1963 PLP 564 (PTD)

Business held in trust‑Part of income applied to charitable purposes, whether exempt from tax‑Income tax Act (XI of 1922), S. 4(3)(i), proviso (b). Where a business or institution is itself held under trust for religious or charitable purposes it is "property held under trust" within the meaning of section 4(3)(1) of the Income‑tax Act, 1922, and its income is exempt from taxation under section 4(3)(i). Such income is not brought back within taxation by proviso (b) to section 4(3)(i), as proviso (b) applies only to income derived from a business carried on on behalf of a religious or charitable institution. A person who was carrying on a business of making and selling Ayurvedic medicines under the pane of Arya Vaidyasala, by his will vested the business on a trustee directing the latter to apply 60 percent. of the profits to charities and 40 percent. to the benefit of his family. On behalf of the Department it was contended that the 60 percent. which was payable to charities was liable to tax under proviso (b) to section 4(3)(i) as the income of the business was not wholly applied for charitable purposes: Held, that as the business itself was held in trust proviso (b) was not applicable to the case and the 60 percent. was exempt under the main provision of section 4(3)(i). Dharma Vijaya Agency v. Commissioner of Income‑tax (1960) 38 I T R 392 ref. STATEMENT OF CASE By this application under section 66(1) of the Indian Income tax Act, the applicant requires the Appellate Tribunal to refer a question of law said to arise out of the Tribunal's order in I. T. A. Nos. 2295 to 2298 and 4903 of 1957‑58 dated February 28, 1958, to the High Court. Inasmuch as, in our opinion, a question of law does arise out of the above order, we hereby draw up a state ment of the case agreed to by the parties and refer it to the High Court of Kerala.

2. P. S. Warriar was a noted and eminent Ayurvedic physician who was carrying on business in Ayurvedic drugs under the name and style of Arya Vaidyasala. He was also running a hospital named by him as Arya Sikitsa Sala. He was also meeting the full deficit in the finances of Aryavaidya Patasala, a school teaching Ayurvaidyam conducted by the Aryavaidya Samajam, an independent institution with which he was associated.

3. Warriar died on January 30, 1944, leaving a will, under which, besides private bequests, he vested the business of Arya Vaidyasala aforesaid to a trustee which was directed to apply the profits therefrom in various ways. Copies of the Malayalam original and English translation thereof of the will are annexed hereunto as Annexures "A‑1" and "A‑2" and form part of the case.

4. According to the aforesaid annexure, the annual income was to be applied as follows: (1) 40yo to two thavazhis represented by Kunji and Lakshmi Varassia, out of which 25% was to be paid in cash from time to time and 15% .to be invested in their account and for their benefit for a limited period of 20 years. (2) 10% to meet the deficit of the Arya Vaidya Patasala (school). (3) 25% to, the Arya Vaidyasala ‑itself to be devoted to its development along with the surplus from the 10% allotted to the school above. (4) 25% to the Arya Vaidya Sikitsa Sala (hospital). The 40% allotted under (1) above was to revert to the beneficiary after the period of 20 years fixed for them.

5. Clause "J" of the aforesaid annexure is as follows: "The trustees are to run the above institutions according to the intentions expressed above with such modifications as the circumstances may warrant."

6. Up to the assessment year 1951‑52, the profits of Arya Vaidyasala, the assessee, were assessed in the hands of the trustees as an association of persons to the extent of 40% thereof being the part of the income of the trust payable to the two thavazhis aforesaid. The rest of the 60%, was exempted under section 4(3)(1).

7. For the assessment years 1952‑53 and 1953‑54, there were originally assessments under section 23(3), on the same lines as above. These assessments were later revised under section 34, as in the opinion of the Income‑tax Officer "the assessee did not satisfy the conditions laid down under section 4(3)(1) as per the amendment brought about by the Finance Act, 1953, which came into operation from April 1, 1952", and accordingly the 60% of the income had escaped assessment in these years. He held that the income of the trust had not been wholly applied within the meaning of clause (b) to proviso (1) of section 4(3)(i). He accordingly revised these assessments and taxed the whole 100% of the income, giving also the benefit of section 41.

8. The Income‑tax Officer completed the assessments of the next 3 years, 1954‑55 to 1956‑57 on similar lines except that in 1954‑55 he omitted to compute the tax under section

41. The following are the full incomes so assessed. Previous year ended. Assessment year Total profits. 31‑1‑1952 1952‑53 Rs. 3,62,407 31‑1‑1953 1953‑54 Rs.2,57,464 31‑1‑1954 1954‑55 Rs.1,09,940 31‑1‑1955 1955‑56 Rs.2,74,959 31‑3‑1956 1956‑57 Rs. 2,50,597 The Income‑tax Officer's full reasons are reproduced below from his order for assessment year 1954‑55: "The assessee contended that the amendment of section 4(3)(i) did not affect the assessment of the income of the Arya Vaidyasala on the ground that the Arya Vaidyasala is not a religious or charitable institution and that the amended section applies only if the business is carried on on behalf of a religious or charitable institution and that in the assessee's case the trust itself was created mainly for carrying on business of the manufacture and sale of Ayurvedic medicines and thereby conduct the . charities mentioned therein by applying a portion of the income of the trust for such charitable purposes that a portion, namely, 60% of the income which has been applied for charitable purpose is still exempt from tax and that it is not altered in any way by the amendment of section 4(3)(i). I regret I cannot agree with the contention mentioned above. In the first place the assessee's contention that Arya Vaidyasala is not a religious or charitable institution does not alter the position in regard to the provisions of the Amendment Act. The amendment to section 4(3)(i) was introduced with the specific purpose of taxing the business carried on by or on behalf of a religious or charitable institution unless the entire income was applied for the purpose of the institution. From this it is pretty clear that even in case where a business is carried on and from out of its profits a portion is utilised for charitable purpose such portion cannot be exempted according to the amendment Act. Here in this case the late Sri P. S. Warriar left a will appointing certain trustees to carry on the business after his death and from out of such profits certain percentages were allotted for charities and certain percentages for enjoyment by his relations. The Arya Vaidyasala is a business and can also be called as an institution which is held under a trust. To be entitled to the exemption under section 4(3)(i) of the Act it is not enough if only a part of such income from business is set apart or applied for the religious or charitable purpose. Clause (b) to proviso (1) to section 4(3) makes it clear that to get exemption under section 4(3)(i) in respect of a business carried on, the income should be wholly applied for the purpose of the religious or charitable institution. As the assessee does not satisfy the conditions laid down in clause (b) of proviso (1) to section 4(3)(i), I bold that the full income of the Arya Vaidyasala has to be taxed."

9. The assessee applied to the Appellate Assistant Commis sioner inter alia against any inclusion of 60% of the above income in all the above assessments and for application of section 41 to all the assessments. It did not, however, plead any contention about the application of section 34 to the assessments of 1952‑53 and 1953‑

54. The relevant grounds of appeal relat ing to the main contention common to all the years is repro duced below from those filed for assessment year 1952‑53 as representing: "The Income‑tax Officer is not justified in holding that the petitioner is not entitled to the exemption contemplated under section 4(3)(i) as the income of the institution is not wholly applied for the purpose of the institution. The business of the Arya Vaidyasala is not carried on on behalf of a religious or charitable institution. The Arya Vaidyasala is a commercial enterprise held in trust under the terms of the will left by the founder, the late Vaidyaratnam P. S. Warriar. Far from being a business carried on by or on behalf of a religious or charitable institution, the present is a case of charitable purposes supported by the income derived from a commercial enterprise. The case is one to which the main clause [section 4(3)(i)] relating to exemp tion of income derived from property held under trust is clearly applicable and falling wholly outside the scope of the special provisions added by the amendment Act of 1953. If any distinction between property consisting of a commercial enterprise and other kinds of property had been drawn in connection with the exemption laid down in section 4, sub‑section (3), clause (i) of the Act, such a distinction would have been a discrimination without the justification of reasonable classification and consequently a denial of the equal protection of the laws guaranteed by Article 14 of the Constitution. Actually it has been well established by decisions of the highest authority that a commercial undertaking held in trust falls within the meaning of the phrase "property held in trust", occurring in section 4, subsection (3), clause. (i) of the Act. The Arya Vaidyasala is therefore entitled to have the 60 percent. of its income spent for charitable purposes excluded for the purposes of income‑tax assessment. By rejecting the petitioner's claim to this exemption, the Income‑tax Officer has proceeded on an unreasonable discrimination between property of one kind and property of another kind, which is not merely unsup ported by statutory sanction, but is actually contrary to the relevant provisions of the Act according to its well established interpretation.

10. The Appellate Assistant Commissioner dismissed all the above appeals as follows: "(a) The proviso (b) to section 4(3)(i) as amended applies and the assessee is not entitled to exemption. (b) Even on merits, sums set apart for the Arya Vaidyasala (viz., 25% and surplus from 10% as described in paragraph 4 supra) did not come within the meaning of "charitable purpose" occurring in the substantive clause itself. (c) The provisions of section 41 do not apply to the assessment. He accordingly duly enhanced the assessment of assessment years 1952‑53, 1953‑54, 1955‑56 and 1956‑

57. His reasons are to be found in his order for 1952‑53, copy whereof is annexed hereunto as Annexure "B" and forms part of the case.

11. The assessee thereupon appealed to the Tribunal for all the aforesaid years praying for exemption of 60% of the income of the business and in the alternative for application of section

41. A copy of the grounds of appeal for 1952‑53 as representative of all of them is annexed hereunto as Annexure "C" and forms part of the case. At the hearing of the appeals, the learned counsel for the assessee also questioned the validity of the proceed ings taken under section 34 for the assessment years 1952‑53 and 1953‑54.

12. The Tribunal accepted the aforesaid main contention in paragraphs 3 to 5 of its order reproduced below: "The business of Arya Vaidyasala, only otherwise compen diously described in the Schedule to the trust deed, we must hold, is a `property held under trust' within the meaning of section 4 (3) (i). Object `J' of the clause 9 of the trust deed is as follows: `The trustees are to run the above institutions according to the intentions expressed above with such modifications as the circumstances may warrant'." It, therefore, follows that the above business is being actually run and conducted by the trust and not one "carried on on behalf of" the trust so that, as contended for the assessee, the proviso has no application. The argument of Mr. Reddy, the able representative of the Department, is that under the terms of the trust, 25% of the profits. are to revert back to the Arya Vaidyasala or in other words not to be applied at all so that all the conditions for exemption laid down in section 4 (3) (i) are not satisfied and accordingly inapplicable. By means of providing a reserve to the extent of 25% of the annual profits, the business is only strengthened and by 'a capitalisation thereof, its profit earning capacity is increased. In our opinion, such a provision salutary from a business point of view, is also covered by terms "finally set apart for application thereto" occurring in the same subsection. We hold that 60% of the profits of the Arya Vaidyasala aforesaid is exempt from taxation. As the assessee has succeeded in this contention on merits, we are not discussing the application of section 34 to some of the assessments under appeal, which, though argued in the circumstances, have become academic.

13. From out of the above facts, the only question of law that arises is "Whether 60% of the income of the assessee applied to the development of Arya Vaidyasala and the conduct of the. hospital and school aforesaid is not exempt under section 4 (3) (i) having regard to clause (b) of the proviso to that subsection ?" G. Rama Ifor the Commissioner. K. V. Suryanarayana Iyer, C. M. Devan and P. R. Balachandran for the Assessee.