1986 (2) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Whether the income derived from the property held under the trust was exempt from tax under section 11 of the Income-tax Act, 1961.
2. Interpretation of the trust deed and its provisions regarding charitable and non-charitable objects.

Issue-wise Detailed Analysis:

1. Exemption under Section 11 of the Income-tax Act, 1961:

The primary issue was whether the income of the Mullick Somnath Charitable Trust was exempt from taxation under section 11 of the Income-tax Act, 1961. The assessee contended that 50% of the net income of the trust was exempt because the trust was a public charitable trust with charitable objects. However, the Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal all held that the trust was not entitled to the exemption. The Tribunal noted that the trust deed did not specify any amount for public charity distinct from the private charitable object of maintaining the poor and indigent relations of the settlor. Thus, the trustees could potentially spend the entire income on non-charitable objects, which disqualified the trust from tax exemption under section 11.

2. Interpretation of the Trust Deed:

The court had to interpret the trust deed to determine whether the predominant object of the trust was public charity or if the provision for the support and maintenance of the poor and indigent relations of the settlor was merely ancillary. The assessee argued that the main object was public charity, and the provision for the settlor's poor relations was ancillary, citing several Supreme Court decisions to support this view.

Relevant Case Law:

- Trustees of the Charity Fund v. CIT [1959] 36 ITR 513 (SC): The Supreme Court held that a trust deed with a predominant charitable object could still qualify as a public charitable trust even if it directed trustees to give preference to the poor and indigent relations of the settlor.

- CIT v. Trustees of Seth Meghji Mathuradas Charity Trust [1959] 37 ITR 419 (Bom): The Bombay High Court followed the Supreme Court's decision, holding that a trust with a predominant charitable object and a preference clause for the settlor's relatives was a public charitable trust.

- CIT v. Moosa Haji Ahmed [1964] 52 ITR 147 (Guj): The Gujarat High Court held that a trust's dominant intention to provide relief to the poor was not affected by a preference clause for the settlor's relatives.

- CWT v. Trustees of the J. P. Pardiwala Charity Trust [1965] 58 ITR 46 (Bom): The Bombay High Court held that a trust supporting indigent persons, including the settlor's relatives, was a public charitable trust.

- CIT v. Board of Mutwallis to the Wakf Estate, Ebrahim Solaiman Saleji [1968] 69 ITR 758 (Cal): The Calcutta High Court held that a trust's dominant object of public charity was not destroyed by provisions benefiting the settlor's relatives if they were poor and indigent.

- Trustees of Gordhandas Govindram Family Charity Trust v. CIT [1973] 88 ITR 47 (SC): The Supreme Court found that a trust primarily benefiting the settlor's family was not a public charitable trust.

- Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC): The Supreme Court held that a trust with a primary charitable purpose and an ancillary non-charitable object could still be a valid charity.

Revenue's Argument:

The Revenue argued that the trust deed allowed trustees to spend the entire income on the support and maintenance of the poor and indigent relations of the settlor, a non-charitable object. Since the trustees' discretion was unfettered and no specific amount was earmarked for charitable purposes, the income was not exempt from taxation. The Revenue cited several cases, including:

- Abdul Sathar Haji Moosa Sait Dharmastapanam v. Commr. of Agrl. LT [1973] 91 ITR 5 (SC): The Supreme Court held that a trust with a significant portion of income earmarked for the settlor's relatives was not a public charitable trust.

- Yogiraj Charity Trust v. CIT [1976] 103 ITR 777 (SC): The Supreme Court held that if trustees could apply the entire income to non-charitable objects, the trust was not exempt from tax.

- Dharmadeepti v. CIT [1978] 114 ITR 454 (SC): The Supreme Court held that a business ancillary to charitable objects did not prevent the trust from being a valid charity.

Court's Conclusion:

The court concluded that the trust deed allowed trustees to spend the entire income on the settlor's poor and indigent relations without any preference, making them direct recipients of the trust's benefits. This distinguished the case from the Supreme Court's decision in Trustees of the Charity Fund [1959] 36 ITR 513, where the relations were not direct beneficiaries. Thus, the court held that the assessee was not entitled to tax exemption, answering the question in the affirmative and in favor of the Revenue.