Report No. 12
Notes to clause 12
This clause is based on section 4(3) (i) and (ii) of the Act. There are certain anomalies which we have noticed in the existing provision and we have attempted in the proposed draft to put an end to such anomalies as far as possible.
2. Before the Amendment Act of 1939, there was in the Act only the provision which corresponds to the existing provision in 4(3) (i), main para. The instruction in the Income-tax Manual issued by the authority of the Government of India at that time was, that the word "property" in clause (i) does not bear the restricted meaning that it bears in section 9 of the Act, but includes securities or business or share in a business. In view of the recommendations made in the Income-tax Enquiry Report, 19361 (to give statutory effect to this practice, subject to the conditions to be observed by the business) an amendment was introduced by adding clause (via) which was as follows:-
1. P. 6 IT ER 1936 (also known as Ayers Committee Report).
"Any income derived from business carried on, on behalf of a religious or charitable institution, when the income is applied solely for 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."
(After the amendment in 1939, the Government changed the instructions in the Manual, expressing the view that in the case of business, the conditions laid down in clause (ia) should be fulfilled before exemption could be granted).
3. The meaning of the word "property" in clause (i) was judicially considered and it was held that it includes even business if the business was subject-matter of a trust. This was the view taken in Charitable Gadodia Swadeshi Stores v. C.I.T., Punjab by the Lahore High Court,1 Dealing with the contention that the word "property" in clause (i) does not include business, their Lordships of the Lahore High Court held that the two clauses were intended to apply to different situations and that the word "property" in clause (i) was wide enough to include all kinds of property including business.
It was also pointed out that clause (ia) dealt with a business conducted by a religious or charitable institution without any reference to trust whatever. In an instructive judgment, Din. Mohammad J. in that case also pointed out the distinction between an institution and a trust. He held that an institution may be religious or charitable and may still not be held under trust. Clause (ia), according to him, does not in any way subtract anything from the subject and provides immunity for a certain kind of business which in the view of the legislature had not already been provided for. From this decision it follows that where business, which is property within the meaning of clause (i), is impressed with the character of trust, the income from such business is altogether exempt and it is not obligatory that in the case of such business the conditions laid down in clause (ia) should be fulfilled.
[Clause (ia) thus applies to a different situation, namely, where there is an institution and that institution carries on business which is not subject to a trust. In such a case the requisites of the section must be complied with. The income must be applied solely to the purpose of the institution and the charitable or religious institution must also fulfil the conditions in sub-clauses (a) and (b). As to the distinction between an institution and a trust, see also the discussion in a recent Privy Council case,1 and Gunn's commentary on the Australian Income-tax Act.2]
1. Minister of National Revenue v. Trusts and Guarantees Co. Ltd., (1932) 4 AER 149 PC. See also Y.M.C.A. v. F.C. of T., (1926) 37 CLR 351 (360-61).
2. 4th Edn., p. 114, para. 292.
4. That "property" in clause (i) includes business has been well established not only by a decision of the Judicial Committee1 but also by the latest pronouncement of the Supreme Court in J.K. Trust case, (1957) 32 ITR 535 [BHC on remand (1938) 33 ITR 32] This aspect therefore does not present much difficulty. (The difficulty as to in which set of circumstances clause (ia) applies still remains, though the view in Gadodia Swadeshi Stores, (1944) 12 ITR 385. case has subsequently been followed and confirmed by the High Courts of Allahabad2 and Bombay3.
1. Tribune case, (1939) 7 ITR 415 PC: 56 IA 241.
2. C.I.T. v. Radhaswami Satsang Sabha, (1954) 25 ITR 472.
3. J.K. Trust v. C.I.T., (1958) 33 ITR 32.
5. In view of the recommendations made by Din. Mohammad J. in Gadodta's case and by the Income-tax Investigation Commission [Report (1948) at pp. 56-57, para. 131] the legislature in 1953 [vide the amending Act of 1953 (Act 25 of 1953)] converted clause (via) into a proviso to clause (i), and by subsequent legislation it was made clause (b) of the proviso to clause (i) (vide the amending Act of 1955). The object of this legislation was to restrict the operation of clause (i), where the property consisted of business impressed with the character of trust, by applying the limitation imposed by clause (b) of the provisos.1
1. Cf. Report of the Taxation Enquiry Commission, 1939-1954, Vol. II. Ch. VIII, paras. 2 and 3, p. 105.
But in carrying out this object, the immunity which was granted under clause (ia), (as it stood before 1953), in the case of business carried on by a religious or charitable institution and not subject to trust, was negatived. The linking up of old clause (via) to clause (i) had the effect of taking away the separate exemption granted by clause (ia). In other words, the conversion of clause (ia) into a proviso has led to the opposite result of depriving the benefit (limited though it be), which was intended to be conferred by clause (ia) on charitable and religious institutions which carried on business which was not subjected to trust [provided they fulfilled the conditions laid down in paragraphs (a) and (b) of that clause].
We think that this result was not intended by the legislature. If the intention is-as undoubtedly it has been from 1936-to impose restrictions in the case of business whether carried on by a trust or by a religious or charitable institution, the intention should be clearly stated in the Act. But the immunity itself need not be taken away. In order to avoid the anomaly the clauses should be so drafted as to bring about the real intention of the legislature, and this we have done in the proposed draft.
6. Incidentally, it may be noted that the legislature really wanted the conditions contained in paragraph (b) of the Proviso to apply not only to cases where business is carried on by the institution, but also where the business was the subject-matter of a trust (i.e., even if there was no institution). This object has also not been properly carried out, and some redrafting is desirable on this point also. On this assumption, it has been made clear in the draft that the restrictions in paragraph (b) of the Proviso will apply to both the cases.
7. In short, the redraft makes clear the two points that require clarification, namely:-
(i) Exemption under section 4(3)(i) is (in the case of a business) subject to the conditions given in Provision (b), irrespective of whether the business is carried on by a trust or an institution.
(ii) The exemption is also available to institutions not subject to trust, (subject to the same conditions).
8. For the sake of clarity, a trust carrying on a business is dealt with separately in draft sub-clause (2), and draft sub-clause (1) is confined to other properties, vide the draft Explanation thereto.
9. Besides this important change, the following points may also be noted:-
(a) The phrase "religious or charitable purposes" occurring in the existing Act has been replaced by the phrase "charitable or religious purposes", to give more prominence to charitable purposes.
(b) The existing section 4(3)(i) opens with the words "subject to the provisions of clause (c) of sub-section (1) of section 16." The limitation expressed by these words has been retained in draft sub-clause (1), but it is to be considered whether there is any sound reason for this limitation. The effect of the words in question seems to be that even in cases of transfer for a charitable purpose the income of the transferred assets is regarded as the transferor's income.1 It would be more consistent with the spirit of the law if such income were excluded from total income, at least so long as the income is applied for a charitable purpose. The words "subject to the provisions of clause (c) of sub-section (1) of section 16" deserve to be deleted.
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