http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: SARDAR BAHADUR S. INDRA SINGH TRUST

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, BENGAL

DATE OF JUDGMENT25/08/1971

BENCH: HEGDE, K.S. BENCH: HEGDE, K.S. GROVER, A.N.

CITATION:  1972 AIR   34            1972 SCR  (1) 392  1971 SCC  (3) 364  CITATOR INFO :  R          1973 SC1252  (2)  R          1981 SC 968  (2)

ACT: Gift made to charitable trust-If valid. Income-tax Act, s. 4(3)(i)-If the income of charitable trust arising from a gift will augment the assessee trust.

HEADNOTE: The assessee is a charitable trust created under two  trusts deeds.   One ,of the trustees, gifted certain fully paid  up equity  shares  to the trust.  On the said  shares  dividend accrued  on which tax was deducted at source.  The  trustees claimed that the said income of the assessee was exempt from payment of income-tax in view of s. 4 (3) (i) of the Act and hence  they  claimed refund of the tax deducted  at  source. The  Income-tax Officer refused to grant the refund  on  the ground that the trust deed did not contain any provision for receipts of gifts from outsiders and so the gift in question was not a valid gift. The  Appellate Assistant Commissioner and the Tribunal  held the  gift  valid  and  decided  against  the  revenue.    On reference,  High Court held that the gift was a valid  gift, but  it did not have the effect of augmenting  the  assessee trust and the assessee was not entitled to get the refund of -the tax. HELD : (i)That the gift was a valid gift.  The trustees  had accepted  the  gift.  The trust deed does not  prohibit  the trustees from accepting a new gift.  The trustees can accept gift  from third parties for the purpose of  furthering  the objectives of the trust.  So long as the trust deed did  not prohibit  from receiving such gifts and so long as the  gift made  did not in any manner impinge on the objects  intended to  be  achieved  by the Trust.  In the  present  case,  the shares  gifted  are  vested  in  the  appellant  trust   and therefore,  the trust is entitled to the dividends  received in  respect  of the gifted shares.  Since  the  dividend  is exempt from tax under s. 4(3) (i) the appellant is -entitled to the refund claimed. [397 A-D]

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeals Nos.  1885  of 1968 and 1084 of 1971. Appeals  from the judgment and order dated November 7,  1967 of the Calcutta High Court in Income-tax Reference No. 21 of 1964. S.R. Banerjee, P. C. Bhartari, for the appellant (in both the  appeals) V.S.  Desai,  P.  L. Juneja, R. N.  Sachthey  and  B.  D. Sharma, for the respondent (in both the appeals). The Judgment of the Court was delivered by Hegde, J. Both these appeals arise from the decision of  the ,Calcutta  High Court in a Reference under s. 66(1)  of  the Indian  Income-tax Act, 1922 (to be hereinafter referred  to as ’the Act. 3 93 The first of these two appeals was brought by the  appellant Trust  on the strength of a certificate granted by the  High Court  under s. 66(A) (2) of the Act.  In  that  certificate all that we find is a bald statement by the High Court  that the case is a fit one for appeal to this Court.  This  Court has  ruled that such a certificate is an invalid one and  an appeal brought on the strength of such a certificate is  not maintainable.   It is for that reason, the  appellant  filed the  Special  Leave  application No. 2214  of  1971  seeking special  leave  from this Court to appeal against  the  very judgment which was the subject matter of the appeal in Civil Appeal No. 1885 of 1968.  After hearing the parties, we came to  the  conclusion  that the leave  asked  for  -should  be granted.  That Petition is now numbered as Civil Appeal  No. 1084 of 197 1. The two questions referred to the High Court are               "(1) Whether on facts and in the circumstances               of the case, the Tribunal was right in holding               that  the gift made by Sardar Ajaib Singh  was               valid and complete in law ?               (2)If  the answer to the first question is  in               the affirmative then whether on the facts  and               in the circumstances of the case, the assessee               was entitled to the refund of tax deducted  at               source on the dividends accruing on the shares               gifted by Sardar Ajaib Singh ?"               The  High  Court answered these  questions  as               follows               "1. The gift made by Sardar Ajaib Singh was  a               valid  and complete gift but did not have  the               effect of augmenting the assessee trust, and               2.The  assessee  was not entitled  to  the               refund  of  the  tax  deducted  at  source  on               dividends  accrued  on the  shares  gifted  by               Sardar Ajaib Singh ?" Now  let us turn to the facts a set out in the Statement  of case.   The assessment years with which we are concerned  in these  appeals  is 1960-61 for which the  relevant  previous year  ended on March 31, 1960 The assessee is  a  charitable Trust  constituted  under a Trust Deed  dated  December  19, 1944.  A-- supplementary Trust Deed was executed on  January 10, 1951.  In the first Trust Deed, the objects of the trust are mentioned as those that "Trustees may in their  absolute discretion  from time to time determine in and :towards  the attainment assistance or support of such charitable  purpose or purposes as the Trustees may in their unfettered judgment deem  to  be  the most deserving of  support."  The  objects mentioned  in the first deed were further elaborated in  the second Deed which requires the Trustees to spend the  income

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

"  amongst  others  for  the  advancement  of  learning  and education 3 94 and/or  ameliorations of the sufferings of all  citizens  of the Indian Union, irrespective of caste, colour or creed for maintaining  library  or libraries for the free use  of  the public in general who are residents of the Indian Union  for fostering  encouraging  and providing the means  of  healthy recreation including teaching or singing classes or choruses for the residents of the Indian Union and for the purpose of providing  music  and instruments for the town  and  in  the premises  hereinbefore  mentioned for meeting  the  expenses wholly or in part of the Khalsa High School and A. V. Middle Schools to the extent and for and during such times as  long as the trust continues and/or to apply such income in  simi- lar  such  objects as the ,trustees may  in  their  absolute discretion  from time to time determine in and  towards  the attainment assistance and support of such charitable purpose or purposes as the Trustees may in their unfettered judgment deem to be the most deserving of support." Sardar  Ajaib  Singh one of the Trustees  of  the  appellant Trust  by his letter dated January 23, 1959 transferred  640 fully  paid  up  enquity shares of the  face  value  of  Rs. 6,40,000/- to the assessee reserving to himself the right to revoke  and  recall the transfer or either  the  entire  640 shares  or any portion thereto but not until the  expiry  of clear full seven years from the date of the delivery of  the shares  to  the Trust.  The Trustees by their  letter  dated February  1, 1959 accepted the offer and also the terms  and conditions  upon which the offer had been made and  ratified the  same by the resolutions of the Trustees dated  February 5, 1959 and March 4. 1959.  The shares were transferred  and given  delivery  of  to the Trustees.  On  the  said  shares dividend  amounting to Rs. 1,28,000/- accrued on  which  tax was  deducted at the source.  The Trustees claimed that  the said  income  of  the assessee was exempt  from  payment  of income-tax in view of s. 4(3)  (i) of the Act.   Hence  they claimed   refund  of  the  tax  deducted  at   the   source, The.Income-tax Officer refused to grant the refund asked for on the ground that the Trust Deed under which, the Trust was formed  did  not  contain  any  provision  for  receipts  of donations  or  gifts from outsiders and therefore  the  gift made by Sardar Ajaib Singh of the 640 shares was not a valid gift.  He also observed that the transfer of the shares  was revocable   after   seven  years  and  accordingly   was   a conditional transfer; hence the assessee was precluded  from claiming the refund of the tax deducted at the source. The  assessee appealed against that order to, the  Appellate Assistant Commissioner.  That Officer upheld the  assessee’s right  to  the refund of tax on the ground that  during  the relevant year the shares did belong to the assessee and  the dividend  income  accruing  thereon was the  income  of  the assessee  and  therefore refund of the tax deducted  at  the source was allowable. 395 The Department went up in appeal to the Income-tax Appellate Tribunal  as  against that order.  Before the  Tribunal  the Department  contended  that the Trust was not  competent  to receive gifts from outsiders.  There being no clause in  the Trust  Deed  empowering the receipt of such gifts.   It  was further  contended  that  the  gift  being  conditional  and revocable was invalid in the eye of law.  The Tribunal found that  the assessee was a public charitable Trust and it  was not  limited  in  its scope of activities  within  the  four corners of the crust Deed by which it was created.  A public

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

charitable  Trust,  the Tribunal held, was  entitled  as  of right to receive gifts and donations from the public and  as such  the gift of the shares made by Sardar Ajaib Singh  had been  validly  received  by  the  assessee.   The   Tribunal accordingly dismissed the first contention raised on  behalf of  the Department.  It is not necessary for us to refer  to the  facts relating to the second contention as that  matter is  not  in issue before us, now the same having  been  held against the Department by the Tribunal. While  dealing with the reference made by the  Tribunal,  as mentioned earlier, the High Court upheld the validity of the gift ’made by Ajaib Singh but strangely enough after holding that  the gift in question was a valid one, it came  to  the conclusion  that the, said gift did not have the  effect  of augmenting  the assessee’s Trust and therefore the  assessee was  not entitled to the refund of the tax deducted  at  the source on the dividend accrued on the shares gifted by Ajaib Singh.  To us these findings appear to be somewhat  mutually conflicting.   If the gift in question was a valid one  then the Trust became the owner of the shares gifted.  That being so  it  also  became the owner of  the  dividends  received. Hence  those  dividends will have to be  considered  as  the income of the Trust. The  reason which persuaded the learned judges of  the  High Court  for  coming to the above conclusion are  set  out  in their  judgment at pp. 21 and 22 of the printed paper  book. We shall quote that part of the High Court’s judgment :               "The question for our consideration,  however,               is  whether  the  gift,  as  accepted  by  the               trustee,  had  the effect  of  augmenting  the               assessee  trust  for  taxation  purposes,   or               whether the effect of it was that it  remained               a separate trust in the hands of the  trustees               of the assessee trust, with liberty to them to               apply  the income of the subsequent trust  for               the  benefit  of  the  assessee  trust.    Mr.               Banerjee  urged  that  it  was  not  necessary               expressly to empower the trust as of a  public               trust     to   accept   gifts,   donations   or               endowments.   That, he submitted, was a  power            inherently vested in them.  We have our doubts.               396               Trust  is a confidence reposed in a person  or               persons, with respect to property of which  he               had  or  they have legal  possession  or  over               which  he or they can exercise power,  to  the               intent  that he or they may hold the  property               or exercise the power for the benefit of  some               other person or object.  Now, this  confidence               may  not  necessarily include  in  itself  the               liberty   that  the  trustees  would   go   on               accepting  donations  and try to  augment  the               trust to such dimensions that the purpose  for               which  the original trust was created  may  be               swamped  or  modified  or  qualified.   If   a               settler wants to invest the trustees with such               a  power, it is but reasonable to expect  that               the  power  should be conferred  by  the  deed               which  created trust. The trust that-,we  have                             to consider does not appearto confer upon               the trustees the further power to acceptdonations               gifts or endowments.  We therefore, do notthink               that  the  trustees have the  liberty  or  the               right  to accept further gifts in the  absence

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

             of   specific   authorisation,   augment   the               original  trust and then claim the benefit  of               section  4(3)  (i) of  the  Indian  Income-tax               Act." It is somewhat difficult to follow the reasoning adpoted  by the learned judges of the High Court.  Either the gift  made by Ajaib Singh and accepted by the Trustees was a valid gift or  it  was not a valid gift.  If it was a valid  gift,  the shares  gifted became the property of the Trust.  If it  was not  a  valid  gift, the shares still continued  to  be  the property  of Ajaib Singh.  It is no body’s case  that  there was  a Trust within a Trust.  No such Trust is  put  forward either  by the Department or pleaded by the  assessee.   The existence  of a Trust is a fact and not a fiction.  We  fail to see how the learned judges were able to come to the  con- clusion  that Ajaib Singh while gifting the  shares  created one more Trust without any writing and without any objective and  appointed the Trustees of the assessee Trust to be  the Trustees of the new Trust as well.  These assumption have no basis either in fact or in law. At  this stage we may mention that the very  learned  judges who decided this Reference had held in Wealth Tax  Reference No.  444 of 1963 on the file of the High Court  of  Calcutta that the shares gifted by Ajaib Singh did not continue to be his property.  If they are not Ajaib Sing’s property,  whose property  are they ?  The only answer is that they  are  the property of the appellant Trust.  Those shares cannot  float in the -mid air.  They must be owned by someone.’ As  seen  earlier,  the appellant is a  public  Trust.   Its objects  are  charitable objects Ajaib Singh made  over  the shares to that 3 97 Trust  for effectuating the very objects of the  Trust.   He did  not  stipulate any other object to  be  attained.   The Trustees  had  accepted the gift.  The Trust Deed  does  not prohibit the Trustees from accepting a new gift.  We fail to see  what  difficulty was there for the Trustees  to  accept gifts  from third parties for the purpose of furthering  the objectives  of the Trust, so long as the Trust Deed did  not prohibit  them from receiving such gifts and so long as  the gift  made  did  not in any manner impinge  on  the  objects intended  to be achieved by the Trust.  We fail to  see  why the Trustees could not accept that gift. In  our  opinion the assumption of the High Court  that  the Trustees were incompetent to receive the gift made by  Ajaib Singh is an erroneous one.  On the other hand we agree  with the  Tribunal that the gift made by Ajaib Singh was a  valid gift,  the  shares  gifted  are  vested  in  the  Trust  and therefore the Trust is entitled to the dividends received in respect  of  those  shares.  In view of s.  4(3)  (i),  that dividend  is  exempt  from  tax.   Hence  the  appellant  is entitled to the refund claimed. In  the result we allow Civil Appeal No. 1084 of 1971,  dis- charge  the  answers given by the High Court  and  in  their place, we answer the questions referred to the High Court in the  affirmative  and  in  favour  of  the  assessee.    The appellant is entitled to its costs in this appeal. We revoke the certificate produced in Civil Appeal No.  1885 of  1968.  In view of our decision in Civil Appeal No.  1084 of 1971, there is no need to send that case back to the High Court  for  giving reasons in support  of  the  certificate. That   appeal   is  accordingly  dismissed  as   being   not maintainable-no costs. S.C. C.A. 1084 of 71 allowed.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

C.A. 1885 of 68 dismissed. 7-L1340SupCI/71 398