Vildirect: IncomeTax-caselaws-1977-VIL-288-BOM-DT

1977-VIL-288-BOM-DT

Equivalent Citation: [1980] 124 ITR 488, 1978 CTR 10

BOMBAY HIGH COURT

Date: 05.07.1977

COMMISSIONER OF INCOME-TAX, BOMBAY CITY III

PRUTHIVI TRUST

BENCH

Judge(s) : KANTAWALA., TULZAPURKAR

JUDGMENT

The judgment of the court was delivered by

KANTAWALA C. J.-At the instance of the revenue the following question is referred to us for our determination :

"Whether, on the facts and in the circumstances of the case, the claim of the assessee for exemption under section 4(3)(i) of the Indian Income-tax Act, 1922, for the assessment years 1958-59 to 1961-62 and under section 11(i) of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64 with reference to the income from a business carried on by the trust in which certain processes held under trust are exploited is proper ?"

The relevant previous years for the assessment years in question are calendar years 1957, 1958, 1959, 1960,1961 and 1962. M. A. Chaudary had obtained certain patents in respect of certain inventions made by him. He also held 45 Shares of Rs. 10 each in M/s. Milliers Ltd. On July 12, 1955, M. A. Chaudary created a trust in respect of the shares, patents, inventions and designs and other properties referred to therein for the objects therein specified. The relevant part of the trust deed provided as under :

" 1. That the trustees shall hold the said shares, patents, inventions and designs and all the patents, inventions and designs that may hereafter be donated to the trustees and all other donations, contributions, additions, profits, royalties, income, dividend, interest, accumulations and accretions thereon and/or any conversion or conversions thereof and/or any investment or investments in which the said donations, contributions, additions, accumulations or accretions may from time to time be invested, hereinafter called the 'Trust Assets' upon the following trusts and subject to the following powers, agreements, declarations, terms and conditions, namely:--"

In sub-clause (2) thereof several objects were set out and it is common ground that they are of a charitable nature. A few days after the execution of the trust, Chaudary donated on August 22, 1955, the following inventions to the trust for their exploitation:

1. A process for manufacturing sizing softener (olein).

2. A process for manufacturing sizing antiseptic (microlin).

The process in item 2 above for manufacturing, sizing antiseptic was being utilised in a manufacturing business carried on by the trust. The income derived therefrom is being applied for the charitable objects set out in the indenture of trust. There was no controversy between the assessee and the taxing authorities that the invention for manufacturing sizing antiseptic was held under the trust.

On October 22, 1958, the indenture of trust dated July 12, 1955, was amended. We have not got before us in the papers the original indenture of trust but it is stated in the statement of case that by this amendment object 2(j) which is as under was added :

2. (j) To conduct researches in all branches of science and to develop processes and products and to manufacture and market them to raise funds for the fulfilment of the aims and objects of the trust."

This amendment was in operation for all the assessment years from 1960-61 onwards.

For the relevant assessment years with which we are concerned the contention of the assessee was that the income of the trust from the manufacturing business carried on by it was exempt under s. 4(3)(i) of the Indian I.T. Act, 1922, for the assessment years 1959-59 to 1961-62 and under s. 11(1) of the I.T. Act, 1961, for the assessment years 1962-63 and 1963-64. This contention on behalf of the assessee was rejected by the ITO. He took the view that the business was not carried on in the course of carrying out the primary object of the trust and as such exemption could not be granted.

In an a peal preferred by the assessee, the AAC took the view that the business consisting of the manufacture and sale of sizing antiseptic was not carried on in the course of actual carrying out of the primary purpose of the institution. According to him the income from the trust was not exempt from tax for any of the years. Even for the years which were to be considered for assessment after introduction of cl. 2(j) he took the view that the said clause would help only in the exploitation of the inventions which came into existence after the trust started research and the trust was not entitled to the exemption claimed.

In a further appeal filed by the assessee before the Tribunal, the Tribunal took the view that the property under trust is the invention or patent, that so long as the income under consideration is traceable directly to the patent or invention, s. 4(3)(i) of the Indian I.T. Act, 1922, would apply. The interposition of a business is only a mechanism for exploitation of the patent and the business is not such as to dissociate the income from the property held under trust. According to the Tribunal consequently the provisions of s. 4(3)(i) were attracted. It also pointed out that the business is incidental to the exploitation of the patents and inventions and what is incidental is a part of the trust. If the patents and inventions are taken out, there would be no business left. According to him the business itself is, therefore, held under trust. The Tribunal went further and held that even assuming that the business was not held under an express trust, the embarking by the trustees with the trust assets gave rise to a trust and the business can in such a case be taken as held under trust as the trustees cannot set up a title adverse to the trust and claim the business as their own. The business, therefore, is that of the trust. On introduction of cl. 2(j) which was added by the amendment made on October 22, 1958, according to the Tribunal it was only with reference to the processes and products developed by research after the trust came into existence and in the course of carrying out the activities of the trust. According to the Tribunal as the process itself was developed by the settlor even before the trust came into existence cl. 2(j) would not apply and the prov. (h) to s. 4(3)(i) would not also apply for the assessment years 1959-60 to 1961-62. According to the Tribunal the income for these years was exempt under the main clause. After the I.T.Act, 1961,came into force it contained s.11(1)which was more or less similar to s. 4(3)(i) of the Indian I.T. Act, 1922. The Tribunal also took the view that even for the years 1962-63 and 1963-64 where the provisions of the I.T. Act, 1961, were applicable the income was exempt. It is against this order of the Tribunal that at the instance of the revenue the reference has been made to this court.

Mr. Joshi on behalf of the revenue submitted that the provisions of s. 4(3)(i) of the Indian I.T. Act, 1922, will only be attracted if any income is derived from property held under trust or other legal obligation wholly for religious or charitable purposes and it also must satisfy the other conditions laid down in this clause. His submission was that the expression " income derived from property held under trust " connotes that the income must directly and substantially be derived from the property held under trust. If it is not so, then the benefit of s. 4(3)(i) will not be available to the assessee. He urged that in respect of assessment years 1958-59 to 1961-62, which were governed by the provisions of the Indian I.T. Act, 1922, the matter should be considered independently for the years when cl. 2(j) was operative and those in which it was absent. His submission was that, as stated in the statement of case, it is quite apparent that cl. 2(j) was in operation for all the assessment years from 1960-61 onwards. His submission was that before cl. 2(j) was introduced in the trust deed the trustees had neither the power to carry on business, nor could it be said that any income derived from business carried on with a view to exploit the patent or invention was income derived from property held under trust. Unless the property held under trust was the immediate and proximate cause of the income the benefit under s. 4(3)(i) will not be available. In short he submitted that prior to the addition of cl. 2(j) it is quite apparent that in no sense of the term the business carried on by the trustees for exploitation of the invention or patent can be regarded as income derived from property held under trust. For the assessment years 1960-61 and 1961-62, which were governed by the provisions of the Indian I.T. Act, 1922, his submission is that so far as these two years are concerned, a distinction should be made between income derived from property held under trust and income derived not from property held under trust but from business which the trustees were authorised to carry on under the enabling power contained in the indenture of trust. If such distinction is borne in mind, his submission is that any income derived from business which the trustees are authorised to carry on after the introduction of cl. 2(j), cannot be regarded as income derived from property held under trust. In short his submission is that to determine the property held under trust regard should be had to the operative part of the indenture of trust and reference can only be made to those properties which are settled upon trust. What the trustees may be permitted to do under the enabling provisions cannot be regarded as property held under trust and, therefore, even for these two years the income from business cannot be regarded as exempt under s. 4(3)(i). For the assessment years 1962-63 and 1963-64, which are governed by the provisions of the I.T. Act, 1961, his submission is that there is one additional reason why such income from business cannot be regarded as income derived from property held under trust. He pointed out that under the provisions of s. 11(1) of the I.T. Act, 1961, it is income derived from property held under trust wholly for charitable or religious purposes that cannot be included in the total income provided the other conditions in the said sub-section are fulfilled. He pointed out that the expression " charitable purpose " has been defined in s. 2(45) of the I.T. Act, 1961, and under that definition if the activity authorised to be carried on by the trustees is the advancement of any object of general public utility, then it will be a charitable purpose only if such object of general public utility does not involve the carrying on of any activity for profit. He submitted that in the present case if the patents and inventions are exploited by the trustees they are indulging in an activity for profit and, therefore, having regard to the special definition given in cl. 2(15) of the I.T. Act, 1961, such purpose cannot be regarded as a charitable purpose and it cannot be said that even after the introduction of cl. 2(j) in the trust deed the business was property held under trust wholly for charitable purposes. He, therefore, submitted that the Tribunal was in error in granting exemption to the trustees for all the assessment years in question either under s. 4(3)(i) or under s. 11(1), as the case may be. Mr. Patil, on the other hand, on behalf of the assessee submitted that any business in which the patent covered by the trust deed is used is property held under trust. He further submitted that the patent itself is property held under trust and, therefore, income derived from business in which such patent is used is income from patent which is the property held under trust. In any event, he submitted that even if for any year it may be contended by anybody that the business was not authorised having regard to the terms of the trust deed as then existing even then as such business was carried on by the trustees with the help of the trust estate, there will be a constructive trust in respect of the business so carried on as well as the income derived from such business. Even looked at from that point of view, irrespective of the fact whether cl. 2(j) was introduced or not for all the relevant years, as the business was carried on by the trustees the income that had been brought to tax is income derived from property held under trust and is, therefore, exempt under s. 4(3)(i) of the Indian I.T. Act, 1922, for the assessment years 1958-59 to 1961-62, and under s. 11(1) of the I.T. Act, 1961, for the assessment years 1962-63 and 1963-64. He also submitted that for determining the scope of the expression " property held under trust " one has not to merely look at the actual trust estate which has been settled upon trust. His submission is that even if under the enabling powers conferred by the trust deed the trustees are authorised to carry on business with the use of any of its assets, like patents and inventions in the present case then naturally such business will automatically be property held under trust and the benefit of the exemption both under s. 4(3)(i) and s. 11(1) of the relevant I.T. Acts would be available.

In the trust deed as executed on July 12, 1955, the provisions of cl. 1 indicate that the property held under trust were " the said shares (45 shares of Rs. 10 each in M/s. Milliers Ltd.), patents, inventions and designs and all the patents, inventions and designs that may hereafter be donated to the trustees and all other donations, contributions, additions, profits, royalties, income, dividend, interest, accumulations and accretions thereon and/or any conversion or conversions thereof and/or any investment or investments in which the said donations, contributions, additions, accumulations or accretions may from time to time be invested (hereinafter called the 'trust assets') ". When the trust deed was initially executed on July 12, 1955, the trustees were not clothed with the power to carry on business of manufacturing products and marketing them with a view to raise funds for the fulfilment of the aims and objects of the trust. Having regard to the introduction of cl. 2(j) by the amendment made on October 22, 1958, which, as stated in the statement of case, was in operation from the year 1960-61 onwards, it is necessary in the present case to divide the period with which we are concerned into the following three categories:

1. Assessment years 1958-59 and 1959-60, governed by the Indian I.T. Act, 1922, when cl. 2(j) was not added in the trust deed.

2. Assessment years 1960-61 and 1961-62, governed by the Indian I.T. Act, 1922, when cl. 2(j) was existing in the trust deed.

3. Assessment years 1962-63 and 1963-64, governed by the I.T. Act, 1961, when cl. 2(j) was in operation but the definition of the words charitable purpose " existed as defined in cl. 2(15) of the said Act.

In order to ascertain the scope and ambit of the expression " income derived from property held under trust " reference can be had to the decision of this court in J. K. Trust v. CIT [1953] 23 ITR 143. In this case, the High Court has held that in order to claim exemption it is not sufficient that the property is indirectly responsible for the income. The income must directly and substantially arise from the property held under trust. For arriving at this conclusion this court referred to the decision of their Lordships of the Privy Council in CIT v. Kamakhya Narayan Singh [1948] 16 ITR 325 at p. 328, where the definition of the expression has been given of the word " derived ". At page 151 (of 23 ITR) this court pointed out :

" Reference might also be usefully made to the definition of the expression ' derived ' given by the Privy Council in Commissioner of Income-tax v. Kamakhya Narayan Singh [1948] 16 ITR 325. It is true that their Lordships were there considering the question of agricultural income, but the interpretation placed upon the expression 'derived' by their Lordships is not without assistance for interpreting the same expression in section 4(3)(i). The expression used in this section is 'any income derived from property held under trust', and to put upon it the interpretation put by the Privy Council, the property must be the effective source from which the income arises. It is not sufficient that the property should be indirectly responsible for the income. The income must directly and substantially arise from the property held under trust ........"

As prior to the introduction of cl. 2(j) in the trust deed the trustees had no authority to carry on business of manufacturing and marketing products with the use of patents and inventions, ordinarily any income derived from such business cannot be regarded as income derived from property held under trust. Before cl. 2(j) was introduced in the trust deed, as the trustees were not clothed with the power to carry on business, it cannot be said that merely because the patents and inventions which were the subject-matter of the trust were utilised therein, such business was property held under trust under the trust deed. Before the amendment of the trust deed what were the trust assets is enumerated in cl. 1 of the trust deed referred to above and there is nothing in that clause read with the objects upon which the trust property is to be held to indicate that the trustees were either authorised to carry on the business or such business should be regarded as property held under trust. It is not possible for us to accept the contention of Mr. Patil that simply because the patent which is the property held under trust is one of the assets used in carrying on business, the business itself should be regarded as property held under trust. What are the properties held under trust will depend upon the provisions of the trust deed and one thing is quite clear that neither under the operative part of cl. 1 of the trust deed nor the enumeration of the objects the business to manufacture and market products by the use of the patents and inventions was either the property held under trust or was an activity which was authorised to be carried on having regard to the provisions of the trust deed as then existing.

Simply because a patent or invention which is used in a business is held under trust it cannot be said that income derived from the business in which such patent or invention is used is income derived from property held under trust. It may be true that before the introduction of cl. 2(j) if the trustees carried on business in which the patents were used they would be held liable to make good the profits, if any, made in such business to the trust and after such profits were made good to the trust, such profits would be treated as trust estate or property held under trust, but, that does not mean that the business which is unauthorisedly carried on by the trustees before the introduction of cl. 2(j) can be regarded as property held under trust. No trustee is permitted to make any profit or gain by the use of trust property for himself. If such user was made by him he would be committing a breach of trust and for the breach of trust he would be accountable to make good the profits to the trust. Business can only be regarded as property held under trust if even the losses incurred in such a business, though carried on unauthorisedly, could have been reimbursed by the trustees out of the trust estate but such a thing is not permissible when the carrying on of the business was in breach of trust. Simply because in a case of breach, the trustee is held liable to make good the profits, be made to the trust, it cannot be said that the activity indulged in or the business carried on was the property held under trust. Thus, prior to the amendment of the trust deed dated July 12, 1955, by the introduction of cl. 2(j), when the trustees carried on business in the relevant years corresponding to the assessment years 1958-59 and 1959-60, the income derived from such business cannot be regarded as income derived from property held under trust within the meaning of s. 4(3)(i) of the Indian I.T. Act, 1922. Thus, in our opinion, the income for these two years will not be exempted from tax under the provisions of s. 4(3)(i) of the Indian I.T. Act, 1922.

That takes us to the two years 1960-61 and 1961-62, which are governed by the Indian I.T. Act, 1922, and when cl. 2(j) was already introduced in the trust deed. An attempt was made by Mr. Patil to urge that as cl. 2(j) was introduced on October 22, 1958, even the profits of the earlier year should be considered on the basis that cl. 2(j) will be available because profits can only be ascertained at the end of the calendar year. We have not permitted Mr. Patil to urge this contention because the original trust deed is not before us. Secondly, in the agreed statement of case, there is a clear statement to the effect that cl. 2(j) was in operation for all the assessment years from 1960-61 onwards. In that view of the matter, it will not be open to Mr. Patil to raise a new point especially when no such point was ever raised either before the taxing authorities or the Tribunal.

After the introduction of cl. 2(j) the trustees were clothed with the power to manufacture and market products with a view to raise funds for the fulfilment of the aims and objects of the trust. It was urged by Mr. Joshi on behalf of the revenue that cl. 2(j) is a composite clause and the, activities like manufacturing and marketing of products were only restricted to those products which were produced after conducting researches in all branches of science and developing processes and products. He submitted that all the things enumerated in cl. 2(j) are cumulatively to be done and only if that is done, then the manufacturing and marketing of products with a view to raise funds for fulfilment of the aims and objects of the trust will come within the scope of cl. 2(j). At the outset, it may be stated that such a contention cannot be accepted. Clause 2(j) is introduced in the object clauses which are referred to in sub-cl. (2) of cl. 1 of the trust deed and simply because the word " and " is used amongst the three activities, it does not mean that each one of them has to be carried on cumulatively before it becomes authorised and the business can be regarded as one authorised by the powers conferred under the trust deed. Under cl. 1 various powers are conferred upon the trustees and such powers can be exercised by them either cumulatively, conjunctively or disjunctively. As an illustration reference can be had to sub-cl. (2)(a) of the object clauses. It relates to " promotion, advancement and propagation of education and learning in all branches of science, industry and agriculture ". Simply because the word " and " is used in the last three words " science and education ", it cannot be said that unless all the three activities are carried on conjunctively the act done will not be within the ambit of sub-cl. (2)(a). Any one of these activities is within the ambit of the object clauses and if the trustees utilise the trust property for carrying on any one of these objects it is used for purposes permitted by the trust.

The question then arises, simply because under cl. 2(j) the trustees are authorised to manufacture and market products with the use of patents and inventions settled upon trust, does it mean that such activities of manufacturing and marketing the products can be regarded as property held under trust. More than one reason exists why such business can be regarded as property held under trust. Even on a plain reading of cl. 2(j) the trustees were clothed with the power of manufacturing and marketing products with the use of the patents and inventions settled upon trust and that was to be done with the idea of raising funds for the fulfilment of the aims and objects of the trust. When such activity is done by the trustees, then it is quite clear that the business so done is the business of the trust and once it is the business of the trust the business itself will be the property held under trust. If any authority is required for this proposition it is to be found in the decision of the Madras High Court in Thiagesar Dharma Vanikam v.CIT[1963]50 ITR 798. In that case the object of the trust was to establish, maintain and run schools,colleges, libraries, hospitals, maternity homes and other institutions of a public charitable nature. The objects also included renovation of places of worship and temples dedicated to Hindu religion and the establishment of institutions devoted to the propagation of Hindu religion. The property that was settled upon trust under this trust was Rs. 61,000. By one of the clauses of the indenture of trust, power was given to the board of trustees to employ the trust funds in such industry, trade or business as the trustees or a majority amongst them may deem fit and proper. The question arose, even though the property settled upon trust consisted of Rs. 61,000 can the business which may be carried on by the board of trustees under the enabling provisions be regarded as property held under trust ? The Madras High Court held that the business owned and carried on by the trust is of course held under trust. The word " property " in s. 4(3)(i) includes business. Income from business held in trust for a religious or a charitable purpose applied or earmarked for application for the purpose of the trust, falls within the exemption provided for under s. 4(3)(i). In view of this decision, it is quite apparent that after the introduction of cl. 2(j) since the trustees were authorised to carry on business of manufacturing and marketing products by the use of the patents and inventions settled upon trust, such business was property held under trust. Even apart from that, if regard be had to the operative part of cl. 1 of the indenture of trust it is quite clear that the following properties are settled upon trust and are, therefore, properties held under trust under the deed :

1. 45 shares, patents, inventions and designs.

2. All the patents, inventions and designs that may hereafter be donated to the trustees.

3. All other donations, contributions, additions, profits, royalties, income, dividend, interest, accumulations and accretions thereon.

4. Any conversion or conversions thereof, and

5. Any investment or investments in which the said donations, contributions, additions, accumulations or accretions may from time to time be invested.

After the trust deed was executed, on August 22, 1955, Chaudary donated the following inventions to the trust for their exploitation :

1. A process for manufacturing sizing softener (olein).

2. A process for manufacturing sizing antiseptic (microlin).

It is the second of these processes that has been utilised for the manufacturing business carried on by the trust. Since the property settled upon trust includes patents donated thereafter and also conversions and investments thereof it is quite clear that if business to manufacture and market products with a view to carry out the aims and objects of the trust was carried on by the trustees after they were clothed with the power under cl. 2(j) such business will in any event fall within the various properties which are settled upon trust as indicated in cl. 1. Thus, for the two years 1960-61 and 1961-62, it is quite clear that when the case was governed by the Indian I.T. Act, 1922, the income derived from the business was fully exempt under s. 4(3)(i) because that was income derived from property held under trust or other legal obligation wholly for religious or charitable purposes. There is no controversy in the present case that the income in the present case was either applied or accumulated for application to such religious or charitable purposes. Thus, for the two years 1960-61 and 1961-62, when cl. 2(j) was operative and the case was governed by the Indian I.T. Act, 1922, the income of the business for these two years would be exempt from tax under s. 4(3)(i) as it is income derived from property held under trust.

That takes us to the assessment years 1962-63 and 1963-64 which are governed by the I. T. Act, 1961. There is no controversy in the present case that for these two years the case was governed by s.11(1) of the Act as then existed and the language thereof was more or less similar to that of a. 4(3)(i) of the Indian I.T. Act, 1922. However, the definition of the expression " charitable purpose " has been altered by s. 2(15) of the I.T. Act, 1961. Under the Indian I. T. Act, 1922, in s. 4(3), the expression "charitable purpose " includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. This definition given in s. 4(3) of the Indian I.T. Act, 1922 was modified, when the I.T. Act, 1961, was enacted. Section 2(15) of the latter Act defines the expression " charitable purpose " as under:

"2. (15) 'Charitable purpose' includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit. "

It is unnecessary for the purpose of the present case to consider whether the last words " not involving the carrying on of any activity for profit " go merely with the word " advancement " or go with both the parts of the definition. Even if we assume that these words go with the latter part of the definition, still as the carrying on of the business, with a view to make profit, of manufacturing and marketing products by using patents and inventions donated to the trust, is an activity for making profits such a thing will be excluded from the definition given in s. 2(15) of the expression " charitable purpose ". The very words of cl. 2(j) make it apparent that the object of carrying on the business of manufacturing and marketing the products by using the patents and inventions is to make profit so as to raise funds for the fulfilment of the aims and objects of the trust. If that is so, such an activity cannot be regarded as a charitable purpose in view of the definition of that expression in s. 2(15) of the I.T. Act, 1961. As under s. 11(1) as it then existed, only income derived from property held under trust wholly for charitable or religious purposes has to be excluded from computation of total income of the previous year, the trustees will not be able to get the benefit of this provision for the assessment years 1962-63 and 1963-64, because the carrying on of the business is an activity for profit.

It was urged by Mr. Patil that the whole of cl. 2(j) should not be regarded as the object clause but should be split up into two parts, namely, to conduct researches in all branches of science and to develop processes and products which according to him should be regarded as the object while the latter part, namely, to manufacture and market them (products), to raise funds for the fulfilment of the aims and objects of the trust should be regarded as an enabling power. Such a construction is not permissible if regard be had to the wording of sub-cl. (2) of cl. 1 which enumerates the various objects. Sub-clause (2) starts with the words "Upon trust to utilise and apply the net balance of the income or the corpus of the trust assets for the following objects, namely ". And then the various objects are enumerated. Thus, it is quite clear that whatever is enumerated in the various object clauses following sub-cl. (2) constitutes the objects of the trust and no distinction can be made to the effect that they only partially constitute the objects and partially not. Thus, this contention of Mr. Patil cannot be accepted.

Thus, our answer to the question referred is as under :

The claim of the assessee for the assessment years 1958-59 and 1959-60 under s. 4(3)(i) of the Indian I.T. Act, 1922, and for the assessment years 1962-63 and 1963-64 under s. 11(1) of the I.T. Act, 1961, with reference to income from business carried on by the trust in which certain processes held under trust are exploited, was not proper, while the claim of the assessee for exemption under s. 4(3)(i) of the Indian I.T. Act, 1922, for the assessment years 1960-61 and 1961-62 with reference to income from business carried on by the trust in which certain processes held under trust are exploited was proper. As both the parties have partially succeeded in this reference each party will bear its own costs.

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