Commissioner of Income Tax vs Mathuradas Goverdhandas Binani Charity Trust

Sen, J.—The Tribunal has referred the following question of law u/s 256(1) of the income tax Act, 1961 (''the Act'') to this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the trust constituted under the deed dated 24-7-1959 and executed by Shri Ghanshyamdas Binani was a valid charitable trust ?

In this proceeding, the assessment year involved is 1960-61 for which the relevant year of account is the year ended on 31-3-1961.

The facts as found by the Tribunal narrated in the statement of case are as under :

Shri Ghanshyamdas Binani executed a deed of trust on 24th July, 1959 and transferred 30,000 shares of Metal Distributors (P.) Ltd. bearing distinctive numbers 50,001 to 60,000 and 72,071 to 92,070. The trustees of the said trust were father of Shri Ghanshyamdas Binani and other two persons. The shares so transferred were registered in the books of the company in the names of the trustees. The object of the trust was that the income from those shares was to be applied for and upon such religious and/or charitable purposes of a public nature as the trustees might think fit for paying donations to any public charitable trust. The trustees were entitled to hold the shares and all accretions thereto. However, they had no power to sell, pledge or otherwise transfer or deal with those shares. The trust was a revocable trust and the trust had not been revoked up to the time when the appeal was first heard by the Tribunal, that is to say, up to 17th June. 1968. Clause ( 15) of the trust deed reads as under :

The settlor hereby reserves the right to revoke this trust at any time after the expiry of seven years from the date of these presents....

On the income of the dividends from those shares income tax was deducted at source. The trustees of the trust, therefore, claiming exemption under clause (1) of section 4(3) of the Indian income tax Act, 1922, claimed refund of tax u/s 48 of the Act. The ITO held that the settlor being Hindu governed by Mitakshara School of Hindu Law was not entitled to revoke the trust meant for charity. He referred to the book: Tagore Law Lectures by Hon''ble Justice B.K. Mukherjee on Hindu Law Religious and Charitable Trust wherein it has been observed that ''of course, if a valid dedication is once complete, there would be no power left in the donor to revoke it and on assertion on his part, or the subsequent conduct of himself and his descendants contrary to such dedication would have the effect of nullifying it''. He, therefore, reached the conclusion that because of clause (15) in the deed of trust giving power of revocation to the settlor the trust was no more charitable and as such was not entitled to exemption from tax. The claim for refund of the tax was, therefore, rejected by him. The appeal was taken up by the assessee-trust against the said order of the ITO before the AAC who held that the condition of revocation did not change the character of the trust. According to him, it was a charitable trust and was as such entitled to exemption from tax. The department then came up in appeal before the Tribunal. The Tribunal by order dated 27-8-1968 in IT Appeal No. 1573 of 1964-65 upheld the order of the AAC. Thereafter, on the application of the department u/s 66 of the Indian income tax Act, 1922, the same question as is being referred now was referred to the Hon''ble High Court. The Hon''ble High Court by order dated 2-9-1977 in IT Reference No. 264 of 1964 without answering the question sent the reference back to the Tribunal with the following observations:

In these circumstances, it will not be proper for us to answer this question at this stage. The Tribunal is to consider afresh whether the trust executed by Ghanshyamdas Binani is a valid trust after giving an opportunity to both the parties of being heard on all points and also giving them opportunities of adducing further evidence as to the application of the trust fund.

Accordingly, the appeal was reheard. Despite Opportunities given to the parties no further evidence as to the application of the trust fund was put forth before us by any of the parties. The only point agitated before us was as to the validity of the charitable trust in view of the settlor having retained the power to revoke the trust. The Tribunal vide order dated 1-10-1985 held that it was valid charitable trust. The Tribunal, thus, upheld the order of the AAC.

The trust was created by a deed dated 24-7-1959. The assessment year involved is 1960-61 for which the relevant previous year ended on 31-3-1961. The dispute in this case has centered around interpretation of clause (15) of the trust deed which was as under :

The settlor hereby reserves the right to revoke the trust at any time after the expiry of seven years from the date of these presents and upon such revocation the trustees will retransfer the said thirty thousand shares of Metal Distributors (P.) Ltd. to the settlor within two months of the receipt of a notice from the settlor of such revocation and the trustees will spend the funds collected up to that time in such manner as they may consider fit and proper for religious and/or charitable purposes of a public nature or for paying donations to any public charitable trust.

It will be seen from clause (15) that the question of revocation could only arise after the expiry of seven years from the execution of the trust deed. In the accounting year in question the settlor had no power to revoke the trust. Moreover, even after revocation the funds of the trust collected by the trustees up to the date of revocation could only be spent for religious and/or charitable purposes of a public nature or for paying donations to any public charitable trust. In other words, the funds in the hands of the trustees up to the date of revocation could only be applied for a public charitable purpose.

Therefore, the purpose of the trust was clearly charitable. The question of validity of the trust was gone into by this Court in the case of Commissioner of Income Tax Vs. Ghanshyamdas Binani, where the question was whether a legally valid trust had been created by the settlor. The scope of clause (15) of the trust deed was specifically examined. It was held by Sabyasachi Mukherji, J. (as his Lordship then was) that the trust deed was valid and the ownership of the shares had been validly transferred by the settlor to the trust. The income of the trust could not be assessed in the hands of the assessee.

In view of the aforesaid, the question referred must be answered in the affirmative and in favour of the assessee. There will be no order as to costs.

Banerjee, J.

I agree.