# HYDERABAD v. COMMISSIONER OF INCOME-TAX, ANDHRA PRAUESH, HYDERABAD

- **Citation:** [1966] 2 S.C.R. 384
- **Court:** Supreme Court of India
- **Decided:** 1965-10-26
- **Bench:** K. SUBBA R.Ao, J. C. Shah Ands. M. Sikri
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/hyderabad-v-commissioner-of-income-tax-andhra-prauesh-hyderabad-3564
- **Pages:** 9

## Headnote

Indian Income-Tax iAct, 1922 (Act 11 of 1922), s. 4(3) (i)-Trust
far religious and charitable objects sonte within taxable
territories
and
son1e outsid,e-Jnco1ne not allocated-Exen1ption, lf can be clabned.
A trust was created for four religious and charitable objects, two of
the objects were within taxable territories and the other two were outside the taxable! territories. The income derived from the trust property
was not allocated or set apart for the said purposes. The Trustees weire
assessed to Income-tax on income derived on the Trust properly. The
Trustees' claim for exemption under s. 4(3)(ii) of the Income-tax Act
was not accepted by the Revenue and the High Court. In appeal to this
Court the. Trustees contended that proviso (a) to s. 4(3) (i) of the Act
would be attracted only when the Trustees exercised their option to apply
the income to religious or charitable purposes outside the. taxable terri•
tories, that in the present case the Trustees had not exercised the said
option, and that therefore their case was directly governed by the sub'
stantive part of cl. (i) of s. 4(3) of the Act.
B
c
D
HELD: Under cl. (i) of s. 5(3) of the Act only income from the
property wholly or in part held in trust actually applied or set apart for
E
application for future spending on religious or charitable purposes within
the taxable territories is exempted from incluo;ion in the total income
(390 G-H]
The substantive part of cl. (i) of s. 4(3) fo in two parts : the first
part relates tG the income derived from prol""rty held under trust wholly
for religiGus or charitable purposes and the second part to income derived
from property held in part only for such purpose. The words "applied or F
finally set apart for application" in the sec,>nd part indicate that unless
the income from ,the. said property is applied or finally set apart for the
purposes within the taxable territories, the said income does not earn the
exemption. There cannot be. any reason :why a different meaning should
be given to the expression "applied or accumulated for applicati0n" in the
first part of the clause, for, on principle, there cannot be anv possible
distinction between such income from
the property wholly held
under the trust or a part of the property held in trust. The
G
w·ords "applied" and Haccumulated", therefore. must mean "applied or
finally set apart''. "Applied" means that the income is actually applied
for the said purposes in the taxable territories; and "accumulated" means
that the income is set apart during the year for future spending on the
said purposeis.
The expression "accumulated for a purpose" involves a
conscious act in presenti and posits a clear indication on the part of the
trustee to set apart the. income: for that purpose (390 B-G]
H
Till the Trustee set apart the accumulation for the purposes within the
taxable territories, it cannot be said that the: purposes are within the taxable territori.,;. [392 CJ
' .,
NIZAM's TRUST v. C.I.T. (Subba Rao, J.)
•
385
A
Mohan1n1ad lbrahiln Riza v.
lnco1ne-tax
Comniissioner,
Nagpur,
(1930) L.R. 57 I.A. 260. referred to.
C1v1r. APPELLATE JURISDICTION: Civil Appeal Nos. 491, 492
of 1964.
Appeal by special leave from the judgment and order dated
'.
B September 14, 1962 of the Andhra Pradesh High Court in Case
Referred No. 4 of 1961.
D. Narsaraju, Anwarullah Pasha, J. B. Dadachanji, 0. C.
{
Mathur and Ravinder Narain, for the appellant.
,.
A. V. Viswmtatha Sastri, N. D. Karkhanis, R.H. Dhebar and
rt
f'.t.
-··~
.\-
w
'
C R. N. Sachthey, for the respondent.

## Text

H.E.H. NIZAM'S RELIGIOUS ENDOWMENT TRUST,
A
HYDERABAD
v.
COMMISSIONER OF INCOME-TAX, ANDHRA PRAUESH,
HYDERABAD
October 26, 1965
[K. SUBBA R.Ao, J. C. SHAH ANDS. M. SIKRI, JJ.J
Indian Income-Tax iAct, 1922 (Act 11 of 1922), s. 4(3) (i)-Trust
far religious and charitable objects sonte within taxable
territories
and
son1e outsid,e-Jnco1ne not allocated-Exen1ption, lf can be clabned.
A trust was created for four religious and charitable objects, two of
the objects were within taxable territories and the other two were outside the taxable! territories. The income derived from the trust property
was not allocated or set apart for the said purposes. The Trustees weire
assessed to Income-tax on income derived on the Trust properly. The
Trustees' claim for exemption under s. 4(3)(ii) of the Income-tax Act
was not accepted by the Revenue and the High Court. In appeal to this
Court the. Trustees contended that proviso (a) to s. 4(3) (i) of the Act
would be attracted only when the Trustees exercised their option to apply
the income to religious or charitable purposes outside the. taxable terri•
tories, that in the present case the Trustees had not exercised the said
option, and that therefore their case was directly governed by the sub'
stantive part of cl. (i) of s. 4(3) of the Act.
B
c
D
HELD: Under cl. (i) of s. 5(3) of the Act only income from the
property wholly or in part held in trust actually applied or set apart for
E
application for future spending on religious or charitable purposes within
the taxable territories is exempted from incluo;ion in the total income
(390 G-H]
The substantive part of cl. (i) of s. 4(3) fo in two parts : the first
part relates tG the income derived from prol""rty held under trust wholly
for religiGus or charitable purposes and the second part to income derived
from property held in part only for such purpose. The words "applied or F
finally set apart for application" in the sec,>nd part indicate that unless
the income from ,the. said property is applied or finally set apart for the
purposes within the taxable territories, the said income does not earn the
exemption. There cannot be. any reason :why a different meaning should
be given to the expression "applied or accumulated for applicati0n" in the
first part of the clause, for, on principle, there cannot be anv possible
distinction between such income from
the property wholly held
under the trust or a part of the property held in trust. The
G
w·ords "applied" and Haccumulated", therefore. must mean "applied or
finally set apart''. "Applied" means that the income is actually applied
for the said purposes in the taxable territories; and "accumulated" means
that the income is set apart during the year for future spending on the
said purposeis.
The expression "accumulated for a purpose" involves a
conscious act in presenti and posits a clear indication on the part of the
trustee to set apart the. income: for that purpose (390 B-G]
H
Till the Trustee set apart the accumulation for the purposes within the
taxable territories, it cannot be said that the: purposes are within the taxable territori.,;. [392 CJ
' .,
NIZAM's TRUST v. C.I.T. (Subba Rao, J.)
•
385
A
Mohan1n1ad lbrahiln Riza v.
lnco1ne-tax
Comniissioner,
Nagpur,
(1930) L.R. 57 I.A. 260. referred to.
C1v1r. APPELLATE JURISDICTION: Civil Appeal Nos. 491, 492
of 1964.
Appeal by special leave from the judgment and order dated
'.
B September 14, 1962 of the Andhra Pradesh High Court in Case
Referred No. 4 of 1961.
D. Narsaraju, Anwarullah Pasha, J. B. Dadachanji, 0. C.
{
Mathur and Ravinder Narain, for the appellant.
,.
A. V. Viswmtatha Sastri, N. D. Karkhanis, R.H. Dhebar and
rt
f'.t.
-··~
.\-
w
'
C R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Subba Rao, J.
This appeal by special leave raises the question
of the true construction of the provision of s. 4(3 )(i) of the
Indian Income-tax Act, 1922, hereinafter called the Act.
D
The relevant facts may be briefly stated.
By an indenture
E
F
G
H
dated September 14, 1950, H.E.H. the Nizam of Hyderabad
created a trust known as "H.E.H. the Nizam's Religious Endow·
ment Trust", hereinafter referred to as the Trust, under which he
settled certain securities of the face value of Rs. 40 lakhs for
implementing the objects described in the Trust deed. Under the
Trust deed three trustees were appointed, including the settlor.
Jt will be convenient at this stage to read the relevant provisions
of the trust deed.
Clause 3. The Trustees shall hold and stand possessed of the Trust Fund upon Trust.
(a) To manage the Trust Fund and to recover the
interest and other income thereof.
(b)
( c) During the life-time of the Settlor the balance
of the income shall be accumulated and shall be
added to the corpus of the Trust Fund.
( d) On and after the death of the Settlor the Trustees shall hold the accumulated corpus of the
Trust Fund upon trust to spend the income
thereof for any one or more of the following
religious or charitable
objects in such shares
and proportions
and in such manner as the
Trustees shall in their absolute discretion deem
proper.
.
386
SUPREME COURT REPORTS
[1966] 2 S.C.R .
(i) For annual religious offerings to the sacred
places of the Muslims outside India, in
Hedjaz and Iraq, viz., Macca, Madina
N ajaf Karbala, Kazamain, Sirraman Raa
and Mashad (in Iran) and Baghdad and
Basra.
(ii) For help either in lump sum or by way of
monthly
allowances, to the Khuddam or
the servants who are looking after the sacred
Shrines, and also by way of charity to
pious people residing at these holy places.
(iii) For the up-keep of the sacred buildings
constructed in the life-time of the Settlor
such as, masjids (mosques), Azakhana
(mourning house, built to commemorate
the name of His Exalted Highness's late
mother), two Askurkhanas
(where the
Alam sits inside the City palace during
Moharram and Ramzan), and the Maqbaras (Tombs) and particularly mentioned
in the Second schedule hereunder written.
(iv) For the annual expenditure during the
mourning period of Moharram and Safar
and also during other religious months,
when different kinds of ceremonies,
religious discourses
(Taqreers) Id Tagreebs,
etc. are performed, including the religious
offerings to the sacred Shrines at Ajmer
and Gulbarga.
( v) It is the desire of the Settlor that the income
of the Trust shall, as far as possible, be
spent equally for the abovementioned four
religious and charitable objects and purposes and in the event of there being any
surplus then the same may be spent by the
Trustees for any other religious and charitable objects for the benefit of Sunni
Mohamedans with liberty to the Trustees
in their absolute discretion to accumulate
the surplus, if any, for any year or years
and utilize the same for the purposes in this
A
B
c
D
E
F
G
H
•
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•
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B
c
N!ZAM's TRUST v. C.I.T. (Subba Rao, J.)
clause provided for any subsequent year or
years.
Clause 4. It is hereby further agreed and declared
that in all matters wherein the Trustees have a discretionary power the votes of the majority of the Trustees
for the time being voting in the matter shall prevail
and be binding on the minority as well as on those
Trustees who may not have voted and if the Trustees
shall be equally divided in opinion the matter shall
during the life-time of the Settlor be decided according
to the opinion of the Settlor and after his death according to the opinion of the Trustee most senior in age for
the time being.
387
Briefly stated, under the deed the Trust fund was to be accumulated during the life-time of the settlor and, after
his
death,
the Trustees should hold the said fund upon trust to spend the
D income therefrom for one or more of the four religious and charitable objects mentioned therein.
Two of the said objects were
for religious and charitable purposes within the taxable territories
and the other two for purposes outside the taxable territories.
It
is important to notice that under the deed no power was conferred
on the trustees during the life time of the settlor to set apart and
E allocate the accumulated income or a part of it from the Trust
properties for any one or more of the objects mentioned therein :
that could be done only by the Trustees after the death of the
settlor.
The said settior is still alive. For the assessment years
1952-53 and 1953-54 the Trnstees were assessed to income-tax
on the income during the relevant previous years arising from the
II'
said Trust property.
The Trustees claimed exemption under
S. 4(3 )(ii) of the Act.
The Income-tax Officer, on appeal the
Appellate Assistant Commissioner, and on further appeals the
Income-tax Appellate Tribunal, Hyder_abad, concurrently held
that the assessee was not entitled to the exemption under the said
section.
At the instance of the assessee, the following question
G was referred to the High Court under s. 66 ( 1) of the Act :
H
"Whether the income arising from property settled
upon trust under the
deed
of
settlement,
dated
14-9-1950, or any part thereof is exempt from
tax
under Section 4 ( 3 )( i) of the Indian Income-tax Act,
1922."
A Division Bench of the Andhra Pradesh High Court, Hyderabad, consisting of Seshachelapati and Venkatesam, JJ.,
on a
388
SUPREME COURT REPORTS
[1966] 2 s.c.R.
consideration of the relevant provisions of the deed and the Act, A
came to the conclusion that on the terms of s. 4(3 )(i) of the
Act, the Trust was not entitled to the exemption.
Hence the
appeals.
Mr. Narasa Raju, learned counsel for the assessee, contended that proviso (a) to s. 4(3) (i) of the Act would be attracted
only when the Trustees exercised their option
to apply
the
income to religious or charitable purposes without the taxable
territories, that in the present case the Trustees had not exercised
the said option and that, therefore, the assessee's case was directly governed by the substantive part of cl. (i) of s. 4(3) of the
Act.
As the income was being accumulated by the Trustees,
the argument proceeded, without setting apart the whole or any
part thereof for one or other of the purposes mentioned in the
Trust deed, it should be held that the Trustees were accumulatB
c
ing the income for religious or charitable purposes Within the
taxable territories, since two of the named purposes were admitD
tedly within the taxable territories.
He would say that if the
Trustees exercised their option to apply the fund for the purposes
without the taxable territories, the Income-tax authorities could,
in terms of the proviso, include that income in the total income.
Mr. A V. Viswanatha Sastri, learned counsel for the ReveE
nue, on the other hand, argued that the assessee would be entitled to exemption under s. 4 ( 3) ( i) of the Act only if the income
was specifically accumulated for religious and charitable purposes within the taxable territories and that, as in the present
case admittedly there was no setting apart of the income for
the said purposes, the assessee could not claim any exemption
F
thereunder.
Let us now scrutinize the validity of the rival contentions.
Section 4 ( 3 )( i) of the Act reads :
"Subject to the provisions of clause
( c) of subsection (1) of section 16, any income derived from
property held under trust or other legal
obligation
wholly for religious or charitable purposes, in so far
as such income is applied or accumulated for application to such religious or charitable purposes as relate
to anything done within the taxable territories,
and
in the case of property so held in part only for such
purposes, the income applied or finally set apart for
application thereto :
G
H
• -
)'
-t-
•
II
NIZAM's TRUST v. C.I.T. (Subba Rao, /.)
389
A
Provided that such income shall be included in the
B
c
D
total income-
( a) if it is applied to religious or charitable purposes without the taxable territories, but in the
following cases, namely :-
(i) where the property is held under trust or
other legal obligation created before the
commencement of the Indian Income-tax
(Amendment) Act, 1953 (25 of 1953),
and the income therefrom
is applied to
such purposes without the taxable territories; and
(ii) where the property is held under trust or
other legal obligation created after such
commencement, and the income therefrom
is applied without the taxable territories
to charitable purposes which tend to promote international welfare in which India
is interested.
The Central Board of Revenue may, by general
or special order, direct that it shall not be included
in the total income.
E Under this section a particular class or kind of income is
exempted
from
taxation.
It is settled Jaw that the burden
is on the Revenue authorities to show that the income is
liable to tax under the statute; but the onus of showing that
a particular class of income is exempt from taxation lies on the
assessee.
To earn the exemption, the assessee has to establish
F that his case clearly and squarely falls within the ambit of the
said provisions of the Act.
A brief history of cl. ( i) of s. 4 ( 3) of the Act will be useful
in the interpretation of its terms. The present cl. (i) was substituted for the following clause by the Income-tax (AmendG ment) Act, 1953, with effect from April I, 1952 :
" ( i) any income derived from property
held in
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."
H Under the said clause, trust income, irrespective of
the fact
whether the said purposes were within or without the taxable
territories, was exempt from tax in so far as the said income was
390
SUPREME
COURT
REPORTS
(1966) 2 S.C.R.
applied or finally set apart for the said purposes.
Presumably,
A
as the State did not like to forgo the revenue in favour of a
charity outside the country, the amended clause described with
precision the class or kind of income that is exempt thereunder
so as to exclude therefrom income applied or accumulated for
roligious or charitable purposes without the taxable territories.
The substantive part of cl. (i) is in two parts : the first part
B
relates to the income derived from property held under trnst
wholly for religious or charitable purposes and the second part,
to income derived from property so held in part only for such
purposes.
But the necessary condition for attracting the first
part of the clause is that the said income is applied or accumulated for application to such religious or charitable purposes
C
within the taxable territories; and to attract the second part, the
income from the property so held in part shall have been applied
or finally set apart for application to the said purposes.
A
comparative study of the two parts clarifies the scope of the
provision.
The expression used in the first part is "applied or
D
accumulated for application"
and the
expression used in the
second part is "applied or finally set apart for application". The
words "applied or finally set apart for application" in the second
part indicate that unless the income from the said property is
applied or finally set apart for the purposes withi!] the taxable
territories, the said income does not earn the exemption.
There I.
cannot be any reason why a different meaning should be given
to the expression "applied or accumulated for application" in
the first part of the clause; for, on principle, there cannot be
any possible distinction between such income from the property
whoUy held under trust or a part of the property held in trust.
The words "applied" and "accumulated", therefore, must mean
F
"applied or finally set apart".
"Applied" means that the income
is actually applied for the said purposes in the taxable territories;
and "accumulated" means that the income
is set apart during
the year for future spending on the said purposes. The expression "accumulated for a purpose involves
a conscious
act in
presenti and posits a clear indication on the part of the trustee
G
to· set apart the income for that purpose.
It is, therefore, manifest that under cl. (i), only income from the property wholly or
in part held in trust actually applied or set apart for application
for future spending on religious or charitable purposes within
the taxable territories
is exempted from inclusion in the total
income..
H
As has been pointed out by Craies in his book on Statute
Law, 6th Edn. at p. 217, "The effect of an excepting or
,
A
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NIZAM's TRUST v. C.I.T. (Subba Rao, J.)
39[
qualifying proviso, according to the ordinary rules of construction,
is to except out the preceding portion of the enactment, or to
qualify something enacted therein, which but for
the proviso
would be within it." The proviso to cl. (i) excepts the two
classes of income subject to the condition mentioned therein from
the operation of the substantive clause.
It comes into operation
only when the said income is applied to religious or charitable
purposes without the taxable territories.
In that event,
the
Central Board of Revenue, by general or special order, may
direct that it shall not be included in the total income.
The
proviso also throws light on the construction of the substantive
part of cl. ( i) as the exception can be invoked only upon the
application of the income to the said purposes outside the taxable territories.
The application of the income
in presenti or
in futuro for purposes in or outside the taxable territories, as the
case may be, is the necessary condition for invoking either the
substantive part of the clause or the proviso thereto.
The argument of Mr. Narasa Raju, namely, that as at the
time the income was accumulated the Trustees did not exercise
the option, the accumulation would necessarily be for some of
the purposes within the taxable territories, leads to a fallacy.
If accepted, it would enlarge the scope of the exemption : while
the. section expressly exempts only such income as is applied
or accumulated for application for such purposes within the
taxable territories, the income would be exempted even though
it was accumulated for mixed purposes, that is, for purposes both
within and without the taxable territories.
Purposes within the
taxable territories are not the same as mixed purposes. At best
the amounts are kept under a suspense account with an option
to the trustees to set apart at a later date for purposes within
or without the taxable territories.
Howsoever
the
option is
exercised at a later stage, it is not an accumulation during the
r~levant accounting year for purposes within the taxable territones .
. Some of the cases cited at the Bar may not be of direct applicat10n, but the principle laid down therein may be helpful in
construing the terms of the present Trust deed.
The Judicial
Committee in Mohammad Ibrahim Riza v. Income-tax Commissioner, Nagpur(') held that where the purposes of a trust were
not ~holly char!table or religious and no portion of the property
had been set aside for those purposes, the income from the trust
could not be identified as appropriated exclusively thereto. The
(I) (1930) L.R. 57 I.A. 260.
392
SUPREME COURT REPORTS
[1966J 2 s.c.R.
principle underlying this decision is, where a trust is for mixed
A
purposes, some religious and other secular, with an option to
the trustee to select one or other of the purposes, it is not possible
to predicate till the selection is made that the object is for religious or charitable purposes.
In the present case, an option is
given to the Trustees to set apart the income for the purposes
within the taxable territories or without such territories and till
B
a selection is made it is not equally possible to predicate that
the accumulation of income is for purposes within the taxable
territories.
Till the Trustees set apart the accumulation for the
purposes within the taxable territories, it cannot be said that the
purposes are within the taxable territories.
Mr. Narasa Raju attempted to argue that in the present case
the income was set apart for purposes within the taxable territories.
This aspect of the question was never raised till now.
It involves a question of fact.
Clause 3(d) (v) of the Trust
deed on which reliance is placed is only an expression of desire
c
on the part of the settlor that the income of the Trust should
D
be spent equally on the four religious and charitable purposes
mentioned in the deed.
The said desire
does not amount to
setting apart by the Trustees of the whole or a part of the income
from the Trust for purposes within the taxable territories. Indeed,
·cl. 3 ( d) of the Trust deed indicates that the Trustees have no
power to set apart or accumulate the income for any of the purE
poses mentioned
in the Trust deed till after the death of the
settlor.
We cannot, therefore, hold on the material placed
before us that the Trustees have set apart the accumulated
income for purposes within the taxable territories.
For the aforesaid reasons we hold that the answer given by
F
the High Court to the question referred to it by the Income-tax
Appella!e Tribunal is correct.
The appeals fail and are dismissed with costs.
One hearing fee.
Appeals dismissed.
"
'