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Ganpatrai Sagarmal (Trustees) For Charity Fund v. Commissioner Of Income-Tax, West Bengal.
Structured Summary of the Opinion delivered by G.K. Mitter, J.
Factual and Procedural Background
This is a reference under section 66(1) of the Indian Income-tax Act for the opinion of the court on three questions of law. The questions arise out of a document described in the proceedings as a "trust deed" executed on 21 October 1949 by two partners (Sagarmal Lohariwalla and Rameshwarlal Lohariwalla) of the firm Messrs. Ganpatrai Sagarmal together with Prithi Raj Thar and Sreemati Mahadei (the latter two referred to as donees or trustees).
The partners had carried on business in partnership since the beginning of the Dewali year 2001-02 (as described in the deed). The deed recited that, as from Kartick Badi 15, Sambat 2006 (the beginning of Dewali year 2006-07; English date 21 October 1949), the assets, liabilities, stock-in-trade and goodwill of the business should "fully vest in a body of persons" consisting of Prithi Raj Thar, Sreemati Mahadei and the original partners, jointly referred to as donees or trustees, and that the business should be carried on by the donees/trustees under certain terms.
Clauses 3, 5, 6, 7, 15, 16 and 18 of the deed set out management powers, profit allocation and purposes of a charity fund. Important terms disclosed in the deed include clause 3 (trustees' management powers), clause 5 (three-fourths of annual profit allocated equally to the parties of the first and second parts; remaining one-fourth allocated to a charity account), clause 6 (losses to be borne equally by the parties of the first and second parts and charity allocation to be nil in loss years), clause 7 (partners reserved rights to augment working capital and receive interest), clause 15 (objects for charity fund), clause 16 (mode of application of charity fund), and clause 18 (agreement deemed to come into force from the beginning of Dewali year 2006-7 / 21 October 1949).
The central controversy before the court was whether the portion of income described as allocated to religious or charitable purposes was exempt under section 4(3)(i) of the Indian Income-tax Act, and whether the settlement resulted in transfer of income to bring it within section 16(1)(c), with consequent assessment in the hands of the settlors.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the ⅛th share of the income of firm Ganpatrai Sagarmal (as framed in the reference) is exempt from income-tax under section 4(3)(i) of the Indian Income-tax Act.
- Whether the settlement resulted in the transfer directly or indirectly of the income of the settlors and as such brought the income within the provisions of section 16(1)(c) of the Indian Income-tax Act.
- If the answer to question No. 2 is affirmative, whether the assessment of the aforesaid income will be raised in the hands of the settlors.
Arguments of the Parties
Revenue's Arguments (Mr. Meyer)
- It was argued that under section 4(3)(i) it is not sufficient that income from the property is said to be held for religious or charitable purposes; the property itself must be held under trust or a similar legal obligation wholly for such purposes. The revenue contended that this trust condition was not satisfied in the present deed.
- Mr. Meyer contended that the proviso to section 16(1)(c) should apply: because the settlors were to receive three-fourths of the income, the arrangement should be treated as a settlement or disposition that effectively results in the income being deemed that of the settlors (i.e., the proviso deems a settlement revocable where it gives the settlor a right to re-assume power or provides for re-transfer directly or indirectly).
- He further argued that the portion said to be set apart for charity must be clearly and distinctly set apart and should not be only a book entry in the business ledger; it should not remain in the power of anybody connected with the business to use what was given to the charity for business purposes. Mr. Meyer referred to "several authorities" on this point (those authorities are not named in the opinion).
Other Parties' Arguments
The opinion does not contain a detailed account of the arguments advanced on behalf of the other parties (the settlors/assessees) beyond the factual description of the deed and its terms as recorded in the document.
Table of Precedents Cited
No precedents were cited in the provided opinion.
Court's Reasoning and Analysis
The court undertook a textual and statutory analysis focused on whether the arrangement created a trust of property for religious or charitable purposes and, if not, whether section 16(1)(c) would still attribute the income to the settlors.
1. Construction of the deed and requirement of a trust
- The court examined the deed's language and the express terms: the deed recited an intention that the "entire property represented by the said business should fully vest in a body of persons" (the donees/trustees) and that income should be appropriated partly to parties and partly to religious/charitable purposes; clause 5 allocated three-fourths of profit equally to the parties and one-fourth to a charity account.
- Relying on the formal requirements stated in sections of the Indian Trusts Act (specifically section 5 and section 6 as cited in the opinion), the court held that in order to constitute a valid trust of property (including moveable property) the ownership of the property must be transferred to the trustee (or the settlor must be the trustee). The opinion notes: "there must be a conveyance of the trust property to the trustee unless the settlor himself is the trustee." Here the settlor was not the sole trustee.
- The court concluded that no such transfer of ownership appears on the face of the document: the deed contains an intention to effect such vesting "at some date in the past" but does not state that any transfer was ever effectuated. The deed merely shows that, from 21 October 1949, the partners carried on the business under the supervision of the trustees and that profit allocation would be as described.
- Because the formal requirements for a trust (transfer of ownership to trustees) were not shown, the court held that "no property was here held under trust or other similar obligations" for religious or charitable purposes.
2. Application of section 4(3)(i)
- Section 4(3)(i) provides that income derived from property held under trust or other legal obligation wholly for religious or charitable purposes shall not be included in the total income of the person receiving them, subject to section 16(1)(c). The court emphasised that the provision requires the property itself to be held under such a trust or obligation.
- Applying that requirement, and finding no transfer of ownership to trustees, the court concluded that the income allocated to charity was not "income derived from property held under trust" within the meaning of section 4(3)(i). On that ground the court answered the first question in the negative.
3. Consideration of section 16(1)(c) (the proviso)
- The court proceeded to address whether the settlement fell within section 16(1)(c), which deems income arising to any person by virtue of a settlement or disposition from assets remaining the property of the settlor to be income of the settlor; the proviso defines a settlement as revocable if it contains any provision for re-transfer directly or indirectly or gives the settlor a right to re-assume power directly or indirectly.
- Mr. Meyer argued that because the settlors were to receive three-fourths of the income, the arrangement was within the mischief of the proviso. The court examined the deed and concluded that it did not contain any provision for re-transfer of the income directly or indirectly by the settlors; nor did it give the settlors a right to re-assume power over the income in the sense contemplated by the proviso.
- However, the court observed that irrespective of whether the proviso literally applied, the property remained the property of the settlors (no transfer of ownership having been effected). Consequently, the income arising from that property was chargeable in the hands of the settlors. On that basis the court answered Questions Nos. 2 and 3 in the affirmative — i.e., the income was to be treated as income of the settlors and assessment would be raised in their hands.
4. Additional point on "clear and distinct" appropriation for charity
- Mr. Meyer also argued that the amount set apart for charity must be clearly and distinctly set apart (not a mere book entry) so that it cannot be used for business purposes. The court noted that Mr. Meyer drew attention to several authorities on that point but considered it unnecessary to decide that issue in view of the primary conclusions already reached.
Holding and Implications
Holding:
- The court answered Question No. 1 in the negative: the portion of income said to be allocated to religious or charitable purposes was not held to be exempt under section 4(3)(i) because no property was shown to be held under a trust or similar legal obligation for such purposes.
- The court answered Questions Nos. 2 and 3 in the affirmative: the settlement did result in the income being treated as income of the settlors and the assessment of that income would be raised in the hands of the settlors (because the property remained the property of the settlors and the income was therefore chargeable to them).
Direct consequences / implications:
- Because the revenue succeeded on the central question (that the income was not exempt under section 4(3)(i) and was chargeable to the settlors), the assessees (the parties who sought the opinion) were ordered to pay the costs of the reference.
- The opinion does not assert or discuss any broader novel legal principle beyond application and construction of the cited statutory provisions and the formal requirements for creating a trust of property; no new precedent is described as being established in the text of the opinion.
Order: "Order accordingly." (The opinion records the concurrence of Ray, J., and directs that costs be paid by the assessee.)
The Judgment of the Court was delivered by
G.K Mitter, J.:— This is a reference under section 66(1) of the Indian Income-tax Act for the opinion of this court on the following questions of law:
“1. Whether, on the facts and in the circumstances of the case, the ⅛th share of the income of firm Ganpatrai Sagarmal is exempt from income-tax under section 4(3)(i)?
2. Whether the settlement resulted in the transfer directly or indirectly of the income of the settlors and as such bringing the income within the provisions of section 16(1)(C)? and
3. If the answer to question No. 2 is in the affirmative, whether the assessment of the aforesaid income will be raised in the hands of the settlors?”
2. The matter relates to the construction of what has been described as a deed of trust in the proceedings before the revenue authorities. Two persons by the name of Sagarmal Lohariwalla and Rameshwarlal Lohariwalla were carrying on business in partnership under the name and style of Messrs. Ganpatrai Sagarmal since the beginning of the Dewali year 2001-02. The terms and conditions of the partnership said to be recorded in a deed bearing date January io, 1946, is not before us. On the 21st October, 1949, a document was executed by these two persons as also by one Prithi Raj Thar and one Sm. Mahadei, wife of Sagaimal Lohariwalla, and this document is referred to as a trust deed. The partners are here described as parties of the first and second part and also referred to as the donors or settlors. After reciting that they have been carrying on business in partnership as mentioned the said donors or settlors go on to say:
“While carrying on business as aforesaid the parties hereto had decided among themselves that on and from Kartick Badi 15,2006, i.e, the beginning of the Dewali year 2006-07 the assets and liabilities of the said business as on Kartick Badi 14, Sambat 2006, i.e, the end of the Dewali year 2005-06, and stock-in-trade and goodwill, etc., that is, in other.words, the entire property represented by the said business should fully vest in a body of persons consisting of Sree Prithi Raj Thar of Monohardas Katra, Calcutta, Sreemati Mahadei, wife of the party hereto of the First Part and of the parties hereto of the First and the Second: Parts, hereinafter jointly to be referred to as the donees or the trustees and whereas it had further been decided that the business should accordingly continue to be carried on.by the donees or trustees as aforesaid, under certain terms and conditions and in manner agreed to among the parties hereto and further that the income arising out of the business so carried on should be appropriated and applied or set apart partly for payment to the parties hereto and partly for religious and/or charitable purposes according to certain terms and conditions and in manner also agreed to among the parties hereto and whereas it has been deemed expedient and proper that the terms and conditions and the manner already agreed on among the parties hereto under and in which the business should be and is being carried on and the income arising therefrom is to be appropriated, applied or set apart should, in order, to avoid any doubt or ambiguity or differences thereabout be reduced in writing in the shape of these presents and now therefore these presents witnesseth the said terms and conditions.”
3. Clauses 1 to 18 specify the terms and conditions on which the business was to be carried on. The important clauses for the purpose of this reference are clauses 3, 5, 6, 7, 15, 16 and 18 which are set out below:
“3. That the donees or the trustees shall be competent to do all such deeds and things as they may think necessary for the management or improvement of the business and shall carry on the business, the actual management-of the affairs thereof concerning the day-to-day transactions relating to the smooth and efficient and proper carrying on of the business being done by the settlors as before, subject to such alter ation or modification thereof as may be suggested or directed by Sree Prithi Raj Thar and Sreemati Mahadei from time to time, as agreed to among the donees or the trustees themselves.
5. That three-fourths of the profit accruing each year shall be allocated or distributed equally, that is, at six annas each, to the accounts of the parties hereto of the First and Second Parts, and the remaining one-fourth shall be allocated or distributed to a charity account in the ledger to be applied or accumulated and thus set apart, as the case may be, for religious or charitable purposes in manner detailed hereinafter.
6. That in the event of the trading in any accounting year resulting in a loss after meeting the usual expenses for running the business the allocation to the charity account or fund should be nil and the loss shall equally be divided between the Parties hereto of the First and the Second Parts.
7. That the Parties hereto of the First and the Second Parts reserve to themselves the right of augmenting the present working capital of the business aforesaid from time to time with interest at the rate of six per cent, per annum or such other rates as may be agreed on among the donees or trustees. The Parties of the First and the Second Parts shall get interest at such rates also on the existing capital standing in their respective names in the books of account of the business.
15. That the purposes for which the charity fund is to be applied or set apart shall include the erection of a dharamsala, a charitable dispensary, on the premises at 8, Jadulal Mullick Road, Calcutta, which belongs to Sreemati Mahadei above-named, and other public charitable or religious objects involving relief or education of the poor and distressed and contributions to public religious or charitable societies or institutions.
16. That the mode and manner of application of the said charity fund shall be determined according to the decisions of the donees in terms set forth above and in the event of any difference among them regarding the matter the opinions of Sreemati Mahadei and Sree Prithi Raj Thar, if in agreement, shall prevail and be accepted. If they do not agree, they shall take the decision of any mediator nominated by them.
18. That this agreement shall be deemed to have come into force on and from the beginning of the Dewali year 2006-7, corresponding to the English date twenty-first day of October, 1949”.
4. The question before us is whether the income from business after the date mentioned in the document should be included in the total income of the two persons. Section 4(3)(i) of the Indian Income-tax Act provides as follows:
“Any income, profits or gains falling, within the following classes shall not be included in the total income of the person receiving them;
(i) 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.”
5. We are not concerned with the proviso to this sub-section. The foremost question in this reference is whether the income which is said to be allocated to charitable or religious purposes is income derived from properties held under trust or other legal obligations wholly for religious or charitable purposes. In my opinion, no property was here held under trust or other similar obligations. Section 5 of the Indian Trusts Act provides as follows:
“No trust in relation to immoveable property is valid, unless declared by a non-testamentary instrument in writing signed by the author of the trust or the trustee and registered, or by the will of the author of the trust or of the trustee.
No trust in relation to moveable property is valid unless declared as aforesaid, or unless the ownership of the property is transferred to the trustee.
These rules do not apply where they would operate so as to effectuate a fraud.”
6. Under section 6 of the Trusts Act there must be a conveyance of the trust property to the trustee unless the settlor himself is the trustee. Here the settlor was not the sole trustee.
7. There is no dispute that the Indian Trusts Act does not apply to a trust for religious or charitable purposes but.again there can be no dispute that in order to constitute a gift to charity the ownership of the property must be transferred to the trustee unless the settlor alone is the trustee. In this case there has been no such transfer. The document only shows that at some date in the past the two partners had agreed that the entire property represented by the business should be transferred to themselves along with others as trustees on a certain date. The deed does not record that any such transfer was ever effectuated. The document is in English and we must abide by the exact words used. The deed merely goes to show that as from the 21st October, 1949, the partners were carrying on the business under the supervision of the trustees and they were each to get six annas share of the income and profits of the business and four annas share thereof was to be allocated or distributed to charity account in the ledger of the business.
8. Mr. Meyer arguing for the revenue pointed out that it was not enough under section 4(3)(i) that the income from the property should be held for religious or charitable purposes but that the property itself should be held under a trust or other similar obligation for religious or charitable purposes. In ray opinion, this contention must be upheld. This document so far as I can see merely shows that if and when there was any income or profit from business the same was not to go entirely to the erstwhile partners but was to be appropriated by them as regards ⅜th and the balance of i/4th was to be allocated to charity. The answer to question No. 1 therefore is in the negative.
9. In this view of the matter there is really no need to answer the second question but because the matter has been argued I should like to indicate my views thereof. Section 4(3)(i) of the Indian Income-tax Act is subject to the provisions of section 16(1), sub-section (c) thereof, which provides as follows:
“In computing the total income of an assessee, all income, arising to any person by virtue of a settlement or disposition whether revocable or not, and whether effected before or after the commencement of the Indian Income-tax (Amendment) Act, 1939 (VII of 1939), from assets remaining the property of the settlor or disponer, shall be deemed to be income of the settlor or disponer, and all income arising to any person by virtue of a revocable transfer of assets shall be deemed to be income of the transferor:
Provided further that for the purposes of this clause a settlement, disposition or transfer shall be deemed to be revocable if it contains any provision for the re-transfer directly or indirectly of the income or assets to the settlor, disponer or transferor, or in any way gives the settlor, disponer or transferor a right to re-assume power directly or indirectly over the income or assets.”
10. It was argued by Mr. Meyer that the proviso mentioned above was attracted to the trust deed and that as the settlors were going to receive ¾th of the income it should be deemed to be the income of the settlors. I do not think that the trust deed in this case comes within the mischief of this proviso. There does not seem to be any provision for re-transfer of the income directly or indirectly by the settlors. The trust deed provides that the trustees were to supervise the running of the business and fth of the profit were to go to the partners and ¼th to charity. If the business had been transferred to the trustees with the condition that the trustees should pay ¼th of the income to charity and ¾th to others it could be said that there was a provision for re-transfer of the income of the assets to the settlor. But this is not the position here. The parties had merely indicated their intention to set apart 174th of the income for charitable purposes. Nevertheless, the income was theirs. As the property remained the property of the settlors the income was chargeable in their hands. Questions Nos. 2 and 3 must be answered in the affirmative.
11. A further point was argued by Mr. Metyer that it is not enough that the trust deed should provide for a part of the income being allocated or distributed to a charity account in the ledger but that what was intended to be set apart for charity must be clearly and distinctly set apart and should not be the subject of a mere book entry, that is to say, it should not be in the power of anybody to use what was given to the charity in the business. Mr. Meyer drew our attention to several authorities on this point but I do not think it is necessary to go into the question in view of the answers given.
12. As the revenue has succeeded on the most vital question the assessee must pay the costs of this reference.
Ray, J.:— I agree.
14. Order accordingly.
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