1995 Supreme(SC) 1171

SUPREME COURT OF INDIA
B.P. Jeevan Reddy and S.B. Majmudar, JJ.
Civil Appeal Nos. 1741-57 (NT) of 1977
Decided On: 16.11.1995
Commissioner of Income-tax, Kanpur Appellants
Vs.
Kamla Town Trust Respondent
Counsel for the Parties
For Appellant/Petitioner/Plaintiff: Dr. V. Gauri Shankar, Sr. Adv., Mr. S. Rajappa and Mr. S.N. Terdol, Advs.
For Respondents/Defendant: Mr. M.L. Verma, Sr. Adv., Mr. M.M. Kshatriya, Ms. Arun Banerjee and Mr. Vivek Sood, Advs.

Headnote:

Civil Procedure Code,1860 - Section 11 - Order 2 - Rule 2 - Income-tax Act, 1922 - Section 4(3)(i) - Income-tax Act, 1961 – Section 2(15),11,11(1)(a),256(1) - Specific Relief Act – Sections 31,26 - Indian Trusts Act – Section 34 - challenge - Income-tax Appellate Tribunal - Kamla Towm Trust, was assessed to income-tax for the relevant assessment years 1949-50 to 1965-66. These assessment orders gave rise to hierarchy of appeals under the Income-tax Act which ultimately culminated into 17 income-tax appeals by the assessee before the Income-tax Appellate Tribunal, Allahabad Bench, Allahabad. The common question in the appeals before the Tribunal was whether for the relevant assessment years the respondent-assessee was entitled to exemption from payment of income-tax as per the provisions of Section 4(3)(i) of the Income-tax Act, 1922 (hereinafter referred to as the 1922 Act), and under Section 11 read with Section 2(15) of the Income-tax Act, 1961 (hereinafter referred to as the 1961 Act) in so far as they applied to the relevant assessment years. The Income-tax Appellate Tribunal dismissed respondent-assessees appeals for assessment years 1949-50 to 1955-56 but it allowed respondent-assessees appeals for assessment years 1956-57 to 1965-66 subject to the rider that the income derived from the trust property by the assessee will be exempt only within the limit permissible under Section 11 (1)(a) of the 1961 Act to the extent to which the income so accumulated is not in excess of 25 of the income from trust property or Rs. 10,000/- whichever is higher, after the 1961 Act came into force. In other words the rider applied to the assessments for the years 1962-63 to 1965-66. As both the Revenue and the assessee were partly aggrieved by the aforesaid common order of the Tribunal, they sought reference of the question. ventilating their grievances under Section 256(1) of the 1961 Act. The Tribunal accordingly granted these reference applications under Section 256(1) and referred the following questions for opinion of the High Court. At the instance of the respondent-assessee two questions were referred for the opinion of the High Court :Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the assessee was not a public charitable trust and its income was not exempt under Section 4(3)(i) of the Income-tax Act, 1922, for the assessment years 1949-50 to 1955-56?) Whether on the facts and in the circumstances of the case the Tribunal was legally correct in holding that the second rectification decree dated 10th May 1955, in suit No. 163 of 1954 operates prospectively from the assessment year 1956-57 and does not have the effect of rectifying the deed of trust dated 27th October, 1941, as from the dated of its execution."While at the instance of Revenue the Tribunal referred five question as under :Whether on the facts and in the circumstances of the case the Tribunal was right in holding by following the decision of the Allahabad High Court in the case of M/s. J. K. Hosiery Factory v. Commr. of Income-tax, (1971) 81 ITR 557, that even the unamended clause 3(19) of the Memorandum of Association of the settlor company viz., M/s J. K. Cotton Spinning & Weaving Mills Co. Ltd., empowered the company to create a public charitable trust and the insertion of sub-section (22) in clause 3 of the Memorandum of Association by the company was a matter of abundant caution?) Whether on the facts and in the circumstances of the case, it is open to the Revenue to take the objection in these proceedings that the second rectification Suit No. 163 of 1954 was barred by Section 11 and Order 2, Rule 2 of the Code of Civil Procedure?Whether on the facts and in the circumstances of the case, the Tribunal was legally correct in holding that the objects and activities of the trust fell within the first limb of the definition of charitable purpose in Section 2(15) of the new Act and the residuary clause thereof is not attracted for the assessment years 1962-63 to 1965-66?Whether on the interpretation of the various clauses of the trusts deed even as amended by the second rectification decree dated 10-5-1955, the trust is void for uncertainty and was not a public charitable trust?Whether on the facts and in the circumstances of the case the Income-tax Officer was entitled to go behind the civil Court decree dated 10-5-1955 in Suit No. 163 of 1954 and adjudge the validity of the rectification? – trust created by a trust deed dated 27-10-1941 executed between M/s. J. K. Spinning & Weaving Mills Co. Ltd., Kanpur (hereinafter called the Company) of the one part and Sir Padampat Singhania, Lala Kailashpat Singhania and Lala Laxmipat Singhania (hereinafter called the trustees) of the other part. The company was registered under the provisions of the Indian Companies Act, 7 of 1913, with its registered office at Cawnpore in U. P. The objects of the trust deed in its original form show that it was created with a view to construct a settlement or colony for their workmen together with amenities in the shape of hospitals, schools, temples, mosques, recreation places and for such other works directly concerning the amenities of workmen. The company made an application to the Improvement Trust, Kanpur for demising to it two tracts of land in Kanpur at concessional rates. The Improvement Trust demised on plot of land to the company for constructing the colony with an extra plot of land for the purpose of constructing a Water Pump Station by an indenture dated 19-10-1936 for a consideration of Rs. 43,700/-. Another plot of land was demised by the Improvement Trust to the company by an indenture dated 2-2-1938 for a consideration of Rs. 26,300/- for constructing an office for the said settlement. Both these plots were demised to the company at confessional rates for the welfare of workmen - Held, There are two clear hurdles in the way of Shri Verma for the respondent which militate against his submissions that the said clause when read as a whole does create a public charitable trust in favour of workmen in general. The first hurdle is that the term workmen in general as employed in the clause is too general and vague but even assuming that in the context of the residential quarters, chawls or buildings to be constructed for them on the lands situated at Kanpur which are settled in trust by the Settlor Company, it would refer to workmen in Kanpur town, even then the more substantial hurdle in the way of the respondent is projected by the fact that there is an obligation cast on the trustees to construct these residential quarters, chawls or building in particular for the workmen, staff and other employees of the company or other allied concerns under the management of and in which the directors of the company may for the time being be interested and for their respective families and dependents. In the light of the words in particular as found in this clause, Dr. Gauri Shankar, learned senior counsel for Revenue rightly submitted, that they represent a scheme of priority for workmen of the Settlor Company and not a scheme of preference. In that words the trustees are bound under an obligation to construct residential quarters etc. first for the workmen or employees of the Settlor Company or its allied concerns. They have no choice in the matter. They cannot in their discretion select an outside workman as recipient of the benefit under the scheme of the Trust Deed. In effect the general class of beneficiaries constituted by the words workmen in general gets whittled down and circumscribed by the words in particular for workmen of the company etc - "....Now. undoubtedly, we would have taken a different view of this trust if there was an obligation upon the trustees to prefer the employees. In other words, if the other members of the public were postponed to the employees of the Premier Construction Co. Ltd., then, looking to the other provisions of the deed, we might easily have taken the view that the main purpose of the trust was to benefit the employees and the charity to the public was merely illusory. But there is no obligation cast upon the trustees by this proviso to prefer the employees of the Premier Construction Co. Ltd. It is for the trustees to exercise their discretion. In the first place, they have to utilise the income for carrying out the four objects, and any member of the public who comes within these four objects would be qualified to receive the bounty of the settlor. If a member of the public also happens to be an employee of the Premier Construction Co. Ltd., it is open to the trustees to give him preference. Therefore, the trustees would not be guilty of committing any breach of trust if they selected for the bounty of the settlor such members of the public as did not fall in the category of employees of the Premier Construction Co. Ltd. That is the real test which we have got to apply. We must not assume that the trustees will exercise their discretion dishonestly or improperly. The test is whether the exercise of the discretion of the trustees is so fettered that they are bound to select particular persons in preference to others. That is clearly not the case here......" - Applying the said test to the clause in question we find that though residential quarters, chawls or buildings are to be constructed for the workmen in general and who, as we have already shown earlier, may be a well defined class of workmen residing in Kanpur and who may be poor and needy in the light of their socio-economic conditions as prevailed in 1945 when the clause was drafted, once we turn to the second part of this clause which lays down in clearest terms that in particular the quarters are to be constructed for the workmen staff and other employees of the company and of its allied concerns, it becomes clear that no discretion is left with the trustees and on the contrary they are enjoined, called upon and under an obligation to construct these quarters, chawls and buildings necessarily for the workmen, staff and other employees of the company and its allies - in order to constitute a valid charitable trust it should be for the benefit of the public or the specified section of it. A fluctuating body of private individuals such as the present and further officers and members of the staff and other employees of a company would not be a part of the general public or of any section of the public and therefore the income of the trust fund was not exempt from the payment of income-tax under Section 4(3)(i). It was further observed that Andrew Yule & Co. Ltd., and their subsidiary concerns for whose employees benefit was conferred under the deed employed a larger number of persons. The trust was for the benefit of the past, present and future officers, members of the staff and other employees of those concerns. Anyone from the Secretary or some other highly paid member of the staff down to the lowest menial may be included within the benefit of this fund. Necessitous circumstances might include the case of a superior employee earning some thousands of rupees per month, who owing to some misfortune -- say the burning down of his house, or the loss of his property -- might find himself suddenly in necessitous circumstances, and in need of money to replace his lost property. – Ordered accordingly