1965 (10) TMI 22 - SC - Income Tax

Whether the income arising from property settled upon trust under the deed of settlement, dated September 14, 1950, or any part thereof is exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922 ? Held that - Clause 3(d)(v) of the trust deed on which reliance is placed is only an expression of desire on the part of the settlor that the income of the trust should be spent equally on the four religious and charitable purposes mentioned in the deed. The said desire does not amount to setting apart by the trustees of the whole or a part of the income from the trust for purposes within the taxable territories. Indeed, clause 3(d) of the trust deed indicates the trustees have no power to set apart or accumulate the income for any of the purposes mentioned in the trust deed till after the death of the settlor. We cannot, therefore, hold on the material placed before us that the trustees have set apart the accumulated income for purposes within the taxable territories. Appeal dismissed.

Issues Involved:
1. True construction of section 4(3)(i) of the Indian Income-tax Act, 1922.
2. Whether the income from the trust is exempt from tax under section 4(3)(i) of the Act.

Detailed Analysis:

Issue 1: True Construction of Section 4(3)(i) of the Indian Income-tax Act, 1922

The primary issue in this case revolves around the interpretation of section 4(3)(i) of the Indian Income-tax Act, 1922. The court scrutinized the statutory language to determine the conditions under which income derived from property held under trust for religious or charitable purposes is exempt from taxation. The relevant provision reads:

"Subject to the provisions of clause (c) of sub-section (1) of section 16, any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes the income applied or finally set apart for application thereto."

The court emphasized that to qualify for the exemption, the income must be "applied or accumulated for application" specifically for religious or charitable purposes within the taxable territories. The terms "applied" and "accumulated" were interpreted to mean that the income should be either actually used for the specified purposes within the taxable territories or consciously set apart for future use for such purposes. The court clarified that the expression "accumulated for a purpose" involves a conscious act and a clear indication by the trustee to set apart the income for that purpose.

The court also examined the proviso to section 4(3)(i), which states that the income shall be included in the total income if it is applied to religious or charitable purposes outside the taxable territories unless the Central Board of Revenue directs otherwise. This proviso further supports the interpretation that the primary clause exempts only the income applied or accumulated for purposes within the taxable territories.

Issue 2: Whether the Income from the Trust is Exempt from Tax

The court examined the facts of the case to determine if the income from the trust was exempt under section 4(3)(i). The trust deed created by H.E.H. the Nizam of Hyderabad specified that the income was to be accumulated during his lifetime and used for religious and charitable purposes after his death. The trust deed listed four purposes, two of which were within the taxable territories and two outside.

The trustees claimed exemption under section 4(3)(i), arguing that since the income was being accumulated and not specifically set apart for any purpose, it should be presumed to be for purposes within the taxable territories. The court rejected this argument, stating that the mere accumulation of income without a specific allocation does not meet the requirement of being "applied or accumulated for application" within the taxable territories. The court held that the income must be consciously set apart for the specified purposes within the taxable territories to qualify for the exemption.

The court also noted that the trust deed did not confer any power on the trustees to allocate the accumulated income for any specific purpose during the lifetime of the settlor. Therefore, the trustees could not claim that the income was set apart for purposes within the taxable territories.

In conclusion, the court affirmed the decision of the lower authorities and the High Court, holding that the income from the trust was not exempt under section 4(3)(i) of the Indian Income-tax Act, 1922. The appeals were dismissed with costs.

Conclusion:
The court's judgment clarified the interpretation of section 4(3)(i) of the Indian Income-tax Act, 1922, emphasizing that income must be specifically applied or accumulated for religious or charitable purposes within the taxable territories to qualify for exemption. The trustees' claim for exemption was denied as they failed to demonstrate that the income was set apart for purposes within the taxable territories.

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