1966 (10) TMI 53 - SC - Income Tax

Whether after the execution of the deed of surrender on 21st July 1955 the income from the trust properties was exempt from income-tax under section 4(3)(i) of the Act or not? Held that - The exemption of the income of the trust properties from liability to income-tax was not dependent entirely on the coming into operation of clause 8 and we therefore think that the question framed should have been broken up into two parts as follows (1) Whether clause 8 of the trust settlement made on 25th November 1946 came into operation immediately following the declaration made by Bai Kasturbai on 21st July 1955 ? and (2) Whether in the circumstances of this case the income that accrued or arose to the trustees from the trust properties from 21st July 1955 onwards was exempt under section 4(3)(i) of the Act ? If the question is so broken up the first question becomes unnecessary and the second question has to be answered in favour of the respondent. The answer to the second question is the only one that is material for purposes of determining the liability of the income of the trust to tax. That question has been answered by the High Court in favour of the respondent. The appeals therefore fail

Summary

Issues:
Interpretation of a deed of trust and its impact on income tax liability under section 4(3)(i) of the Income-tax Act.

Analysis:
The case involved a deed of trust executed by Seth Walchand and his wife, Bai Kasturbai, creating a trust for charitable purposes. The deed provided that after Bai Kasturbai's death, the trustees were to apply the income of the trust properties for charitable purposes. Following Bai Kasturbai's execution of a deed surrendering her rights to the income, the question arose regarding the income tax liability of the trust properties for specific assessment years. The Income-tax Officer initially held that the income was not exempt from tax, but subsequent appeals led to differing opinions. The Appellate Assistant Commissioner and the Income-tax Appellate Tribunal both ruled in favor of the trust, stating that the income was exempt under section 4(3)(i) of the Act. The High Court also upheld this decision, leading to an appeal to the Supreme Court by the Commissioner of Income-tax.

The Supreme Court analyzed the validity of Bai Kasturbai's deed of surrender and its impact on the income tax liability of the trust properties. The Court noted that under the Indian Trusts Act, the income of trust properties is treated as received by trustees on behalf of beneficiaries and is taxable accordingly. However, the exemption from tax applies when the trust properties are held wholly for charitable purposes. Bai Kasturbai's surrender of her rights to the income was deemed valid under the Indian Trusts Act, extinguishing her beneficiary rights and allowing the trustees to utilize the income for charitable purposes.

The Court emphasized that the income tax exemption was not solely dependent on the operation of a specific clause in the trust deed. Even if the clause allowing application of income for charitable purposes did not come into effect immediately, the income remained exempt as long as Bai Kasturbai's rights were surrendered. Therefore, the Tribunal's framing of the question was deemed erroneous, and the Court suggested breaking it into two parts to clarify the issue. Ultimately, the Court upheld the High Court's decision in favor of the trust, dismissing the appeals and ruling in favor of the respondent.