The judgment of the court was delivered by
HEGDE J.--Both these appeals arise from the decision of
the Calcutta High Court in a reference under section 66(1) of the Indian
Income-tax Act, 1922 (to be hereinafter referred to as "the Act"). The
first of these two appeals was brought by the appellant trust on the strength of
a certificate granted by the High Court under section 66A(2) of the Act. In that
certificate all that we find is a bald statement by the High Court that the case
is a fit one for appeal to this court. This court has ruled that such a
certificate is an invalid one and an appeal brought on the strength of such a
certificate is not maintainable. It is for that reason, the appellant filed
Special Leave Application No. 2214 of 1971 seeking special leave from this court
to appeal against the very judgment which was the subject matter of the appeal
in Civil Appeal No. 1885 of 1968. After hearing the parties, we came to the
conclusion that the leave asked for should be granted. That petition is now
numbered as Civil Appeal No. 1084 of 1971.
The two questions referred to the High Court are:
" (1) Whether, on the facts and in the circumstances
of the case, the Tribunal was right in holding that the gift made by Sardar
Ajaib Singh was valid and complete in law ?
(2) If the answer to the first question is in the
affirmative, then, whether, on the facts and in the circumstances of the case,
the assessee was entitled to the refund of tax deducted at source on dividends
accruing on the shares gifted by Sardar Ajaib Singh ? "
The High Court answered these questions as follows:
" 1. The gift made by Sardar Ajaib Singh was a valid
and complete gift but did not have the effect of augmenting the assessee trust,
and
2. The assessee was not entitled to the refund of the tax
deducted at source on dividends accrued on the shares gifted by Sardar Ajaib
Singh. "
Now let us turn to the facts as set out in the statement
of the case. The assessment year with which we are concerned in these appeals is
1960-61, for which the relevant previous year ended on March 31, 1960. The
assessee is a charitable trust constituted under a trust deed dated December 19,
1944. A supplementary trust deed was executed on January 16, 1951. In the first
trust deed, the objects of the trust are mentioned as those that: "Trustees
may in their absolute discretion from time to time determine in and towards the
attainment assistance or support of such charitable purpose or purposes as the
trustees may in their unfettered judgment deem to be the most deserving of
support. " The objects mentioned in the first deed were further elaborated
in the second deed which requires the trustees to spend the income "amongst
others for the advancement of learning and education and/or amelioration of the
sufferings of all citizens of the Indian Union, irrespective of caste, colour or
creed for maintaining library or libraries for the free use of the public in
general who are residents of the Indian Union for fostering encouraging and
providing the means of healthy recreation including teaching or singing classes
or choruses for the residents of the Indian Union and for the purpose of
providing music and instruments for the town and in the premises hereinbefore
mentioned for meeting the expenses wholly or in part of the Khalsa High School
and A. V. Middle Schools to the extent and for and during such times as long as
the trust continues and/or to apply such income in similar such objects as the
trustees may in their absolute discretion from time to time determine in and
towards the attainment assistance and support of such chartiable purpose or
purposes as the trustees may in their unfettered judgment deem to be the most
deserving of support."
Sardar Ajaib Singh, one of the trustees of the appellant
trust, by his letter dated January 23, 1959, transferred 640 fully paid up
equity shares of the face value of Rs. 6,40,000 to the assessee reserving to
himself the right to revoke and recall the transfer of either the entire 640
shares or any portion thereof but not until the expiry of clear full seven years
from the date of the delivery of the shares to the trust. The trustees, by their
letter dated February 1, 1959, accepted the offer and also the terms and
conditions upon which the offer had been made and ratified the same by the
resolutions of the trustees dated February 5, 1959, and March 4, 1959. The
shares were transferred and given delivery of to the trustees. On the said
shares a dividend amounting to Rs. 1,28,000 accrued on which tax was deducted at
the source. The trustees claimed that the said income of the assessee was exempt
from payment of income-tax in view of section 4(3)(i) of the Act. Hence they
claimed a refund of the tax deducted at the source. The Income-tax Officer
refused to grant the refund asked for on the ground that the trust deed under
which the trust was formed did not contain any provision for receipt of
donations or gifts from outsiders and therefore the gift made by Sardar Ajaib
Singh of the 640 shares was not a valid gift. He also observed that the transfer
of the shares was revocable after seven years and accordingly was a conditional
transfer; hence the assessee has precluded from claiming the refund of the tax
deducted at the source.
The assessee appealed against that order to the Appellate
Assistant Commissioner. That officer upheld the assessee's right to the refund
of tax on the ground that during the relevant year the shares did belong to the
assessee and the dividend income accruing thereon was the income of the assessee
and therefore refund of the tax deducted at the source was allowable.
The deparement went up in appeal to the Income-tax
Appellate Tribunal as against that order. Before the Tribunal the department
contended that the trust was not competent to receive gifts from outsiders there
being no clause in the trust deed empowering the receipt of such gifts. It was
further contended that the gift being conditional and revocable was invalid in
the eye of law. The Tribunal found that the assessee was a public charitable
trust and it was not limited in its scope of activities within the four corners
of the trust deed by which it was created. A public charitable trust, the
Tribunal held, was entitled as of right to receive gifts and donations from the
public and as such the gift of the shares made by Sardar Ajaib Singh had been
validly received by the assessee. The Tribunal accordingly dismissed the first
contention raised on behalf of the department. It is not necessary for us to
refer to the facts relating to the second contention as that matter is not in
issue before us, now, the same having been held against the department by the
Tribunal.
While dealing with the reference made by the Tribunal, as
mentioned earlier, the High Court upheld the validity of the gift made by Ajaib
Singh but strangely enough after holding that the gift in question was a valid
one, it came to the conclusion that the said gift did not have the effect of
augmenting the assessee's trust and, therefore, the assessee was not entitled to
the refund of the tax deducted at the source on the dividend accrued on the
shares gifted by Ajaib Singh. To us these findings appear to be somewhat
mutually conflicting. If the gift in question was a valid one then the trust
became the owner of the shares gifted. That being so it also became the owner of
the dividends received. Hence, those dividends will have to be considered as the
income of the trust.
The reason which persuaded the learned judges of the High
Court for coming to the above conclusion are set out in their judgment at pages
21 and 22 of the printed paper book. We shall quote that part of the High
Court's judgment:
"The question for our consideration, however, is
whether the gift, as accepted by the trustees, had the effect of augmenting the
assessee-trust for taxation purposes, or whether the effect of it was that it
remained a separate trust in the hands of the trustees of the assessee-trust,
with liberty to them to apply the income of the subsequent trust for the benefit
of the assessee-trust. Mr. Banerjee urged that it was not necessary to expressly
empower the trustees of a public trust to accept gifts, donations or endowments.
That, he submitted, was a power inherently vested in them. We have our doubts.
Trust is a confidence reposed in a person or persons, with respect to property
of which he has or they have legal possession or over which he or they can
exercise power, to the intent that he or they may hold the property or exercise
the power for the benefit of some other person or object. Now, this confidence
may not necessarily include in itself the liberty that the trustees would go on
accepting donations and try to augment the trust to such dimensions that the
purpose for which the original trust was created may be swamped or modified or
qualified. If a settlor wants to invest the trustees with such a power, it is
but reasonable to expect that the power should be conferred by the deed which
created the trust. The trust that we have to consider does not appear to confer
upon the trustees the further power to accept donations, gifts or endowments.
We, therefore, do not think that the trustees have the liberty or the right to
accept further gifts, in the absence of specific authorisation, augment the
original trust and then claim the benefit of section 4(3)(i) of the Indian
Income-tax Act."
It is somewhat difficult to follow the reasoning adopted
by the learned judges of the High Court. Either the gift made by Ajaib Singh and
accepted by the trustees was a valid gift or it was not a valid gift. If it was
a valid gift, the shares gifted became the property of the trust. If it was not
a valid gift, the shares still continued to be the property of Ajaib Singh. It
is nobody's case that there was a trust within a trust. No such trust is put
forward either by the department or pleaded by the assessee. The existence of a
trust is a fact and not a fiction. We fail to see how the learned judges were
able to come to the conclusion that Ajaib Singh while gifting the shares created
one more trust without any writing and without any objective and appointed the
trustees of the assessee-trust to be the trustees of the new trust as well.
These assumptions have no basis either in fact or in law.
At this stage we may mention that the very learned judges
who decided this reference had held in Wealth-tax Reference No. 444 of 1963 on
the file of the High Court of Calcutta that the shares gifted by Ajaib Singh did
not continue to be his property. If they are not Ajaib Singh's property, whose
property are they ? The only answer is that they are the property of the
appellant trust. Those shares cannot float in mid air. They must be owned by
someone.
As seen earlier, the appellant is a public trust. Its
objects are charitable objects. Ajaib Singh made over the shares to that trust
for effectuating the very objects of the trust. He did not stipulate any other
object to be attained. The trustees had accepted the gift. The trust deed does
not prohibit the trustees from accepting a new gift. We fail to see what
difficulty was there for the trustees to accept gifts from third parties for the
purpose of furthering the objectives of the trust, so long as the trust deed did
not prohibit them from receiving such gifts and so long as the gift made did not
in any manner impinge on the objects intended to be achieved by the trust. We
fail to see why the trustees could not accept that gift.
In our opinion the assumption of the High Court that the
trustees were incompetent to receive the gift made by Ajaib Singh is an
erroneous one. On the other hand we agree with the Tribunal that the gift made
by Ajaib Singh was a valid gift, the shares gifted are vested in the trust and
therefore the trust is entitled to the dividends received in respect of those
shares. In view of section 4(3)(i), that dividend is exempt from tax. Hence the
appellant is entitled to the refund claimed.
In the result we allow Civil Appeal No. 1084 of 1971,
discharge the answers given by the High Court and in their place, we answer the
questions referred to the High Court in the affirmative and in favour of the
assessee. The appellant is entitled to its costs in this appeal.
We revoke the certificate produced in Civil Appeal No.
1885 of 1968. In view of our decision in Civil Appeal No. 1084 of 1971, there is
no need to send that case back to the High Court for giving reasons in support
of the certificate. That appeal is accordingly dismissed as being not
maintainable--no costs.
Appeal by special leave allowed.
Appeal by certificate dismissed.
