurisdiction of the High Court in a reference under S. 66(1) and it was pointed
out that even where a question of law was not raised before the Tribunal but
the Tribunal deals with it, it must be deemed to be one arising out of its
order. Applying the principle to the present case, we hold that the High Court
was within its jurisdiction in examining the question whether the Agastyar
trust was eligible for exemption from income-tax under S.
4(3)(i) of the Act. We accordingly reject the
argument of the appellants on this aspect of the case.
For these reasons we hold that this appeal is
without merit and must be dismissed with costs.
Y.P. Appeal dismissed.
(1) 42 I.T.R. 589.