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Petitioner: COMMISSIONER OF INCOME-TAX VS Respondent: KAMLA TOWN TRUST
Court Name: Supreme Court of India Judge(s): B. P. Jeevan Reddy, S. B. Majmudar Title: COMMISSIONER OF INCOME-TAX vs KAMLA TOWN TRUST Case No.:Civil Appeals Nos.1741 to 1757 (NT) of 1977 Income-tax References Nos. 18 of
JUDGMENT
Reported As: 1996 PTD 1157 Result: Order accordingly Judgment JUDGMENT ' S.B. MAJMUDAR, J.---In this group of 17 appeals by special leave, the Commissioner of Income-tax, Kanpur has brought in challenge the judgment and order, dated February 20, 1975 of the Allahahad High Court in Income-tax References Nos.18 of 1973 and 715 of 1972 (see (1982) 133 ITR 632). The respondent-Kamla Town Trust-is the common respondent in all these appeals. As common questions of law and fact are involved between the very same parties in all these appeals, the appeals were heard together and are being disposed of by this common judgment. ' The common respondent, Kamla Town Trust, was assessed to income-tax for the relevant Assessm ent years 1949-50 to 1965-66. These Assessment orders gave rise to hierarchy of appeals under the Income Tax Act which ultimately culminated in 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 the payment of income-tax as per the provisions of section 4(3)(i) of the Indian 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 "1961 Act"), in so far as they applied to the relevant assessment years. The Income Tax Appellate Tribunal dismissed the respondent-assessee's appeals for the Assessment years 1949-50 to 1955-56 but it allowed the respondent-assessee's appeals for the 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 per cent. Of the income from trust property or Rs,10,000
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whichever is higher, after the 1961 Act came into force. In other words, the rider applied to the assessm ents 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 questions, 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 the opinion of the High Court. At the instance of the respondent-assessee, two questions were referred for the opinion of the High Court (at page 634): "(1) 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 Indian Income-tax Act, 1922, for the Assessment years 1949-50 to 1955-56? (2) 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 Assessm ent year 1956-57 and does not have the effect of rectifying the deed of trust, dated 27th October, 1941 as from the date of its execution?" While at the instance of Revenue, the Tribunal referred five questions as under (at page 635): "(a) 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 J.K. Hosiery Factory v. CIT (1971) 81 ITR 557 that even the unamended clause 3(19) of the memorandum of association of the settlor- company, viz., J.K. Cotton Spinning and Weaving Mills Co. Ltd., empowered the company to create a public charitable trust and the insertion of subsection (22) in clause 3 of the memorandum of association by the company was a matter of abundant caution? (b) Whether, on the facts and in the circumstances of the case, it is open to the Revenue to take 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, 1908? (c) 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 Assessm ent years 1962-63 to 1965-66? (d) Whether, on the interpretation of various clauses of the trust deed even as amended by the second rectification decree, dated May 10, 1955, the trust is void for uncertainty and was not a public charitable trust? (e) 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 May 10, 1955, in Suit No, 163 of 1954, and adjudge the validity of the rectification?" ' The Division Bench of the High Court after hearing the rival contentions canvassed by the parties answered all the referred questions in favour of the respondent-assessee and against the Revenue. It is under these circumstances that the Revenue through the Commissioner of Income- tax Kanpur, having obtained special leave to appeal has preferred these 17 appeals. It may be noted at the outset that though the Revenue lost on all the referred seven questions before the High Court, in the present proceedings at the stage of final hearing Dr. Gauri Shankar, learned senior counsel for the appellant-Commissioner of Income-tax highlighted the grievance of the Revenue centering round the answers of the High Court on some of the referred questions. The grievance highlighted on behalf of the Revenue by Dr. Gauri Shankar centered round the answers of the High Court to questions Nos. 1 and 2 referred on behalf of the assessee-respondent as well as answers of the High Court on questions Nos. (d) and (e) referred on behalf of the Revenue. ' Before proceeding to deal with the main submissions canvassed by learned senior counsel for the Revenue centering round the answers of the High Court on the aforesaid questions and the rival contentions canvassed by learned senior counsel Shri Verma for the respondent-assessee in
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support of these answers, it will be apposite to have a look at the relevant background facts leading to the present proceedings. Background facts: ' The assessee is a trust created by a trust deed, dated October 27, 1941, executed between J.K. Spinning and 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 one 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 October 19, 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 February 2, 1938 for a consideration of Rs,26,300 for constructing an office tor the said settlement. Both these plots were demised to the company at concessional rates for the welfare of workmen. The company transferred both the plots by the said trust deed of October 27, 1941, to the trustees for effectuating its object of settling these plots upon the charitable trust thereinafter mentioned in the deed. ' We will deal with the relevant recitals in the trust deed, in detail, at an appropriate stage in the latter part of this judgment. Suffice it to state at this juncture that one of the objects of the trust, as mentioned in paragraph 2(b) of the trust deed of 1941 was as under: "To erect, establish, equip, furnish, fit, maintain and repair on the said two plots of land, and any land that may hereafter be acquired by the trust. (1) residential quarters, chawls or buildings for the workmen and staff and other employees of the company or other allied concerns under the management or in which the directors of the company may for the time being be interested and for their respective families and dependents and for such other skilled and unskilled workmen, craftsmen, traders, merchants, technical or professional men whom the trustees. May permit to reside or work in the said two plots with a view to supply their needs and requirements or to render them services or to cater to .:their wants comforts conveniences and amenities." ' Later on the settlqr-company filed a suit being Suit No, 40 of 1945 in the Court of Civil and Sessions Judge, Kanpur, under section 31 of the Specific Relief Act, 1877, for rectification of the trust deed .So as to bring it in conformity with its real intention to create a public charitable trust. It was alleged in the plaint that having regard to its memorandum of association, the settlor-company intended to settle the properties mentioned in the trust deed and transfer them to the trustees for the purposes of creating a public charitable trust including the benefits of its own employees, but the operative part of the trust deed was found to be less comprehensive than what was intended by the parties thereto at the time when the instructions were given for preparing a draft of the same and when they executed the deed of trust. The senior-company further alleged that through a misunderstanding on the part of the draftsman and through a mutual mistake the deed of trust did not truly express their intention. It was asserted that the real intention of the parties was to create a public charitable trust, but the company was advised that it was doubtful whether the trust deed on a strict construction thereof might not exclude from its benefits the rest of the public apart from the employees of the company and residents of the said settlement. In order to give effect to the said intention the company submitted that certain amendments by way of
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rectification of the deed should be made in the object clause (2) of the trust deed. The learned Civil Judge by his judgment, dated August 18, 1945, ordered the deed of trust to be rectified as prayed for in the plaint. We will refer to the relevant rectified paragraphs of the trust deed as per the aforesaid order of the Civil Court a little later. ' The deed of trust of 1941 as rectified in 1945, became the subject-matter of interpretation by the Income Tax Appellate Tribunal and the High Court of Allahabad in the case of J.K. Hosiery Factory v, CIT (1971) 81 ITR 557. In the said partnership, the respondent-assessee trust happened to be a partner. The High Court held the rectification decree passed by the Civil Court to be valid and further held that it was not possible for the Income Tax Officer to question the validity of the rectification on the ground that the conditions for grant of rectification did not in fact exist. However, it was further held that the objects of the trust deed as rectified in 1945 did not create a public charitable trust and on an analysis of the object clause 2(b)(i) of the trust deed held that it being a mixture of charitable and non-charitable objects, could not be treated to be creating a public charitable trust. ' In the meanwhile, the settlor-company had filed another suit being Suit No,163 of 1954 in the Court of First Civil Judge, Kanpur, for further rectification of the trust deed. It was reiterated in the plaint that the real intention of the senior company was to create a public charitable trust for the benefit of the public in the city of Kanpur and the surrounding areas particularly, the members of the working class including the workmen employed in the plaintiff-company, but in their capacity as members of the working class. The intention, it was repeated, was to create the said trust wholly and exclusively for charitable objects and purposes. It was alleged that the trustees had, in fact, been giving the benefit of the trust to the members of the public and no part of the trust moneys had, at any time, been used for a non-charitable or non-religious object or purpose. It was contended that the said deed of trust even as rectified was less comprehensive than what was intended by the parties thereto at the time when instructions were given for preparing a draft of the same and when they executed it and the settlor-company was advised that it did not truly express the intention of the parties. It was prayed that the rectifications sought for be allowed so as to bring it in conformity with the real intention of the parties. In the said suit besides the trustees two persons interested in the trust were impleaded as defendants in their representative capacity after the service of a public notice under Order 1, rule 8 of the Code of Civil Procedure, 1908. The Civil Judge, Kanpur, by a judgment and decree, dated May 10, 1955, decreed the suit. By the second rectification decree certain rectifications were made in the preamble of the trust deed and in paragraphs 1 and 2 of the trust deed. At an appropriate stage in the latter part of this judgment we will deal with these rectified clauses inserted in the trust deed in 1955. ' The jurisdictional Income Tax Officer issued notice under section 34 of the 1922 Act and section 148 of the 1961 Act for the relevant assessment years to the assessee-trust alleging that the income had escaped assessm ent for the relevant years. In response to the said notices, the assessee filed "Nil" returns for all the assessm ent years under reference. The contention of the trust before the Income Tax Officer was that it was a public charitable trust and, therefore, its income was exempt from income-tax. The Income Tax Officer rejected this contention as discussed in his earlier assessm ent order for the Assessm ent year 1948-49. He stated that in the earlier assessment order, he had come to a clear conclusion that the trust was a private trust for the benefit of the employees only and was not at all exempt from tax. With regard to the rectification made by.The decrees of the Civil Court, the Income Tax Officer held that the trust was originally created for the benefit of the settlor-company and the objects of the trust could not be altered subsequently unless the trust was revoked for which there was no power under the deed. The income from it was, therefore, assessed to tax. He relied on the decision of the Calcutta High Court in Mercantile:Bank of
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India (Agency) Ltd.: In re (1942) 10 ITR 512 and held that a trust for the benefit of its employees and members of the staff is not a charitable trust. ' The respondent-assessee preferred appeals to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed all the appeals of the respondent. It is under these circumstances that the respondent-assessee approached the Income Tax Appellate Tribunal as noted earlier. The assessee partly succeeded while the Revenue also succeeded in part before the Income Tax Tribunal and that is how seven questions came to be referred to the High Court under section 256(1) by the Tribunal, two at the instance of the assessee and five at the instance of the Revenue and which came to be wholly decided in favour of the respondent-assessee as already noted earlier. Rival contentions: ' Learned senior counsel, Dr. Gauri Shankar, raised the following contentions in support of these appeals: The second rectification in the year 1955 as decreed by the Civil Court was without jurisdiction as in substance by the so-called rectification a new trust deed was sought to be substituted, which was beyond the powers of the Civil Court. (2) The condition precedent for invoking the jurisdiction of the Civil Court under section 26 of the Specific Relief Act of 1963 or under section 31 of the earlier Act that there should be mutual mistake on the part of parties to the document was absent in the facts of the present case and, consequently, the Civil Court had no jurisdiction to grant such rectification. (3) The rectification decree was in persona and not in rem to which the Revenue was not a party and, therefore, it was not binding on the income-tax authorities. (4) Even assuming that the rectification order of 1955 was validly made, it would operate only prospectively and could not have any retrospective effect. This submission was made for challenging the answer to question No,2 posed for consideration of the High Court at the instance of the respondent-assessee. (5) Even after the rectification of 1955, the trust deed as rectified did not create any public charitable trust entitling the respondent-assessee to claim income-tax exemption under the relevant provisions of the 1922 Act as well as the 1961 Act as applicable to the concerned assessm ent years. (6) The entire trust deed as originally executed and as twice rectified in 1945 and 1955 was merely a colourable device on the part of the three main trustees, the Singhania brothers, who held partnership interest in the firm of J.K. Hosiery Factory but went out as partners of the said partnership and entered by the back door assuming the garb of the trustees of the respondent- trust which became a partner in the same partnership firm claiming income-tax exemption. Consequently, such a colourable device on the part of the respondent should not be countenanced. Ski Verma, learned senior counsel for the respondent-assessee, on the other hand, combatted the aforesaid contentions of learned senior counsel for the Revenue and submitted that even for the Assessm ent years 1949-50 to 1955-56 wherein the rectified trust deed of 1945 prior to its further rectification in 1955 was holding the field, it was a trust for public charitable purposes and consequently even apart from the retrospective effect of the rectification in 1955, the respondent-assessee was entitled to claim exemption from the payment of income-tax for these relevant years. However, so far as the answer to question No,2 referred for the opinion of the High Court at the instance of the respondent-assessee was concerned, Shri Verma fairly stated that he was not supporting the said answer and that he was conceding that 1955 rectification of the trust deed had only prospective effect. ' Shri Gauri Shankar, learned senior counsel for the Revenue in the rejoinder submitted that 1945 rectification did not create a public charitable trust. He, however, fairly stated that as there was no clear indication from the judgment of the High Court about any colourable device on the part of
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the assessee or its trustees underlying the creation of the trust, he was not pressing that point any further. ' In the light of the aforesaid rival contentions the battle lines are clearly drawn between the contesting parties wherein the first five contentions canvassed on behalf of the Revenue by Dr. Gauri Shankar will have to be examined and the sixth and the last contention which arises for consideration in the light of the additional contention of learned senior counsel Shri Verma for the respondent, namely, whether the rectification of 1945 created a public charitable trust or not, will also fall for determination. ' We shall now deal with the aforesaid six contentions canvassed for our consideration seriatim: Contention No, l: So far as jurisdiction of the Civil Court to grant rectification of the trust deed is concerned the relevant provision is found in section 26 of the Specific Relief Act, 1963, which had succeeded the prior Specific Relief Act of 1877. Under the earlier Act an analogous provision was found in section 31 of the Act. As per these provisions a suit could be filed before the competent Civil Court for rectification of an instrument when, through fraud or a mutual mistake of the parties, a contract or other instrument in writing does not express their real intention. It is obvious that a trust deed is not a contract in the strict sense of the term but it would certainly be covered by the expression "other instrument in writing". It could, therefore, not be urged with any emphasis that the competent Civil Court which was approached by the settlor-company for rectification of the instrument of the trust, was not having requisite jurisdiction to entertain such proceedings. However, Dr. Gauri Shankar, learned senior counsel for the Revenue, pitched his faith on a decision of the Andhra Pradesh High Court in the case of Trustees of H.E.H. The Nizam's Pilgrmage Money Trust v. CWT (1988) 171 ITR 323. In that case the trustees of H.E.H. Nizam's Pilgrmage Money Trust had applied to the Chief Judge, City Civil Court, Hyderabad, under section 34 of the Indian Trusts Act, 1882, seeking his opinion, advice and directions with respect to the utilisation of the income of the trust fund in terms of the resolution. By the said resolution the trustees contrary to the objects of the trust had resolved to utilise the income of the trust fund for charitable purposes in India when the settlor had clearly laid down in the trust deed that the trust fund and unspent accumulations, if any, were to be utilised for religious or charitable objects at Hedjaz and/or Iraq. It was, therefore, held that the resolution of the trustees was invalid and the order of the Chief Judge permitting the trustees to spend the trust income in India was equally inoperative and without jurisdiction. It was also held that the Trusts Act applied only to private trusts and not to public trusts. And that after the death of the settlor, the trust had become a public trust. Moreover, section 34 of the Trusts Act provided only for a summary enquiry and order with respect to management or administration of the trust property other than questions of detail, difficulty or importance. We fail to appreciate how the aforesaid decision can be of any assistance to learned senior counsel for the Revenue in the present case. On the facts of the case before the Andhra Pradesh High Court, the City Civil Court, Hyderabad, had no jurisdiction under section 34 of the Trusts Act to bring about any changes in the objects of the trust which had become a public trust. On the facts of the present case section 31 of the 1877 Act (Specific Relief Act) or the corresponding provisions of section 26 of the 1963 Act could be effectively invoked for rectification of the instrument of the trust. Such a Court does not suffer from any inherent lack of jurisdiction, like the City Civil Court in the Andhra Pradesh case which had no such jurisdiction under section 34 of the Indian Trusts Act. The first contention must, therefore, be rejected. Contention No,2: ' So far as this contention is concerned it was vehemently contended by learned senior counsel for the Revenue that the Civil Court will get jurisdiction to entertain rectification proceedings provided any of the two conditions precedent are satisfied, namely, (i) through fraud; or (ii) by mutual mistake of the parties the instrument in writing does not express real intention of the parties. So far
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as fraud is concerned it is not the case of anyone that either party to the instrument had committed any fraud. In fact learned senior counsel went to the extent of submitting that there are no two parties in an instrument of trust. It is difficult to agree. The settlor is one party to the trust who settles his property in trust for the benefit of others who become beneficiaries and the legal ownership of the property is transferred to the trustees. Thus, not only are there more than one party to the instrument of the trust but in fact there would at least be two main parties, namely, the settlor on the one hand and the trustees on the other and also there will be the beneficiaries who would be indirectly third parties to the instrument though not being direct parties thereto. Thus, it would be almost a tripartite transaction. Dr. Gauri Shankar then submitted that even if it is so, no mutual mistake was alleged in the rectification proceedings. Even this contention cannot be accepted. The…
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