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

2. The relevant facts may be briefly stated. By an indenture dated September 14, 1950, H. E. H. the Nizam of Hyderabad created a trust known as H. E. H. the Nizams Religious Endowment 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. It will be convenient at this stage to read the relevant provisions of the trust deedClause 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 lifetime 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(i) For annual religious offerings to the sacred places of the Muslims outside India, in Hedjaz and Iraq, viz., Macca Madina, Najaf 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 placesp of the sacred buildings constructed in the lifetime of the Settlor such as, masjids (mosques), Azakhana (mourning house, built to commemorate the name of His Exalted Highnesss 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 Safarand also during other religious months, when different kinds of ceremonies, religious discourses (Taqreers), Jd. Tagreebs, etc., are performed, including the religious offerings to the sacred Shrines at Ajmer and Gulbargav) It is the desire of the Settlor that the income of the Trust shall, as far as possible, be spent equally for thed 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 Mahomedans 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 clause provided for any subsequent year or yearsClause 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 lifetime 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 beingBriefly stated, under the deed the Trust fund was to be accumulated during thesettlor and, after his death, the Trustees should hold the said fund upon trust to spend the 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 thesettlor to set apart and 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 settlor is still alive. For the assessment years4 the Trustees were assessed tox on the income during the relevant previous years arising from the said Trust property. The Trustees claimed exemption under S. 4(3)(i) of the Act. Thex Officer. on appeal the Appellate Assistant Commissioner, and on further appeals thex Appellate Tribunal, Hyderabad. Concurrently held that the assessee was not entitled to the exemption under the said section. At the instance of the assessee, the following question was referred to the High Court under S. 66(1) of the Act:Whether the income arising from property settled upon trust under the deed of settlement, dated, or any part thereof is exempt from tax under S. 4(3)(i) of the IndianA Division Bench of the Andhra Pradesh High Court, Hyderabad, consisting of Seshachelapati and Venkatesa, JJ., on a consideration of the relevant provisions of the deed and the Act, 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.

Reasoning: 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.