The Commissioner of Income-tax, Bombay v. Smt. Kasturbai Walchand Trust, Bombay
Bhargava, J. Seth Walchand Hirachand and his wife, Bai
Kasturbai, owned certain shares, had several insurance policies,
owned house property and also held lease lands. The two of them
together joined in executing an indenture on 25th November,
I 946, by which they created a trust. The trustees were both of
them themselves and three brothers of Seth Walchand. The provi
sions of the trust, with which we are concerned, laid down that,
after defraying the expenses for management of the trust properties
and certain other expenses, such as, rents, rates, etc., the trustees
were to pay to Bai Kasturbai, during her life-time, the income
arising from the trust funds and properties. Further, Seth Walcband
himself and Bai Kasturbai, during their life-time, had the right of
residence in some of the house property, free of rent and without
any obligation for payment of any outgoings or moneys in respect
thereof. These provisions were contained in clause 7 of the deed
of trust. The next provision contained in clause 8 of the deed was
that, from and after the death of Bai Kasturbai, the trustees were
directed to apply the net rents, profits and income of the properties
and trust funds, at their discretion, on charitable purposes enumerat
ed in the deed of trust. It is not disputed that all the charitable
purposes mentioned in the trust constituted public charities. Seth
ff
C.l.T. v. KASTURBAI TRUST (Bhargava, J.) 9
Walchand died and, thereafter, Bai Kasturbai, on 21st July, 1955,
executed a deed in which the relevant clause runs as follows:-
"Bai Kasturbai Walchand both hereby surrender,
release, quit claim, transfer and assign unto the Trustees
all the income to arise as from the 21st day of July one thou
sand nine hundred and fifty-five from the Trust funds of the
investments for the time being representing the same and
her beneficial life interest and all her rights, claims and
demands under the said Indenture of Settlement including
the liberty to occupy and enjoy rent free of the lands,
hereditaments, messuages and premises described in the
First and Second Schedules hereto the intent that her
beneficial interest may be determined as aforesaid and that
the same may be immediately vested in the Trustees and that
the Trustees may utilise the same for charitable purposes
mentioned in the said-Indenture of Settlement."
Subsequent to the execution of this deed, the question arose
of assessment to·income-tax of the income from the trust properties
for the assessment years 1956-57, 1957-58, 1958-59 and 1959-60.
The corresponding previous years were the financi,il years ending
on 31st March in the years 1956 to 1959. It was claimed by the
Trust that, during these previous years, these properties were held
under a trust wholly for charitable purposes, and consequently,
the income was exempt from income-tax under s. 4(3)(i) of the
Income-tax Act (hereinafter referred to as "the Act"). The In
come-tax Officer, however, ·held that the deed executed by Bai
K.asturbai did not amount to a renouncement of her rights under
the trust deed, and that it really amounted to a transfer of the
income received by her for purposes of the use of the trust. Since
the income of the trust was receivable by Bai Kasturbai, it could
not be held that the trust properties were held wholl;y for chari
table purposes. On appeal, the Appellate Assistant Commissioner
disagreed with the Income-tax Officer and accepted the submission
made by the respondent, holding that the income received by the
Trust, after the.execution of tlie deed of surrender by Bai Kasturbai,
was exempt from tax under s. 4(3)(i) of the Act in view of the appli
cability of s. 9 of the Indian Trusts Act, 1882. The Income-tax
Appellate Tribunal, on further appeal, upheld the same decision,
but on a slightly different ground. The Tribunal's view was that.
the surrender by Bai Kasturbai was valid under s. 58 of the Indian
Tnists Act, and consequently, after that deed was executed, the
properties were held wholly for charitable purposes and the income
was exempt from tax under s. 4(3)(i) of the Act. Thereupon, at
the request of .the Commissioner of Income-tax, the following
question was referred for the opinion of the High Court of Bombay:
Ml9Sup.Cl/66-2
1 0 SUPREME COURT REPORTS [1967] 2 S.C.R.
"Whether clause 8 of the trust settlement made on
the 25th November, 1946, came into operation immediately
following t~e declaration made by Bai Kasturbai on the
21st July, 1955, and as such the income that accrued or
arose to the trustees from the trust property from 21st July,
I 955, onwards was exempt under s. 4(3)(i) of the Act?"
The High Court answered the question in favour of the Trust,
which is the respondent in these appeals before us, and conse
quently, the Commissioner of Income-tax has come up to this Court
in these appeals by special leave.
It appears that, in this case, the question that was framed
by the Income-tax Appellate Tribunal and referred to the High
Court was not happily worded, so that it will need a slight amendment
which we shall indicate later. The real question under dispute was
whether, after the execution of the deed of surrender on 21st July,
1955, the income from the trust properties was exempt from income
tax under s. 4(3)(i) of the Act or not. In dealing with this question,
it has to be kept in view"that, even under the deed of trust as ori
ginally executed on 25th November, 1946, the income from the
trust properties was not the income of Bai Kasturbai. Whenever
a valid trust is executed, the property vests in the Trustees, and the
income accruing from those properties is the income of the trust
and not of the beneficiaries. For purposes of income-tax law,
however, the income under s. 41(1) of the Act is treated as received
by the Trustees on behalf of the beneficiaries, but is to be taxed
in the hands of the Trustees in the like manner and to the same
amount as it would be leviablc upon the person on whose behalf
such income is receivable. The liability of the income to tax is,
therefore, independent of the income actually being received by the
beneficiaries and may be subjected to tax as soon as it is earned by
the trust. The exception is that, where the trust properties are
held wholly for charitable or religious purposes, in so far as such
income is applied or accumulated for application to such religious
or charitable purposes, it is exempt from incomNax. In the
present case, therefore, in dealing with the question referred to the
High Court, any assumption that the income of the trust properties
was received by Bai Kasturbai will not be correct. The income
during her life-time was clearly taxable as income in the hands
of the trustees received by them on behalf of Bai Kasturbai.
Subsequently, when Bai Kasturbai executed the deed of surren
der on ·21st July, 1955, she made a declaration that" she was giving
up all her rights to the income. In clear words, she stated in the
deed that she was surrendering, releasing, transferring and assigning
unto the trustees all the income which was to arise after that date
from the trust properties, and that she was also surrendering all
her rights, claims and demands under the deed of trust, including
C.I.T. v. KASTURBAI TRUST (Bhargava, J.) 11
her right to occupy and enjoy rent-free lands, hereditaments,
messuages and premises described in the trust-deed. It was further
stated by her that' the deed was executed with the intent that her
beneficial interest may be determined and the same may be imme
diately vested in the Trustees and that the Trustees may utilise the
same for charitable purposes mentioned in the deed of trust. This deed
executed by Bai Kasturbai was clearly valid in view of the provision
contained ins. 58 of the Indian Trusts Act (No. 2 of 1882) which
provides that "the beneficiary, if competent to contract, ma) transfer
his interest, but subject to the law for tJie time being in force as to
the circumstances and extent in and to which he may dispose of
such interest." Bai Kasturbai was quite competent to contract
so as to transfer her interest under the deed of trust, and by execu
ting the deed dated 21st July, 1955, she surrendered all her rights.
The right which had accrued to her under clause 7 of the deed of
trust was the right to use certain immovable properties and to receive
the net income arising from trust properties. The right to receive
the income arose because of the obligation laid on the Trustees to
pay the net income to her during her life-time. That was clearly
the right as a beneficiary under the trust, and when she executed
the indenture dated 21st July, 1955, she surrendered that right in
favour of the trust for charitable purposes, so that her right became
extinguished.
It may be mentioned that, at one stage, an attempt was made
on behalf of the Commissioner of Income-tax to raise the question
about the validity of this deed of surrender, but, when the Commis
sioner asked the Tribunal to refer a question about the competence
of Bai Kasturbai to renounce her beneficial interest under the Trust
Settlement, that request was refused by the Tribunal. The Commis
sioner did not, thereafter, move the High Court to obtain a state
ment of the case from the Tribunal on that question, so that, in
these appeals, it is no longer open to the Commissioner to contend
that Bai Kasturbai was not competent to renounce her beneficial
interest. Once she renounced her interest, the direction contained
in the deed of trust to the Trustees to pay to her the net income of
the trust properties ceased, though the Trustees continued to hold
the property under the trust. At the same time, the right of Bai
Kasturbai to use the immovable properties also ceased to exist.
Thereafter, clearly, the entire properties were held by the Trw~cr·s
for the charitable purposes mentioned in clause 8, because that
was the only purpose of the trust which remained after this deed
of surrender had been executed by Bai Kasturbai. On these facts,
it is clear that the income, which accrued from the trust properties
thereafter, was income which could be applied or allowed to accu
mulate for application to the charitable· purposes mentioned in
clause 8 and for no other purpose.
12 SUPREME ·coUJlT llEPOllTS [1967] 2 S.C.Jl.
It appears that there was considerable argument before the
High Court and the Tribunal as to whether clause 8 of the deed of
trust could come into effect so as to permit the Trustees to apply
the income of the trust properties for the charitabl_e purposc;;
mentioned in that clause even before the death of Bai Kasturb111.
That clause, in clear words says that the Trustees shall apply the
said net rents, profits and income, etc. in all or any of the chari
table purposes mentioned therein "from and after the death of Bai
Kasturbai". Relying on this last expression, it was urged that
unless Bai Kasturbai died, the Trustees were not permitted to
apply \he income for the charitable purposes mentioned in clause 8.
It seems to us that, in this case, it was quite unnecessary to go Into
this question for the purpose of deciding .whether the income of the
trust properties, after the deed of surrender by Bai .Kasturbai
executed on 21st July, 1955, was exempt from Income-tax under
'· 4(3)(i) of the Act. Under that provision, the Income from
trust properties, held wholly for charitable or religious purposes,
is exempt from tax under two circumstances •. The first is when
that income is actually applied for such religious or charitable
purposes, and the second is when it is accumulated for application
to such religious or charitable purposes. In this case, as we have
indicated above, as soon as Bai Kasturbai executed the deed of
surrender, her rights under clause 7 completely ceased and all the
income from the trust properties remained with the Trustees to be
applied in accordance with other terms of the deed of trust. If it
could be held that clause 8 came into operation and permitted
the application of that income to the charitable purposes mentioned
in it as soon as Bai Kasturbai's rights ceased, even though she re
mained alive, there would be no difficulty in holding that s. 4(3)(i)
would have exempted the income from income-tax. In fact, this
view was accepted by all the income-tax authorities. However,
even if it be held that clause 8 did not come into operation and the
Trustees were incompetent to apply the income of the trust proper
ties for the purposes mentioned in it so long as Bai Kasturbai
was alive, the only effect would be that that income would accumu
late and that accumulation would continue during the life-time of
Bai Kasturbai. On her death, the accumulated income would
have to be applied by the Trustees for the charitable purposes
mentioned in clause 8. Consequently. the income of the trust
properties became exempt from liability to income-tax as soon
as the rights of Bai Kasturbai ceased on execution by her of the
-deed of surrender dated 21st July. 1955, even though it may not
be held that clause 8 came into operation from that very date.
It is in these circumstarices that we consider that, in framing the
question, the Tribunal committed an error. The exemption of
the income of the trust properties from liability to income-tax was
not dependent entirely on coming into operation of clause 8. and
ii
C.I.T. v. KASTURBAI TRUST (Bhargava, ]. ) 13
we, therefore, think that the question framed should have been
broken up into two parts as follows:-
"(!) Whether clause 8 of the Trust Settlement made on
25th November, 1946, came into operation immediately
following the declaration made by Bai Kasturbai on 21st
July, 1955, and
(2) Whether, in the circumstances of this case, the
income that accrued or arose to the Trustees from the trust
!'lropcrties from 21st July, 1955, onwards was exempt under
section 4(3)(i) of the Act."
If tht1 question is so broken up, the first question becomes unneces
sary, 11nd the second question has to be answered in' favour of the
respondent. The answer to the second question is the only one
that is lllaterfol for purpose~ of determining the liability of the
income of the Trust It' tax. That question has been answered by
the High Court in fuvour of the respondent. The appeals, therefore,
fail and are dismissed with costs. The1e will be one bearing fee.
R.K.P.S. Appeals dismissed.
I