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PETITIONER: H.E.H. NIZAM’S  RELIGIOUS ENDOWMENT TRUSTHYDERABAD

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, ANDHRA PRADESH,HYDERABAD

DATE OF JUDGMENT: 26/10/1965

BENCH: SUBBARAO, K. BENCH: SUBBARAO, K. SHAH, J.C. SIKRI, S.M.

CITATION:  1966 AIR 1007            1966 SCR  (2) 384

ACT:  Indian  Income-Tax Act, 1922 (Act 11 of 1922), s 4(3)  (i)- Trust  for  religious  and charitable  objects  some  within taxable  territories and some outside-Income not  allocated- Exemption, if can be claimed.

HEADNOTE: A  trust  was  created for  four  religious  and  charitable objects, two of the objects were within taxable  territories and the other two were outside the taxable territories.  The income derived from the trust property was not allocated  or set apart for the said purposes.  The Trustees were assessed to Income-tax on income derived on the Trust property.   The Trustees’  claim  for exemption under s’ 4(3)  (ii)  of  the Income-tax Act was not accepted by the Revenue and the  High Court.  In appeal to this Court the, Trustees contended that proviso  (a)  to s’ 4(3) (i) of the Act would  be  attracted only  when the Trustees exctcised their option to apply  the income  to  religious  or charitable  purposes  outside  the taxable  territories, that in the present case the  Trustees had not exercised the said option, and that therefore  their case  was directly governed by the substantive part  of  cl. (i) of s. 4(3) of the Act. HELD : Under cl. (i) of s. 5(3) of the Act only income  from the  property  wholly  or in part  held  in  trust  actually applied or set apart for application for future spending  on religious   or  charitable  purposes  within   the   taxable territories is exempted from inclusion in the: total  income [390 G-H] The substantive part of cl. (i) of s. 4(3) is in two parts : the  first part relates to the income derived from  property held under trust whooly for religious or charitable purposes and the second part to income derived from property held  in part only for such purpose.  The words "applied ’Or  finally set apart for application" in the second part indicate  that unless  the  income from the, said property  is  applied  or finally  set  apart  for the  purposes  within  the  taxable territories,  the said income does not earn  the  exemption. There cannot be any reason why a different meaning should be given   to  the  expression  "applied  or  accumulated   for application"  in  the  first part of  the  clause,  for,  on

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principle, there cannot be any possible distinction  between such income from the property wholly held under the trust or a  part of the property held in trust.  The words  "applied" and "accumulated" , therefore, must mean "applied or finally set  apart".   "Applied" means that the income  is  actually applied  for the said purposes in the  taxable  territories; and "accumulated" means that the income is set apart  during the  year  for future spending on the  said  purposes.   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 [390 B- G] ’Till  the  Trustee  set  apart  the  accumulation  for  the purposes  within the taxable territories, it cannot be  said that  Me, purposes are within the taxable territories.  [392 CT                             385 Mohammad  Ibrahim Riza V. Income-tax  Commissioner,  Nagpur, (1930) L.R. 57 I.A. 260, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 491, 492  of 1964. Appeal  by special leave from the judgment and  order  dated September 14, 1962 of the Andhra Pradesh High Court in  Case Referred No. 4 of 1961. D.   Narsaraju,  Anwarullah Pasha, J. B. Dadachanji,  O.  C. Mathur and Ravinder Narain, for the appellant. A.   V. Viswanatha Sastri, N. D. Karkhanis, R. H. Dhebar and R.   N. Sachthey, for the respondent. The Judgment of the Court was delivered by Subba  Rao,  J.  This appeal by  special  leave  raises  the question  of the, true construction of the provision  of  S. 4(3)  (i) of the: Indian Income-tax Act,  1922,  hereinafter called the Act. The  relevant facts may be briefly stated.  By an  indenture dated  September  14, 1950, H.E.H. the  Nizam  of  Hyderabad created  a  trust  known as "H.E.H.  the  Nizam’s  Religious Endowment  Trust",  hereinafter referred to  as  the  Trust, under which he settled certain securities of the face  value of  Rs. 40 lakhs for implementing the objects  described  in the  Trust deed.  Under the Trust deed three  trustees  were appointed, including the settlor.  It will be convenient  at this  stage  to read the relevant provisions  of  the  trust deed.               Clause  3. The Trustees shall hold  and  stand               possessed of the Trust Fund upon Trust.               (a)   To manage the Trust Fund and to  recover               the interest and other income thereof.               (b)               (c)   During the life-time of the Settlor  the               balance of the income shall be accumulated and               shall  be  added to the corpus  of  the  Trust               Fund.               (d)   On  and after the death of  the  Settlor               the Trustees shall hold the accumulated corpus               of  the  Trust Fund upon trust  to  spend  the               income  thereof  for any one or  more  of  the               following  religious or charitable objects  in               such shares and proportions and in such manner               as  the  Trustees  shall  in  their   absolute               discretion deem proper.               3 86

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             (i)   For  annual religious offerings  to  the               sacred places of the Muslims outside India, in               Hedjaz  and  Iraq, viz., Macca,  Madina  Najaf               Karbala, Kazamain, Sirraman Raa and Mashad (in               Iran) and Baghdad and Basra.               (ii)  For help either in lump sum or by way of               monthly  allowances,  to the  Khuddam  or  the               servants  who  are looking  after  the  sacred               Shrines,  and also by way of charity to  pious               people residing at these holy places.               (iii) For the up-keep of the sacred  buildings               constructed  in the life-time of  the  Settlor               such as, masjids (mosques), Azakhana (mourning               house,  built to commemorate the name  of  His               Exalted    Highness’s   late   mother),    two               Askurkhanas  (where the Alam sits  inside  the               City  palace during Moharram and Ramzan),  and               the   Maqbaras   (Tombs)   and    particularly               mentioned  in  the Second  schedule  hereunder               written.               (iv)  For  the annual expenditure  during  the               mourning period of Moharram and Safer and also               during other religious months, when  different               kinds  of  ceremonies,  religious   discourses               (Taqreers)  Id Tagreebs, etc.  are  performed,               including  the  religious  offerings  to   the               sacred Shrines at Ajmer and Gulbarga.               (v)   It is the desire of the Settlor that the               income of the Trust shall, as far as possible,               be spent equally for the above mentioned  four               religious and charitable objects and  purposes               and  in the event of there being  any  surplus               then the same may be spent by the Trustees for               any other religious and charitable objects for               the  benefit of Sunni Mohamedans with  liberty         X       X to  the Trustees in their absolute  discretion               to  accumulate  the surplus, if any,  for  any               year  or  years and utilize the same  for  the               purposes in this                                    387               clause  provided  for any subsequent  year  or               years.               Clause  4.  It is hereby  further  agreed  and               declared  that  in  all  matters  wherein  the               Trustees have a discretionary power the  votes               of  the majority of the Trustees for the  time               being  voting in the matter shall prevail  and               be binding on the minority as well as on those               Trustees  who  may not have voted and  if  the               Trustees  shall be equally divided in  opinion               the  matter shall during the life-time of  the               Settlor be decided according to the opinion of               the  Settlor and after his death according  to               the opinion of the Trustee most senior in  age               for the time being. Briefly  stated,  under the deed the Trust fund  was  to  be accumulated  during the life-time of the settlor and,  after his death, the Trustees should hold the said fund upon trust to  spend the income therefrom for one or more of  the  four religious and charitable objects mentioned therein.  Two  of the said objects were for religious and charitable  purposes within  the  taxable  territories  and  the  other  two  for purposes  outside the taxable territories.  It is  important to notice that under the deed no power was conferred on  the

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trustees  during the life time of the settlor to  set  apart and allocate the accumulated income or a part of it from the Trust  properties  for  any  one  or  more  of  the  objects mentioned therein : that could be done only by the  Trustees after  the death of the settlor.  The said settlor is  still alive.   For  the assessment years 1952-53 and  1953-54  the Trustees  were assessed to income-tax on the  income  during the  relevant  previous years arising from  the  said  Trust property.  The Trustees claimed exemption under S. 4(3) (ii) of the Act.  The Income-tax Officer, on appeal the Appellate Assistant  Commissioner, and on further appeals the  Income- tax  Appellate Tribunal, Hyderabad, concurrently  held  that the  assessee  was not entitled to the exemption  under  the said  section.   At  the  instance  of  the  assessee,   the following  question was referred to the High Court under  s. 66(1) of the Act               "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." A  Division Bench of the Andhra Pradesh High Court,  Hydera- bad, consisting of Seshachelapati and Venkatesam, JJ, on a 388 consideration of the relevant provisions of the deed and the Act, came to the conclusion that on the terms of S. 4(3) (i) of  the  Act, the Trust was not entitled to  the  exemption. Hence the appeals. Mr. Narasa Raju, learned counsel for the assessee, contended that  proviso  (a)  to S. 4 (3 ) (i) of  the  Act  would  be attracted ,only when the Trustees exercised their option  to apply the income to religious or charitable purposes without the  taxable  territories,  that in  the  present  case  the Trustees  had  not  exercised  the  said  option  and  that, therefore, the assessee’s case was directly governed by  the substantive  part of cl. (i) of s. 4(3) of the Act.  As  the income  was being accumulated by the Trustees, the  argument proceeded,  without  setting  apart the whole  or  any  part thereof  for one or other of the purposes mentioned  in  the Trust  deed,  it  should  be held  that  the  Trustees  were accumulating the income for religious or charitable purposes within  the  taxable  territories, since two  of  the  named purposes were admittedly within the taxable territories.  He would  say  that if the Trustees exercised their  option  to apply  the  fund  for  the  purposes  without  the   taxable territories,  the Income-tax authorities could, in terms  of the proviso, include that income in the total income. Mr.  A. V. Viswanatha Sastri, learned counsel for the  Reve- nue,  on the other hand, argued that the assessee  would  be entitled  to exemption under S. 4(3) (i) of the Act only  if the  income was specifically accumulated for  religious  and charitable purposes within the taxable territories and that, as  in  the present ,case admittedly there  was  no  setting apart  of  the income for the said  purposes,  the  assessee could not claim any exemption thereunder. Let us now scrutinize the validity of the rival contentions. Section 4(3) (i) of the Act reads :               "Subject  to the provisions of clause  (c)  of               subsection  (1)  of  section  16,  any  income               derived  from  property held  under  trust  or               other legal obligation wholly for religious or               charitable purposes, in so far as such  income               is  applied or accumulated for application  to               such  religious  or  charitable  purposes   as               relate  to  anything done within  the  taxable

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             territories,  and in the case of  property  so               held  in  part  only for  such  purposes,  the               income  applied  or  finally  set  apart   for               application thereto                                    389               Provided that such income shall be included in               the total income-               (a)   if   it  is  applied  to  religious   or               charitable   purposes  without   the   taxable               territories,  but  in  the  following   cases,               namely :-               (i)   where  the property is held under  trust               or  other legal obligation created before  the               ,commencement   of   the   Indian   Income-tax               (Amendment)  Act, 1953 (25 of 1953),  and  the               income  therefrom is applied to such  purposes               without the taxable territories; and               (ii)  where  the property is held under  trust               or  other legal obligation created after  such               commencement,  and  the  income  therefrom  is               applied  without  the taxable  territories  to               charitable  purposes  which  tend  to  promote               international   welfare  in  which  India   is               interested. The  Central  Board of Revenue may, by  general  or  special order,  direct  that it shall not be included in  the  total income. Under  this section a particular class or kind of income  is exempted  from taxation.  It is settled law that the  burden is  on  the Revenue authorities to show that the  income  is liable,  to tax under the statute; but the onus  of  showing that  a particular class of income is exempt  from  taxation lies  on the assessee.  To earn the exemption, the  assessee has  to establish that his case clearly and  squarely  falls within the ambit of the said provisions of the Act. A  brief  history of cl. (i) of S. 4(3) of the Act  will  be useful in the interpretation of its terms.  The present  cl. (i) was substituted for the following clause by the  Income- tax (Amendment) Act, 1953, with effect from April 1, 1952 :               "(i) any income derived from property held  in               trust  or  other legal obligation  wholly  for               religious  or charitable purposes, and in  the               case of property so held in part only for such               purposes,  the income applied or  finally  set               apart for application thereto." Under  the said clause,, trust income, irrespective  of  the fact  whether the said purposes were within or  without  the taxable  territories, was exempt from tax in so far  as  the said income was 390 applied  or  finally  set  apart  for  the  said   purposes. Presumably as the State did not like to forgo the revenue in favour  of charity outside the country, the  amended  clause described with precision the class or kind of income that is exempt thereunder so as to exclude therefrom income  applied or accumulated for religious or charitable purposes  without the taxable territories.  The substantive part of cl. (i) is in  two parts : the first pan relates to the income  derived from  property  held  under trust wholly  for  religious  or charitable  purposes and the second part, to income  derived from  property so held in part only for such purposes.   But the necessary condition for attracting the first part of the clause is that the said income is applied or accumulated for application to such religious or charitable purposes  within the taxable territories; and to attract the second part, the

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income  from  the property so held in part shall  have  been applied  or  finally set apart for application to  the  said purposes.   A comparative study of the two part-,  clarifies the  scope  of the provision.  The expression  used  in  the first  part is "applied or accumulated for application"  and the  expression  used  in the second  part  is  "applied  or finally  set apart for application".  The words "applied  or finally  set  apart  for application"  in  the  second  part indicate  that unless the income from the said  property  is applied  or  finally set apart for the purposes  within  the taxable  territories,  the  said income does  not  earn  the exemption.   There  cannot  be any reason  why  a  different meaning  should  be  given to  the  expression  "applied  or accumulated  for  application"  in the  first  part  of  the clause;  for,  on principle, there cannot  be  any  possible distinction  between  such income from the  property  wholly held  under trust or a part of the property held  in  trust. The words "applied" and "accumulated", therefore, must  mean "  applied or finally set apart".  "Applied" means that  the income  is  actually applied for the said  purposes  in  the taxable territories; and "accumulated" means that the income is set apart during the year for future spending on the said purposes.    The  expression  "accumulated  for  a   purpose involves  a  conscious  act in present and  posits  a  clear indication  on  the  part of the trustee to  set  apart  the income  for that purpose.  It is, therefore,  manifest  that under  cl. (i), only income from the property wholly  or  in part  held  in  trust  actually applied  or  set  apart  for application  for future spending on religious or  charitable purposes  within  the taxable territories is  exempted  from inclusion in the total income. As  has  been pointed out by Craies in his book  on  Statute Law, 6th Edn. at p. 217, "The effect of an excepting or                             391 qualifying  proviso,  according  to the  ordinary  rules  of construction, is to except out the preceding portion of  the enactment,  or to qualify something enacted  therein,  which but for the proviso would be within it." The proviso to  cl. (i)  excepts  the  two  classes of  income  subject  to  the condition  mentioned  therein  from  the  operation  of  the substantive  clause.  It comes into operation only when  the said  income is applied to religious or charitable  purposes without the taxable territories.  In that event, the Central Board  of Revenue, by general or special order, may,  direct that  it  shall not be included in the  total  income.   The proviso  also  throws  light  on  the  construction  of  the substantive part of cl. (i) as the exception can be  invoked only upon the application of the income to the said purposes outside  the  taxable territories.  The application  of  the income in presents or, in future for purposes in or  outside the  taxable  territories,  as  the  case  may  be,  is  the necessary condition for invoking either the substantive part of the clause or the proviso thereto. The argument of Mr. Narasa Raju, namely, that as at the time the  income was accumulated the Trustees did  not  exerciser the  option, the accumulation would necessarily be for  some of  the purposes within the taxable territories, leads to  a fallacy.   If  accepted, it would enlarge the scope  of  the exemption  : while the section expressly exempts  only  such income as is applied or accumulated for application for such purposes within the taxable territories, the income would be exempted even though it was accumulated for mixed  purposes, that  is, for purposes both within and without  the  taxable territories.   Purposes within the taxable  territories  are not  the  same as mixed purposes.  At best the  amounts  are

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kept  under  a  suspense  account with  an  Options  to  the trustees to set apart at a later date for purposes within or without  the taxable territories.  Howsoever the  option  is exercised at a later stage, it is not an accumulation during the,  relevant  accounting  year  for  purposes  within  the taxable territories. Some  of  the cases cited at the Bar may not  be  of  direct application,  but  the principle laid down  therein  may  be helpful  in construing the terms of the present Trust  deed. The  Judicial Committee in Mohammad Ibrahim Riza v.  Income- tax Commissioner, Nagpur(1) held that where the purposes  of a  trust  were  not wholly charitable or  religious  and  no portion  of  the  property had ’been  set  aside  for  those purposes, the income from the trust could not be  identified as appropriated exclusively thereto.  The (1)  (1930) L.R. 57 I.A. 260. 392 principle underlying this decision is, where a trust is  for mixed  purposes, some religious and other secular,  with  an option  to  the  trustee  to select  one  or  other  of  the purposes, it is not possible to predicate till the selection is  made  that  the object is for  religious  or  charitable purposes.   In the present case, an option is given  to  the Trustees to set apart the income for the purposes within the taxable  territories or without such territories and till  a selection  is made it is not equally possible  to  predicate that  the accumulation of income is for purposes within  the taxable  territories.   Till  the  Trustees  set  apart  the accumulation   for   the   purposes   within   the   taxable territories, it cannot be said that the purposes are  within the taxable territories. Mr. Narasa Raju attempted to argue that in the present  case the  income  was set apart for purposes within  the  taxable territories.   This aspect of the question was never  raised till now.  It involves a question of fact.  Clause 3 (d) (v) of  the  Trust deed on which reliance is placed is  only  an expression  of  desire on the part of the settlor  that  the income  of  the Trust should be spent equally  on  the  four religious  and  charitable purposes mentioned in  the  deed. The  said  desire does not amount to setting  apart  by  the Trustees of the whole or a part of the income from the Trust for purposes within the taxable territories.  Indeed, cl.  3 (d)  of the Trust deed indicates that the Trustees  have  no power  to set apart or accumulate the income for any of  the purposes mentioned in the Trust deed till after the death of the  settlor.   We cannot, therefore, hold on  the  material placed  before  us  that the Trustees  have  set  apart  the accumulated   income   for  purposes  within   the   taxable territories. For  the aforesaid reasons we hold that the answer given  by the High Court to the question referred to it by the Income- tax Appellate Tribunal is correct.  The appeals fail and are dismissed with costs.  One hearing fee. Appeals dismissed. 393