Commissioner of Income Tax, Madras vs G.D. Naidu Industrial Educational Trust

On the 24th January 1938 one G. D. Naidu, a gentleman largely interested in motor engineering and transport companies in the Combatore

District, created the G. D. Naidu Industrial Educational Trust and purported to endow it with the shares held by him in six transport companies of

which he had the control and immovable property worth Rs. 1,10,000. Mr. Naidu Constituted himself the managing trustee of the trust and gave

himself full power to deal with its assets This reference arises out of a claim made u/s 4(3)(i) of the Indian Income Tax paid in respect of dividends

declared on the shares held in these transport companies. The Income Tax a authorities refused to allow are fund .Their reason was that the shares

were not held under trust wholly for charitable purposes within the meaning of the section. The managing trustee having asked the Commissioner of

Income Tax Act, the Commissioner has referred this question :

Whether on approver construction of the Instrument of trust dated 24-1-1938 the properties in question were held under trust for charitable

purposes within the meaning of Section 4(3)(i) of the Indian Income Tax Act"".

The transport companies in which Mr. Naidu was interested had accumulated their profits from the date of their incorporation in 1932, but after

the execution of the deed of the 24th January 1938 they declared dividends amounting in the aggregate to Rs. 3,49,155 of which Rs. 2,75,340

was not, however, paid over to the trustees. The money remained a with the companies. All that the trust received were promissory notes of the

fact value of Rs. 2,75,340.

The object of the trust many be stated shortly as follows :- (1) To provide permanent facilities for he improvement of motor electrical and other

industries and transport in the country.

(2) To found an institution providing for research, education and training in this connection.

(3) To ensure the permanence and efficiency the institution by placing at its disposal the workshops and the motor transport concerns in which the

founder is interested .

If the assets which Mr. Naidu purported to set apart were to be devoted directly to such objects, no doubt the trust would be entitled to the

refund claimed; but the deed clearly show that the contemplated institution was not to be brought into being immediately and that the companies in

which Mr. Naidu was interested were to have the benefit of the assets set apart by him. Clause 54 of the deed provides that so long as Mr. Naidu

holds the office of managing trustee he shall have the power to borrow to any extent on the properties conveyed to the trusts and that the board of

trustees shall be able to borrow moneys which are necessary to discharge debts contracted by Mr. Naidu. The power given to him is not limited to

borrowing for the purpose of the trust. Apparently he can borrow moneys for his own purposes on the security of the assests set apart by him. By

clause 55 the trustees are empowered, so long as Mr. Naidu holds the office of managing trustee, to sell immovable properties belonging to the

trust ""in expanding or floating industrial institutions, "" in other words for the purpose of floating other companies. Clause 59 provides that the

trustees may advance to the companies in which M. Naidu is interested money for (a) discharging their liabilities (b) purchasing and substituting

diesel or other more economical engines for the petrol engines on buses run by them and (c) constructing passenger sheds and garages and other

amenities and facilities"" for the use of the transport services ""wherever the Trust is interested"".

Clause 60 deals with the foundation of the proposed institution. It reads as follows :-

That the Trustees shall as early as they consider it expedient utilise the Trust for the purpose of starting an institute for industrial and scientific

research and training, with a factory attached thereto, for the manufacture of all or any types of automobiles, electrical plants, mills and other

machinery and all accessories and equipment therefore ,or other goods approved by the Board of Trustees from time to time, for providing training

to deserving persons irrespective of sex, caste, creed or colour in such scientific research experimental work, and manufacture or industries.

The foundation of the institution was apparently to be left over until the companies had made sufficient money for the purpose. By clause 71 Mr.

Naidu reserves to himself the power to revoke the trust at any time.

In view of the provisions of the deed by which the assets can be utilized for Mr. Naidu''s own purpose or the purposes of his companies, it is

impossible for him to contend with reason that some day the deed creates a trust wholly for charitable purposes. The idea that some day the

institution contemplated b the deed may be founded is not sufficient compliance with the section.

It is said that in 1939 Mr. Naidu made considerable alterations in the trust deed and that these alteration remove the objections now referred to.

Whether the deed as it now stands creates a trust which is entitled to the benefits of Section 4(3)(i) is a question with which the Court is not

concerned. It is concerned only with the question whether a trust was created wholly for charitable purposes in the year of account, 1937-38, and

it is obvious that this was not the case. The Commissioner of Income Tax has correctly appreciated the situation and the question referred will be

answered in accordance with the opinion expressed by him.

The Commissioner is entitled to his costs which we fix at Rs. 250.

Reference answered accordingly.