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Petitioner: COMMISSIONER OF INCOME-TAX, EAST PAKISTAN, DACCA VS Respondent: MUHAMMAD ABDUR RAUF KHANHonorable Justice A. R. CorneliusA. F. M. Mesbahuddin,Hamidul Huq Chowdhury
1963 P T D 517
1963 P T D 517
[Supreme Court Pakistan]
Present: A. R. Cornelius, C. J., S. A. Rahman and B. Z. Kaikaus, JJ
COMMISSIONER OF INCOME‑TAX, EAST PAKISTAN, DACCA‑Appellant
Versus
MUHAMMAD ABDUR RAUF KHAN‑Respondent
Civil Appeal No. 1‑D of 1962, decided on 18th March 1963.
(On appeal from the judgment and order of the High Court of East Pakistan, Dacca, dated the 16th February 1961, in Reference Case No. 11 of 1960).
(a) Income‑tax Act (XI of 1922)------
----S. 4 (3) (i), proviso‑Business itself, subject of trust‑Proviso applicable‑Business carried on "on behalf of" a religious or charitable "institution"‑Requirement of "on behalf of" to be satisfied‑"Institution" does not convey the sense necessarily of an "elaborate organization"‑Property held in trust: two launches‑Run by trustee himself who was engaged in the trade of plying launches for hire‑Trust business, held, not one carried on "in the course of the carrying out of a religious or charitable purpose of the institution"‑Requirement of "on behalf of" not established by assessee [S. A. Rahman, J. (contra)]‑Trust not entitled to exemption‑"Religious or charitable" purposes include "relief to the poor", "education", "medical facilities", etc.
Held (per Cornelius, C. J.) that on the wording of clause (i) and its proviso, regarded fairly, the proviso applies to a business which may itself be the subject of a trust.
To apply the proviso only if the business is not itself the subject of the trust may be to defeat the very purpose of the amendment which was carried out in 1951.
It will be necessary for the purposes of applying the proviso so as to avoid the relief, also to find that there is a "religious or charitable institution" and that the business is carried on behalf of such institution.
The expression "institution" does not necessarily convey the sense of an elaborate organization, particularly in the context of religious or charitable activity. It does not appear to mean anything more than that there should be a distinct operating unit with an individuality of its own. It need not be a corporate body, and the intention of the proviso would be sufficiently carried out if the case be that there is a duality, that is, that the active operation of the business is by one person or entity, on behalf of another entity, the latter being of a religious or charitable character. There is nothing in the language used to indicate that the relationship between the agent and the institution should be of a special kind, and equally there are no words to indicate that either the agent or the entity for which the business is being carried on should possess any special character. The words must be intended to apply to every kind of religious or charitable trust, from the smallest to the largest.
The Trust in this case comprising two launches and an insurance policy for Rs. 50,000 was covered by the expression "religious or charitable institution".
An assessee claiming an exemption should carry the burden of establishing that all the circumstances requisite for the grant of the exemption are satisfied. In the present case, the assessee had left it in doubt whether the business was carried on exclusively by the Trust or was being carried on behalf of the Trust, through the circumstance that the same person was the trustee and was also carrying on the larger business of which a part appertained to the Trust. In the circumstances, the assessee had failed to establish that it was entitled to the exemption which it claimed.
Charitable Gadodia Swadeshi Stores 1944 I T R 385 ; Dharma Vijaya Agency 38 I T R 392 ; Commissioner of Income‑tax v. Krishna Warriar 44 I T R 828 and Dharmodayam Co. v. Commissioner of Income‑tax 45 I T R 478 ref.
According to S. A. Rahman, J., the condition that the business should be carried on on behalf of the religious or charitable institution and its income should be applied solely for the purposes of that institution had been met in this case.
Per S. A. Rahman, J.‑Clause (i) of the proviso appears to contemplate business of a character which has a direct and intimate relation with one of the religious or charitable purposes of the institution. For instance, if a charitable institution adopts as one of its objects, the teaching of a profession or trade, to its beneficiaries and starts business strictly for that purpose so that some income accrues to the Trust in the course of running teat business intended to train the beneficiaries, the income would be exempt from taxation. If the business be not of that nature, its income would appear to be outside the purview of the exemption altogether. The object may have been to limit the exemption to such subsidiary business only, as was part and parcel of the execution of an object of the charitable institution and to avoid conferring an undue advantage on other business carried on by or under a Trust, in competition with business sponsored by commercial companies or private individuals. This seems to me to be the plain intention of the language of the proviso.
J. K. Trust, Bombay v. Commissioner of Income‑tax A I R 1957 S C 846 considered.
Dharma Vijaya Agency v. Commissioner of Income‑tax, Bombay City‑I 38 I T R 392 distinguished.
Per Kaikaus, J.‑The words used in the proviso point to an intention that all income which is derived from business is liable to payment of income‑tax except where the fulfilment of the purpose of a religious or charitable trust involves in itself the carrying on of some business by the Trust.
The intention by this condition was to exempt from income tax income from business carried on by a Trust only in a case where not to exempt it would amount to the placing of obstructions in the way of the fulfilment of the purpose of a Trust. There are trusts of a kind where necessarily some business has to be carried on in the execution of its purpose. For instance if free training is to be given to persons for making a particular article, then during the course of that training that particular article is to be produced and it will have to be sold. In such a case there is a business which is being carried on in the course of the execution of a Trust.
By religious or charitable purposes are meant purposes like relief to the poor, education, medical facilities, etc.
(b) Trust‑Property‑-----
--- Comprising two motor launches and a policy of insurance for Rs. 50,000 dedicated to religious and charitable purpose‑Trust deed providing that all "accretions or additions" made with income of trust property will be deemed to be included in "Trust Fund"‑Third launch purchased with income of two launches‑Addition of third launch does not change nature of trust.
A. F. M. Mesbahuddin Advocate Supreme Court instructed by A. M. Khan Chowdhury Attorney for Appellant.
Hamidul Huq Chowdhury Senior Advocate Supreme Court (B. H. Chowdhury Advocate Supreme Court with him) instructed by A. M. Khan Attorney for Respondent.
Date of hearing: 31st January 1963.
JUDGMENT
CORNELIUS, C. J.‑This appeal by the Commissioner of Income‑tax, East Pakistan against a trustee Muhammad Abdur Rauf Khan, comes before the Court upon leave granted by the High Court of East Pakistan, and raises a question regarding the right of exemption from taxation of certain income derived from its activities by a religious and charitable trust known as the Ghaus‑e‑Pak‑i‑Azam Welfare Trust which was created in 1953 by him of which he is himself the sole trustee.
The property of the Trust consists of two launches, and an insurance policy for Rs. 50,000. The trustee was then, and still, is, engaged in the trade or business of plying launches for hire. He owned five launches which were apparently licensed by the authorities for particular routes, and out of these, he donated two launches to the Trust. The Trust thus became engaged in the business of plying these two launches, and it seems that it made a profit, sufficient, in fact, for the purchase of a third launch in 1954. In 1955‑56, some profit was also made by trading in rice. These profits were shown in the return of income for purposes of tax, and the taxing authorities declined to allow the Trust exemption from taxation on these profits. Exemption from tax of the income of religious or charitable institutions is provided by section 4, subsection (3), clause (i) of the Income‑tax Act, which contains a proviso placing restrictions on the grant of exemption in favour of such income derived from business as below :‑
"(3) Any income, profits or gains falling within the following classes shall not, to such extent as may be specified in this subsection or prescribed in this behalf, 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 in the case of income derived from business this clause shall not apply unless the business is carried on, on behalf of a religious or charitable institution and the income is applied solely for a religious or charitable purpose of the institution ; and either,
(i) the business is carried on in the course of the carrying out of a religious or charitable purpose of the institution ; or
(ii) the work in connection with the business is mainly carried on by beneficiaries of the institution."
The final decision of the Assistant Commissioner of Income tax was expressed as follows:‑
"In plying of motor launches and doing side business in rice, as the appellant did, the business cannot be said to be carried on in the course of the carrying out of a religious or charitable purpose of the Trust and the business also not being carried on mainly by the beneficiaries of the Trust, by no trace of imagination the business can be said to satisfy the conditions laid down in proviso (i) of section 4 (3) (i)."
The stress is laid on the nature of the business in question. There were appeals before the Income‑tax Appellate Tribunal, which were rejected. It was held that to secure exemp tion for business income of a trust, "the business must run in such manner as would realise and carry out the ideal of the institution". The Tribunal found, in addition, that the purchase of a third launch and investment in rice business showed that the income from the launch‑plying business was not being "used solely for charitable and religious purposes 'of the institution". Thereafter, the parties agreed upon a reference to the High Court under section 66 of the Income‑tax Act of the following question:
"Whether on the facts and in the circumstances of the case, the assessee was exempt from taxation under the provisions of section 4 (3) (i) of the Income‑tax Act."
The reference was heard by a Division Bench of the High Court which reached the following conclusions. The rice business having been conducted in the assessment year 1956‑57 was not in question in the case, which related to the assessment years 1955‑56 and 1957‑58. But as to the purchasing of the new launch, the learned Judges found that it was within the powers of the trustee provided by clause (i) of paragraph 2 of the Trust Deed to acquire "movable or immovable properties which may be deemed necessary or convenient for any of the purposes of the Trust and for furtherance of the above‑mentioned objects". The learned Judges went on to hold that the "purchase of a new launch with part of the income of the Trust business cannot be said to have not been solely applied for the purpose of the institution, nor can it be said that the purpose was not religious or charitable when the institution itself is religious and charitable public trust". They held also that the launch business had been carried on "in the course of the carrying out of the purposes of the institution."
Mr. Mesbahuddin for the Commissioner of Income‑tax has relied upon the wording of section 4(3)(i) for the argument that while "property held under trust" may include a running business, yet it is not every kind of running business operated by a trust whose income will be held free of income‑tax for that reason alone. The statute requires a number of conditions of which the following are in this case necessary conditions of qualification for exemption, namely:‑
(1) the business should be carried on, on behalf of the religious or charitable institution;
(2) the income should be applied solely for a religious or charitable purpose of the institution ; and
(3) the business should be carried out in the course of the carrying out of a religious or charitable purpose of the institution.
It is urged that there has been failure of application of the income of the Trust solely for such a purpose as is specified in the statute. It is argued further that the plying of launches for profit not being "a religious or charitable purpose", the third condition is clearly not satisfied. There is force in this argument. There is no presumption that because the institution is a religious or charitable trust, all of its activities must be supposed to be for the carrying out of a religious or charitable purpose. The proviso is carefully worded to distinguish activities whose object is to implement or effectuate directly a religious or charitable purpose, from all other activities, and clearly the plying of launches by itself cannot be brought within any of the religious or charitable purposes which are specified in the Trust Deed. These are briefly medical relief, relief for distress due to natural calamities, relief to the poor, promotion of physical culture and education, establishment of schools and institutions for the relief of the poor etc., providing aid in money to poor students and finally the erection of mosques and places for public worship. In this view, not only is the launch plying business not within the excepted purpose; but expansion of that business by purchase of a new launch cannot be thought to be an application of Trust income solely for "a religious or charitable purpose". It may be true that the launch plying business is being carried on for the purpose of providing an income for the Trust, and that the purchase of a new launch is intended to increase that income, and thereby to expand the area of relief which the Trust can afford, but these circumstances are not sufficient for grant of the exemption from tax which is claimed. The income‑producing business is indeed owned by the Trust, and is carried on, on behalf of the Trust, by the trustee, who is himself in the same business for his own profit. But to secure exemption, it is necessary also that the business should be carried on in imple mentation of a religious or a charitable purpose of the Trust, and in addition, all the income derived from the business should be applied solely for a religious or charitable purpose of the Trust. Neither of these conditions would appear to be satisfied.
The view of the learned Judges of the High Court cannot therefore be sustained on the grounds advanced in the judgment, but Mr. Hamidul Huq Chowdhury has argued that the statute should be so construed as to give full effect both to the main provision granting the exemption, as well as to the proviso, se that the purposes of such trusts mould be advanced. It being settled that "property held under trust" may include running businesses, it is, he argued, clear that running businesses may be dedicated, which do not satisfy the requisites of the proviso. Businesses of the types specified in the proviso could, no doubt, be operated by trusts, but such businesses are not likely ever to be the subject‑matter of a dedication to a trust. A running business made over to a trust would ordinarily be one capable of producing substantial profit, and of continuing to provide such profit if properly run. Those conditions cannot ordinarily be ensured where the making of profit is not the primary objective, yet it cannot be the intention that a business, run for profit, when dedicated, should be converted in the manner requisite to satisfy the conditions of the proviso, if the advantage of exemption from tax is desired in relation to the profits. The Trust would be entitled to hold and run the business, as it was received, and the income thus derived, should enjoy the exemption under the main provision. In the submission of learned counsel, the proviso to section 4(3)(i) was intended to be applied only to businesses which were not donated to the trust, but which had been com menced by the trust itself independently. As for the purchase of a new launch, if the running of the launch business was within the Trust's powers, the addition or replacement of apparatus necessary for the running of the business, e.g., to meet competition, was also permissible, and did not amount to mis application of income, such as would entail forfeiture of the tax exemption.
The argument has elements of attractiveness, but it cannot be sustained on the wording of the statute. The expression "property held under trust" would certainly include a running business donated to a trust, but its meaning is by no means confined to donated property. All the property which a trust receives by donation or acquires for itself would fall within the expression "property held under trust". This is placed beyond doubt by the provision in the preamble of the Trust Deed that "all additions and accretions to the Trust properties shall also form part thereof". Therefore, whether a running business is one donated to the Trust, or is a business commenced by the Trust independently, the provisions of the exempting clause would apply equally to both classes, and income derived from the running of either class of business would only qualify for exemption from tax if it should satisfy the precise requirements of the proviso. The proviso itself is quite general in its application, i.e., to all "income derived from business".
A number of reasons can be conceived as justifying the statutory restriction of exemption from tax in respect of running businesses owned by trusts, to the cases specified. It would be entirely reasonable to discourage trusts from applying their funds for commencing or promoting a business in a commercial way in view of the danger of malversation of Trust funds, or diversion from the true objects of the Trust. Another consideration might be that of ensuring equal conditions of competition to all enter prises in the purely commercial sphere. But if the business itself be either in direct furtherance of a religious or charitable purpose e.g., the publication and sale of religious books, or the setting up of a chain of nursing homes for paying patients, or in the alternative, if the enterprise be commenced to provide gainful occupation to persons in need, e.g., by commencing industries in a distressed area by way of flood or famine relief, or a similar work in an orphanage, these considerations would fall away, and the ordinary exemption from taxation may be allowed in favour of any moderate profit so made, otherwise than in the pure pursuit of profit.
The avoidance of exemption being by means "of a proviso" it is necessary that its terms should be narrowly construed so as to restrict the denial of relief against taxation within the words of the proviso, construing and applying them to the facts of the case, bearing in mind not only the intention of the main provision allowing exemption but also the duty of ensuring that, on a fair appreciation, both of language as well as of the circumstances, evasion of the tax is not assisted. For this purpose, it is necessary to refer briefly to the history of this particular provision in the Income‑tax Act. The present proviso was inserted in replacement of clause (i‑a) of section 4 (3), by amendment in 1951, and there have been certain further minor amendments since. As it originally stood, the provision was in the following shape, viz. :‑
"(3) This Act shall not be applied to the following classes of income :‑
(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:
(i‑a) any income derived from business carried on on behalf of a religious or charitable institution when the income is applied solely for the purposes of the institution and‑
(a) the business is carried on in the course of the carrying out of a primary purpose of the institution, or
(b) the work in connection with the business is mainly carried on by beneficiaries of the institution."
These provisions came under examination by the Lahore High Court in the case of the Charitable Gadodia Swadeshi Stores (1944 I T R 385) where the business in question did not fulfil the requirements of clause (i‑a), and it was sought to deny the relief from tax on this basis. The Lahore High Court held that clause (i‑a) did not derogate from the exemption granted by clause (i), but on the contrary provided an additional exemption for certain types of business which did not fall within clause (i). Taking the matter in this light, it was held as follows :‑
"Viewed in its proper perspective therefore, clause (i‑a) can be taken to apply only to such business as is carried on on behalf of religious or charitable institutions which were not held under trust, and not to such business as was itself held under trust, or was conducted by or on behalf of such charitable or religious institutions as were held under trust. If it was intended to narrow down the scope of clause (i) so as to destroy the exemption enjoyed by a business held in trust or conducted by or on behalf of a religious or charitable trust, the new clause should have been added as a proviso to the old clause."
In the context of the taxing provisions, I find it a little difficult to conceive of religious or charitable institutions being themselves either held or not held "under trust". The question does not in any case arise here since the business, whether with the original two launches or with the third launch added, would nevertheless qualify for the description of property held under trust. Be that as it may, it appears that following the suggestion made in the Gadodia case, the Act was amended, in 1951, when clause (i‑a) was replaced by the present proviso. No occasion appears to have arisen prior to the present case for the meaning and application of this proviso to be examined in the Courts in Pakistan. There have been cases in India, where the law is in pari materia. A proviso in terms similar to the proviso here under examination was considered by a Division Bench of the Bombay High Court in the case of the Dharma Vijaya Agency (38 I T R 392). Mr. Justice Shah was of the view that "business", within the meaning of the proviso "need not be business which is held for religious or charitable purposes, provided it is business carried on on behalf of a religious or charitable institution". Mr. Justice Desai observed that there was "nothing in proviso (b) to clause (i) of section 4(3) which in any way touches the case of a business which is held under trust for religious or charitable purposes". A statement in the "Statement of Objects and Reasons" which accompanied the Bill by which the Act was amended in 1953, to the effect that the intention was to bring all businesses carried on by trusts within the scope of the proviso was held to be inadmis sible to explain the content of the words used.
More recently, two cases have come before the High Court of Kerala in India and have been reported as Commissioner of Income‑tax v. Krishna Warriar (44 I T R 828) and Dharmodayam Co. v. Commissioner of Income‑tax (45 I T R 478). The view expressed in the case of the Dharma Vijaya Agency was relied upon in each case for coming to the same conclusion, which was expressed in two propositions, viz. :‑
(1) there is nothing in proviso (b) to clause (i) of section 4 (3) which touches the case of a business which is held under trust for religious or charitable purposes ; and
(2) if the business is not itself the subject of the trust, but the business is carried on by an institution which is held under a trust and the business does not itself form part of the trust, then section 4 (3) (i) (b) will apply.
It is appropriate that I should acknowledge the assistance derived from a perusal of these judgments of foreign High Courts in the examination of the question before this Court. It seems to me to be sufficiently clear that the proviso in the case has particular reference to institutions of a religious or charitable nature, and to income from business carried on on behalf of such an institution, but I consider that to regard such…
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