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Sri Agastyar Trust v. Commissioner Of Income-Tax, Madras.
Factual and Procedural Background
The reference under section 66 of the Income-tax Act required the court to decide whether, on the facts of the case, the income derived by Sri Agastyar Trust as a partner in the firm Indian Metal and Metallurgical Corporation was exempt from tax under section 4(3)(i) of the Income-tax Act. Sri Agastyar Trust, Madras, was constituted by a registered deed dated 2 July 1944 by T.N. Venkatarama Chetti. The trust deed contains multiple objects, some religious or charitable and some not; one specified object permits the trust "to manufacture, buy, sell and distribute pharmaceutical, medicinal, chemical, and other preparations and articles such as medicines, drugs, medicinal and surgical articles, preparations and restoratives or foods."
The trust held a one-third share in the registered partnership firm Indian Metal and Metallurgical Corporation of Madras, which carries on business; the income flowing to the trust from that partnership was admitted to be business income.
For the year ending 31 August 1955 (assessment year 1956–57) the trust omitted that partnership share income from its return and claimed exemption under section 4(3)(i). The Income-tax Officer rejected the claim; the Appellate Assistant Commissioner affirmed, holding that the business did not belong to the assessee and that the partnership could not be treated as held in trust for charitable purposes because the assessee was only one of the partners. The Income-tax Appellate Tribunal also rejected the assessee's contention. On the assessee's application for a reference under section 66(1), the question was referred to this court.
Legal Issues Presented
- Whether the income derived by Sri Agastyar Trust as a partner in the firm Indian Metal and Metallurgical Corporation is exempt from tax under section 4(3)(i) of the Income-tax Act.
- Whether proviso (b) to section 4(3)(i) applies so as to prevent taxation of the said income (as argued by the assessee), assuming the main provision could apply.
Arguments of the Parties
Assessee's Arguments
- The trust's share in the firm was property held for religious and charitable purposes; accordingly, income from that property was exempt under section 4(3)(i).
- Alternatively, proviso (b) to section 4(3)(i) applied and would prevent taxation of the income even if the main provision did not straightforwardly cover the situation.
Revenue's / Appellate Authority's Arguments
- The business income did not belong to the assessee in the sense required for exemption, and the partnership interest could not be regarded as held in trust for charitable purposes because the trust was only one of the partners.
- Because the trust deed allowed non-charitable objects and the trustees could apply income to non-charitable purposes, the trust did not qualify for exemption under section 4(3)(i).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. East India Industries (Pte.) Ltd., T.C. No. 62 of 1958; reported [1962] 46 I.T.R. 1086 | The principle that where trustees have an unfettered discretion to apply the whole income of a trust to non-charitable objects, the property cannot be deemed to be held wholly for charitable or religious purposes for the purposes of section 4(3)(i). | The court followed this decision and applied the principle to the Agastyar Trust: because trustees could lawfully devote the whole income to a non-charitable object (carrying on a pharmaceutical business), the trust property could not be regarded as held wholly or partly for charitable or religious purposes and thus did not qualify for exemption under section 4(3)(i). |
Court's Reasoning and Analysis
The court analysed the statutory exemption regime under section 4(3)(i) and identified the essential requisites for exemption:
- The income must be from property held under trust or other legal obligation wholly for religious or charitable purposes.
- Where property is held wholly for charitable or religious purposes, exemption is available only to the portion of income actually applied or accumulated for those purposes.
- Where property is held in part for charitable or religious purposes, only that income which is actually applied or finally set apart for such purposes is not taxable.
- A multipurpose trust that mixes charitable/religious objects with non-charitable objects cannot fall within section 4(3)(i) unless there is a compelling obligation on trustees to devote some portion of income to charitable or religious purposes (i.e., trustees cannot have an unfettered discretion to apply income to non-charitable objects without risking breach of trust).
Applying those principles to the facts disclosed in the trust deed, the court observed that one of the trust's objects expressly permitted carrying on a pharmaceutical business. The deed permitted the trustees to utilize the income for non-charitable commercial objects; therefore, the property could not be deemed to be held wholly or partly for religious or charitable purposes. The court expressly followed the prior Division Bench decision in T.C. No. 62 of 1958 (Commissioner v. East India Industries) which reached the same conclusion on substantially similar reasoning.
Because the assessee could not establish that section 4(3)(i) applied, the court held there was no occasion to decide the applicability of proviso (b) to section 4(3)(i); the proviso could not save the assessee if the main provision did not apply.
Holding and Implications
Holding: The court answered the referred question against the assessee. In particular, the court concluded that the income derived by Sri Agastyar Trust as a partner in Indian Metal and Metallurgical Corporation is not exempt from tax under section 4(3)(i) of the Income-tax Act.
Implications:
- Direct effect on the parties: The trust's partnership share income is taxable; the assessee does not obtain exemption under section 4(3)(i). The assessee was ordered to pay the costs of the department and counsel's fee of Rs. 250.
- Precedential effect: The court followed an earlier Division Bench decision (Commissioner v. East India Industries) and applied its reasoning; the decision does not purport to create a novel principle beyond the application of that precedent to the facts of this trust deed.
Disposition: Question answered against the assessee; costs awarded to the department; counsel's fee Rs. 250.
Jagadisan, J.:— The question referred to us for decision under section 66 of the Indian Income-tjax Act is whether, on the facts and in the circumstances of the case, the income derived by the assessee trust as a partner in the firm of Indian Metal and Metallurgical Corporation is exempt from tax under the provisions of section 4(3)(i) of the Act.
2. The relevant facts giving rise to this reference can be briefly stated. Sri Agastyar Trust, Madras, is a trust constituted under the registered deed dated 2nd July, 1944, by one T.N Venkatarama Chetti. The objects of the trust are many, and some of them are of religious and charitable character. One of the objects of the trust is thus set out in the deed of trust:
“To manufacture, buy, sell and distribute pharmaceutical, medicinal, chemical, and other preparations and articles such as medicines, drugs, medicinal and surgical articles, preparations and restoratives or foods.”
3. An item of property held by this trust is a one-third share in a registered firm of partnership styled Indian Metal and Metallurgical Corporation of Madras. This firm is carrying on business, and, admittedly, the share income of the trust from this business is business income.
4. For the year ending 31st August, 1955, relevant to the assessment year 1956-57, in submitting the return of income, the Agastyar Trust (the assessee) did not include its share income as the partner of Indian Metal and Metallurgical Corporation and claimed that such income was exempt from taxation under the provisions of section 4(3)(i) of the Income-tax Act. The Income-tax Officer rejected this claim and the assessee preferred an appeal to the Appellate Assistant Commissioner. The appellate authority held that the business did not belong to the assessee and that the partnership cannot be said to have been held in trust for charitable purposes as the assessee was only one of the partners of the firm. The result was that the decision of the Income-tax Officer was affirmed. The assessee went up in further appeal to the Income-tax Appellate Tribunal, but failed to establish that the income was not taxable. On an application by the assessee to the Tribunal for a reference under section 66(1) of the Act, the above question has been referred to us.
5. The contention of the assessee before the Tribunal was really twofold. The first contention was that the share of the firm of Indian Metal and Metallurgical Corporation was property held for religious and charitable purposes and that the income from such property was covered by section 4(3)(i) of the Act and was, therefore, exempt from taxation. The second contention was that, in any event, proviso (b) to section 4(3)(i) was applicable and would enable the assessee to prevent the income from being taxed. We are unable to see how the assessee can see to bring itself within the proviso if the main provision (section 4(3)(i)) cannot apply. The exemption of income of trust properties from taxation is provided for in section 4(3)(i). One of the essential requisites of such immunity to tax is that the income must be from property held under trust or other legal obligation wholly for religious or charitable purposes. A multipurpose trust with objects, religious or charitable, mixed with objects not religious or charitable, cannot come within the scope of that section, if there is no compelling obligation on the trustee administering the trust to devote any portion of the income for religious or charitable purposes. If the property is held wholly for religious or charitable purposes, the exemption is available only to such portion of the income therefrom as is actually applied or accumulated for application for such purposes. If the properties are held in part only for religious and charitable purposes, what is not taxable is the income applied or finally set apart for such purposes. But a trust with several objects, some of which alone are religious and charitable, cannot be said to be a trust in which the trust property is held wholly or in part for religious and charitable purposes, if the trust can be performed by fulfilling the other objects and purposes, not religious and charitable in character, without laying open to a charge of breach of trust.
6. The question whether Sri Agastyar Trust is a trust of such a character as would fall within the ambit of section 4(3)(i) of the Act has been considered by this court in T.C No. 62 of 1958: (Commissioner of Income-tax v. East India Industries (Pte.) Ltd. [1962] 46 I.T.R 1086.) by a Division Bench, to which one of us was a party. The conclusion of the learned judges in this matter is set out in these terms:
“Our conclusion accordingly is that, since it is open to the trustees of the Agastyar Trust to utilise the whole of the income of the trust in their unfettered discretion to an object which is a non-charitable one, the property cannot be deemed to be held in trust wholly for charitable or religious purposes. The Agastyar Trust is thus ineligible to the exemption contemplated by section 4(3)(i)”
7. We have again perused the provisions of the trust deed constituting the trust and we see no reason to differ from the above conclusion. We are, therefore, of opinion that Sri Agastyar Trust is not a trust, in respect of which the income from its properties can be exempted from taxation under section 4(3)(i) of the Act.
8. Learned counsel for the assessee contends that, in the present case, both the department and the Tribunal proceeded on the basis that the trust is one which falls within the ambit of section 4(3)(i) and that the only question mooted was whether proviso (b) to section 4(3)(i) was or was not applicable. We do not see any basis for this contention. It seems to us that the question whether section 4(3)(i) can govern the assessee was raised and considered by the Tribunal, though, ultimately, the decision seems to have been rested on the ground that even the proviso cannot help the assessee. But it is quite obvious that the assessee cannot succeed unless and until it is able to show that section 4(3)(i) grants the necessary exemption in its favour. There is no necessity to consider the applicability of the proviso at all in case the assessee fails to bring itself within the scope of the main provision (section 4(3)(i)). As stated already, the trust, which has for one of its objects the carrying, on of a pharmaceutical business, which can be properly and lawfully performed by devoting the entire income of the property to the carrying on of the said business, cannot be called a trust, in respect of which the property is held wholly or partly for religious and charitable purposes. With respect, we follow the decision of this court in T.C No. 62 of 1958: (Commissioner of Income-tax v. East India Industries (Pte.) Ltd.). In this view of the matter, it is not necessary for us to go into the question as to how far the assessee can successfully invoke proviso (b) to section 4(3)(i). The question is answered against the assessee, who will pay the costs of the department. Counsel's fee Rs. 250.
9. Question answered accordingly.
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