Citation Codes

Equivalent Citations

citation codes

Case Number

Income-tax Reference No. 16 of 1967.

Attorney(S)

— M/s. N.A Palkhiwala, Kirpa Ram Bajaj, Ravinder Narain, A.K Verma, S.P Mehta, J.N Aggarwal and P.N Monga, Advocates.
— M/s. G.C Sharma, V. Kumaria, Randhir Chawla and R.P Suri, Advocates.

Judges

M Ansari

Acts

Section 4 (3) (i) of the Income-tax Act, 1922, hereinafter referred to as the Act,
provisions of clause (c) of sub-section (1) of Section 16,
Section 4 (3) (i) of the Indian Income Tax Act, 1922.(ii)
Section 5 (1) (i) of the Wealth Tax Act
Section 21 (4) of the Wealth Tax Act

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Smart Summary

Judgment Summary — Hamdard Dawa Khana (Wakf) represented by Mutawali Hakim Abdul Hamid

Factual and Procedural Background

The Wakf (Hamdard Dawakhana) had been run in partnership up to 27 August 1948 by Hakim Abdul Hamid, Hakim Hafiz Mohd. Sayeed and Rabea Begum. By a Wakf deed dated 28 August 1948 the partners created a trust in respect of the movable properties of the Hamdard Dawakhana. The deed allocated annual business income into three parts: (1) one-eighth to a Reserve Fund, (2) seven-eighths for charitable purposes (Quami income), and (3) one-eighth as Khandani income payable to the Mutawali. Rabea Begum died on 5 October 1949 and Hakim Hafiz Mohd. Sayeed was declared an evacuee effective 1 January 1948. On 6 September 1950 Hakim Abdul Hamid purchased his evacuee brother's share of Khandani income and declared it for charitable objects.

For assessment years 1956-57 and 1957-58 (previous years ending 31 Dec 1955 and 31 Dec 1956), the assessee claimed exemption under Section 4(3)(i) of the Income-tax Act, 1922 in respect of amounts set apart for charitable purposes and offered the Khandani portion for assessment in the personal hands of Hakim Abdul Hamid. The Income-tax Officer (I.T.O.) granted exemption for the charitable portion and assessed the Khandani portion in Abdul Hamid's hands. The I.T.O. declined to exempt amounts transferred to the Reserve Fund and assessed the entire Reserve Fund amount at the maximum rate under the first proviso to Section 41(1) of the Act.

The assessee appealed to the Appellate Assistant Commissioner, who confirmed the I.T.O.'s assessments. The assessee then appealed to the Income Tax Appellate Tribunal (Tribunal). With permission of the Tribunal the assessee raised the alternative contentions (either entire Reserve Fund exempt under s.4(3)(i) or split between Quami and Khandani in 7/8 and 1/8 proportions). The Tribunal rejected these contentions, held Reserve Fund accrues as income to the Mutawali and, because of uncertainties in ultimate destination of Reserve Fund amounts, applied the proviso to Section 41(1) to assess at maximum rate. The Tribunal referred two questions to the High Court under Section 66(1).

Legal Issues Presented

Whether, on the facts and on a true construction of the Wakf Deed dated 28 August 1948 read with the declaration dated 6 September 1950, the whole or any part of the one-eighth of the annual income of the Wakf transferred to the Reserve Fund was exempt from tax under Section 4(3)(i) of the Indian Income Tax Act, 1922.
If the answer to question No. 1 is wholly in the negative (as posed by the Tribunal), whether the said one-eighth of the annual income of the Wakf transferred to the Reserve Fund was liable to tax at the maximum rate within the meaning of the first proviso to sub-section (1) of Section 41 of the Indian Income-tax Act, 1952.

Arguments of the Parties

Assessee's (Appellant's) Arguments

The amounts transferred to the Reserve Fund should be treated as applied or finally set apart for charitable purposes (and hence exempt under Section 4(3)(i)) because the Reserve Fund is an integral part of the Wakf and is to be used for preserving, expanding and developing the Wakf business the profits of which largely benefit charity.
In the alternative, the Reserve Fund amount should be allocated between Quami (charitable) and Khandani (mutawali) portions in the proportion one-eighth (to Mutawali) and seven-eighths (to charity), so that only the one-eighth portion should be assessable in the hands of Hakim Abdul Hamid.
Counsel (Mr. Palkhiwala) emphasized that the Reserve Fund retains the character of Wakf property, is inalienable, and under the deed only a limited share could benefit the Mutawali — i.e., under no circumstances could the Mutawali enjoy more than one-eighth of the Reserve Fund.

Revenue's Arguments

The Tribunal's finding of uncertainty was correct: it cannot be predicated on whose behalf the Reserve Fund income is receivable in each year, nor in what precise proportions; therefore the proviso to Section 41(1) should apply and the amount be assessed at the maximum rate in the hands of the trustee.
It was contended that nowhere in the Wakf deed is it stated that seven-eighths of the Reserve Fund is to be spent on charities and one-eighth to the Mutawali; thus the Reserve Fund and its income are indeterminate and may ultimately form part of the capital of the Wakf business rather than being dedicated to specific beneficiaries.
In support, Revenue cited multiple authorities (listed below) which, in Revenue's submission, indicated that where beneficiaries or their shares are not determinate the proviso to Section 41(1) can be invoked.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
C.I.T. v. Manilal Dhanji, (1962) 44 I.T.R. 867	Authority relied on by the Tribunal concerning indeterminacy of beneficiaries in a private trust.	The court observed the facts there were quite different: it was a private trust where beneficiaries were private family members and their shares were not defined. The Court held this case was not analogous to the present Wakf.
Official Trustee of West Bengal v. Commissioner of Income-tax, (1954) 26 I.T.R. 410	Principle concerning assessment where trusts had indeterminate beneficiaries (case concerned private trust).	The Court held this case had no application: it was a private trust and not charitable; thus not analogous to the present Wakf facts.
Trustees of Sir Currimbhoy Imbrahim Baronetcy Trust v. Commissioner of Income-tax, Bombay, (1934) 2 I.T.R. 148	Illustration of trusts created for private beneficiaries (cited by Revenue).	The Court grouped this with other private-trust cases and held it was not applicable because the present Wakf is for charitable purposes and a portion of income is admittedly exempt.
Income-tax Appellate Tribunal, Bombay v. Managing Trustee Shri Radha Madho Trust, Saugor, (1946) 14 I.T.R. 470	Case involving a trust for religious/charitable purposes but where exemption under Section 4(3)(i) was disqualified by clause (i)(a) of sub-s. (3) of Section 4.	The Court noted that although this was a charitable trust, the income was disqualified from exemption under s.4(3)(i); the High Court did not consider exemption in that case. Thus it was not directly applicable to the present facts.
Trustees of Sahebzadas of Sarf-e-khas Trust v. Commissioner of Income-tax, (1962) 44 I.T.R. 332	Authority (listed among citations) concerning trusts; referenced by the Court as not directly applicable.	The Court indicated it did not present a directly applicable principle for the present case.
Bankim Ch. Datta & others v. Commissioner of Income-tax, Calcutta, (1966) 62 I.T.R. 239	Case of a trust created for religious ceremonies where exemption questions were not advanced; concerned assessment at maximum rate under Section 41(1).	The Court observed that in that case no claim for exemption under s.4(3)(i) was made; only the applicability of Section 41(1) was considered, so it was not directly analogous.
Commissioner of Income-tax, Bombay City v. Lady Ratanbai Mathuradas & others, (1968) 67 I.T.R. 505	Cited among authorities concerning private trusts and indeterminate beneficiaries.	The Court treated it as a private-trust authority and held it not applicable to the present Wakf situation.
Commissioner of Income-tax, Gujarat v. Arvind Narottam, (1969) 73 I.T.R. 490	Cited among authorities concerning private trusts and assessment principles.	The Court regarded it as not applicable because it concerned trusts for private beneficiaries rather than charitable Wakf properties.
Nirmala Bala Sarkar v. Commissioner of Income-tax, (1969) 74 I.T.R. 268	Cited by Revenue as part of its authorities.	The Court said this decision was not relevant to the specific issues in the present case.
Executors of the Estate of J.K. Dubash v. Commissioner of Income-tax, Bombay City, (1951) 19 I.T.R. 182	Cited by Revenue but described by the Court as not relevant to present questions.	The Court held it was not relevant; the questions there differed from those here.
Chintamani Ghosh Trust v. Commissioner of Wealth-tax, U.P., (1971) 80 I.T.R. 331	Wealth-tax case involving a trust with parts earmarked for charitable purposes and private beneficiaries; judges divided on whether beneficiaries and their shares were determinate under Wealth Tax Act provisions (Sections 5(1)(i) and 21(4) referenced).	The Court observed the decision had limited application: it was a wealth-tax matter, two judges disagreed but a third supported the view beneficiaries were determinate. The Court said this decision would not support Revenue's contention and had no application to the present case where exemption had been allowed for portions earmarked for charity.

Court's Reasoning and Analysis

The Court began with the statutory provision relied upon by the assessee: Section 4(3)(i) of the Income-tax Act, 1922, which exempts from total income any income derived from property held under trust in part only for religious or charitable purposes "in so far as such income is applied or finally set apart for application" to those purposes. Because the Wakf properties were held in part for charitable purposes (seven-eighths) and in part for payment to the Mutawali (one-eighth), the Court held that to claim exemption for any portion of the Reserve Fund the assessee must show that the income was applied or finally set apart for charitable purposes.

The Court undertook a textual analysis of the Wakf deed, particularly clauses 34–36 (which govern the Reserve Fund while the Wakf business operates) and clauses 31, 37 and 38 (which govern the Reserve Fund if the business runs at a loss or ends). Key findings from the clauses as read by the Court:

Clause 34 requires one-eighth of annual net profits to be transferred to the Reserve Fund and prescribes that amounts be invested so they remain readily available for the purposes set out in clause 35; the Reserve Fund and property acquired through it are part of the Wakf and therefore inalienable Wakf property.
Clause 35 enumerates permissible uses of the Reserve Fund while the Wakf business continues (set off losses, guard against anticipated losses, make up temporary insufficiency for divisible profits, grant refundable loans to beneficiaries in lean years, and to extend/develop the Wakf business).
Clause 36 provides for re-transfer to the Reserve Fund when temporary withdrawals are repaid.
Clauses 31, 37 and 38 govern the Reserve Fund where the business fails or is closed: the Reserve Fund merges with Wakf assets, may become non-business Wakf capital, and a Beneficiaries Reserve Fund may be constituted; the Court also corrected a translation error in clause 38 (the English translation wrongly included the word "not").

From these clauses the Court concluded:

The Reserve Fund is impressed with the character of Wakf property; it is intended for the benefit of the Wakf (which itself is for charitable purposes) and is not available for arbitrary use by the Mutawali.
The Reserve Fund is to be used primarily for preserving, expanding, or developing the Wakf business; consequently the Reserve Fund retains the character of the Wakf business and thus the same ultimate distributional character (seven-eighths to charity, one-eighth to the Mutawali) as the business income itself.
Although at the moment the income accrues to the Mutawali it initially bears the character of business income, Section 4(3)(i) looks to whether the income is ultimately applied or finally set apart for charitable purposes; the "ultimate destination" test is controlling.
Accordingly, a seven-eighth portion of the amount transferred annually to the Reserve Fund is applied or finally set apart for religious/charitable purposes and is therefore exempt under Section 4(3)(i).

Turning to the Tribunal's reliance on uncertainty and the proviso to Section 41(1), the Court differentiated the present Wakf from the private-trust authorities relied on by the Tribunal and Revenue. The Court found the Tribunal's conclusion that beneficiaries and their shares were indeterminate was incorrect in the present factual matrix: the beneficiaries (charity and Mutawali) and their shares (seven-eighths and one-eighth) are defined by the deed and thus determinate. The Court stated that even though a portion of the Reserve Fund could be temporarily used and may find its way into divisible profits, the embedded allocation (7/8 to charity) means that proportion of the Reserve Fund is exempt; that leaves only the one-eighth private share which is identifiable and therefore not subject to the proviso to Section 41(1).

The Court also corrected a translation error in clause 38 (removal of the English word "not") and observed that the I.T.O. and Appellate Assistant Commissioner had based some conclusions on that mistranslation.

Holding and Implications

Holding (core ruling):

A seven-eighth portion of the annual income of the Wakf which is transferred to the Reserve Fund is exempt from assessment under Section 4(3)(i) of the Act; the remaining one-eighth portion of the income transferred to the Reserve Fund is not exempt under Section 4(3)(i).

Further holding: The one-eighth portion of the income transferred to the Reserve Fund is not chargeable to tax at the maximum rate under the first proviso to Section 41(1) of the Act; since seven-eighths is exempt, the one-eighth private share is taxable in the hands of the private beneficiary (Mutawali) at ordinary rates.

Implications and direct effects:

Seven-eighths of each year's amount credited to the Reserve Fund is to be treated as applied or finally set apart for charitable purposes and is therefore exempt under Section 4(3)(i).
The remaining one-eighth is taxable in the hands of the Mutawali (Hakim Abdul Hamid) at ordinary rates; the proviso to Section 41(1) (assessment at maximum rate because of indeterminacy) does not apply because beneficiaries and shares are determinate under the deed.
The Court corrected an erroneous English translation in clause 38 of the deed and noted that earlier tax authorities had relied on that mistranslation.
The Court decided the matter on first principles, noting none of the cited authorities was directly in point; the decision resolves the two referred questions in the manner set out above and awards the costs of the reference (counsel's fee fixed at Rs. 250/-).

Reference answered accordingly. Costs awarded to the assessee; counsel's fee fixed at Rs. 250/-.

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Hakim Abdul Hamid Petitioner v. Commissioner Of Income-Tax

M. R.A Ansari, J.:— The assessee in this case is the Hamdard Dawa Khanna (Wakf) represented by its Mutawali Hakim Abdul Hamid. Up to 27th August 1948 the business styled as ‘Hamdard Dawakhana’ was carried on in partnership by Hakim Abdul Hamid, his brother Hakim Hafiz Mohd. Sayeed and their Mother Rabea Begum. By a Wakf deed dated 28th August 1948 the partners created a Trust in respect of the movable properties of the Hamdard Dawakhana. Under the terms of the Wakf deed the business income of the Hamdard Dawakhana of each year was divided into three portions, namely, (1) to be transferred to a Reserve Fund, (2) to be spent for charitable purposes, and (3) to be paid to the Mutawalis. The portion which was to be spent for charitable purposes was termed as Quami income and the portion which was to be paid to the Mutawalis was termed the Khandani income. Rabea Begum died on 5-10-1949 and Hakim Hafiz Mohd. Sayeed was declared an evacuee with effect from 1-1-1948.

On 6-9-1950, Hakim Abdul Hamid purchased the share of the Khandani income receivable by his evacuee brother out of the charitable funds of the Wakf and this share was also earmarked for charitable objects by a declaration dated 6th September 1950 made by Hakim Abdul Hamid after 6-9-1950 and the profits of the Wakf business were to be allocated in the following manner under the Wakf Deed:—

(a) One-eighth of the total business profit of the Wakf business was to be transferred to the Reserve Fund;

(b) Out of the balance, seven-eighth was to be spent on charities; and

(c) One-eighth to be paid to the sole Mutawali, namely, Hakim Abdul Hamid.

For the assessment years under reference, namely, 1956-57 and 1957-58 for which the relevant previous years are the calendar years ending 31st December 1955 and 31st December 1956 respectively, the assessee in the returns filed by it claimed exemption in respect of the portion of the income which was set apart for being spent for charitable purposes and offered that portion of the income which was termed as Khandani income for assessment in the hands of Hakim Abdul Hamid. The Income-tax Officer granted exemption under Section 4 (3) (i) of the Income-tax Act, 1922, hereinafter referred to as the Act, for the income which was set apart for being spent for charities. The portion of the income which was termed Khandani income was assessed in the personal hands of Hakim Abdul Hamid. There is no dispute with regard to the exemption granted in respect of the income set apart for charities and there is no dispute also with regard to the assessment of the Khandani income in the hands of Hakim Abdul Hamid.

As regards the portion of the income which was transferred to the Reserve Fund the assessee in the first instance offered this income also for assessment at the maximum rate under the first proviso to Section 41 (1) of the Act. But in the course of the assessment proceedings the assessee claimed that this portion of the income also was eligible for exemption under section 4 (3) (i) of the Act on the ground that the Reserve Fund was also a part for being spent for charitable purposes. In the alternative it was contended that the income transferred to the Reserve Fund in each year should be split up into Khandani income and Quami income and that part of the Reserve Fund which went to the benefit of Hakim Abdul Hamid only may be assessed in his hands and that the balance of the Reserve Fund which was earmarked for charitable purposes should be exempt from assessment under section 4 (3) (i). The Income-tax Officer did not accept either the main or the alternative contention of the assessee and held not only that no portion of the income transferred to the Reserve Fund was exempt under section 4 (3) (i) of the Act, but also that the entire income so transferred was liable to be assessed at the maximum rate under Section 41 (1) of the Act.

The assessee preferred appeals before the Appellate Assistant Commissioner. In these appeals the assessee did not claim total exemption under section 4 (3) (i) of the Act in respect of the entire amounts transferred to the Reserve Fund. The assessee merely contended that the amounts transferred to the Reserve Fund should be allocated between the Khandani income and the Quami income and that only the one-eighth part of the amount so transferred to the Reserve Fund should be assessed in the hands of the Mutawali Hakim Abdul Hamid. This contention was, however, rejected by the Appellate Assistant Commissioner and the assessments made by the Income-tax Officer were confirmed.

The assessee thereupon preferred further appeals before the Income Tax Appellate Tribunal and with the permission of the Tribunal raised the alternative contentions which had been raised before the Income Tax Officer, namely, that either the entire amount transferred to the Reserve Fund should be exempt under section 4 (3) (i) of the Act or in the alternative this amount should be allocated between the Khandani income and the Quami income in the proportion of one-eighth and seven-eighth and that the seven-eighth portion of the Reserve Fund should be exempt under section 4 (3) (i) of the Act and only the one-eighth portion of the Reserve Fund should be assessed in the hands of the Mutawali Hakim Abdul Hamid. The Tribunal did not accept either of the contentions raised by the assessee. According to the Tribunal the amounts transferred to the Reserve Fund did not fall either in the category of the Quami income or in the category of Khandani income and that the Reserve Fund accrued to the Mutawali as income from the Wakf business. The Tribunal then posed for itself the question whether the Mutawali was entitled to receive it on behalf of any one person or if the income was receivable on behalf of more than one person whether a such persons or their shares were determinate. On consideration of the relevant clauses of the Wakf Deed the Tribunal came to the conclusion that even the beneficiaries were not known for it could not be said with any measure of certainty whether that portion of the Income which had to be carried to the Reserve Fund or any portion thereof would go to the Wakf charity exclusively or to the Mutawali or to both. The Tribunal observed that there was a possibility of a portion of the Reserve Fund finding its way into the divisible profits. The Tribunal further observed that it was open to the Mutawali in view of the provisions of clause 35 to use up such portion of the Reserve Fund as may be required to meet the present or anticipated loss in the Wakf business and in this way a portion of the Reserve Fund could be utilised and pooled into the divisible profits. The Tribunal, therefore, held that the very uncertainties inherent in the situation would justify the application of the proviso to Section 41 (1) of the Act. The assessments made by the Income-tax Officer were, therefore, confirmed.

At the instance of the assessee, however, the Tribunal has referred the following questions to this court under Section 66 (1) of the Act:—

(i) Whether on the facts and circumstances of the case and on a true construction of the Wakf Deed dated 28th August 1948 read with the declaration dated 6th September 1950 the whole or any part of the one-eighth of the annual income of the Wakf transferred to the Reserve Fund was exempt from tax under section 4 (3) (i) of the Indian Income Tax Act, 1922.

(ii) If the answer to question No. 1 above is wholly in the negative whether the Tribunal was right in holding that the said one-eighth of the annual income of the Wakf transferred to the Reserve Fund was liable to tax at the maximum rate Within the meaning of the first proviso to sub-section (1) of Section 41 of the Indian Income-tax Act, 1952.

section 4 (3) (i) of the Act under which the assessee claims exemption in respect of the whole or a portion of the amount transferred to the Reserve Fund in each year is as under:—

“4 (3) (i): Any income, profits, or gains falling within the following classes shall not be included in the total income of the person receiving them:

Subject to the provisions of clause (c) of sub-section (1) of Section 16, any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto”.

In the present case the properties of the Trust are not held wholly for religious or charitable purposes inasmuch as a portion of the income is payable to the Mutawali. This would, therefore, be a case of property held in part only for religious or charitable purposes. Therefore, in order to claim exemption in respect of the whole or a portion of the amount transferred to the Reserve Fund the assessee must show that such income was applied or finally set apart for application for religious or charitable purposes. The amount transferred to the Reserve Fund is part of the business income of the asessee and it is not eligible for exemption merely by reason of the fact that it is transferred to a Reserve Fund. It would be eligible for exemption only if it is applied or finally set apart for application for religious or charitable purposes. The question, therefore, for consideration is whether the whole or a portion of the amount transferred to the Reserve Fund in each year is applied or finally set apart for application for religious or charitable purposes.

The answer to this question depends upon the appreciation of the true character of the Reserve Fund and it is, therefore, necessary to refer to the relevant clauses of the Wakf Deed. The Wakf deed contemplates two contingencies, namely, (1) when the Wakf business of Hamdard Dawakhan is running at a profit and (2) when the business is running at a loss and ultimately comes to an end. In the first contingency the character of the Reserve Fund and the manner of its utilisation is governed by clauses 34, 35, and 36 of the Wakf Deed and these are reproduced below:—

“34. Out of the net profits arrived at under Clause 33 on 31st December, 1948 or for the subsequent years, the profits payable to those persons who may have been admitted as partners under Clause 27, shall be deducted. From the balance, one-eighth shall be transferred to the Reserve Fund. The amounts thus transferred to the Reserve Fund and the income earned therefrom either directly or indirectly shall be deposited in a reliable Bank or invested in some Government or Semi-Government Securities or in the shares of some reliable limited companies or in such movable or immovable property as can be easily converted into cash in time of need. But, only that portion of the Reserve Fund shall be utilised in the purchase of immovable property which shall exceed the total value of the then capital of the Wakf-business. The movable and immovable property acquired with the aid of the Reserve Fund shall also be treated as part of this Wakf but is shall be capable of being transferred either by outright sale or by mortgage for the purposes of the Wakf and the Wakf-business mentioned in Clause 35. The right to transfer the movable and immovable property relating to the Reserve Fund of the Wakf shall vest in us, the two Wakf-Mutawallis jointly during our life-time and to the survivor alone on the death of one of us and after the death of both of us in the MAJLIS-E-AYAN which shall be exercised by the said Majlis through the Mutawalli or Mutawallis of the Wakf, by means of Special Resolutions passed by it in this behalf.

35. The cash or movable and immovable property belonging to the Reserve Fund of the Wakf-business could only be used and transferred for the under-mentioned purposes in the event of any Wakf-business being in existence:

(1) To set off the losses resulting from the Wakf-business.

(2) To save the Wakf-business from anticipated certain or apprehended losses.

(3) To make up temporarily the insufficiency of cash for payment of divisible profits.

(4) To grant refundable loans to the beneficiaries entitled to receive money from the net profits in the event of net profits for any year being totally non-existing or being extraordinarily small.

(5) To extend and develop the Wakf-business in such a way as may contain a strong expectation of increase in the income of the said business.

36. Any amount received from the Reserve Fund of the business as a loan or for any of the objects specified in Clause 35, in case those objects are of a temporary nature, shall be re-transferred to the Reserve Fund of the business as quickly as possible.”

Under clause 34, the amount transferred to the Reserve Fund has to be invested in such a way that it would be available for being utilised for the various purposes mentioned in clause 35 and the amount should not be invested in such a way that the amount will not be readily available for utilisation for the purposes set out in clause 35. It has also to be noted that under clause 34 the amounts transferred to the Reserve Fund are impressed with the character of Wakf properties along with the other properties of the Wakf. The Reserve Fund is an inalienable part of the Wakf. Whatever is purchased with it becomes a part of the Wakf and, therefore, the Wakf has exclusive rights over the Reserve Fund. The Reserve Fund cannot be squandered. It cannot be taken over by the Mutawali for his personal benefit. The Mutawali cannot spent it in a whimsical manner. It is for the benefit of the Wakf as a whole and there is no dispute that the Wakf itself is for the benefit of charity. Only a small portion of the income from the Wakf business goes to the benefit of the Mutawali. The learned counsel for the assessee laid stress on the fact that under no circumstances Hakim Abdul Hamid could get or enjoy more than one-eighth of the Reserve Fund and the Revenue could not controvert the proposition.

Clause 35 mentions the purposes for which the Reserve Fund may be utilised. These purposes are classified under five heads. Except for heads 3 and 4 which only provide for a temporary utilisation of the Reserve Fund, the other purposes enumerated under heads 1, 2 and 5 provide for the utilisation of the Reserve Fund either for the preservation of the Wakf business or for its expansion and development. Clause 36 is merely supplementary to clause 35. Mr. Palkhiwala argued that the Reserve Fund provided under the Trust deed is to be ignored in computing the income as in other cases. He added that the Reserve Fund was for the benefit and development of the business held under Trust for charity and would bear the same character as that of the Wakf business. He further argued that the Reserve Fund was for the benefit of only two beneficiaries in the Trust Deed and in their profit sharing proportion. It is customary for every business or industry to store some funds for future exigencies. Therefore, the Wakf has to keep something which may be used to set off the losses whenever they occur. Again, it cannot be guaranteed that sufficient money will always be available for payment of the divisible profits. The Reserve Fund is meant to meet such a contingency. It has to be noted that a seven-eighth of the divisible profits go to charity. If charity is to be sustained, if its sphere is to be expanded, if its activities are to be multiplied, then considerable amounts have to be invested. Such amounts will be available from the Reserve Fund for being ploughed back in the business. The Reserve Fund is thus used to expand and develop the Wakf business and the profits which are yielded by such expanded and developed business again go to the charities to a large extent and to the Mutawali to a smaller extent.

From a perusal of the above clauses it would be clear that the Reserve Fund has to be applied primarily for either presenting the Wakf business or for expanding or developing the said business and as such it retains the character of the Wakf business itself.

In the event of the Wakf business running at a loss or coming to an end, the character and mode of utilisation of the Reserve Fund is governed by clause 31, 37, and 38 of the Wakf Deed and these are reproduced below:—

“31. If the Wakf-business of Hamdard Dawakhana continues to run at a loss for three years in succession and there does not appear any prospect of sufficient profit thereafter or the total income from the Wakf-business is so reduced that its continuance becomes inexpedient and contrary to interests of the beneficiaries under this Wakf, then we the Wakif-Mutawallis jointly during our terms of office and in case only one of us be alive, then he alone and in case both of us cease to be Mutawallis, then the MAJLIS-E-AYAN shall have the power by means of an Extra-Ordinary Resolution to close down the above mentioned Wakf-business or to change it into some other form or to start some other profitable business in lieu thereof, or in the event of its (May God forbid) going into insolvency whatever assets in the form of cash or property, movable or immovable shall remain as a result of the sale of stocks-in-trade and recovery of debts after deducting the amounts due by the business, the same shall be transferred to the Reserve Fund of this Wakf. If instead of the Wakf-business thus closed, it is decided to start and run some other business, then the cash realised from the closed business or the stocks and goods relating to the same may be utilized for the new business and this new business shall also form part of this Wakf in the same way as the dedicated business of Hamdard Dawakhana and shall be subject to the conditions, rules and objects mentioned in this Deed.

37. In the event of all the trading business of the Wakf coming to an end, the net assets left behind after the sale of the stocks and goods and from the recovery of the debts and out-standing due to the business after paying off the debts due by it, shall be transferred to the Reserve Fund. In such a case the nature of the business Reserve Fund shall not be that of the Reserve Fund but the entire cash and property movable and immovable belonging to the said Reserve Fund shall have the same character as the other non-business property or capital of the Wakf. In the event of the Reserve Fund being converted into non-business Wakf property, all powers regarding expenditure or alienation of property, movable as well as immovable in relation to the Reserve Fund, vested in us the two Wakif-Mutawallis or in the MAJLIS-E-AYAN under Clause 35, shall cease. Whatever net profit is realised from such properties belonging to the Reserve Fund, the same shall in the absence of any other source of income, be treated as the total profits of the Wakf or a portion of it as the case may be.

“38. In the event of the trading character of the former business Reserve Fund coming to an end, the division of the net profits derived therefrom shall be subject to the same rules and conditions as have been laid down in Clause 39 in regard to the distribution of the general net profits of this Wakf. But the outside partner whose capital has not been included in this Wakf, shall have no right in or concern with the income and property belonging to the Reserve Fund. The 1/8th (one-eighth) share of the net profits which during the subsistence of the business of the Wakf is required under Clause 34 to be transferred to the business Reserve Fund, shall be transferred to a new Reserve Fund instead of the business Reserve Fund. The new Reserve Fund shall be called the BENEFICIARIES RESERVE FUND. The amounts transferred to the BENEFICIARIES RESERVE FUND and the income derived directly or indirectly from the amounts so transferred and the income from properties movable and immovable, purchased from the BENEFICIARIES RESERVE FUND shall be transferred part of this Wakf. But the same shall be capable of being transferred and used for the following purposes, with the authority of us — the Wakif-Mutawallis or with the permission of the MAJLIS-E-AYAN accorded under a Special Resolution:—

(a) To make up any insufficiency of cash for payment of the divisible profits.

(b) To make up any deficiency of income in the event of some temporary obstacle in the receipt of any receivable income of the Wakf.

(c) To renovate or construct afresh the immovable property belonging to the Wakf which may appreciably add to the income or character of the said property.

(d) To protect the Wakf properties from unforeseen accidents or to compensate for such losses.

(e) or for any such purpose as may appreciably add to the income or character of the Wakf properties.”

We would like to mention at this stage that in clause 38 there is a mistake in the English translation. According to the translation the relevant portion stood thus “the amounts transferred to the BENEFICIARIES RESERVE FUND and the income derived directly or indirectly from the amounts so transferred and the income from properties movable and immovable purchased from the BENEFICIARIES RESERVE FUND not be treated as part of this Wakf”. On verification with the original document in Urdu, we have found that the word ‘not’ does not appear in the original. This part of clause 38 shall, therefore, be read as follows:—

“The amounts transferred to the BENEFICIARIES RESERVE FUND and the income derived directly or indirectly from the amounts so transferred and the income from properties movable and immovable, purchased from the BENEFICIARIES RESERVE FUND shall be treated as part of this Wakf”.

We have found it necessary to refer to this mistake in the translation as the Income-tax Officer and the Appellate Assistant Commissioner appear to have based some of their conclusions on the mistake in the translation of clause 38.

A perusal of clauses 31, 37 and 38 would make it clear that in the event of the Wakf business running into losses or closing down, the essential character of the Reserve Fund is not changed. Clause 31 merely envisages a change in the nature of the Wakf business. For instance, if the business of the Dawakhana does not yield any profit then it is open to the trustees to start some other kind of business which is likely to yield profits. But whatever the nature of the business might be, the income from such business is to be divided or utilised in the same manner as the business of the Hamdard Dawakhana. In other words, one-eight portion of the income from such business has again to be transferred to the Reserve Fund and out of the balance, one-eighth has to be paid to the Mutawali and seven-eighth has to be spent for charitable purposes. Clause 37 envisages the contingency when it is no longer possible either to run the business of the Dawakhana or any other business. In such a case the Wakf properties as well as the Reserve Fund merged together and the income realised from such properties will again be utilised in the same manner in which the net profits of the Wakf business were being utilised. In other words, one-eighth portion of such income will again be transferred to the new Reserve Fund called the BENEFICIARIES RESERVE FUND and out of the balance one-eighth will be paid to the Mutawalli and the remaining seven eighth will be spent on charities. This is the purport of clause 38.

The creation of the Reserve Fund was necessary in the interest of the Trust itself. If the Trust business has to continue to yield profits which are to be utilised for the purposes for which the Trust was created then it was necessary that a portion of the profit should be transferred to a Reserve Fund. The purpose of the Reserve Fund, therefore, is the same as the purpose of the Trust itself. The trust has a two-fold purpose, namely, benefit to the community at large and maintenance of the family of the Mutawalli. The Reserve Fund also has the same two-fold purpose. To the extent that the Reserve Fund is ultimately utilised for the benefit of the community at large it is exempt from assessment under section 4 (3) (i) of the Act just as the portion of the income from the Wakf business which is set apart for charities has been exempted from assessment by the department itself.

In our view, there is no difference in the character of the business income of the Trust and the Reserve Fund. The proportion in which the Reserve Fund is utilised for the dual purpose is also the same as the proportion in which the business income of the Trust is utilised, that is to say, seven-eighth portion for charities and one-eighth portion for payment to the Mutawalli.

It appears to have been contended on behalf of the Revenue before the Appellate Tribunal that under the facts and circumstances of the present case it cannot be predicated on whose behalf the income in question is receivable by the Mutawalli in each year and much less in what precise proportions and this argument appears to have found favour with the learned Tribunal and it is on the basis of this contention that the learned Tribunal has held the proviso to Section 41 (1) of the Act to be applicable.

Mr. Palkhiwala argued that the Tribunal was in error in observing that there was uncertainty about beneficiaries on whose behalf the one-eighth of the net profits carried to the Reserve Fund is held by the Mutawalli. He submitted that there was no uncertainly about either the beneficiaries or their shares. Both the beneficiaries are known and their shares are defined in the Trust Deed. The Reserve Fund was for the benefit of the Wakf business and the business is for the benefit of charity. We find considerable force in these arguments.

The learned Tribunal has relied on the judgment of the Hon'ble Supreme Court in C.I.T v. Manilal Dhanji (1962) 44 I.T.R 867. The facts of that case are quite different from those of the instant case. That was a case of a private trust and there all the beneficiaries were private parties belonging to the same family and their shares were not defined. In the present case the principal beneficiary is the charity and the shares of the two beneficiaries are defined as 7/64 and 49/64.

The other case cited by the learned Tribunal is Official Trustee of West Bengal v. Commissioner of Income-tax (1954) 26 I.T.R 410 (1). That case has no application to the present case. It was also a private trust and not a charitable one, and the income was not receivable on behalf of any particular beneficiary. In the case of the petitioner Wakf the beneficiaries are known and the shares are defined. The income is received for the benefit of two beneficiaries in defined proportions and their ultimate destination is also for the benefit of the beneficiaries in the given proportions.

There can be no doubt that at the point of time the amount in question is received by the Mutawalli, it bears the character of business income of the Trust, that is to say, the same character which the rest of the income of the Wakf business bears. But if the income in question after it is received by the Mutawalli is applied or finally set apart for application for religous or charitable purposes then it would be exempt from assessment under section 4 (3) (i) of the Act notwithstanding the fact that the said income had the character of business income at the time it was received by the Mutawalli. The learned Tribunal is conscious of this position when it has observed in another portion of its appellate order that “in other words at the stage of the accrual in the hands of the Mutawalli we have to investigate and determine the ultimate destination of the income because it is trite law that under a Trust the income could be accumulated for the beneficiaries and need not be applied immediately for their benefit in the year in question.” If the test of the ultimate destination of the income is to be applied and that in our view is the true test, then keeping in view the relevant clauses of the trust deed, it would be obvious that the ultimate destination of the Reserve Fund is again the two beneficiaries, namely the charity and the Mutawalli. The learned Tribunal no doubt is correct in its view that at the stage when the amount in question is received by the Mutawalli before it is transferred to the Reserve Fund, it is not in the same category as the Quami income nor does it belong to the other category called the Khandani income. But the character of this income at this stage is not the criterion for determining whether it is eligible for exemption from assessment. The learned Tribunal has observed that there is a possibility of a portion of the Reserve Fund finding its way into the divisible profits. The learned Tribunal is quite correct in saying so. In fact there is not only a possibility of a portion of the Reserve Fund finding its way into the divisible profits, this is its only destination. But when a portion of the divisible profits, namely, a seven-eighth portion is again earmarked for charities and is, therefore, admittedly exempt from assessment then an equal portion of the Reserve Fund is also exempt from assessment. The learned Tribunal in our view did not pursue its finding to its logical conclusion. We are of the view that a seven-eighth portion of the amount transferred to the Reserve Fund in each year is applied or finally set apart for application for religious or charitable purposes and is, therefore, eligible for exemption under section 4 (3) (i) of the Act.

When a seven-eighth portion of the amount transferred to the Reserve Fund is thus exempt from assessment it is only in respect of the other portion of the said amount which is not exempt from assessment that the question of the applicability of the proviso to Section 41 (1) of the Act arises. If the beneficiary of this portion of the amount transferred to the Reserve Fund is not known or if the beneficiaries are more than one and their identity or their shares are not determinate then such portion of the amount is liable to be assessed in the hands of the trustee at the maximum rate under the proviso to Section 41 (1) of the Act. But in this case, the beneficiary of this portion of the Reserve Fund is known and his share is also determinate. It is only if the seven-eighth portion of the Reserve Fund is subject to assessment, as for instance, if the religious or charitable purposes for which this portion is applied or set apart for application are of a communal character, then it can be said that the beneficiaries of this portion or their respective shares are not determinate. In such a case the proviso to Section 41 (1) of the Act would apply. But when such portion of the Reserve Fund is entitled to exemption, the further question of the beneficiaries of this portion or their respective shares not being determinate does not arise. It follows that the proviso to Section 41 (1) of the Act cannot be invoked.

Mr. G.C Sharma, the learned counsel for the Revenue, contended that it was nowhere mentioned in the Wakf Deed that a seven-eighth part of the Reserve Fund was to be spent on charities and a one-eighth part was to be paid to the Mutawalli and that, therefore, the Reserve Fund and its income was indeterminate in each year and ultimately it becomes a part of the capital of the Wakf business. It was further contended by him that the ultimate destination of the Reserve Fund was not known and that the profits of the business which are transferred to the Reserve Fund was not specifically receivable on behalf of any one person and that as the beneficiaries who come under the category of charity and their shares are both indeterminate, the proviso to Section 41 (1) of the Act is attracted. In support of these contentions the learned counsel has cited before us the following decisions:—

1. Trustees of Sir Currimbhoy Imbrahim Baronetcy Trust v. Commissioner of Income-tax, Bombay, (1934) 2 I.T.R 148 (2).

2. Income-tax Appellate Tribunal Bombay v. Managing Trustee Shri Radha Madho Trust, Saugor, (1946) 14 I.T.R (3).

3. The Official Trustee of West Bengal v. Commissioner of Income-tax, East Bengal, (1954) 26 I.T.R 410 (1)

4. Executors of the Estate of J.K Dubash v. Commissioner of Income-tax Bombay City, (1951) 19 I.T.R 182 (4).

5. Trustees of Sahebzadas of Sarf-e-khas Trust v. Commissioner of Income-tax, Andhra Pradesh, (1962) 44 I.T.R 332. (5).

6. Bankim Ch. Datta and others v. Commissioner of Income-tax, Calcutta, (1966) 62 I.T.R 239 (6).

7. Commssioner of Income-tax, Bombay City v. Lady Ratanbai Mathuradas and others, (1968) 67 I.T.R 505. (7).

8. Commissioner of Income-tax, Gujarat v. Arvind Narottam, (1969) 73 I.T.R 490. (8).

9. Nirmala Bala Sarkar v. Commissioner of Income-tax, (1969) 74 I.T.R 268, and (9).

10. Chintamani Ghosh Trust v. Commissioner of Wealth-tax, U. P., (1971) 80 I.T.R 331. (10).

The cases cited at serial Nos. 1, 3, 5, 7 and 8 are cases of Trusts, created for the benefit of private persons and not for religious or charitable purposes and no portion of the income from the trust properties was exempt from assessment under section 4 (3) (i) of the Act. These cases are, therefore, not applicable to the case before us where a portion of the income from the trust business was admittedly exempt from assessment. The cases cited at serial Nos. 4 and 9 are not at all relevant, the questions considered in the said cases being totally different from the questions that arise for determination in the present case. The cases cited at serial Nos. 2, 6 and 10 are no doubt cases of the trust being created for religious or charitable purposes. In the case at serial No. 2, namely, Income-tax Appellate Tribunal, Bombay v. Managing Trustee Shri Radha Madho Trust, Saugor (1946) 14 I.T.R 470 (3) although the trust was created for religious and charitable purposes, the income from the trust properties was, however, not eligible for exemption under section 4 (3) (i) of the Act by virtue of the application of Clause (i) (a) of sub-section (3) of Section 4 of the Act. The assessee's claim in that case for exemption from assessment under section 4 (3) (i) of the Act was not considered by the High Court. Similarly, in the case at serial No. 6, namely, Bankim Ch. Datta and others v. Commissioner of Income-tax, Calcutta (1966) 62 I.T.R 239 (4) although the trust was created to ensure due performance of certain religious ceremonies and Pujas, no claim for exemption from assessment was made by the assessee in respect of such income and the only question for consideration before the High Court was regarding the assessment of such income at the maximum rate under Section 41 (1) of the Act. The case at serial No. 10, namely, Chintamani Ghosh Trust v. Commissioner of Wealth-tax, U. P., (1971) 80 I.T.R 331 (10) was a case under the Wealth Tax Act. The facts of this case are to a certain extent similar to the facts of the present case because a portion of the income from the trust properties was earmarked for religious and chariable purposes and the remaining portion was to be paid to private beneficiaries. The two Judges who decided this case, namely, Rathak and Mukherjee, JJ. agreed on some points and differed on some others. Both the learned Judges agreed that the trustees in that case were not holding any specific property for any public purpose of a charitable or religious nature within the meaning of Section 5 (1) (i) of the Wealth Tax Act and were not entitled to exemption under that provision. They differed on the question whether the beneficiaries and their shares were determinate, Mukerjee, J. holding that the beneficiaries as well as their shares were determinate and, therefore, Section 21 (4) of the Wealth Tax Act was excluded and Rathak, J. holding that the beneficiaries and their shares were not determinate and, therefore, Section 21 (4) applied. The point on which the two learned Judges different was then referred to a third Judge, namely, Asthana, J. and he agreed with the view expressed by Mukherjee, J. on the said point. This decision would not, therefore, support the contention of the learned counsel for the Revenue that the shares of the beneficiaries were not determinate and this decision would have no application to the facts of the present case inasmuch as no exemption was granted in respect of the portions of the trust properties which were earmarked for religious and charitable purposes.

None of these decisions is, therefore, directly in point. In all these cases either the trust was created for the benefits of private persons and not for religious or charitable purposes or even if the trust was created for religious or charitable purposes the income from the trust properties was disqualified from exemption for other reasons. No case has been cited before us in which a portion of the income received by the trustee was exempt from assessment and yet the proviso to Section 41 (1) of the Act was applied on the ground that the beneficiaries in respect of such portion of the income or the shares were not determinate. This case is, therefore, being decided on first principles. For, the reasons already stated, the portion of the Reserve Fund set apart for application for religious or charitable purposes has to be excluded from the scope of Section 41 (1) of the Act and so far as the balance which is applied for the benefit of the Mutawalli is concerned proviso to Section 41 (1) of the Act cannot be invoked for the reason that both the beneficiary as well as his shares are determinate.

We, therefore, answer the first question referred by the Tribunal as under:—

A seven-eighth portion of the annual income of the Wakf which is transferred to the Reserve Fund is' exempt from assessment under section 4 (3) (i) of the Act and the remaining one-eighth portion of the income transferred to the Reserve Fund is not exempt from assessment under section 4 (3) (i) of the Act.

In view of our answer to the first question, the second question referred to us has to be amended by omitting from the question the following words:—

“If the answer to question No. 1 above is wholly in the negative,”

and after so amending the question we answer it as under:—

The one-eighth portion of the income transferred to the Reserve Fund is not chargeable to tax at the maximum rate under the first proviso to Section 41 (1) of the Act. Since seven-eighth of the amount of the share of charity is exempt the one-eighth share of the private beneficiary is taxable in his hands at the ordinary rates.

The assessee will get the costs of this reference. Counsel's fee is fixed as Rs. 250/-.

Reference answered accordingly.

CRIMINAL MISCELLANEOUS

Hakim Abdul Hamid Petitioner v. Commissioner Of Income-Tax

Judgment Summary — Hamdard Dawa Khana (Wakf) represented by Mutawali Hakim Abdul Hamid

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's (Appellant's) Arguments

Revenue's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Hakim Abdul Hamid Petitioner v. Commissioner Of Income-Tax

Comments