1977 (7) TMI 5 - HC - Income Tax

Summary

Issues Involved:
1. Exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922, for assessment years 1958-59 to 1961-62.
2. Exemption under Section 11(1) of the Income-tax Act, 1961, for assessment years 1962-63 and 1963-64.
3. Interpretation of "income derived from property held under trust."
4. Impact of the amendment introducing clause 2(j) in the trust deed.

Issue-wise Detailed Analysis:

1. Exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922, for Assessment Years 1958-59 to 1961-62:
For the assessment years 1958-59 and 1959-60, the trust deed did not include clause 2(j), which authorized the trustees to carry on business activities. The court held that "income derived from property held under trust" must directly and substantially arise from the property held under trust. Since the trustees were not authorized to carry on business prior to the introduction of clause 2(j), the income derived from such business could not be considered as income derived from property held under trust. Therefore, the income for these years was not exempt under Section 4(3)(i) of the Indian Income-tax Act, 1922.

For the assessment years 1960-61 and 1961-62, clause 2(j) was introduced, authorizing the trustees to manufacture and market products using the patents and inventions held under trust. The court held that this business activity was within the scope of the trust's objectives and thus constituted "property held under trust." Therefore, the income derived from this business was exempt under Section 4(3)(i) for these years.

2. Exemption under Section 11(1) of the Income-tax Act, 1961, for Assessment Years 1962-63 and 1963-64:
For the assessment years 1962-63 and 1963-64, the case was governed by Section 11(1) of the Income-tax Act, 1961, which is similar to Section 4(3)(i) of the Indian Income-tax Act, 1922. However, the definition of "charitable purpose" under Section 2(15) of the Income-tax Act, 1961, includes the advancement of any object of general public utility, provided it does not involve the carrying on of any activity for profit. The court held that the business of manufacturing and marketing products using the patents and inventions was an activity for profit and therefore did not qualify as a "charitable purpose" under the new definition. Consequently, the income derived from this business was not exempt under Section 11(1) for these years.

3. Interpretation of "Income Derived from Property Held Under Trust":
The court referred to the decision in J.K. Trust v. CIT [1953] 23 ITR 143, which held that income must directly and substantially arise from the property held under trust to qualify for exemption. The court emphasized that merely using a patent held under trust in a business does not make the business itself property held under trust. The business must be explicitly authorized by the trust deed to be considered as such.

4. Impact of the Amendment Introducing Clause 2(j) in the Trust Deed:
Clause 2(j) was introduced on October 22, 1958, and authorized the trustees to conduct research, develop processes and products, and manufacture and market them to raise funds for the trust's objectives. The court held that this clause allowed the business activities to be considered as property held under trust from the assessment year 1960-61 onwards. However, for the years governed by the Income-tax Act, 1961, the business activities were deemed to be for profit and thus did not qualify as charitable purposes under Section 2(15).

Conclusion:
- The claim for exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922, for the assessment years 1958-59 and 1959-60 was not proper.
- The claim for exemption under Section 4(3)(i) for the assessment years 1960-61 and 1961-62 was proper.
- The claim for exemption under Section 11(1) of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64 was not proper.
- Each party will bear its own costs as both parties partially succeeded.