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Commissioner Of Income-Tax, Bombay City Ii v. Trustees Of Seth Meghji Mathuradas Charity Trust
Factual and Procedural Background
One Seth Meghji Mathuradas executed a deed of trust on 4th May, 1943, concerning a sum of Rs. 3,50,000 to be held by trustees for religious or charitable purposes. The deed specified that after certain expenses, the remaining income was to be used at the trustees' absolute discretion for any one or more of five specified charitable purposes benefiting the three upper or twice-born castes of the Hindu community. A proviso required trustees to prefer members of the settlor's caste (the Bhatia caste), and particularly his family and relatives, over others.
The trustees managed the trust properties accordingly. The income-tax authorities sought to tax the trust's income, contending that the proviso enabling preference to the settlor’s community and family meant the trust did not qualify for exemption under section 4(3)(i) of the Income-Tax Act. The Income-Tax Appellate Tribunal held that the proviso operated only when claimants were equally poor and when the objects were charitable, and thus upheld the exemption.
The matter was referred for this court's decision.
Legal Issues Presented
- Whether the proviso in the deed of trust requiring preference to the settlor's caste, family, and relatives affects the dominant charitable intention of the trust such that the trust income is not exempt under section 4(3)(i) of the Income-Tax Act.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Trustees of the Charity Fund v. Commissioner of Income-Tax, [1959] 36 I.T.R 513 | Preference to family members in a charitable trust does not affect the dominant charitable intention or exemption under Income-Tax Act | The court relied on this Supreme Court decision to hold that the proviso preferring certain beneficiaries did not negate the trust's charitable character or tax exemption. |
Court's Reasoning and Analysis
The court analyzed the deed of trust and observed that the settlor expressed a dominant charitable intention by directing trustees to apply income for specified charitable purposes at their absolute discretion. The proviso requiring preference to members of the settlor's caste and family was found to operate only after the charitable purpose was selected, affecting only the choice among beneficiaries and not the charitable nature of the trust itself.
The court noted that the preference clause did not impair the dominant charitable intention or convert the trust into a private trust. It relied heavily on the precedent of the Trustees of the Charity Fund case, where a similar preference clause was held not to affect the public charitable nature of the trust.
Thus, the court affirmed that the trust income was exempt under section 4(3)(i) of the Income-Tax Act.
Holding and Implications
Holding: The question referred was answered in the affirmative, confirming that the trust income is exempt from tax under section 4(3)(i) of the Income-Tax Act despite the proviso preferring certain beneficiaries.
Implications: The decision directs the Commissioner of Income-Tax to pay the costs of the assessee. No new precedent was established; the ruling follows the established legal principle that beneficiary preference clauses do not negate the charitable character of a trust where the dominant intention is charitable.
Shah, J.:— One Seth Meghji Mathuradas executed a deed of trust on 4th May, 1943, in respect of a sum of Rs. 3,50,000 to be held by the trustees for purposes which were religious or charitable in character. By clause 1(d) of the deed of trust it was directed that after setting apart certain sums by way of depreciation and other expenses the balance of the income, interest, dividends, rents and profits of the trust properties was to be utilised for all or any one or more of the following charitable purposes, in such shares and proportions and in such manner in every respect as the trustees shall, in their absolute and unfettered discretion, think fit:
“(i) In giving aid to deserving or poor Hindus of the three upper or twice-born classes in the shape of money, clothes, books, articles, food or otherwise howsoever as the trustees may in their absolute discretion think fit;
(ii) For the purpose of advancement of education (primary, secondary, technical or other) by the opening, starting, maintaining, and conducting schools, colleges or other educational institutions or by awarding scholarships or prizes or by giving donations to educational institutions or otherwise for educational purposes for the benefit of the members of the three upper or twice-born castes of the Hindu community;
(iii) For the purpose of founding, maintaining, conducting, or helping an institution or institutions for the benefit of the three upper or twice-born castes of the Hindu community for the teaching and practice of arts and crafts industries with a view to making the persons taking advantage of such institutions earn their livelihood at the institution on elsewhere;
(iv) In giving relief against distress or bodily ailment, e.g, by opening, starting, maintaining and conducting hospitals or dispensaries, convalescent or nursing homes or sanatoriums or other like institutions or by giving donations to other hospitals, dispensaries, convalescent or nursing homes, sanatoriums or like institutions or by other means for relieving distress and ailment among the members of the three upper or twice-born castes of the Hindu community;
(v) For the purpose of founding, maintaining, conducting or helping charitable institutions like orphanages, boarding schools, anathashrams for the residence, maintenance and education of poor and destitute infants and children of the said three upper or twice-born castes of the Hindu community.”
2. Then followed a proviso which stated:
“Provided however that in carrying out one of the above charitable intentions the trustees shall always prefer the members of my caste, viz., the Bhatia caste, to the members of any other caste in the Hindu community and shall further prefer members of my family and my relatives to those who are not such members or relatives…”
3. Pursuant to the trust deed the trustees entered upon management of the trust properties. The income-tax authorities sought to tax the income of the trust properties in the hands of the trustees on the view that the trust was, in view of the proviso w-hich enabled the trustees to utilise even the whole of the income for the benefit of the members of the community of the settlor and particularly for the benefit of the members of the family and relatives of the settlor, a trust not falling within section 4, sub-section (3)(i), of the Income-Tax Act.
4. The Income-Tax Appellate Tribunal was of the view that the proviso contained in the deed of trust relating to the preference of members of the community of the settlor, and in particular of the members of the family and relatives of the settlor, to those who were not such members, became operative only where the necessary conditions applicable were equal, i.e, the claimants being poor and the objects of help being religious or charitable in character. The Tribunal accordingly held that the income from the trust properties was liable to exemption from tax under section 4(3)(i) of the Income-Tax Act.
5. In this reference, Mr. Joshi, who appears on behalf of the Department, has very fairly invited our attention to a recent judgment of their Lordships of the Supreme Court in Civil Appeal No. 396 of 1957, Trustees of the Charity Fund v. Commissioner of Income-Tax Since reported in [1959] 36 I.T.R 513. decided on 5th May, 1959. Before we refer to that judgment it may be pertinent to observe that by clause 1(d) of the deed of trust, after applying the income to certain purposes, the trustees were directed to utilise the balance for purposes which were charitable in such shares and proportions as the trustees in their absolute and unfettered discretion thought fit and such balance was to be utilised for any one or more of the five purposes specified therein. Evidently there was a dominant charitable intention expressed by the settlor. That the five purposes which are set out in the deed of trust are charitable in character cannot, in our judgment, be disputed; and even before the taxing authorities and the Tribunal the only contention sought to be raised was that the dominant charitable intention was affected by reason of the obligation which was cast upon the trustees to prefer the members of the community of the settlor and in particular the members of the family and relatives of the settlor to others. In our view, this proviso only requires the trustees, in utilising the funds for charitable purposes, to prefer certain beneficiaries (application of the funds to whom being also for a charitable purpose) on the ground that they belonged to the community of the settlor and in particular because they were members of the family or relatives of the settlor. It cannot be said that by reason of this proviso the dominant charitable intention expressed by the settlor, which authorised the trustees to select the parties in their absolute discretion for application of the income of the trust properties, was effected. It was only after the purpose or object was selected that the question of preference arose.
6. In the case of the Trustees of the Charity Fund, Esplanade Road, Fort, Bombay, the settlor, after setting out the charitable purposes, had directed in the deed of trust that in applying the income of the trust properties the trustees shall give preference to the “poor and indigent relations or members of the family of Sir Sassoon David, including therein distant and collateral relations”: and their Lordships of the Supreme Court held that the provision relating to the giving of preference to the poor and indigent relations or members of the family of Sir Sassoon David could not affect the public charitable trust constituted under sub-clause (a) of clause 13 of the trust deed. In our view, this judgment is decisive of the question which is sought to be raised before us.
7. We, therefore, answer the question referred for decision in the affirmative. The Commissioner of Income-Tax to pay the costs of the assessee.
Question answered in the affirmative.
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