1967 (7) TMI 52 - HC - Income Tax

Section 4(3)(i) of the Income-tax Act 1922 and section 11 of the Income-tax Act 1961 - Whether section 4(3)(i) of the IT Act 1922 will apply equally in regard to section 11 of the IT Act 1961 - held that element of public benefit requisite to attract the applicability of s. 4(3)(i) and the assessee was not entitled to claim exemption under s. 4(3)(i)

Summary

Issues Involved:
1. Interpretation of section 4(3)(i) of the Income-tax Act, 1922, and section 11 of the Income-tax Act, 1961.
2. Determination of whether the purposes set out in the assessee's constitution are charitable.
3. Evaluation of whether the beneficiaries constitute a section of the public.

Issue-wise Detailed Analysis:

1. Interpretation of Section 4(3)(i) of the Income-tax Act, 1922, and Section 11 of the Income-tax Act, 1961:
The court noted that section 11 of the Income-tax Act, 1961, is materially identical to section 4(3)(i) of the Income-tax Act, 1922. Therefore, the interpretation of section 4(3)(i) would equally apply to section 11. Section 4(3)(i) exempts income derived from property held under trust or other legal obligation wholly for charitable or religious purposes. The term "charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility.

2. Determination of Whether the Purposes Set Out in the Assessee's Constitution Are Charitable:
The court examined the purposes outlined in the assessee's constitution, which included managing properties, increasing education, providing medical help, and promoting unity and brotherhood within the Rana community of Ahmedabad. The Income-tax Officer initially denied exemption, arguing that the purposes were not charitable and the beneficiaries did not constitute a section of the public. The Appellate Assistant Commissioner partially agreed, stating that certain purposes were not charitable and the beneficiaries were vague and ill-defined. The Tribunal, however, ruled in favor of the assessee, holding that the purposes were charitable and the beneficiaries constituted a section of the public.

3. Evaluation of Whether the Beneficiaries Constitute a Section of the Public:
The court emphasized that for a purpose to be charitable, it must benefit the community or a section of the community, not just private individuals. The court referred to English law, noting that a charitable purpose must have a public character. The court cited several cases to support this view, including In re Faveaux, Verge v. Somerville, and Oppenheim v. Tobacco Securities Trust Co. Ltd., which established that the beneficiaries must not be defined by personal relationships but by a public or impersonal characteristic.

Applying this test, the court found that the beneficiaries in the present case were members of the Rana caste residing in Ahmedabad, either natives or those accepted by the community according to old customs. The court concluded that this class of beneficiaries did not constitute a well-defined section of the public united by a common, impersonal characteristic. The requirement of acceptance by the community according to old customs introduced a personal element, undermining the public character of the class.

Conclusion:
The court held that the element of public benefit required to attract the applicability of section 4(3)(i) was lacking. Therefore, the assessee was not entitled to claim exemption under section 4(3)(i). The court answered the question referred to it in the negative and ordered the assessee to pay the costs of the reference to the Commissioner.