# COMMISSIONER_ OF INCOME TAX, KANPUR v. KAMLA TOWN TRUST

- **Citation:** [1995] Supp. 5 S.C.R. 300
- **Court:** Supreme Court of India
- **Decided:** 1995-11-16
- **Bench:** B.P. Jeevan Reddy, S.B. Majmudar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-kanpur-v-kamla-town-trust-13530
- **Pages:** 61

## Headnote

Income Tax Act, 1961-Section 11 r/ws 2(15)-Public Cha1itable
Trust-Creation of-Basic requirements-Provision for construction of houses
for 'workmen in general'-Whether constitutes a charitable object.
Indian Evidence Act, 1872-Sections 43 and 11-0rder granting rectification of instrnment of trust-Judgment in personam-Binding on parties
to rectified instrnment-Order relevant in income tax proceedings.
Specific Relief Act, 1963-Section 26-Trnst Deed-Not a contract-It
D would be covered by expression 'other instrnment in writing-Proceedings for
rectification of instrument of trnst-Jwisdiction of Civil Court.
E
F
G
Interpretation of Statutes-Trnst Deed-For finding out real intention
of settle,-One has to go by express words of Deed.
The assessee was a trust created by a trust deed dated 27-10-1941
executed between a company and the trustee. The trust was created with a
view to construct a settlement or colony for their workmen together with
amenities in the shape of hospitals, schools, temples, mosques etc. The
company made an application to the Improvement Trust for demising to
it two tracts of land at concessional rates. Both these plots were demised
to the company at concessional rates for the welfare of workmen. The
company transferred both the plots by the said trust to the trustee for
effectuating its object of settling these plots upon the charitable trust.
Later on the settler company filed a suit u/s 31 of the Specific Relief Act,
1877 for rectification of the Trust Deed so as to bring it in conformity with
its real intention to create a public charitable trust. The company alleged
that the operative part of the Trust Deed was found to be less comprehensive than what was intended by the parties thereto; that through a
misunderstanding on the part of the draftsman and through a mutual
mistake the Deed of Trust did not truly express their intention and it was
H
doubtful whether the Trust Deed on a strict construction thereof might not
300
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COMMNR. OF INCOME TAX v. KAMLA TOWN TRUST
301
exclude from its benefits the rest of the public apart from the employees
of the company and residents of the said settlement. The Civil Judge by
his judgment dated 18.8.1945 ordered the Deed of Trust to be rectified as
prayed for in the plaint. The Deed of Trust of 1941 as rectified in 1945
became a subject matter of interpretation by the Appellate Income Tax
Tribunal and High Court. The High Court held the rectification decree
passed by Civil Court to be valid and further held that it was not possible
for the Income Tax Officer to question the validity of the rectification on
the ground that conditions for grant of rectification did not in fact exist
and that the objects of the Trust Deed as rectified in 1945 did not create
a public charitable trust and it being mixture of charitable and noncharitable objects, could not be treated to be creating a public charitable
Trust.
A
B
c
The Settler Company filed another suit in the year 1954 for further
rectification of the Trust Deed while pleading that the real intention of the
Settler Company was to create a public charitable trust for the benefit of D
the public in the city of Kanpur and the surrounding areas particularly,
the members of the working class including the workmen employed in the
plaintiff company; that the trustees had, in fact, been giving the benefit of
the trust to the members of the public and no part of the trust moneys
had, at any time, been used for a non- charitable or non-religious object
or purpose; that Deed of Trust even as rectified was less comprehensive
than what was intended by the parties thereto at the time when instructions
were given and, therefore, the rectification sought for be allowed so as to
bring it in conformity with the real intention of the parties. The Civil Judge
in 1955 decreed the suit. By the second rectification decree certain rectification were made in the Preamble of the Trust Deed.
The Income Tax Officer issued notices u/s 34 of the Incom

## Text

_Characters 0–39,880 of 152,723. This is a partial read: ask again with offset=39880 for what follows._

A
B
c
COMMISSIONER_ OF INCOME TAX, KANPUR
v.
KAMLA TOWN TRUST
NOVEMBER 16, 1995
[B.P. JEEVAN REDDY AND S.B. MAJMUDAR, JJ.]
Income Tax Act, 1961-Section 11 r/ws 2(15)-Public Cha1itable
Trust-Creation of-Basic requirements-Provision for construction of houses
for 'workmen in general'-Whether constitutes a charitable object.
Indian Evidence Act, 1872-Sections 43 and 11-0rder granting rectification of instrnment of trust-Judgment in personam-Binding on parties
to rectified instrnment-Order relevant in income tax proceedings.
Specific Relief Act, 1963-Section 26-Trnst Deed-Not a contract-It
D would be covered by expression 'other instrnment in writing-Proceedings for
rectification of instrument of trnst-Jwisdiction of Civil Court.
E
F
G
Interpretation of Statutes-Trnst Deed-For finding out real intention
of settle,-One has to go by express words of Deed.
The assessee was a trust created by a trust deed dated 27-10-1941
executed between a company and the trustee. The trust was created with a
view to construct a settlement or colony for their workmen together with
amenities in the shape of hospitals, schools, temples, mosques etc. The
company made an application to the Improvement Trust for demising to
it two tracts of land at concessional rates. Both these plots were demised
to the company at concessional rates for the welfare of workmen. The
company transferred both the plots by the said trust to the trustee for
effectuating its object of settling these plots upon the charitable trust.
Later on the settler company filed a suit u/s 31 of the Specific Relief Act,
1877 for rectification of the Trust Deed so as to bring it in conformity with
its real intention to create a public charitable trust. The company alleged
that the operative part of the Trust Deed was found to be less comprehensive than what was intended by the parties thereto; that through a
misunderstanding on the part of the draftsman and through a mutual
mistake the Deed of Trust did not truly express their intention and it was
H
doubtful whether the Trust Deed on a strict construction thereof might not
300
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COMMNR. OF INCOME TAX v. KAMLA TOWN TRUST
301
exclude from its benefits the rest of the public apart from the employees
of the company and residents of the said settlement. The Civil Judge by
his judgment dated 18.8.1945 ordered the Deed of Trust to be rectified as
prayed for in the plaint. The Deed of Trust of 1941 as rectified in 1945
became a subject matter of interpretation by the Appellate Income Tax
Tribunal and High Court. The High Court held the rectification decree
passed by Civil Court to be valid and further held that it was not possible
for the Income Tax Officer to question the validity of the rectification on
the ground that conditions for grant of rectification did not in fact exist
and that the objects of the Trust Deed as rectified in 1945 did not create
a public charitable trust and it being mixture of charitable and noncharitable objects, could not be treated to be creating a public charitable
Trust.
A
B
c
The Settler Company filed another suit in the year 1954 for further
rectification of the Trust Deed while pleading that the real intention of the
Settler Company was to create a public charitable trust for the benefit of D
the public in the city of Kanpur and the surrounding areas particularly,
the members of the working class including the workmen employed in the
plaintiff company; that the trustees had, in fact, been giving the benefit of
the trust to the members of the public and no part of the trust moneys
had, at any time, been used for a non- charitable or non-religious object
or purpose; that Deed of Trust even as rectified was less comprehensive
than what was intended by the parties thereto at the time when instructions
were given and, therefore, the rectification sought for be allowed so as to
bring it in conformity with the real intention of the parties. The Civil Judge
in 1955 decreed the suit. By the second rectification decree certain rectification were made in the Preamble of the Trust Deed.
The Income Tax Officer issued notices u/s 34 of the Income Tax Act,
E
F
1922 and section 148 of the Income Tax Act, 1961, for the relevant assessment years 1949-50 to 1965-66 to the assessee- trust alleging that the
income had escaped assessment for the relevant years. The assessee filed
'NIL' returns of the assessment years 1949-50 to 1965-66 alleging that it G
was a public charitable trust and therefore, its income was exempt from
income tax. The Income Tax Officer rejected this contention holding that
the trust was a public trust for the benefit of the employees only and was
not at all exempt from tax; that the trust was originally created for the
benefit of the settler company and the objects of the trust could not be H
302
SUPREME COURT REPORTS [1995] SUPP. 5 S.C.R.
A
altered subsequently unless the trust was revoked for which there was no
power under the Deed and that a trust for the benefit of its employees and
members of the staff is not a charitable trust. On appeal, the Appellate
Assistant Commissioner dismissed all the appeals of the respondent. In
appeals before the Income Tax Appellate Tribunal, the Tribunal dismissed
B
respondent's appeals for assessment years 1949-50 to 1955-56 but allowed
appeals for assessment years 1956-57 to 1965-66 while holding that the
income derived from the trust property by the assessee win be exempt only
within the limits permissible u/s 11(1) (a) of the 1961 Act to the extent to
which the income so accumulated was not in excess of 25% of the income
from trust property or Rs. 10,000 which ever was higher, after the 1961 Act
C came into force. Both the Revenue and the assessee sought reference of the
question u/s 256 (1) of the 1961 Act. The tribunal granted reference
applications and referred the question for opinion of the High Court. The
Division Bench of the High Court answered all the referred questions in
favour of the assessee and against the revenue. Hence these appeals by
D
special leave.
The appellant contended that the second rectification in the year
1955 as decre~d by the Civil Court was without jurisdiction as in substance
a new Trust Deed was sought to be substituted, which was beyond the
powers of the Civil Court; that the condition precedent for invoking the
E
jurisdiction of the Civil Court U/s 26 of the Specific Relief Act, 1963, that
there should be mutual mistake on the part of parties to the document
was absent in the facts of the present case and consequently the Civil
Court had no jurisdiction to grant such rectification; that the rectification
decree was in personam and not in rem to which revenue was not a party
F
and, therefore, it was not binding on the Income Tax authorities; that even
if Rectification Order of 1955 was validly m:ade, it would operate only
prospectively, and could not have restrospective effect; that even after the
rectification of 1955 the Trust Deed as rectified did not create any public
charitable trust entitling the respondent assessee to claim income tax
exemption; and that the entire Trust Deed as originally executed and as
G twice rectified in 1945 and 1955 were merely a colourable device on the part
of the main trustee which should not be countenanced.
The respondent-assessee submitted that even for the assessment
years 1949-50 to 1955-56, wherein the rectified Trust Deed of 1945 was
H holding the field, it was a trust for public charitable purposes and conse-
COMMNR. OF INCOME TAXv. KAMLATOWNTRUST
303
quently even apart from the retrospective effect of the rectification in 1955, A
the respondent was entitled to claim exemption from payment of income
tax for these relevant assessment years and that workmen in general and
in particular of the company were also a part and parcel of public and it
could not be said that they were not members of the general public residing
in Kanpur and that the correct connotation of the term 2 'workmen in B
general' had to be judged in the light of economic and social conditions
that prevailed in 1945 when the deed was rectified.
Disposing of the matter, this Court
HELD : 1. For assessment years 1949-50 to 1955-56 the assessee C
would not be entitled to get the benefit of section 4(3) (i) of the Income
Tax Act, 1922 and income derived by it from its properties would not get
exemption from income tax. (343-G; 344-A]
When any property is settled for charitable purposes for catering to D
the needs of a class of public which is poor and needy, any preference given
to poor and needy workmen of the settler company would not necessarily
detract from the charitable object underlying such bequest or settlement.
The basic fact must remain that the settlement is made in favour of a well
earmarked class of needy and poor persons who may form a part of the
general public and for whom such charitable bequest or endowment is
made, and the preferred class of beneficiaries must form a part and parcel
of that very general earmarked class. The provision for construction of
houses for 'workmen in general' as found in Clause 2(b) (1) of 1945
rectified Deed did constitute a charitable object. However, the term
'workmen in general' is too general and vague. There is an obligation cast
on the trustee to construct these residential quarters, chawls or buildings
in particular for the workmen, staff and other employees of the company
E
F
or other allied concerns under the management of and in which the
directors of the company may for the time being be interested and for their
respective families and dependents. The words 'in particular' represented G
a scheme of priority for workmen of the settler Company and not a scheme
of preference. The trustee were bound under an obligation to construct
residential quarters etc. first for the workmen or employees of the settler
company or its concerns. They had no choice in the matter. They could not
in their discretion select an outside workmen as recipient of the benefit
under the scheme of the Trust Deed. In effect the general class of H
A
B
304
SUPREME COURT REPORTS (1995] SUPP. 5 S.C.R.
beneficiaries constituted by the words 'workmen in general' gets whittled
down and circumscribed by the words 'in particular for workmen of the
company etc.'. Thus in substance it becomes a trust for the benefit of a
well defined smaller class of beneficiaries, namely, employees or workmen
of the company and its allied concerns and it fails to meet the requirement
of a genuine or public or charitable trust. Once such an obligation is cast
on the trustees the public character of the endowment gets whittled down
and in substance becomes the settlement for an identified group of persons.
Though residential quarters, chawls or buildings were to be conC
structed for the workmen in general and who, might be a well defined class
of workmen residing in Kanpur and who might be poor and needy in the
light of their socio-economic conditions as prevailed in 1945 when the
clause was drafted, the second part of this clause laid down in clearest
terms that in particular the quarters were to be constructed for the
D
workmen staff and other employees of the company and of its allied
concerns. No discretion was left with the trustee and on the contrary they
were enjoined, called upon and under an obligation to construct these
quarters, chawls and buildings necessarily for the workmen, staff and
other employees of the company and its allies. It was also easy to visualise
that other employees of the company may include even affluent employees
E
who may not necessarily constitute an object of charity. Once this conclusion flows from the wordings of the clause, it becomes clear that
reference to workmen in general becomes illusory and the settlement can
be said to be substance meant only for catering to the needs of a well
defined group of persons, namely, workmen, staff and other employees of
F
the company and its allied concerns and in that case the object clause in
question 'would fall short of creating any public charitable trust.
The terms 'workmen in general' when read in the context socioeconomic situation prevailing in 1945 in this country and when also
considered in the context of construction of residential quarters, chawls
G or buildings in Kanpur may partake the character of a well defined class
of workmen in Kanpur city who may be poor and needy, still as the trustees
are enjoined to construct residential quarters, chawls or buildings in
particular for the workmen, staff and other employees of the company it
follows that other employees of the company who are the beneficiaries may
H not necessarily be poor or needy or affluent. Therefore, it must be held
COMMNR. OF INCOME TAX v. KAMLA TOWN TRUST
305
that rectified clause 2(b)(i) of 1945 deed fell short of projecting an object A
of a public charitable nature and it could not be said that under the
rectified deed of 1945 the trust properties were held by respondent-trust
wholly for religious or charitable purposes. Rest of the sub-clauses of
clause 2(b) did refer to charitable objects but as one of the objects was not
of a public charitable nature it could not be held that the entire trust was
B
wholly for religious or charitable purposes.
CIT. Bombay v. Walchand Diamond Jubilee Tlust, (1958) 34 ITR 228
(Born), approved. (337-H; 338-B-E; G-H; 339-A-B; 340-C-H; 342-G-H;343-A]
2. For the assessment years 1956-57 to 1961-62 the income derived C
by the respondent-assessee from trust properties during these years will
get exempted u/s 4(3) (i) of 1922 Act as the 1955 rectified Trust Deed was
having objects of wholly charitable nature. (344-B)
2.1. In order to find out whether the relevant clauses of a trust deed
create a public charitable trust or not one has to go by the express words D
employed by the Trust Deed. For finding out the real intention of the settler
, the words used in the Deed would be the real vehicle of thought of the
settler expressing his intention in cold print. This would be must more so
when such recitals in the Trust Deed are not challenged on the ground that
they are a camouflage or a result of a colourable device. On the express E
language of clause 2(b) (i) of the 1955 rectified deed, the object were
specific and charitable in nature. The beneficiaries were also clearly indicated. There was also no ambiguity about the trustee or the trust properties. Thus all the basic requirement for creation of a public charitable trust
did exist on the express language of the relevant sub- clauses of clause (2)
of 1955 rectified deed. [328-C-H]
F
2.2. For the assessment years 1962-63 to 1965-66 the income derived
from trust properties by the respondent trust will be entitled to exemption
from income tax u/s 11 of the Income Tax Act, 1961 subject to the compliance with the conditions laid down therein as even during this period the G
rectified Trust Deed of 1955 will be treated to have held the field. (344-C]
3. Even a workmen who was not an employee of the settler company
could in appropriate case seek direction under section 92, Code of Civil
Procedure from competent Civil Court against the trustees to act according to the object of the trust and give benefit to such an applicant H
306
SUPREME COURT REPORTS (1995) SUPP. 5 S.C.R.
A
beneficiary if the circumstances so permitted and the income of the trust
was sufficient to cater to his needs. If at all the trustees diverted the benefit
to the beneficiaries other than the workmen of the company itself it would
give a cause of action to the original vendor, namely, the Town Improvement Trust, which had taken- no steps in all these years or made any
B
c
D
grievance about the same and secondly as provided by the indentures
themselves all that would result on account of any alleged breach of the
conditions of the indentures on the part of trustees would be that they
would be liable to pay additional quantified amount to the original vendor
and the concessional rate of consideration for the grant in that eventuality,
may stand withdrawn. But it would not amount to any breach of trust on
the part of the trustees if such be;.efit is conferred on outside workmen
who fell within the clearly earmarked class of beneficiaries as per objects
clause 2(b)(i). On the contrary, the trustee not only would not be alleged
to be guilty of any breach of trust but can be said to have acted according
to the objects of the trust. [329-E-F; 330-D-F]
4. A Trust Deed is not a contract in the strict sense of the term but
it would be covered by the expression 'other instrument in writing' as found
in section 26 of the Specific Relief Act, 1963. Therefore, competent Civil
Court which was approached by the Settler Company for rectification of
the instrument of Trust, was having requisite jurisdiction to entertain each
E
proceedings. Section 26 could be effectively invoked for rectification of
instrument of trust. [316-H; 317; G-H]
F
G
Trustee of H.E.H. the Nizam's Pilgrimage Money Trnst v. Conunissioner of Wealth Tax, (1988) 171 ITR 323, distinguished.
4.1. The Settler Company had clearly indicated in the rectification
proceedings that the real intention of the settler to create a public
charitable trust was not clearly brought out on the wordings of the original
Trust .Deed and, therefore, the need to rectify the instrument, as neither
the Settler Company nor the trustees who assumed the legal ownership of
the property settled in trust would have agreed to the transaction in
question if it had purported not to create a public charitable trust. It was
this mutual mistake on the part of both the parties that required rectification of the instrument to make, what was latent intention a patent one.
Even that apart it was strictly not open to the Revenue which was not a
H party to the instrument to take up such a contention about non-fulfulment
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COMMNR. OF INCOME TAX v. KAMLA TOWN TRUST
307
of condition precedent as it would be a fact in issue before the competent A
Court which was called upon to rectify the instrument by either of the
parties to the instrument. Absence of such a condition would at the most
make the order erroneous and which can be challenged by either of the
parties to the proceedings but it will have no impact on the jurisdiction of
the Civil Court to pass such an order however erroneous it may appear to B
be to the Revenue. At the highest such an error would remain in the realm
of error in the exercise of jurisdiction and not an error depriving jurisdiction to the competent Court to entertain such rectification proceedings.
When such rectified Trust Deed is pressed in service before the
Income-tax authorities in assessment years the Income- Tax Officer will
C
have to interpret such rectified instrument for finding out its correct legal
effect. But it will not be open to the Income-tax Officer to refuse to look at
such rectified instrument of trust and to insist that the trustees of the trust
should ignore the said rectified objects and should stick to the instrument
as it existed prior to its rectification. The Income- tax officer will have to D
take the instrument as it exists in its actual amended form when it is
pressed in service for framing the assessment concerning the relevant
assessment year in which such rectified instrument holds foe field.
[318-D-H; 321-E-G]
Jagdamba Chlllity Trnst v. CIT, Delhi (Central), (1981) 128 ITR 377 E
(Delhi) and Laxminarain Lath Trnst v. CIT, (1988) 170 I.T.R. 375 (Raj),
affirmed.
5. Order of rectification of instrument trust is not a judgment in rem.
It would be a jn,dgment in personam binding on the parties to the rectified
instrument, namely the settler on the one hand and the trustees on the F
other as well as on the ultimate beneficiaries. A rectified Trust Deed pursuant to the order of the Court would make the rectification order relevant
under the provisions of section 11 of the Indian Evidence Act, as the fact in
issue in an enquiry before the Income-tax Officer would be whether on the
basis of the rectified Trust instrument the asses see-trust was entitled to get G
its income exempted from tax under the relevant provisions of the Incometax Act. In such proceedings, therefore, the order granting rectification of
such instrument of trust would certainly remain relevant. It will be for the
income-tax officer to consider the real scope and ambit of the Trust Deed
as presented to him in rectified form with a view to finding out whether on
the basis of such a rectified instrument the assessee trust had earned H
308
SUPREME COURT REPORTS {1995) SUPP. 5 S.C.R.
A
exemption from payment of income tax. Therefore, though the rectification
order of the Civil Court are not judgments in rem they are relevant in
assessment proceedings before the income-tax officer and will have to be
given effect to for whatever they are worth. [321-H; 322-A; D-H]
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1741-57
B
(NT) of 1977.
c
D
E
From the Judgment and Order Dated 20.2.75 of the Allahabad High
Court in I.T.R. No. 18173 and 715 of 1972.
Dr. V. Gouri Shankar, S. Rajappa and S.N. Terdol for the Appellant.
M.L. Verma, M.M. Kshatriya, Ms. Arun Banerjee and Vivek Sood
for the Respondent.
The Judgment of the Court was delivered by
S.B. MAJMUDAR, J. In this group of 17 appeals by special leave,
the Commissioner of Income Tax, Kanpur has brought in challenge the
judgment and order dated 20th February 1975 of the Allahabad High
Court in Income Tax References Nos. 18 of 1973 and 715 of 1972. Respondent - Kamla Town Trust - is the common respondent in all these appeals.
As common questions of law and fact are involved between the very same
parties in all these appeals, the appeals were heard together and ~re being
disposed of by this common judgment.
The common respondent, Kamla Town Trust, was assessed to income tax for the relevant assessment years 1949-50 to 1965-66. These
F
assessment orders gave rise to hierarchy of appeals under the Income Tax
Act which ultimately culminated into 17 income tax appeals by the assessee
before the Income Tax Appellate Tribunal. Allahabad Bench, Allahabad.
The common question in the appeals before the Tribunal was whether for
the relevant assessment years the respondent-assessee was entitled to
exemption from payment of income tax as per the provisions of Section
G 4(3)(i) of the Income-tax Act. 1922 (hereinafter referred to as the '1922
Act'), and under section 11 read with section 2(15) of the Income-tax Act,
1961 (hereinafter referred to as the '1961 Act') in so far as they applied to
the relevant assessment years. The Income Tax Appellant Tribunal dismissed respondent-assessee's appeals for assessment years 1949-50 to 1955H 56 but it allowed· respondent-assessee's appeals for assessment years
COMMNR OFINCOMETAXv. KAMLA TOWNTRUST[S.B. MAJMUDAR,J.j 309
1956-57 to 1965-66 subject to the rider that the income derived from the A
trust property by the assessee will be exempt only within the limit permissible under section ll(l)(a) of the 1961 Act to the extent to which the
income so accumulated is not in excess of 25% of the income from trust
property of Rs. 10,000 whichever is higher, after the 1961 Act came into
force. In other words the rider applied to the assessments for the year B
1962-63 to 1965-66. As both the Revenue and the assessee were partly
aggrieved by the aforesaid common order of the Tribunal, they sought
reference of the questions, ventilating their grievances under Section 256(1)
of the 1961 Act. The Tribunal accordingly granted these reference applications under section 256(1) and referred the following questions for opinion
of the High Court. At the instance of the respondent-assessee two quesC
tions were referred for the opinion of the High 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 D
4(3)(i) of the 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 E
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."
While at the instance of Revenue the Tribunal referred five questions as
under:
F
"(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 M/s. J.K Hosie1y Factory v.
Commissioner of Income Tax, 81 I.T.R. 557 that even the unG
amended clause 3(19) of the Memorandum of Association of the
settler company viz., M/s. J.K Cotton Spinning & 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?
H
310
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SUPREME COURT REPORTS [1995) SUPP. 5 S.C.R.
(b) Whether on the facts and in the circumstances of the case, it
is open to the Revenue to take the 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 Code of Civil Procedure.?
(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 the 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?"
E The Division Bench of the High Court after hearing the rival contentions
canvassed by the parties answered all the referred questions in favour of
the respondent-assessee and against the Revenue. It is under these circumstances that the Revenue through Commissioner of Income Tax, Kanpur having obtained special leave to appeal has preferred these 17 appeals.
It may be noted at the outset that though the Revenue lost on all the
F
referred seven questions before the High Court, in the present proceedings
at the stage of final hearing Dr. Gauri Shankar, learned senior counsel for
the appellant-Commissioner of Income Tax highlighted the grievance of
the Revenue centering round the answers of the High Court on some of
the referred questions. The grievance highlighted on behalf of the Revenue
G by Dr. Gauri shankar centered round the answers of the High Court to
Questions Nos. 1 and 2 referred on behalf of the assessee-respondent as
wdl as answers of the High Court on Questions Nos. (d) and (e) referred
on behalf of the Revenue.
Before proceeding to deal with the main submissions canvassed by
H learned senior counsel for the Revenue centering round the answers of the
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COMMNR. OF INCOME TAX v. KAMLA TOWN TRUST [S.B. MAJMUDAR, J.) 311
High Court on the aforesaid questions and the rival contentions canva~sed A
by learned senior counsel Shri Verma for the respondent-assessee in
support of these answers, it will be apposite to have a look at the relevant
background facts leading to the present proceedings.
Background facts
B
The assessee is a trust created by a trust deed dated 27.10.1941
executed between Mis. J.K. Spinning & Weaving Mills Co. Ltd., Kanpur
(hereinafter called 'the company') of the one part and Sir Padampat
Singhania, Lala Kailashpat Sinhgania and Lala Laxmipat Sinhgania
(hereinafter called 'the trustees') of the other part. The company was
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registered under the provisions of the Indian Companies Act 7 of 1913 with
its registered office at Cawnpore in U .P. The objects of the trust deed in
its original form show that it was created with a view to construct a
settlement or colony for their workmen together with amenities in the
shape of hospitals, schools, temples, mosques, recreation places and for D
such other works directly concerning the amenities of workmen. The
company made an application -to the Improvement Trust, Kanpur for
demising to it two tracts of land in Kanpur at concessional rates. The
Improvement Trust demised one plot of land to the company for constructing the colony with an extra plot of land for the purpose of constructing a
Water Pump Station by an indenture dated 19.10.1936 for a consideration E
of Rs. 43,700. Another plot of land was demised by the Improvement Trust
to the company by an indenture dated 2.2.1938 for a consideration of Rs.
26,300 for constructing an office for the said settlement. Both these plots
were demised to the company at concessional rates for the welfare of
workmen. The company transferred both the plots by the said trust deed F
of 27.10.1941 to the trustees for effectuating its object of settling these plots
upon the charitable trust thereinafter mentioned in the deed .
We will deal with the relevant recitals in the Trust Deed, in details,
at an appropriate stage in latter part of this judgment. Suffice it to state at
this juncture that one of the objects of the trust, as mentioned in paragraph G
2(b) of the Trust Deed of 1941 was as under:
"To erect, establish, equip, furnish, fit, maintain and repair on the
said two plots of land, and any land that may hereafter be acquired
by the Trust.
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· (1) residential quarters, chawls or buildings for the workmen and
staff and other employees of the Company or other allied
concerns under the management or in which the Directors
of the Company may for the time being be interested 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 with a view to supply
their needs and requirements or to render them se1vices or to
cater to their wants comf 01ts conveniences and amenities."
C
Later on the Settlor Company filed a suit being suit No. 40 of 1945 in the
Court of Civil and Sessions Judge, Kanpur under section 31 of the Specific
Relief Act, 1877 for rectification of the Trust Deed so as to bring it in
conformity with its real intention to create a public charitable trust. It was
alleged in the plaint that having regard to its Memorandum of Association,
D
the settlor Company intended to settle the properties mentioned in the
Trust Deed and transfer them to the trustees for the purposes of creating
a public charitable trust including the benefits of its own employees, but
the operative part of the Trust Deed was found to be less comprehensive
than what was intended by the parties thereto at the time when instructions
were given for preparing a draft of the same and when they executed the
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Deed of Trust. The Settlor Company further alleged that through a
misunderstanding on the part of the draftsman and through a mutual
mistake the Deed of Trust did not truly express their intention. It was
asserted that the real intention of the parties was to create a public
charitable trust, but the Company was advised that it was doubtful whether
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the Trust Deed on a strict construction thereof might. not exclude from its
benefits the rest of the public apart from the employees of the company
and residents of the said settlement. In order to give effect to the said
intention the company submitted that certain amendments by way of
rectification of the deed should be made in the Object Clause 2 of the Trust
Deed. The learned Civil Judge by his judgment dated 18th August 1945
G ordered the Deed of Trust to be rectified as prayed for in the Plaint. We
will refer to the relevant rectified paragraphs of the Trust deed as per the
aforesaid order of the Civil Court a little later.
The Deed of Trust of 1941 as rectified in 1945 became a subject
H matter of interpretation by the Appellate Income Tax Tribunal and High
COMMNR OF INCOME TAX v. KAMLA TOWN TRUST [S.B. MAJMUDAR, J.] 313
Court of Allahabad in the case of J.K Hosiery Factory v. Commissioner of A
Income Tax, U.P., (1971) 81 I.T.R. 557. In the said partnership the respondent-assessee trust happened to be a partner. The High Court held the
rectification decree passed by Civii' Court to be valid and further held that
it was not possible for the Income Tax Officer to question the validity of
the rectification on the ground that conditions for grant of rectification did
not in fact exist. However, it was further held that the objects of the Trust
Deed as rectified in 1945 did not create a public charitable trust and on
an analysis of the object clause 2(b )(i) of the Trust Deed held that it being
a mixture of charitable and non-charitable objects, could not be treated to
be creating a public charitable trust.
In the meanwhile the Settlor Company had filed another suit being
suit No. 163 of 1954 in the Court of First Civil Judge, Kanpur for further
rectification of the Trust Deed. It was reiterated in the plaint that the real
intention of the Settlor Company was to create a public charitable trust for
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the benefit of the public in the city of Kanpur and the surrounding areas D
particularly, the members of the working class including the workmen
employed in the plaintiff company, but in their capacity as members of the
working class. The intention, it was repeated, was to create the said trust
wholly and exclusively for charitable objects and purposes. It was alleged
that the trustees had, in fact, been giving the benefit of the trust to the
members of the public and no part of the trust moneys had, at any time,
been used for a non-charitable or non-religious object or purpose. It was
contended that the said Deed of Trust even as rectified was less comprehensive than what was intended by the parties thereto at the time when
instructions were given for p~eparing a draft of the same and when they
executed it and the Settlor Company was advised that it did not truly
express the intention of the parties. It was prayed that the rectifications
sought for be allowed so as to bring it in conformity with the real intention
of the parties. In the said suit besides the trustees two persons interested
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F
in the trust were impleaded as defendants in their representative capacity
after the service of a public notice under Order 1 Rule 8 of the Code of G
Civil Procedure. The Civil Judge, Kanpur by judgment and decree dated
10.5.1955 decreed the suit. By the second rectification decree certain
rectifications were made in the Preamble of the Trust Deed and in paragraphs 1 and 2 of the Trust Deed. At an appropriate stage in latter part
of these judgment we will deal with these rectified clauses inserted in the
Trust Deed in 1955.
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A
The jurisdictional Income Tax Officer issued notices under section
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34 of 1922 Act and section 148 of 1961 Act for the relevant assessment
years to the assessee-trust alleging that the income had escaped assessment
for the relevant years. In response to the said notices the assessee filed
'NIL' return for all the assessment years under reference. The contention
of the trust before the Income Tax Officer was that it was a public
charitable trust and, therefore, its income was exempt from income tax.
The Income Tax Officer rejected this contention as discussed in his earlier
assessment order for the assessment year 1948-49. He stated that in the
earlier assessment order, he had come to a clear conclusion that the trus!
was a private trust for the benefit of the employees only and was not at all
exempt from tax. With regard to the rectifications made by the decrees of
the Civil Court, the Income Tax Officer held that the trust was originally
created for the benefit of the settlor company and the objects of the trust
could not be altered subsequently unless the trust was revoked for which
there was no power under the Deed. The income from it was, therefore,
D
assessed to tax. He relied on the decision of the Calcutta High Court in re.
Mercantile Bank of India (Agency) Ltd., (1942) 10 I.T.R. 512 and held that
a trust for the benefits of its employees and members of the staff is not a
charitable trust.
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G
H
Respondent-assessee preferred appeals to the Appellant Assistant
Commissioner. The Appellate Assistant Commissioner dismissed all the
appeals of the respondent. It is under these circumstances that the respondent-assessee approached the Income Tax Appellate Tribunal as noted
earlier. The assessee partly succeeded while the Revenue also succeeded
in part before the Income Tax Tribunal and that is how seven questions
came to be referred to the High Court under section 256(1) by the
Tribunal, two at the instance of the assessee and five at the instance of the
Revenue and which came to be wholly decided in favour of the respondent-assessee as already noted earlier.
Rival Contentions
Learned senior counsel Dr. Gauri Shankar raised the following contentions in support of these appeals :
(1) The second rectification in the year 1955 as decreed by the
Civil Court was without jurisdiction as in substance by the so-called
rectification a new Trust Deed was sought to be substituted, which
COMMNR. OF INCOME TAX v. KAMLA TOWN TRUST (S.B. MAJMUDAR, J.] 315
was beyond the powers of the Civil Court.
(2) The condition precedent for invoking the jurisdiction of the
Civil Court under section 26 of the Specific Relief Act of 1963 or
under section 31 of the earlier Act that there should be mutual
mistake on the part of parties to the document was absent in the
facts of the present case and consequently the Civil Court had no
jurisdiction to grant such rectification.
(3) The rectification decree was in personam and not in rem to
which Revenue was not a party and, therefore, it was not binding
on the Income Tax Authorities.
( 4) Even assuming that Rectification Order of 1955 was validly
made, it would operate only prospectively and could not have any
retrospective effect. This submission was made for challenging the
answer to Question No. 2 posed for consideration of the High
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Court at the instance of the respondent-assessee.
D
(5) Even after the rectification of 1955 the Trust Deed as rectified
did not create any public charitable trust entitling the respondentassessee to claim income tax exemption under the relevant
provisions of 1922 Act as well as 1961 Act as applicable to the
concerned assessment years.
( 6) The entire Trust Deed as originally executed and as twice
rectified in 1945 and 1955 was merely a colourable device on the
part of the three main trustees Singhania brother who held partnership interest in the firm of J.K. Hosiery Factory but went out as
partners of the said partnership and entered by the back door
assuming the garb of the trustees of respondent- trust which
became a partner in the same partnership firm claiming income
tax exemption. Consequently such a colourable device on the part
of the respondent should not be countenanced.
Shri Verma, learned senior counsel for the respondent-assessee on
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the other hand combatted the aforesaid contentions of learned seniox
counsel for the Revenue and submitted that even for the assessment years
1949-50 to 1955-56 wherein the rectified Trust Deed of 1945 prior to its
further rectiucation in 1955 was holding the field, it was a trust for public H
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