Subba Rao, J. - (1.) This appeal by special leave raises the question of the true construction of the provisions of S. 4(3)(i) of the Indian Income-tax Act, 1922, hereinafter called the Act.
(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 Nizam's 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 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 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 places. (iii) For the up-keep 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 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 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 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 above-mentioned 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 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 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 being. 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 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 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 years 1952-53 and 1953-54 the Trustees were assessed to income-tax 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. The Income-tax Officer. on appeal the Appellate Assistant Commissioner, and on further appeals the Income-tax 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 14-9-1950, or any part thereof is exempt from tax under S. 4(3)(i) of the Indian Income-tax Act. 1922" A 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.
(3.) 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 accumulating the income for religious or charitable purposes within the taxable territories, since two of the named purposes were admittedly 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.;