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PETITIONER: COMMISSIONER OF INCOME TAX, WEST BENGAL

       Vs.

RESPONDENT: TOLLYGUNGE CLUB LTD.

DATE OF JUDGMENT15/03/1977

BENCH: BHAGWATI, P.N. BENCH: BHAGWATI, P.N. FAZALALI, SYED MURTAZA

CITATION:  1977 AIR 1343            1977 SCR  (3) 225  1977 SCC  (2) 790  CITATOR INFO :  R          1979 SC 346  (5,17)

ACT:             Income-tax Act,  1922--S.  15B-Diversion  of  income  or         diversion     of    source--Charity    surcharge     whether         income--Obligation in the nature of trust, how to be  creat-         ed.

HEADNOTE:             The  assessee  was a Company limited by  guarantee  anti         owned  a  Social  end Sports Club one of  whose.  activities         consisted  of conducting horse. races with  amateur  riders.         It  charged  for admission into-the enclosure  of  the  club         admission fee 10 the guests introduced by the members of the         club  as  well as to the members of the  public.    It  also         charged  a  surcharge of eight annas  solely  earmarked  for         local  charities.   That was done pursuant to  a  resolution         passed at the meeting of the General Body providing that the         surcharge  of eight annas on the entrance ticket  should  be         earmarked for local charities.         The Income Tax Officer prior to the assessment year  1960-61         did not treat the receipts on account of surcharge as  trad-         ing receipts of the assessee and bring them to tax as income         of  the assessee.  While making the assessment for  the  as-         sessment year 1960-61, the Income Tax Officer took the  view         that  the  receipts  on account of  surcharge  were  revenue         receipts  in  the hands of assessee and they  could  not  be         excluded from the total income of the assessee merely on the         ground  that they were applied for charitable purposes.   It         was  common ground that the amounts received by way of  sur-         charge  had in fact been disbursed to local charities.   The         Income  Tax Officer treated the receipts on account of  sur-         charge as income of the assessee and allowed rebate under s.         15B  in respect of the amounts actually disbursed in  favour         of  local charities.   The Appellate Assistant  Commissioner         confirmed the order of the Income Tax Officer on the  ground         that a person who wished to gain admission to the  enclosure         of the club had to pay the surcharge whether he was  willing         to  contribute to the charity or not and the amount  of  the         surcharge  was therefore a part of the price charged by  the         assessee  for  admission and it was  accordingly  a  revenue         receipt  in the hands of the assessee.  On  further  appeal,

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       the Tribunal held that the surcharge was levied on admission         ticket for the purpose of charity and hence the receipts  in         respect of the surcharge were not income of the assessee  at         the  point  of time when they reached its  hands  and  being         earmarked  for charity they never belonged to the assessee.             The  High  Court  on a reference made  by  the  Tribunal         agreed  with  the view taken by the  Tribunal  holding  that         since the  surcharge was charged by the assessee and paid by         the race goers for the specific purpose of being applied  to         local  charities pursuant to, the resolution passed  by  the         general  meeting of the assessee, there was at the  time  of         receipts  of  the  amounts in respect of  the  surcharge,  a         legally enforcible obligation on the assessee to apply  them         to  local  charities and those amounts accordingly  did  not         reach  assessee  as its income but were  diverted  to  local         charities before they reached the assessee.         Dismissing the appeal,             HELD:  (1)  Income tax is a tax on income.    Every  re-         ceipt  by   the assessee is not necessarily  income  in  his         hands.  It is only when it bears the character of income  at         the  time when it reaches the hands of the assessee that  it         becomes exigible to tax. [228 E]         London County Council v.Attorney General [1901] AC 26.         226             (2)  The assumptions of the Revenue that  the  surcharge         was  received as part of the price for admission to the  dab         enclosure  and that there was no legally enforcible  obliga-         tion  on  the assessee to spend the amounts on  charity  are         erroneous.   The admission to the enclosure was the occasion         and  not the consideration for.the surcharge taken from  the         race-goers.  It is not  a correct analysis of the nature  of         the  legal relationship to say that there was  nothing  more         than a mere desire or intention on the part of the  assessee         to apply the amounts received on account of surcharge to the         local  charities without any legally enforcible  obligation.         The  resolution  was passed at the general  meeting  of  the         assessee  and pursuant to that resolution the surcharge  was         paid by the race-goers and received by the assessee for  the         specific  purpose of being applied to local charities.   The         surcharge when paid was clearly impressed with an obligation         in the nature of trust for being applied tot  the benefit of         local  charities.   A trust may be created by  any  language         sufficient to show the intention and no technical words  are         necessary. [228 H, 229 A, C, D&G]         C.I.T  v. Thakar Das Bhargava, 40 I.T.R. 301, followed.             (3)  In the present case, the surcharge being  impressed         with an obligation the nature of trust for being applied  to         local  charities was by this obligation diverted  before  it         reached the hands of the assessee and at no stage it  became         a  part of the income of the assessee.  The amount  of  sur-         charge  never reached the assessee as parts of  its  income.         [230 G-H]         C.I.T. v. Sitaldas Tirathdas, 41 I.T.R. 367, followed.

JUDGMENT:              CIVIL APPELLATE JURISDICATION:   Civil  Appeal No.  578         of 1972.             (From  the  Judgment and Order dated  17-4-1969  of  the         Calcutta High Court in Income Tax Reference No. 71/65)         S.C. Manchanda and R.N. Sachthey, for the appellant.             Sukumar  Mitra, D.N. Mukherjee and N.R.  Chaudhary,  for         the respondent.         The Judgment of the Court was delivered by

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           BHAGWATI,  J.   This is an appeal on  a  certificate  of         fitness granted by the High Court of Calcutta under  section         66A,  sub-section  (2) of the Indian Income-tax  Act,  1922.         The  facts  giving  rise to the appeal are few  and  may  be         briefly stated as follows.             The assessee is Tollygunge Club Ltd., a company  limited         by  guarantee, and it owns a social and sports club  one  of         whose activities consists of conducting Gymkhana races, that         is, horse races with .amateur riders.  It charges for admis-         sion  into  the  enclosure of the Club at the  time  of  the         races, admission fee to the guests introduced by the members         of  the Club as well as to the members of the public.  There         is  no  dispute between the parties that the  admission  fee         received by the assessee constitutes trading receipt in  the         hands of the assessee exigible to tax.   But it appears that         on 28th February, 1945 a resolution was passed at the  meet-         ing of the General Body of the Club for levying a  surcharge         of  eight annas over and above the admission fee., the  pro-         ceeds  of  which were to go to the Red Cross  Fund.     This         resolution  was  subsequently varied by  another  resolution         dated  30th  January, 1950 and the new  resolution  provided         that the surcharge of eight annas on entrance ticket  should         be  earmarked "for  local charities and not solely  for  the         Indian Red Cross".   The assessee         227         accordingly issued to every entrant to the enclosure on  the         race course two tickets, one an admission ticket for  admis-         sion to the enclosure of the Club and the other, a  separate         ticket in respect of the surcharge of eight annas for  local         charities.    The slip in respect of the surcharge of  eight         annas was in the following term:                       "Surcharge on admission to                       The Tollygunge Gymkhana Races                                           for Local Charities                                    Rs. 4/8 Enclosure Surcharge                       RS. -/8/-"         The  receipts  from the surcharge were not credited  to  the         profit and loss account but they were carried directly to  a         separate account styled ’Charity Account’.   These  receipts         on account of surcharge were not treated as trading receipts         of  the assessee and were  not brought to tax as  income  of         the  assessee in the assessment years perior to the  assess-         ment  year  1960-61.   But while making assessment  for  the         assessment year  1960-61, the  Income Tax  Officer took  the         view  that  receipts on account of  surcharge  were  revenue         receipts in the hands of the assessee and they would not  be         excluded from the total Income of the assessee merely on the         ground that they  were applied for charitable purposes.   It         may   be  pointed  out  at  this stage that it was not  dis-         puted  before the Revenue authorities that the amounts  rea-         lised by way of surcharge had been disbursed to local chari-         ties  and in fact a list was filed showing the local  chari-         ties in whose favour such disbursement had been made.    The         Income  Tax Officer treated the disbursement of the  amounts         received  on  account  of surcharge as  application  of  the         income belonging to the assessee and he accordingly included         these  receipts  in the total income of  the  assessee,  but         allowed  rebate  under section 15B on the  amounts  actually         disbursed in favour of local charities during  the  account-         ing  year.   This view taken by the Income Tax  Officer  was         affirmed  on appeal by the Appellate Assistant  Commissioner         who held that  a person who wished to gain admission to  the         enclosure  of  the  Club on any racing day had  to  pay  the         surcharge  whether  he  was willing to  contributes  to  the         charity or not and as such the amount  of  the surcharge was

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       a part of the price charged by the assessee for admission to         the  enclosure and it was, therefore, a revenue  receipt  in         the hands of the assessee.   This was followed by a  further         appeal  to the Tribunal and this time the assessee was  suc-         cessful.    The  Tribunal  held  that   the   surchange  was         levied   on  admission  tickets  for the purpose of  charity         and hence the receipts in respect of the surcharge were  not         income  of  the  assessee at the point  of  time  when  they         reached  its hands and being "earmarked for  charity",  they         "never belonged to the assessee" and were hence not includi-         ble  in the taxable income of the assessee.    The  Tribunal         accordingly  directed  that  the receipt  of  the  surcharge         credited  to the charity  account  should  be  deleted  from         the total income of the assessee.         228             The  Commissioner then moved the Tribunal for stating  a         case  to the High Court on the question of law  which  arose         out of the. order of the Tribunal.  The Tribunal was of  the         opinion  that a question of law did arise out of  its  order         and hence it formulated a question in the following terms:                       "Whether,  on  the facts and in   the  circum-                       stances  of the case, the  Appellate  Tribunal                       was  right  in  holding  that  the  assessee’s                       receipts  from the surcharge levied on  admis-                       sion tickets for purposes of charity could not                       be included in the assessee’s  taxable  income                       for  the  assessment  year 1960-617",         and  referred  it to the High Court for its  opinion.    The         High  Court agreed with the view taken by the  Tribunal  and         held  that  since  the surcharge on  admission  tickets  was         charged   by  the  assessee  and paid by the race-goers  for         the  specific  purpose of being applied to  local  charities         pusuant  to the resolution passed by the general meeting  of         the  assessee,  there  was, at the time of  receipt  of  the         amounts  in respect of the surcharge, a legally  enforceable         obligation on  the assessee to apply them to local charities         and those amounts accordingly did not reach the assessee  as         its  income but were  diverted  to  local  charities  before         they reached the assessee.  The correctness  of  this  deci-         sion  is  questioned  by the  Commissioner  in  the  present         appeal under section 66A, sub-section (2) of the Act.             It is familiar learning and yet Lord Magnaughten had  to         draw our attention to it in London County Council v.  Attor-         ney General (1) that income tax is a tax on income.             It  is what reaches the assessee as income that  is  in-         tended to  be charged to tax under the Act.   Every  receipt         by the assessee  is not necessarily income in his hands.  It         is only when  it  bears  the character of income at the time         when  it reaches  the  hands  of  the assessee that  it  be-         comes  exigible  to  tax.  The quest  on  which,  wherefore,         arises  for  determination here is whether the  amounts  re-         ceived  on  account of surcharge reached the  hands  of  the         assessee  as its income.   The argument of the  Revenue  was         that these  amounts were received by the assessee as part of         the  price for admission into the enclosure of the Club  and         merely  because the assessee expressed its desire or  inten-         tion to apply them to local charities, they did not cease to         be  the income of the assessee.  This argument is  based  on         two  assumptions:  first, that the amounts  .on  account  of         surcharge  were received as part of the price for  admission         to  the Club enclosure, and secondly, that it was  merely  a         voluntary  desire on the part  of the assessee to use  these         amounts  for  private  charities and there  was  no  legally         enforceable obligation on the assessee to do so.   These two         assumptions  are in a way inter-related, each  depending  on

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       and  to  some extent supporting the other, but in  our  view         neither of them is well founded.   It is not correct to  say         that merely because surcharge is levied from every race-goer         who wants admission to the enclosure of the Club, it becomes         a part of the price for admission.   The         (1) [1901] A.C.26.         229         test  is not whether every race-goers seeking admittance  to         the  enclosure of the Club is required to pay the  surcharge         but  what  is it for which the surcharge is  taken.   Is  it         taken  as  part  of  the  price for admission, or  for  some         other  purpose, such as, benefit of local charities ?   Sup-         pose  every  race-goer  seeking  admittance  to   the   Club         enclosure  were told that in addition to the price  of   the         admission  ticket  he  would have to  contribute  a  certain         amount  to a recognised charity, could it be contended  that         the   amount   which  he  is  required  to   contribute   to         charity--and   we  are  deliberately  using  the  word  ’re-         quired’  because  otherwise he would not be able  to  secure         admittance  to the Club enclosure is part of the  price  for         admission  ? the surcharge is undoubtedly a payment which  a         race-goer  is  required to make in addition to the price  of         admission ticket if  he  wants  to witness the race from the         Club enclosure, but on that account it does not become  part         of the price for admission.   The admission to the enclosure         is the occasion and not the consideration for the  surcharge         taken  from  the race-goer.  It is true that  but  for  this         insistence on payment of the surcharge at the time of admis-         sion to the enclosure, the race-goer might not have paid any         amount  for  local  charities. But that does not render  the         payment  of the surcharge involuntary, because it is out  of         his  own volition that he seeks admittance to the  enclosure         and if he wants such admittance, he has to pay not only  the         price  of  the admission ticket but also the  surcharge  for         local charities.  The surcharge is clearly not a part of the         price for admission but it is a payment made for the specif-         ic purpose of being  applied to local charities.   Secondly,         it  is not a  correct analysis of  the nature of  the  legal         relationship,  to say that there was nothing more than  mere         desire or intention on the part of  the  assessee  to  apply         the  amounts  received  on account of  surcharge   to  local         charities, without any legally enforceable obligation  bind-         ing  it  to  do so.   We may straightaway  concede  that  if         nothing  more had  been  done  by the assessee  than  merely         passing  a resolution  deciding  to  utilise  a part of  the         admission  fee  received by it to  charitable  purposes,  no         legal obligation would have been created obliging the asses-         see to utilise this amount for the purpose of charity.  Such         a  resolution  would have left it open to  the  assessee  to         alter it or to rescind it and it would have been nothing but         an expression of the desire or intention of the assessee  to         apply the amount for charitable purposes. But here a resolu-         tion was passed at the general meeting of the. assessee  for         levying  the surcharge for local charities and  pursuant  to         this  resolution, the surcharge was paid by  the  race-goers         and  received  by the assessee for the specific  purpose  of         being applied to local charities.   The surcharge when  paid         was  clearly impressed with an obligation in the  nature  of         trust for being applied for the benefit of local  charities.         It  is settled law, as observed, by this Court in C.I.T.  v.         Thakar Das Bhargava (1) that a  trust  may  be  created   by         any language sufficient to show the intention and no techni-         cal   words are necessary and it may even be created by  the         use  of words which are primarily words of condition.    The         only  requisites  which  must be satisfied  are  that  there

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       should  be "purposes independent of the donee to  which  the         subject-matter of the gift is required to be applied         (2) 40 I.T.R. 301.         230         and an obligation on the donee to satisfy  those  purposes".         When the race-goers paid the surcharge to the assessee, they         did   so  far  a specific purpose ,and  thereby  imposed  an         obligation  on the assessee to utilise it for  local  chari-         ties.             The  question  then arises whether this  obligation   to         utilise  the surcharge for local charities was an obligation         to  apply the surcharge to local charities after it  reached         the  assessee  as its income or it was  diverted  for  being         applied to local charities before  it  was  resolved by  the         assessee.   Did it involve an application by  the   assessee         of a part of its income to local charities, or was it rather         an  allocation  of a receipt for local charities  before  it         became  income in the hands of the assessee ? The true  test         for  determining this question is, to use the words  of  Hi-         dayatullah,  J., in C.I.T. v. Sitaldas Tirathdas(1)  whether         the  amount  sought to be deducted, in  truth,  reaches  the         assessee  as  his  income. The learned  Judge  proceeded  to         explain this test in the following words:                       "In our opinion, the true test is whether  the                       amount sought to be deducted, in truth,  never                       reached  the assessee as his  income.  Obliga-                       tions, no doubt, there are in every case,  but                       it  is the: nature of the obligation which  is                       the  decisive  fact.  There  is  a  difference                       between an amount which a person is obliged to                       apply but of his income and an amount which by                       the nature of the obligation cannot be said to                       be  a  part  of the income  of  the  assessee.                       Where  by  the obligation income  is  diverted                       before  it reaches the assessee, it   is.  de-                       ductible   : but where the income is  required                       to  be  applied to  discharge   an  obligation                       after  such income reaches the  assessee,  the                       same    consequence,  in  the  law,  does  not                       follow.    It   is the first kind  of  payment                       which can truly be excused and not the second.                       The second payment is merely an obligation  to                       pay  another a  portion of one’s  own  income,                       which  has been received and is since applied.                       The first is a case in which the income  never                       reaches  the assessee, who even if he were  to                       collect  it, does so, not as part of  his  in-                       come,  but for and on behalf of the person  to                       whom  it  is  payable.  In  our  opinion,  the                       present  case  is one in which  the  wife  and                       children. of the assessee who continued to  be                       members  of the family received a  portion  of                       the income  of the assessee, after the  asses-                       see  had received the income as his own.   The                       case  once is one of application of a  portion                       of  the income to discharge an obligation  and                       not  a case in which by an  overriding  charge                       the  assessee  became  only  a  collector   of                       another’s income".             It is clear on the application of this test that in  the         present case, the surcharge being impressed with an  obliga-         tion  in  the  nature of trust for being  applied  to  local         charities was by  this obligation diverted before it reached         the hands of the assessee and at no stage, it became a  part         of the income of the assessee.   When the assessee  received

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       the  amounts on account of surcharge, they  were  ’impressed         with a legal         (1) 41 I.T.R 367.         231         obligation to be applied for the benefit of local  charities         and  they never reached the assessee as part of its  income.         The  case clearly fell within the rule in Raja  Bijoy  Singh         Dudhuria  v.C.I.T.(1)  and  the surcharge  received  by  the         assessee  could  not be regarded  as  income  assessable  to         tax.             Before  we end the discussion of this question, we  must         refer   to the decision of this Court in Thakar Das  Bharga-         va’s  case (supra)  on which strong reliance was  placed  on         behalf   of the Revenue.   The assessee in this case was  an         advocate  who agreed to defend certain accused persons in  a         criminal trial on condition that he would be provided with a         sum of Rs. 40,000/- for creating a public charitable trust.         When the trial was over, the assessee-was paid a sum of  Rs.         32,500/-  and he created a  trust of  that amount  by   exe-         cuting  a  trust deed.  The  question  arose  whether   this         sum  of  Rs. 32,500/- was liable to be taxed as part of  the         professional  income  of the assessee.   This  question  was         answered by the High Court in favour of the assessee but the         view  taken by the High Court was reversed by this Court  on         appeal.   This  Court pointed out that the findings  of  the         Tribunal  clearly showed "that the persons who paid the  sum         of Rs.32,500/- did not use any words of an imperative nature         creating  a  trust or an obligation.  They were  anxious  to         have the services of the assessee in Farrukhnagar case;  the         assessee  was  at first unwilling to give his  services  and         later  he agreed, proposing that he would himself  create  a         charitable trust out of the money paid to  him  for  defend-         ing   the accused persons in the Farrukhnagar case."    Con-         siderable  reliance was placed by this Court on the  recital         in  the trust deed where the assessee had said "that he  was         receiving  his professional income as an  advocate  accruing         after June 1944 for payment of taxes and charity and accord-         ingly  when  he received his professional  income   in   the         Farrukhnagar  case he created a charitable trust out of  the         money  so  received." It was also emphasised by  this  Court         that it was not stated any where "that the persons who  paid         the  money created a trust or imposed a legally  enforceable         obligation  on the assessee" and even in the affidavit  made         by  the assessee there was "no suggestion that  the  persons         who paid the money created the trust or imposed an   obliga-         tion on the assessee" and it was "the asessees own voluntary         desire that he would create a trust out of the fees paid  to         him  for defending the accused persons in  the  Farrukhnagar         case" and "such a voluntary desire on the part of the asses-         see  created no trust, nor did it give rise to  any  legally         enforceable  obligation".  This Court accordingly held  that         "the  money  when it was received by the  assessee  was  his         professional  income,  though the assessee had  expressed  a         desire earlier to create a charitable trust out of the money         when received by him".  It wilt be seen from what is  stated         above’  that  when  the accused person paid  a  sum  of  RS.         32,500/-  to the assessee, they paid it by way of  fees  and         they did not impose any obligation on the assessee that this         amount  should be utilised only for the purpose of  charity.         It was merely a voluntary desire on the part of the assessee         that he would create a trust out of the amount of fees  paid         to him and until the         (1) [1933] 1 I.T.R. 135 A.I.R. 1933 P.C. 145. 16--240SC1/77         232         trust was created by the assessee, there was no legal  obli-

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       gation to utilise that amount for charity.  That is why this         Court held that the amount when received by the assessee was         income  in  his hand and the creation of  trust  was  merely         application of the amount after it reached his hands as  his         income.  This Court by approving the following  observations         of the Appellate Assistant Commissioner that "if the accused         persons  had  themselves resolved to  create  a   charitable         trust in memory of the professional aid rendered to them  by         the  appellant  and had made the assessee  trustee  for  the         money  so  paid  to him for that purpose, it could, perhaps,         be  argued that the money paid was earmarked for charity  ab         initio but of this there was no indication anywhere" clearly         suggested that if the money paid by the accused persons  had         been  "earmarked for charity ab initio" it would  have  been         possible to say that they had made the assessee trustee  for         the  money so paid to him and in that event  the  conclusion         would  have been that the money did not reach the  hands  of         the assessee as his income.  Here, the surcharge paid by the         race-goers  was earmarked for local charities ab initio  and         the  surcharge  was received by the assessee  with  a  legal         obligation  to apply it to local charities. The decision  of         this Court in Thakar Das Bhargava’s case (supra), therefore,         far from militating against the contention of the  assessee,         supports it.             We  must accordingly hold that the High Court was  right         in  answering the question referred to it in favour  of  the         assessee  and in this view, the appeal must stand  dismissed         with costs.         P.H.P.                                 Appeal dismissed.         233