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Kamla Town Trust vs Commissioner Of Income-Tax

High Court Of Judicature at Allahabad|20 February, 1975

JUDGMENT / ORDER

JUDGMENT Satish Chandra, J.
1. These two references are inter-connected. I.T.R. No. 18 of 1973 has been made at the instance of M/s. Kamla Town Trust, the assessee. It is a consolidated reference relating to the assessment years 1949-50 to 1955-56. I.T.R. No. 715 of 1972 is at the instance of the Commissioner of Income-tax. It is also a consolidated reference and relates to the assessment years 1956-57 to 1965-66.
2. The two principal questions that require consideration are-
" (i) Whether the Kamla Town Trust, the assessee, was a public charitable trust ? and
(ii) Whether the rectification made in its indenture by an order of the court made in 1955 was retrospective in effect, with the result that the trust was a public charitable trust right from its inception ? "
3. The J. K. Cotton Spinning and Weaving Mills Co. Ltd., Kanpur, by a deed of indenture dated October 27, 1941, created a charitable trust called Kamla Town Trust so that a colony or settlement be erected and established primarily for the residence of workmen employed by the company and its allied concerns. In Re Mercantile Bank of India Agency Ltd. [1942] 10 ITR 512, the Calcutta High Court held that a trust created for the benefit of one's employees was not a charitable trust within the meaning of Section 4(3)(i) of the Indian I.T. Act, 1922. The company filed Suit No. 40 of 1945 in the Civil Courts at Kanpur for a rectification of the trust deed so as to bring it in conformity with its real intention to create a public charitable trust. The trustees were, inter alia, the defendants to the suit. The Civil Judge, Kanpur, by a decree dated 18th August, 1945, ordered the rectification of the deed of trust in, terms prayed for. After rectification the objects of the trust was to establish residential quarters for the workmen, staff and other employees of the company and its allied concerns.
4. On 15th January, 1946, the three Singhania brothers retired from a partnership firm called J. K. Hosiery Factory. On 5th February, 1946, the firm, J. K. Hosiery Factory, was reconstifuted. In the reconstituted firm the Kamla Town Trust became a partner. In the assessment proceedings for the year 1948-49 relating to the linn, J. K, Hosiery Factory, a question arose whether Kamla Town Trust was a public charitable trust so as to be exempt from tax under Section 4(3)(i) of the Indian I.T. Act, 1922. The Tribunal held that after rectification some of the objects were charitable but some were not of a charitable nature. The trust being for mixed objects was not a public charitable trust and was not exempt under Section 4(3)(i) of the Indian I.T. Act, 1922. The Tribunal gave its decision on 11th May, 1953.
5. On 25th April, 1954, the J. K. Spinning and Weaving Mills amended its memorandum of association by adding a clause expressly authorising it to create a public charitable trust. This amendment was sanctioned by the court under Section 12 of the Indian Companies Act on 26th March, 1955. On 10th May, 1955, the settlor-company filed Suit No. 163 of 1954 in the Civil Court at Kanpur for further rectification of the trust deed. On 18th August 1955 the suit was decreed. After rectification the preference towards the workmen of the company and its allied concerns was deleted. The principal object of the trust was stated to be the benefit of the workmen in the city of Kanpur and the surrounding areas, including the workmen employed in the company, who on account of poverty are in need of help and really deserve help.
6. Being of the view that the trust was public charitable and exempt from income-tax, the trust did not file any returns. The ITO issued a notice under Section 34(1) of the Indian I.T. Act, 1922, and, subsequently, under Section 148 of the I.T. Act, 1961. The'trust filed returns of income under protest. The ITO repelled the objections and held that the trust was not public charitable in nature and brought its income to tax. The assessee-trust appealed. The AAC elaborately dealt with the various submissions raised on behalf of the assessee, but upheld the view that the income of the trust was-liable to tax. The assessee took the matter to the Tribunal.
7. By the time this appeal came to be heard by the Tribunal, the Tribunal's order in regard to the case of J. K. Hosiery Factory was, on a reference decided by the High Court. That decision is reported as J. K. Hosiery Factory v. CIT [1971] 81 ITR 557. The Tribunal noticed that the High Court had held that it was for the civil court to go into the question as to the validity of the rectification and it was not possible for the ITO to question its validity. The High Court had also held that the original Clause 3(19) of the memorandum of association of the settlor-company empowered the company to establish a public charitable trust. The deed of trust was hence within the scope of the powers possessed by the company even prior to the amendment of its memorandum of association. The High Court further held that, after the first rectification of 1945, the objects of the trust were partly charitable but partly non-charitable. The objects being mixed, the trust was not purely charitable, so as to be exempt from tax.
8. The Tribunal held that these findings of the High Court were binding on it. It followed them.
9. The Tribunal then considered the effect of the second rectification made by the decree dated 18th August, 1955, and held that after this rectification the trust became a public charitable trust, so as to be exempt from tax. The Tribunal reached this conclusion by consideration of the objects clause of the trust as verified by the circumstance that in fact no distinction was made between the tenants, who belonged to the J. K. group, and those who came from other vocations of life in deciding upon the prospective tenants of the trust properties. It was held that the second rectification decree was not barred by the doctrine of res judicata under Section 11, CPC, nor was it barred by Order 2, Rule 2, CPC.
10. The Tribunal then addressed itself to the question as to the effect of the second rectification, namely, whether it would operate retrospectively or only prospectively. The Tribunal observed that the contention that in law rectification relates back to the date of execution of the instrument was supported by decided cases as well as text books. It, however, held that since the High Court had interpreted the trust deed as rectified by the decree of 1945 as a mixture of charitable and non-charitable objects, any finding now recorded that the second rectification operates with retrospective effect from the date of execution of the trust deed on 27th October, 1941, will have the effect of overriding the finding of the High Court, which it was not open to the Tribunal to do. On this view, it held that it was not possible for it to hold that the second rectification operates with retrospective effect. The result was that the trust was held to be a pubic charitable trust only with effect from the date of the second rectification decree in 1955; that is, in respect of the assessment years 1956-57 onwards. The Tribunal repelled the revenue's contention that the trust was void for uncertainty. On these findings, the assessee's appeals for the assessment years 1949-50 to 1955-56, failed and were dismissed. Its appeals for the assessment years 1956-57 to 1964-65 were, however, allowed and it was held that the income derived by the trust in these years would be exempt, keeping in view the provisions of Section 11(1)(a) of the I.T. Act, 1961.
11. At the instance of the assessee the Tribunal has referred the following questions of law for the opinion of this court :
" 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 assessment 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 ? "
12. In substance, both these questions raise the problem whether the second rectification operated retrospectively with effect from 27th October, 1941, or only prospectively with effect from the date of the rectification decree.
13. At the instance of the revenue, the Tribunal has referred to us the following five questions of law :
" (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. Commissioner of Income-tax [1971] 81 ITR 557 that even the unamended Clause 3(19) of the memorandum of association of the settlor-company, viz., M/s. J. K. Cotton Spinning and Weaving Mills Co. Ltd., empowered the company to create a public charitable trust and the insertion of Sub-section (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 CPC ?
(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 assessment 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 10-5-1955, 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 10-5-1955 in Suit No. 163 of 1954, and adjudge the validity of the rectification ? "
14. With regard to the first question referred at the instance of the revenue, the position is that the Tribunal followed the decision of this court in J. K. Hosiery Factory v. CIT [1971] 81 ITR 557, that the unamended memorandum of association of the settlor-company empowered it to create a public charitable trust and that the amendment was by way of abundant caution. In our view, the Tribunal was plainly right in following the decision of this court which was binding on it. The decision of the Division Bench in [1971] 81 ITR 557 is equally binding on us as a precedent. This question has, therefore, to be answered against the department.
15. The second question referred to us at the instance of the revenue raises the question of the applicability of Section 11 and Order 2, Rule 2, CPC. Section 11, CPC, relates to the doctrine of res judicata. Order 1, Rule 2, CPC, bars the trial of a claim based on the same cause of action in a subsequent suit. Such pleas are open to the parties in the second suit. If such pleas are raised the court has to decide them, but if no such plea is raised in the second suit, obviously such pleas are neither heard nor decided. Neither of these pleas can be taken by a person who was not a party to either the first or the second suit. The decree passed in the second suit could not be challenged as without jurisdiction or void in subsequent proceedings, even by the parties to the suit, much less strangers. In the assessment proceedings it could not be urged that the decree passed in the second rectification suit was not operative or binding because the subject-matter of the second suit would have been barred by Section 11, CPC, or Order 2, Rule 2, CPC. The Tribunal was, in our opinion, plainly right in holding that the revenue was not entitled to take such objections. The second question is answered^ against the revenue.
16. The fifth question referred at the instance of the revenue raises the problem whether the ITO was entitled to go behind the rectification decree and adjudge the validity of the rectification. A Division Bench of this court had in J. K. Hosiery Factory v. CIT [1971] 81 ITR 557, clearly held that in law the validity of the decree could not be adjudged in the assessment proceedings. The Tribunal held that a decree for rectification may be questioned on the ground that it was obtained by fraud or collusion. The Tribunal, however, found that the department has not brought any material on the record to show that the rectification was obtained by the settlor-company either by fraud or collusively. It held :
"......it is clear to us that the decree was not obtained collusively or by fraud. "
17. Under the circumstances, the fifth question is answered against the revenue.
18. We next take up the question whether the rectification of an indenture of trust operates retrospectively.
19. In Halsbury's Laws of England, 3rd Edn., Vol. 26, para. 1702, at p. 920, it has been stated that rectification, if granted, relates back to the time when the instrument was executed. After rectification the instrument has to be read as if it has been originally drawn in its rectified form.
20. In Snell's Principles of Equity, 26th Edn., at p. 689, it has been observed that a rectification decree has retrospective force. The effect is not that the instrument continues to exist though with the parol variation but that it is to be read as if it had been originally drawn in its rectified forms. Thus, existing transactions, which only the rectified instrument would have authorised, become retrospectively valid.
21. In Dagdu v. Bhana [1904] ILR 28 Bom 420, at p. 425, Jenkins C.J. observed that if the mistake is established then the court can give relief by rectification, but what is rectified is not the agreement but the mistaken expression of it.
22. It is thus settled that after the deed is rectified by a decree of the court, the deed as rectified will be deemed to be operative ever since its original execution. The portions that have been deleted by the rectification decree will have to be treated as non-existent from the very beginning of the life of the trust deed.
23. The Tribunal did not, however, give effect to this well-settled principle of law because of the judgment of this court in J. K. Hosiery's case reported in [1971] 81 ITR 557. In that case, this court interpreted the trust deed as it stood after the first rectification effected in August, 1945, and not the trust deed as it stood after its rectification in 1955. The trust deed before and after its rectification in 1955 was materially different. The interpretation placed by this court on the trust deed as it stood prior to its rectification in 1955 would be valueless in proceedings where the question relates to the interpretation of the deed after its amendment in 1955. The Tribunal was, in our judgment, in error in holding that the second rectification did not operate with retrospective effect.
24. Mr. Jagdish Swarup, appearing for the revenue, submitted that Suit No. 163 of 1954, filed by J. K. Cotton Spinning and Weaving Mills Co. Ltd. for the rectification of the trust deed was under Section 31 of the Specific Relief Act. Section 31 provides for rectification of an instrument on grounds of fraud or mutual mistake. An indenture which creates a public trust is a unilateral transaction of the settlor ; there not being two parties to such a transaction, any mistake in it could not be held to be a mutual mistake within the meaning of Section 31. Section 31 of the Specific Relief Act was hence inapplicable and so the decree dated 10th May, 1955, rectifying the trust deed was without jurisdiction and could be ignored by the revenue.
25. In Snell's Principles of Equity, 26th Edn. at p. 683 it has been said that the general rule is that there can be no rectification where the mistake is merely unilateral. But there are four cases where a unilateral mistake may be rectified. They are fraud, estoppel, equitable election and unilateral transactions. In regard to unilateral transactions it has been stated that, where a transaction is unilateral, a unilateral mistake suffices. Thus, a deed poll may be rectified on sufficient proof of a mistake in carrying out the intention of the grantor and so (also) many provisions in favour of volunteers in an ante-nuptial or post-nuptial settlement. It is thus not quite accurate to say that mistakes in unilateral transactions cannot be rectified. Assum-
ing that Section 31 of the Specific Relief Act does not apply to unilateral transactions, yet, in equity unilateral mistakes occurring in a unilateral transaction can be rectified, and so, even though the suit filed by the company for the rectification purported to be under Section 31, the civil court being a court of general jurisdiction will be deemed to possess the equitable jurisdiction to rectify unilateral mistakes in unilateral transactions. The mere putting of the label of Section 31 of the Specific Relief Act at the head of the plaint could not deprive the court of its otherwise undeniable jurisdiction. It may be mentioned that the civil court while decreeing the suit did not even purport to pass the decree under Section 31.
26. Moreover, we are not satisfied that the submission of Mr. Jagdish Swarup that the trust deed in question was a unilateral transaction, is justified.
27. In Lewin on Trust, 16th Edn., p. 9, it has been stated that for an express trust the competent parties are the settlor, the trustees and the beneficiaries. At p. 41 the learned author states that as a general rule it has been laid down that when property is given absolutely to any person, and the same person is, by the giver who has power to command, recommended, or entreated or wished, to dispose of that property in favour of another, the recommendation, entreaty or wish shall be held to create a trust. Thus, an express trust consists primarily in the settlor transferring his interest or title in the property to another person, called trustees, who then becomes the legal owner of the property. The property is held for the benefit of another, who is called the beneficiary. A trustee is put under an obligation to treat the property in the manner indicated by the settlor for the benefit of the beneficiary. At p. 164, it has been stated that it is a clear and undisputed rule that no person can be compelled to accept a trust. This rule of law clarifies the position that the trustees are competent parties to the creation of a trust. They cannot be compelled to accept a trust. Since they cannot be compelled to accept the trust, their assent is essential. This makes them a party to the transaction. An express trust, therefore, has at least two parties, whose assent is necessary to the valid creation of a trust, namely, the settlor and the trustee. If there is any mistake in the expression of their intentions in creating the trust, the mistake will be mutual within the meaning of Section 31 of the Specific Relief Act.
28. The trust deed in question purports to be an indenture made between J. K. Cotton Spinning and Weaving Mills Co. Ltd. of the one part, and Lala Padampat Singhania, Kailashpat Singhania and Lakshmipat Singhania called trustees of the other part. The indenture goes on to state that the company was desirous of transferring the plots of land mentioned in it to the trustees aforesaid. It also states that the trustees had agreed to become and act as the first trustees, as was testified by their being parties to and executing " these presents ". Paragraph 1 of the deed states :
" the company doth hereby grant, convey and assure unto the trustees the said plots of land situate at Cawnpore......to have and to hold the said two plots of land hereby conveyed, granted or assured or expressed so to be and every part thereof unto and to the use of the trustees for every to be by them held upon the trusts hereinafter appearing ".
29. There can be no doubt that the deed of indenture by which the trust was created was a bilateral transaction between the company and the trustees. This trust deed could validly be rectified under Section 31 of the Specific Relief Act on ground of mutual mistake. The decree rectifying the trust deed could not be ignored on the ground that it was without jurisdiction.
30. The next question that requires consideration is whether the deed of trust as rectified in 1955 purported to create a public charitable trust.
31. Section 4(3)(i) of the Indian I.T. Act, 1922, inter alia, exempted from income-tax any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes. By the last paragraph of Sub-section (3) " charitable purpose " was defined as including relief of the poor, education, medical relief and the advancement of any other object of general public utility.
32. Generally speaking, the same is the position under the I.T. Act, 1961. Section 2(15) of the 1961 Act defines "charitable purpose" as including relief of the poor, education, medical relief and the advancement of any other object of general public utility, not involving the carrying on of any activity for profit.
33. Thus, income from property qualifies for exemption under this provision if two conditions co-exist: (1) the property is held under trust or other legal obligation ; and (2) it is so held wholly or in part for religious or charitable purposes. In CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 at p. 728, the Supreme Court observed that the definition of the term " charitable purpose " is intended to serve as a special definition of the expression " charitable purpose " for the Act ; it is again inclusive and not exhaustive or exclusive. Even if the object or purpose may not be regarded as charitable in the popular signification as not tending to give relief to the poor or for the advancement of education or medical relief, it would still be included in the expression "charitable purpose" if it advances any object of general public utility. The court then held (p. 729) :
" The expression ' object of general public utility ', however, is not restricted to objects beneficial to the whole of mankind. An object beneficial to a section of the public is an object of general public utility......It is sufficient if the intention is to benefit a section of the public as distinguished from specified individuals. "
34. It was further held that the section of the community sought to be benefited must undoubtedly be sufficiently defined and identifiable by some common quality of a public or impersonal nature where there is no common quality uniting the potential beneficiaries into a class it may not be regarded as valid.
35. Keeping these principles in view, we may turn to the trust deed. The preamble of the trust deed states that the company wants to create a public charitable trust for the benefit of the public in the city of Kanpur and surrounding areas including members of the working class. Paragraph 2(b) of the trust deed provides the objects of the trust as follows :
" (b) To erect, establish, equip, furnish, fit, maintain and repair on the said two plots of land and any other land that may hereafter be acquired by the trustees on behalf of the trust.
(i) residential quarters, chawls or buildings for the workmen in the town of Kanpur and the surrounding areas and extensions 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 provided that the benefit in this clause shall be granted only to those persons who on account of poverty are in need of help and really deserve help.
(ii) Public schools, patashalas, colleges, libraries, public halls, hostels or boarding houses.
(iii) Hospitals, dispensaries, museum, places of recreation, instruction, swimming baths, lakes, parks, playgrounds, temples, mosques, churches, a market or markets and such other works and institutions of general public utility.
(iv) Such other works, buildings and installations as the trustees may in their discretion think fit to provide for the advancement of any other similar object of general public utility."
36. It will thus appear that the principal object was the construction of residential quarters or buildings for the workmen in the town of Kanpur and the surrounding areas 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 provided that the benefit in this clause shall be granted only to those persons who, on account of poverty, are in need of help and really deserve help". The provision clearly applies to all kinds of persons mentioned earlier in this clause. The beneficiaries are those workmen, craftsmen, traders, etc., who on account of poverty, are in need of help and really deserve help. This is clearly an object of relief of the poor.
37. The beneficiaries are in our opionion, sufficiently identifiable and form a class. They are the workmen in the town of Kanpur and surrounding areas as also other skilled and unskilled workmen, craftsmen, etc., who may be permitted to reside in the buildings constructed on the said plots. It cannot, in our opinion, be said with any justification that the beneficiaries are not identifiable, so that the trust may be deemed void for uncertainty.
38. The other sub-clauses of Clause (b) provides for education, medical relief as well as other subjects of general public utility for those who are residing in the colony that was to be built on the plots which were transferred to the trustees. The objects of the trust, in our judgment, were covered, by the definition of " charitable purpose " given in the I.T. Act. The income from these properties was exempt from tax in accordance with the provisions of the I.T. Acts.
39. In the result, our answer to the various questions referred to us is as follows :
Assessee's Reference : I.T.R. No. 18 of 1973.
Question No. 1 : No, in favour of the assessee and against the department.
Question No. 2 : No, in favour of the assessee and against the department.
Revenue's Reference : I.T.R. No. 715 of 1972.
Question No. 1 : Yes, in favour of the assessee and against the department.
Question No. 2 : No, in favour of the assessee and against the revenue.
Question No. 3 : Yes, in favour of the assessee and against the department.
Question No. 4 : No, in favour of the assessee and against the department.
Question No. 5 : No, in favour of the assessee and against the department.
40. The assessee will be entitled to costs, which are assessed at Rs. 200.
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Title

Kamla Town Trust vs Commissioner Of Income-Tax

Court

High Court Of Judicature at Allahabad

JudgmentDate
20 February, 1975
Judges
  • S Chandra
  • R Gulati