Case: H.E.H. Nizam'S Religious Endowment Trusthyderabad Vs. Commissioner Of Income-Tax, Andhra Pradesh,Hyderabad

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 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 application in the first part of the clause; for, on principle, there cannot be any possible distinction between such income from the property wholly held under trust or a part of the property held in trust. The words applied any accumulated 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 purposes. The expression accumulated for a purpose involves a conscious act in praesenti and posits a clear indication on the part of the trustee 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. 7. As has been pointed out by Craies in his book on Statute Law, 6th Edn., at p. 217, The effect of an excepting or 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 praesenti 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. 8. 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 relevant accounting year for purposes within the taxable territories. 9. Some of the cases cited at the Bar may not be of direct application but the principle laid down therein may be helpful in construing the terms of the present Trust deed. The Judicial Committee in Mohammad Ibrahim v. Income-tax Commissioner, Nagpur, 57 Ind App 260: (AIR 1930 PC 226 ) held that where the purposes of a trust were not wholly charitable 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 principle underlying this decision is, where a trust is for mixed 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 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. 10. 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 on the part of the settlor that the income of the Trust should 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 the Trustees have no power to set apart or accumulate the income for any of the purposes 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.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]Under this section a particular class or kind of income is exempted from taxation.It is settled law 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 that his case clearly and squarely falls within the ambit of the said provisions of the Act. There 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 wholly held under trust or a part of the property held in trust. The words applied any accumulated 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 purposes. The expression accumulated for a purpose involves a conscious act in praesenti and posits a clear indication on the part of the trustee 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 incomeThe 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 praesenti 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 thereto8. 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 relevant accounting year for purposes within the taxable territoriesIn 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 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 territories10. 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 on the part of the settlor that the income of the Trust should 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 the Trustees have no power to set apart or accumulate the income for any of the purposes 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.