1976 (3) TMI 5 - SC - Income Tax

Whether the income of the trust which was spent on the religious and charitable purposes within the taxable territories was exempt u/s 4(3)(i) - If one of the objects of the trust deed is not of a religious or charitable nature and the trust deed confers full discretion on the trustees to spend the trust funds for an object other than of a religious or charitable nature, the exemption under section 4(3)(i) of the Act is not available to the assessee

Summary

Issues Involved:
1. Exemption under section 4(3)(i) of the Indian Income-tax Act, 1922.
2. Charitable and non-charitable objects of the trust.
3. Trustees' discretion in applying trust income.
4. Dominant purpose of the trust.
5. Application of income to charitable purposes.

Issue-wise Detailed Analysis:

1. Exemption under section 4(3)(i) of the Indian Income-tax Act, 1922:
The primary question was whether the income of the trust, spent on religious and charitable purposes within the taxable territories, was exempt under section 4(3)(i) of the Act. The trust claimed exemption under this section, arguing that it was for religious and charitable purposes only. However, the High Court answered this question in the negative, and the Supreme Court upheld this decision.

2. Charitable and non-charitable objects of the trust:
The trust deed listed numerous objects, including opening schools, giving scholarships, maintaining temples, and providing employment. However, it also included non-charitable objects such as establishing commercial institutions. The revenue argued that these non-charitable objects gave trustees unfettered discretion to use the trust income for non-charitable purposes, which invalidated the entire trust's claim for exemption.

3. Trustees' discretion in applying trust income:
The revenue contended that clauses 11 and 16 of the trust deed gave trustees uncontrolled discretion to spend the trust's funds on non-charitable objects. The Supreme Court agreed, stating that if trustees have the authority to apply the entire income to non-charitable purposes, the trust fails to qualify for exemption under section 4(3)(i) of the Act.

4. Dominant purpose of the trust:
The appellant argued that the dominant purpose of the trust was charitable, even if some money was spent on non-charitable purposes. However, the Court held that where there are several objects, some charitable and some non-charitable, and trustees can apply income to any object, the whole trust fails. The Court emphasized that all primary objects must be charitable for the trust to be valid.

5. Application of income to charitable purposes:
The appellant contended that income applied wholly to charitable purposes should qualify for exemption. However, the Court noted that mere application of income to charity does not secure exemption if the income is primarily applicable to non-charitable objects. The Court cited previous judgments, including East India Industries (Madras) P. Ltd. v. Commissioner of Income-tax, to support this view.

Conclusion:
The Supreme Court dismissed the appeals, affirming that the trust did not qualify for exemption under section 4(3)(i) of the Act. The Court reiterated that if any object of the trust is non-charitable and trustees have discretion to apply income to non-charitable purposes, the entire trust fails to qualify for tax exemption. The parties were directed to bear their own costs, as ordered by the High Court.