Commissioner of Income-Tax, Kerala and Coimbatore vs Puthiya Ponmanichintakam

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

Court: Supreme Court of India

Case Number: Civil Appeal No. 397 of 1960

Decision Date: 14 August, 1961

Coram: P.B. Gajendragadkar, M. Hidayatullah, K. Subba Rao

In this appeal the Commissioner of Income‑Tax for Kerala and Coimbatore instituted proceedings against the respondent, Puthiya Ponmanichintakam, and the case was decided by the Supreme Court of India on 14 August 1961. The judgment was delivered by a bench consisting of Justice P. B. Gajendragadkar, Justice M. Hidayatullah and Justice Subbarao K, and the decision is reported in 1962 AIR 163, 1962 SCR (3) 137 and cited as R 1971 SC 2463 (12). The matter concerned the application of section 41(1) of the Indian Income‑Tax Act, 1922, as amended, together with the first proviso to that section, and also involved sections 3 and 4 of the Mussalman Wakf Validating Act, 1913. The central question for determination was whether the wakf created by the parties should be assessed for income tax under section 41(1) either through its manager as an individual or as an association of persons, on the ground that the individual shares of the beneficiaries were indeterminate and therefore unknown. The deed of the wakf directed the mutawalli to perform acts necessary for charitable purposes and to meet the maintenance expenses of the wakif’s children, grandchildren, any future female children, and the male children born to those female children. After payment of taxes, repair costs and maintenance of the properties, the remaining income was to be used for daily household expenses, for food, clothing and other necessities of the female members of the family, for conducting specified ceremonies, for feeding the poor and for other necessary expenditures; any surplus was to be employed in acquiring further properties that would generate good income. The Court held that, under the terms of the wakf deed, the individual shares of the beneficiaries were indeed indeterminate within the meaning of the first proviso to section 41(1). Consequently the assessee was liable to pay income tax at the maximum rate prescribed by that provision. The Court further found that it was incorrect to rely on sections 3 and 4 of the Mussalman Wakf Validating Act to argue that the property vested in the Almighty and that, therefore, the mutawalli did not receive the income on behalf of any person for the purposes of section 41(1). Under Mahomedan law, wakf property vests in the Almighty only in an ideal sense, while the mutawalli, acting in his own name, utilizes the income for the benefit of the beneficiaries. Accordingly, the phrase “on behalf of any person” in section 41(1) could only refer to the beneficiaries and not to the Almighty. The Court referred to the decision in Jewun Doss Sahoo v. Shah Kubeer‑ood‑deen, 1841 2 M.I.A. 390 in support of this view. Finally, the Court held that there was no scope for importing Mahomedan law into the interpretation of section 41(1) of the Income‑Tax Act in this context.

The Court noted that the wakf fell within section 41 of the Income‑Tax Act because that provision expressly treated the Mutawalli as a trustee, even though under Mohamedan law the Mutawalli is not technically a trustee. The matter was decided in civil appellate jurisdiction as Civil Appeal No 397 of 1960, an appeal from the judgment and order dated 24 November 1958 of the Kerala High Court in I.T.R. No 23 of 1957. Counsel for the appellant were K N Rajagopala Sastri and I P C Menon, and counsel for the respondent were A V Viswanatha Sastri Narayanaswami and R Gopalakrishnan. The judgment was delivered on 14 August 1961 by Justice Subbarao. The case concerned a deed executed by P B Umbichi and his wife on 20 December 1915, by which they created a wakf of their properties. The deed provided, among other things, that the income from those properties should be used for the maintenance of their two daughters and the descendants of the daughters on the female side. For forty years up to and including the assessment year 1954‑55, the income‑tax assessments were made on the wakf through its manager under section 41 of the Act, treating the wakf as an individual. For the assessment year 1955‑56, however, the Income‑Tax Officer treated the assessee as an association of persons and, on the ground that the beneficiaries’ shares were indeterminate, levied tax at the maximum rate under the first proviso to section 41. On appeal, the Appellate Assistant Commissioner of Income‑Tax held that the Officer was not correct in stating that the family members were indeterminate, but he confirmed the assessment because the shares were not specified among the individual family members and also because the distinction between the family members on one side and the charitable and religious purposes on the other meant that the first proviso to section 41 would apply to the assessee. On further appeal, the Income‑Tax Appellate Tribunal took the view that the proprietary rights in the property vested in the Almighty and that the Mutawalli was only to look after and administer the properties as a manager; consequently, the proper person in whose hands the income should be assessed was the Mutawalli in his capacity as an “individual”, and the assessment was allowed. At the instance of the Commissioner of Income‑Tax, the Tribunal referred a question to the Kerala High Court: whether, in the facts and circumstances of the case, the first proviso to section 41 was applicable. The High Court held that the proviso was not applicable because, under the wakf deed, the beneficiaries and their respective shares were ascertainable. Aggrieved by that order, the Commissioner of Income‑Tax preferred the present appeal.

Mr. Rajagopala Sastri, counsel for the Commissioner of Income‑tax, argued that a proper reading of the waqf deed showed that the mutawalli was only mandated to maintain the members of the family, that none of those family members possessed any ascertainable share in the income, and that, consequently, the matter fell squarely within the first proviso to section 41 of the Act. Mr. Viswanatha Sastri, counsel for the respondent, sought to preserve the interpretation advanced by the High Court, but also maintained that the present case lay outside the ambit of section 41(1) because the mutawalli was receiving the income on behalf of the Almighty, who was not a “person” within the meaning of the statute; therefore, the principal provision of the section would not apply, the proviso would likewise not be attracted, and the mutawalli would have to be assessed as an individual.

The dispute therefore turned on the construction of section 41 of the Act, and it was appropriate to set out the relevant portion of that provision. Section 41 reads: “(1) In the case of income, profits or gains chargeable under this Act which… any trustee or trustees appointed under a trust declared by a duly executed instrument in writing whether testamentary or otherwise, including the trustee or trustees under any waqf deed which is valid under the Muslim Waqf Validating Act 1913, are entitled to receive on behalf of any person, the tax shall be levied upon and recoverable from such trustee or trustees, in the like manner and to the same amount as it would be leviable upon and recoverable from the person on whose behalf such income, profits or gains are receivable, and all the provisions of this Act shall apply accordingly: Provided that where any such income, profits or gains or any part thereof are not specifically receivable on behalf of any one person, or where the individual shares of the persons on whose behalf they are receivable are indeterminate or unknown, the tax shall be levied and recoverable at the maximum rate, but, where such persons have no other personal income chargeable under this Act and none of them is an artificial juridical person, as if such income, profits or gains or such part thereof were the total income of an association of persons.” This section therefore applies to a trustee under a waqf deed that is valid under the 1913 Act. Under the substantive part of the section, tax is imposed on the trustee in the same manner and to the same extent as it would be imposed on the beneficiary, meaning that assessment would be made at the individual tax rates applicable to the beneficiary. However, the first proviso introduces two exceptions to that general rule: (i) where the income is not specifically receivable on behalf of any one person, and (ii) where the individual shares of the persons on whose behalf the income is receivable are indeterminate or unknown, in which circumstances tax is to be levied at the maximum rate.

In this case the Court considered whether the second exception under the first proviso applied, namely whether the individual shares of the persons on whose behalf the income was receivable were indeterminate or unknown. The Court first observed that the exception concerning income not being specifically receivable on behalf of any one person did not apply to the present matter. Consequently the issue was limited to the determination of whether the shares of the beneficiaries could be ascertained. The Court held that the answer depended on the interpretation of the Wakf deed that created the trust. The deed had been executed on 20 December 1950 by Umbichi and his wife, who dedicated their entire movable and immovable property, valued at rupees one lakh, to the objects specified in the deed. The deed appointed a Mutawalli and directed that the Mutawalli manage the properties “to do acts necessary for charitable purposes and, to meet the maintenance expenses of their children and grandchildren and the female children that might be born to them in future, and to the male children born to the said female children.” Further directions instructed that after payment of taxes and the expenses incurred for repairs and maintenance, the remaining income should be used for “the daily necessary expenses of the house and food expenses as we are doing now,” for purchasing “dresses and other necessities for the then male and female members of the tarwad,” and for conducting “nerchas (ceremonies), such as Yasin, Moulooth, etc., charitable ceremonies for feeding the poor and such other necessary expenses,” and that any balance thereafter could be employed by the Mutawalli to acquire properties yielding good income. The Court noted that the remaining recitals of the deed were not relevant to the question before it. The Court then asked whether the deed expressly specified the individual shares of the beneficiaries. It found that the deed did not expressly allocate shares, nor did it imply such allocation as necessary. The Court observed that the shares of the beneficiaries were not material to the objects of the deed. The Mutawalli was instructed to meet, out of the income, the expenses necessary for maintaining the members of the tarwad and to perform the required religious ceremonies, while the distribution of family income and family expenses was left to the Mutawalli’s discretion. Moreover, the deed envisaged that prudent and efficient management by the Mutawalli would allow savings for the purchase of additional properties. The directions, the Court concluded, clearly demonstrated that no specific share of the income was assigned to any beneficiary; the beneficiaries’ right was limited to maintenance according to their reasonable needs, a matter left to the Mutawalli’s judgment. Although the number of beneficiaries could be determined at any given time, the Court held that it was not possible to say that each beneficiary had a determinable share of the income under the deed.

In the appeal, the High Court had concluded that the document created an equal right to the income for each beneficiary. Although the document did not assign a particular share of the income to any beneficiary, it did grant each of them the right to be maintained out of the income. The Court’s interpretation therefore treated the beneficiaries as having equal shares. The present Court examined that construction and held that it could not be sustained because the plain language of the document did not indicate any definitive share for any beneficiary. Consequently, the Court found that, under the terms of the document, the individual shares of the beneficiaries were indeterminate within the meaning of the first proviso to section 41(1) of the Act. Accordingly, the proviso makes the assessee liable to pay income‑tax at the maximum rate.

The Court then turned to the alternative argument advanced by counsel for the respondent. That argument contended that, because a Wakf deed vests the property in the Almighty, the Mutawalli receives the income only on behalf of the Almighty and not on behalf of any person within the meaning of section 41(1) of the Act; therefore, the provision of section 41(1) should not apply to the assessment in question. The Court regarded the argument as subtle but without merit and set out three responses. First, the issue had not been raised before the High Court; the only question before that Court was whether the beneficiaries and their individual shares could be ascertained. Second, although under Mahomedan law the property dedicated by a Wakf deed belongs in an ideal sense to the Almighty, the Mutawalli, acting in the name of the Almighty, utilizes the income for the purposes and for the benefit of the beneficiaries named in the deed. When a Wakf is created, all rights in the property pass out of the Wakf and vest in the Almighty; the Mutawalli does not acquire legal title to the property, he is merely a manager and not a technical trustee. The practical significance of this principle has been explained in Jeewan Dass Sahoo v. Shah Kubeer‑ood‑deen, where the Court observed that a Wakf represents the appropriation of an article so that it becomes subject to divine property rules, extinguishing the appropriator’s right and rendering the article a property of God, the advantage of which accrues to His creatures. Thus, while the property is, in theory, owned by the Almighty, it is held for the benefit of His creatures, namely the beneficiaries.

Third, the Court noted that section 41(1) of the Act provides for a vicarious assessment to facilitate the levy and collection of income‑tax from a trustee in respect of the income of the beneficiaries. The provision expressly treats the Mutawalli of a Wakf as a trustee for tax purposes. Accordingly, the phrase “on behalf of any person” in section 41 must be understood as referring to the beneficiaries and not to the Almighty.

The Court observed that under Mahomedan law a wakf is created for a religious, pious or charitable purpose of a permanent character. Section 4 of the Wakf Validating Act further provides that a wakf shall not be invalid merely because the benefit reserved for the poor or for religious purposes is postponed until the extinction of the family (1840)2. M.I.A. 390, 421. Consequently, it is manifest that, according to Mahomedan law, the legal ownership of the wakf property vests only in the Almighty, while the Mutawalli, acting in His name, utilizes the income for the advantage of the beneficiaries.

Therefore, the expression “on behalf of any person” in section 41 of the Act can be understood to refer solely to the beneficiaries and not to the Almighty. The Court further explained that section 41(1) of the Act provides for a vicarious assessment to facilitate the levy and collection of income‑tax from a trustee in respect of the income of the beneficiaries. In express terms, the provision equates the Mutawalli of a wakf to a trustee. For the purpose of section 41, the Mutawalli is treated as a trustee and, by analogy with a trustee, holds the property for the benefit of the beneficiaries.

The Court held that there is no scope for importing the Mahomedan law of wakf into section 41 when the section itself treats the Mutawalli as a trustee, even though the Mutawalli is not a trustee in the technical sense under Mahomedan law. Accepting the argument of the learned counsel for the respondent would render section 41 otiose with respect to wakfs, because every wakf property would be held for the Almighty and not for any person. The Court therefore rejected that contention and answered the question in the affirmative.

In consequence, the Court set aside the order of the High Court and held that the respondent had been rightly assessed by the income‑tax officer at the maximum rate. The appeal was allowed with costs.