The Trustees Of The Charity... vs The Commissioner Of Income-Tax, Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 396 of 1957

Decision Date: 5 May 1959

Coram: Natwarlal H. Bhagwati, M. Hidayatullah, DAS

In this appeal the Supreme Court of India examined a dispute brought by the trustees of the Charity Fund located on Esplanade Road in Fort, Bombay. The petitioners were identified as the trustees of the Charity Fund founded by Sir Sassoon David, Baronet of Bombay. The respondent was the Commissioner of Income‑Tax for Bombay. The judgment was delivered on 5 May 1959. The case was reported in the All India Reports as 1959 AIR 1060 and in the Supreme Court Reporter Supplement as 1959 SCR Supl.(2) 923. The bench hearing the matter consisted of Justice Natwarlal H. Bhagwati and Justice M. Hidayatullah, with reference to the chief justice, Justice Das, Sudhi Ranjan. The headnote of the reported judgment described the trustees as the appellants and noted that the fund was created by Sir Sassoon David. Clause 13 of the deed of trust, which formed the operative basis of the trust, directed that the net income of the fund be applied for any of the following purposes: (a) the relief and benefit of poor and indigent members of the Jewish community or any other community in Bombay, elsewhere in India, or elsewhere in the world, by making cash payments, providing food, clothing, lodging, residential quarters, or by granting education, scholarships, or other assistance deemed appropriate by the trustees; (b) the maintenance and support of hospitals and educational institutions such as schools and colleges; (c) the relief of distress caused by natural calamities including famine, pestilence, fire, tempest, flood, earthquake or similar events; (d) the care and protection of animals useful to mankind; (e) the advancement of religion; and (f) other purposes beneficial to the community that did not fall within the foregoing categories. Two provisos were added to the deed. The first proviso required that, when applying the net income to the purposes mentioned in sub‑clause (a), the trustees must give preference to poor and indigent relatives of Sir Sassoon David, including distant and collateral kin. The second proviso mandated that at least one half of the income earmarked for sub‑clause (a) be applied for the benefit of members of the Jewish community of Bombay, which also included the relatives of Sir Sassoon David and objects related to Judaism.

The primary question for determination was whether the income generated by the trust fund qualified for exemption from tax under section 4(3)(i) of the Indian Income‑Tax Act, 1922 (XI of 1922). The High Court had previously concluded that the trust could not be said to be held, either wholly or partly, for religious or charitable purposes that involved a public‑utility element, and therefore answered the question in the negative. On appeal, the Supreme Court held that there could be no doubt that each of the primary purposes set out in the deed of trust, including the purpose described in sub‑clause (a), when properly construed, involved an element of public utility. Consequently, the Court found that the purposes enumerated in the deed constituted a valid charitable trust, and the income of the fund fell within the exemption provision of section 4(3)(i). The Court’s decision thereby reversed the High Court’s view and affirmed that the trust’s income was exempt from taxation under the applicable statutory provision.

The Court observed that the trustees were legally permitted to apply the whole income of the trust to the purpose described in sub‑clause (a). This possibility did not undermine the legitimacy of the trust, because the relatives or family members of the founder could obtain benefits only through sub‑clause (a) and only as preferential beneficiaries selected from the broader class of primary beneficiaries defined by that clause, as stipulated in the provisos. The appropriate test for determining the validity of a deed of trust claimed to be a public charitable trust, the Court held, is whether the trust possesses a charitable character at the initial stage of determining eligibility. The Court applied the test articulated in In re Koettgan's Will Trusts [1954] Ch. 252. It distinguished the earlier decision in Trustees of Gordhandas Govindram Family Charitable Trust v. Commissioner of Income‑tax (Central), Bombay [1952] 21 I.T.R. 231, and held that the principles in that case were not applicable here. The Court further noted that, although the trustees were required to give preference, under the provisos, to the relations or members of Sir Sassoon David’s family when choosing the actual beneficiaries—925 persons—from the primary class of beneficiaries under sub‑clause (a), such preferential selection did not alter the public charitable nature of the trust created by sub‑clause (a). Consequently, the Court concluded that the income generated from the trust’s properties was entitled to exemption under section 4(3)(i) of the Indian Income‑tax Act.

The judgment proceeded to set out the civil appellate jurisdiction for Civil Appeal No. 396 of 1957, which arose from the judgment and order dated 21 February 1956 of the Bombay High Court in Income‑tax Reference No. 32 of 1954. The appeal was heard before a bench consisting of R. J. Kolah, J., B. Dadachanji, J., and S. N. Andley, representing the appellants, while K. N. Rajagopal Sastri and D. Gupta appeared for the respondent. The appeal was decided on 5 May 1959, and the judgment of the Court was delivered by Chief Justice C. DAS. The Court explained that the appeal was instituted on a certificate granted on 19 September 1956 by the High Court of Bombay pursuant to section 66(A)(2) of the Indian Income‑tax Act (hereinafter referred to as “the said Act”). The certificate was issued against the High Court’s order dated 21 February 1956, which had answered two questions of law referred to it under section 66(1) of the Act in the negative, at the request of the appellants. The appellants were identified as the trustees of a charitable fund known as “The Charity Fund Founded by Sir Sassoon David, Baronet of Bombay.” The fund had been created by Sir Sassoon David, Baronet, together with four other persons who, on 8 June 1922, executed a Deed of Declaration of Trust placing certain securities valued at Rs. 24,25,000 under trust for charitable purposes. Clause 13 of that deed, the proper construction of which was central to the questions posed, provided that the trust fund shall be held by the trustees upon the trusts to apply the net income thereof, after providing for all necessary expenses in relation to the management of the trust funds, for all the purposes specified in the deed.

The deed stipulated that the trust fund was to be held by the trustees and that, after meeting all necessary expenses of managing the fund, the net income could be applied to any of several charitable purposes. The first purpose authorized the trustees to provide relief and benefit to poor and indigent members of the Jewish community or of any other community residing in Bombay, elsewhere in India, or anywhere in the world. Such relief could be given by making cash payments, supplying food, clothing, lodging or residential quarters, granting education through scholarships, establishing the beneficiaries in life, or by any other manner the trustees deemed appropriate. The second purpose allowed for the institution, maintenance and support of hospitals, schools, colleges or other educational institutions. The third purpose covered relief of distress caused by natural calamities, including famine, pestilence, fire, tempest, flood, earthquake or any other similar disaster. The fourth purpose concerned the care and protection of animals useful to mankind. The fifth purpose related to the advancement of religion. The sixth purpose permitted any other purposes beneficial to the community that did not fall within the foregoing categories.

While applying the income in the manner described, the trustees were required to give preference to poor and indigent relatives or members of the family of Sir Sassoon David, Baronet, including distant and collateral relations. Further, the deed prescribed a specific proportion for the distribution of income: at least fifty percent of the income of the fund had to be applied at all times for the benefit of members of the Jewish community of Bombay, including the relatives of Sir Sassoon David, and for Jewish objects, particularly through donations made on the anniversary of the death of Sir Sassoon David and his wife Lady Hannah David, which fell on the twenty‑second day of June. The remaining income could be used for the benefit of all persons and objects, including Jewish persons and objects, in such proportions that the trustees thought proper. The deed also provided that if, in any year, the income of the trust fund was not wholly applied to the specified trusts, the surplus could be carried forward to the next year or years and applied as income arising in those subsequent years. Additionally, during the lifetime of Sir Sassoon David, the trustees were to consider his wishes, and Sir Sassoon David himself retained the right to direct, if he so desired, that the income then existing or any part of it be applied to any charitable object or objects of his choosing, and the trustees were bound to implement such direction.

The trustees had placed the trust fund, among other assets, in 3 ½ percent Government Securities. In 1930 the Income‑tax Officer, A Ward of Bombay, issued a certificate authorising the Reserve Bank of India to withhold no tax at source on the interest earned by the trustees on those securities. The certificate expressly stated that it would remain effective until such time as it was cancelled. In 1946 the Government of India redeemed the 3 ½ percent securities and substituted them with a 3 percent Conversion Loan dated 1946. Consequently, in February 1948 the earlier exemption certificate was withdrawn because the securities on which it had been based no longer existed. Following this cancellation, the trustees applied to the Income‑tax Officer of the Bombay Refund Circle for a fresh exemption certificate covering the income from the new 3 percent Conversion Loan. The officer declined the application, contending that the income derived from the trust fund was not exempt under section 4(3)(i) of the Indian Income‑tax Act as it stood at that time. The relevant portion of the statute read: “(3) Any income, profits or gains falling within the following classes shall not be included in total income of the person receiving them: (i) Any income, derived from property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application, thereto.”

After the refusal to grant a new certificate, the same Income‑tax Officer, A‑V Ward, informed the trustees that proceedings would be instituted against them under section 34 of the Act for the assessment years 1944‑45 through 1947‑48. He also commenced regular assessment proceedings for the year 1948‑49 and for each subsequent year up to 1952‑53. In all nine of those assessment periods the officer maintained that the trust‑fund income was not exempt under section 4(3)(i) and therefore assessed the trustees. For the first four years (1944‑45 to 1947‑48) he assessed them on the basis that the income had escaped assessment, and for the remaining five years (1948‑49 to 1952‑53) he levied tax in the usual manner. The appellants appealed, and the Appellate Assistant Commissioner affirmed the assessments. On a further appeal, the Income‑tax Appellate Tribunal set aside the assessments for the initial four years, holding that section 34 had been incorrectly invoked because the matter involved merely a difference of opinion between successive Income‑tax Officers on the same facts. The tax department thereafter accepted the Tribunal’s view and took no further action concerning those years, which are not the subject of the present appeal. Regarding the assessments for the five years from 1948‑49 to 1952‑53, the Tribunal upheld the assessments.

The Tribunal upheld the decision of the Appellate Assistant Commissioner, who had confirmed the assessments originally made by the Income‑tax Officer. The appellants then filed an application under section 66(1) of the Income‑tax Act, prompting the Tribunal to prepare a statement of case and to refer two questions of law to the High Court for its opinion. The questions posed were: first, whether the trust property was held wholly for religious or charitable purposes within the meaning of section 4(3)(i) of the Indian Income‑tax Act; and second, if the answer to the first question was negative, whether the trust property was held in part only for religious or charitable purposes. The High Court heard the reference and answered both questions in the negative. Despite that conclusion, the High Court issued the appellants a certificate of fitness for appeal to this Court, and the present appeal was filed on the basis of that certificate.

Clause 13 of the trust deed declares that the trust fund is to be held by the trustees “upon trusts to apply the net income thereof for all or any of the six purposes enumerated therein.” The parties conceded before the High Court, and this point has not been disputed here, that if clause 13 were read in isolation, each of the six listed purposes would qualify as a charitable purpose possessing an element of public utility and would therefore fall within the protection of section 4(3)(i). It was further conceded that the trustees’ ability to expend the net income on any one of the six purposes, to the exclusion of the remaining five, would not affect the income’s exemption from tax. For example, even if the trustees applied the entire net income solely to the purpose described in sub‑clause (a) and excluded sub‑clauses (b) through (f), the income would still be exempt under section 4(3)(i). The High Court, however, adopted a different approach, interpreting clause 13 together with its provisos and concluding that the trust was primarily intended for the benefit of the relations or members of the family of Sir Sassoon David, Baronet. Under the first proviso, the trustees are required, when applying the net income to the purpose in sub‑clause (a), to give preference to the poor and indigent relations or family members of Sir Sassoon David, including distant and collateral relations. The second proviso, according to the appellants, further obliges the trustees to allocate not less than one‑half of the income for the benefit of the members of the Jewish community of Bombay, specifically “including the relations of Sir Sassoon David, Baronet as aforesaid,” and the Jewish objects.

The Court observed that the phrase “not less than half” was emphasized to show that the trustees were permitted to allocate more than half, and indeed the whole, of the net income of the trust for the benefit of the relations or members of the family of Sir Sassoon David, Bart. It further noted that, although any remaining income, if any existed, was required to be spent for the benefit of all persons and objects, including Jewish persons and objects, the trustees were nevertheless free, if they so desired, to apply that remaining income also for the benefit of the relations or members of Sir Sassoon David’s family, treating them as Jewish persons. The argument that gained the approval of the High Court was that the provisos created a compulsory duty on the trustees (i) to give preference to the poor and indigent relations or members of the family of Sir Sassoon David, Bart, and (ii) to spend not less than half of the income, a requirement that could extend to the entire income, for the benefit of those relations or family members. The High Court pointed out that, when clause 13 of the deed was read in its entirety, it was open to the trustees, without committing any breach of trust, to expend the whole net income of the trust fund for the purpose of providing relief to the poor and indigent relations or members of the family of Sir Sassoon David, Bart, including distant and collateral relations. On that basis the High Court concluded that the property could not be said to be held wholly or partly for religious or charitable purposes that involved an element of public utility. Consequently, the High Court held that the income from the trust fund was not exempt from taxation under section 4(3)(i) and answered both of the questions posed to it in the negative. The matter before the present Court was whether the High Court’s answers to those questions were correct. In arriving at its conclusions, the High Court relied upon an earlier decision it had rendered in the case of Trustees of Gordhandas Govindram Family Charitable Trust v. Commissioner of Income‑Tax (Central), Bombay. The Court, however, observed that the facts of that earlier case were somewhat different from the facts before it now. In that earlier case the trust was described as the “Gordhandas Govindram Family Charitable Trust”. Clause 2 of that trust deed provided for the application of the net income in giving help or relief to such poor Vaishyas and other Hindus as the trustees might consider deserving of assistance, in the manner and to the extent specified in the deed and subject to the conditions and directions stated in the following clauses. Sub‑clause (a) of clause 3 stipulated that Vaishya Hindus who were members of the Seksaria family should be preferred to poor Vaishyas who were not members of that family, and maintenance was to be provided under the subsequent sub‑clause.

Clause (b) authorised the payment of money to poor male descendants of the settlor, while clause (c) dealt with poor female descendants of the settlor. Clause (d) provided for marriage expenses for poor male descendants, and clause (e) did the same for poor female descendants of the settlor. Additional sub‑clauses made provision for payments to poor male or female descendants of other members of the Seksaria family. The High Court, in reviewing the earlier judgment that it was now appealing, observed that the trust examined in that earlier case represented “a fairly blatant illustration of a settlor trying to benefit his own family and his own relations.” The Court further noted that the earlier decision had held that “the benefit to the public was too remote and too illusory and accordingly held that … was not a trust which had for its object a general public utility” (see [1952] 21 I.T.R. 231). The Court emphasized that such a conclusion could not be drawn with respect to the provisions of the present Deed of Declaration of Trust.

Under clause 13 of the present deed, the trustees were given the discretion to hold the trust fund and to apply the net income for any or all of the six purposes enumerated in the deed. The relatives or members of the family of Sir Sassoon David, Bart., including distant and collateral relatives, were not named as direct recipients of benefits under clauses (b) through (f). Consequently, for those purposes, the trust unquestionably possessed an element of public utility. The Court recognized that the trustees could, if they wished, apply the entire net income solely to the purpose described in clause (a) and disregard the other clauses. Nevertheless, the fact that family members did not appear as direct beneficiaries under the later clauses could not be ignored, because it bore on the identification of the primary objects of the trust as a whole. Clause (a) was drafted to provide “relief and benefit of the poor and indigent members of the Jewish or any other community of Bombay or other parts of India or of the world.” Counsel for the parties conceded that this clause expressed a general charitable intention with a clear public‑utility component. Accordingly, the Court held that clause (a) created a valid public charitable trust whose beneficiaries were the various classes of persons mentioned therein. The first proviso, which began with the words “in applying the income as aforesaid,” referred back to clause (a) and indicated that, when applying income for the purpose of clause (a), the trustees were to give preference to the poor and indigent relations or family members of Sir Sassoon David, Bart.

The Court observed that the proviso attached to clause (a) does not function on its own but becomes operative only when the income is applied “as aforesaid.” The requirement to give preference therefore introduces a mechanism for selecting certain individuals from the broader class defined in sub‑clause (a). Consequently, a poor or indigent relative or family member of Sir Sassoon David, Bart. can claim a benefit under the trust only if that person also falls within one of the categories enumerated in sub‑clause (a). To illustrate the effect of this limitation, the Court offered an extreme hypothetical: suppose a poor and indigent relative of Sir Sassoon David, Bart. renounces the Jewish faith, does not adopt any other religion, and consequently ceases to be a member of the Jewish community without becoming a member of any other community. Such a person, although qualifying as a poor and indigent relative under the first proviso, would not be entitled to the benefits of sub‑clause (a) because the primary class of beneficiaries requires membership in a recognized community. In other words, sub‑clause (a) establishes the primary pool of potential beneficiaries, and the provisos thereafter narrow the actual recipients by giving preference to the relatives or family members of Sir Sassoon David, Bart. The Court then turned to precedent, holding that the case of In re Koettgan’s Will Trusts (1) was more applicable to the facts than the Gordhandas Govindram Family Charity Trust case (2) which the High Court had relied upon. In the English case cited, the testatrix devised a residuary estate to be held on trust for the promotion and furtherance of commercial education. The class of persons eligible for the fund was defined as British‑born individuals of either sex who desired commercial education but lacked sufficient means to obtain it. The testatrix further directed that, in selecting the beneficiaries, the trustees should give preference to employees of John Batt & Co. (London) Ltd. or members of their families; if an insufficient number of such preferred persons existed, the trustees could then select any British‑born persons, provided that no more than 75 percent of the total annual income was allocated to the preferred class. The Court held that, on construction of the will, the primary class from which trustees could select beneficiaries contained the requisite element of public benefit, and that the validity of the trust depended on the identification of that class. Accordingly, the subsequent instruction to give preference to a limited subset, together with the 75 percent cap, did not invalidate the trust, which remained a valid charitable trust.

In this case the Court observed that directing a limited class to receive a specified portion of the income did not defeat the charitable nature of the trust, and therefore the trust remained a valid and effective charitable trust. Referring to the first part of the testatrix’s will, Justice Upjohn explained at page 257 that if the construction of the will were to end at that point, the trust would clearly qualify as a charitable trust because a gift intended for commercial education is recognised as a gift for the advancement of education. After establishing that point, the Judge turned to the next step, which was the selection of beneficiaries from the primary class identified in the will. He stated that only when the trustees began to choose individuals from that primary class did the employees of John Batt & Co. and their family members become relevant, and he posed the question of whether such a direction to prefer those persons would invalidate the primary trust. Justice Upjohn answered that it would not. He further explained that the issue of whether the trust possessed a public character arises at the moment the primary class of eligible persons is ascertained, and that, in his view, the will satisfied the requirement of a sufficiently public character. Consequently, the Judge concluded that a direction to give preference to the company’s employees and their families could not undermine the validity of the primary trust, especially since it was uncertain whether those preferred persons would ever consume the stipulated seventy‑five percent of the income in any given year. On a proper construction of the will, the trust was not principally for persons connected with John Batt & Co., and the class of persons who could benefit was not confined to them. Accordingly, the provisions contained in clauses 7 and 8 of the testatrix’s will were held to constitute a valid charitable trust. The Court noted that, although this decision was rendered by a single judge, it has not been overturned or contradicted by any later authority and appears to be founded on sound legal principles.

Applying the test laid down by Justice Upjohn, the Court found no doubt that the earlier portion of element 13, when read without the provisos, formed a valid public charitable trust. The fact that, under sub‑element (a), the trustees were required to give preference, according to the provisos, to the relations or family members of Sir Sasoon David, Baronet, did not disturb the public charitable character of the trust. In the Court’s opinion the facts of the present case more closely resembled those of the English case previously cited than the facts of the earlier Bombay High Court decision in the Gordhandas Govindram Family Charity Trust case. As already indicated, the relatives of the family are clearly not the primary objects intended by sub‑clauses (b) through (f). The first part of sub‑clause (a), if read without the provisos, is therefore not limited to the family and retains its public character. Consequently, the Court affirmed that the preference given to the poor and indigent relatives of Sir Sasoon David does not affect the validity of the underlying public charitable trust, and the income from the trust properties falls within the ambit of section 4(3)(i) and is therefore eligible for exemption.

The Court observed that the provision in question was described as being overly broad, vague, and therefore unenforceable. It further held that the clause granting preference to poor and indigent relatives or members of the family of Sir Sassoon David, Bart., could not disturb the existence of the public charitable trust that had been created under clause (a). In the Court’s view, the income generated from the trust property fell within the ambit of section 4(3)(i) of the Income‑Tax Act and consequently qualified for tax exemption. Accordingly, the Court concluded that the negative response rendered by the High Court to Question I was untenable and that the proper answer to that question must be in the affirmative. Because the Court accepted the affirmative answer to Question I, it found that Question II became unnecessary and required no determination. As a result, the appeal was allowed, with the affirmation of Question I, and the appellants were ordered to bear the costs incurred in the reference before the High Court as well as the costs of this appeal. The appeal was therefore permitted, and the order is recorded as “Appeal allowed.” (1) [1952] 21 I.T.R. 231.