Manockjee Cowasjee Petit Charities v. Director of Income-tax (Exemption), Mumbai, Income Tax Appellate Tribunal, Judgment, Law, casemine.com

Citation Codes

Equivalent Citations

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Case Number

IT Appeal No. 4881 (Mum.) OF 2009

Attorney(S)

S.E. DasturMadhur Agarwal

Judges

S.V. MEHROTRAP.M. JAGTAPVIJAY PAL RAOR.S. SYAL

Acts

section 12AA(l)(b)(ii) r/w section 12A of the Income Tax Act, 1961 (for short "the Act"),
clause (a) or clause (aa) of sub-section (1) of section 12A, shall(a)
DIT(Exp) u/s 12AA(l)(b)(ii) r.w.s. 12A of the IT Act
Section 12AA, inserted by Finance Act (No. 2), 1996,
referred u/s. 255(4) of the Income Tax Act, 1961
section 2(13) of the Bombay Public Trust Act
Section 2(15) of the Income-tax Act, 1961
provisions of section 11 and section 12
section 9 of the Indian Trust Act, 1882,
Section 6 of the Indian Trust Act, 1882,
u/s. 255(4) of the Income-tax Act, 1961
u/s 12A(a) of the Income-tax Act, 1961.
SECTION 255(4) OF THE INCOME TAX ACT,
section 3 of Indian Trust Act, 1882,
u/s. 12AA of the Income Tax Act,
Bombay Public Trust Act, 1950.
sub-section (2) of section 288
provisions of section 13(l)(c)
sub-section (3) of section 13,
u/s 11 read with section 13
clause (b) of sub-section (1)
Bombay Public Trusts Act
u/s 254(4) of the IT Act
Indian Trust Act, 1882,
u/s 9(1) of this Act
INCOME TAX ACT 1961
u/s 2(15) of IT Act
INCOME TAX ACT
section 13(l)(b)
section 4(3)(1)

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Smart Summary

Factual and Procedural Background

This appeal arises from the rejection of the assessee's application for registration as a charitable trust under section 12AA(1)(b)(ii) read with section 12A of the Income Tax Act, 1961. The application was rejected by the Commissioner on two grounds: (i) no valid trust came into existence due to lack of divesting ownership of assets by the settlor, and (ii) the trust was deemed non-charitable because relatives of the settlor obtained benefits by preference. The trust was originally created in 1928 and registered under the Bombay Public Trust Act, 1950 in 1952. The assessee challenged the rejection before the Income Tax Appellate Tribunal (ITAT), where a difference of opinion arose between the Accountant Member (AM) and the Judicial Member (JM). The matter was referred to a Third Member under section 255(4) of the Income Tax Act to resolve the difference. The Third Member concurred with the AM's view allowing the appeal and directing registration of the trust under section 12AA from the date of application.

Legal Issues Presented

Whether the Director of Income Tax (Exemption) erred in rejecting the assessee's application for registration under section 12AA of the Income Tax Act on the ground that the trust indenture is not charitable.
Whether the trust is a valid charitable trust given the settlor retained beneficial interest and management control during his lifetime.
Whether preference given to lineal descendants of the settlor's father in the trust deed negates the public charitable nature of the trust.

Arguments of the Parties

Appellant's Arguments

The trust was validly created in 1928 with existing trust property (Government of India stock) transferred to trustees.
Section 9 of the Indian Trust Act, 1882 permits the settlor to be a beneficiary, provided he is not the sole beneficiary.
The settlor receiving income during lifetime does not invalidate the trust; it is a "living trust" as explained in the commentary by Austin Wakeman Scott.
Preference to relatives in the trust deed does not make it a family trust or non-charitable, as supported by precedents including Trustees of the Charity Fund and Trustees of Seth Meghji Mathuradas Charity Trust.
The Commissioner erred in rejecting registration based on absence of transfer of property and familial benefit, because these issues relate to assessment stage under section 13 and not registration.
The trust's dominant intention is charitable, aimed at relief of poor or indigent Parsis and educational assistance, with preference clauses being incidental.
Auditors certified no payments were made to settlor's family members since 1970 and the settlor is deceased.

Respondent's Arguments

The property was not absolutely transferred to the trust, as the settlor retained ownership and management control during his lifetime.
The trust deed’s clause directing income payment to the settlor and granting him managing trustee powers negates the existence of a charitable trust during his lifetime.
The preference given to family members indicates it is a private or family trust, not a public charitable trust.
The Commissioner rightly rejected registration due to lack of divesting ownership and the trust being non-charitable.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Mullick Somnath Charitable Trust v. Commissioner of Income-Tax [1986] 160 ITR 3 / 26 Taxman 156	Trust deemed non-charitable if relatives of settlor obtain benefit by preference without public charitable intent.	Distinguished by the Tribunal as the present trust benefits general poor Parsis and preference is only incidental; thus not applicable.
Nachimuthu Industrial Association v. Commissioner of Income-Tax, Madras [1980] 123 ITR 611 / 4 Taxman 181	Property must exist and be divested to create valid trust; mere credit to donation account insufficient.	Found not applicable as trust property existed and was vested in trustees after settlor's death.
Commissioner of Income-Tax, Madras v. G.D. Naidu Industrial Educational Trust [1942] 10 ITR 358	Whether trust is charitable depends on the use of assets; trust for founder's own benefit not charitable.	Distinguished as facts differ; present trust is for charitable purposes after settlor's death.
Trustees of the Charity Fund v. CIT [1959] 36 ITR 513	Preference to poor relatives does not negate charitable nature if dominant object is public charity.	Applied to hold that preference to settlor's relatives in present trust does not negate charitable character.
CIT v. Trustees of Seth Meghji Mathuradas Charity Trust [1959] 37 ITR 419	Preference to settlor’s caste and relatives does not affect charitable status if dominant object is charitable.	Applied to support that preference clause in the trust deed is incidental and does not render trust non-charitable.
CIT v. Moosa Haji Ahmed [1964] 52 ITR 147	Dominant intention to help poor prevails over incidental preference to relatives in determining charitable nature.	Applied to affirm that preference does not disqualify charitable status.
CIT v. Trustees of Gordhandas Govindram Family Charity Trust [1952] 21 ITR 231 (Bom.) and [1973] 88 ITR 47 (SC)	Trust primarily for benefit of settlor’s family is a private trust and not charitable.	Distinguished as present trust’s primary object is public charity benefiting poor Parsis, not family members.
CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722	Advancement of public utility is charitable even with incidental political activities.	Reaffirmed that dominant charitable purpose is determinative.
D.V. Arur v. CIT [1945] 13 ITR 465 (Bom.)	Trust limited to education of family members is not charitable under Income Tax Act.	Applied to contrast with present trust which benefits a broader class beyond family.

Court's Reasoning and Analysis

The Tribunal analyzed the trust deed and relevant statutory provisions, focusing on section 12AA of the Income Tax Act which mandates registration of trusts if the Commissioner is satisfied about the genuineness of the activities and the charitable nature of the objects. The AM found that the trust was validly constituted with the Government of India stock transferred to trustees and that the settlor’s receipt of income during his lifetime did not invalidate the trust under section 9 of the Indian Trust Act, 1882, as the settlor was not the sole beneficiary and the trust was a living trust.

The AM also held that preference to relatives does not negate charitable status if the dominant object is charitable, relying on binding precedents. The Commissioner’s reliance on judgments concerning family trusts was rejected as the present trust’s primary objective was relief and aid to poor Parsis, with preference clauses being incidental and subordinate.

The JM disagreed, emphasizing that during the settlor’s lifetime, the trust income and management were controlled solely by him, negating the existence of a charitable trust at that stage. The JM noted that the charitable activities and objects became operative only after the settlor’s death, and that the preference clause subordinated the public charitable purpose. The JM found the trust to be a private or family trust during the settlor’s lifetime and thus not charitable for registration purposes.

The Third Member, after reviewing factual and legal aspects, concurred with the AM’s view. It was observed that the settlor died long ago, and since then the trust property vested in the trustees and was used for charitable purposes. The preference clause was interpreted as a preference in competing cases among beneficiaries of a charitable class, not exclusion of the public. The Third Member held that the objections raised by the Commissioner were not sustainable and that registration should have been granted. The Tribunal thus allowed the appeal and directed registration of the trust under section 12AA from the date of application.

Holding and Implications

The appeal filed by the assessee is allowed and the application for registration of the trust under section 12AA of the Income Tax Act is directed to be granted from the date of filing of the application.

The direct effect of this decision is that the trust is recognized as a charitable trust eligible for registration, enabling it to claim exemption under sections 11 and 12 of the Income Tax Act subject to compliance with other conditions. The ruling clarifies that a settlor’s receipt of income during lifetime does not invalidate a trust if the dominant purpose is charitable and that preference to relatives, when incidental and subordinate to charitable objects, does not render the trust non-charitable. No new precedent was established; rather, existing legal principles and precedents were applied to the facts.

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Manockjee Cowasjee Petit Charities v. Director of Income-tax (Exemption), Mumbai

S.V. Mehrotra, Accountant Member - This appeal has been filed by the assessee against the impugned order dated 29th June 2009, passed under section 12AA(l)(b)(ii) r/w section 12A of the Income Tax Act, 1961 (for short "the Act"), rejecting the assessee's application for registration as charitable trust. In the rejection order, the Commissioner has given primarily two reasons - (i) a valid trust did not come into existence because there was no divesting of ownership in the assets by the author of the trust; and (ii) since the relative of the settlor obtained benefit by way of preference, therefore, in view of the judgment of Hon'ble Calcutta High Court rendered in Mullick Somnath Charitable Trust v. Commissioner Of Income-Tax [1986] 160 ITR 3 / 26 Taxman 156 , the trust would be regarded as non-charitable.

1.1. Before us, the learned Sr. Counsel for the assessee submitted that the trust was formed in the year 1928 and is registered with Charity Commissioner. He referred to the trust deed contained at Pages-2 to 13 of the paper book. He submitted that in the trust deed, it is mentioned that the 5 Government of India stock 3^½% of the face value of Rs. 2,00,000, under the certificate no. B0315, was transferred into the joint name of the parties mentioned in the indenture being Manockjee Cowasjee Petit and Nasserwanji Dady Dadyset, Furdunji Cowasji Petit, Bai Mithibai widow of Merwanji Dhunjibhoy Jeejeebhoy, Bai Virbaiji widow of Nusserwanji Muncherji Cama, Bai Soonubhai wife of Jehangirji Framji Batliboi and Cowasji Hormusji Petit. He further submitted that no benefit has ever been taken by settlor's family. Learned Sr. Counsel submitted that the first reason is that there was no transfer of asset to the trust. In this regard, learned Sr. Counsel submitted that the main objection was that the income was to be paid to the settlor. Learned Sr. Counsel in this regard referred to section 9 of the Indian Trust Act, 1882, which deals with the persons who can be beneficiary. He submitted that according to section 9, every person capable of holding property may be a beneficiary but cannot be the sole beneficiary. Learned Sr. Counsel further referred to the commentary on the Law of Trust by Austin Wakeman Scott, wherein, vide Para-114, it is observed as follows:-

"114. The settlor as beneficiary. The person who creates a trust inter vivos may be one of the beneficiaries of the trust, or indeed, he may be the sole beneficiary. It is very common for an owner of property to transfer it to a trustee in trust to pay him the income for life and on his death to hold the property in trust for or to convey it to other beneficiaries. This is the type of trust commonly called a "living trust". Sometimes the owner of property transfers it in trust for his own benefit alone as for example where it is provided that the income is payable to him for a term of years or until some event should happen and then the principal is to be conveyed to him; or to pay the income to him for life and on his death to pay the principal to his estate. It is sometimes a difficult question of construction to determine whether the settlor is the sole beneficiary or not. The question of the power of the settlor to terminate the trust when he is the sole beneficiary is dealt with hereafter.

As we have seen, the fact that the settlor reserves a beneficial interest for life does not make the creation of the trust a testamentary disposition, and it is not invalid because of a failure to comply with the requirements of the statute of Wills.

It is to be noticed that the beneficial interest reserved to the settlor is for some purposes treated differently from a beneficial interest created in a third person. Thus, although a beneficial interest created in a third person may be inalienable by him and not subject to the claims of his creditors, a beneficial interest reserved to the settlor himself can be alienated by him or reached by his creditors even though it is otherwise provided by the terms of the trust."

2. Learned Sr. Counsel further referred to the judgment of Hon'ble Madras High Court in Nachimuthu Industrial Association v. Commissioner Of Income-Tax, Madras. [1980] 123 ITR 611 / 4 Taxman 181 relied upon by the Commissioner and pointed out that the said judgment deals with the issue that when you create a trust, property must be in existence. He submitted that, in the present case, the property was in existence as noted in the indenture itself. Further, he submitted that the judgment of Hon'ble Madras High Court relied upon by the Commissioner in Commissioner Of Income-Tax, Madras v. G.D. Naidu Industrial Educational Trust [1942] 10 ITR 358 , deals with the issue whether the trust was charitable trust or not and not whether the trust was valid. He submitted that neither of the two cases referred to by the Commissioner support the reasoning given by the Commissioner. As regards the second reason given by the Commissioner, learned Sr. Counsel submitted that while granting registration, it is not relevant to examine whether the trust is a family trust or public trust. This aspect assumes importance at the time of assessment while allowing exemption under section 11. He submitted that, at the time of assessment, it is to be examined whether the amount was actually paid or not to the beneficiaries who are family members. Learned Sr. Counsel submitted that since it is a trust created in the year 1928, therefore, restrictions contained under section 13(l)(b) did not apply. Learned Sr. Counsel referred to the decision of Hon'ble Supreme Court rendered in Trustees of the Charity Fund v. CIT [1959] 36 ITR 513 and pointed out that in this case, the appellants were trustees of charitable fund known as "the charity fund funded by Sir.... and in the clauses of trust deed, it was mentioned that in applying the income, the trustees shall give preference to the poor and indigent relations or members of the family of said Sir...., including co-lateral relations. It was held that this provision could not affect the public charitable trust and the income from trust properties was held to be eligible for exemption under section 4(3)(i). Learned Sr. Counsel further referred to the judgment of Hon'ble Bombay High Court in CIT v. Trustees of Seth Meghji Mathuradas Charity Trust [1959] 37 ITR 419. In this case, there was a direction in the deed that in carrying out the charitable intention, the trustees shall always prefer the members of the settlors' caste to the members of any other caste in the Hindu community and shall further prefer the members of the settlor's family and settlor's relative to those who were not such members and relatives. After examining these clauses, it was held following the judgment in Trustees of the Charity Fund (supra) that the property was held by the trustees wholly for religious and charitable purposes and income of the assessee was exempt from income tax. He, therefore, submitted that mere preference to the settlor's family members, does not make the trust non-charitable. Learned Sr. Counsel further referred to the judgment of Hon'ble Gujarat High Court rendered in CIT v. Moosa Haji Ahmed [1964] 52 ITR 147 , wherein the Court has, inter alia, held that in deciding whether a trust is one wholly for religious or charitable purpose for the purpose of section 4(3)(i) of the Act, it is the dominant intention of the settlor that has to be considered, and if the dominant intention of the settlor was to help a poor, the mere fact that there was a direction to the trustee to give preference to the poor relation of the settlor would not render section 4(3)(1) inapplicable to such trust. He, therefore, submitted that the dominant intention of the settlor is to be examined and not merely incidental direction thereto. Learned Sr. Counsel submitted that the judgment relied upon by the Commissioner in Mallick Somnath Charitable Trust (supra), is not applicable to the facts of the case inasmuch as the trustee spent the entire income of the trust for the support and maintenance of the relations of the settlor which were poor and indigent without exercising any preference. The poor relations of the settlor had been made direct recipients of the benefit of the trust. Thus, he submitted that the poor relatives are the only beneficiaries and not by way of preference. Learned Counsel further submitted that even other wise this benefit to relatives is outside the scope of registration. He submitted that the provisions of section 13(l)(c) can be examined only at the time of assessment and in case of non-compliance the income to that extent can be treated as income of the trust. Learned Counsel, therefore, submitted that the Commissioner be directed to grant registration from the date of application as it is not a case of family trust.

3. Learned Departmental Representative supported the order of the Commissioner and submitted that the property had not absolutely been transferred to the trust. He submitted that the direction in the trust deed regarding income to be given preferably to family members effectively, amounts to giving benefit only to the relatives.

4. We have heard the rival submissions, perused the orders of the lower authorities and the materials available on record. Section 12AA, inserted by Finance Act (No. 2), 1996, w.e.f. 1st April 1997, deals with the procedure for registration of a trust or institution. Section 12A, prescribes the conditions for applicability of sections 11 and 12 and as per the requirement of clause (a) to sub-section-(i) of these sections, a person in receipt of the income has to make an application for registration of the trust or institution in the prescribed form. As per the requirement of section 12AA, the Commissioner has to call for such documents or information from the trust or institution as he thinks necessary in or to satisfy himself about the genuineness of the activity of the trust or institution and he can also make such enquiries as he may deem necessary in this behalf. After satisfying himself about the objects of the trust or institution and the genuineness of its activity, he has to pass a necessary order. Thus, a combined reading of clauses (a) and (b) to section 12AA(1), shows that the Commissioner has to satisfy himself about two aspects viz. (i) genuineness of the activities; and (ii) objects of the trust. At this juncture, he is not required to examine about the actual application of funds. If he is satisfied that the dominant object of the trust is charitable, then merely because there are certain incidental directions in the trust deed, which, in his opinion, cannot be treated as directions in line with charitable objects, then, on that ground only, registration cannot be denied. The object of registration is only for the Commissioner to prima-facie satisfy himself about the bona fides of the applicant for getting registration. He is not required, at this juncture, to go into the detailed examination of the objects of the trust. Broadly if the dominant object of the trust is charitable in nature, then he has to grant registration. In the present case, we find that the Commissioner has denied the registration for two reasons; firstly, valid trust had not come into existence as no property had been transferred to the trust and secondly, since the relatives of settlor could obtain benefit by way of preference, therefore, it was a family trust. Insofar as the first reasoning is concerned, the Commissioner reached his conclusion after examining the indenture, wherein, at point no. 3, it is mentioned as under:-

"3. Subject to the forgoing clause the said trustees shall pay the said interest and income to the Settlor for and during his life and down to his death."

We do not find any substance in this reasoning. According to section 3 of Indian Trust Act, 1882, a trust is an obligation annexed to the ownership of the property and arising out of a confidence reposed in and accepted by the owner or declared and accepted by him, for the benefit of another or of another and the owner. In the present case, the subject matter of the trust is Government of India subscribed stock of 3^½% of the face value of Rs. 2,00,000, which were transferred into the joint names of the trustees. This is evident from Pages-1 and 2 of indenture. The interest from this stock was to be paid to the settlor during his life time and, thereafter, the amount was to be applied towards various charitable acts including relief or aid to poor or indigent or infer or helpless Parsee who may be in temporary monitory distress. Further, there are other clauses also for utilizing the money for charitable purposes though related to Parsee. From the commentary of the Indian Trust Act, 1882, by I.B. Rangacharya, it is clear that according to section 9 of the Indian Trust Act, 1882, the person who creates a trust intervivos may be one of the beneficiaries of the trust. The only restriction is that, he should not be the only beneficiary. Section 6 of the Indian Trust Act, 1882, provides that the trust is created when the author of the trust indicates with reasonable certainty by any words or goods viz. (a) intention on his part to create thereby a trust; (b) the purpose of trust; (c) the beneficiary; (d) the trust property and transfers the trust property to the trustee. We find that all these conditions are fulfilled in the present case. Further, from the commentary of Law of Trust by Austin Wakeman Scott, it is evident that the person who creates trust intervivos may be one of the beneficiaries of the trust. It has been observed in the said commentary that it is very common for the owner of the property to transfer to a trustee in trust to pay him the income for life and after his death to hold the property in trust for or to convey it to other beneficiaries. This type of trust is commonly called a living trust. The Commissioner has referred to the judgment of Hon'ble Madras High Court in Nachimuthu Industrial Association (supra). In this case, the facts were, entirely different. The assessee had appropriated out of his profits Rs. 3,00,000 and credited to the "reserve for donation account" and had not actually spent or utilized the income for charitable purposes. In the backdrop of these facts, it was held that since the property itself did not exist on the date of resolution, there was no question of any trust coming into existence. The resolution was a mere pious expression of opinion that if and when there were profits, sum of Rs. 2,50,000 should be given to the polytechnique. Thus, the subject matter of the trust itself was contingent upon accruing of profits and, therefore, the issue was decided against the assessee. In the second judgment relied upon by the Commissioner in G.D. Naidu Industrial Education Trust (supra), the facts were, entirely, different. In this case, it was held that in view of the provisions of deed of trust by which the assets could be utilized for the founder's own purpose or for the purpose of companies, the deed did not create a trust only for charitable purpose. The idea that some day the institution contemplated by the deed might be founded was not sufficient compliance. We do not find any similarity in the facts with the present case. In view of the above discussion, we cannot subscribe to the view taken by the Commissioner. The second reason given by the Commissioner is that it is a case of private trust or family trust because preference is to be given to lineal descendent of Cowaji Depshawji Patel, and such lineal descendent to those connected with him in the direct male line and partly through female line or wholly through the female line and to those who may be more nearly related to him over those who may be more remotely so related. We find that this issue is squarely covered by the following judgments:-

♦ Trustees of Charity Fund (supra)

♦ Trustees of Seth Meghji Mathuradas Charity Trust (supra )

♦ Moosa Haji Ahmed (supra)

In all the above judgments, it has been held that mere preference to settlors family does not affect the public charitable nature of the trust. It is the dominant object which is to be taken into consideration for deciding whether the assessee is a charitable trust or not. In the trust deed, it is clearly mentioned that out of charitable motives and considerations, the settlor had settled the Government of India subscribed stock of the 3½% of the face value of Rs. 2,00,000, upon the charitable and other trust. It is further provided in Para-4 of the trust deed as under:-

"4. After the death of the Settlor the said trustees shall (subject nevertheless to the provisions of clause one hereof insofar as the same may be subsisting) apply and expend the said interest and income towards and in the following charitable acts and purposes in such propositions and in such manner and subject to such conditions as the said trustees may in their absolute discretion think fit, namely -

(a) In providing relief or aid to poor or indigent or maimed or infirm or helpless Parsees or who may be in temporary monetary distress or unable to maintain themselves or their family or children or in defraying the expenses of or in supplying medicine or medical aid or physical relief in any form to any poor or helpless Parsees provided always that such relief may be given by supplying monetary aid or aid in kind or in any other shape or form of eleemosynary relief and either by monthly or other periodic allowances or in lump sum or by providing other means or relief and the same may be either continuous or interrupted.

(b) In providing means or assistance for acquiring primary, secondary or higher education or technical or commercial or industrial education or in providing instruction in any particular business profession calling handicraft manufacture, manufacturing process or industry or art to poor or indigent Parsees or in placing or introducing them in any particular business profession or calling and in rendering assistance in the shape of money or otherwise to any poor Parsees in the acquisition by or improvement in him of the knowledge of any service art or industry provided always that such assistance may be given either by supplying deserving applicants with the necessary monetary help or in the shape of scholarships or by supplying them with books or instruments and other materials or otherwise.

(c) In donations or subscriptions to any educational institution or institutions for the Parsees or to any charitable institution or institutions for the Parsees having for its or their object the alleviation of physical or mental disease or suffering or the care maintenance protection or relief of old infirm blind or maimed or otherwise diseased members of the Parsee community or Parsee orphans to the intent and on condition however that every such donation or subscription or its income shall be used and shall be used and employed towards one or other of the objects aforesaid and no other purpose whatsoever.

(d) In such other charitable acts and purposes for the Parsees generally as to the said trustees may seem fit having regard to them prevailing times and circumstances.

Provided always that in the giving or distribution or allocation of any relief and the payment of any allowance or other sums towards any of the charitable purposes aforesaid preference shall be given in all competing cases to the lineal descendants of Cowasji Dinshawji Petit the father of the Settlor and amongst such lineal descendants to those connected with him in the direct male line over those connected with him partly through the male line over those connected with him partly through the male line and partly through the female line or wholly through the female line and to those who may be more nearly related to him over those who may be more remotely so related."

A bare perusal of the above objects clearly shows that the dominant object of the trust was to help poor persons and also to donate the amounts to educational institutions. Merely because it was provided that preference was to be given to lineal descendant of the father of the settlor does not, in any manner, dilute the dominant charitable object of the trust. We, therefore, do not find any substance in this reasoning given by the Commissioner. The Commissioner has relied on the judgment in Mallick Somnath Charitable Trust (supra), wherein, as noted earlier, the trust was only for the purpose of support and maintenance of the relations of the settlors family who were poor and indigent. Therefore, this decision is not applicable to the facts of the present case. Further, in any view of the matter, the submissions made by the applicant dated 25th June 2009, noted by the Commissioner in his order, clearly show that no amount had been paid to the family members. It has been certified by the auditors of the trust who were associated since 1970 that no amount had been paid either to the founder of the trust or any other trustee since that date. Further, the founder is not alive and, therefore, there was no question of any payment made to him. Further, it was also pointed out that the major object of the trust for the last several years had been medical relief for the poor and the needy. These aspects, as rightly been pointed out by the learned Counsel can be examined in course of assessment proceedings only. However, the genuineness of the trust and the dominant objects of the trust being charitable, cannot be doubted. Only these two aspects merit consideration while granting registration and the actual application of the income can be examined only during the course of assessment proceedings. In view of the above discussion, we are of the opinion that the Commissioner was not justified in rejecting the application for registration. We, therefore, direct the Commissioner to register the society under section 12AA of the Act from the date of filing of application by the assessee.

1. In the result, assessee's appeal stands allowed.

ITA No. 4881/Mum/2009

Vijay Pal Rao, Judicial Member - On perusal of the order of the learned brother and after giving my deep thought on the issue involved reasoning and conclusion of the ld. AM, I find myself unable to concur and agree with the view and findings of the ld. AM.

2. Though, some of the facts of the case are discussed in the order of the ld. brother AM; however, the relevant facts are being reproduced hereunder wherever it is necessary for discussion of the issue.

3. At the time of registration u/s 12AA, the Commissioner has to satisfy himself about the genuineness of the activities of the Trust/institution and also about the objects of the trust/institution. On being satisfied about the genuineness of the activities of the trust/institution and also about the objects of the trust/institution, the Commissioner would either grant the certificate or would reject the prayer. It is settled proposition of law that Commissioner while considering the application for registration shall restrict the enquiry to the examination as to whether the assessee is actually in the activities which are genuine. The genuineness of the activities of the trust/institution has to be seen, keeping in mind the objects thereof, which necessarily means that the Commissioner shall satisfy himself about the fact that the activities, which are genuine and in consonance with the objects of the trust or the institution. Thus, it is clear that in order to satisfy himself, the Commissioner has to see whether the activities of the trust/institution are genuine to achieve the objects of the trust/institution. These two aspects are required to be looked into by the Commissioner at the time of registration u/s 12A/12AA of the Act whether the Trust/Institution is for charitable purposes and genuineness of existence of Trust and activities. In other words, the objects of the trust/institution for which the trust/institution has been brought into existence are charitable in nature and second, the existence of genuineness of the activities to achieve the objects of the trust. To ascertain whether the objects of the Trust/institution are charitable purpose, the words used by the Settlor in the trust deed are decisive.

4. The relevant clauses of the trust deed are mainly to find out whether it creates a public charitable trust or not. One has to go by the expression of the words employed in the trust deed. Thus, the contents and words used in the trust deed indicate the real intention of the settlor as to the purposes and objects of the trust. It is apt to reproduce the relevant clauses of the trust deed in question as under:

"2. The said Trustees shall (subject and without prejudice to clause ten hereof) collect and get in the interest dividends and other the income of the said trust funds and shall from and out of the same pay in the first place all the proper costs, charges and expenses of and incidental to the collection or realization thereof and the costs and expenses of the management and administration of the said trust funds and the said interest and income including the costs of appointment from time to time of new trustees of the said trust funds and of these presents as occasion may require.

3. Subject to the foregoing clause the said trustees shall pay the said interest and income to the Settlor for and during his life and down to his death.

4. After the death of the Settlor the said trustees shall (subject nevertheless to the provisions of clause one hereof in so far as the same may be subsisting) apply and expend the said interest and income towards and in the following charitable acts and purposes in such proportions and in such manner and subject to such conditions as the said trustees may in their absolute discretion think fit, namely:

(a) In providing relief or aid to poor or indigent or maimed or infirm or helpless Parsis or who may be in temporary monetary distress or unable to maintain themselves or their family or children or in defraying the expenses of or in supplying medicine or medical aid or physical relief in any form to any poor or helpless Parsis Provided always that such relief may be given by supplying monetary aid or aid in kind or in any other shape or form of eleemosynary relief and either by monthly or other periodic allowances or in lum sums or by providing other means of relief and the same may be either continuous or interrupted.

(b) In providing means or assistance for acquiring primary, secondary or higher education or technical or commercial or industrial education or in providing instruction in any particular business profession calling handicraft manufacture, manufacturing process or industry or art to poor or indigent Parsis or in placing or introducing them in any particular business profession or calling and in rendering assistance in the shape of money or otherwise to any poor Parsis in the acquisition by or improvement in him of the knowledge of any service art or industry provided always that such assistance may be given either by supplying deserving applicants with the necessary monetary help or in the shape of scholarships or by supplying them with books of instruments and other materials or otherwise.

(c) In donations or subscriptions to any educational institution or institutions for the Parsis or to any charitable institution or instructions for the Parsis having for its or their object the alleviation of physical or mental disease or suffering or the care maintenance protection or relief of old infirm blind or maimed or otherwise diseased members of the Parsis community or Parsi orphans to the intent and on condition however that every such donation or subscription or its income shall be used and employed towards one or other of the objects aforesaid and no other purpose whatsoever.

(d) In such other charitable acts and purposes for the Parsis generally as to the said trustees may seen fit having regard to the then prevailing times and circumstances.

Provided always that in the giving or distribution or allocation of any relief and the payment of any allowance or other sums towards any of the charitable purposes aforesaid preference shall be given in all competing cases to the lineal descendants of Cowasji Dinshawji Petit the father of the Settlor and amongst such lineal descendants to those connected with him in the direct male line over those connected with him partly through the male line and partly through the female line or wholly through the female line and to those who may be more nearly related to him over those who may be more remotely so related.

5. The said trustees shall subject as aforesaid have absolute discretion as to the selection of persons deserving of any relief support or assistance under any of the provisions hereof and as to the mode of distribution and application of such relief or assistance.

10. The Settlor shall be the managing trustee of these presents and of the said trust funds during his lifetime and the said trustees shall if required by him so to do leave the collection of the interest and income and the whole management of the said trust funds to the Settlor during his life without any interference or supervision on their part and shall not be liable in any way for any loss depreciation or damage that may occur or arise in consequence or during the course of such management."

5. The word 'charitable purpose' has been defined u/s 2(15) of IT Act as under:

"Chartable purpose" includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or laces or objects of artistic or historic interest and the advancement of any other object of general public utility.

Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or applicable, or retention, of the income from such activity.

Provided further that the first proviso shall not apply of the aggregate value of the receipts from the activities referred to therein is ten lakh rupees or less in the previous year."

The very concept of 'charity' denotes altruistic thought and action for wellbeing of others. Its objects must necessarily be to benefit others rather than one's self. The action, which flows from charitable thinking, is always directed at benefiting others. Thus, it is this direction of thought and effort, which determines that it is charitable purposes.

6. The Hon'ble Supreme Court in the case of CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 observed that if primary purposes is advancement of objects of general public utility, it would remain charitable even if there is an incidental entry in to the political domain for achieving any purpose. Thus, the primary/predominant purpose of the Trust/institution should be charitable. In case of D.V. Arur v. CIT [1945] 13 ITR 465 (Bom.), the jurisdictional High Court has observed that the benefit should not exclusively be for the family members. A trust's object and scope of which is limited to the education of the members of the family would not come within the definition of charitable purpose contained in the Income Tax Act.

7. In the case in hand, as per clause (2) of the Trust deed, the trustee has no free choice but is bound under the obligation of the Settlor as the expression used subject to and without prejudice to clause ten thereof.

8. As per clause 10 of the trust deed, the Settlor himself shall be the Managing Trustee and the said trust funds and the income from the trust funds was for the benefit of the Settlor during his lifetime without any interference or supervision on the part of the other trustee. Thus, the very essential condition of existence of charitable purpose is absent when the Trust funds and income arising from the trust funds was only for the benefits of the Settlor himself, who appointed himself as Managing Trustee throughout his life time.

9. All the object clauses of the Trust deed are subjected to clause 10; therefore, the concept of benefit must ensure to others and not self is absent in the case of the assessee.

10. Clause 3 of the trust deed further provides that the trustee shall pay the interest and income arising from Govt. of India inscribed stock, which is a subject matter of the Trust in question, to the Settlor during his life and down to his death.

11. Clause 4 talks about the utilization of the income of the trust after the death of the Settlor for providing relief or aid to poor or indigent or maimed or infirm or helpless Parsis.

12. Sub-clauses (b) & (c ) of clause 4 further provide the means or assistance and aid for which such relief has to be given but only for the person of Parsis's community. All these objects as contained in clause '4' are subject to the provision below clause 4 which set out the relief and the payment of any allowance with the preference to be given in all competing cases to the lineal descendants of the father of the Settlor. As per this proviso in the case of relief or assistance such lineal descendants to those connected with him in the direct male line shall be given preference over those connected with him partly through male line and partly through female line or wholly through female line. Thus, income/funds of the trust were available in the order of preference as provided in the proviso to clause 4. The trustee has discretion subject to the clauses 2, 3 & 4 and further subjected to clause 10 of the trust deed to the selection of persons deserving of any relief support or assistance.

13. From the trust deed, it is clear that benefits are only to the Settlor himself for lifetime and thereafter the first lineal descendants of the father of the Settlor. Even among the lineal descendants of father of the Settlor preference has been given to the direct lineal descendants of the male line over the partly male and partly female or wholly female line.

14. Therefore, domain and primary objects for which the trust has been brought into existence is the benefit to the Settlor himself and after his death to the lineal descendants and at last the members of the Parsi communities. Though, the object clauses talk about poor or indigent or maimed or infirm or helpless parsis but only those who are connected with the Settlor which means other person are placed as residual or secondary object of the trust. The expression or language used in the various clauses of the trust deed clearly distinguished the real beneficiary of the trust, which indicates that the trust was not created as a public charitable trust but for the benefit of the Settlor and classes of relatives and lineal descendants. The trustee has limited discretion to utilize the income and funds of the trust only after the death of the Settlor who has appointed himself as Managing Trustee. Thus, the other trustees have a limited discretion or freedom to use the income/funds of the trust only after the death of the Settlor that too only on the subject of selecting poor or indigent of maimed or infirm or helpless Parsis who are did not lineal descendants of the father of Settlor. There is no choice with the other trustees to decide the beneficiary but preference order has been dictated by the Settlor in the object clause. Even otherwise, the Trustees are bound by the mandate of trust deed to expand income/funds of the trust for a particular object and in a particular manner. As it is manifest from the objects clauses of the trust deed that the income of the trust property was to be utilized for the benefit of the person and there was no absolute discretion on the application of the income of the trust property with the other trustees. Therefore, dominant intention does not appear to be charitable; much less public charitable.

15. Under these facts and circumstances, the DIT (Exemption) has taken a correct and proper view in rejecting the application of the assessee for registration u/s 12A/12AA of the IT Act.

REFERENCE UNDER SECTION 255(4) OF THE INCOME TAX ACT, 1961

There is a difference of opinion between the Hon'ble Members of the Bench on the following issue :-

"Whether in the facts and circumstances of the case, Director of Income Tax (Exemption) (Mumbai) had erred in not registering the assessee's institution u/s. 12AA of the Income Tax Act, inter alia, on the ground that indenture of the assessee Trust is not charitable."

The above issue is, therefore, referred u/s. 255(4) of the Income Tax Act, 1961 to the Hon'ble President of the Income Tax Appellate Tribunal for referring the case to a Third Member.

THIRD MEMBER ORDER

R.S. Syal, Accountant Member (AS A Third Member). - The following point of difference has been referred to me by the Hon'ble President u/s. 255(4) of the Income-tax Act, 1961 :-

"Whether on the facts and circumstances of the case, Director of Income Tax (Exemption) (Mumbai) had erred in not registering the assessee's institution u/s 12AA of the Income Tax Act, inter alia, on the ground that indenture of the assessee Trust is not charitable?"

2. The factual matrix of the case has been elaborated by my learned colleagues' in their respective proposed orders. However I am briefly recapitulating the undisputed facts. The assessee-trust was created by late Shri Manockjee Cowasjee Petit by way of a trust deed dated 20.09.1928, settling Government of India Inscribed Stock of the three and a half per cents Rupees Loan of 1900-01 of the face value of Rs. 2 lakhs for charitable motives and considerations, which he earlier possessed as full beneficial owner. The settlor himself became the first trustee along with Nusserwanji Dady Dadyset, Furdunji Cowasji Petit, Bai Mithibai widow of Merwanji Dhunjibhoy Jeejeebhoy, Bai Virbaiji widow of Nusserwanji Muncherji Cama, Bai Soonubai wife of Jehangirji Framji Batliboi and Cowasji Hormusji Petit. The settlor died on or about 30.11.1935 as emanates from affidavit filed by Shri Homa Dinshaw Petit, the trustee who filed application with the Commissioner for registration in Form No. 10A. The settlor was the eldest brother of Shri Homa Dinshaw Petifs grandfather's eldest brother. Prior to Shri Homa Dinshaw Petit stepping in as trustee, the present trust was managed by his late parents as is borne out from his letter dated 05.12.2008 addressed to the Commissioner for registration. This trust was registered by the Charity Commissioner on 21.11.1952 under the Bombay Public Trust Act, 1950. Shri Homa Dinshaw Petit, the trustee, filed application in Form No. l0A dt. 04.12.2008 for the registration of trust u/s 12A(a) of the Income-tax Act, 1961. The CIT rejected the application for registration on two reasons. First, that there was no divesting of the ownership in the assets by the settlor and second, it was not a charitable but a private or family trust. The learned AM accepted the assessee's contention and directed the Commissioner to register it u/s 12AA of the Act from the dale of filing of the application by the assessee. On the other hand, the learned JM upheld the view taken by the Commissioner in rejecting the application of the assessee for registration.

3. I have heard the rival submissions and perused the relevant material on record. It is noticed that the learned CIT has held that since the relevant clauses of the trust deed indicated that the trust property remained with the settlor, there was no divesting of the ownership of the property by the settlor to the trust and hence it could not be considered as a charitable trust. In order to evaluate the view point of the learned CIT it is imperative to note the relevant clauses of the trust deed, which read as under:-

1. The charitable trusts hereby constituted shall be always known by the name of "The Manockjee Cowasiee Petit Charities" and the funds for the time being subject to these presents shall always be designated "The Manockjee Cowasiee Petit Charity Funds".

2. The said Trustees shall (subject and without prejudice to clause ten hereof) collect and get in the interest dividends and other the income of the said trust funds and shall from and out of the same pay in the first place all the proper costs, charges and expenses of and incidental to the collection or realization thereof and the costs and expenses of the management and administration of the said trust funds and the said interest and income including the costs of appointment from time to time of new trustees of the said trust funds and of these presents as occasion may require.

3. Subject to the foregoing clause the said trustees shall pay the said interest and income to the Settlor for and during his life and down to his death.

(a) In providing relief or aid to poor or indigent or maimed or inform or helpless Parsis or who may be in temporary monetary distress or unable to maintain themselves or their family or children or in defraying the expenses of or in supplying medicine or medical aid or physical relief in any form to any poor or helpless Parsis Provided always that such relief my be given by supplying money aid or aid in kind or in any other shape or form of eleemosynary relief and either by monthly or other periodic allowance or in lump sums or by providing other means of relief and the same may be either continuous or interrupted.

(b) In providing means or assistance for acquiring primary, secondary or higher education or technical or commercial or industrial education or in providing instruction in any particular business profession calling handicraft manufacture, manufacturing process or industry art to poor or indigent Parsis or in placing or introducing them in any particular business profession or calling and in rendering assistance in the shape of money or otherwise to any poor Parsi in the acquisition by or improvement in him of the knowledge of any service art or industry Provided Always that such assistance may be given either by supplying deserving applicants with the necessary monetary help or in any shape of scholarships or by supplying them with books or instruments and other material or otherwise.

(c) In donations or subscriptions to any educational institution or institutions for the Parsis or to any charitable institution or institutions for the Parsis having for its or their object the alleviation of physical or mental disease or suffering or the care maintenance protection or relief of old infirm blind or maimed or otherwise diseased members of the Parsi community or Parsi orphans to the intent and on conditions however that every such donation or subscription or its income shall be used and employed towards one or other of the objects aforesaid and no other purposes whatsoever.

(d) In such other charitable acts and purposes for the Parsis generally as to the said trustees may seem fit having regard to the then prevailing times and circumstances.

Provided Always that in the giving or distribution or allocation of any relief and the payment of any allowance or other sums towards any of the charitable purposes aforesaid preference shall be given in all competing cases to the lineal descendants of Cowasji Dishawji Petit the father of the Settlor and amongst such lineal descendants to those connected with him in the direct male line over those connected with him partly through the male line and partly through the female line or wholly through the female line and to those who may be more nearly related to him over those who may be more remotely so related.

6. The said trustees shall not be bound to use or employ towards the charitable purpose aforesaid the whole of the income of the said trust funds arising in any particular year but shall be at liberty to accumulate the surplus or unexpended income or interest for so long as they having regard to the demand for assistance for the time being or likely to rise in future and to all other circumstances may reasonable think fit. And shall until the same is applied in the manner herein provided invest the said surplus or unexpended interest in any of the investments hereby authorized With Liberty However to the said trustees to employ the unexpended surplus of any particular year or years and the accumulations representing the same and the resulting income thereof in any subsequent year or years in the same manner as if it was interest or income arising during such subsequent year or years.

7. The said trustees shall have absolute control superintendence management and administration of the charities hereby constituted and the funds for the time being belonging thereto and of all the affairs and concerns relating thereto and shall be entitled to do all acts and things which they may deem necessary or property for the promotion of the objects of the different charities as herein specified.

8. The said trustees shall be entitled to frame all such rules and regulations as they may in their absolute discretion think fit proper or necessary for the proper management and execution of any of the charities hereinbefore referred to and from time to time to vary rescind or suspend the same.

9. The said trustees shall be at liberty to receive donations or contributions in cash or otherwise from any relation of the Settlor or any member of the Parsi community towards the said charities or as part of the income thereof for any object connected therewith or with such charities and upon such terms and conditions as the said trustees may think fit.

4. The learned Departmental Representative vehemently argued that as per clause (3), the trustees were required to pay the interest and income to the Settlor during his life and down to his death. He further stated that by virtue of clause (10), the settlor continued to retain possession of ownership over the trust funds and income resulting there from during his life time. He mainly relied on clause (10) of the deed by which the settlor having the cap of managing trustee had the full power to collect interest income from the trust property and manage the trust funds without any intervention by the trustees. It was argued that clause (10) has an overriding effect on the other clauses including clause (4) of the trust deed, which in turn, deal with the charitable objects. It was therefore, argued that the settlor during his life time and thereafter his relatives were entitled to the benefits of trust and there was no effective divesting of the trust property. All these submissions were countered on behalf of the assessee.

5. Clause (1) of the trust deed refers to its name as Manockjee Cowasjee Petit Charity and stipulates that the trust shall always be known by this name alone. In other words during the lifetime of the settlor or after his death, no trustee is empowered to change the name of the trust. Clause (2) provides that the trustees shall collect the gross income of the trust and shall firstly, pay the expenses relating to realization of income and thereafter, the expenses of management of the trust. Clause (2) is subject and without prejudice to clause (10) of the trust deed. Clause (10), in turn, provides that the settlor shall be the managing trustee during his life time with the power to collect the entire income from trust by himself and manage its affairs without any interference by other trustees. Clause (3) which is subject to clause (2) makes it abundantly clear that after realizing the interest income and meeting of the trust expenses, the trustees shall pay net income to the settlor. It shows that during the life time of the settlor, the trustees had a very little role to play as the settlor was competent enough to realize the income and spend such income in the way he liked. When clause (3) and clause (2) along with clause (10) are read, it becomes manifest that insofar as the collection of trust income or defraying the expenses is concerned that was to be done by the trustees but the settlor had the supreme power to take charge of income and management of trust in his hands without any intervention by the trustees.

6. Here it is relevant to note that a trust, in common parlance, means a legal arrangement under which a person (called the settlor) gives fiduciary control of his own separate property to a person or persons or institution (called trustees) for the benefit of beneficiaries. The subject matter of trust, being the trust property, earlier belonging to the author of the trust is now held by the trustees for the benefit of others i.e. beneficiaries. Unless all these elements, viz., settlor, trust property, trustees, and application for beneficiaries are present, there cannot be a valid trust. By virtue of clause (3) and clause (2) which is subject to clause (10), the settlor kept everything under his control during his lifetime to the exclusion of other trustees. Whether he applied income for any charitable purpose or not could not have been monitored by the trustees. Section 2(15) of the Income-tax Act, 1961 defines 'charitable purpose' as including 'relief of the poor, education, medical relief...., and advancement of any other object of general public utility'. Therefore, it becomes abundantly clear that during the lifetime of the settlor, there was nothing like a charitable trust because it was the settlor who was to receive the entire income either through trustees or himself directly and further there was no provision for the application of income for any charitable purpose.

7. Clause (4) of the trust deed indicates that 'after the death of the settlor' the trustees shall apply the trust income for charitable acts and purposes. Charitable purposes have been set out in sub-clauses (a) to (d) of clause (4), being providing relief to the poor or indigent or maimed or helpless Parsis in the shape of medical relief or education assistance or subscription to any educational institutions for the Parsis or any other charitable acts for the Parsis. Proviso to clause (4), which has become the bone of contention, states that "in all competing cases'" the preference shall be given to the lineal descendants of the father of the settlor and amongst such lineal descendants to those connected with him in the direct male line over those connected with him partly through the male line and partly through the female line or wholly through the female line and to those who may be more nearly related to him over those who may be more remotely so related. Some of the salient features of clause (4) can be profitably noticed. Firstly, the charitable activities have been provided in sub-clauses (a) to (d) of clause (4). Secondly, the trust income is to be applied for such charitable activities only after the death of the settlor. Thirdly, this clause is subject to clause (1) which means that the name of the trust could never be changed by the trustees after the death of the settlor. The last and the most important feature of this clause is that in distributing or allocating relief, the preference shall always be given "in all competing cases" to the lineal descendants of the father of the settlor. The proviso makes it richly clear that the preference is to the descendants of the father of the settlor in all competing cases. When clause (4) is read in entirety, it clearly emerges that the trust income is to be applied for the charitable purposes set out in sub-clauses (a) to (d) and while so applying the income for such charitable purposes, if some lineal descendants of the father of the settlor is there, such descendant shall have first right over the others who are not lineal descendants. The words 'in all competing cases' make all the difference. It shows that if medical aid is to be given to the poor or indigent or helpless Parsis and some lineal descendant of the father of settlor also happens to be poor or helpless Parsis in the need of such medical aid which is being offered to other helpless Parsis in similar circumstances, then the preference shall be given to such lineal descendants over the other non-lineal descendants in need of medical assistance. It is further relevant to note that this proviso does not talk of handing over the income of trust to the lineal descendants of the father of the settlor for their personal gain, without there being involvement of any charitable purpose. It is only when the charitable purpose as defined in sub-clause (a) to (d) of clause (4) is under consideration for the application of trust income and some lineal descendant of the settlor happens to be in queue for help in respect of such defined charitable purpose, that he shall have preference over the general Parsis unrelated to the settlor. In my considered opinion, the learned Departmental Representative was not correct in inferring from clause (4) read with its proviso that only when the trust funds are utilized for the benefit of lineal descendants of the settlor that the amount, if any, remaining shall be distributed amongst the general poor Parsis. If this argument is taken to a logical conclusion that the trust income shall be applied for the benefit of lineal descendants of the settlor de hors the charitable purpose, then there will remain nothing with the trust for distributing amongst the general Parsis as the entire amount would be pocketed by such lineal descendants of the father of the settlor. The further contention of the learned Departmental Representative that clause (4) of the trust deed is also subject to clause (10) is also sans merit for the reason that it is only clause (2) which is subject to clause (10) and that too during the lifetime of the settlor. Clause (4) which contains the objects of the trust no where makes itself subordinate to clause (10). Further this hypothetical proposition is patently impossible because clause (4) comes into play only after the death of the settlor. When the settlor has died, naturally there cannot be any question of his exercising any control through clause (10).

8. A brief overview of the relevant clauses brings out that no charitable trust subsisted during the lifetime of settlor as he had full power to hold the trust income and use it in any manner he liked. The charitable activity of the trust commenced only after the death of the settlor in 1935. The charitable objects set out in clause (4) came to be pursued by the trustees only after the death of the settlor by employing trust income for the benefit of poor and helpless Parsis and in case of competing cases by giving preference to lineal descendants of the father of the settlor. During the life time of the settlor, the trust was not carrying out any charitable activity and hence no registration or exemption under the Income-tax Act was claimed or could have been envisaged. It is only after his death that the charitable activities became possible. It is further imperative to note that the assessee trust got registered with the Charity Commissioner under the Bombay Public Trusts Act with effect from November 1952. At this stage it would be useful to note that under the Bombay Public Trust Act, 1950 it is compulsory for every public trust to register with the Charity Commissioner. The "Public Trust" has been defined in section 2(13) of the Bombay Public Trust Act to mean an express or constructive trust for either a public, religious or charitable purposes or both. Charitable purpose has been defined u/s 9(1) of this Act as including relief of poverty, education, medical relief etc. Thus it can be seen that when the assessee applied for registration of trust in 2008 with the CIT, the ownership of the trust property had already vested in favour of the trust as there could not have been even any remotest possibility to the contrary because of the death of the settlor long back. After his death, clause (10) of the trust deed became redundant and only a dead letter. That is probably the reason that the Charity Commissioner granted registration to the assessee in 1952 after the death of the settlor. In my considered opinion the learned CIT was not justified in holding that the settlor had not divested himself of the ownership of the trust property. As the settlor had expired many decades ago and the trust property vested with and was being utilized for the advancement of the charitable objects by the trust, such a view is not capable of acceptance.

9. The other objection taken by the learned CIT for refusing the registration is that the assessee is a private or family trust. In reaching this conclusion he observed that clause (4) granted preference to the lineal descendants of the father of the settlor. In that view of the matter it was opined that the elements of public trust were missing. The ld. DR reiterated the view of the ld. CIT for bolstering his submission that it was a case of family trust. I am not impressed with this submission put forth on behalf of the Revenue. A family trust is a trust set up for the benefit of the members of the family of the settlor. In a family trust the beneficiaries normally include every member of the settlor's family including the possible future family members such as future grandchildren also. There is nothing like any public charitable activity done in family trusts as the very object of the family trust is to transfer the assets to the trust so that the trust holds the trust property for the benefit of the family members of the settlor. On the other hand a public trust is a trust for either a public, religious or charitable purposes or both and includes temple and church etc. formed for religious or charitable purposes. Further in case of a public trust, the benefits are made available to a sufficiently large number of the members of public who are uncertain or fluctuating as distinct from the specified individuals in a family trust. Thus it can be seen that there is a vast difference between a public and a family trust. From the objects and other relevant clauses of the present trust deed, as extracted above, it can be noticed with utmost ease that the trust property or the income there from has been directed to be used for the charitable purposes set out in clause (4) for the benefit of poor and indigent Parsis in need of medical or educational help. As the beneficiaries as a class are poor and indigent Parsis, it is difficult to hold that it is a family trust. The reference to the descendants of the father of the settlor has to be seen in a proper context. It is only a preference which has been accorded to the lineal descendants of the father of the settlor and not to the exclusion of generally poor and indigent Parsis as a lot. By no standard these lineal descendants become the sole beneficiaries of the trust's income or property.

10. Now the question arises as to whether a preference given to lineal descendants over the general Parsis is sufficient enough to mar the registration of a trust whose objects are otherwise charitable.

11. Before I proceed to find answer to this question, it would be apt to have a look at the scheme of taxation of charitable or religious trusts. Chapter III of the Income-tax Act, 1961 deals with the 'Incomes which do not form part of total income'. In the present context only sections 11 to 13 of this Chapter are relevant. On a macro level, section 11 with the heading - 'Income from property held for charitable or religious purposes' - provides that income derived from property held under trust for charitable or religious purposes to the extent to which such income is applied to such purposes in India and where such income is accumulated for application to such purposes in India to the specified extent, shall not be included in the total income of the previous year of the person in receipt of income. Further, income in the form of corpus donations has also been mandated as not includible in the total income. Thus, whereas income derived from property held under trust has to be necessarily applied to charitable or religious purposes in India in the year of receipt or in the alternative to be accumulated as per limits, there is no such requirement in respect of corpus donations. Section 12 with the marginal note -Income of trusts or institution from contributions - provides that any voluntary contributions (other than corpus donations) received by a trust created wholly for charitable or religious purposes shall be deemed to be income derived from property held under trust as per section 11. Thus the non-corpus voluntary donations, by virtue of the deeming provision in section 12, assume the character of income derived from property to be applied in the year of receipt or accumulated as per the specified limit so as to qualify for exemption. These two sections therefore, enable an assessee to claim exemption in the given circumstances. On a conjoint reading of sections 11 and 12, it transpires that whereas corpus donations are exempt u/s 11, non-corpus donations or other income derived from property held under trust wholly for charitable or religious purposes must be applied in the year of receipt or accumulated as per the limit so as to eligible for exemption. Then comes section 13 with the title : 'Section 11 not to apply in certain cases.' It is a disabling provision which excludes the items of income covered under sections 11 and/or 12 from the purview of exemption where the case falls under the circumstances given in section 13(1), such as, if the income does not enure for the benefit of the public or under clause (c) of sec. 13(1) where any part of such income is applied directly or indirectly for the benefit of persons referred to in sub-section (3) of section 13, that is, the author of the trust or any person who has made a substantial contribution to the trust or where author of trust is a HUF, then a member of the family or any relative of such author or any trustee of the trust or any relative of any such author, founder or any concern in which any of the above persons has a substantial interest. Thus on a careful reading of sections 11, 12 and 13, it becomes evident that the final amount of income exempt is the one which is determined by adding the income u/s 11 with that u/s 12 as reduced by the income or its such part as is covered u/s 13.

12. It is important to note that the sum as determined above is not automatically exempt. Certain further conditions are required to be satisfied. That is where section 12A read with section 12AA come into picture. Section 12A provides that no exemption u/s 11 and 12 shall be allowed unless (i) the person in receipt of the income has made an application for registration of the trust or institution on or after the 1st day of June, 2007 in the prescribed form and manner to the Commissioner and such trust or institution is registered under section 12AA ; and (ii) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds the maximum amount which is not chargeable to income-tax in any previous year, the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed. It is thus manifest that in order to claim exemption of income u/s 11 and 12 as reduced by that u/s 13, it is sine qua non that, inter alia, the trust must be registered u/s 12AA. The sequence of events is thus evident that the person claiming exemption must firstly apply for and get the trust or institution registered u/s 12AA, then return is filed for the relevant previous year and on the basis of such registration and other relevant factors, the AO considers the applicability or otherwise of sections 11, 12 and 13.

13. It can thus be seen that whereas the registration is granted by the Commissioner only once, which remains valid unless cancelled by the Commissioner under sub-section (3) of section 12AA, the act of granting actual exemption on year to year basis is done by the AO. The AO has no jurisdiction in the matter of granting or refusing registration. In the like manner, the Commissioner has no jurisdiction in granting exemption on year to year.

14. In the present appeal the issue is concerning the registration of the trust and not the granting of exemption. Thus it will be productive to consider section 12A which inter alia provides that the provisions of sections 11 and 12 shall not apply in relation to the income of any trust or institution unless the person in receipt of income has made the application for registration of trust in the prescribed form and in the prescribed manner for registration u/s 12AA. The procedure for registration has been enshrined in section 12AA, the relevant part of which is reproduced as under:-

"12AA. Procedure for registration.—(1) The Commissioner, on receipt of an application for registration of a trust or institution made under clause (a) or clause (aa) of sub-section (1) of section 12A, shall—

(a) call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf; and

(b) after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he -

(i) shall pass an order in writing registering the trust or institution;

(ii) shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution,

and a copy of such order shall be sent to the applicant:

Provided that no order under sub-clause (ii) shall be passed unless the applicant has been given a reasonable opportunity of being heard.

(3) Where a trust or an institution has been granted registration under clause (b) of sub-section (1) and subsequently the Commissioner is satisfied that the activities of such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, as the case may be, he shall pass an order in writing cancelling the registration of such trust or institution :

Provided that no order under this sub-section shall be passed unless such trust or institution has been given a reasonable opportunity of being heard. "

15. A bare perusal of section 12AA reveals that on receipt of an application for registration of a trust, the Commissioner shall call for any information or documents to satisfy himself about the genuineness of activities of the trust and after satisfying himself about the objects of the trust or institution and the genuineness of its activities shall grant registration. Only if he is not satisfied with the objects of the trust and the genuineness of its activities, he shall pass an order in writing refusing to register the trust. In order to grant registration, the CIT has to satisfy himself about two things viz., first, the objects of the trust and second, the genuineness of its activities. Obviously the objects of the trust can be gone examined from the trust deed and the decision as to the genuineness of its activities is possible only after consideration of the relevant documents or information or on making of needful inquiries in this regard.

16. The learned CIT has relied on the judgment of the Hon'ble Calcutta High in Mallick Somnath Charitable Trust (supra) to canvas the view that where a relative of a settlor obtains any benefit even by way of preference, the entire trust deed would be regarded as non-charitable. It can be seen from the facts of that case that the trustees therein were to spend the entire income of the trust for the support and maintenance of the relatives of the settlor without exercising any preference. The poor relations of the settlor were made direct recipients of the benefit of the trust. It was under such circumstances that the Hon'ble Calcutta High Court held that the assessee was not entitled to exemption from income tax. Firstly, this case is on granting or non-granting of exemption u/s 11 and not on registration. Secondly, the trustees therein were required to spend the income on the poor and indigent relations of the settlor. The benefit was confined to the relatives alone and not the general public or a particular section of public, as is the case in the present appeal. In deciding the issue against the assessee, the Hon'ble Calcutta High Court distinguished the judgment of the Hon'ble Supreme Court in the case of Trustees of the Charity fund (supra) by holding that in that case there was a proviso in the clause that in applying the income, the trustees should give preference to the poor and indigent members of the family of settlor. Adverting to the facts of the instant case, it is seen that clause (4) of the trust deed provides in unequivocal terms that the charitable activities shall be carried out for helpless or poor Parsis and the proviso simply provides that in the competing cases, the preference shall be given to the lineal descendants of the father of settlor. Thus it is apparent that the objects of the trust are basically aimed at helping the general poor or helpless Parsis. It is only if some lineal descendant of father of the settlor happens to be a poor and helpless Parsi in need of medical or education help, the preference shall be given by the trustees to such relative of the settlor, while discharging such charitable purpose of the trust. Thus it can be seen that the facts of the instant case match with the case of Trustees of the Charity Fund ( supra) which has been found by the Hon'ble Calcutta High Court in Mallick Somnath Charitable Trust ( supra) to be distinguishable, on which the ld. CIT has placed reliance for refusing the registration. As such an attempt by the ld. DR to draw support from this judgment is misconceived.

17. The next case considered by the learned CIT is that of Nachimuthu Industrial Association (supra) in which a sum of Rs. 3 lakhs was transferred to the donation fund by a resolution after the close of the previous year on passing a transfer entry in the books of account. In that case there was no divesting of the property in favour of trust in the year in question. It was under such circumstances that the Hon'ble Madras High Court held that mere credit to the donation reserve account was not sufficient for granting exemption u/s 11 as the actual application of income in the relevant previous year was necessary to claim relief u/s 11(1). Again this case is found to be of no assistance to the Revenue insofar as the facts of the present case are distinguishable. In the present case the settlor expired several decades ago and after his death, the trust property vested in the name of the trust and income there from was being continuously utilized for the benefit of general Parsis in need of help. This case is also, therefore, does not justify the refusal of registration. Similar is the position with the last case considered by the learned CIT in G.D. Naidu Industrial Educational Trust (supra ). In that case the deed provided that the contemplated institution was not to be brought into being immediately and that the companies in which the settlor was interested were to have the benefit of these assets set apart by him.

18. During the course of hearing, the learned Departmental Representative has relied on the judgment of the Hon'ble Bombay High Court in the case of Trustees of Gordhandas Govindram Family Charity Trust v. CIT [1952] 21 ITR 231 (Bom.) for contending that the registration was rightly denied by the CIT in the given circumstances. On the perusal of the facts of that case it can be clearly noticed that the trust deed therein provided that the primary object of the trust was to provide maintenance and meeting marriage expenses of the poor members of the family of the settlor. It was only after all the members of the family were exhausted that a section of public, Vaishya Hindus or other Hindus could come in for the benefit under the trust. It was under such circumstances that the Hon'ble Bombay High Court held that the income from trust was not exempt from taxation. From the facts of that case it is apparent that the primary purpose of the settlor was to benefit the members of his family and remotely and indirectly to benefit the general public. Further the very name of the trust being "Govardhandas Govindram Family Charity Trust" fairly indicated that it was a family charity trust and not a public charity trust. As the primary object of the trust in that case was to benefit the poor members of the family of the settlor, it was quite natural to hold that the income was not exempt from taxation. In sharp contradistinction, it is noticed that the primary object in the present case is to benefit the poor and indigent Parsis in need of financial assistance and not the family members of the settlor. Whereas in the case of Trustees of Govardhandas Govindram Family Charity Trusty (supra), the income was to be firstly applied for the members of the family of the settlor and only thereafter there was the consideration of general public interest, in the present case the primary object is to help the general Parsis in need of medical and financial assistance and it is only if some lineal descendants of the father of the settlor is also in need of financial assistance for medical or education purposes that the preference is to be given to such lineal descendants. It can further be noticed from the judgment of the Hon'ble Supreme Court Trustees of Gordhandas Govindram Family Charity Trust v. CIT [1973] 88 ITR 47 (SC), approving the above noted case of the Hon'ble Bombay High Court in Trustees of Govardhandas Govindram Family Charity Trust (supra) that the said trust was considered as a private trust with the primary object of the settlor to benefit the members of the family. Thus it is clear that this case does not advance the view point of the learned Departmental Representative.

19. It is interesting to note the judgment of the Hon'ble jurisdictional High Court in Trustees of Seth Meghji Mathuradas Charity Trust (supra ) in which case trust was created for charitable purposes with a proviso that in carrying out the charitable intentions, the trustees shall always prefer the members of the settlor's caste and further preference to the members of his family and relatives. Exemption from income was denied on the ground that the relatives of the settlor were entitled to preference in carrying out the charitable intentions. Rejecting this view point, the Hon'ble Bombay High Court held that the property was held under trust wholly for religious or charitable purposes, and the income there from was exempt from taxation. Similar view has been taken in Moosa Haji Ahmed ( supra). In this case also the trust was created with the object of helping the poor but the trust deed provided that the relation of settlor would have preference over others. The Hon'ble Gujarat High Court held that this clause would not make the trust any less charitable.

20. A survey of above judgments including that of the Hon'ble Supreme Court in Trustees of the Charity fund (supra) the Hon'ble jurisdictional High Court in Trustees of Seth Meghji Mathuradas Charity Trust (supra) manifestly divulges that the relative criteria is to consider the dominant objects of the trust. If the dominant objects of the trust are charitable in nature then the mere fact that some relatives of the settlor would also participate and have preference over general public in such charitable objects, would not make the trust as non-charitable. The view canvassed by the ld. CIT that the assessee is a private or family trust is not sustainable. Thus it is obvious that both the objections raised by the ld. CIT for refusing registration are not valid.

21. Reverting to section 12AA it can be seen that the Commissioner has to order registration of the trust where he is satisfied about the objects of the trust and the genuineness of its activities. So long as the objects of the trust are charitable and the activities are in advancement of such objects, the registration cannot be refused. Once registration is granted to trust or institution but later on it is found by the AO during the course of assessment proceedings that the income of charitable trust is applied directly or indirectly for the benefit of persons referred to in section 13(3), then he has ample power to deny exemption to that extent u/s 13(1 )(c) of the Act.

22. Coming back to the facts of the instant case it is seen that the trust deed adequately provides that, after the death of the settlor, the income from the trust properly is to be used for charitable purposes, which are covered under section 2(15) of the Act. This shows that the objects of the trust, after the death of settlor, are fully charitable. The assessee produced copies of its final accounts for last three years ending on 31st March, 2006 and 2007 and 2008 before the learned CIT. It was specifically claimed that not even a single paisa was applied for the benefit of any lineal descendants of the father of the settlor. The learned CIT, despite the availability of audited accounts before him for the last three years, failed to point out any single instance in which the income of the trust was not utilized for the charitable purposes set out in the trust deed or the money was applied for the lineal descendants of the father of the settlor. Even if any amount is actually spent on the relatives of the settlors, then there is section 13(3) enabling the AO to refuse exemption u/s 11 read with section 13 to that extent and that too in the year in which such amount is spent. It cannot be a reason to refuse registration u/s 12AA. As such it is noticed that both the conditions u/s 12AA warranting the registration of the trust, are fully satisfied in the present case. In my considered opinion the learned CIT was not justified in refusing the registration from the assessment year immediately following the financial year in which such application was made. I, therefore, answer the question in affirmative by holding that the Director of Income Tax (Exemption) (Mumbai) erred in not registering the assessee's institution u/s 12AA of the Income Tax Act.

23. For the foregoing reasons I agree with the view expressed by the learned Accountant Member. The registry of the Tribunal is directed to list this matter before the Division Bench for passing of order in accordance with majority view.

ORDER

Vijay Pal Rao, Judicial Member - This appeal by the assessee is directed against the order dated 29.6.2009 passed by the DIT(Exp) u/s 12AA(l)(b)(ii) r.w.s. 12A of the IT Act whereby the application of the assessee for registration was rejected.

2. Aggrieved by the order of the DIT(Exp), the assessee filed an appeal before the Tribunal. There was a difference of opinion between the Members of the Division Bench of this Tribunal. The ld. AM was of the view that the Commissioner was not justified in rejecting the application for registration and accordingly directed to register the assessee's society u/s 12A. Whereas the JM was of the view that DIT(Exp) has taken a correct and proper view in rejecting the application of the assessee for registration u/s 12A.

3. As there was difference of opinion between the Members of the Division Bench, they requested the Hon'ble President u/s 254(4) of the IT Act to constitute a Third Member for resolving the points of difference. Accordingly, the Hon'ble President referred the points of difference to the ld. Third Member. We quote the points of difference as under:

"Whether in the facts and circumstances of the case, Director of Income Tax (Exemption) Mumbai had erred in not registering the assessee's institution u/s 12AA of the Income Tax Act, inter alia, on the ground that indenture of the assessee Trust is not charitable."

4. The ld. Third Member has concurred with the view expressed by the ld. AM vide order dated 14.12.2011 as under:

"22. Coming back to the facts of the instant case it is seen that the trust deed adequately provides that, after the death of the settlor, the income from the trust property is to be used for charitable purposes, which are covered under section 2(15) of the Act. This shows that the objects of the trust, after the death of settlor, are fully charitable. The assessee produced copies of its final accounts for last three years ending on 31st March, 2006 and 2007 and 2008 before the learned CIT. It was specifically claimed that not even a single paisa was applied for the benefit of any lineal descendants of the father of the settlor. The learned CIT, despite the availability of audited accounts before him for the last three years, failed to point out any single instance in which the income of the trust was not utilized for the charitable purposes set out in the trust deed or the money was applied for the lineal descendants of the father of the settlor. Even if any amount is actually spent on the relatives of the settlors, then there is section 13(3) enabling the AO to refuse exemption u/s 11 read with section 13 to that extent and that too in the year in which such amount is spent. It cannot be a reason to refuse registration u/s 12AA. As s such it is noticed that both the conditions u/s 12AA warranting the registration of the trust, are fully satisfied in the present case. In my considered opinion the ld. CIT was not justified in refusing the registration from the assessment year immediately following the financial year in which such application was made. I, therefore, answer the question in affirmative by holding that the Director of Income Tax (Exemption) (Mumbai) erred in not registering the assessee's institution u/s 12AA of the Income Tax Act.

5. Now, this appeal is placed before us for passing for consequential/conformity order. Accordingly, the appeal of the assessee stands allowed as per the majority view.

6. In the result, the appeal filed by the assessee is allowed.

Manockjee Cowasjee Petit Charities v. Director of Income-tax (Exemption), Mumbai

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's Arguments

Respondent's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Manockjee Cowasjee Petit Charities v. Director of Income-tax (Exemption), Mumbai

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