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PETITIONER: THE COMMISSIONER OF INCOME-TAX, BOMBAY

       Vs.

RESPONDENT: SMT.  KASTURBAI WALCHAND TRUST, BOMBAY

DATE OF JUDGMENT: 31/10/1966

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C. RAMASWAMI, V.

CITATION:  1967 AIR  844            1967 SCR  (1)   7

ACT: Income  Tax Act 1922, s. 4(3)(i)-Income of  trust  property- payable  to beneficiary during her  lifetime-Thereafter  for specified    charitable    purposes-Beneficiary    executing surrender  of beneficial interest-Thereafter  whether  trust property held wholly for charitable purposes and exempt from tax-Whether   income   of  trust  property   receivable   by beneficiary or by trust on behalf of beneficiary.

HEADNOTE: By a deed executed in November 1946, the respondent and  her husband created a trust in respect of their properties.   In accordance  with  Clause 7 of the deed, the  income  of  the trust properties was to be paid to the respondent during her lifetime  and,  by Clause 8 the trustees  were  directed  to apply   the  income,  from  and  after  the  death  of   the respondent, to certain charitable purposes enumerated in the deed.   On July 21, 1955, the respondent executed a deed  of surrender whereby she gave up her beneficial interest in the income  of the trust so that it may immediately vest in  the trustees  and  may be utilised for the  charitable  purposes mentioned in the trust deed. In the course of assessment to income tax in respect of  the income  from the trust properties for the  assessment  years 1956-57  to 1959-60, it was claimed on behalf of  the  trust that during the relevant previous years, the properties were held  under  a  trust wholly for  charitable  purposes,  and consequently, the income was exempt from income-tax under s. 4(3)(i) of the Income Tax Act, 1922.  The Income Tax Officer rejected  this claim on the view that the deed of  surrender executed by the respondent did not amount to renouncement of her rights under the trust deed and that it really  amounted to  a transfer of the income received by her for the use  of the  trust;  and  since the income  was  receivable  by  the respondent,  the trust properties were not held  wholly  for charitable  purposes.   However,. the:  Appellate  Assistant Commissioner, on appeal held that the income from the  trust properties  was  exempt under s. 4(3)(i) and this  view  was upheld  by the Tribunal.  The High Court, upon a  reference, also held in favour of the trust. It  was also contended on behalf of the department  that  as

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clause  8  of  the  trust deed  executed  in  November  1946 provided that the income of the trust was to be applied  for charitable  purposes  "from  and after  the  death"  of  the respondent  the  trustees could not, during  her  life-time, apply  the income for any charitable purposes and  therefore no exemption could be claimed under s, 4(3) (i). HELD:The  income from the trust properties -after  July 21, 1955 was exempt from tax under s. 4(3) (i). [ 1 3 B-C] Whenever  a valid trust is executed, the property  vests  in the Trustees, and the income accruing from those  properties is  the  income of the trust and not of  the  beneficiaries. For purposes of income-tax law, however, the income under s. 41(1)  of the Act is treated as received by the Trustees  on behalf of the beneficiaries, but is to be taxed in the hands of  the  Trustees  as  it  would be  in  the  hands  of  the beneficary for whom it is 8 received.  In the present case, therefore, it would be wrong to  proceed on any assumption that the income of  the  trust properties  was  received  by  the  respondent.   Once   the respondent renounced her interest by the deed of July  1955, which  was  clearly  valid in view of s. 58  of  the  Indian Trusts Act, the entire properties were held by the  Trustees for  the charitable purpose mentioned in clause  8,  because that was the only purpose of the trust which then  remained. The income which accrued thereafter was come which could  be applied  or  allowed to accumulate for  application  to  the charitable  purposes mentioned in clause 8 and for no  other purpose. [10 E; 11 B-H] Even  if it were to be held that by virtue of clause  8  the trustees could not apply the income for charitable  purposes so  long as the respondent was alive, the only effect  would be  that  the income would accumulate.   Such  accumulations would also be exempt from the liability to income-tax  under s.  4(3) (i) as soon as the rights of the respondent  ceased on  the  execution by her of the deed of surrender  in  July 1955. [12 F-]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 180 to 183 of 1966. Appeal  by special leave from the judgment and  order  dated September  27, 1962 of the Bombay High Court  in  Income-tax Reference No. 42 of 1961. B.   Sen, Gopal Singh and B. N. Sachthey, for the appellant (in all the appeals). S.   T.  Desai and Ravinder Narain, for the  respondent  (in all the   appeals). The Judgment of the Court was delivered by Bhargava,  J.  Seth  Walchand Hirachand and  his  wife,  Dai Kasturbai,  owned  certain  shares,  had  several  insurance policies,  owned house property and also held  lease  lands. The two of them together joined in executing an indenture on 25th  November,  1946, by which they created a  trust.   The trustees were both of them themselves and three brothers  of Seth  Walchand.  The provisions of the trust, with which  we are concerned, laid down that, after defraying the  expenses for  management  of the trust properties and  certain  other expenses, such as, rents, rates, etc.,, the trustees were to pay  to  Bai  Kasturbai, during  her  lifetime,  the  income arising from the trust funds and properties.  Further,  Seth Walchand himself and Bai Kasturbai, during their  life-time, had  the right of residence in some of the  house  property,

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free  of rent and without any obligation for payment of  any out  goings or moneys in respect thereof.  These  provisions were  contained in clause 7 of the deed of trust.  The  next provision  contained in clause 8 of the deed was that,  from and  after  the death of Bai Kasturbai,  the  trustees  were directed  to apply the net rents, profits and income of  the properties   and  trust  funds,  at  their  discretion,   on charitable purposes enumerated in the deed of trust.  It  is not  disputed that all the charitable purposes mentioned  in the trust constituted public charities.  Seth 9 Walchand died and, thereafter, Bai Kasturbai, on 21 st July, 1955,  executed a deed in which the relevant clause runs  as follows:-               "Bai Kasturbai Walchand both hereby surrender,               release, quit claim, transfer and assign  unto               the  Trustees all the income to arise as  from               the 21st day of July one thousand nine hundred               and  fifty-five  from the Trust funds  of  the               investments  for the time  being  representing               the same and her beneficial life interest  and               all  her rights, claims and demands under  the               said  Indenture  of Settlement  including  the               liberty  to occupy and enjoy rent free of  the               lands,  hereditaments, messages  and  premises               described  in the First and  Second  Schedules               hereto the intent that her beneficial interest               may  be determined as aforesaid and  that  the               same may be immediately vested in the Trustees               and that the Trustees may utilise the same for               charitable  purposes  mentioned  in  the  said               Indenture of Settlement." Subsequent to the execution of this deed, the question arose of  assessment  to income-tax of the income from  the  trust properties for the assessment years 1956-57, 1957-58,  1958- 59  and 1959-60.  The corresponding previous years were  the financial  years ending on 31st March in the years  1956  to 1959.   It  was  claimed by the  Trust  that,  during  these previous  years,  these properties were held under  a  trust wholly for charitable purposes, and consequently, the income was  exempt from income-tax under s. 4(3)(i) of the  income- tax  Act  (hereinafter referred to as "the Act").   The  In- ,come-tax  Officer, however, held that the deed executed  by Bai Kasturbai did not amount to a renouncement of her rights under  the  trust  deed, and that it really  amounted  to  a transfer  of the income received by her for purposes of  the use  of  the  trust.   Since the income  of  the  trust  was receivable  by Bai Kasturbai, it could not be held that  the trust  properties were held wholly for charitable  purposes. On  appeal, the Appellate Assistant Commissioner  ,disagreed with the Income-tax Officer and accepted the submission made by  the respondent, holding that the income received by  the Trust,  after the execution of the deed of surrender by  Bai Kasturbai,  was exempt from tax under s. 4(3)(i) of the  Act in  view of the applicability of s. 9 of the  Indian  Trusts Act,  1882.  The Income-tax Appellate Tribunal,  on  further appeal,  upheld  the  same  decision,  but  on  a   slightly different   ground.   The  Tribunal’s  view  was  that   the surrender  by  Bai Kasturbai was valid under s.  58  of  the Indian  Trusts  Act, and consequently, after that  deed  was executed,  the  properties were held wholly  for  charitable purposes and the income was exempt from tax under s. 4(3)(i) of  the Act.  Thereupon, at the request of the  Commissioner of  Income-tax, the following question was referred for  the opinion of the High Court of Bombay:

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M19Sup.CI/66-2 10 .lm15 "Whether clause 8 of the trust, settlement made on the  25th November,  1946, came into operation  immediately  following the  declaration  made by Bai Kasturbai on  the  21st  July, 1955,  and as such the income that accrued or arose  to  the trustees  from  the  trust property from  21st  July,  1955, onwards was exempt under s’ 4(3)(i) of the Act?" The High Court answered the question in favour of the Trust, which  is  the respondent in these appeals  before  us,  and consequently, the Commissioner of Income-tax has come up  to this Court in these appeals by special leave. It appears that, in this case, the question that was  framed by  the  Income-tax Appellate Tribunal and referred  to  the High  Court was not happily worded, so that it will  need  a slight  amendment which we shall indicate later.   The  real question under dispute was whether, after the. execution  of the  deed of surrender on 21st July, 1955, the  income  from the  trust  properties was exempt from income-tax  under  S. 4(3)(i)  of the Act or not.  In dealing with this  question, it has to be kept in view that, even under the deed of trust as  originally executed on 25th November, 1946,  the  income from  the  trust  properties  was  not  the  income  of  Bai Kasturbai.  Whenever a valid trust is executed, the property vests  in the Trustees, and the income accruing  from  those properties  is  the  income  of the trust  and  not  of  the beneficiaries.  For purposes of income-tax law, however, the income  under s. 41(1) of the Act is treated as received  by the  Trustees on behalf of the beneficiaries, but is  to  be taxed in the hands of the Trustees in the like manner and to the  same amount as it would be leviable upon the person  on whose  behalf such income is receivable.  The  liability  of the  income to tax is, therefore, independent of the  income actually  being  received by the beneficiaries  and  may  be subjected to tax as soon as it is earned by the trust.   The exception  is  that,  where the trust  properties  are  held wholly for charitable or religious purpose in so far as such income  is. applied or accumulated for application  to  such religious or charitable purposes, it is exempt from, income- tax.   In the present case, therefore, in dealing  with  the question referred to the High Court, any assumption that the income of the trust properties was received by Bai Kasturbai will  not be correct.  The income during her  life-time  was clearly  taxable  as  income in the hands  of  the  trustees received by them on behalf of Bai Kasturbai.  Subsequently,  when  Bai  Kasturbai executed  the  deed  of surrender  on 21st July, 1955, she made a  declaration  that she  was giving up all her rights to the income.   In  clear words,  she  stated in the deed that she  was  surrendering, releasing, transferring and assigning unto the trustees  all the income which Was to arise after that date from the trust properties,  and  that  she was also  surrendering  all  her rights,  claims  and  demands  under  the  deed  of   trust, including                              11 her   right   to   occupy   and   enjoy   rent-free   lands, hereditaments,  messuages  and  premises  described  in  the trust-deed.  It was further stated by her that the deed  was executed with the intent that her beneficial interest may be determined  and  the same may be immediately vested  in  the Trustees  and  that the Trustees may utilise  the  same  for charitable  purposes mentioned in the deed of  trust.   This deed executed by Bai Kasturbai was clearly valid in view  of the  provision contained in s. 58 of the Indian  Trusts  Act

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(No.  2  of 1882) which provides that "the  beneficiary,  if competent to contract, may transfer his interest but subject to  the  law  for  the  time  being  in  force  as  to   the circumstances and extent in and to, which he may dispose  of such  interest."  Bai  Kasturbai  was  quite  competent   to contract  so as to transfer her interest under the  deed  of trust, and by executing the deed dated 21st July, 1955,  she surrendered all her rights.  The right which had accrued  to her  under clause 7 of the deed of’ trust was the  right  to use  certain  immovable properties and to  receive  the  net income arising from trust properties.  The right to  receive the  income  arose  because of the obligation  laid  on  the Trustees to pay the net income to her during her  life-time. That was clearly the right as a beneficiary under the trust, and when she executed the indenture dated 21 st July,  1955, she  surrendered  that  right in favour  of  the  trust  for charitable purposes, so that her right became extinguished. It may be mentioned that, at one stage, an attempt was  made on  behalf  of the Commissioner of Income-tax to  raise  the question about the validity of this deed of surrender,  but, when the Commissioner asked the Tribunal to refer a question about  the  competence  of Bai  Kasturbai  to  renounce  her beneficial  interest  under  the  Trust,  Settlement,   that request  was refused by the Tribunal.  The Commissioner  did not,  thereafter, move the High Court to obtain a  statement of the case from the Tribunal on that question, so that,  in these  appeals, it is no longer open to the Commissioner  to contend that Bai Kasturbai was not competent to renounce her beneficial  interest.  Once she renounced her interest,  the direction contained in the deed of trust to the Trustees  to pay  to her the net income of the trust  properties  ceased, though the Trustees continued to hold the property under the trust.  At the same time, the right of Bai Kasturbai to  use the immovable properties also ceased to exist.   Thereafter, clearly,  the entire properties were held by  the  Trustees, for  the charitable purposes mentioned in clause 8,  because that was the only purpose of the trust which remained  after this  deed of surrender had been executed by Bai  Kasturbai. On  these facts, it is clear that the income, which  accrued from the trust properties thereafter, was income which could be  applied or allowed to accumulate for application to  the charitable  purposes mentioned in clause 8 and for no  other purpose. 12 High  Court and the Tribunal as to whether clause 8  of  the deed  of  trust could come into effect so as to  permit  the Trustees to apply the income of the trust properties for the charitable purposes mentioned in that clause even before the death  of Bai Kasturbai.  That clause, in clear  words  says that  the Trustees shall apply the -said net rents,  profits and  income, etc. in all or any of the  charitable  purposes mentioned   therein  "from  and  after  the  death  of   Bai Kasturbai".   Relying on this last expression, it was  urged that  unless  Bai  Kasturbai died,  the  Trustees  were  not permitted  to apply the income for the  charitable  purposes mentioned in clause 8. It seems to us that, in this case, it was  quite  unnecessary  to go into this  question  for  the purpose  of  deciding  whether  the  income  of  the   trust properties,  after  the deed of surrender by  Bai  Kasturbai executed  on  21st July, 1955, was  exempt  from  income-tax under  s.  4(3)(i) of the Act.  Under  that  provision,  the income from trust properties, held wholly for charitable  or religious   purposes,   is  exempt  from   tax   under   two circumstances.   The first is when that income  is  actually applied  for such religious or charitable purposes, and  the

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second  is  when it is accumulated for application  to  such religious or charitable purposes.  In this case, as we  have indicated above, as soon as Bai Kasturbai executed the  deed of  surrender, her rights under clause 7  completely  ceased and  all the income from the trust properties remained  with the Trustees to be applied in accordance with other terms of the  deed of trust.  If it could be held that clause 8  came into operation and permitted the application of that  income to  the charitable purposes mentioned in it as soon  as  Bai Kasturbai’s  rights ceased, even though she remained  alive, there  would  be no difficulty in holding  that  s.  4(3)(i) would  have  exempted the income from income-tax.  In  fact, this  ,view was accepted by all the income-tax  authorities. However, ,even if it be held that clause 8 did not come into operation  and the ’Trustees were incompetent to  apply  the income of the trust properties for the purposes mentioned in it so long as Bai Kasturbai was alive, the only effect would be  that that income would accumulate and that  accumulation would  continue during the life-time of Bai  Kasturbai.   On her  death, the accumulated income would have to be  applied by  the  Trustees for the charitable purposes  mentioned  in clause  8. Consequently, the income of the trust  properties became  exempt from liability to income-tax as soon  as  the rights  of Bai Kasturbai ceased on execution by her  of  the ,deed of surrender dated 21st July, 1955, even though it may not be held that clause 8 came into operation from that very date.   It is in these circumstances that we consider  that, in  framing the question, the Tribunal committed  an  error. The  exemption  of the income of the trust  properties  from liability to income-tax was not dependent entirely on coming into operation of clause 8. and we,  therefore, think that the question framed  should  have been broken up into two parts as follows:-               " (1) Whether clause 8 of the Trust Settlement               made   on  25th  November,  1946,  came   into               operation     immediately    following     the               declaration  made  by Bai  Kasturbai  on  21st               July, 1955, and               (2)Whether,  in the circumstances  of  this               case, the income that accrued or arose to  the               Trustees  from the trust properties from  21st               July,  1955, onwards was exempt under  section               4(3)(i) of the Act." If the question is so broken up, the first question  becomes unnecessary,  and the second question has to be answered  in favour of the respondent.  The answer to the second question is the only one that is material for purposes of determining the  liability  of  the income of the Trust  to  tax.   That question  has been answered by the High Court in  favour  of the  respondent.   The  appeals,  therefore,  fail  and  are dismissed with costs.  There will be one bearing fee. R.K.P,S.                                             Appeals dismissed. 14