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The Commissioner Of Income-Tax, Bombay City Ii, Bombay v. M/S. Walchand Diamond Jubilee Trust
Legal Opinion Summary
Factual and Procedural Background
This reference concerns whether income arising from a trust established by Mr. Walchand Hirachand is exempt from income tax on the ground that it falls within the provision cited in the reference (initially identified as s. 4(5)(i) of the Indian Income-tax Act; the court's reasoning also discusses s. 4(3)(i)). The trust-deed is dated 31 May 1943 and arose on the Diamond Jubilee (61st birthday) of the settlor. A committee of the settlor's employees presented the settlor with Rs. 4,11,111, which formed the trust fund.
Key operative provisions of the trust-deed described in the opinion:
- The trust fund is to be invested in shares of the Premier Construction Co., Ltd.
- Clause 2: for 18 years the income of the trust is also to be invested in such shares (i.e., income is to be accumulated and reinvested).
- Clause 3: on and after the expiry of 18 years the net income of the investments is to be used for any one or more of four enumerated objects — giving scholarships, medical relief, monetary help to the poor and needy, and relief in times of famine, cyclone, floods, earthquake, etc.
- The proviso to Clause 3 allows trustees to give preference to persons eligible under those objects who are at the time, or have in the past been, employees of the Premier Construction Co., Ltd.
- Clause 4 obliges trustees to attend meetings of the Premier Construction Co., Ltd., and to exercise votes to further the trust's objects.
Procedurally, the reference asked whether the income from this trust is exempt from tax under the section cited in the reference. Advocate names recorded: Solicitor for the applicant A.S. Parikh; Solicitor for the respondents S.P. Mehta. The court ultimately answers the reference in the affirmative and orders the Commissioner to pay costs.
Legal Issues Presented
- Whether the income arising from the trust is derived from property held under trust wholly for religious or charitable purposes and therefore exempt from tax under the section relied on in the reference (initially identified as s. 4(5)(i) of the Indian Income-tax Act; the opinion's discussion refers to s. 4(3)(i) in considering the statutory test).
- Whether a provision directing accumulation and reinvestment of income for a fixed period (18 years) prevents the trust from being a charitable trust at the relevant year of account.
- Whether the proviso permitting trustees to give preference to employees of Premier Construction Co., Ltd. means the trust is, in substance, a trust for the benefit of a specific class of employees (and thus not a charity for the public or a section of the public), in light of precedent considering employee-based beneficiary classes.
Arguments of the Parties
Mr. Joshi's Arguments (for the Revenue)
- The exemption under the statute requires that in the year of account there be a trust in existence for charitable purposes from which the income is derived; here, no such charitable trust exists in the relevant year because the obligation to spend on charitable objects arises only after 18 years.
- Before expiry of the 18 years, the trustees' only obligation is to invest the income in shares — therefore the income is not derived from property impressed with a charitable trust at the relevant time.
- The direction to invest and to accumulate income alters the character of the trust in the interim and cannot be treated as merely procedural; capitalising income for 18 years changes the trust fund so that the charitable trust does not exist until the end of that period.
- Separately, the power to prefer employees of Premier Construction Co., Ltd. indicates the settlor's main object may be to benefit those employees; if the trust's beneficiaries are employees (or their children), then the trust would not satisfy the statutory requirement of being for the public or a section of the public and would not be a charitable trust (relying on English authority that employee classes can fail the public-benefit test).
Counter / Other Positions Noted in the Opinion
- The opinion notes that Mr. Palkhivala did not dispute the legal proposition that a trust solely for the employees of a particular employer would not be charitable under the statutory test; however, the opinion does not provide a detailed account of his affirmative arguments in the text excerpt provided.
- The court's discussion emphasizes that the settlor's direction to accumulate income for 18 years is a mode of carrying out the charitable intention rather than a separate non-charitable object; the Charity Commissioner and court are not bound by settlor's investment directions if imprudent.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Oppenheim v. Tobacco Securities Trust Co. Ltd. [1951] A.C. 297 | Held that a body of beneficiaries tied together only by employment by particular employers, however numerous, does not constitute a section of the public for charity law purposes; therefore such a trust does not satisfy the public-benefit requirement for charity. | The court accepted the principle that a trust limited to employees of a particular concern would not qualify as charity under the statutory test. It applied this principle as a touchstone for analysis but distinguished the present deed because the trustees here have discretion and are not obliged to limit benefits to employees; thus the trust is not confined to an employee class as in Oppenheim. |
Court's Reasoning and Analysis
The court's analysis proceeds by identifying the central inquiry: the nature of the trust with which the property is impressed — specifically, whether its object is charitable or religious. The court frames this as a question of dominant intention disclosed by the trust-deed.
Key elements of the court's reasoning:
- Object versus mode: The court distinguishes an object's nature from directions about investment or accumulation. It holds that directions to invest or accumulate income are modes of carrying out the settlor's charitable intention and are not per se separate objects that negate that charitable intention.
- Accumulation allowed: The trust-deed's scheme to accumulate income for a specific period (18 years) and then apply the enlarged fund to charitable objects is a legitimate expression of the settlor's dominant charitable intention. The mere fact that the income is not spent immediately does not destroy the charitable character if the income is being saved for the ultimate charitable purpose.
- Supervisory power over investments: The court notes that the Charity Commissioner (under the Bombay Public Trusts Act) and the court, exercising equitable/jurisdictional supervision, are not bound by the settlor's investment directions if they are imprudent; thus investment directions are procedural and subject to oversight.
- Public-benefit test and employee preference: The court recognises that if the trust were in substance to benefit employees alone, it would fail the public-benefit test (as explained in Oppenheim). However, the clause in the deed merely allows trustees to give preference to eligible persons who are or have been employees; it does not impose an obligation to prefer employees or confine beneficiaries to that class.
- Discretion of trustees: Because the trustees retain discretion to select beneficiaries from the public meeting the charitable criteria — and are not bound to prefer employees or to exclude other eligible members of the public — the trust is not effectively restricted to a non-public class. The court therefore rejects the contention that the trust is solely for employees.
- Dominant intention controls: Putting those points together, the court concludes that the dominant intention of the settlor was charitable — to establish a fund ultimately to be applied to stated charitable objects — and that interim investment/accumulation instructions do not alter that character.
Holding and Implications
Holding:
The court answered the reference question in the affirmative. On the facts and the trust-deed as described, the court found that the trust's dominant intention is charitable and that the income is not excluded from exemption by the interim accumulation or by the trustees' power to prefer employees.
Immediate consequences and order recorded in the opinion:
- The court resolved the reference in favour of the applicant (i.e., the question of tax exemption was answered affirmatively in the terms of the reference).
- The Commissioner is ordered to pay the costs.
Broader implications: The opinion emphasises legal principles — notably the distinction between a trust's object and directions as to investment/accumulation, the role of dominant intention, and the public-benefit test as applied in Oppenheim — but the excerpt does not record the court claiming to establish any novel precedent beyond applying these principles to the facts. No wider rule-making beyond the case disposition is articulated in the provided text.
Chagla, C.J:— The question that arises in this reference is whether an income arising from a certain trust in exempt from tax on the ground that it tails within s. 4(5)(i) of the Indian Income-tax Act. The trust in question was constituted on the Diamond Jubilee of Mr. Walchand Hirachand, a well-known industrialist of Bombay, and the trust-deed which is dated May 31, 1943, seta out the objects of the trust. The recitals clearly state how the trust came into existence, and the origin of the trust was the celebration of the 61st birthday of the settlor, and a committee of the employees of the settlor presented to him a sum of Rs. 4,11,111, and the recital further points out that the settlor was anxious to strengthen the hands of the organization which controlled the various companies in which the settlor had an interest and, therefore, he thought it necessary to maintain a uniform control over the management and working of the Premier Construction Co., Ltd., by centralising the voting power in the company in the hands of a certain definite body instead of having it spread over in individuals or small groups. Then we have the operative clause which provides that the trust fund shall be invested in the purchase of shares of any kind of the Premier Construction Co., Ltd.; Clause 2 provides that for 18 years the income is also to be invested in the shares of the Premier Construction Co., Ltd.; and Clause 3 provides that on and after the expiry of the period of 18 years the net income derived from the investments is to be utilised for all or any one of the four objects mentioned in that clause, and those objects are, giving scholarships, medical relief, monetary help to the poor and needy, and relief to the poor and distressed in time of famine, cyclone, floods, earthquake, etc. There is a proviso to this clause which entitles the trustees to give preference to such persons as are eligible under the four objects enumerated and who are at the time or have in the past been employees of the Premier Construction Co., Ltd. Clause 4 also casts an obligation upon the trustees to attend meetings of the Premier Construction Co., Ltd., and to exercise their vote in such, manner as would be conducive to the furtherance of the various objects of the trust.
2. The first question that we have to consider is whether the income from this trust is derived from property which is held under trust wholly for religious or charitable purpose; and the contention of Mr. Joshi is that, on a true reading of this section, what is required is that in the year of account in which the exemption is claimed there must be a trust in existence for religious or charitable purposes from which the income in respect of which exemption is sought is derived. Mr. Joshi says that, when we look at the scheme of this trust-deed, it is clear that in the year of account no such trust was in existence. What is urged upon us is that the trust for charitable purposes would only come into existence after 18 years and prior to the 18 years there is no trust whatever for any charitable purpose, the only obligation upon the trustees being to invest the income in the shares of the Premier Construction Co., Ltd. Mr. Joshi is right that before we grant an exemption to the assessee under s. 4(3)(i), we must be satisfied that at the relevant time—and the relevant time is the year of account—there is property which is impressed with a charitable trust, that property yields income and it is that income for which exemption is sought. Now it is not disputed that the four objects to which reference has been made are objects of a charitable nature and that a trust in respect of those four objects would be a trust which would fall within the ambit of s. 4(3)(i). What is said is that there is no obligation with regard to these four objects until a lapse of 18 years; it is only after 18 years that there is an obligation upon the trustees to spend income on these four objects: and, therefore, at the relevant date what is in existence is not a trust for a charitable purpose, but a trust for an entirely different purpose. Now, this raises a rather important question. When you analyse the provisions of the trust-deed, the scheme which emerges is clear. The settlor did not wish the trustees to spend the income of the trust on the charitable objects immediately. He wanted the trust fund to increase and expand, and after the trust fund had expanded, he wanted the income of that trust fund to be spent on the charitable objects. In other words, the trust-deed contains a scheme for accumulation of income and for the accumulated income to form part of the trust fund; and there is also a provision for the accumulation to go on for a specific period of time and on the expiry of that time the income of the enlarged trust fund to be spent on the charitable objects. Can it be said that, because the income of the trust is not to be spent immediately or in the relevant year on the charitable objects, therefore the income is not exempt although the object of the trust may he a charitable object?
3. Now for the purpose of s. 4(3)(i) what the Court has to consider is what; is the nature of the trust with which the property is impressed. In other words, the question that the Court has to ask itself is: What is the object of the trust? Is it a charitable object or a religious object? If the property is impressed with a charitable trust or the object of the trust is charitable or religious, then the income derived from such trust or property would be income which would fall within the ambit of s. 4(3)(i). It is fallacious to suggest that the object of the trust for the first 18 years is to invest monies in a particular manner. That is not the object: it is a mode of investment; it is a direction given by the settlor how the income is to be utilised for the ultimate object of its being spent on the objects of the trust. It is entirely untenable, in our opinion, to suggest that a direction with regard to investment can be looked upon as an object of the trust. An object of the trust is something definite and unvarying; it is the intention that the settlor has for settling his property; it is an object with which the Court can rarely interfere. Except when a question of the cy pres doctrine comes in, the Court exercising charitable jurisdiction must always respect the charitable intention disclosed by the settlor and help the trustees to carry out the charitable intention. But the direction with, regard to its investment is entirely different. No Court exercising equity jurisdiction—and the Charity Commissioner to-day is exercising his jurisdiction under the Bombay Public Trusts Act under which this trust is registered—is ever tied down by the directions of the settlor with regard to investments. If at any time within the 18 years the Court or the Charity Commissioner is satisfied that the investments directed by the settlor, are not prudent investments and are not beneficial to the trust, it is perfectly competent to the Charity Commissioner or the Court to direct that the investment should be made in a different manner. This clearly explains the dividing line between what are strictly the objects of the trust and the procedural matters, if one might say so, contained in the trust-deed which may deal with details like the accumulation of income, the investment of income, and so on. Mr. Joshi says that there would have been no objection if the settlor had given directions for the accumulation of income if ultimately the whole of that income was directed to be spent on charitable objects. But Mr. Joshi's quarrel is that, at the end of 18 years, the trust fund that is constituted is not merely the trust fund as originally set up, but the trust fund plus all the income which has arisen to that trust fund in the course of 18 years. In other words, the direction is to capitalise income for a period of 18 years. It is difficult to understand what possible objection in principle there can be to that direction in a trust-deed. Illustrations will immediately come to mind of many charitable schemes which it may not be possible to give effect to immediately and where a settlor may well provide, having laid apart a certain amount for a charitable purpose, that the charitable purpose should only be carried out after a period of 10 or 20 years when the fund has grown sufficiently to make it possible for that scheme to be carried out. If Mr. Joshi were right, no such trust could be set up, or if it were set up, the income from such a trust would have to pay tax. What has to be looked at is the dominant intention disclosed in the trust-deed. It is not necessary that intention must be immediately carried out. So long as the income from the trust property is not spent on any non-charitable object and it is saved, as it were, or set apart or accumulated for the ultimate object of carrying out the charitable purpose, then even in the intervening period the trust continues to be a charitable trust, the property is held on a charitable trust and the income from that trust is exempt from tax.
4. The second objection that is raised by Mr. Joshi is as regards the power conferred upon the trustees to prefer the employees of the Premier Construction Co., Ltd, for being the object of the settlor's bounty; and it is said that, when the whole scheme of the trust-deed is looked at, it is nothing more than a trust to help the employees of the Premier Construction Co., Ltd. Mr. Joshi is perfectly right that, if we take the view that the trust is to benefit the employees, even though they are to be benefited for purposes which are charitable, the trust would not come within the ambit of s. 4(3)(i). What s. 4(3)(i) has in view is not merely a religious or charitable purpose, but also that the object of the trust must be an object of general public utility. In other words, the bounty of the settlor must be directed towards the public as a whole or a section of the public. If the object of his bounty is neither the public nor a section of the public but merely a conglomeration of men who constitute a mere group and the nexus which ties them is not a nexus which constitutes them a section of the public, then the trust would not be a trust which would fall within the ambit of s. 4(3)(i). Now, there is a very interesting English decision to which our attention was drawn by Mr. Joshi and that is Oppenheim v. Tobacco Securities Trust Co. Ltd. . [1951] A.C 297. In this case a group of numerous persons was the object of the settlor's bounty, but the nexus between them was employment by particular employers; and the House of Lords held that the trust did not satisfy the test of public benefit requisite to establish it as charity. As has been very happily put by Lord Normand at page 310, if the object of the bounty is an aggregate of persons without public significance, then that aggregate of persons, however numerous, does not constitute a section of the public. Therefore, it cannot be disputed—and Mr. Palkhivala does not dispute it—that if the object of the trust was to benefit the employees of a particular concern or the children of the employees, then the trust would not be a charitable trust within the meaning of s. 4(5)(i).
5. But the question is whether on a fair reading of this trust it could be said that the objects of the settlor's bounty were only the employees of the Premier Construction Co., Ltd.
6. In this connection Mr. Joshi puts emphasis upon the proviso which gives the power to the trustees to give preference to the employees of the Premier Construction Co., Ltd. Now, undoubtedly we would have taken a different view of this trust if there was an obligation upon the trustees to prefer the employees. In other words, if the other members of the public were postponed to the employees of the Premier Construction Co., Ltd., then, looking to the other provisions of the deed, we might easily have taken the view that the main purpose of the trust was to benefit the employees and the charity to the public was merely illusory. But there is no obligation cast upon the trustees by this proviso to prefer the employees of the Premier Construction Co., Ltd. It is for the trustees to exercise their discretion. In the first place, they have to utilise the income for carrying out the four objects, and any member of the public who comes within these four objects would be qualified to receive the bounty of the settlor. If a member of the public also happens to be an employee of the Premier Construction Co., Ltd., it is open to the trustees to give him preference. Therefore, the trustees would not be guilty of committing any breach of trust if they selected for the bounty of the settlor such members of the public as did not fall in the category of employees of the Premier Construction Co., Ltd. That is the real test which we have got to apply. We must not assume that the trustees will exercise their discretion dishonestly or improperly. The test is whether the exercise of the discretion of the trustees is so fettered that they are bound to select particular persons in preference to others. That is of early not the case here. They may or they may not give preference to the employees. They may say that, other things being equal, an employee of the Premier Construction Co., Ltd., may be preferred. On the other hand, they may say that there is a member of the public who is more deserving than the employee and they would prefer him to receive the bounty. With regard to the other provisions in the trust-deed to which reference has been made, about the anxiety of the settlor to control the voting power, to see that the concern in which he was vitally interested and which he helped to build up should be conducted in a particular manner, those are all side issues which do not affect the question of property or income. They undoubtedly help us to understand what the intention of the settlor was; and although it may be conceded that he was greatly interested in the employees of the Premier Construction Co., Ltd., the trust-deed as drafted, in so far as it does not compel the trustees to make the employees the sole beneficiaries of the bounty of the settlor, the ??? cannot be struck down as a trust-deed for a purpose other than a charitable purpose the income from which is not entitled to exemption under s. 4(3)(i).
7. We must, therefore, answer the question submitted to us† in the affirmative.
8. The Commissioner to pay the costs.
Solicitor for the applicant: A.S Parikh.
Solicitor for the respondents: S.P Mehta.
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