1995-VIL-47-SC-DT
Equivalent Citation: Other Citation: [1996] 217 ITR 699 (SC), 1996 AIR 620, 1995 (5) Suppl. SCR 300, 1996 (7) SCC 349
Supreme Court of India
C.A. 1741 OF 1977
Date: 16.11.1995
COMMISSIONER OF INCOME-TAX
Vs
KAMLA TOWN TRUST
BENCH
B. P. JEEVAN REDDY. and S. B. MAJMUDAR.
JUDGMENT
The judgment of the court was delivered by
S. B. MAJMUDAR J.--In this group of 17 appeals by special leave, the Commissioner of Income-tax, Kanpur, has brought ill challenge the judgment and order dated February 20, 1975 of the Allahabad High Court in Income-tax References Nos. 18 of 1973 and 715 of 1972 (see [1982] 133 ITR 632). The respondent--Kamla Town Trust--is the common respondent in all these appeals, As common questions of law and fact are involved between the very same parties in all these appeals, the appeals were heard together and are being disposed of by this common judgment. The common respondent, Kamla Town Trust, was assessed to income-tax for the relevant assessment years 1949-50 to 1965-66. These assessment orders gave rise to a hierarchy of appeals under the Income-tax Act which ultimately culminated in 17 income-tax appeals by the assessee before the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad. The common question in the appeals before the Tribunal was whether for the relevant assessment years the respondent-assessee was entitled to exemption from the payment of income-tax as per the provisions of section 4(3)(i) of the Indian Income-tax Act, 1922 (hereinafter referred to as the "1922 Act"), and under section 11 read with section 2(15) of the Income-tax Act, 1961 (hereinafter referred to as "1961 Act"), in so far as they applied to the relevant assessment years. The Income-tax Appellate Tribunal dismissed the respondent-assessee's appeals for the assessment years 1949-50 to 1955-56 but it allowed the respondent-assessee's appeals for the assessment years 1956-57 to 1965-66 subject to the rider that the income derived from the trust property by the assessee will be exempt only within the limit permissible under section 11(1)(a) of the 1961 Act to the extent to which the income so accumulated is not in excess of 25 per cent. of the income from trust property or Rs. 10,000 whichever is higher, after the 1961 Act came into force. In other words, the rider applied to the assessments for the years 1962-63 to 1965-66. As both the Revenue and the assessee were partly aggrieved by the aforesaid common order of the Tribunal, they sought reference of the questions, ventilating their grievances under section 256(1) of the 1961 Act. The Tribunal accordingly granted these reference applications under section 256(1) and referred the following questions for the opinion of the High Court. At the instance of the respondent-assessee, two questions were referred for the opinion of the High Court :
" (1) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was not a public charitable trust and its income was not exempt under section 4(3)(i) of the Indian Income-tax Act, 1922, for the assessment years 1949-50 to 1955-56 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the second rectification decree dated 10th May, 1955, in Suit No. 163 of 1954, operates prospectively from the assessment year 1956-57 and does not have the effect of rectifying the deed of trust dated 27th October, 1941 as from the date of its execution ? "
While at the instance of Revenue, the Tribunal referred five questions as under :
"(a) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding by following the decision of the Allahabad High Court in the case of J. K. Hosiery Factory v. CIT [1971] 81 ITR 557 that even the unamended clause 3(19) of the memorandum of association of the settlor-company, viz., J. K. Cotton Spinning and Weaving Mills Co. Ltd., empowered the company to create a public charitable trust and the insertion of sub-section (22) in clause 3 of the memorandum of association by the company was a matter of abundant caution ?
(b) Whether, on the facts and in the circumstances of the case, it is open to the Revenue to take objection in these proceedings that the second rectification, Suit No. 163 of 1954, was barred by section 11 and Order 2, rule 2 of the Code of Civil Procedure, 1908 ?
(c) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the objects and activities of the trust fell within the first limb of the definition of charitable purpose in section 2(15) of the new Act and the residuary clause thereof is not attracted 'for the assessment years 1962-63 to 1965-66 ?
(d) Whether, on the interpretation of various clauses of the trust deed even as amended by the second rectification decree dated May 10, 1955, the trust is void for uncertainty and was not a public charitable trust ?
(e) Whether, on the facts and in the circumstances of the case, the Income-tax Officer was entitled to go behind the civil court decree dated May 10, 1955, in Suit No. 163 of 1954, and adjudge the validity of the rectification ?
The Division Bench of the High Court after hearing the rival contentions canvassed by the parties answered all the referred questions in favour of the respondent-assessee and against the Revenue. It is under these circumstances that the Revenue through the Commissioner of Income-tax, Kanpur, having obtained special leave to appeal has preferred these 17 appeals. It may be noted at the outset that though the Revenue lost on all the referred seven questions before the High Court, in the present proceedings at the stage of final hearing Dr. Gauri Shankar, learned senior counsel for the appellant-Commissioner of Income-tax highlighted the grievance of the Revenue centering round the answers of the High Court on some of the referred questions. The grievance highlighted on behalf of the Revenue by Dr. Gauri Shankar centered round the answers of the High Court to questions Nos. 1 and 2 referred on behalf of the assessee respondent as well as answers of the High Court on questions Nos. (d) and (e) referred on behalf of the Revenue.
Before proceeding to deal with the main submissions canvassed by learned senior counsel for the Revenue centering round the answers of the High Court on the aforesaid questions and the rival contentions canvassed by learned senior counsel Shri Verma for the respondent-assessee in support of these answers, it will be apposite to have a look at the relevant background facts leading to the present proceedings.
Background facts :
The assessee is a trust created by a trust deed dated October 27, 1941, executed between J. K. Spinning and Weaving Mills Co. Ltd., Kanpur (hereinafter called "the company"), of the one part and Sir Padampat Singhania, Lala Kailashpat Singhania and Lala Laxmipat Singhania (herein after called "the trustees") of the other part. The company was registered under the provisions of the Indian Companies Act 7 of 1913 with its registered office at Cawnpore in U. P. The objects of the trust deed in its original form show that it was created with a view to construct a settlement or colony for their workmen together with amenities in the shape of hospitals, schools, temples, mosques, recreation places and for such other works directly concerning the amenities of workmen. The company made an application to the Improvement Trust, Kanpur, for demising to it two tracts of land in Kanpur at concessional rates. The Improvement Trust demised one plot of land to the company for constructing the colony with an extra plot of land for the purpose of constructing a water pump station by an indenture dated October 19, 1936, for a consideration of Rs. 43,700. Another plot of land was demised by the Improvement Trust to the company by an indenture dated February 2, 1938, for a consideration of Rs. 26,300 for constructing an office for the said settlement. Both these plots were demised to the company at concessional rates for the welfare of workmen. The company transferred both the plots by the said trust deed of October 27, 1941, to the trustees for effectuating its object of settling these plots upon the charitable trust thereinafter mentioned in the deed.
We will deal with the relevant recitals in the trust deed, in detail, at an appropriate stage in the latter part of this judgment. Suffice it to state at this juncture that one of the objects of the trust, as mentioned in paragraph 2(b) of the trust deed of 1941 was as under :
" To erect, establish, equip, furnish, fit, maintain and repair on the said two plots of land, and any land that may hereafter be acquired by the trust.
(1) residential quarters, chawls or buildings for the workmen and staff and other employees of the company or other allied concerns under the management or in which the directors of the company may for the time being be interested and for their respective families and dependents and for such other skilled and unskilled workmen, craftsmen, traders, merchants, technical or professional men whom the trustees may permit to reside or work in the said two plots with a view to supply their needs and requirements or to render them services or to cater to their wants comforts conveniences and amenities."
Later on the settlor-company filed a suit being Suit No. 40 of 1945 in the Court of Civil and Sessions judge, Kanpur, under section 31 of the Specific Relief Act, 1877, for rectification of the trust deed so as to bring it in conformity with its real intention to create a public charitable trust. It was alleged in the plaint that having regard to its memorandum of association, the settlor-company intended to settle the properties mentioned in the trust deed and transfer them to the trustees for the purposes of creating a public charitable trust including the benefits of its own employees, but the operative part of the trust deed was found to be less comprehensive than what was intended by the parties thereto at the time when the instructions were. given for preparing a draft of the same and when they executed the deed of trust. The settlor-company further alleged that through a misunderstanding on the part of the draftsman and through a mutual mistake the deed of trust did not truly express their intention. It was asserted that the real intention of the parties was to create a public charitable trust, but the company was advised that it was doubtful whether the trust deed on a strict construction thereof might not exclude from its benefits the rest of the public apart from the employees of the company and residents of the said settlement. In order to give effect to the said intention the company submitted that certain amendments by way of rectification of the deed should be made in the object clause 2 of the trust deed. The learned civil judge by his judgment dated August 18, 1945, ordered the deed of trust to be rectified as prayed for in the plaint. We will refer to the relevant rectified paragraphs of the trust deed as per the aforesaid order of the civil court a little later.
The deed of trust of 1941 as rectified in 1945, became the subject matter of interpretation by the Income-tax Appellate Tribunal and the High Court of Allahabad -in the case of J. K Hosiery Factory v. CIT [1971] 81 ITR 557. In the said partnership, the respondent-assessee trust happened to be a partner. The High Court held the rectification decree passed by the civil court to be valid and further held that it was not possible for the Income-tax Officer to question the validity of the rectification on the ground that the conditions for grant of rectification did not in fact exist. However, it was further held that the objects of the trust deed as rectified in 1945 did not create a public charitable trust and on an analysis of the object clause 2(b)(i) of the trust deed held that it being a mixture of charitable and non-charitable objects, could not be treated to be creating a public charitable trust.
In the meanwhile, the settlor-company had filed another suit being Suit No. 163 of 1954 in the Court of First Civil judge, Kanpur, for further rectification of the trust deed. It was reiterated in the plaint that the real intention of the settlor company was to create a public charitable trust for the benefit of the public in the city of Kanpur and the surrounding areas particularly, the members of the working class including the workmen employed in the plaintiff-company, but in their capacity as members of the working class. The intention, it was repeated, was to create the said trust wholly and exclusively for charitable objects and purposes. It was alleged that the trustees had, in fact, been giving the benefit of the trust to the members of the public and no part of the trust moneys had, at any time, been used for a non-charitable or non-religious object or purpose. It was contended that the said deed of trust even as rectified was less comprehensive than what was intended by the parties thereto at the time when instructions were given for preparing a draft of the same and when they executed it and the settlor-company was advised that it did not truly express the intention of the parties. It was prayed that the rectifications sought for be allowed so as to bring it in conformity with the real intention of the parties. In the said suit besides the trustees two persons interested in the trust were impleaded as defendants in their representative capacity after the service of a public notice under Order 1, rule 8 of the Code of Civil Procedure, 1908. The Civil judge, Kanpur, by a judgment and decree dated May 10, 1955, decreed the suit. By the second rectification decree certain rectifications were made in the preamble of the trust deed and in paragraphs 1 and 2 of the trust deed. At an appropriate stage in the latter part of this judgment we will deal with these rectified clauses inserted in the trust deed in 1955.
The jurisdictional Income-tax Officer issued notices under section 34 of the 1922 Act and section 148 of the 1961 Act for the relevant assessment years to the assessee-trust alleging that the income had escaped assessment for the relevant years. In response to the said notices, the assessee filed "Nil" returns for all the assessment years under reference. The contention of the trust before the Income-tax Officer was that it was a public charitable trust and, therefore, its income was exempt from income-tax. The Income-tax Officer rejected this contention as discussed in his earlier assessment order for the assessment year 1948-49. He stated that in the earlier assessment order, he had come to a clear conclusion that the trust was a private trust for the benefit of the employees only and was not at all exempt from tax. With regard to the rectifications made by the decrees of the civil court, the Income-tax Officer held that the trust was originally created for the benefit of the settlor-company and the objects of the trust could not be altered subsequently unless the trust was revoked for which there was no power under the deed. The income from it was, therefore, assessed to tax. He relied on the decision of the Calcutta High Court in Mercantile Bank of India (Agency) Ltd., In re [1942] 10 ITR 512 and held that a trust for the benefit of its employee and members of the staff is not a charitable trust.
The respondent-assessee preferred appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed all the appeals of the respondent. It is under these circumstances that the respondent-assessee approached the Income-tax Appellate Tribunal as noted earlier. The assessee partly succeeded while the Revenue also succeeded in part before the Income-tax Tribunal and that is how seven questions came to be referred to the High Court under section 256(1) by the Tribunal, two at the instance of the assessee and five at the instance of the Revenue and which came to be wholly decided in favour of the respondent-assessee as already noted earlier.
Rival contentions :
Learned senior counsel, Dr. Gauri Shankar, raised the following contentions in support of these appeals :
(1) The second rectification in the year 1955 as decreed by the civil court was without jurisdiction as in substance by the so-called rectification a new trust deed was sought to be substituted, which was beyond the powers of the civil court.
(2) The condition precedent for invoking the jurisdiction of the civil court under section 26 of the Specific Relief Act of 1963 or under section 31 of the earlier Act that there should be mutual mistake on the part of parties to the document was absent in the facts of the present case and, consequently, the civil court had no jurisdiction to grant such rectification.
(3) The rectification decree was in personam and not in rem to which the Revenue was not a party and, therefore, it was not binding on the income-tax authorities.
(4) Even assuming that the rectification order of 1955 was validly made, it would operate only prospectively and could not have any retrospective effect. This submission was made for challenging the answer to question No. 2 posed for consideration of the High Court at the instance of the respondent-assessee.
(5) Even after the rectification of 1955, the trust deed as rectified did not create any public charitable trust entitling the respondent-assessee to claim income-tax exemption under the relevant provisions of the 1922 Act as well as the 1961 Act as applicable to the concerned assessment years.
(6) The entire trust deed as originally executed and as twice rectified in 1945 and 1955 was merely a colourable device on the part of the three main trustees, the Singhania brothers, who held partnership interest in the firm of J. K. Hosiery Factory but went out as partners of the said partnership and entered by the back door assuming the garb of the trustees of the respondent-trust which became a partner in the same partnership firm claiming income-tax exemption. Consequently, such a colourable device on the part of the respondent should not be countenanced.
Shri Verma, learned senior counsel for the respondent-assessee, on the other hand, combatted the aforesaid contentions of learned senior counsel for the Revenue and submitted that even for the assessment years 1949-50 to 1955-56 wherein the rectified trust deed of 1945 prior to its further rectification in 1955 was holding the field, it was a trust for public charitable purposes and consequently even apart from the retrospective effect of the rectification in 1955, the respondent-assessee was entitled to claim exemption from the payment of income-tax for these relevant years. However, so far as the answer to question No. 2 referred for the opinion of the High Court at the instance of the respondent-assessee was concerned, Shri Verma fairly stated that he was not supporting the said answer and that he was conceding that 1955 rectification of the trust deed had only prospective effect.
Shri Gauri Shankar, learned senior counsel for the Revenue in the rejoinder submitted that 1945 rectification did not create a public charitable trust. He, however, fairly stated that as there was no clear indication from the judgment of the High Court about any colourable device on the part of the assessee or its trustees underlying the creation of the trust, he was not pressing that point any further.
In the light of the aforesaid rival contentions the battle lines are clearly drawn between the contesting parties wherein the first five contentions canvassed on behalf of the Revenue by Dr. Gauri Shankar will have to be examined and the sixth and the last contention which arises for consideration in the light of the additional contention of learned senior counsel Shri Verma for the respondent, namely, whether the rectification of 1945 created a public charitable trust or not, will also fall for determination.
We shall now deal with the aforesaid six contentions canvassed for our consideration seriatim :
Contention No. 1
So far as jurisdiction of the civil court to grant rectification of the trust deed is concerned the relevant provision is found in section 26 of the Specific Relief Act, 1963, which had succeeded the prior Specific Relief Act of 1877. Under the earlier Act an analogous provision was found in section 31 of the Act. As per these provisions a suit could be filed before the competent civil court for rectification of an instrument when, through fraud or a mutual mistake of the parties, a contract or other instrument in writing does not express their real intention. It is obvious that a trust deed is not a contract in the strict sense of the term but it would certainly be covered by the expression "other instrument in writing". It could, therefore, not be urged with any emphasis that the competent civil court which was approached by the settlor-company for rectification of the instrument of the trust, was not having requisite jurisdiction to entertain such proceedings. However, Dr. Gauri Shankar, learned senior counsel for the Revenue, pitched his faith on a decision of the Andhra Pradesh High Court in the case of Trustees of H. E. H. the Nizam s Pilgrimage Money
Trust v. CWT [1988] 171 ITR 323. In that case the trustees of H. E. H. Nizam's Pilgrimage Money Trust had applied to the Chief judge, City Civil
Court, Hyderabad, under section 34 of the Indian Trusts Act, 1882, seeking his opinion, advice and directions with respect to the utilisation of the income of the trust fund in terms of the resolution. By the said resolution, the trustees contrary to the objects of the trust had resolved to utilise the income of the trust fund for charitable purposes in India when the settlor had clearly laid down in the trust deed that the trust fund and unspent accumulations, if any, were to be utilised for religious or charitable objects at Hedjaz and/or Iraq. It was, therefore, held that the resolution of the trustees was invalid and the order of the Chief judge permitting the trustees to spend the trust income in India was equally inoperative and without jurisdiction. It was also held that the Trusts Act applied only to private trusts and not to public trusts. And that after the death of the settlor, the trust had become a public trust. Moreover, section 34 of the Trusts Act provided only for a summary enquiry and order with respect to management or administration of the trust property other than questions of detail, difficulty or importance. We fail to appreciate how the aforesaid decision can be of any assistance to learned senior counsel for the Revenue in the present case. On the facts of the case before the Andhra Pradesh High Court, the City Civil Court, Hyderabad, had no jurisdiction under section 34 of the Trusts Act to bring about any changes in the objects of the trust which had become a public trust. On the facts of the present case section 31 of the 1877 Act (Specific Relief Act) or the corresponding provisions of section 26 of the 1963 Act could be effectively invoked for rectification of the instrument of the trust. Such a court does not suffer from any inherent lack of jurisdiction, like the City Civil Court in the Andhra Pradesh case which had no such jurisdiction under section 34 of the Indian Trusts Act. The first contention must, therefore, be rejected.
Contention No. 2
So far as this contention is concerned it was vehemently contended by learned senior counsel for the Revenue that the civil court will get jurisdiction to entertain rectification proceedings provided any of the two conditions precedent are satisfied, namely, (i) through fraud ; or (ii) by mutual mistake of the parties the instrument in writing does not express real intention of the parties. So far as fraud is concerned it is not the case of anyone that either party to the instrument had committed any fraud. In fact learned senior counsel went to the extent of submitting that there are no two parties in an instrument of trust. It is difficult to agree. The settlor is one party to the trust who settles his property in trust for the benefit of others who become beneficiaries and the legal ownership of the property is transferred to the trustees. Thus, not only are there more than one party to the instrument of the trust but in fact there would at least be two main parties, namely, the settlor on the one hand and the trustees on the other and also there will be the beneficiaries who would be indirectly third parties to the instrument though not being direct parties thereto. Thus it would be almost a tripartite transaction. Dr. Gauri Shankar then submitted that even if it is so, no mutual mistake was alleged in the rectification proceedings. Even this contention cannot be accepted. The settlor-company had clearly indicated in the rectification proceedings that the real intention of the settlor to create a public charitable trust was not clearly brought out on the wording of the original trust deed and, therefore, the need to rectify the instrument, as neither the settlor-company nor the trustees who assumed the legal ownership of the property settled in trust would have agreed to the transaction in question if it had purported not to create a public charitable trust. It was this mutual mistake on the part of both the parties that required rectification of the instrument to make what was a latent intention a patent one. Even that apart it is strictly not open to the Revenue which is not a party to the instrument to take up such a contention about non-fulfilment of a condition precedent as it would be a fact in issue before the competent court which was called upon to rectify the instrument by either of the parties to the instrument.
Absence of such a condition would at the most make the order erroneous and which can be challenged by either of the parties to the proceedings but it will have no impact on the jurisdiction of the civil court to pass such an order however erroneous it may appear to be to the Revenue. At the highest such an error would remain in the realm of error in the exercise of the jurisdiction and not an error depriving jurisdiction to the competent court to entertain such rectification proceedings. In this connection, it is profitable to have a look at the decision of the Delhi High Court in the case of Jagdamba. Charity Trust v. CIT [1981] 128 ITR 377. In that case the deed of trust was got rectified by the parties from the civil court. These proceedings had to be initiated in the light of the judgment of the High Court which had held that due to the provisions in certain clauses of the trust deed the trust was non-charitable and the trust was not entitled to exemption under the Income-tax Act and that since the decision had created some doubts regarding the validity of some clauses of the deed it was necessary that the deed should be rectified. The civil court granted a decree and directed that the trust deed be rectified. The question was whether such rectification order of the civil court was binding on the Income-tax Department when the assessee-trust armed with such rectification order claimed exemption from income-tax under section 11 of the 1961 Act. S. Ranganathan J., as he then was, speaking for the Delhi High Court, took the view that the word "instrument" used in section 26 of the Specific Relief Act has a very wide meaning and includes every document by which any right or liability is, or is purported to be created, transferred, limited, extended, extinguished or recorded. There is no reason to exclude a trust deed from its purview. A trust deed is a document which sets out the terms of an understanding between the author of the trust and the trustees. Though in form, the trustees are not signatories to the instrument as drawn up, they are parties to the instrument in a real sense, for, it is on the terms of the instrument that they accept office and proceed to administer the trust. The law obliges them to act upon the terms of the trust deed and they cannot commit a breach thereof. If a gift deed, sale deed or promissory note could be within the terms of the section, there is no reason why a trust deed cannot be rectified under section 26. It was further held that since there was an order of the civil court binding on the author and the trustees, they could administer the trust only in terms of the amendment directed by the court. The trustees were and must be deemed, from the beginning, to have been under a legal obligation to hold the properties only for the objects and with the powers set out in the trust deed as amended. Therefore, whatever might be the correctness or otherwise of the order passed by the civil court under section 26 of the Specific Relief Act, 1963, it was not open to the Income-tax Officer to say that the trustees could administer the trust in accordance with the original deed and that the claim for exemption had to be dealt with on the basis of the original deed. Nor was it open to the Income-tax Officer to say that, in the relevant accounting year, the trustees held the property subject to the terms of the original and not the amended deed. In our view, the aforesaid decision of the Delhi High Court lays down the correct legal position in connection with the proceedings for rectification of instruments like trust deeds, initiated before the competent civil courts under the relevant provisions of the Specific Relief Act.
In the case of Laxminarain Lath Trust v. CIT [1988] 170 ITR 375, a Division Bench of the Rajasthan High Court speaking through S. C. Agrawal J., as he then was, had to consider the question whether any rectification of the trust deed which changed the character of the private trust into a public charitable trust could be relied upon before the income-tax authorities for claiming exemption under section 11 of the Income-tax Act, 1961, by the assessee-trust. In that case the original trust deed executed in August, 1948, did not bring out the real intention of the settlor to create a public charitable trust on account of certain sub-clauses of object clause No. 2. It was, therefore, felt necessary to rectify the mistake in the original settlement deed so as to put on record the true intention of the settlor and of the trust created by him. It was held by the Rajasthan High Court that it was permissible for the settlor to clarify his intention in creating the trust under the original settlement deed by executing the supplementary deed. Even in the original deed, a discretion had been conferred on the trustees to apply the income of the trust in rendering aid to persons belonging to the family and it was permissible for the trustees not to apply the income of the trust for the said object and in fact the income of the trust had never been applied for that object. It could not be said that the beneficiaries under clause 2(vi), namely, persons belonging to the family of L, had an enforceable right to the application of the income of the assessee for the object mentioned in clause 2(vi), and in these circumstances their consent was not necessary before altering the terms of the trust deed.. In any case, although the supplementary deed was executed in May, 1958, none of the persons belonging to the family of had challenged the validity of the same in a court of law. After the execution of the supplementary deed, it was not open to the trustees to apply the funds of the assessee for non-charitable purposes. The assessee trust had acquired the status of a trust wholly for charitable and religious purposes after the amendment of the trust deed in May, 1958. It was entitled to exemption under section 11 of the Income-tax Act, 1961. The doctrine of cy pres was also invoked in the said case by observing that in respect of charities the courts apply the doctrine of cy pres which envisages that if a clear charitable intention is expressed, it will not be permitted to fail because the mode, if specified, cannot be executed and the law will substitute another mode cypres, i.e., as nearly as possible to the mode specified by the donor. The said doctrine is applied on the principle that the court would lean in favour of charity and where a general charitable goal is projected and particular objects and modes are indicated, the court, acting to fulfil the broader benevolence of the donor and to avert the frustration of the good to the community, reconstructs, as nearly as may be, the charitable intent and makes viable what otherwise may die. The aforesaid decision of the Rajasthan High Court also takes a view which is almost parallel to the view taken by the Delhi High Court though the binding nature of the rectification order of the civil court on the Income-tax Officer is not highlighted as no such occasion arose for the Rajasthan High Court to pronounce on the same on the facts of that case. However, the fact remains that after due rectification of the original trust deed either by the settlor himself by executing a supplementary deed or by getting it rectified through the competent civil court under the relevant provisions of the Specific Relief Act, the trustees would be bound to carry out the amended and rectified objects of the trust and if they fail to do so they would be guilty of breach of trust for which even proper proceedings can be initiated against them under section 92 of the Code of Civil Procedure. For all these reasons, therefore, it must be held that when such rectified trust deed is pressed in service before the income-tax authorities in the assessment proceedings concerning the relevant assessment years the Income-tax Officer will have to interpret such rectified instrument for finding out its correct legal effect. But it will not be open to the Income-tax Officer to refuse to look at such rectified instrument of the trust and to insist that the trustees of the trust should ignore the said rectified objects and should stick to the instrument as it existed prior to its rectification. The Income-tax Officer will have to take the instrument as it exists in its actual amended form when it is pressed in service for framing the assessment concerning the relevant assessment year in which such rectified instrument holds the field. The second contention, therefore, fails and is rejected.
Contention No. 3
So far as this contention is concerned Dr. Gauri Shankar, learned senior counsel for the Revenue, was right when he contended that the order of rectification by a civil court is not a judgment in rem. It would be a judgment in personam binding on the parties to the rectified instrument, namely, the settlor on the one hand and the trustees on the other as well as on the ultimate beneficiaries. It is also true that section 41 of the Indian Evidence Act cannot apply to such rectification order as under the said provision only judgments and orders passed in the exercise of probate, matrimonial, admirality or insolvency jurisdiction would have the character of judgments in rem. Similarly, section 42 of the Indian Evidence Act also could not make them relevant in any enquiry or proceedings unless they relate to the matters of a public nature relevant to the enquiry. However, it is section 43 of the Evidence Act which would squarely get attracted in such cases. The said section lays down that judgments, orders or decrees, other than those mentioned in sections 40, 41 and 42, are irrelevant, unless the existence of such judgment, order or decree is a fact in issue, or is relevant under some other provision of this Act. Section 40 deals with "previous judgments relevant to bar a second suit or trial". That obviously cannot have any application. But a rectified trust deed pursuant to the order of the court would certainly make the rectification order relevant under the provisions of section 11 of the Indian Evidence Act, as the fact in issue in an enquiry before the Income-tax Officer would be whether on the basis of the rectified trust instrument the assessee-trust is entitled to get its income exempted from tax under the relevant provisions of the Income-tax Act. In such a proceeding, therefore, the order granting rectification of such instrument of the trust would certainly remain relevant. Consequently, it cannot be said that such rectification orders passed by the civil courts permitting rectifications of the trust deeds under the relevant provisions of the Specific Relief Act could not be relied upon by the assessee-trust in the assessment proceedings before the Income-tax Officer even though the Revenue or the Income-tax Officer was not a party to such rectification proceedings. It will be for the Income-tax Officer to consider the real scope and ambit of the trust deed as presented to him in rectified form with a view to finding out whether on the basis of such a rectified instrument the assessee trust had earned exemption from payment of income-tax under the relevant provisions holding the field in the concerned assessment years. The third contention is, therefore, decided by an swering that though the rectification orders of the civil court are not judgments in rem they are relevant in the assessment proceedings before the Income-tax Officer and will have to be given effect to for whatever they are worth.
Contention No. 4
So far as this contention is concerned learned senior counsel for the Revenue is spared his pains as learned senior counsel for the respondent assessee fairly stated in the light of the debate that took place in the court that he was not supporting the answer given by the High Court in favour of assessee on question No. 2 referred for the opinion of the High court at the instance of the assessee-trust. In short, he submitted that he would treat the 1955 rectification of the instrument of trust as creating almost a new trust or substituting the new for the old and, therefore, he would not press that such rectification of 1955 would have any retrospective effect. In view of the fair stand taken by learned senior counsel for the respondent-assessee, this contention will have to be decided in favour of the Revenue and against the assessee by holding that the rectification brought about by the order of the civil court in 1955, namely, the second rectification had no retrospective effect and would operate prospectively from the date on which such rectification saw the light of the day and would cover assessment years 1956-57 onwards up to the assessment years 1965-66 and would not 1ook back on the previous assessment years from 1949-50 to 1955-56. In other words, the decision of the Tribunal on the referred question No. 2 will remain operative and that the contrary answer of the High Court on this question would stand rejected.
Contention No. 5
Having cleared the Revenue's stand in connection with the trust deed in question for the assessment years 1949-50 to 1955-56 as aforesaid, Dr. Gauri Shankar, learned senior counsel for the Revenue, set his sails on the subsequent assessment years 1956-57 onwards wherein the trust deed as rectified in 1955 held the field. He submitted that even after the rectification of 1955, the situation had not at all improved for the respondent-trust and it remained a private trust and not a public charitable trust. So far as this contention is concerned it was vehemently opposed by learned senior counsel for the respondent-assessee, Shri Verma. In fact, this has remained now the real bone of contention between the warring parties.
In order to resolve this controversy it will be profitable to have a close look at the relevant provisions of the trust deed of 1941 as amended in 1955 pursuant to the second rectification order of the civil court. The said trust deed as amended in 1955 is found at annexure "J" to the paper book Volume II. Leaving aside the introductory recitals, the relevant operative recitals in the trust deed read as under :
"1. That in exercise of the power reserved to it under the memorandum of association and for effectuating its object of establishing a trust or settlement for public religious or charitable purposes including trusts or settlements for relief of poverty, education, medical relief and advancement of any other object of general public utility of religious or charitable nature, the company doth hereby grant convey and assure up to the trustees the said plot of land situate at Kanpur and numbered as 1 in Block H Factory Workmen Area containing by admeasurement 43.70 (forty-three decimal point seventy) acres more or less and more clearly delineated and shown on the plan annexed to the said indenture bearing date the 19th day of October, 1936, and thereon marked red as also the said plot of land situate at Kanpur and numbered as 2 in Block H Factory Workmen Area containing by admeasurement 26.30 (twenty-six decimal point thirty) acres more or less and more clearly delineated and shown on the plan annexed to the said indenture dated the 2nd day of February, 1938, and thereon marked red together with all way wells waters, water courses, sewers, ditches, drains, trees, shrubs, liberties, easements, profits privileges and appurtenances whatsoever to the said plots of land, respectively, belonging or in any wise appertaining with the same or any part thereof now or at any time heretofore usually held occupied or enjoyed therewith and all the state right, title, interest, claim and demand whatsoever at law or in equity of it was the company into or upon the said two plots of land and every part thereof to have and to hold the said two plots of land hereby conveyed granted or assured or expressed so to be and every part thereof unto and to the use of the trustees for ever to be by them held upon the trusts and with the subject to the powers, provisions, agreements and declarations in respect thereof hereinafter appear ing and contained.
2. The trustees do hereby declare that they shall hold and stand possessed of the said two plots of land upon the trusts following, namely :
(a) To manage the said two plots of land (hereinafter called 'the trust properties') which term shall include any security or securities or investments of any kind whatsoever into which the same or any part thereof may be converted and varied from time to time and such as may be acquired by the trustees or come to their hands by virtue of these presents or by operation of law or otherwise however in relation to these trusts as also all donations, funds or endowments either in the shape of cash, shares, securities or other movable or immovable properties which may be given to the trustees by any person whosoever for the benefit of the trusts hereby created) and to collect and recover the rents profits and other income thereof and to pay thereout the expenses of collection of such income and the rates, taxes, assessments and other outgoings in respect of any properties that may at any time be comprised in the trust properties including the premia for insurance of any such property against loss or damage by fire or lightning or civil commotion air-raids and other risks or losses or damages as the trustees may in their absolute discretion think proper (but so that nothing herein contained shall impose any obligation on the trustees to insure any of the premises comprised in the trust properties which they do not wish to do so) as also to pay the expenses of painting or whitewashing the buildings and structures that may be created on the said trust properties and of effecting all repairs additions and alterations thereto as well as to all plant and machinery which may be lying thereon or affixed thereto.
(b) To erect, establish, equip, furnish, fit, maintain and repair on the said two plots of land or any other land that may hereafter be acquired by the trustees on behalf of the trust
(i) residential quarters, chawls or buildings for the workmen in the town of Kanpur and the surrounding areas and extensions and for their respective families and dependents and for such other skilled and unskilled workmen, craftsmen, traders, merchants, technical or professional men whom the trustees may permit to reside or work in the said two plots provided that the benefit in this clause shall be granted only to those persons who on account of poverty are in need of help and really deserve help.
(ii) Public schools, pathshalas, colleges, libraries, public halls, hostels or boarding houses,
(iii) Hospitals, dispensaries, museum, places of recreation, instruction, swimming baths, lakes, parks, play-grounds, temples, mosques, churches, a market or markets and such other works and institutions of general public utility.
(iv) Such other works, building and installations as the trustees may in their discretion think fit to provide for the advancement of any other similar object of general public utility.
(c) To erect, establish, equip, furnish fit, maintain and repair on the second of the aforesaid two plots a temple, a hospital with all necessary quarters for housing its staff, an off ice or offices for the management and administration of the colony or settlement to be established on the said two plots and quarters for the office staff and a water pumping station and similar other works.
(d) To charge such rent or fees for the use and occupation of any of the said premises as the trustees may in their discretion from time to time think fit.
(e) To use and spend the income of the trust properties or the corpus of any funds or donations given or endowed for the benefit of these trusts for the objects herein mentioned."
A mere look at the aforesaid objects of the trust which remained operative and kicking after the second rectification of 1955 shows that each of the objects mentioned in clauses (b), (c), (d) and (e) of the object clause 2 clearly partakes of the character of a charitable disposition meant for the benefit of a well-demarcated mass of humanity. There is not much dispute on this aspect, so far as paragraphs 2(a) and (b)(ii) to (iv), (c), (d) and (e) are concerned. However, learned senior counsel foi- the Revenue vehemently submitted that leaving aside the objects mentioned in paragraph 2(b), sub-paragraphs (ii), (iii) and (iv), so far as sub-paragraph (i) of clause (b) of paragraph 2 is concerned, at least that object does not create a public charitable trust as the object mentioned therein, namely, constructing residential quarters, chawls or buildings for the workmen in the town of Kanpur and surrounding areas was a very vague object. It was next contended that though the object is so widely worded, it, in substance, is meant to benefit only the workmen of the company if the entire history of the trust from 1941 onwards is minutely scrutinised. It was submitted by Dr. Gauri Shankar that initially when the two pieces of land were obtained at concessional rates from the Improvement Trust, Kanpur, in 1941 by indentures of October 19, 1936, and February 2, 1938, respectively, they were meant to be utilised for the construction of colonies for the workmen of the settlor-company itself. That the original trust deed of 1941 without the later rectifications of 1945 and 1955 clearly indicated that the beneficiaries were only the employees of the settlor-company and there was no whisper about benefit to humanity at large or to members of the general public. Thus it was clearly a private trust. That though by the rectification of 1945 the term "workmen in general" was introduced for indicating the class of beneficiaries, in substance the benefit was reserved to the workmen of the settlor-company itself, and that even after 1955 rectification, the words "workmen in general in Kanpur and surrounding areas and extensions" remained a mere camouflage. It is not possible to agree with the aforesaid submissions of learned senior counsel Dr. Gauri Shankar, for the Revenue. The reasons are obvious. It cannot be said that the indicated beneficiaries, namely, the workmen in the town of Kanpur and surrounding areas and extensions are so vague as to make the object of the trust inoperative or otiose. The workmen in the town of Kanpur and the surrounding areas and extensions formed a clearly earmarked class or category of members of the general public and they were certainly a part and parcel of the general public. It is also not possible to countenance the submission that the words "surrounding areas and extensions of Kanpur town" introduced vagueness in the identification of the beneficiaries. Surrounding areas and extensions would naturally include those areas which are on the periphery of Kanpur town, and which are adjacent to Kanpur town. They would obviously not include any areas which are geographically far removed from and situated at a long distance from Kanpur town and which could not be said to be in the vicinity of Kanpur town. The words "surrounding areas and extensions of Kanpur town" indicate proximity of such areas with Kanpur town and have a clear nexus with the geographical boundary of Kanpur town. It is also easy to visualise that the trustees will have to make available the benefit of the clause only to those workmen in the town of Kanpur and surrounding areas and extensions and to their respective families and dependents who on account of poverty are in need of help and really deserve help. Any provision made for a poor class of the public well earmarked--as the recipient--of such benefits would certainly make the object of such bounty a charitable one. In fact, Dr. Gauri Shankar fairly stated that if one only goes by the verbiage of the clause as found in the 1955 rectified deed then it would appear to be a public charitable trust. But he submitted that we have to X-ray the clause and try to find out as to who are the real beneficiaries of the said trust. It is difficult to countenance even this submission. In order to find out whether the relevant clauses of a trust deed create a public charitable trust or not we have to go by the express words employed by the trust deed. In our view for finding out the real intention of the settlor, the words used in the deed would be the real vehicle of thought of the settlor expressing his intention in cold print. This would be much more so when such recitals in the trust deed are not challenged on the ground that they are a camouflage or a result of a colourable device. As we have noted earlier, the contention regarding colourable device was not pressed by Dr. Gauri Shankar for the Revenue and rightly so as it did not arise out of the judgment under appeal. On the other hand, on the express language of clause 2(b)(i) of the 1955 rectified deed, it cannot be said that it does not create a public charitable trust. On the contrary, it becomes clear on a close reading of the relevant provisions of this clause that the objects are specific and charitable in nature. The beneficiaries are also clearly indicated. There is also no ambiguity about the trustees or the trust properties. Thus, all the basic requirements for creation of a public charitable trust do exist on the express language of the relevant sub-clauses of clause 2 of the 1955 rectified deed. Dr. Gauri Shankar, learned senior counsel for the Revenue, then submitted that in any case absolute discretion is vested in the trustees under the trust deed to utilise the trust income for the benefit of any of the sub-classes of workmen in the town of Kanpur and they were likely to divert the entire benefit to their-own workmen. To say the least, it is merely a discretion left to the trustees and not an obligation of the trustees that they must necessarily spend the income of the trust for the workmen of the settlor-company itself and not for the benefit of any other outside worker. We shall deal with this aspect in greater detail when we will refer to contention No. 6 canvassed by learned senior counsel for the assesseetrust that even apart from the rectification of 1955 the earlier rectification of 1945 did create a public charitable trust. However, so far as the second rectification of 1955 is concerned, it has clearly indicated that only a discretion is vested in the trustees to utilise the trust income for the benefit of poor workmen in the town of Kanpur and in the surrounding areas and extensions and that may include even poor and needy workmen of the settlor-company itself. In this connection, Shri Verma also rightly invited our attention to section 92 of the Code of Civil Procedure and clause 2(b)(i), sub-clause (b)(iv) whereby trustees in their discretion could provide for advancement of other similar objects of general public utility. Relying on a series of decisions of this court in CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 ; Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704 ; Abdul Sathar Haji Moosa Sait Dharmastapanam v. Commr. of Agrl. L T. [1973] 91 ITR 5 ; Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 ; Yogiraj Charity Trust v. CIT [1976] 103 ITR 777 and CIT v. Andhra Chamber of Commerce [1981] 130 ITR 184. It was submitted that the objects of general public utility could clearly indicate that they are meant for public benefit and would create a public charitable trust. That in the light of the objects of the trust as rectified in 1955 even a workman who is not an employee of the settlor-company could in an appropriate case seek a direction under section 92, Code of Civil Procedure, from the competent civil court against the trustees to act according to the object of the trust and give benefit to such an applicant beneficiary if the circumstances so permit and the income of the trust is sufficient to cater to his needs.
When confronted with these very widely worded objects of the trust, Dr. Gauri Shankar, learned senior counsel for the Revenue, mounted his attack in the light of clause 30 of the trust deed as rectified in 1955 which reads as under :
" 30. The trust premises shall be held by the trustees hereof subject to the terms and provisions of the said two indentures bearing the dates the 19th day of October, 1936, and 2nd February, 1938, and the trustees shall accordingly duly and faithfully observe perform and comply with all the terms and provisions thereof and all such other terms, provisions, rules and regulations which the said Cawnpore Improvement Trust may from time to time impose upon them or require them to observe, perform and comply with or such as may from time to time be mutually agreed upon between the Cawnpore Improvement Trust and the trustees consistently with the powers reserved by the said Cawnpore Improvement Trust in that behalf under the said two indentures."
It is no doubt true that the trustees are enjoined to utilise the trust properties subject to the terms and provisions of the indentures dated October 19, 1936, and February 2, 1938, which require the trustees to utilise the trust property for the benefit of the settlor-company's own workmen. But as rightly submitted by Shri Verma, learned senior counsel for the assessee-trust, the said clause would not detract from the public charitable nature of the trust as projected by the relevant operative parts of the object clause to which we have made detailed reference earlier. Shri Verma was also right when he contended that if at all the trustees diverted the benefit to the beneficiaries other than the workmen of the company itself it would give a cause of action to the original vendor, namely, the Town Improvement Trust, which had taken no steps in all these years or made any grievance about the same and secondly as provided by the indentures themselves all that would result on account of any alleged breach of the conditions of the indentures on the part of trustees would be that they would be liable to pay an additional quantified amount to the original vendor and the concessional rate of consideration for the grant in that eventuality, may stand withdrawn. But it would not amount to any breach of trust on the part of the trustees if such benefit is conferred on outside workmen who fell within the clearly earmarked class of beneficiaries as per object clause 2(b)(i). On the contrary, the trustees not only would not be alleged to be guilty of any breach of trust but can be said to have acted according to the object of the trust.
Dr. Gauri Shankar, learned senior counsel for the Revenue, next contended that as observed by the Appellate Assistant Commissioner in connection with the assessment year 1948-49 not a pie of the income of the trust was utilised during the relevant years by the trust for the benefit of outside workmen and almost nothing was spent on charity. He particularly invited our attention to the following observations as found in annexure 'F-2' in Volume II of the paper book which contains the order of the Appellate Assistant Commissioner of Income-tax, Range II, Kanpur, for the assessment year 1948-49. In paragraph 13 of the judgment, the learned Appellate Assistant Commissioner has observed as under :
" 13. The appreciation of the real nature of the trust would not be complete without referring to its balance-sheets and the income and expenditure accounts right from the year of inception of the trust up to the date. I have gone through the income and expenditure accounts of the various years and I find that not a single paisa was ever spent by the trust for charity. The balance-sheet of the trust shows that all its funds were mostly employed by the various companies and firms of J. K. Group to whom huge advances were made from time to time. A certain portion of the trust funds was no doubt employed in the construction, maintenance and repairs of quarters which were let out to the employees of J. K. Cotton Spg. and Wvg. Mills Co. Ltd., and to other allied concerns like J. K. Jute Mills Company, J. K. Hosiery Factory, J. K. Iron and Steel Co. Ltd. and J. K. Cotton Manufacturers' Ltd. but all the surplus funds available to the trust were either given over to the various concerns of J. K. Group for the advancement of their business or advanced to J. K. Charitable Trust. From the day-to-day working of the trust also it is thus quite clear that it enured for no charitable purposes. "
Now, it must be at once noted that the said observations are made in connection with the assessment proceedings for 1948-49. They would be governed by the trust deed as rectified by the first rectification in 1945.
Consequently, these observations cannot apply to the interpretation of an entirely different set of recitals found in the rectified deed of 1955. Even that apart Shri Verma, learned senior counsel for the assessee, has invited our attention to various documents which are on record in Volume I of the paper book at pages 21, 28, 176, 179, 183 and 184 to indicate that in fact the benefit of the income from the trust was made available not only to workmen of the company but to outside workmen also who resided within Kanpur town. It was also submitted that the aforesaid documents clearly showed that the rent recovered from the workmen who occupied these 160 cottages put up by the settlor-company on the trust land was minimal and was highly subsidised as compared to the market rent. That water and electricity were given free to the beneficiaries and a part of the land was also made available to the municipality to establish a primary school. It was also contended that the Income-tax Appellate Tribunal itself had noted in the common judgment from which the references arose, that the Appellate Assistant Commissioner had himself conceded that no exorbitant rents were charged from the tenants who occupied the residential quarters in question and in fact the average rent recovered showed that the rents were only nominal. Shri Verma also submitted that the Income-tax Appellate Tribunal had noted the contention on behalf of the assessee that as regards rent charged it was pointed out that the average rent realised from 160 cottages was Rs. 7,660 per annum from 1947-48 to 1964-65. That amenities of water and electricity were provided free and even the schools were free. In other words, the rent including service and electricity charges works out to less than Rs. 16 per mensem for the accommodation whose fair market rate in an industrial city like Kanpur would be over Rs. 150 per mensem. This according to the assessee's counsel shows that cottages were given to the poor employees at concessional rent. In our view, these contentions on behalf of the assessee are well supported on the evidence on record. It cannot, therefore, be urged that the trustees had indulged in any profit-making while employing the income of the trust on the beneficial objects of the trust deed and in discharging the obligations with which they were charged under the said trust deed. In fact, in fairness, it must be stated that Dr. Gauri Shankar did not also pursue this aspect any further. Before parting with the discussion on this aspect we may also mention that at page 410 of the paper book, Volume II, a list of tenants not working in the J. K. group of mills but who are living in Kamla Town Trust quarters, was furnished by the respondent assessee before the Income-tax Appellate Tribunal along with the affidavit of one Shri R. B. Somnath, engineer of the respondent-trust. This also showed that the beneficiaries of the trust income and properties are not only the workmen of the settlor-company but also outside workmen who are residing in Kanpur town being apart and parcel of the general public. It must, therefore, be held that the rectified trust deed of 1955 did create a public charitable trust as rightly held by the High Court. Contention No. 5, therefore, stands rejected.
Contention No. 6 :
So far as this contention is concerned, it is canvassed for the first time before us by Shri Verma, learned senior counsel for the assessee-trust, for supporting the ultimate answer given by the High Court on question No. 1 referred for the opinion of the High Court at the instance of the assessee. Shri Verma submitted that leaving aside the 1955 second rectification even the original trust deed of 1941 as rectified in 1945 did create a public charitable trust. The main plank of his argument was based on the following premises :
1. Workmen in general and in particular of the company are also a part and parcel of the public and it cannot be said that they are not members of the general public residing in Kanpur.
2. We have to judge the correct connotation of the term "workmen in general" in the light of the economic and social conditions that prevailed in 1945 when the-deed was rectified.
According to Shri Verma, construction of the residential quarters, chawls or buildings for the workmen in general and in particular or the workmen, staff and other employees of the company or other allied concerns under the management of or in which the directors of the company may for the time being be interested and for their respective families and dependents and for such other skilled and unskilled workmen, craftsmen, traders, merchants, technical or professional men whom the trustees may permit to reside or work in the said two plots with a view to supply their needs and requirements or to render them services or to cater to their wants, comforts, conveniences and amenities, as enjoined by clause 2(b)(i) of the trust deed as rectified in 1945 would indicate a well-defined class out of general members of the public in Kanpur city. It is trite to note that the workmen as a class would consist of poor and needy persons and it cannot be said that they would be representing an affluent class of society or public who would not be in need of a roof over their head for themselves as well as for their dependents. Consequently, implicit in the said provision is the object of charity for these poor and well-defined class of needy persons constituting a part and parcel of the general public residing in Kanpur.
On this premises, it wag submitted that even the 1945 deed did create a public charitable trust. It was also contended that the Tribunal and the High Court had wrongly taken the view that because of the earlier judgment of the Allahabad High Court in J. K. Hosiery Factory's case [1971] 81 ITR 557, the trust deed as rectified in 1945 could not be said to have created a valid public charitable trust. That in the proceedings before the Allahabad High Court in the said case, the respondent-trust was not a party. The assessment was of the partnership. Even otherwise the said decision could not be binding on the parties in the present assessment proceedings pertaining to entirely different years and for an entirely different assessee. Shri Verma relying on a series of decisions of the different courts including this court submitted that if the trust deed provides a charitable object for the benefit of a class of public and also
gives preference to a smaller class of public which may consist of even the workmen of the settlor-company or even the poor and needy relatives of the settlor himself the public charitable nature of the trust does not get whittled down or effaced. On the other hand, Dr. Gauri Shankar, for the Revenue, relying upon a number of other judgments including judgments of the Chancery Division of the English court submitted that the workmen by themselves cannot be treated to be a poor class of citizens for whom any benefit given under the trust deed would necessarily make it a public charitable object and if the trustees under the deed are under an obligation to provide the benefit of the trust properties to the employees of the settlor-company itself the company by giving such benefit would, in turn, be exonerating itself from its otherwise contractual obligation or even statutory obligation of providing welfare facilities and residential facilities to its own workmen who because of these facilities would work more efficiently for the company. Thus, there would be a quid pro quo between the settlor on the one hand and the beneficiaries, namely, the workmen and the employees of the company, on the other. That such a provision would detract from the real public charitable nature of the endowment. In the light of the aforesaid rival contentions on this issue, we shall now proceed to examine this moot question.
Before we deal with these rival submissions, it will be profitable to have a look at the relevant recitals in the rectified trust deed of 1945. Clause 2(b)(i) of the deed of trust after the said rectification dated August 18, 1945, laid down amongst others, the following object :
" To erect, establish, equip, furnish, fit, maintain and repair on the said two plots of land and any other land that may hereafter be acquired by the trustees on behalf of the trust
(i) residential quarters, chawls or buildings for the workmen in general and in particular for the workemen staff and other employees of the company or other allied concerns under the management of or in which the directors of the company may for the time being be interested and for their respective families and dependents and for such other skilled and unskilled workmen, craftsmen, traders, merchants, technical or professional men whom the trustees may permit to reside or work in the said two plots with a view to supply their needs and requirements or to render them services or to cater to their wants, comforts, conveniences and amenities."
Shri Verma submitted that if workmen in general represent a poor and needy class of persons who are a part and parcel of the general public residing in Kanpur, as residential quarters, chawls or buildings had to be constructed in Kanpur, then even if a preference is given to similarly needy and poor workmen, staff members or the other employees of the company it could not be said that only because of such preference the charitable aspect of the endowment would get frustrated or would become a private trust. In order to support his contention, Shri Verma invited our attention to a decision of this court in the case of Trustees of the Charity Fund v. CIT [1959] 36 ITR 513. In that case, the clause in the deed of trust provided for grant of relief and benefit to the poor and indigent members of the Jewish community or any other community of Bombay or other parts of India or of the world and preference was to be given to the poor and indigent relations of the family of the settlor, Sir Sassoon David. It was held that despite such preference the trust would remain a public charitable trust. Relying on sub-clauses (a) to (f) of clause 13 of the deed of trust it was held that the deed constituted a valid public charitable trust and as the relations or members of the family of Sir Sassoon David did not figure as direct recipients of any benefits under sub-clauses (b) to (f) and the circumstance that in selecting the beneficiaries under sub-clause (a) preference had to be given under the provisos to the relations or members of the family of Sir Sassoon David could not affect that the public charitable trust, the income from the properties came within the scope of section 4(3)(i) of the Income-tax Act and were exempt. Reliance was also placed on a number of other decisions of various High Courts which obviously fell in line with the aforesaid decision of this court and which had taken the view that if the main benefit of the settled property in trust had to go to charity, if the trustees were permitted to give preference to poor relations of the settlors the trust would remain a public charitable trust. In this connection, our attention was invited to the decisions of the Gujarat High Court in CIT v. Moosa Haji Ahmed [1964] 52 ITR 147, the Calcutta High Court in CIT v. Board of Mutwallis to the Wakf Estate, Ebrahim Solaiman Saleji [1968] 69 ITR 758 and the three decisions of the Bombay High Court in CIT v. Trustees of Seth Meghji Mathuradas Charity Trust [1959] 37 ITR 419 ; CWT v. Trustees of the J. P. Pardiwala Charity Trust [1965] 58 ITR 46 and CIT v. D. D. Deshpande [1976] 102 ITR 390.
On the other hand, Dr. Gauri Shankar, learned senior counsel for the Revenue, submitted that as the benefit is made available under the trust deed to workmen in general and in particular to the workmen, staff and other employees of the company it cannot necessarily be held that these workmen must be poor and needy as no such words are found in the clause. He submitted that any trust deed conferring benefit on an identified group of persons like workmen or employees of the company would make the trust a private trust and not a public charitable trust. In support of this contention, he heavily relied upon the decision of the Madras High Court in Sakthi Charities v. CIT [1984] 149 ITR 624. In that case, it was held agreeing with the view of the Tribunal that as the trust deed provided for conferring benefit only on the employees of Sakthi Sugar Ltd. and the relatives of the deceased employees, the said benefits could not be available to the members of the general public not connected with Sakthi Sugar Ltd. Consequently, all these clauses were not charitable in nature. Our attention was also invited by Dr. Gauri Shankar to two decisions of the Chancery Division of the High Court of justice in England in Trustees of the William Vernon and Sons Ltd., Employees Fund v. IRC [1956] 36 TC 484 (Ch. D.) and in Ashworth v. Drummond [1914] 2 (Ch. D.) 90. In Trustees of the William Vernon's case [1956] 36 TC 484 (Ch. D.), the question was whether a bequest under the will directing 20 per cent. of the received moneys to be paid to some organisation or charity at the discretion of the executors for the benefit of employees of the firm would constitute a public charitable endowment. It was held that the objects of the scheme were not charitable only. Justice Upjohn at page 495 of the report observed as under :
" Thirty years ago it was not always appreciated that in order to constitute a valid charitable trust it must be a public trust, and that if a trust is limited to the employees of a company the personal nexus constituted by that common employment does not satisfy the necessary test of the character of publicity. That is now well-established, and it was established in a line of authorities after the last war culminating in Oppenheim v. Tobacco Securities Trust Co. Ltd. [1951] AC 297 in the House of Lords in 1951. Therefore, it is common ground that the scheme does not constitute valid charitable trusts. . . . "
In Drummond, In re [1914] 2 Ch D 90, it was held that the work people in question could not be regarded as poor people, within the statute of Elizabeth. In our view, the aforesaid decisions of the English Chancery Courts cannot ipso facto be made applicable to workmen residing in this country and who had to face entirely different socio-economic conditions, especially in 1945, when the rectified object of the trust deed saw the light of day. While interpreting the word "workmen in general" as employed in 1945 rectified trust deed, we have to sit in the settlor's arm chair with a view to visualising what was meant by the settlor-company when it used these terms in 1945, keeping in view the then prevalent socioeconomic conditions in this country. It is easy to visualise that workmen who were to toil for their existence would necessarily represent a class of needy persons requiring a shelter over their head. When the settlor-company in 1945 contemplated to construct residential quarters, chawls or buildings for workmen it necessarily meant to provide these facilities for a needy class of persons who could legitimately be presumed to be a class of downtrodden persons suffering from penury and want. The socio-economic situation prevailing in England treating workmen as not necessarily poor, cannot almost automatically be imported and applied for judging the economic status of the working class in India especially in 1945 when even the definition of "workmen" under the Industrial Disputes Act, 1947, had also still to see the light of day. We, therefore cannot agree with the general proposition canvassed by Dr. Gauri Shankar, for the Revenue, that any provision made for the benefit of workmen in general would not necessarily be a provision for the needy or poor class of citizens who may be forming part of the general public.
Shri Verma, learned senior counsel for respondent-assessee, was also right when he submitted, relying upon the decision of this court in Trustees of the Charity Fund's case [1959] 36 ITR 513 and other decisions of the High Courts to which we have made a reference earlier, that when any property is settled for charitable purposes for catering to the needs of a class of public which is poor and needy, any preference given to poor and needy workmen of the settlor-company would not necessarily detract from the charitable object underlying such bequest or settlement. It is trite to observe that if the settlor's poor relatives can legitimately be the recipients of charitable benefits under a public charitable trust, then if such preference is given to poor workmen of the settlor-company who are not even related to the settlor, they would stand at least on an equal if not a better footing and in no eventuality on a worse footing, in judging the public charitable nature of the settlement in their favour. However, the basic fact must remain that the settlement is made in favour of a well earmarked class of needy and poor persons who may form a part of the general public and for whom such charitable bequest or endowment is made, and the preferred class of beneficiaries must form a part and parcel of that very general earmarked class. It must, therefore, be held that the provision for construction of houses for "workmen in general" as found in clause 2(b)(i) of the 1945 rectified deed, so far as it went, did constitute a charitable object.
However, this conclusion of ours does not end the controversy centering round the aforesaid clause. There are two clear-hurdles in the way of Shri Verma for the respondent which militate against his submission that the said clause when read as a whole does create a public charitable trust in favour of workmen in general. The first hurdle is that the term " workmen in general" as employed in the clause is too general and vague but even assuming that in the context of the residential quarters, chawls or buildings to be constructed for them on the lands situated at Kanpur which are settled in trust by the settlor-company, it would refer to workmen in Kanpur town, even then the more substantial hurdle in the way of the respondent is projected by the fact that there is an obligation cast on the trustees to construct these residential quarters, chawls or buildings in particular for the workmen, staff and other employees of the company or other allied concerns under the management of and in which the directors of the company may for the time being be interested and for their respective families and dependents. In the light of the words "in particular " as found in this clause, Dr. Gauri Shankar, learned senior counsel for the Revenue, rightly submitted, that they represent a scheme of priority for workmen of the settlor-company and not a scheme of preference. In other words, the trustees are bound under an obligation to construct residential quarters, etc., first for the workmen or employees of the settlor-company or its allied concerns. They have no choice in the matter. They cannot in their discretion select an outside workman Is recipient of the benefit under the scheme of the trust deed. In effect, the general class of beneficiaries constituted by the words "workmen in general" gets whittled down and circumscribed by the words "in particular for workmen of the company, etc." Thus, in substance, it becomes a trust for the benefit of a well-defined smaller class of beneficiaries, namely, employees or workmen of the company and its allied concerns, and it fails to meet the requirement of a genuine or public or charitable trust. We are in agreement with this submission, of Dr. Gauri Shankar. Once such an obligation is cast on the trustees the public character of the endowment gets whittled down and in substance becomes the settlement for an identified group of persons. In this connection, we may profitability refer to a Division Bench judgment of the Bombay High Court in the case of CIT v. Walchand Diamond Jubilee Trust [1958] 34 ITR 228, wherein Chagla C. J., spoke for the Bench. In that case the question was whether the provision made in the trust deed to utilise the accumulated income of the property of the trust on charitable objects like giving scholarships to deserving students or giving medical relief of the nature and kind such as starting maternity homes, etc., or giving monetary help to the poor needy persons and for providing relief to the poor and distressed in time of famine would get adversely affected and would cease to be a charitable object if preference was to be given to such persons as are eligible under the aforesaid provisions who are at the time or have in the past been employees of Premier Construction Co. Ltd. and of the associated companies and their relatives and dependents as the trustees may in their discretion think expedient and, proper. In this connection, the following pertinent observations were made by Chief Justice Chagla at pages 236 and 237 of the report :
" Now, undoubtedly, we would have taken a different view of this trust if there was an obligation upon the trustees to prefer the employees. In other words, if the other members of the public were postponed to the employees of the Premier Construction Co. Ltd., then, looking to the other provisions of the deed, we might easily have taken the view that the main purpose of the trust was to benefit the employees and the charity to the public was merely illusory. But there is no obligation cast upon the trustees by this proviso to prefer the employees of the Premier Construction Co. Ltd. It is for the trustees to exercise their discretion. In the first place, they have to utilise the income for carrying out the four objects, and any member of the public who comes within these four objects would be qualified to receive the bounty of the settlor. If a member of the public also happens to be an employee of the Premier Construction Co. Ltd., it is open to the trustees to give him preference. Therefore, the trustees would not be guilty of committing any breach of trust if they selected for the bounty of the settlor such members of the public as did not fall in the category of employees of the Premier Construction Co. Ltd. That is the real test which we have got to apply. We must not assume that the trustees will exercise their discretion dishonestly or improperly. The test is whether-the exercise of the discretion of the trustees is so fettered that they are bound to select particular persons in preference to others. That is clearly not the case here. "
In our view the aforesaid is the correct test evolved by the High Court. Applying the said test to the clause in question we find that though residential quarters, chawls or buildings are to be constructed for the workmen in general and who, as we have already shown earlier, may be a well-defined class of workmen residing in Kanpur and who may be poor and needy in the light of their socioeconomic conditions as prevailed in 1945 when the clause was drafted, once we turn to the second part of this clause which lays down in clearest terms that in particular the quarters are to be constructed for the workmen, staff and other employees of the company and of its allied concerns, it becomes clear that no discretion is left with the trustees and on the contrary they are enjoined, called upon and under an obligation to construct these quarters, chawls and buildings necessarily for the workmen, staff and other employees of the company and its allies. It is also easy to visualise that other employees of the company may include even affluent employees who may not necessarily constitute an object of charity. Once this conclusion flows from the wording of the clause, it becomes clear that the reference to workmen in general becomes illusory and the settlement can be said to be in substance meant only for catering to the needs of a well-defined group of persons, namely, workmen, staff and other employees of the company and its allied concerns and in that case on the aforesaid ratio of the decision of the Bombay High Court, which we approve, the object clause in question would fall short of creating any public charitable trust. In this connection, we may also refer to two decisions, one of the Calcutta High Court and another of the Allahabad High Court, to which our attention was drawn by Dr. Gauri Shankar for the Revenue. In the case of Mercantile Bank of India (Agency) Ltd [1942] 10 ITR 512, a Division Bench of the Calcutta High Court, speaking through Derbyshire C. J., held that in order to constitute a valid charitable trust, it should be for the benefit of the public or a specified section of it. A fluctuating body of private individuals such as the present and future officers and members of the staff and other employees of a company could not be a part of the general public or of any section of the public and, therefore, the income of the trust fund was not exempt from the payment of income-tax under section 4(3)(i). It was further observed that Andrew Yule and Co Ltd., and their subsidiary concerns for whose employees benefit was conferred under the deed employed a large number of persons. The trust was for the benefit of the past, present and future officers, members of the staff and other employees of those concerns. Anyone from the secretary or some other highly paid member of the staff down to the lowest menial may be included within the benefit of this fund. Necessitous circumstances might include the case of a superior employee earning some thousands of rupees per month, who owing to some misfortune--say the burning down of his house, or the loss of his property--might find himself suddenly in necessitous circumstances, and in need of money to replace his lost property. The learned judge could see no reason why the administrators of the fund should not be in a position to make a grant to such a person to make up his loss. It might be a most desirable thing to do and the administrators might justly think that they had used some of the funds to the best advantage. But such use cannot be said to be for the relief of poverty. Even if (as had been argued) the administrators are bound to use this fund solely "to relieve persons suffering from indigence, ill-health or other necessitous circumstances it was impossible to say that the fund is to use the words of the section property held in trust wholly for charitable purposes." A Division Bench of the Allahabad High Court in the case of J. K Hosiery Factory [1971] 81 ITR 557 had an occasion to consider the very same clause of the rectified deed of 1945. It is of course true that the said decision was rendered in the assessment proceedings of the firm wherein the respondent-assessee was a partner and not in the assessment proceedings of the respondent-firm itself. Still the interpretation placed on the very same trust deed as rectified in 1945 in proceedings to which the respondent-assessee was a party in another capacity cannot be said to be totally irrelevant. H. N. Seth J., speaking for the Division Bench, made the following observations in this connection (at page 575) :
We are doubtful whether the construction of residential colony for workmen in general can be regarded as an object of public charity. While enabling the trustees to construct residential quarters, etc., for the benefit of the workmen in general, the settlor made it clear that such buildings were not to be constructed for the benefit of the public in general. The expression 'workmen in general' does not fix a definite class of public which is intended to be benefited under the deed. What types of employees or workers can be said to be covered by this expression is not at all clear. Moreover, the precise language used by the settlor is 'to erect .... residential quarters, etc., for the workmen in general and in particular for the workmen, staff and other employees of the company or other allied concerns under the management of ..... This shows that the expression 'workmen in general' was not intended to mean merely poor labourers. The expression was intended to cover even such classes of persons who might be employed in any concern in any capacity whatsoever and who may be drawing high salaries. Making a provision for constructing residential quarters, etc., for the benefit of the employees irrespective of whether they are poor or not, can hardly be said to be a charitable object or a work of general public utility.
As we have discussed earlier, the term "workmen in general" when read in the context of the socioeconomic situation prevailing in 1945 in this country and when also considered in the context of construction of residential quarters, chawls or buildings in Kanpur may partake of the character of a well-defined class of workmen in Kanpur city who may be poor and needy, still as the trustees are enjoined to construct residential quarters, chawls or buildings in particular for the workmen, staff and other employees of the company it follows that other employees of the company who are the beneficiaries may not necessarily be poor or needy or affluent. We, therefore, concur with the second part of the reasoning of the Allahabad High Court in the aforesaid judgment though we are not in a position to subscribe to the general proposition that construction of residential colonies for workmen in general cannot by itself be regarded as an object of public charity. As a result of the aforesaid discussion, therefore, it must be held that rectified clause 2(b)(i) of the 1945 deed fell short of projecting an object of a public charitable nature and it could not be said that under the rectified deed of 1945 the trust properties were held by the respondent-trust wholly for religious or charitable purposes. It is, of course, true that the rest of the sub-clauses of clause 2(b) did refer to charitable objects but as one of the objects was not of a public charitable nature it could not be held that the entire trust was wholly for religious or charitable purposes.
Now, is left the consideration of one submission of Shri Verma, learned senior counsel for the respondent, who relied upon the Explanation to sub-section (3) of section 4 of the 1922 Act which read as under :
"In this sub-section 'charitable purpose' includes relief of the poor, education, medical relief and advancement of any other object of general public utility, but nothing contained in clause (i) or clause (ii) shall operate to exempt from the provisions of this Act that part of the income from property held under a trust or other legal obligation for private religious purposes which does not enure for the benefit of the public. "
In our view, the said Explanation cannot be of any avail to the respondent-assessee so far as the rectified deed of 1945 is concerned. The emphasis in the Explanation is on charitable objects of general public utility like relief of the poor, education, medical relief and advancement of any other object of general public utility. Once it is held that clause 2(b)(i) of the 1945 rectification deed imposed an obligation on the trustees to utilise the trust property for the benefit of the settlor-company's own workmen and employees, it would cease to be projecting an object of providing relief to poor workmen only. Nor would it advance any other object of general public utility but would be confined to the utility of a well-defined class of employees and workmen of the settlor-company and its allied concerns only. For all these reasons, therefore, it is not possible to accept the submission of Shri Verma, learned senior counsel for the respondent-assessee, based on this Explanation. This contention, therefore, stands rejected.
Conclusions :
The aforesaid decisions on the contentions canvassed on behalf of the rival contesting parties by their learned senior advocates, yield the following result :
(i) For the assessment years 1949-50 to 1955-56, the respondent-assessee would not be entitled to get the benefit of section 4(3)(i) of the 1922 Act and income derived by it from its properties would not get exemption from income-tax under the said provision.
(ii) For the assessment years 1956-57 to 1961-62, the income derived by the respondent-assessee from the trust properties during these years will get exempted under section 4(3)(i) of the 1922 Act as the 1955 rectified trust deed is held by us to be having objects of wholly charitable nature.
(iii) For the assessment years 1962-63 to 1965-66, the income derived from the trust properties by the respondent-trust will be entitled to exemption from income-tax under section 11 of the 1961 Act subject to compliance with the conditions laid down therein as even during this period the rectified trust deed of 1955 as interpreted by us will be treated to have held the field.
Final Order :
In the light of the aforesaid discussion and the conclusions to which we have reached the questions referred for the opinion of the High Court will stand answered as under :
Questions referred at the instance of the assessee in Income-tax Reference No. 18 of 1973 :
Question No. 1 :
Answered in the affirmative in favour of the Revenue and against the assessee.
Question No. 2 :
Answered in the affirmative in favour of the Revenue and against the assessee as the answer of the High Court on this question was not supported by learned counsel for the respondent.
Questions referred at the instance of the Revenue
in Income-tax Reference No. 715 of 1972 :
Question No. (a) :
Answered in the affirmative in favour of the assessee and against the Revenue as answer of the High Court was not challenged before us by learned counsel for the Revenue.
Question No. (b) :
Answered in the negative in favour of the assessee and against the Revenue as the answer of the High Court was not challenged by learned counsel for the appellant-Revenue.
Question No. (c) :
Answered in the affirmative in favour of the assessee and against the Revenue as the answer of the High Court was not challenged by learned counsel for the Revenue.
Question No. (d) :
Answered in the negative in favour of the assessee and against the Revenue.
Question No. (e) :
Answered in the negative in favour of the assessee and against the Revenue.
In the result, out of these 17 appeals filed by the Revenue, seven appeals pertaining to the assessment years 1949-50 to 1955-56 will stand allowed while the Revenue's remaining ten appeals pertaining to the assessment years 1956-57 to 1965-66 will stand dismissed. In the facts and circumstances of the case, there will be no order as to costs in these appeals.
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