Rajasthan H.C : Whether, on the facts and in the circumstances of the case, the Tribunal w as justified in holding that by the amended trust deed of 1958, the assessee-trust has not acquired the status of a trust wholly for charitable or religious purposes in order to entitle it to exemption under s. 11 of the IT Act, 1961 ?

Counsel Appeared

N.M. Ranka, for the Assessee : R.N. Surolia, for the Revenue

S.C. AGRAWAL, J.:

In this reference, which relates to the asst. yr. 1972-73, the Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as “the Tribunal”), has referred the following questions for the opinion of this Court :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal w as justified in holding that by the amended trust deed of 1958, the assessee-trust has not acquired the status of a trust wholly for charitable or religious purposes in order to entitle it to exemption under s. 11 of the IT Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-trust is not entitled to exemption under s. 11 of the IT Act, 1961 ?”

2. Laxminarain Lath Trust (hereinafter referred to as “the assessee”) is a trust established by Shri Laxminarain Lath by a settlement deed (Annexure D) dt. 25th Aug., 1948. By the said settlement deed, the settlor, Shri Laxminarain Lath, transferred to the trustees a sum of Rs. 5,000 and the investment for the time being representing the same and all other sums of property for the time being forming part of the trust estate to have and to hold the same unto the trustees for the objects mentioned in cl. 2 of the said settlement deed. In sub-cls. (i) to (xv) of cl. 2 of the settlement deed, the objects of the trust were set out. The said objects were, inter alia, advancement of education amongst Hindus at Mandrella in the former Jaipur State or any other place in India, puja of Shiva, establishment of temples, dharamshalas, hospitals, orphanage homes, provision of medical aid and relief to suffering people by aiding, establishing and maintaining hospitals, dispensaries and nursing homes and providing help to victims of natural calamities, etc. One of the objects as mentioned in sub-cl. (vi) of cl. 2 was “to render aid to any persons belonging to the family of Laths and to grant monthly and other periodical aids to them.” Under the said settlement deed, there were four trustees, namely, Shri Laxmi Narain Lath, the settlor, Shri Narbada Prasad Lath, the son of the settlor, Shri Bissessur lal Lath and Shri Motilal Lath. On 21st May, 1958, the settlor, Shri Laxminarain Lath, and the then trustees executed a supplementary (clarification) deed (Annexure E) with a view to clarify and place on record the true intention of the settlor and of the trust. By this supplementary deed, amendments were made in sub- cls. (i), (vi), (vii) and (xv) of cl. 2 of the settlement deed. In sub-cls. (i), (vii) and (xv) of cl. 2, the word “Hindus” was deleted and in its place, the following words “the public in general” were inserted. In sub-cl. (vi) of cl. 2, the words “belonging to the family of Laths” were deleted and in their place the words “in distress” were inserted.

In relation to the IT assessment for the asst. yrs. 1954-55, 1955-56, 1956-57 and 1957-58, a question arose as to whether the income of the assessee was exempt from income tax under s. 4 (3)(i) of the Indian IT Act, 1922 (hereinafter referred to as the “1922 Act”). The said question was considered by this Court in Lakshmi Narain Lath Trust vs. CIT (1969) 73 ITR 402 (Raj), on a reference made to it by the Tribunal and this Court, after examining the terms of the settlement deed and more specially sub-cl. (vi) of cl. 2 of the said deed, held that the object mentioned in the said sub-clause could not be regarded as a charitable purpose in terms of the other charitable purposes contained in cl. 2 and that under the settlement deed, the trustees had full discretion to spend the trust fund and in doing so they could spend their entire funds on one of the objects to the exclusion of the others and thus within the framework of the trust deed they would be able to spend the entire funds for the aid of the members of the settlor’s family and that if they decided to spend for the particular object mentioned in cl. 2(vi) of the trust deed, then the trustees were under no obligation to spend it on persons other than the family of the settlor. This Court, therefore, held that the exemption under s. 4(3)(i) of the 1922 Act was not available to the assessee. In that case, this Court has noticed the amendments made in the settlement deed by the supplementary deed, but it did not deal with the said amendments for the reason that the said amendments could not be held to be retrospective in operation.

It appears that subsequently in respect of the asst. yrs. 1959-60 to 1966-67, the IT authorities allowed exemption to the assessee treating it as a trust wholly for charitable and religious purposes within the meaning of s. 4(3)(i) of the 1922 Act and s. 11 of the IT Act, 1961 (hereinafter referred to as “the. 1961 Act”). In relation to the asst. yrs. 1967-68, 1968-69, 1969-70 and 1970-71, the Bombay Bench of the Tribunal, by its order dt. 30th Sept., 1975 (Annexure H), after considering the amendments made in the settlement deed by the supplementary deed, has held that the amendments made in the settlement deed by the supplementary deed are not valid in law and that in spite of the supplementary deed, it could not be said that the assessee has acquired the status of a trust wholly for charitable and religious purposes so as to entitle it to exemption under s. 11 of the 1961 Act and the Tribunal, therefore, held that the assessee was not entitled to exemption under s. 11 of the 1961 Act.

In relation to the asst. yr. 1972-73, the ITO, Jhunjhunu, by order dt. 12th Dec., 1974 (Annexure A), rejected the claim of the assessee for exemption of its income under s. 11 of the 1961 Act. On appeal, the AAC, Bikaner Range, Bikaner, by his order dt. 13th Dec., 1976 (Annexure B), upheld the order of the ITO. The AAC has placed reliance on the order of the Bombay Bench of the Tribunal dt. 30th Sept., 1975, in relation to the asst. yrs. 1967-68 to 1970-71 which was also followed in respect of the asst. yr. 1971-72. On further appeal, the Tribunal, by its order dt. 30th Oct., 1977 (Annexure C), has upheld the order of the AAC. The Tribunal has adopted the reasons given by the Bombay Bench of the Tribunal in its order dt. 30th Sept., 1975, in relation to the appeals for the asst. yrs. 1967-68 to 1970-71. Thereupon, the questions mentioned above have been referred by the Tribunal for the opinion of this Court at the instance of the assessee.

6. We have heard Shri N. M. Ranka, learned counsel for the assessee, and Shri R. N. Surolia, learned counsel for the Revenue. During the course of his arguments, Shri Ranka has urged that the earlier decision of this Court in Lakshmi Narain Lath Trust vs. CIT (supra), given in relation to the asst. yrs. 1954-55 to 1957-58 is no longer good law in view of the subsequent decisions of the Supreme Court and that even if the supplementary deed executed on 21st May, 1958, is excluded from consideration, the income of the assessee is entitled to exemption under s. 11 of the 1961 Act. Shri Ranka has urged that in order to determine whether a trust is a trust for charitable purposes, the test to be applied is to ascertain the dominant or primary purpose of the trust, and that if the dominant or primary purpose of the trust is charitable in nature, then even if some of the purposes are not charitable in nature, it would not alter the nature of the trust. In support of his aforesaid submission, Shri Ranka has placed reliance on the decisions of the Supreme Court in Addl. CIT vs. Surat Art Silk Cloth Mfg. Association (1979) 13 CTR (SC) 378 : (1980) 121 ITR 1 (SC) : TC23R.195, CIT vs. Bar Council of Maharashtra (1981) 22 CTR (SC) 106 : (1981) 130 ITR 28 (SC) : TC23R.253 and CIT vs. Federation of Indian Chambers of Commerce & Industry (1981) 22 CTR (SC) 124 : (1981) 130 ITR 186 (SC) : TC23R.523.

7. We have given our careful consideration to the aforesaid submission of Shri Ranka, but we are unable to accept the same. In Lakshmi Narain Lath Trust vs. CIT (supra), this Court has taken note of the principle, on which reliance has been placed by Shri Ranka, that the dominant intention of the settlor must be found out and where the dominant intention is one of charity, in general, the trust will still be held to be wholly charitable in character and would qualify for exemption. This Court has, however, held that the said principle could not be applied in the case of the assessee, because, under cl. 2(vi) of the settlement deed, the trustees were given full discretion to spend the trust fund and in doing so they could spend the entire fund on one of the objects to the exclusion of the others and it is permissible for the trustees to spend the entire fund for the object set out in cl. 2(vi), namely, for the aid of the members of the settlor’s family and the said object could not be held to be a charitable purpose. The said view of this Court has been approved by the Supreme Court in Yogiraj Charity Trust vs. CIT (1976) 103 ITR 777 (SC) : TC23R.1103, wherein the Supreme Court has observed as under : “The test is that if one of the objects of the trust deed 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 under s. 4(3)(i) of the Act is not available to the assessee.”

In view of the aforesaid decision of the Supreme Court, it is not possible to hold that the view taken by this Court in Lakshmi Narain Lath Trust vs. CIT (supra) is not correct and that even under the settlement deed dt. 25th Aug., 1948, the assessee must be held to be a trust wholly for charitable purposes and its income exempt under s. 11 of the 1961 Act.

9. The next question which needs to be considered is as to the effect of the supplementary deed dt. 21st May, 1958, whereby cl. 2(vi) has been amended and the words “belonging to the family of Laths” have been deleted and in their place, the words “in distress” have been inserted. As a result of the aforesaid amendment, cl. 2(vi) reads as under : “To render aid to any persons in distress and to grant monthly and other periodical aids to them.” The supplementary deed dt. 21st May, 1958, was executed by the settlor, Shri Lakshminarain Lath, and who is party of the one part and the trustees of the assessee who are parties of the other part in the said deed. The trustees who were parties to the supplementary deed were Shri Lakshminarain Lath, the settlor of the trust, his son, Shri Narbada Prasad Lath, Shri Mahabir Prasad Poddar and Shri Motilal Lath. Three out of the four trustees, namely, Shri Laxminarain Lath, Shri Narbada Prasad Lath and Shri Motilal Lath, were also parties, as trustees, to the original settlement deed dt. 25th Aug., 1948. Shri Bissessurlal Lath, who was a party to the original settlement deed dt. 25th Aug., 1948, as a trustee, was not a party to the supplementary deed dt. 21st May, 1958. The reason being that in the meanwhile, Shri Bissessurlal Lath had died and in his place, Shri Mahabir Prasad Poddar had been appointed as a trustee and he was a party to the settlement deed dt. 21st May, 1958.

The Bombay Bench of the Tribunal, in its order dt. 30th Sept., 1975, has held that amendments introduced in the settlement deed by the supplementary deed were invalid for the reason that the objects of the trust as set out in the original trust deed could be modified only with the consent of the beneficiaries and in a case where the beneficiaries are found to be incompetent to contract, approval of the Court was necessary which had not been obtained in this case. The Bombay Bench of the Tribunal has, in this connection, referred to ss. 9, 11, 58, 61 and 78 of the Indian Trusts Act, 1882.

We have looked into the said provisions of the Indian Trusts Act, 1882. Sec. 9 makes provision with regard to persons who may be beneficiaries. Sec. 11 relates to the duties of the trustees to execute the trust. Sec. 58 relates to the right of the beneficiary to transfer his beneficial interest. Sec. 61 provides for the right of the beneficiary to compel the trustee to perform any particular act or his duty. Sec. 78 provides for revocation of the trust. On a closer reading of the order of the Bombay Bench of the Tribunal, we find that the Tribunal has relied upon s. 11 of the Indian Trusts Act. Shri Surolia, learned counsel for the Revenue, has also laid stress on the provisions of the said section which provide as under : “Sec. 11 : Trustee to execute trust.—The trustee is bound to fulfil the purpose of the trust, and to obey the directions of the author of the trust given at the time of its creation, except as modified by the consent of all the beneficiaries being competent to contract. Where the beneficiary is incompetent to contract, his consent may, for the purposes of this section, be given by a principal civil Court of original jurisdiction. Nothing in this section shall be deemed to require a trustee to obey any direction when to do so would be impracticable, illegal or manifestly injurious to the beneficiaries. Explanation.—Unless a contrary intention be expressed, the purpose of a trust for the payment of debts shall be deemed to be : (a) to pay only the debts of the author of the trust existing and recoverable at the date of the instrument of trust, or, when such instrument is a will, at the date of his death, and (b) in the case of debts not bearing interest, to make such payment without interest.”

12. With regard to the aforesaid provisions of the Indian Trusts Act, it may be stated that in s. 1 of the Indian Trusts Act, it has been expressly laid down that nothing contained in the said Act would apply to public or private religious or charitable endowments. Although the provisions of the Indian Trusts Act as such are not applicable to public trusts in view of s. 1 of the said Act, the principles underlying them, being based on general principles or rules of English Law, are applied by the Courts to public trusts also (See Phulchand Lakhmichand Jain vs. Hukamchand Gulabchand Jain, AIR 1960 Bom 438 and Kishore Joo vs. Guman Behari Joo Deo, AIR 1978 All 1. In State of Uttar Pradesh vs. Bansi Dhar, AIR 1974 SC 1084, the Supreme Court has observed as under :

“The next question is whether the Indian Trusts Act, 1882, applies to the present case. The Courts below have argued themselves into an application of s. 83 of the Trusts Act. Shri Dixit rightly objects to this course because that Act relates only to private trusts, public charitable trusts having been expressly excluded from its ambit. But while these provisions proprio vigore do not apply, certainly there is a common area of legal principles which covers all trusts, private and public and merely because they find a place in the Trusts Act, they cannot become ‘untouchable’ where public trusts are involved. Care must certainly be exercised not to import by analogy what is not germane to the general law of trusts, but we need have no inhibitions in administering the law by invoking the universal rules of equity and good conscience upheld by the English Judges, though also sanctified by the statute relating to private trusts. The Courts below have drawn inspiration from s. 83 of the Trusts Act and we are not inclined to find fault with them on that score because the provision merely reflects a rule of good conscience and of general application.”

The question which needs to be considered is whether the rule incorporated in s. 11 of the Indian Trusts Act can be regarded as a rule which is germane to the general law of trusts to be applied as part of the rules of equity and good conscience to public trusts. In this context, it may be stated that in a private trust the beneficiaries are a determinate body and, therefore, any modification in the matter of terms of the author of the trust is required to be made with the consent of all the beneficiaries who are competent to contract and in cases where the beneficiary is incompetent to contract, his consent may be given by the civil Court. The situation in the case of a public trust is, however, different because in a public trust, the beneficiaries are generally indeterminate and the provisions of s. 11 requiring the consent of the beneficiaries cannot, therefore, be applied to a public trust.

In the present case, we find that cl. 2(vi) of the original settlement deed which made provision for giving aid to persons belonging to the family of Laths was never implemented as would be apparent from the judgment of this Court in Lakshmi Narain Lath Trust vs. CIT (supra), wherein it is mentioned that the ITO had found as a fact that the income had not been utilised for any non-charitable purposes and was exclusively being utilised for charitable purposes. That case related to the asst. yrs. 1954-55 to 1957 58. In 1958, the supplementary deed was executed whereby cl. 2 (vi) was amended and thereafter there was no question of the funds of the assessee being used for giving aid to the persons belonging to the family of Laths.

15. It may also be stated that although the supplementary deed was executed on 21st May, 1958, none of the persons belonging to the family of Laths has challenged the validity of the same in a Court of law. In this context, it would be relevant to refer to the decision of the Supreme Court in Apoorva Shantilal Shah vs. CIT (1983) 33 CTR (SC) 153 : (1983) 141 ITR 558 (SC). In that case, there was a partial partition of the HUF and the said partition was held to be invalid by the Tribunal and this finding was affirmed by the Gujarat High Court. The Supreme Court reversed the said finding and has observed as under : “If, however, any such partial partition causes any prejudice to any of the minor sons and if any minor son feels aggrieved by any such partial partition, he can always challenge the validity of such partial partition in an appropriate proceeding and the validity of such partial partition will necessarily have to be adjudicated upon in the proceeding on a proper consideration of all the facts and circumstances of the case. Till such partial partition has been held to be invalid by any competent Court, the partial partition must be held to be valid. It is not open to the IT authorities to consider a partial partition to be invalid on the ground that shares have not been equally divided and to refuse to recognise the same.”

16. Similarly, it can be said that if the amendments introduced in cl. 2(vi) of the settlement deed by the supplementary deed was causing prejudice to any of the beneficiaries, viz., the members of the family of Laths, they could challenge the validity of the supplementary deed in an appropriate proceeding in a competent Court and till the supplementary deed is held to be invalid by a competent Court, the supplementary deed must be held to be valid and it is not open to the IT authorities to treat it as invalid and to refuse to recognise the same. The IT authorities could ignore the supplementary deed if it was not found to be genuine and was found to be fictitious or sham. There is no such finding by the IT authorities in the present case. On the other hand, we find that the supplementary deed has been acted upon by the trustees and, therefore, it cannot be said that the amendments introduced by the supplementary deed are fictitious or sham.

It would also be relevant to mention that in the present case, there was no binding obligation on the trustees to use the income of the assessee for the object mentioned in cl. 2(vi), namely, “to render aid to any persons belonging to the family of Laths and to grant monthly and other periodical aids to them”. A discretion had been conferred on the trustees to apply the income of the trust for the various objects mentioned in cl. 2 including the said object. It was permissible for the trustees not to apply the income of the trust for the said object and in fact the income of the assessee was not applied for the said object. It cannot, therefore, be said that the beneficiaries under cl. 2(vi), namely, persons belonging to the family of Laths had an enforceable right to the application of the income of the assessee for the object mentioned in cl. 2(vi) and in these circumstances, it cannot be said that the consent of the beneficiaries referred to in cl. 2(vi) was necessary before any alteration could be made in the said clause.

In D. K. Sain vs. Nandarani Dassi (1969) 73 CWN 877, the settlor, Madhoo Soodon Sain, had created a trust for the benefit of himself and his son, Motilal Sain, his daughter-in- law, Nandarani, their sons and daughters as also grandsons and grand-daughters. Subsequently, by a deed of rectification, the settlor, Madhoo Soodon Sain, made an alteration in the original trust deed and the question was whether it was permissible for the settlor to make the said rectification in the original trust deed. The reason for making the said rectification, as stated in the deed of rectification, was that the trust deed did not represent the true intention of the settlor and that certain words had crept in which were contrary to his intention. A learned judge of the Calcutta High Court upheld the said deed of rectification executed by the settlor on the view that the original trust deed was not in consonance with the true intention of the settlor and a mistake had been committed in the drafting of the original trust deed. The learned judge also held that the said mistake could be rectified by taking appropriate proceedings for rectification of the trust deed in the Court and the Court in those proceedings would have rectified the said mistake. The learned judge observed that what enables the Court to rectify the mistake, enables the settlor so to do. The learned judge also observed that the mere fact that the trust deed conveys by way of settlement the trust property irrevocably, does not mean that the deed cannot be reformed, and that the irrevocability can be no bar to the deed’s rectification.

If the supplementary deed, dt. 21st May, 1958, is examined, it will be noticed that in the said deed, the settlor and the trustees have stated that by the settlement deed dt. 25th Aug., 1948, the settlor intended to create a public charitable trust for the benefit of the public in general and not for the benefit of any particular family or community and that unfortunately through inadvertence certain words had crept in some of the sub-clauses of the object cl. (2) of the settlement deed and that the said accidental slip in the object clause had lately been brought to the notice of the settlor and the trustees and the settlor and the trustees were desirous of putting on record the true intention of the settlor and of the trusts created by him under the said deed of settlement and rectifying the mutual mistakes appearing therein in the manner expressed in the said supplementary deed. This would show that the settlor felt that on account of the words used in certain sub-clauses of object cl. (2), the true intention of the settlor was not being reflected and, therefore, it was necessary to rectify the said mistakes in the original settlement deed so as to put on record the true intention of the settlor and of the trust created by him.

In respect of charities, Courts apply the doctrine of cy pres which envisages that where a clear charitable intention is expressed, it will not be permitted to fail because the mode, if specified, cannot be executed and the law will substitute another mode of cy pres, i.e., as nearly as possible to the mode specified by the donor. The said doctrine is applied on the principle that the Court would lean in favour of charity and where a general charitable goal is projected and particular objects and modes are indicated, the Court, acting to fulfil the broader benevolence of the donor and to avert the frustration of the good to the community, reconstructs, as nearly as may be, the charitable intent and makes viable what otherwise may die (See State of Uttar Pradesh vs. Bansi Dhar, AIR 1974 SC 1084). In the present case, the settlor was alive and he had indicated what his intention was in creating the trust by executing the supplementary deed. In our opinion, it was permissible for the settlor to clarify his intention in creating the trust under the original settlement deed by executing the supplementary deed and it cannot be said that the supplementary deed, dt. 21st May, 1958, executed by the settlor must be ignored.

We are also of the view that the supplementary deed binds the trustees who were parties to the said deed as well as future trustees of the assessee and in view of the supplementary deed, it is no longer permissible for the trustees of the assessee to use the trust funds for giving aid to persons belonging to the family of Laths. As a result, the flaw which was found by this Court in its judgment in Lakshmi Narain Lath Trust vs. CIT (supra), that a discretion was vested in the trustees to apply the funds of the trust towards the object contained in cl. 2(vi) of the object clause, i.e., to give aid to the persons belonging to the family of Laths and that, therefore, it was not a trust for charitable purposes, no longer exists. After the execution of the supplementary deed dt. 21st May, 1958, which is binding on the trustees, it is not open to the trustees to give aid only to persons belonging to the family of Laths and, therefore, it is not permissible for the trustees to apply the funds of the assessee for non-charitable purposes. In these circumstances, we are of the opinion that after execution of the supplementary deed, dt. 21st May, 1958, it cannot be said that the income of the assessee could be used for non-charitable purposes and that the income of the trust was not used wholly for charitable purposes. We are, therefore, unable to agree with the Tribunal that the income of the trust is not entitled to exemption under s. 11 of the 1961 Act.

The reference is, therefore, answered in favour of the assessee and the questions referred are answered as under : On the facts and in the circumstances of the case, the Tribunal was not justified in holding that by the amended trust deed of 1958, the assessee-trust has not acquired the status of a trust wholly for charitable and religious purposes in order to be entitled to exemption under s. 11 of the IT Act, 1961.

On the facts and in the circumstances of the case, the Tribunal was not justified in holding that the assessee-trust is not entitled to exemption under s. 11 of the IT Act, 1961.

There will be no order as to costs.

[Citation : 170 ITR 375]