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I.TA. No. 377/ KB of 1982-83, decided on 28th September, 1986.
---S. 4(3)(1)--Income from trust--Exemption--Income neither wholly applied to charitable purposes for which it was created nor it laid down proportion to which income of trust was applicable for charitable purposes--Absence of any clear stipulation in this regard, held, would render income of trust taxable.
---S. 4(3)(1)--Income from trust--Exemption--Income of trust hospital not wholly applied to charitable purposes--Trust stated to have been created in 1968 but no evidence of the fact available either on record or with assessee--Despite insistence by Income-tax Officer assessee failing to produce Admission and Discharge Register of the hospital for ascertaining whether or not assessee had been operating on charitable basis--Clause of declaration of Trust in trust deed not clear and rendering document redundant for purpose of claiming exemption- Intention of charity neither spelt out nor unequivocal declaration made in this behalf--Claim for exemption of Trust Hospital rejected in circumstances.
Hamdard Dawakhana v. Commissioner of Income-tax P L D 1980 SC 84 distinguished.
(1959) 36 I T R 513; (1959) 37 I T R 419; (1964) 52 I T R 147; (1980) 121 I T R 154 (1976) 440 I T R 777 and (1978) 114 I T R 454 ref.
---S. 23--Addition--Assessee, a hospital failing to produce Discharge and Admission Register for ascertaining receipts as well as expenses incurred--Income-tax Officer, held, justified in making additions which even otherwise were not excessive.
---S. 6--Trust--Where share of beneficiary not determinate, legal trust, held, not created.
Estate of Harendra Kumar Roy's case (1944) 12 I T R 68; Yakub v. Lalijee and another. (1946) 14 I T R 548; Bankim Chand Datta's case (1966) 62 I T R 239; A. Razzak's case; (1963) 48 I T R 276 and Shamsuddin Khan and another's case (1958) 33 I T R 733rel.
Rehan Hassan Naqvi for Appellant.
Muhammad Farid, D.R. for Respondent.
Date of hearing: 28th September, 1986.
.--This appeal is directed against the order of the Commissioner of Income-tax (Appeals).
2. Mr. Rehan Hassan Naqvi, the learned counsel for the appellant has taken objection to the rejection of appellant's claim for exemption of income of Trust as well as rejection of trading results. It is stated that the Commissioner of Income-tax failed to appreciate the facts of the case. In his impugned order he recorded that the appellant's claim for exemption for the assessment year 1977-78 was rejected by the department when the Income-tax Officer, while making re-assessment, had already accepted the claim of the assessee. The facts leading to the acceptance and the rejection of claim for exemption of income of the Trust is somewhat chequered. It is stated that the declaration for the creation of trust was made in 1968. This was executed on non-judicial stamp paper on 10-8-1976. He also produced a copy of yet another 'Trust Deed', dated 27-5-1981 whose contents fall beyond the scope of the assessment year under consideration. It is, therefore, not discussed.
3. The sale trustee Dr. Tajamul Hussain who is son-in-law of Dr. Ziauddin had invested a sum of Rs.50,000 as initial capital. Subsequently donations were invited and a building was constructed in North Nazimabad, Karachi. For the year under appeal an income of Rs.15,677 was disclosed which the Income-tax Officer vide his order, dated 28-6-1981 estimated at Rs.8,71,277. On appeal the Commissioner of Income-tax deleted Rs.6,44,000 and directed the Income-tax Officer to look the appellant's case afresh. Appellant's claim for exemption was, however, rejected by the CIT (A). It is against this impugned order as well as the additions made in the trading accounts that he has come to us in appeal.
4. The learned counsel pointed out that his claim for 1977-78 was accepted by the Income-tax Officer on 30-6-1982. This was available to the Commissioner of Income-tax when he passed his order on 1-8-1982. In 1979-80 his claim for exemption was accepted by the Income-tax officer vide his order, dated 25-6-1982. It was again rejected in 1980-81 and accepted in 1981-82. Thus, he argued that at least two orders for 1977-78 and 1979-80 in respondent's favour were available on record while the CIT (A) made observations in his order that appellant's claim for the year 1977-78 were rejected by the department.
5. The learned counsel also quoted from law of Income-tax in India by Sundaram (Eight Edition) page 282 and Hamdard Dawakhana v. Commissioner of Income-tax cited as P L D 1980 SC 84. The case cited by the learned counsel-. has not been found relevant to the issue at hand. Briefly stated the facts narrated in the above case were as follows: -
A trust was created by virtue of a trust deed to be known as Hamdard Dawakhana Trust, stipulating that with effect from a particular date, the running business under the name and style of Hamdard Dawakhana, Karachi shall stand transferred to the Trust. A fixed proportion i.e. 3/4th of the apportionable net profit of the Trust was to be spent on "the development of the arts and science pertaining to 1/4th and on other philanthropic and charitable works. The remaining 1/4th of the profit of the Trust was to be made over to the donor during his lifetime and after his death to his legal heirs and the heirs of his successors, generation after generation".
It was held by their Lordships that:-
" to the extent of dedication the income must be devoted to the purposes of the trust and any diversion to other purposes would be in breach of the trust. It is for this reason that the Legislature allows complete exemption, without stipulating any further conditions, to income of such property which is permanently tied up for application on to religious or charitable purposes."
It is further stated in the same order "that the conditions prescribed by the Legislature for granting this exemption to the income of such a business have a rational basis in that they are all intended to ensure that religious or charitable institutions, do not embark upon ordinary 'commercial venture merely for the sake of profit making".
Mr. Muhammad Farid, the learned Departmental Representative stated that the initial fund of Rs.50,000 was not contributed by the appellant. Dr. Tajamul Hussain, as claimed by the learned counsel but it was collected from 25 different persons whose names from different cities of Sind were supplied to the Income-tax Officer. As the addresses were not given, the same were not found verified. He, therefore, pointed out that there is contradiction in the statement of the learned counsel when he says that a sum of Rs.50,000 was paid by Dr. Tajamul Hussain. He further stated that for the assessment year 1977-78 the case was not set aside to consider the assessee's case for exemption. The fact relating to setting aside of the order was like this that the Income-tax Officer issued a notice under section 23(3) and for non-compliance he completed the assessment under section 23(4). The learned A.A.C. on this very ground set aside the assessment and when the Income-tax Officer made re-assessment for 1977-78 orders for 1978-79 and 1980-81 rejecting the claim of the appellant for exemption was available on record. The circumstances under which the Income-tax Officer accepted the appellant's claim is neither ascertainable nor known. Assessment for 1981-82 was completed under section 59(1) Here again the Income-tax Officer erred by accepting the return under section 59(1) when legal issue involved was pending in appeal. The self-assessment scheme, he argued, is clear on this issue. While we reserve our comments on the performance of the Income-tax Officer, it is for the department to find out the circumstances in which assessments for the years 1977-78, 1979-80 were framed.
The trust deed executed on 10-8-1976, argued the D.R. was not registered. Coming to the purpose for which the Trust was created the D.R. drew our attention to section 4(3)(i) of the Act which reads as under:-
"Any income derived from-property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application, thereto,
(i) the business is carried on in the course of the carrying out of (religious or charitable) purposes of the institution or
(ii) the work in connection with the business is mainly carried on by beneficiaries of the institution.
He argued that the trust created by the respondent was not for charitable purposes as envisaged in the subsection quoted above and proved by the assessing officer in his order for the year under appeal.
He further quoted from paragraph 3 of page 3 of the Declaration of Trust:
"That 'the objects of the trust shall be to establish a hospital as aforesaid, to provide medical and other treatment and facilities at reasonable cost, and to do charity as far as possible in the memory of Dr. Sir Ziauddin Ahmad and thereby obtain pleasure of Allah, utilise the assets and funds at the disposal of the sole trustee for the time being, its yields and profits and income and such other properties, movable and immovable hereinafter vested, therein or acquired by the trust for the purposes as aforesaid."
He drew the conclusion that the trust was not valid as it did not fulfil I the conditions as laid down in section 4(3)(i) of the Act. As the income was neither wholly applied to the charitable purposes for which it was created nor it laid down the proportion to which the income of the trust was applicable for charitable purposes. The-absence of any clear stipulation in this regard renders the income of the trust taxable as rightly done by, the assessing officer.
He says that Hamdard case is not helpful as the trust has to be permanently tied up wholly or partly to religious and charitable purposes. The claim for exemption was, therefore, rejected by the assessing officer and upheld by the Commissioner of Income-tax (Appeals). Let us now examine section 4(3)(i) under which exemption has been claimed. It reads as under:---
"4(3) Subject to the provisions of this Act, any income profits or gains falling within the following classes shall not to such extent as may be specified in this subsection or prescribed in this behalf be included in the total income of the person receiving them:-
(i) Any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application, thereto:"
From a plain reading of the above section the following important points emerge for consideration and disposal of claim for exemption.
(i) that there should be a trust, (ii) that the nature of the trust should be charitable,
(iii) that the income of the trust to be applied wholly or in part for charitable purposes should be determinate, and
(iv) that it should be irrevocable.
Let us now examine the claim of the appellant for exemption of income under the above section of the Income-tax Act, 1922. The very nature of the appellant as a Trust was challenged by the Income-tax Officer in his impugned order passed under section 62 of the Act, as under:-
"On 27-6-1981 statement of Dr. Tajamul Hussain the trustee was recorded in which he accepted that the accounts were maintained on the same pattern as in the succeeding years. It is, therefore, not understood as to why Admission and Discharge Register has been withheld. This being the primary record the assessees declared version cannot be accepted."
Mr. Muhammad Farid, learned Departmental Representative challenged the claim of the assessee for exemption of his income under section 4(3)(i). He stated that the appellant had submitted before the Income-tax Officer as borne out from the record, that he had collected a sum of Rs.50,000 from 25 persons, living in various cities of the Province of Sind to create a trust.
The above fact is not matched with the learned counsel's contention before us that the trust was created with Rs.50,000 donated by Dr. Tajamul Hussain. The trust was created in, 1968 but no evidence of this fact is available either on record or with the assessee.
.-- An effort was made by the Income-tax Officer to ascertain whether a trust for charitable purpose was created or not. He writes: -
"On the very outset the assessee's claim of the trust being charitable has to be ascertained. On 17-6-1981 the assessee was given an opportunity vide the order sheet entry to produce evidence to the effect that the hospital was being run as a charitable trust. No such evidence is produced by assessee.
The assessee has been charging the normal rates from the patients as any other hospital. It was contended that some of the patients were treated on charity basis. It is also admitted vide order sheet noting on 26-6-1981 that patient addresses are not maintained. As such these patients who allegedly received free treatment were not traceable.
On that day cash book on pages 1-19 and 34 was signed. Ledger pages Nos. 111-114, 120 and 131 were signed. Entire receipt register was also signed on 6-1-1977 from these books no evidence on any charitable treatment can be ascertained. The assessee's authorised representative Messrs Habib A. Sheikh & Co, vide their letter, dated 22-6-1981 filed on 24-6-1981 stated as under;
The trust made is a charitable and a copy of trust deed is already in your record. We are however, submitting herewith another supplementary trust deed which is also registered in the trust act on 3-6-1981. On page 3 of this deed vide paragraph 3 it is clear that the trust is charitable one and it is also further confirmed in the objects of the trust vide page 4 item 'A' of this deed. Similar provisions also exist in the original trust deed."
From the above it is evident that the assessee did not prove any other evidence of the trust being charitable except the trust deed only. Vide the order sheet nothings on 24-6-1981 again it was accepted by the assessees representative that addresses of the patients were not available.
On 27-6-1981 a visit to the hospital further confirm that it was not being run on charitable basis. In this connection statement on solemn affirmation of Dr. M. Asghar Minhas (being a senior employee since September, 1975) was recorded. The relevant portion of statement is produced as under:-
| Room charges at present are | 80 per day |
| General Ward Charges are | 25 per day |
| O.P.D. charges are | 10 per day |
further charges are made depended upon the nature of management.
For the complimentary treatment no entries are made on O.P. D register nor any address of the patient attending O.P.D. are maintained. On query about payment of Rs.400 by Mr. Hashmat Ali and the morning on 3-6-1981 no details are available in register.
Out of the admission discharge register of the 4th floor', I cannot pinpoint having received free/complimentary management of the patients. The columns of this admission and discharge register do not show any free treatment. In my knowledge I do not know whether they keep such register."
The Income-tax Officer then recorded statement on 'solemn affirmation of the assessee's Accountant Mr. Hamid Hussain on 27-6-1981. The relevant portion reads as under:-
"- - - - - There is probably a separate register in which particulars of free treatment of patients are noted. However, I have not seen it. I am in the service of the hospital since 1-7-1977 since then I have no knowledge who maintains the register showing free and charitable treatment to the patients.
And thus the Income-tax Officer concluded from the statements of the employees recorded by him that the trust created by the appellant was riot charitable in nature. The assessee was also confronted with these statements and was offered opportunity as to why the trust should not be treated as being not charitable. This was done vide the order sheet entry, dated 27-6-1981. In response to this query the appellant had produced a register on 28-6-1981 with contention that it contained the details of treatment on charity basis. This register was examined by the assessing officer and his observations are as under:-
"On serial No. 87 charity of Rs.670 was shown. On close scrutiny it was discovered that this amount was a rebate from the total bill of Rs.3,052 and the balance amount of Rs.2,282 was received in cash.
Another claim to charitable treatment was showing at Rs.27 on scrutiny it was discovered that this was given as a rebate from the total bills of Rs.427.
Bill No 5672 shows total I charges of Rs.7,8,15 out of which Rs.1,915 were reduced and claimed as charity."
It was observed that the assessee was a 'profit earning' and not a charitable trust.
The next important fact to consider is whether the income of the trust is applied solely for religious or charitable purposes or the income to be applied for charitable purpose is certain and determinate. For this we revert to assessee's declaration of trust, dated 10-8-1976. The relevant portion on page 3 of the declaration is reproduced as under:- .
"That the objects of the Trust shall be to establish a hospital as aforesaid, to provide medical and other treatment and facilities at reasonable cost and to do charity as far as possible in the memory of Dr. Sir Ziauddin Ahmad and thereby obtain pleasure of Allah.
It is interesting to note that the Income-tax Officer has all along been insisting on the production of Admission and Discharge Register from the appellant, which he always either withheld or refused on one pretext or the other. The idea was to ascertain from this register whether or not the appellant had been operating on charitable basis. This fact still remains obscure from the eye of the tax authorities.
The Trust Act, 1882 vide Article 6, Chapter II, lays down the following criteria for the creation of a valid trust. The relevant section read as under:-----
"Subject to the provisions of section 5, a trust 'is created when the author of the trust indicates with reasonable certainty by any words or acts (a) and intention on his part to create thereby a trust, (b) the purpose of the trust, (c) the beneficiary, and (d) the trust property, and (unless the trust is declared by will or the author of the trust is himself to be the trustee) transfers the trust property to the trustee."
It provides the following examples by way of illustration:
(c) A bequeaths certain property to B, requesting him to distribute it among such members of C's family as B should think most deserving. This does not create a trust, for the beneficiaries are not indicated with reasonable certainty.
(d) A bequeaths certain property to B desiring him to divide the bulk of it among C's children. This does not create a trust, for the trust property is not indicated with sufficient certainty."
In view of the clause quoted above (page 7) from the respondent's declaration of Trust, the words 'to provide medical and other treatment and facilities at reasonable cost, and to do charity as far as possible-----do not lend support either to 'certainty', or 'positive determination'. In a number of cases it has been held by Indian Courts that where the share of beneficiary is not determinate, a legal trust is not created.
In the case quoted as Estate of Harendra Kumar Roy- - - - - - - (Cal.) (1944), 12 I T R 68 it was held that 'the assessment was to be made on the trustees under the proviso to section 41(1) and tax was leviable at the maximum rate, because the individual shares of the beneficiary were not determinate 'where the trust deed conferred absolute discretion on trustees, observed their Lordships,' to hold the trust properties and accumulate their income or use it for the benefit of one or more of the beneficiaries to the exclusion of others', it was held that the shares of the trustees were indeterminate or unknown- - - - -Trustees were liable to be assessed at the maximum rate under the proviso of subsection (1) of section 41.
In another case quoted as Yakub v. Laljee and another (Bom.) (1946) 14 I T R 548 it was held 'what was to be determined is not only the point of share but also who is beneficiary and who is entitled to it and the proviso (of section 410), will apply where both the shares of beneficiaries are indefinite and known. On, a true interpretation of trust-deed and on the facts of the case it was held that the shares were unknown and assessment was to be made at the maximum rate.
Even where shares are specified only in regard to a part of trust income and are variable to the balance it was held that the trust was not valid and income was to be taxed as per case reported as Bankim Chand Datta . . . . . . (Cal.) (1966) 62 I T R 239.
In another case A. Razzak- - - - - - -(Cal.) (1963) 48 I T R 276 it was held 'where a business was transferred to a trustee for the benefit of the assessee's sons and the shares of the beneficiaries were specified in the trust deed the income must be divided according to the shares of the beneficiaries and separately assessed in the hands of the trustee. In a further decision in the case of Shamsuddin Khan and another - - - - - (Ori.) (1958), 33 I T R 733 their Lordships clinched the issue by declaring 'where Waqf provided for the maintenance of the beneficiary out of the income of its properties but the quantum of shares of the beneficiaries was not specified, section 41(l) was applicable and the income of Waqf properties was taxable at the maximum rate'.
The last point to be considered is whether the trust so created is irrevocable. To our mind the following clause of the declaration of trust renders the documents redundant for the purpose of claiming exemption. The relevant portion of page 4 of the deed reads as under:----
"That the sole trustee for the time being shall have the powers to dispose of any or all the properties of the trust, whether movable or immovable to any person or persons on any account." We now turn to the case-laws quoted by the learned counsel. In the first case cited as P L D 1980 SC 84 their Lordships had given opinion on the fact where there existed a valid charitable institutions. In the present case we are discussing the very existence of a trust which is challenged.
While summing up the case under reference their Lordships of the Supreme Court of Pakistan held that the term 'property' as used in clause (i) of subsection (3) of section 4 of the Income-tax Act includes business; 'that this clause deals with property, including business held wholly or partly under trust' for religious or charitable purposes and that income derived from such property or business is exempt from tax to the extent of its dedication or application. Be that as it may, their Lordships observation in respect o application of profit of charitable institution are as under:----
"If follows, therefore, that clause (i) exempts from taxation any income derived from business., held, as property, under trust or other legal obligation wholly for religious or charitable purposes, and if the business is so held in part only for such purposes, the exemption would apply only to the income applied or finally set apart for application to such purposes. In other words, the clause deals with income accruing from property including business, dedicated or donated to the trust either wholly or partly. It is clear to the extent pf dedication the income must be devoted to the purposes of the trust, and any diversion to other purposes would be in breach of the trust. It is for this reason that the Legislature allows complete exemption without stipulating any further conditions, to the income of such property, which is permanently tied up for application to religious or charitable purposes. The clause, as it stands, does not contain any reference to business or property which is not itself the subject-matter of dedication."
They again observed that in case relating to income derived from business, it would be a further question of fact for determination as to whether the income is in fact applied solely for the specified purpose or not. Mere setting apart could not be enough in a case of income derived from business, though it would be enough in the case of income derived from other property. It is thus proved beyond doubt that the case cited by the learned counsel does not help him as the Income-tax Officer has all along been trying to ascertain whether the income wholly or even partly has been applied to charitable purpose. Even the declaration of trust is not clear when it says: 'to provide medical and other treatment and facility at reasonable cost and to do the charity as far as Possible'. The sentence is full of ambiguity it is not in unequivocal terms. The intention of charity has not been clearly spelt out nor unequivocal declaration made, which we feel is a sine quanon of a charitable institution. To our mind the Income-tax Officer has rightly challenged the charitable nature of the institution. For once the flood gate is opened it would be very difficult to contain the number of spurious trusts claiming exemption under section 4(3)(i).
The number of other cases cited in support by the learned counsel are as under:-
(1959) 36 I.T.R 513 (SC), (1959) 37 I T R 419, (1964) 52 ITR 147 , (1980) 121 I T R 147, (1976) 440 I T R 777 and (1978) 114 I T R 454.
We have gone through the above citations. But unfortunately none of these come to the rescue of the appellant, besides being irrelevant to the issues involved. In citation made as (1976) 440 I T R 777, for exemption, it was held 'if one of the objects of the trust-deed is not of a religious or charitable nature and trust-deed confers full discretion on the trustees to spend the trust funds for an object other than of religious or charitable nature, the exemption from tax under section 4(3)(i) of the Indian Income-tax Act, 1922, is not available to the assessee'. Similar in the case cited as (1980) 121 I T R 1 'the real question whether a trust is created or an institution is established for a charitable purpose falls to be determined by reference to the real, purpose of the trust ....
In view of the above discussion we reject the claim for exemption of income of Dr. Ziauddin Hospital Trust under section 4(3)(i) of the Act.
The learned counsel pleaded that the estimates made in various trading accounts were excessive and without any basis. He also supplied a chart of estimates made during 1977-78 and the year under appeal as under:-
| 1977-78 X-Ray | Declared-18,500 No estimate |
| 1978-79 X-Ray | Declared-47,084 |
| Receipts estimated CP @ 60% | 75, 000 |
| 1977-78 O.P.D. | Declared-2,460 No addition |
| 1978-79 O.P.D. | Declared-36,905 |
| Receipts estimated GP @ 75% | 1, 25, 000 |
| 1977-78 Indoor Account | |
| 1978-79 Indoor Account | Declared-6,32,856 |
| Receipts estimated GP @ 75% | 8,00,000 |
| 1977-78 Lab. Account | |
| 1978-79 Lab. Account | Declared-1,62,530 |
| Receipts estimated GP @ 75% | 1,50,000 |
| The Income-tax Officer reduced the receipts but increased the rate of gross profit. |
Thus, total addition in the above accounts were made to the extent of Rs.1,98,513.
We find the defect and objections as discussed in the assessment order by the Income-tax officer do exist. The recorded statement of the Chief Accountant of the Hospital as well as the Senior Doctors do not me to the assistance of the appellant. The assessee had failed to produce the Discharge and Admission Register in the absence of which was very difficult to ascertain the receipts as well as the expenses incurred. In the circumstances the Income-tax Officer was justified in making additions, which do not appear to be excessive. The arguments advanced by the learned counsel being without merit are rejected.
As a result the appeal fails and is hereby dismissed.
M. Y.H. Appeal dismissed.
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