1970 (12) TMI 7 - HC - Income Tax

Trust - building of residential quarters for workmen in general - but trustees had discretion to spend the entire income for the benefit of the workmen belonging to a particular company - whether object of the trust cannot be said to be a charitable object

Issues Involved:

1. Validity of the rectification of the trust deed by the civil court.
2. Existence of a genuine partnership involving Kamla Town Trust.
3. Legal capacity of a trust to be a partner.
4. Validity of the deed of partnership dated February 5, 1946.
5. Material supporting the Tribunal's finding on the purchase price of needles.

Issue-wise Detailed Analysis:

1. Validity of the rectification of the trust deed by the civil court:

The court considered whether the rectification of the trust deed by the civil judge in Suit No. 40 of 1945 was valid. The trust deed was initially executed on October 27, 1941, and later rectified by a decree on August 18, 1945, to extend the class of beneficiaries to include the general public. The court found that the rectification was valid, as the civil court had the jurisdiction to rectify the deed to express the true intention of the parties, which was to create a charitable trust. The court also determined that the rectification did not go beyond the objects mentioned in the memorandum of association of J.K. Cotton Spinning and Weaving Mills Co. Ltd., which allowed the company to create a public charitable trust.

2. Existence of a genuine partnership involving Kamla Town Trust:

The Tribunal's finding that no genuine partnership came into existence by which the Kamla Town Trust became a partner was supported by material evidence. The Tribunal noted that the three Singhania brothers, who were also the trustees, manipulated their dual capacity to create an arrangement that appeared to show the trust as a partner, while in reality, the business was conducted by the Singhania brothers in their individual capacity. The Tribunal observed various inconsistencies and manipulations, such as the preparation of the balance sheet, the handling of trust funds, and the reversion of assets to the original partners, which indicated that the partnership was not genuine.

3. Legal capacity of a trust to be a partner:

The court addressed whether a trust could be a partner in law. It concluded that a trust for religious and charitable purposes, if raised to the status of a juristic person, could enter into a partnership. Even if the trust was not a juristic person, the trustees could act on behalf of the trust and enter into a partnership. Thus, the court found that the trust could be a partner in law.

4. Validity of the deed of partnership dated February 5, 1946:

The court examined the validity of the partnership deed dated February 5, 1946, between J.P. Agarwal and Kamla Town Trust. Given that the rectified trust deed was found to be invalid due to the mixture of charitable and non-charitable objects, the partnership deed was also deemed invalid. The court concluded that no valid partnership came into existence under the partnership deed dated February 5, 1946.

5. Material supporting the Tribunal's finding on the purchase price of needles:

The court reviewed whether there was material to support the Tribunal's finding that the needles purchased in the black market during the previous year relevant to the assessment year 1947-48 were purchased at the rate of Rs. 500 per thousand. The Tribunal had estimated the price based on the average rates of verified and unverified purchases and the rates determined for previous years. The court found that there was sufficient material to support the Tribunal's estimation and upheld the finding.

Summary of Answers:

1. The rectification by the decree of the civil judge in Suit No. 40 of 1945 was valid.
2. There was material in support of the Tribunal's finding that no genuine partnership came into existence by which the Kamla Town Trust became a partner.
3. The trust as such could be a partner in law.
4. The deed of partnership dated February 5, 1946, was not valid.
5. There was material for the finding of the Tribunal that the needles purchased in the black market during the previous year relevant to the assessment year 1947-48 were purchased at the rate of Rs. 500 per thousand.

The court directed the parties to bear their own costs of this reference.

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