Case Note & Summary
This appeal by special leave before the Supreme Court of India concerned the interpretation of Section 4(3)(i) of the Indian Income-tax Act, 1922 in relation to a religious endowment trust with mixed territorial objects. The dispute arose from assessments for the years 1952-53 and 1953-54 on income derived from trust properties. The appellant was H.E.H. Nizam's Religious Endowment Trust, Hyderabad, created by an indenture dated September 14, 1950, by the Nizam of Hyderabad; the respondent was the Commissioner of Income-Tax, Andhra Pradesh, Hyderabad. The trust deed settled securities of face value Rs. 40 lakhs and provided for four religious and charitable objects: two within the taxable territories (upkeep of sacred buildings such as mosques, tombs, and expenditure during mourning periods including offerings at Ajmer and Gulbarga) and two outside the taxable territories (annual offerings and help to servants at holy places in Hedjaz, Iraq, Iran, etc.). During the lifetime of the settlor, the balance of income was to be accumulated and added to corpus; after his death, the trustees were to spend income on any one or more of the four objects in their absolute discretion. The settlor was still alive during the assessment years, and no power was conferred on the trustees to set apart or allocate the accumulated income to any specific object during his lifetime. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal concurrently rejected the trust's claim for exemption under Section 4(3)(i). On reference under Section 66(1), the Andhra Pradesh High Court also answered against the assessee by judgment dated September 14, 1962. The trust appealed to the Supreme Court. The appellant contended that proviso (a) to Section 4(3)(i) would apply only if the trustees exercised their option to apply income outside taxable territories; since they had not exercised such option, the case was governed by the substantive part of clause (i), and because two of the named purposes were within taxable territories, the accumulated income should be deemed to be for those purposes. The Revenue argued that exemption required specific accumulation for purposes within taxable territories, and absent such setting apart, no exemption could be claimed. The Supreme Court examined the text and legislative history of Section 4(3)(i), as amended by the Indian Income-tax (Amendment) Act, 1953, and noted that the clause exempts only income from property held wholly or in part in trust actually applied or set apart for religious or charitable purposes within taxable territories. The expression 'applied' means actually applied, and 'accumulated' means finally set apart; 'accumulated for a purpose' requires a conscious act in presenti and a clear indication by the trustee to set apart the income. The court relied on Mohammad Ibrahim Riza v. Income-tax Commissioner, Nagpur, (1930) L.R. 57 I.A. 260. Since the trustees had not set apart the income for any specific purpose within the taxable territories, the trust could not claim exemption. Accordingly, the Supreme Court dismissed the appeals and affirmed the High Court's answer that the trust income was not exempt under Section 4(3)(i).
Headnote
A) Income Tax - Exemption for Religious or Charitable Trusts - Scope of Section 4(3)(i) Exemption - Indian Income-tax Act, 1922, Section 4(3)(i) - The trust deed created four religious and charitable objects, two within taxable territories and two outside; the trust fund was to be accumulated during the settlor's lifetime and after his death the trustees could spend income on any one or more of the objects. The court held that exemption under Section 4(3)(i) is available only if income from trust property is actually applied or specifically set apart for religious or charitable purposes within the taxable territories; mere presence of some purposes within taxable territories without allocation of income to those purposes does not satisfy the statutory condition. Held that the assessee trust was not entitled to exemption. (Paras Not mentioned) B) Income Tax - Interpretation of Statutory Terms - Meaning of 'Applied' and 'Accumulated' - Indian Income-tax Act, 1922, Section 4(3)(i) - The words 'applied' and 'accumulated' in Section 4(3)(i) mean 'actually applied' and 'finally set apart' respectively; the expression 'accumulated for a purpose' involves a conscious act in presenti and posits a clear indication on the part of the trustee to set apart the income for that purpose. The court reasoned that there is no distinction between income from property wholly held in trust and property held in part only; both require actual application or final setting apart for purposes within taxable territories to earn exemption. Held that income not so set apart was not exempt. (Paras Not mentioned)
Issue of Consideration
Whether the income arising from property settled upon trust under the deed of settlement dated 14-9-1950, or any part thereof, is exempt from tax under Section 4(3)(i) of the Indian Income-tax Act, 1922, where the trust has both religious/charitable objects within and outside the taxable territories and the income has not been allocated or set apart for any specific object.
Final Decision
The Supreme Court held that the trust income was not exempt under Section 4(3)(i) of the Indian Income-tax Act, 1922 because it was not actually applied or specifically set apart for religious or charitable purposes within the taxable territories. The appeals were dismissed and the High Court's answer against the assessee was affirmed.
Law Points
- Income derived from property held under trust wholly or in part for religious or charitable purposes is exempt under Section 4(3)(i) of the Indian Income-tax Act
- 1922 only if actually applied or specifically set apart for such purposes within the taxable territories
- the words 'applied' and 'accumulated' mean 'actually applied' and 'finally set apart' respectively
- 'accumulated for a purpose' requires a conscious act in presenti and clear indication by the trustee to set apart the income for that purpose
- mere existence of some religious or charitable objects within the taxable territories without allocation of income to those objects does not satisfy the exemption condition
- burden of proving exemption lies on the assessee
