COMMISSIONER OF INCOME TAX-II, vs. LAL KAMLA TRUST

This Tax Appeal filed under Section 260A of the Income   Act,   1961   (for   short   the   “Act”)   is   at   the instance of Revenue and it is directed against the order   dated   16.10.2007   passed   by   the   Income   Tax Appellate Tribunal, Rajkot Bench, Rajkot in the ITA No.195/Rjt/2006, whereby the Tribunal has allowed the appeal preferred by the assessee.

By   order   dated   2nd  April,   2009,   this   appeal   is admitted on the   following substantial question of law:­ “2(A) Whether the facts and in circumstances of the   case   in   law,   the   Appellate   Tribunal   was correct in holding that for granting registration under Section 12AA only 'nature of its object' and 'genuineness of the activities' of the trust are to be considered, even when the very basis and very object of creation of the trust was hit by the prohibition provided under Section 13(1) (b) of the I.T. Act.?

The brief facts of the case are as under:­

1 The   assesse   trust   has   filed   application   for registration   under   Section   12A   of   the   Act   on 30.09.2005. The trust has been created by virtue of will date 12.10.1973 left by Shri Lalchand Hirachand Jhangiyani of Rajkot. As per provisions of Section 12A(a) of the Act, the assessee trust has to file application for registration within one year of its inception.   But   the   assessee   trust     filed   such application  after   31   years.  The  assessee   submitted that   the   trust   has   been   created   out   of   'will'   of Late   Shri   Lalchand   Hirachand   Khangiyani  who  wanted to establish a school and a maternity hospital. The funds   for   the   said   purpose   was   to   be   obtained   by selling   trust's   land,   property   etc.   On   account   of lack of fund, no construction of school premises or medical   center   could   be   taken   up   and   no   donation could also be obtained for this purpose. Thereafter, the  assessee   has   filed   application   for   condonation of   delay   praying   that   the   assessee   trust   may   be registered.

2 A public charitable trust has to satisfy certain preconditions viz (I) it should be a trust created under   the   Indian   Trust   Act   setting   apart   certain property, the income of which should be utilised as per the wish of the Settler (ii) the objects must be charitable   as   per   Section   2(15)  of   the   Income   Tax Act, 1961 (iii) the beneficiaries should be public at   large,   irrespective   of   caste,   creed,   religion community and (iv) the trust should be irrevocable.

3 The Commissioner of Income Tax (for short “CIT”) rejected   the   application   of   registration   holding that in this case, as per clause 22 of the 'will' creating   the   'Trust',   the   institution   (i.e.   Lal Kamla High School or Lal Kamla Maternity Hospital) provided   that   trust  would   give   help  to   Sindhis   as far   as   possible   with   nominal   charges   and   the balance, if any, after giving benefit to the Sindhi community   should   also   be   given   to   non­sindhi community.   This   means   the   primary   purpose   of   the trust   is   to   benefit   the   Sindhi   Community   after meeting their needs, if any, fund remains the same would   be   utilized   for   the   benefit   of   non­sindhi community. Secondly, as per clause 20 of the 'will' out  of   the   five  trustees,   four   trustees  should   be from Sindhi community and one permanent trustee from non­sindhi community. If the trustee board is less than   five   trustees,  then   in  any  case,   one   trustee should   be   from   non­sindhi   community.   Hence,   the benefit   primarily   accrue   to   the   members   of   the Sindhi Community.

4 It was further held that the Income of the trust would   lose   exemption   in   case   the   trust   or institution   is   created   or   established   for   the benefit   of   any   particular   religious   community   or caste.   Sindhi   Community   constitute   a   separate religious community. Sindhi Community is not covered within exception as per Explanation­2 of Section 13 of the Act, hence, do not fall under the exemption provided under Section 13(1)(b) of the Act.

5 The assessee trust therefore being aggrieved by the order of rejection passed by CIT preferred an appeal before the Income Tax Appellate Tribunal (for short “Tribunal”).   The   Tribunal   vide   its   order   NO.ITA No.195/Rjt/2006 dated 16.10.2007 held that the trust by the assessee held as under:­ “ I have also gone through the order of the CIT wherein the CIT has refused the registration on the ground that this Trust is created for the benefit of Sindhi Community and if this Trust   is   registered   then   it   would   give benefits   to   the   Sindhi   Community   only.   The Trust   is   created   only   for   Sindhi   Community and the beneficiaries are not public at large as per Section 2(15) of the Act. I have also perused   paragraph   no.22   of   the   Trust   Deed wherein   it   has   been   specifically   mentioned that   aims   and   objects   were   to   assist   the Sindhi   Community   in   providing   education   and medical aids to the Sindhi Community and if surplus   fund/benefits   are   there   it   may   be given to Non­Sindhi Community also. From the as under:­ “ allowing the appeal, that the objection of   the   assessee,   as   indicated   in   the objects   clause   3(1)   and   3(2)   of   its trust  deed,  were of charitable  nature and since the powers of the Director of Income­tax (Exemption) conferred under Section 12AA were confined to satisfy himself   about   the   genuineness   of   the activities of the trust and the nature of its objects being charitable, he was not   justified   in   refusing   to   grant registration   to   the   assessee   under Section 12A merely on the ground that the said objects were violative of the provisions of Section 13(1)(b).” I   respectfully   following   the   same   hold that   the   benefits   of   activities   of   the assessee Trust is of charitable nature and purpose and the assessee cannot be denied registration   under   Section   12A   of   the Income Tax Act.”

1 Learned   advocate   Ms.   Mauna   Bhatt   for   the appellant   submitted   that   the     Tribunal's   order   is erroneous in view of the clear  provision of Section 13(1).   Section   13   deals   with   the   cases   wherein Section   11   and   12   are   not   applicable   and   since registration   under   Section   12A   is   applied   for availing   the   benefit   under   Section   11   &   12 therefore,   the   registration   under   Section   12A   was validly rejected as the case of the assessee trust was not fulfilling the provision of Section 13(1) of the Act.

The substantial questions of law falling for our consideration is no longer res­integra in view of the decisions  of the Apex Court and of this Court. Even otherwise, we are convinced with the reasons assigned by the Tribunal while allowing the appeal preferred by the assessee.

The Supreme Court in the case of Commissioner of Income   Tax,   Ujjain   vs.   Dawoodi   Bohara   Jamat   [2014 Lawsuit (SC) 450] has observed thus:­ “41. Thus, the second issue which arises for our consideration and decision is: whether the respondent Trust is a charitable and religious trust  only for the purposes of a particular community   and   therefore,   not   eligible   for exemption under Section 11 of the Act in view of the  provisions of Section 13(1)(b)  of the Act?

In   the   instant   case,   the   Tribunal   has found on facts after analysing the objects of the   Trust   that   the   respondent   Trust   is   a public   religious   trust   and   its   objects   are solely  religious  in nature and being of the opinion that Section 13(1)(b) is solely meant for charitable trust for particular community, negated   the   possibility   of   applicability   of Section 13(1)(b) of the Act at the outset. The High   Court   has   also   confirmed   the   aforesaid view in appeal and observed that Section 13(1) (b) would only be applicable in case of income of   the   trust   for   charitable   purpose established   for   the   benefit   of   a   particular religious community. In our considered view, the   said   view   may   not   be   the   correct interpretation of the provision.

From   the   phraseology   in  clause   (b)   of Section 13(1),  it could be inferred that the legislature   intended   to   include   only   the trusts   established   for   charitable   purposes. That however does not mean that if a trust is a   composite   one,   that   is,   one   for   both religious   and   charitable   purposes,   then   it would not be covered by clause (b). What is intended   to   be   excluded   from   being   eligible for exemption under Section 11 is a trust for charitable   purpose   which   is   established   for the   benefit   of   any   particular   religious community or caste.

Such trusts with composite objects would not be expelled out of the purview of Section 13(1)(b) per se. The section requires it to be established   that   such   charitable   purpose   is not for the benefit of a particular religious community or caste. That is to say, it needs to   be   examined   whether   such   religious­ charitable   activity   carried   on   by   the   trust only   benefits   a   certain/particular   religious community   or   class   or   serves   across   the communities   and   society   at   large.   (Sole Trustee, Lok Shikshana Trust v. Cit, Mysore) The   section   of   community   sought   to   be benefited must be either sufficiently defined or   identifiable   by   a   common   quality   of   a public   or   impersonal   nature.   (CIT   v.   Andhra Chamber of Commerce.)

This Court in Commissioner Of Income Tax, Cochin  v. Palghat  Shadi  Mahal  Trust.  2002 9 SCC   685,   the   Muslim   residents   of   Kerala constituted   a   trust   “for   the   purpose   of constructing   and   establishing   at   Palghat­a­ Shadi   Mahal   and   other   institutions   for   the educational,   social   and   economic   advancement of   the   Muslims   and   for   religious   and charitable objects recognised by Muslim law…” ( SCC p. 687, para 2) and later clarified that the proceeds would be utilised for the benefit for the public at large and upon this basis, the trust made a claim for exemption from tax under   Section   11. This   Court   held   that   the resolution   clarifying   the   object   would   not validly amend the object of the trust deed and since the object confined the benefit to only the Muslim community, it would be covered by the restriction under Section 13(1)(b) of the Act   even   though   it   functioned   for   public benefit. Thus, therein the object sufficiently defined or expressly stated beneficiary class and restricted the activities of the trust to a specific community.

Further, in State Of Kerala v. M.P Shanti Verma Jain State Of Kerala v. M.P Shanti Verma Jain, this Court has held that propagation of religion   and   restriction   of   benefits   of activities of trust in its objects to the said community would render the trust as ineligible for   claiming   exemption   under   similar provisions of the Kerala Agricultural Income Tax Act, 1950. The Court observed as follows: (SCC p. 67, para 5) “5. … The deed of trust and the rules run into more than thirty pages out of which six pages of the trust deed narrate  the philosophy of Jain Dharma. The objects of the Trust clearly show that the Trust is meant for propagation of   Jain   religion   and   rendering   help   to   the followers of Jain religion. Even medical aid and similar facilities are to be rendered to persons devoted to Jain religion and to non­ Jains   if   suffering   from   ailments   but   the medical aid could be given to them only if any member   of   the   families   managing   the   Trust, shows   sympathy   and   is   interested   in   their treatment. The Tribunal, in our opinion, was right   in   its   conclusion   that   the   dominant purpose of the Trust in the present case was propagation of Jain religion and to serve its followers and any part of agricultural income of the Trust spent in the State of Kerala also could not be treated as allowable item of the expenses.” (emphasis supplied)

In the present case, the objects of the respondent Trust are based on religious tenets under the Quran according to religious faith of   Islam.   We   have   already   noticed   that   the perusal   of   the   objects   and   purposes   of   the respondent   Trust   would   clearly   demonstrate that the activities of the Trust though both charitable and religious are not exclusively meant   for   a   particular   religious   community. The   objects,   as   explained   in   the   preceding paragraphs, do not channel the benefits to any community if not the Dawoodi Bohra community and thus, would not fall under the provisions of Section 13(1)(b) of the Act.

In that view of the matter, we are of the considered opinion that the respondent Trust is a charitable and religious trust which does not benefit any specific religious community and therefore, it cannot be held that Section 13(1)(b) of the Act would be attracted to the respondent   Trust   and   thereby,   it   would   be eligible to claim exemption under Section 11 of the Act.

In   the   result,   the   appeals   are dismissed with no order as to costs. Ordered accordingly.”

Mahajan   Trust   [(2016)   74   taxmann.com199   (Gujarat). The relevant paragraphs are quoted herein below:­

In view of the aforesaid position of law, which is applied by the Tribunal to the facts of the case, the   relevant   objects   of   the   trust   deed   read   as under:­ “Cl.

Out   of   above   trustee   is   not willing to work as trustee in the course any post of trustees become vacant, then any   gentlemen   should   be   appointed   as trustee.   Out   of   above   trustees,  four trustee should be from Sindhi community and one permanently from the non­sindhi community.   If   the   trust   board   is   less than 5 trustees, then in any case,  one trustee   should   be   from   non­sindhi community (other community). Cl.22 The object of trust is to give help to   Sindhi   Community   for   education   and medical. The income of my property vested to the trust should be utilized for the above   object.   It   is   my   wish   that   a maternity   hospital   or   school   should   be built   in   my   property   admeasuring   600 Sq.Yards.   in   New   Jagnath   Plot,   Rajkot. For   this   purpose,   I   give   right   to   the trust  board  for  any  change  in property, renovation,   seeking   loan   etc.   to   run above institution. I also wish that name of institution should be “Lal Kamla High School” or“Lal Kamla Maternity Hospital”. This   institution   should   give   help   to Sindhi; as far as possible with a nominal charges,   the   banalce,   if   any,   after giving benefit to Sindhi Community should also   be   given   to   non­sindhi   community (other community).

On perusal of   the above clauses of the trust deed, it cannot be said the  trust is only religious trust. Thus, finding arrived at by the CIT that the objects of the trust were only for the benefit of a Sindhi   community,   is   not   correct.     The   CIT   was

In   that   view   of   the   matter,   we   are   of   the considered   opinion   that   the   respondent­trust   is charitable and religious trust which does not give benefit to any specific religious community only, and therefore, it cannot be held that Section 13(1)(b) of the Act could be attracted to the respondent­trust, and thereby, it would be entitled to get registration under Section 12A of the Act.

In view of the foregoing reasons question of law is answered in favour of the assessee and against the revenue.   The   appeal   fails   and   accordingly,   stands dismissed. No order as to costs. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) GIRISH