1997 (7) TMI 11 - SC - Income Tax

Trust - interest income - Held that the purport of the proviso is in no way obscure and the proviso would apply only if the trust created before April 1, 1962, mandated at that time that the trustees could invest the funds of the trust in a concern in which they were interested being the persons referred to in clause (c)(ii) of sub-section (1) and sub-section (2) by virtue of sub-section (3) of section 13 - assessee-trust is not exempt u/s 21A of the Wealth-tax Act and u/s 11 of Income-tax Act.

Summary

Issues Involved:

1. Amendment of Clause 39 of the Trust Deed.
2. Exemption of Interest Income under Section 11 read with Section 13 of the Income-tax Act, 1961.
3. Exemption from Wealth-tax under Section 21A of the Wealth-tax Act, 1957.

Issue-wise Detailed Analysis:

1. Amendment of Clause 39 of the Trust Deed:

The first issue pertains to whether Clause 39 of the trust deed can be legally amended in view of Clause 41 of the same deed, and if such an amendment would create a legally enforceable mandate as contemplated by the first proviso to sub-section (1) of Section 13 of the Income-tax Act, 1961. Clause 41 of the trust deed allows the trustees to amend any rules or regulations regarding the conduct and management of the trust by a majority of 75%. Originally, Clause 39 required that all monies be invested in banks or securities approved by the trustees. However, on March 13, 1971, the trustees amended Clause 39 to mandate that funds not required for immediate needs be kept with Gokal Chand Rattan Chand Woollen Mills Private Limited, where the trustees had a substantial interest.

2. Exemption of Interest Income under Section 11 read with Section 13 of the Income-tax Act, 1961:

The second issue concerns whether the interest income of the assessee-trust is exempt from tax under Section 11 read with the first proviso to sub-section (1) of Section 13 of the Income-tax Act, 1961. Section 11 exempts income from property held for charitable or religious purposes, while Section 13 specifies conditions under which this exemption would not apply. The Income-tax Officer denied the exemption, arguing that the trust violated Section 13 by investing in a concern where trustees had an interest, thus contravening clauses (a) and (h) of sub-section (2) of Section 13. The Appellate Assistant Commissioner upheld this view, but the Income-tax Appellate Tribunal reversed it, holding that the amendment to Clause 39 was valid and did not violate Section 13. The High Court affirmed the Tribunal's view, deciding in favor of the assessee. However, the Supreme Court concluded that the mandatory provision for investment in a concern where trustees had an interest should have existed before April 1, 1962, and could not be introduced later, even if the trust deed allowed amendments. Thus, the exemption under Section 11 was not applicable.

3. Exemption from Wealth-tax under Section 21A of the Wealth-tax Act, 1957:

The third issue deals with whether the assessee-trust is exempt from wealth-tax under Section 21A of the Wealth-tax Act, 1957. Section 21A stipulates that wealth-tax is applicable if any part of the property or income of a trust is used for the benefit of persons referred to in sub-section (3) of Section 13 of the Income-tax Act, unless such use is in compliance with a mandatory term of the trust deed existing before April 1, 1962. The Supreme Court interpreted that the mandatory term for investment in a concern where trustees had an interest should have been present in the trust deed before the specified date. Since Clause 39 was amended after this date, the trust did not qualify for the exemption under Section 21A.

Conclusion:

The Supreme Court allowed the appeals, set aside the judgments of the High Court, and answered the questions in the negative, favoring the Revenue and against the assessee. The court concluded that the amendments to the trust deed made after April 1, 1962, could not qualify for the exemptions under the Income-tax Act and the Wealth-tax Act.