J.K. Trust, Bombay vs The Commissioner Of Income-Tax/Excess
Rewritten Version Notice: This is a rewritten version of the original judgment.
Court: Supreme Court of India
Case Number: Not extracted
Decision Date: 22 May, 1957
Coram: J.L. Kapur, Venkatarama Aiyar
In this matter, the Court recorded that the case was styled J.K. Trust, Bombay versus the Commissioner of Income‑Tax (Excess) and that the judgment was delivered on 22 May 1957 by the Supreme Court of India, with Justice Venkatarama Aiyar authoring the opinion. The present filing constituted an appeal by special leave against a decision of the Bombay High Court. That decision had been rendered in a reference made under section 66(1) of the Indian Income‑Tax Act, 1922 (hereinafter referred to as “the Act”) together with sections 21 and 19 of the Excess Profits Tax Act, 1940 and the Business Profits Tax Act, 1947, each read in conjunction with section 66(1) of the Act. The core of the dispute concerned the assessment of income tax for the assessment years 1946‑47, 1947‑48 and 1948‑49, as well as the assessment of excess profits tax for the chargeable accounting periods covering 3 September 1945 to 31 March 1946, 1 April 1946 to 31 March 1947 and 1 April 1947 to 31 March 1948. The parties agreed that the matters arose out of the same factual matrix and raised identical points for determination, thereby necessitating a unified adjudication.
The Court then set out the factual background. On 15 June 1945, three brothers—Sir Padampat Singhania, Lala Kailashpat Singhania and Lala Lakshmipat Singhania—who conducted business under the name Juggilal Kamlapat, executed a deed of trust (Exhibit A). By that deed they earmarked a sum of one lakh rupees (Rs 1,00,000) for various charities identified therein and created the J.K. Trust, Bombay. They also appointed themselves together with two additional individuals, Lala Ramdeo Podar and Sir Chunnilal Mehta, to serve as trustees of the newly constituted trust. The trust instrument contained a clause, inter alia, providing that “the trustees may with the help of the trust fund, for and on behalf of and for the benefit of the trust, carry on such business including the taking up and conducting the managing agency or selling agency of any company in such name or manes as they in their absolute discretion may think fit and proper and may close and re‑start such business and utilise the profits for all or any of the objects aforesaid.” Accordingly, the trustees were vested with broad authority to conduct business on behalf of the trust, including the power to raise or borrow money as required for the trust’s purposes.
Subsequently, Messrs E. D. Sassoon and Co., Ltd. were serving as managing agents of the public company Raymond Woollen Mills Ltd. The partnership of Juggilal Kamlapat, in which the three Singhania brothers were partners, purchased a controlling interest in Raymond Woollen Mills by acquiring the shares held by Messrs E. D. Sassoon and Co. Following that acquisition, the shareholders of the mill passed a special resolution on 3 September 1945 appointing the trustees of the J.K. Trust as the new managing agents, thereby effecting the resignation of Messrs E. D. Sassoon and Co. A memorandum of agreement (Exhibit B) was then executed on 10 September 1945 by the company, formally constituting the trustees of the J.K. Trust, Bombay, as its managing agents and setting out the terms and conditions of that agency. The Court noted that the five persons named in Exhibit A thus assumed the role of managing agents in their capacity as trustees, a position expressly defined in the agreement.
The trustees listed in Exhibit A were designated as managing agents in their capacity as trustees, and the agreement expressly stated that the term “managing agents” would, unless the context excluded it, include the trustees of that trust or any other trust that might be merged with it. The agency was granted for a period of twenty years, but the trustees retained the right to terminate it by giving three months’ notice. Under the agreement, the managing agents were to receive a remuneration equal to ten per cent of the net annual profits, subject to a minimum payment of Rs 50,000, together with an office allowance of Rs 1,000 per month. Clause 7 required the managing agents, during the continuance of the agreement, to keep a cash deposit of Rs 1,00,000 with the company as security for the performance of their obligations, and it permitted them to charge interest on that deposit at the rate of three and one‑half per cent per annum in addition to their regular remuneration. Clause 8 imposed upon the managing agents an obligation to arrange loans and advances to the company whenever required, provided that the total amount did not exceed Rs 10 lakh at any time, and the agents were authorised, if necessary, to guarantee such loans or advances. Clause 14 further provided that, notwithstanding any other provision, all the terms and conditions of the agreement, including the length of the managing agents’ appointment, could be varied or cancelled by mutual agreement of the parties.
The trustees assumed their duties as managing agents pursuant to the agreement, and by an arrangement dated 14 May 1946 they appointed Mr Tej Narain Khaitan, who was the son‑in‑law of one of the three Singhania brothers, to act as their representative in carrying out the managing‑agency work. Mr Khaitan was to receive a remuneration equal to thirty per cent of the annual income that was payable to the trustees under Exhibit B. Before the income‑tax authorities, the appellant argued that the income derived from the managing‑agency activity originated from property held under the trust and was to be applied wholly for charitable purposes; consequently, the appellant claimed that such income should be exempt from tax under section 4(3)(i) of the Income‑Tax Act. The income‑tax authorities rejected this claim, holding that the income in question represented remuneration for services rendered and was not derived from any trust property, and therefore it did not fall within the scope of section 4(3)(i). The authorities further observed that even if the managing‑agency business could be characterised as trust property, it would be governed by the special provision contained in section 4(3)(ia), and the conditions prescribed in that provision had not been satisfied; consequently, no exemption could be claimed. Accordingly, the authorities permitted a deduction of Rs 30,000 per annum for Mr Khaitan’s remuneration under section 10(2)(x) of the Act, and they held that the remaining amounts of income—Rs 23,287 for the year 1946‑47, Rs 36,786 for the year 1947‑48, and Rs 2,16,460 for the year 1948‑49—were liable to tax under the applicable provisions of the tax statutes.
The Tribunal held that the amount of Rs 1,00,000 shown in Exhibit A, which was the only property settled on trust, had not been invested in the managing‑agency business. Consequently, that sum could not be characterized as trust property, and the income derived from the business could not fall within the exemption provided by section 4(3)(i) of the Income‑Tax Act. Accordingly, the Tribunal answered the first reference question against the appellant.
Regarding the second reference question, the Tribunal observed that it was unnecessary to express an opinion. Both parties agreed that even if section 4(3)(ia) were applicable, none of the conditions described in sub‑clauses (a) or (b) had been satisfied; therefore, no exemption could be granted under that provision.
The appeal raised two principal issues for determination. First, whether the income received by the trustees of J K Trust, Bombay, in their capacity as managing agents of Raymond Woollen Mills Ltd., constituted income derived from property held on trust or from an obligation resembling a trust. Second, whether any claim for exemption of that income should be examined under section 4(3)(i) or under section 4(3)(ia) of the Income‑Tax Act.
With respect to the first issue, counsel for the appellant argued that a managing agency is a business and therefore constitutes property. He further contended that the business was held on trust because the trustees operated it on behalf of the trust, utilizing trust assets and following the directions set out in the trust deed. He also submitted that, even if the business were not held on trust, it was at least held on an obligation of a trust nature under the principle laid down in section 88 of the Trusts Act, which would bring section 4(3)(ii) into play.
For the respondent, counsel asserted that while the managing agency could indeed be characterised as a business, there could be no trust over such an agency because it essentially involved the rendering of services and could not be described as property over which a trust could be created. He further argued that the managing agency was an office rather than property, and that the agency created under Exhibit B could not be deemed trust property because the trustees could terminate it at any time on three months’ notice. Consequently, he maintained that no trust of that precarious, ephemeral nature could exist, and that section 88 of the Trusts Act was inapplicable since there was no property held on an obligation resembling a trust.
The respondent argued that a managing agency could not be regarded as property because it is essentially an office rather than a tangible asset. He further contended that, even assuming the agency existed under Exhibit B, it could be terminated at the trustees’ discretion upon three months’ notice, rendering it a precarious and temporary interest that could not constitute trust property. In his view, a trust cannot be imposed upon such an evanescent arrangement, and consequently the provision of section 88 of the Trusts Act was inapplicable, since there was no property held on an obligation resembling a trust.
The Court noted that the question of whether a managing agency constitutes a business had already been settled in Lakshminarayan Ram Gopal and Son Ltd. v. The Government of Hyderabad. In that case the issue arose in the context of excess‑profits tax on remuneration received by managing agents, where the tax statute applied only to business income. The Court held that the managing agency was indeed a business and that the profits derived from it were properly subject to tax. Accordingly, the Court affirmed that managing agency is unquestionably a business.
Having established that the managing agency is a business, the Court turned to the question of whether that business could fall within the definition of “property” under section 4(3)(i) of the Income‑Tax Act. The term “property” is defined in its broadest sense, encompassing every possible interest that a person may acquire, hold, or enjoy, unless the legislation expressly narrows its meaning. Consequently, business interests would ordinarily be classified as property unless the statutory language indicates otherwise. Section 4(3)(i) provides that any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, or income applied or set aside for such purposes, shall be excluded from total income. The Court observed that, read in isolation, the provision contains no limitation that would exclude business from the ordinary meaning of “property”.
Supporting this interpretation, the Court referred to the decision in In re The Tribune, where the High Court had examined whether a trust over a newspaper qualified as charitable under section 4(3)(i). The majority held that the trust’s object was not wholly religious or charitable, and therefore the exemption could not be claimed. On appeal, the Privy Council reversed that judgment, indicating that the statutory term “property” was to be given its full, ordinary meaning, which includes business interests. The Court therefore concluded that business can be treated as property within the ambit of section 4(3)(i).
The High Court held that the object of the trust was wholly charitable and therefore fell within the exemption provided by section 4(3)(i). This conclusion was recorded in the decision reported as In re The Trustees of the Tribune [1939] 7 I.T.R. 415; L.R. 66 I.A. 241. Although that judgment is not the subject of the present appeal and the Privy Council’s ultimate ruling on the same issue does not affect the controversy before this Court, the High Court’s reasoning on the definition of “property” is directly relevant. Before the High Court, it was argued that the term “property” must carry the same meaning in sections 9 and 4(3)(i), because section 9 uses the word in contrast to “business,” which is dealt with under section 10, and therefore “property” in section 4(3)(i) could not include business. The High Court rejected that contention, holding that the meaning of “property” in section 4(3)(i) could not be limited by the connotation of the same word in section 9, and it cited In re The Tribune [1935] 3 I.T.R. 246 for support. Before the Privy Council, the question of whether the business of the Tribune press and newspaper constituted “property” was not raised; the Board merely observed that the reference letter contained no suggestion that the assessed income was not derived from property held under the trust described in the twenty‑second and twenty‑third paragraphs of the will.
The issue of business being “property” arose directly for decision in All India Spinners’ Association v. Commissioner of Income‑tax, Bombay [1944] 12 I.T.R. 482; L.R. 71 I.A. 159. In that case the assessee was an unregistered association formed to develop village hand‑spinning and hand‑weaving industries. The Association collected subscriptions and donations from its members, used the funds to purchase raw cotton, supplied the cotton to poor labourers for spinning into yarn, provided the yarn to the same labourers for weaving into cloth, and then sold the cloth, applying the sale proceeds to the Association’s funds for the stated purposes. The Association claimed exemption under section 4(3)(i) on the ground that its income arose from property held under trust. The High Court rejected that claim, holding that the yarn and cloth produced could not be regarded as property held in trust, and consequently section 4(3)(i) did not apply. On appeal, the Privy Council reversed the decision, holding that “the property consisted of the organisation and the undertaking as well as the fluctuating stock of yarn and cloth,” and therefore the exemption in section 4(3)(i) was applicable. This authority directly supports the appellant’s contention that business may be treated as property for purposes of the exemption.
In response, the respondent relied on the decision in Eggar v. Commissioner of Income‑tax [(1926) 2 I.T.C. 286]. In that case a professor agreed to devote his university lecture remuneration to charitable purposes, but no deed of trust was executed. The question before the court was whether the amounts actually paid to the professor by the university were exempt from tax. The court held that the payments were not exempt, describing the income at the time of receipt as the professor’s private property arising from services rendered, and noting that there was no source of income dedicated to a trust. Accordingly, that decision has no bearing on the point presently before this Court, because it does not involve income derived from trust‑held property. The weight of authority therefore favours the view that business can be regarded as “property” within the meaning of section 4(3)(i) of the Act.
In the earlier decision of Eggar v. Commissioner of Income‑tax [(1926) 2 I.T.C. 286], a professor agreed to receive for charitable purposes the remuneration that the University would pay him for delivering lectures, but no deed of trust was ever executed. The issue before the court was whether the sums actually paid by the University to the professor were exempt from tax. The court held that the amounts were not exempt because, at the time they were received, they constituted the private property of the professor as remuneration for services rendered. The court observed that there was no source of income dedicated to a trust in that case, and therefore the decision had no relevance to the matter under consideration. Consequently, the weight of authority supported the view that a business could be regarded as “property” for the purposes of section 4(3)(i) of the Act.
The respondent further argued that, even if a business could generally be treated as property within section 4(3)(i), a managing agency could not be so characterised because, under sections 2(9A), 87A and 87B of the Indian Companies Act, it was merely an office involving the performance of services and the discharge of certain obligations, and therefore could not constitute the subject‑matter of a trust. The court rejected this contention. It cited Angurbala Mullick v. Debabrata Mullick [(1951) S.C.R. 1125] and The Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt [(1954) S.C.R. 1005, 1019], where even an office of trusteeship was held to be property, especially when emoluments were attached. By the same reasoning, the office of managing agency, which is profitable and may be alienable, must also be regarded as property. The court noted that the performance of services does not exclude the existence of a business, pointing to examples such as insurance and commission agencies where services generate regular income. It affirmed that the test is whether the services provide a regular source of income, and, because managing agency had been held to be a business in Lakshminarayan Ram Gopal and Son Ltd. v. The Government of Hyderabad, it must consequently be property for the purposes of section 4(3)(i). The court also rejected the description of the managing‑agency trust as a “trust of an obligation,” stating that it is in truth a trust of property burdened with obligations, and that the law does not prohibit creating a trust over such property, although a trustee may be allowed to repudiate it if the obligations are unduly onerous.
The respondent then contended that, even if a managing agency could be the subject of a trust, the particular managing agency created by Exhibit B could not be held on trust because, unlike a public charity, it was not required to be permanent and could be terminated by the trustees upon three months’ notice. The court clarified that this argument confused the nature of public charitable trusts, which are indeed perpetual in character, with properties merely devoted to charitable purposes. It explained that the perpetuity of a public charity means that the trust can be enforced as long as there is any property left to apply to its objects, and that, even if some objects become impossible to fulfil, the remaining trust property would be applied to similar or allied charitable purposes under the doctrine of cy pres. However, the court emphasized that the trust properties themselves are subject only to the incidents imposed by law. Accordingly, if the trust property consists of a leasehold interest, it would terminate with the lease; similarly, if trust property is alienated under circumstances that bind the trust, it would cease to be part of the trust. This reasoning demonstrated that the managing agency created by Exhibit B could indeed be held on trust despite its terminable nature.
The Court observed that a managing agency created by Exhibit B could be terminated by the trustees on giving three months’ notice, whereas a charitable trust is described as “incapable of being revoked or put an end to at the option of the trustee.” The Court held that this comparison confused the concept of a public charity with the concept of property devoted to charity. It affirmed that a public charity is, by its nature, perpetual and therefore enforceable so long as any property remains that can be applied to its charitable objects. Even if some or all of the charitable objects become impossible to fulfil, the doctrine of cy pres would require that the trust property be applied to similar or allied charitable purposes. The Court further explained that trust property is subject only to the legal incidents that attach to it. For example, if the trust property is a leasehold interest, it must terminate when the lease ends; likewise, if trust property is alienated under circumstances that bind the trust, it will leave the trust. Such events do not extinguish the trust unless no property remains with which the trust can be carried out. The Court noted that Section 77(c) of the Indian Trusts Act, 1882 embodies this principle, although it applies only to private trusts. Consequently, the Court concluded that the trustees’ power to terminate the managing agency at any time did not create any legal obstacle to the managing agency being regarded as property capable of being held on trust.
Finally, the Court addressed the contention arising from Exhibit A, which stated that the trustees were “to hold and stand possessed of” the sum of Rupees One Lac together with any donations, contributions, accretions, and investments in securities. It was argued that the managing agency could not be considered trust property because no portion of the one‑lakh‑rupee sum had been used to acquire the business, and therefore the sum had not acquired the character of an accretion. Moreover, it was submitted that the one‑lakh‑rupee amount given as security under Exhibit B was intended solely to ensure the trustees’ performance of their duties as managing agents and had not actually been injected into the business. The Court observed, however, that Clause 3 of the trust deed expressly authorised the acquisition of the managing‑agency business on behalf of the trust “with the help of the trust fund.” The Court found that this provision had been acted upon and that, when read together, Exhibits A and B formed an integrated scheme. Accordingly, the Court held that the settlors’ intention in Clause 3 of Exhibit A was precisely to acquire the managing agency, making the agency itself part of the trust property.
The Court observed that the managing agency which was acquired under Exhibit B fell within the category of a trust‑related business. It noted that English jurisprudence contains considerable authority for the proposition that when trustees conduct a business using trust funds, the law treats that situation as if the trust money were actually invested in the business, even though in reality the funds may not have been directly spent. The Court cited the decision in Rocke v Hart, reported as (1805) 11 Ves Jun 58; 32 E.R. 1009 at 1010, where Sir William Grant, delivering the judgment, said that a trader who deposits money with his banker effectively enjoys a benefit comparable to using his own cash in his trade, because the balance kept with the banker serves the purpose of his credit and therefore constitutes employment of the money in his business. The Court also referred to similar observations made by Lord Gifford in Moons v De Bernales, reported as (1826) 1 Russ 301; 38 E.R. 117. On the basis of these authorities, the Court expressed the opinion that the term “property” in section 4(3)(i) of the Income‑Tax Act is sufficiently broad to include a “business”. Consequently, if the question were to be decided solely on the language of that sub‑section, the managing agency created under Exhibit B would have to be treated as property held on trust within the meaning of section 4(3)(i). However, the Court emphasized that this conclusion alone could not determine the appeal in favour of the appellant, because the respondent raised an additional question concerning the interpretation of “property” when the same provision is read together with section 4(3)(ia). The respondent contended that, although the word “property” is generally wide enough to embrace a business, within the specific context of section 4(3)(i) read in conjunction with section 4(3)(ia) it should be given a narrower meaning, limited to property other than a business. This contention formed the second issue that the Court was asked to consider.
To address the second issue, the Court first explained the legislative background. When the Income‑Tax Act was originally enacted, the only exemption for income derived from property dedicated to a religious or charitable trust was contained in section 4(3)(i). The question then arose whether profits from a business carried on for and on behalf of a trust fell within that exemption. In Commissioner of Income‑Tax, Madras v Arunachalam Chettiar, reported as I.L.R. (1926) 49 Mad 833, following the House of Lords decision in Coman v Governors of the Rotunda Hospital, Dublin, [1921] A.C. 1, the court held that such profits were not exempt. The Allahabad High Court affirmed the same view in Lachhman Das Narain Das, In re, reported as I.L.R. (1925) 47 All 68. Later, the Lahore High Court, in the case In re The Tribune, held that “property” in section 4(3)(i) was broad enough to include a business, and that profits from a business conducted by trustees would therefore be exempt from tax. Although the matter was subsequently taken on appeal to the Privy Council, the specific question of whether the term “property” covered business was not raised before that court. The Court noted that this state of the law existed when the Legislature introduced a new provision, section 4(3)(ia), which provides that income derived from a business carried on on behalf of a religious or charitable institution may be exempt only if the income is applied solely to the institution’s purposes and the business is either part of the institution’s primary purpose or is mainly performed by its beneficiaries. The Court concluded that, given this legislative amendment, the question of whether the earlier exemption under section 4(3)(i) could be read to include business required further analysis, and that the prevailing legal position at the time of the amendment formed the backdrop for the Court’s subsequent examination.
The Legislature subsequently introduced a new subsection, identified as section 4(3)(ia). This provision states that any income, profit or gain falling within the specified classes shall be excluded from the total income of the person receiving it. In particular, subsection (ia) provides that income derived from a business carried on on behalf of a religious or charitable institution will be exempt provided that the income is applied solely to the purposes of that institution and either (a) the business is carried on in the course of fulfilling a primary purpose of the institution, or (b) the work connected with the business is mainly performed by beneficiaries of the institution. Accordingly, the exemption of business profits under this clause is conditional upon satisfaction of the two stipulated requirements.
The Department argued that, because section 4(3)(ia) is a special provision dealing specifically with exemption of income from business undertaken for a trust, any claim for exemption of such profit must be made only under this subsection. The Department further asserted that if the conditions of subsection (ia) are not satisfied, the assessee cannot rely on the general exemption found in section 4(3)(i) by contending that the business constitutes “property.” This contention was based on the well‑known maxim “generalia specialibus non derogant.” In the earlier case of Charitable Gadodia Swadeshi Stores v. Commissioner of Income‑tax, Punjab, the Lahore High Court considered the same issue and held that the failure of a business to meet the two conditions of section 4(3)(ia) did not preclude exemption under section 4(3)(i). The court reasoned that the two categories created by sections 4(3)(i) and 4(3)(ia) were enacted as separate clauses and therefore one did not exclude the other. The appellant relied on this decision before the Tribunal, which nevertheless treated the decision as distinguishable, although the Tribunal’s order indicated some uncertainty about its correctness. Consequently, when the appellant sought a reference under section 66(1) of the Act, the Tribunal referred the second question – whether the business is “property” within section 4(3)(i) – to the High Court. The Bombay High Court, however, concluded that the business was not “property” under section 4(3)(i) and therefore did not address the second question. Having now held that the term “property” in section 4(3)(i) can be given a broader meaning that includes business, the Court found it necessary to consider the second question. Counsel for both sides agreed that it would be appropriate to remit this issue to the High Court for determination. In view of these considerations, the Court ordered that the case be remanded for further hearing on the second question.
The Court ordered that the matter be sent back to the High Court of Bombay so that the reference could be dealt with anew, with particular emphasis on reassessing the second question that had been raised. In relation to the costs, the Court directed that the respondent be required to pay the appellant the expenses incurred in pursuing this appeal, as well as the costs that had been borne by the appellant for the hearing that took place before the High Court. The Court further specified that the expenses associated with the additional hearing, which the Court had ordered to occur after the remand, would be determined by the High Court when it conducts the fresh disposal of the reference. Accordingly, the Court concluded that the appeal was to be allowed and that the entire case was to be remanded for further proceedings in accordance with the directions set out above.