Commissioner of Income-Tax Kerala and Coimbatore vs Krishna Warriar

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

Court: Supreme Court of India

Case Number: Civil Appeal Nos. 606-610 of 1963

Decision Date: 29 April 1964

Coram: J.C. Shah, S.M. Sikri, Subba Rao

In the matter titled Commissioner of Income‑Tax Kerala and Coimbatore versus Krishna Warriar, the Supreme Court of India delivered its judgment on 29 April 1964. The bench that heard the case comprised Justice J.C. Shah, Justice S.M. Sikri and Justice K. Subbarao. The petition was instituted by the Commissioner of Income‑Tax for the states of Kerala and Coimbatore, and the respondent was Krishna Warriar. The case is reported in the 1965 volume of the All India Reporter at page 59 and also appears in the 1964 Supreme Court Reports, volume 8, page 36, with subsequent citations including E 1976 SC 1836, RF 1977 SC 2211, R 1978 SC 1443, and RF 1980 SC 387. The statutory provision in issue was Section 4(3)(i) of the Indian Income‑Tax Act, 1922 (Eleventh Act), relating to income‑tax exemption for businesses held in trust for religious or charitable purposes.

The headnote of the judgment explained that the deceased testator had conducted a business dealing in Ayurvedic medicines under the name and style “Arya Vaidya Sala.” In his will, he placed all his properties, including this business, under a trust whose purpose was to apply sixty per cent of the trust’s profits to religious and charitable activities for a period of twenty years after his death, and thereafter to apply eighty‑five per cent of the profits to such purposes. The assessment years that were examined fell within the first twenty‑year period following the testator’s death. The central question before the Court was whether the portion of income representing sixty per cent of the trust’s earnings was exempt from income‑tax assessment under Section 4(3)(i) of the Act. The income‑tax authorities had rejected the claim for exemption and had assessed the entire income from the trust properties, reasoning that only clause (b) of the proviso to Section 4(3) applied and that the conditions required by that clause were not satisfied.

The Court held five principal points. First, it determined that the business carried on under the name “Arya Vaidya Sala” constituted “property” within the meaning of Section 4(3)(i) of the Act, and because the whole business was held in trust with the intention of applying a portion of its profits to religious or charitable purposes, the income in question was exempt from income‑tax assessment under that provision. Second, the Court explained that clause (b) of the proviso to Section 4(3)(i) was intended to apply only to businesses that were not held in trust but were operated on behalf of a religious or charitable institution. Third, it clarified that a business held in trust, whether wholly or partially, for religious or charitable purposes did not fall within the category of a business carried on on behalf of such an institution. Fourth, the Court observed that the distinction between the expressions “wholly” and “in part” found in Section 4(3)(i) was not based on whether the entire property or only a fractional part of it was dedicated, but rather on whether the income derived from the property was to be used wholly for religious or charitable purposes or only in part for those purposes. Fifth, the Court interpreted the phrase “such income” appearing at the beginning of the proviso to Section 4(3)(i) as referring to “income accruing or arising in favour of the trust.”

The judgment was issued in the civil appellate jurisdiction of the Supreme Court. The appeals were numbered 606 to 610 of the year 1963 and were instituted by special leave from the judgment of the Kerala High Court dated 20 January 1961 in Income‑Tax Referred Case No. 16 of 1959.

On January 20 1961 the Kerala High Court delivered a judgment in Income‑tax Referred Case No 16 of 1959. The appellant was represented by counsel K N Rajagopal Sastri and R N Sachthey, while the respondent was represented by counsel S T Desai and Sardar Bahadur. The Supreme Court heard the appeals by special leave on April 29 1964, and Justice Subba Rao delivered the opinion of the Court. The appeals raised the issue of how to interpret section 4(3)(i) of the Indian Income‑tax Act, 1922, as amended by the Indian Income‑tax (Amendment) Act, 1953. The factual background involved the late P S Warriar, a well‑known Ayurvedic physician who operated a business in Ayurvedic medicines under the name “Arya Vaidya Sala”. He also managed a hospital called “Arya Sikitsa Sala” and a school named “Arya Vaidya Pata Sala”. After his death on January 30 1944, Warriar executed a will that created a trust over his properties, including Arya Vaidya Sala. The will instructed the trustees to continue the business and to distribute the income in specified proportions: sixty per cent of the income was to be applied to the three charitable institutions and forty per cent to his descendants.

Prior to the operation of the 1953 Amendment, the Income‑tax Department granted exemption from assessment for the sixty‑per‑cent portion of the income under section 4(3)(i). When the Amendment, which was given retrospective effect from April 1 1952, came into force, the Department ceased to allow the exemption even for that portion. Consequently, for the assessment years 1954‑55 and 1955‑56 the Income‑tax Officer assessed the whole income from the trust property. For the earlier years 1952‑53 and 1953‑54, which had originally been assessed with the exemption, the Officer issued notices under section 34 and, by two orders dated September 28 1956, reassessed the sixty‑per‑cent portion on the basis of escaped assessment. On December 20 1956, for the assessment year 1956‑57, the Officer again assessed the entire income. The assessee appealed these assessment orders to the Appellate Assistant Commissioner, but the appeals were dismissed. The subsequent appeals to the Income‑tax Appellate Tribunal in Madras were consolidated, and by its order dated February 28 1958 the Tribunal allowed the appeals, thereby exempting the sixty‑per‑cent portion of the income from tax under section 4(3)(i). References made to the High Court of Kerala were rejected, leading to the present appeals before this Court.

The Court of Kerala had dismissed the earlier references, and consequently the matter proceeded to the present appeals. The counsel representing the Revenue, identified as Mr Rajagopala Sastri, argued that Section 4(3)(i) of the Income‑Tax Act provides an exemption from tax only when the income originates from property that is held, either wholly or partly, in trust for religious or charitable purposes. He maintained that the enterprise operating under the name and style of Arya Vaidya Sala could not be characterized as property held in trust. Even assuming, for the sake of argument, that the business could be placed in trust, he contended that it was not held, in whole or in part, for religious or charitable purposes because merely a portion of the income was earmarked for such uses. Accordingly, he submitted that clause (b) of the proviso to the statutory provision became applicable, and that the specific conditions prescribed in that proviso had not been satisfied. On the other side, the counsel for the respondent, Mr S T Desa, advanced the position that the business itself qualifies as “property” within the meaning of Section 4(3)(i) and that it is indeed held in trust, at least in part, for religious and charitable objectives. He therefore argued that the substantive portion of the exemption provision should apply to the facts of this case, rendering the proviso inapplicable. Before undertaking a detailed construction of the relevant statutory language and evaluating the submissions of both parties, the Court found it appropriate to examine the substantive terms of the testator’s will in order to determine the extent of the trust created. The will, filed as Annexure A2, contains several pertinent excerpts. Paragraph 1 records that the will was executed by the deceased, Panniampalli Warriath, identified as the son of Parvathi alias Kunkikutty Warassiar, namely Sri Sankunny Warriar, also known as Vaidyaratnam Sri P S Warriar, who resided at Puthan Warian in Kottakkal Amsom and Desom of Ernad Taluk. Paragraph 7 declares that, excluding the properties listed in Schedules B, C and D, all remaining movable and immovable assets belonging to the testator are hereby constituted into a trust to be administered by the trustees in accordance with the directions set out in the will, with the properties described in Schedule E and slated to vest in the trustees upon his death. The testator unequivocally expressed the intention that, apart from the assets specified in paragraphs 4 and 5 (the B, C & D schedules), every other property should be deemed part of the trust, such that even any inadvertent omission would be considered included and vested in the trustees. Paragraph 8 proceeds to nominate the initial Board of Trustees, while paragraph 9 outlines that the trust is to be managed and operated pursuant to detailed terms labelled A through F. Finally, clause G specifies that the principal purpose of the trust is to perpetually maintain two institutions – the Arya Vaidya Sala and the Arya Vaidya Hospital – following their existing practices, with the aim of expanding and enhancing their scope and utility, and that the work of these institutions forms the core activity of the trust.

Arya Vaidya Sala presently carries out four main activities. First, it prepares Ayurvedic medicines. Second, it sells those medicines to the public. Third, it treats patients and receives compensation from them according to each patient’s financial capacity. Fourth, it conducts research into Arya Vaidya with the aim of increasing its usefulness to society. The institution called Arya Vaidya Hospital performs several specific functions. It examines poor patients free of charge, prescribes treatment, and supplies medicines at no cost in its outpatient department. It also admits at least twelve impoverished patients at any given time, providing them with lodging, board, free medicines and treatment in its inpatient department. The hospital carries out these services with the assistance of an Arya Vaidyan and, where necessary, an Allopath doctor for operations. In addition, the hospital offers treatment and medicines to all persons who seek them, collecting whatever remuneration they are able to pay, including the cost of medicines. The medicines used in the hospital are supplied by Arya Vaidya Sala, and the incidental expenses of the hospital are met from the funds of Arya Vaidya Sala.

The trustees are directed to operate both institutions in accordance with the intentions expressed above, and they may make modifications as circumstances require. Under the auspices of the Arya Samajam, the Arya Vaidya Patasala teaches Arya Vaidya in accordance with the service of Ayurveda. The settlor has been meeting the expenses of these institutions from the profits of Arya Vaidya Sala, where the income of the Sala does not fully cover the costs.

From the net profits of Arya Vaidya Sala, the settlor prescribed a specific allocation. Twenty‑five percent of the net profits are to be devoted to the development of Arya Vaidya Sala. Another twenty‑five percent are to be used for meeting the expenses of Arya Vaidya Hospital. A further twenty‑five percent are to be divided equally between the two tavazhies for a period of twenty‑five years. From the remaining twenty‑five percent, a sum not exceeding ten percent may, according to the needs of the institution, be utilized for the purposes of Arya Vaidya Patasala. Any balance that may remain after the ten percent is allocated to the Patasala may be used for Arya Vaidya Sala itself. The balance, amounting to fifteen percent, must be deposited each year by the trustees in approved banks as a reserve fund for the two tavazhies for a period of twenty years. The accumulated fund, together with interest, is to be divided equally between the two tavazhies, each receiving one half. The trustees are required to invest this reserve fund in immovable property, subject to proper authority.

The trustees are not obligated to pay any amount to the two tavazhies after the expiry of the twenty‑year period. The forty percent of profit that was earmarked for the twenty‑year term and that becomes available after the term ends is therefore to be utilized for the development of Arya Vaidya Sala and Arya Vaidya Hospital at the discretion of the trustees.

In this case the court observed that the testator had created a trust that comprised all of his property, including the assets listed in Schedules B, C and D, and that these assets were specifically vested in the trustees named in the instrument. The trust also encompassed the business that was conducted under the name and style of Arya Vaidya Sala. The principal purpose of the trust was to operate the two institutions identified in the will – Arya Vaidya Sala and Arya Vaidya Hospital – together with the other purposes that were enumerated in the same document. According to the directions contained in the will, the income generated by the business held in trust was to be allocated as follows: twenty‑five percent was to be spent on the development of Arya Vaidya Sala; another twenty‑five percent was to meet the expenses of Arya Vaidya Hospital; not more than ten percent was to be applied to Arya Vaidya Patasala; an additional twenty‑five percent was to be shared equally between the two branches of the testator’s family for a period of twenty years, after which that share was to be used for the purposes of Arya Vaidya Sala and Arya Vaidya Hospital; and fifteen percent was to be given to the two branches. Altogether, the trust stipulated that sixty percent of the total property income for the first twenty years following the testator’s death should be devoted to religious and charitable purposes, and that after that period eighty‑five percent of the income should be applied to those same purposes, with the remaining portion available for non‑religious and non‑charitable uses.

The court noted that the assessment years presently under consideration fell within the initial twenty‑year period after the testator’s demise; consequently the enquiry was confined to the sixty‑percent portion of the trust income. The central issue for determination was whether this sixty‑percent share of income derived from the trust property was exempt from income‑tax assessment under section 4(3)(i) of the Income‑Tax Act. The relevant statutory provision was quoted in full: “Section 4(3) – Any income, profits or gains falling within the following classes shall not be included in the 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: Provided that such income shall be included in the total income … … (b) in the case of income derived from business carried on behalf of a religious or charitable institution, unless the income is applied wholly for the purpose of the …”. The court therefore framed the question of tax exemption in the context of whether the stipulated sixty‑percent allocation satisfied the condition that the income be applied, or finally set apart for application, to religious or charitable purposes as required by the provision.

In this case, the Court examined the condition that for income from a business to be exempt, the business must either be carried on in the course of actually performing the primary purpose of the religious or charitable institution, or the work connected with the business must be mainly performed by the beneficiaries of that institution. The Court then provided a brief history of the proviso attached to section 4(3)(i). Before the Amending Act of 1953, the proviso existed as a separate substantive clause that was numbered clause (i‑a). That clause (i‑a) later became the subject of judicial examination. The Revenue argued that even when a business was held under trust for religious or charitable purposes, the income from that business would fall within clause (i‑a) and would therefore not be exempt from income‑tax unless the conditions specified in that clause were satisfied. The Court cited the decision in Charitable Gadodia Swadeshi Stores v. Commissioner of Income‑tax, Punjab, where the Lahore High Court rejected the Revenue’s contention. One of the reasons given for the rejection was that if the aid clause was intended to limit the scope of clause (i), it would have been inserted as a proviso to the original clause rather than as a separate substantive provision. On the basis of that observation, the Amending Act of 1953 replaced clause (i‑a) with clause (b) of the proviso. The Court noted, however, that it is not a rigid rule of construction that a statutory proviso must always be read as a limitation on the main provision. The general presumption is that, but for the proviso, the enacting part of the section would have covered the subject matter of the proviso; nevertheless, the clear language of both the substantive provision and the proviso may show that the proviso functions as an independent substantive provision rather than merely qualifying the main clause. Referring to the authority of Maxwell, the Court quoted that “the true principle is that the sound view of the enacting clause, the saving clause and the proviso taken and construed together is to prevail.” Applying this approach, the Court found no difficulty in holding, as it had earlier expressed in its judgment, that clause (b) of the proviso addresses a situation where the business is not vested in trust for religious or charitable purposes within the meaning of the substantive clause of section 4(3)(i). With these introductory observations, the Court proceeded to interpret section 4(3)(i) of the Act together with clause (b) of the proviso. Under clause (i), for the exemption to apply, the income must have been derived from property that is held under trust, either wholly or partly, for religious or charitable purposes. Under clause (b) of the proviso, when income is derived from a business carried on on behalf of a religious or charitable institution, the exemption does not apply unless the conditions specified in that clause are complied with. If

In this case the Court observed that when a business qualifies as property and is held under a trust wholly or partly for religious or charitable purposes, it plainly falls within the substantive provision of clause (i) of section 4(3) and, consequently, the proviso’s clause (b) cannot be invoked, because clause (b) refers to a business that is carried on on behalf of a religious or charitable institution and is not itself held under trust. The Court noted that the argument seeking to remove the business from clause (i) and place it under clause (b) relied on the contention that a business is not property, or that even if it were property it is not held wholly or partly in trust for religious or charitable purposes. The Court rejected that contention, stating that the characterisation of business as property is now well settled. The Privy Council in In re Trustees of the Tribune(') had affirmed the view of the Bombay High Court that the business of publishing the newspaper Tribune was property held under a trust for charitable purposes. Likewise, this Court in J. K. Trust, Bombay v. Commissioner of Income‑tax…Excess Profits Tax Bombay(') endorsed that view and declared that the word “property” bears the widest possible meaning and that a business would inevitably be property unless the enactment expressly says otherwise.

Accordingly, the Court held that because the business of operating the Arya Vaidya Sala was vested under a trust for religious and charitable purposes, it fell within clause (i) of section 4(3) provided the other statutory conditions were satisfied, as earlier authorities such as (1) (1939) I.T.R. 415 (P.C.) and (2) (1958) S.C.R. 65 had recognised. The essential requirement for the operation of clause (i) is that the property, namely the business, must have been held wholly or in part for religious or charitable purposes. The Court observed that since forty per cent of the business’s profits were allocated to purposes other than religious or charitable, the business could not be said to have been held wholly for such purposes. However, because sixty per cent of the profits were spent for religious or charitable purposes, the question arose whether the business could be deemed to have been held in trust in part for those purposes.

The Revenue argued that the phrase “in part” in clause (i) applies only where an aliquot segment of the property itself is vested in trust, a scenario the Revenue claimed is legally impossible for a business. The Revenue further contended that a business is a single, indivisible entity and therefore the trust can only relate to the share of profits payable to a partner during the partnership’s continuance or after its dissolution. To support this position, the Revenue relied on the decisions in K. A. Ramachar v. Commissioner of Income‑tax, Madras('), David Burnet v. Charles P. Leininger( 2), and Mohammad Ibrahim Riza v. Commissioner of Income‑tax, Nagpur( 3). The Court noted that the first two decisions addressed a different issue, namely the taxability of an assessee’s share of profits in a firm after the share had been assigned to a third party, and therefore did not decide whether a business could be held in trust wholly or partially for religious or charitable purposes.

The earlier authorities that the Revenue relied upon dealt with a different problem, namely whether a taxpayer is liable to tax on his share of a firm’s profits after he has set‑off or assigned that share in favour of a third party. The courts examining those cases held that the profits which accrued to the taxpayer before the assignment could still be taken into account and that the taxpayer remained liable to be assessed on those profits. In the third decision cited, the Judicial Committee concluded that there was no valid charitable trust because the decision as to whether the income would be applied to charitable or secular ends was left entirely to the discretion of the head of the community. None of these three decisions, however, addresses the question of whether a business may be held in trust either wholly or partly for religious or charitable purposes. That issue, the Court observed, must be examined on its own set of considerations.

In the present analysis the Court expressed the view that the expression “in part” contained in clause (i) does not signify an aliquot or fractional part of the property. For example, if one half of a house were held in trust wholly for religious or charitable purposes, that situation would fall within the first limb of the substantive clause because the subject‑matter of the trust would be that particular half of the house, and that half would be held wholly for the religious or charitable purpose. Consequently, the phrase “in part” must be applied to a situation that is different from one in which a portion of the property is itself held wholly for such purposes.

The Court noted that Indian law recognises a variety of trusts in which the dedication of the property is not absolute but only partial. A property may be dedicated in its entirety to a religious or charitable institution or to a deity; this represents a case of complete dedication. A property may also be dedicated to a deity while being subject to a charge that a portion of the income be paid to the grantor’s heirs. Likewise, a property may be conveyed to an individual but burdened with a charge in favour of an idol, a religious institution, or a charitable purpose. An owner may retain possession of the property and nevertheless carve out a beneficial interest for the public, for instance by creating an easement or a similar right. Other examples exist where, although a trust is created, only a partial dedication of the income of the property is made, meaning that only a part of the income is applied to religious or charitable ends.

Thus, the distinction between the expressions “wholly” and “in part” does not rest on whether the whole or a fractional part of the property is dedicated, but rather on whether the dedication itself is intended to be wholly for religious or charitable purposes or only in part for such purposes. When understood in this way, the two limbs of the substantive clause of clause (i) merge coherently. The first limb deals with a property—or a part of a property—that is held in trust wholly for religious or charitable purposes, while the second limb addresses situations where the trust holds the property only partly for those purposes.

The Court explained that the first limb of the provision deals with a property or a part of a property that is held in trust wholly for religious or charitable purposes, while the second limb covers a property that is held in trust only partly for such purposes. Interpreting the provision in this manner, the Court observed that the whole business of Arya Vaidya Sala is held in trust for the purpose of applying sixty percent of its profits – that is, a portion of the income – to religious or charitable ends. Accordingly, the matter before the Court squarely falls within the substantive portion of clause (i) of section 4(3) of the Act. The appellant, however, argued that clause (b) of the proviso imposes an additional restriction that must be satisfied before any exemption could be granted. The Court noted, however, that the proviso’s clause (b) is applicable only to income that arises from a business carried on on behalf of a religious or charitable institution. A business that is itself held in trust, whether wholly or partly, for religious or charitable purposes does not qualify as a business carried on on behalf of such an institution, because the business is already held in trust. The Court then referred to several decisions that illustrate the distinction between the substantive part of clause (i) of section 4(3) and clause (b) of the proviso. In the case of Dharma Vijiya Agency v. Commissioner of Income‑tax, Bombay City, a Division Bench of the Bombay High Court held that a business held in trust for charitable purposes was not a business carried on on behalf of a religious or charitable institution within the meaning of clause (b) of the proviso. Shah J., after reviewing the relevant authorities and the statutory provisions, remarked that “in our view, the business referred to in clause (b) of the proviso need not be a business which is held for religious or charitable purposes, provided it is a business carried on on behalf of a religious or charitable institution.” Desai J. similarly explained that the scope of property includes business held under trust wholly for religious or charitable purposes, and that clause (i) therefore embraces a very wide category of trust‑property businesses, whereas the proviso’s clause (b) is confined to a narrower category of businesses that are carried on by or on behalf of a religious or charitable institution. A Division Bench of the Kerala High Court in Dharmodayam Co. v. Commissioner of Income‑tax, Kerala expressed the same view. Likewise, a Division Bench of the Madras High Court in Thiagesar Dharma Vanikam v. Commissioner of Income‑tax, Madras, after considering the decisions of various High Courts and the relevant provisions of the Act, observed that when a trustee acts, it is the trust that acts, because the trustee fully represents the trust, and that a business carried on on behalf of a trust indicates a business that is not itself held in trust, as opposed to a business of the trust run by its trustees. The Court concluded that the distinction was clear.

The Court opined that proviso (b) to section 4(3)(i) did not limit the operation of the principal provision contained in section 4(3)(i). Accordingly, where a trust carried on a business and the business itself was held in trust, and the income arising from that business was applied or accumulated for application toward the trust’s religious or charitable purpose, the conditions prescribed in section 4(3)(i) were satisfied and the income was exempt from taxation. The Court further held that this exemption could not be defeated even if the business were conducted by another person acting on behalf of the trust. The Court explained that proviso (b) to section 4(3)(i) applied only to businesses that were not held in trust, and therefore its domain was distinct and separate from that covered by section 4(3)(i). The Court noted the emphasis placed on the expression “such income” in the opening words of the proviso and observed a contention that the income referred to in the proviso was income derived from property held under trust. The Court acknowledged that the adjective “such” in the phrase “such income” could be read as referring back to the income mentioned in the substantive clause, and that such a reading would imply a legislative intention to distinguish between business and other property even though both were held under trust. The Court found no acceptable reason for such a distinction. The Court also observed that the term “such” might refer to the “income” in the opening sentence of sub‑section (3), which states that the incomes mentioned thereunder shall not be included in total income, but that the proviso lifts that bar and provides that such incomes shall be included in total income if the conditions laid down are satisfied. The Court concluded that the expression “such income” meant only the income accruing or arising in favour of the trust. The Court summarized the legal position by stating that clause (i) of section 4(3) covered every property or any fractional part of it held in trust wholly for religious or charitable purposes, and also covered property held only in part for such purposes, with business also falling within the meaning of property under the clause. Clause (b) of the proviso to section 4(3)(i) applied solely to a business not held in trust but carried on on behalf of religious or charitable institutions. For these reasons, the Court held that the High Court had correctly answered the question referred to it. Consequently, the appeals were dismissed, the parties were ordered to bear costs, and one set of hearing fees was awarded, with the appeal dismissed.