IMPORTANT POINT
First proviso to Section 13(1) of the Income Tax Act, 1961 would apply only if the Trust created before 1.4.1962 mandated at that time that the trustees could invest the funds of the Trust in a concern in which they were interested being the persons referred to in clause (c)(ii) of sub- sections (1) and (2) by virtue of sub-section (3) of Section 13 of the Act.

Headnote:(i) Taxation-Income Tax Act, 1961-Section 13(1)(c)(ii), Proviso-Wealth Tax Act, 1957-Section 21A, Proviso First-Interpretation of -Trust created before 1.4.1962-Trustees apply funds of Trust in a concern in which they themselves are interested if there was a mandatory provision in Trust Deed for such a purpose-Such a mandate in Trust Deed should have existed before 1.4.1962 and could not have been brought in by amending Trust Deed at a later stage.
       Held : The requirements of the proviso with which we are concerned are (1) Trust should have been created before April 1, 1962 and (2) the trustees apply the funds of the Trust in a concern in which they themselves are interested if there was a mandatory provision in the Trust Deed for such a purpose. The question which squarely falls for consideration is if the second condition should have been there is the Trust Deed before April 1, 1962 when the I.T. Act came into force or if such a condition could be added subsequently in the Trust Deed after this date if the propounder of the Trust in the Trust-Deed so authorised the trustees to amend and Trust-Deed allowing the trustees to invest the funds of the Trust in a concern in which they might be interested. To us it appears the answer is quite obvious that such a mandate in the Trust-Deed should have existed before April, 1, 1962 and could not have been brought in by amending the Trust-Deed at a later stage after that crucial date even if the Trust-Deed so authorised the Trustees to amend the Trust-Deed to bring in the mandatory condition or requirement for them to invest funds of the Trust in a concern in which they might be interested. Any other interpretation would set at naught the proviso and would defeat the very purpose for which the proviso was added in Section 13. If we accept any other interpretation then the Trustees even today could amend the Trust-Deed and bring in their case to fall within the proviso. (Para 10)
       (ii) Income Tax Act, 1961-Sections 11, 13(1)(c)(ii), proviso-Wealth Tax Act, 1957-Section 21-A-Assessment years 1973-74, 1975-76-Assessee, a Trust was created by Deed of Trust dated March, 1942-Clause 41 of Trust Deed provided for amendment to provisions of Trust Deed with regard to conduct and management of Trust-Amendment to clause 39 in 1971-Trust funds invested in a firm in shares and deposits-Trustees of assessee s Trust were interested in this concern-Interest income received by assessee from that firm-Claim of exemption u/s 11-Whether amendment of Clause 39 would give rise to a legally enforceable mandate, as contemplated by first proviso to sub-section (1) of Section 13 of the Act?-(No)-Whether Tribunal was right in holding that interest income of assessee is exempt from tax u/s 11 r/w first proviso to Section 13(1) of the Act?-(No)-Claim of exemption u/s 21-A of Wealth Tax Act-Disallowed. (Paras 9, 10, 11)

JUDGMENT

D.P. Wadhwa, J.-Leave granted in Special Leave Petition.

2. These appeals arise out of the two judgments of the Punjab and Haryana High Court dated January 18, 1980 and November 25, 1988. The first judgment arose out of the Income Tax Reference under Section 256(1) of the Income Tax Act, 1961 (for sort the I.T. Act ) for the assessment years 1971-72, 1972-73 and 1973-74 and Wealth Tax Reference under Section 27(1) of the Wealth Tax Act, 1957 (for short the W.T. Act ) for the assessment years 1973-74 and 1974-75; and second judgment is in reference under Section 256(1) of the I.T. Act for assessment year 1975-76.

3. The questions which arise from the references under the I.T. Act are :

"1. "Whether, in view of clauses 41 of the Trust Deed. Clause 39 of the Trust Deed can be legally amended. If so, whether such amendment would give rise to a legally enforceable mandate, as contemplated by the first proviso to sub-section (1) of Section 13 of the Income Tax Act, 1961?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the interest income of the assessee Trust is exempt from tax under Section 11 read with first proviso to sub-section (1) of Section 13 of the Income Tax Act, 1961 ?"

The question on which reference was sought under the W.T. Act is as under :

"Whether on the facts and in the circumstances of the case, the appellate Tribunal is right in law in holding that the assessee trust is exempt from Wealth Tax under Section 21-A of the Wealth Tax Act, 1957?"

4. As to how these questions arose we may refer, in brief, to the facts of case.

Assessee is a Trust and was created by Deed of Trust dated March 28, 1942. Clause 41 of the Trust Deed provided for amendment to the provisions of the Trust Deed with regard to the conduct and management of the Trust. It is as under :

"41. Except as to the names and aims and objects of the Trust the trustees shall have the power by the majority of 75% of their total number to change, modify or amend any of the rules, regulations, any provisions hereinbefore contained with regard to the conduct and management of the Trust and with regard to any matter in respect of which any power is confirmed or duty imposed."

When the Trust Deed was executed clause 39 provided as under :

"39. All the monies with trustees or sub-committees except imprest sums to be determined by the trustees shall be invested by the trustees in such banks or securities in such manner as may be approved of by the trustees. The trustees may from time to time purchase immovable property with the surplus funds in their hands."

However, in pursuance of the powers conferred on the trustees by virtue of clause 41 aforesaid the trustees passed a resolution on March 14, 1971 amending clause 39 of the Trust Deed. This new clause 39 reads as under:

"That the Trustees may from time to time purchase immovable property with the funds of the Trust. The funds of the Trust which are not required for immediate needs of the Trust shall be kept with M/s. Gokal Chand Rattan Chand Woollen Mills Private Limited. Provided that the Trustees may keep not exceeding Rs. 2,00,000/- in government securities, Bank accounts and/or cash in hand."

By virtue of this amendment to clause 39 Trust funds were invested in M/s. Gokal Chand Rattan Chand Woollen Mills Private Limited in shares and deposits. It is admitted case that the trustees of the assessee s Trust are interested in this concern. The dispute in the present appeals relates to the interest income received in each assessment year by the assessee from M/s. Gokal Chand Rattan Chand Woollen Mills Private Ltd. The assessee claimed exemption in respect of the interest income under Section 11 of the Act which exempts income from property held for charitable or religious purposes. The Income Tax Officer did not agree with the contention of the assessee that the interest income was exempt under Section 11 of the Act. T