Jammu & Kashmir H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right that the trust was not entitled to claim exemption from tax under s. 11 of the IT Act for the income derived from the property held under the trust ?

JUDGMENT

Dr. B.P. SARAF, C.J. :

By this reference under s. 256(1) of the IT Act, 1961 (‘the Act’), made at the instance of the assessee, theTribunal, Amritsar Bench, Amritsar, has referred the following questions of law to this Court for opinion :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right that the trust was not entitled to claim exemption from tax under s. 11 of the IT Act for the income derived from the property held under the trust ?

2. Whether, on the facts and in the circumstances of the case, the object of the trust providing for promotion of science and technology and Muslim theology among Muslim intelligentsia, was hit by the provisions contained in cls. (a) and (b) of sub-s. (1) of s. 13 ?”

2. The assessee is a trust created by an Instrument of Trust dt. 8th April, 1974. Clauses 13 and 14 of the Instrument of Trust, which contain the objects of the trust, read as under :

“13. That the object of the trust will in the main be the promotion of science and technology and Muslim theology among the Muslim intelligentsia comprising both males and females.

14. That in this connection, the author of the trust is painfully aware of the fact that, whereas, rapid strides have been made in other spheres of national activity, the Muslims of the state and some other sections of the population have lagged behind in this particular branch of learning and it is his earnest desire that a substantial portion of the income derived or derivable from the subject-matter of the trust shall be used in futherance of this great purpose of the trust. As a practical step in that direction, the author of the trust desires that scholars belonging to educational institutions both in and outside the State may be given such financial assistance by way of ex gratia grants or loans on easy terms to enable them to prosecute their further studies and research in science and technology both within and outside the state, it being clearly understood that the selection for such grants have to be confined to the Muslims and such other communities as in the opinion of the trustees are backward in this regard.” The assessee claimed exemption of its entire income under s. 11 of the Act. The ITO rejected the claim of the assessee on the ground that the trust was not a charitable trust and it was hit by the provision contained in s. 13(1)(b) of the Act. The ITO also rejected the claim on the ground that the income was not applied for charitable purposes, but only for construction of building for commercial purposes which was not one of the objects of the trust. In appeal, the AAC found the trust to be partly charitable and partly religious in nature. The AAC, therefore, held that the part of the income, which was used for charitable purposes, was exempt under s. 11 of the Act. He, accordingly, directed the ITO to bifurcate the income of the assessee in the two objects and allow exemption in respect of that part of the income which was applied for charitable purposes. The AAC also held that the income of the trust had been properly applied for the purposes of the trust notwithstanding the fact that the assessee had used the same in the construction of the building for commercial purposes. Aggrieved by the order of the AAC, both Revenue and the assessee appealed to the Tribunal. The Revenue felt aggrieved because the AAC held that a part of the income of the trust was eligible for exemption. The assessee felt aggrieved because the AAC denied exemption in respect of a part of the income. The Tribunal analysed cls. 13 and 14 of the instrument of trust, which contained the objects of the trust, and held that the trust was partly charitable and partly religious. The Tribunal further held that as there was no apportionment of income between the two objects of the trust and it was left to the exclusive discretion of the trustees to spend whatever they liked on any of the objects, the assessee was not entitled to claim exemption under s. 11 of the Act in respect of its income. Hence, this reference at the instance of the assessee. We have heard Mr. Z.A. Qureshi, the learned counsel for the assessee. We have also heard Mr. Anil Bhan, the learned counsel for the Revenue. The real controversy in this case is whether the assessee-trust established for the promotion of Muslim theology amongst the Muslim intelligentsia is hit by cl. (a) and cl. (b) of sub-s. (1) of s. 13 of the Act. Sec. 13(1)(a) provides that nothing contained in s. 11 or s. 12 of the Act shall operate to exempt any part of the income from the property held under the trust which does not enure for the benefit of the public. Clause (b) provides that no exemption under s. 11 of the Act shall be available in case of a trust created or established for the benefit of any religious community or caste. Sec. 13(1)(a) and (b) read as follows : “13. Sec 11 not to apply in certain cases.—(1) Nothing contained in s.11 or s. 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof : (a) any part of the income from the property held under a trust for private religious purposes which does not ensure for the benefit of the public; (b) in the case of a trust for charitable purposes or a charitable institution created or established after the commencement of this Act, any income thereof if the trust or institution is created or established for the benefit of any particular religious community or caste.”

The assessee-trust was created by the instrument of trust dt. 8th Jan., 1974, much after the coming into force of the Act. It is, therefore, not outside the purview of s. 13(1)(b). The question that arises for consideration is whether it is created for the benefit of a particular religious community within the meaning of s. 13(1)(b), because in that event no part of its income will be eligible for exemption under s. 11 of the Act. The answer to the above question will depend upon the objects of the trust. Clauses 13 and 14 of the instrument of trust, which contain the objects of the assessee-trust, have already been set out above. It is clear from a perusal of the same that the primary and dominant object of the assessee-trust is ‘promotion of science and technology and Muslim theology among the Muslim intelligentsia’. In cl. 14 of the trust deed, power has been given to the trustees to give financial assistance by way of ex gratia grants or loans on easy terms to scholars belonging to educational institutions to enable them to prosecute their further studies and research in science and technology both within and outside the State. Here again, it is provided that the selection for such grants has to be confined to Muslims and such other candidates as in the opinion of the trustees are backward in this regard. The two object clauses of the trust, thus, clearly show that the trust is a religious trust created exclusively for the benefit of persons belonging to a particular religious community, viz., Muslim community. Even the ex gratia grants and loans on easy terms for further study and research are confined to Muslims. That being so, the assessee-trust clearly falls within the ambit of cl. (b) of s. 13(1) which denies exemption to income of such trust under s. 11 of the Act. Similarly cl. (a) of s. 13(1) of the Act is also attracted to this case because the whole of the income from the property held under trust, which is a private religious trust, does not enure for the benefit of the public. The above conclusion of ours gets full support from the decision of the Supreme Court in State of Kerala vs. M.P. Shanti Verma Jain (1998) 149 CTR (SC) 279 : (1998) 231 ITR 787 (SC) : TC S23.2412. That was a case under the Kerala IT Act, 1950 (the ‘Kerala Act’). The assessee in that case claimed exemption from tax on its agricultural income under s. 4 of the Kerala Act. The authorities under that Act held that the trust was a private family trust and dominant object of the trust was to propagate a particular religion and render services to the followers of that religion. This finding of the authorities were reversed by the High Court. The High Court held that the trust was both religious and charitable and even if it was construed as a private religious trust, the benefit to the public provided for in the trust deed took it out of the exclusion of cl. (a) of sub-s. (3) of s. 4 of the Kerala Act. The High Court said that taken as a charitable trust the benefits of the trust were not confined to any particular religious community or caste and for that reason it did not fall under the exclusion in cl. (b) of sub-s. (3) of s. 4 of that Act as well.

The High Court was, therefore, of the view that the income of the trust was entitled to exemption under s. 4 of the Kerala Act except to the extent to which it was not applied for charitable and religious purposes within the State. The State appealed to the Supreme Court against the decision of the High Court. The Supreme Court examined the scheme of s. 4 of the Kerala Act which is more or less identical to that of ss. 11(1) and 13(1) of the IT Act, 1961. Like s. 11 of the IT Act, s. 4 of the Kerala Act provides for exemption from tax of agricultural income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied to such purpose in the State. Clauses (a) and (b) of sub-s. (3) of s. 4 of the Kerala Act are identical to cls. (a) and (b) of s. 13(1) of the IT Act. These clauses read as under : “(1) Nothing contained in cl. (b) or cl. (c) of sub-s. (1) shall operate so as to exclude from the total agricultural income of the previous year of the person in receipt thereof, (a) any part of the agricultural income from the property held under trust for private religious purposes which does not ensure for the benefit of the public; (b) in the case of a trust for charitable purposes or a charitable institution, any agricultural income thereof, if the trust or institution is created or established for the benefit of any particular religious community or caste;”

7. Like s. 13(1)(a) of the IT Act, s. 4(3)(a) of the Kerala Act also provides that exemption under s. 4(1)(b) of that Act would be denied if any part of the agricultural income from property held under trust for private religious purpose is not meant for the benefit of the public. Similarly, s. 4(3)(b) of the Kerala Act, which is identical to s. 13(1)(b) of the IT Act, also provides that exemption shall not be available in respect of agricultural income of the trust for charitable purposes if it is established only for the benefit of a particular religious community or caste. The Supreme Court examined the trust deed and observed as follows : “……The objects of the trust clearly show that the trust is meant for propagation of the Jain religion and rendering help to the followers of the Jain religion. Even the medical aid and similar facilities are to be rendered to persons devoted to the Jain religion and to non- Jains if suffering from ailments but the medical aid could be given to them only if any member of the families managing the trust shows sympathy and is interested in their treatment. The Tribunal, in our opinion, was right in its conclusion that the dominant purpose of the trust in the present case was propagation of the Jain religion and to serve its followers and any part of agricultural income of the trust spent in the State of Kerala also could not be treated as an allowable item of expense.”

8. The ratio of the above decision squarely applies to the facts of the present case. In this case also the objects of the assessee-trust contained in cls. 13 and 14 of the instrument of trust clearly show that the dominant purpose of the trust is promotion of Muslim theology among Muslim intelligentsia. Another object is promotion of science and technology but that too among the Muslim intelligentsia. Similarly, in cl. 14 of the instrument of trust which confers powers on the trustees to give financial assistance by way of ex gratia grants or loans on easy terms to scholars of educational institutions to enable them to prosecute their further studies and research in science and technology, it is specifically provided that the selection for such grants has to be confined to Muslims only. The trustees, however, have been given a discretion to extend this benefit to such other communities as in their opinion are backward in this regard. It is obvious that the author of the trust felt, as indicated in cl. 14 of the instrument of trust that the Muslims of the State and some other sections of the population had lagged behind in this particular branch of learning and it was to improve that situation that power was conferred on the trustees to grant financial assistance by way of ex gratia grants, etc., to scholars to enable them to prosecute their further studies. This assistance too, as indicated above, is intended to promote science and technology and Muslim theology among the Muslim intelligentsia, which is the main and dominant object of the trust. In such a situation, s. 13(1)(b) of the Act is attracted and the assessee-trust is not entitled to exemption in respect of its income under s. 11 of the Act. Clause (a) of s. 13(1) of the Act will also be attracted in this case because the income has been derived by the assessee from property held under trust, which does not enure for the benefit of the public.

9. Moreover, even if we hold that the object is not only promotion of Muslim theology amongst the Muslim intelligentsia, but also promotion of science and technology among them, the income of the trust would not be exempt under s. 11 because law is well-settled that if there are several objects of the trust, some of which are charitable and some non-charitable, and the trustees in their discretion are to apply the income to any of the objects, the whole trust would fail and no part of its income would be exempt from tax. The reason is that in such a case no definite part of the property or its income is allocated to charitable purposes and it would be open to the trustees to apply its income to any of the non-charitable objects or religious purposes. In the instant case, the trustees are at liberty to apply whole of the income for the promotion of Muslim theology among the Muslim intelligentsia.

10. In may be expedient in this connection to refer to the decision of the Privy Council in Mohammad Ibrahim Riza Malak vs. CIT AIR 1930 PC 226. In that case, dealing with the provisions of s. 4(3)(i) of Indian IT Act,

1922, it was held : “Where the property is vested in the head of a community under deeds of trust, but the trust property is applicable to purposes, many of which are neither religious nor charitable, and it is not suggested that any part of the property is set aside for any charitable or religious purposes, so that it can be identified as appropriated exclusively for such purposes, then the income of the whole of the property is assessable to income- tax.”

11. To the same effect is the decision of the Supreme Court in East India Industries (Madras) (P) Ltd. vs. CIT (1967) 65 ITR 611 (SC) : TC 54R.452. In that case, the Supreme Court held : “……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 the Act, 1961.”

12. It is clear from the above decisions that where the objects are distributive, each one of the objects must be charitable in order that the trust might be upheld as a valid charity. The reason is that in such case no definite part of the property or its income is allocated to charitable purposes and it would be open to the trustees to apply the whole income to any of the non-charitable objects. The fact that the income is applied only for charitable purpose in such a case would be immaterial.

13. This position was reiterated by the Supreme Court in Yogiraj Charity Trust vs. CIT 1976 CTR (SC) 211 : (1976) 103 ITR 777 (SC) : TC 23R.1103. In that case, the Supreme Court held that if one of the objects of the trust is not of a religious or charitable nature and the trust deed confers full discretion on the trustees to spend the trust funds for an object other than of a religious or charitable nature, the exemption from tax under s. 4(3)(i) of the Indian IT Act, 1922 [corresponding to s. 11(1) of the Act] is not available to the assessee. The Supreme Court also held that where in a trust deed providing for many charitable objects the trustees were given uncontrolled discretion to spend the whole of the trust funds for any of the non-charitable purposes of the trust, the income of the trust would not be exempt from tax under s. 4(3)(i) of the Indian IT Act.

14. It is clear from the ratio of the decision of the Supreme Court set out above that, in the instant case, the assessee-trust is not entitled to exemption under s. 11 even if the contention of the assessee-trust that at least one of the objects, viz., promotion of science and technology among the Muslim intelligentsia is not religious purpose, is accepted, because absolute discretion has been given to the trustees to spend the income of the trust or income from the property held under the trust for any of the two purposes, i.e., promotion of science and technology among Muslim intelligentsia or promotion of Muslim theology among the Muslim intelligentsia. The latter object undoubtedly falls under cl. (a) of s. 13(1) of the Act. As indicated earlier, in view of the absolute discretion given to the trustees to spend the whole of the income from the properties held under the trust or the income of the trust for any of the objects of the trust which do not enure for the benefit of the public but for the benefit of a particular religious community, even if the trust is held to be partly charitable and partly religious, it would not be entitled to the benefit of exemption under s. 11 of the Act because no definite part of the property or its income is allocated to charitable purposes and it would be open to the trustees to apply the whole of the income to any of the non- charitable purposes and objects. For the reasons set out above, we are of the clear opinion that, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-trust was not entitled to claim exemption under s. 11 of the Act for the income derived by it from the property held under trust. The Tribunal was also right in holding that the object of the trust providing for promotion of science and technology and Muslim theology among Muslim intelligentsia was hit by the provisions of cls. (a) and (b) of s. 13(1) of the Act. In view of the above, we answer both the questions referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee. This reference is disposed of, accordingly, with no order as to costs.

[Citation : 248 ITR 587]