JUDGMENT
BHAGWATI J. – This reference raises an interesting question of law relating to the construction of section 4(3) (i) of the Income-tax Act, 1922, and section 11 of the Income-tax Act, 1961. Though the question refers both to section 4(3) (i) of the Income-tax Act, 1922, and section 11 of the Income-tax Act, 1961, it would be sufficient to make reference only to section 4(3) (i) of the Income-tax Act, 1922, since section 11 of the Income-tax Act, 1961, is in material respects identical with section 4(3) (i) of the Income-tax Act, 1922, will what we say in regard to section 4(3) (i) of the Income-tax Act, 1922, will apply equally in regard to section 11 of the Income-tax Act, 1961. The reference relates to the assessment years 1960-61, 1961-62 and 1962-63, the relevant accounting years being the financial years ending 31st March, 1960, 31st March, 1961 and 31st March, 1962. During the relevant account years the assessee, which is an association of persons, held diverse properties under legal obligation for the purpose set out in its constitution. The purposes, in so far as they are material for the purpose of the present reference, were as follows and here we are giving an English translation of the relevant clauses of the constitution :
“3. The objects and purposes of this institution are as under :
(1) To manage the immovable and movable properties of the Rana community of the City of Ahmedabad.
(2) To do such acts so that the education be increased in the community and to give necessary help for that.
(3) To give medical help to the community.
(4) To do other acts beneficial to the community.
(5) To do all acts, according to the capacity, so that unity and brotherhood is increased in the community and life of every member – brother and sister – of the community is developed fully and satisfactorily…
8. (4) The Vahivat and management of the properties, etc., of the whole community will be done as profitably as can be done in the interest of the community. And in the month of Chaitra Havan and Bhandaro and every alternate year in Shravan procession and Bhandaro and the Sangh going to Bahucharaji Mata every three years and the Bhandaro taking place there at that time : all these will be managed intelligently.”
The beneficiaries of the purposes were all male and female members of “Rana jnati” that is, Rana caste of Ahmedabad but the expression “Rana jnati” was defined in the constitution as follows :
“Rana jnati etle phakt Andabadman multhi vasta are nyatna juna rivaj mujat jnatise swikaresa shaher Andabadman vasta jnatibandhuvo.”
There was dispute between the parties as regards the proper construction of this definition and since its correct translation would depend on the construction to be placed by us, we have set out the definition in the original Gujarati language. The definition on a plain reading of its language comprises two classes of members of the Rana caste residing in Ahmedabad. One class consist of those who have been residing since the beginning, that is, who are natives of Ahmedabad, while the other class consist of those who are admitted by the Rana caste according to the old custom or usage of the community. The assessee made application to the Income-tax Officer claiming exemption under section 4(3) (i) of the Income-tax Act, 1922, for the assessment years 1960-61 and 1961-62 and the question, therefore, arose whether the income of the assessee was derived from properties held under legal obligation wholly for charitable or religious purpose so as to attract the applicability of section 4(3) (i). The Income-tax Officer took the view that the purpose set out in sub-clauses (1), (4) and (5) of clause 3 and sub-clause (4) of clause 8 were not charitable purposes and the beneficiaries also did not constitute a section of the public and the assessee was, therefore, not entitled to exemption under section 4(3) (i). On appeal by the assessee, the Appellate Assistant Commissioner disagreed with the view taken by the Income-tax Officer as regards the purpose set out in sub-clause (1) of clause 3 and sub-clause (4) of clause 8 but he held that the purposes set out in sub-clauses (4) and (5) of clause 3 were not charitable purposes and the class of beneficiaries sought to be benefited was also vague and ill-defined and was numerically negligible and did not, therefore, constitute a section of the public. The Appellate Assistant Commissioner in this view refused to accord exemption to the assessee under section 4(3) (i). The assessee thereupon preferred appeals to the Tribunal. The Tribunal decided both the points in favour of the assessee and held that the purposes set out in sub-clauses (2), (3), (4) and (5) of clause 3 and sub-clause (4) of clasue 8 were charitable and the beneficiaries intended to be benefited constituted a section of the public and section 4(3) (i) was, therefore, applicable to exempt the income of the assessee. This view taken by the Tribunal is challenged on the present reference.
The view taken by the Tribunal is challenged before us on behalf of the revenue on both the points on which the Tribunal decided in favour of the assessee. The revenue contended that the purposes set out in sub-clauses (4) and (5) of clause 3 are not charitable purposes within the meaning of the definition of “charitable purpose” contained in section 4(3) (i) and the income derived by the assessee cannot, therefore, be said to be income derived from properties held under legal obligation wholly for charitable purposes so as to qualify for exemption under section 4(3) (i). Now, there is no doubt that the purposes specified in sub-clauses (2), (3), (4) and (5) of clause 3 are distributive and the entire income from the properties can be applied for any one or more of the purposes specified and if, therefor, any of these purposes does not fall within purview of legal obligation of charitable purpose, it would not be possible to say that the properties are held by the assessee under legal obligation wholly for charitable purposes within the meaning of section 4(3) (i). But we do not consider it necessary to go into this question since we are of the view that the contention of the revenue with regard to the second point is well-founded and must result in refusal of exemption to the assessee under section 4(3) (i). The second point raised by the revenue was that the beneficiaries who were the objects of the bounty did not constitute the public or a section of the public and the necessary element of public benefit was therefre, lacking and in the absence of such element of public benefit, the properties could not be said to be held wholly for charitable purposes. The validity of this point depends on the true interpretation of the meaning and content of section 4(3) (i).
Section 4(3) (i), as it stood at the material time during the assessment years 1960-61 and 1961-62, was in the following terms :
“4. (3) Any income profits or falling within the following classes shall not be included in the total income of the person receiving them :
(i)…. any income derived from property held under 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……
In this sub-section charitable purpose includes relief of the poor, education, medical relief and the advancement of any other object of general public utility, but nothing contained in clause (i), or clause (ii) shall operate to exempt from the provisions of this Act that part of the income….. for private religious purposes which does not tenure for the benefit of the public.”
The section, it will be noticed, consisted of two parts : the first exempting income derived from properties held under trust or other legal obligation wholly for charitable purposes on the basis of the statutory definition that “charitable purpose” includes relief of the poor, education, medical relief and advancement of any other object of general public utility and the second, exempting income derived from property held under trust or other legal obligation wholly for religious purposes with this qualification that part of the income of a private religious trust which does not tenure for the benefit of the public would not be entitled to exemption. We are concerned in this reference only with the first part of the section, for it is only under that part that the claim for exemption has been formulated on behalf of the assessee. The part raises the question whether the income sought to be assessed could be said to be derived by the assessee from properties held wholly for charitable purposes, keeping in view the statutory definition of “charitable purposes” contained in the last paragraph of the section. Now it is well-settled as a result of the decisions of the Privy Council in In re Trustees of the Tribunal and All India Spinners Association v. Commissioner of Income-tax that the Indian statute must be construed on its actual words and is not to be governed by English decisions on the subject. We must, therefore, base ourselves only on the construction of the words of the section before, us but before we do so, it would be useful, to refer to the English law on the subject taking care at the same time to see that we do not fall into the error of blindly accepting its principles in disregard of the language of our section.
In England, as observed by Lord Russell of Killowen in In re Grove Glady “matters have been stretched in favour of charitable almost to bursting point”. But the courts have firmly drawn the line at least in one direction. Barring the class of cases familiarly known as “poor relations” cases, it is now a universal rule that the law recognises no purpose as charitable unless it is of a public character. That so to say, a purpose must, in order to be charitable, be directed to the benefit of the community or a section of the community. Authority for this proposition is to be found in numerous case. In In re Foveaux Chatty J. said, at page 504 :
“To be a charity there must be some public purpose -something lending to the benefit of the community.”
In Verge v. Somerville Lord Wrenbury said, in delivering the judgment of the Privy Council :
“To ascertain whether a gift constitutes a valid charitable trust so as to escape being void on the ground of perpetuity, a first inquiry must be whether it is public – whether it is for the benefit of the community or of an appreciably important class of the community. The inhabitants of a parish or town, or any particular class of such inhabitants, may, for instance be the objects of such a gift, but private individuals, or a fluctuating body of private individuals, cannot.”
Lord Simonds also said to the same effect in Oppenheim v. Tobacco Securities Trust Co. Ltd. : “It is a clearly establish principle of the law of charity that a trust is not charitable unless it is directed to the public benefit. This is sometimes stated in the proposition that it must benefit the community out a section of the community…. With a single exception, to which I shall refer, this applies to all charities.”
and later he added :
“It must not, I think, be forgotten that charitable institutions enjoy rare and increasing privileges, and that the claim to come within that privileged class should be clearly established.”
The proposition is true of all charitable gift and is not confined to the fourth class in Lord Macnaghtens well-known statement in Pemsels case. The element of public benefit must exist whatever be the class in Lord Macnaghtens statement to which the charitable purpose may belong. The only exception is to be found in the case of trusts for the relief of poverty where the element of public benefit is dispensed with as a result of the historical development of the law of charity. There is ancient authority for supporting a gift for the relief of poor relation and recently the court of Appeal in England held valid a gift to relief poverty of employees of a particular employer : Gibson v. South American stores (Gath and Chaves) Ltd. These however constitute an anomalous line of cases which serve more to emphasize the rule rather than to detract from it.
When we turn to the words of section 4(3) (i), we find that the overriding test of general public benefit is insisted upon also in India and the reason is that a gift or bequest for a charitable purpose enjoys certain privileges under the law of transfer, the law of will and the law of incomes-tax and the intendment of the legislature, therefore, clearly is that such privileges should be available only where the purpose is one which tends to the benefit of the public. As a matter of fact, this requirement is more stringent in India than in England, for it makes the test of general public benefit applicable to all the four classes of charitable purposes mentioned in the last paragraph of the section, namely, “relief of the poor, education, medical relief and the advancement of any other object of general public utility”, and does not recognize any exception in favour of gifts for relief of poverty as in England. The words “any other object of general public utility” used by the legislature to describe the last class, with particular emphasis on the word “other”, clearly show, as a matter of plain grammatical construction and also on the principle of nastier a sociis, that the first three classes should also be purpose of general public utility, that is, they must also be invested with public character. In regard to the first class of charitable purpose, namely, relief of the poor, the Calcutta High Court held in In re Mercantile Bank of India (Agency) Ltd. that relief of the poor must not be relief of a body of private individuals but must have public character. The Madras High Court in Commissioner of Income-tax also took the same view and held that trust for the relief of poverty of poor relatives of the settler were not for a charitable purpose since no element of public benefit was involved. Similarly it was held by the Bombay High Court in D. V. Arur v. Commissioner of Income-tax that “education”, in order to be charitable, must relate to the public and on that view, the Bombay High Court found a trust for the education of the members of a family or the descendants of a certain named individual to be non-charitable. The element of public benefit must, therefore, be present before a purpose falling within any of the four classes set out in the last paragraph of section 4(3) (i) can be regarded as charitable. The purpose in order to be charitable must be directed to the benefit of the community or a section of the community and not to the benefit of particular private individuals or a fluctuating body of private individuals. That is the plain meaning of the words “general public utility,” and it is clearly supported by the observations of Subba Rao J., as he then was, in Laxman Balwant v. Charity Commissioner. The decision of Subba Rao J. in this case was of course a dissenting judgment but on the point as to the true connotation of the words “general public utility”, the majority judges did not take a different view and it would not, therefore, be improper for us to find support for our view from the observation made in the judgment of the learned judge.
The question which, therefore, requires to be considered is whether the purpose for which the properties are held in the present case have the public character which the income-tax law requires of the charities it recognizes and favours ? Are the purposes directed to the benefit of the community or section of the community as distinguished from private individuals or a fluctuating body of private individuals ? The contention of the revenue was that the beneficiaries were not the community nor a section of the community and the element of public benefit was, therefore, lacking. Now, there can be no doubt that the beneficiaries did not constitute a community since they were confined only to the members of the Rana caste residing in Ahmedabad and fulfilling one or the other condition set out in the definition clause. The only question, therefore, is whether they could be said to constitute a section of the community and that raises the question : What is a section of the community ? Now this expression has always eluded definition and having regard to the impossibility of laying down a precise definition of what is meant by a “section of the community”, Lord Greene M. R. in In re Compton, Powell v. Compassion, while discussing this question, disclaimed any intention even to make an attempt to define it but proceeded to explain what, in his opinion, would constitute a “section of the community”. In order to appreciate the test laid down by him for ascertaining when a class of persons can be said to constitute a section of the community as distinguished from an aggregate of individuals not constituting such section, it is necessary to notice the facts of the case which came before him. The testatrix there created a trust for the education of the lawful descendants of three named persons. When the matter came before the court, there were twenty-eight descendants under the age of 25. The trust was held, and if we may respectfully say so, rightly held, to be a “family trust” and not one for the benefit of a section of the community. It was not a valid charitable trust, for the beneficiaries were defined by reference to a personal relationship with named individuals and so it lacked the quality of being a public trust. It was a mere private or family benefaction and mere numbers could not have the effect of raising a family or private benefaction into the class of charitable gifts. The learned Master of the Rolls said at page 202.
“I come to the conclusion, therefore, that on principle a gift under which the beneficiaries are defined by reference to a purely personal relationship to a named propositus cannot on principle be valid charitable gift. And this, I think, must be the case whether the relationship be near or distant, whether it is limited to one generation or is extended to two or three or in perpetuity. The inherent vice of the personal element is present however long the chain and the claimant avoid basing his claim upon it”.
This principle which was laid down in Comptons case was applied by the Court of Appeal in the subsequent decision in In Re Hobourn Aero Components Ltd. and it was approved by the House of Lords in Oppenheim v. Tobacco Securities Trust Co. Ltd. In the last mentioned case the trust was for the education of the children of employees or ex-employees of a British company or any of its subsidiary or allied companies. The number of such limited employees exceeded 1,10,000 and yet Lord Simonds held that the children of the employees who were the beneficiaries under the trust did not constitute a section of the public so as to satisfy the test of public benefit. He observed :
“These words section of the community have no special sancity, but they conveniently indicate (i) that the possible (I emphasise the word possible) beneficiaries must not be numerically negligible, and (ii) that the quality which distinguishes them other members of the community, so that they from by themselves a section of it, must be a quality which does not depend on their relationship to a particular individual. It is for this reason that a trust for the education of members of a family or, as in In re Compton of a number of families cannot be regarded as charitable. A group of persons may be numerous, but, if the nexus between them is their personal relationship to a single propositus or to several propositi, they are neither the community nor a section of the community for charitable purposes.”
This test evolved by the English Courts for the purpose of determining what is a “section of the community” was accepted by us a valid test for determining the same question under the Indian law in Hazrat Primohamed Shah Saheb Roza Committee v. Commissioner of Income-tax. But as pointed out in that case we must, in applying the test, take into account “the standered of customary law and common opinion amongst the community to which the parties interested belonged” and “the conditions of Indian life” and not blindly hold that whatever constitutes a section of the community according to English view must be regarded as a section of the community for determining the charitable character of a gift in India and whatever is not regarded as a section of the community according to English view must likewise be refused recognition as section of the community under the Indian law.
In every case, therefore, where the question arises whether a class of beneficiaries under a gift constitutes a section of the community or is a mere conglomeration of individuals that is not a section of the community, the inquiry must be what is the common quality which unite those whithin the class and is that quality essentially impersonal or essentially personal; if the former, the class will rank as a section of community and the gift will have the element common to and necessary for all legal charities; but if the latter, the gift will be private and not charitable. And this test must be applied having regard to the standard of customary law and common opinion amongst the community to which the parties interested belong and the conditions of Indian life.
Before we proceed to apply this test the facts of the present case, we must refer to an interesting argument raised by the learned Advocate General on behalf of the revenue. He contended that this test was not universally valid in its application to all the charitable purposes set out in the last paragraph of section 4(3) (i) but that it had validity only in so far as the question of existence of the public benefit was involved in any of the first three classes of charitable purposes, namely, relief of the poor, education, medical relief. Where the charitable purpose was sought to be supported under the last head, namely, “advancement of any other object of general public utility”, the test could not be relied upon as yielding a satisfactory solution to the question as to whether the charitable purpose was invested with a public character. The argument of the revenue was that in a case falling under the last head, namely, “advancement of any other object of general public utility”, it was necessary that the beneficiaries should comprise all those who are equally willing and able to take advantage of the benefit and “if the form, which the purporting charity takes, is something of general utility which is nevertheless made available not to the whole public capable of taking it but only to a selected body of the public – an important class of the public it may be”, it would not be a trust of general public utility within the last head. This argument was sought to be supported by reference to the speeches of Viscount Simonds and Lord Somervell of Harrow, two of the learned Law Lords who decided the case of Inland Revenue Commissioner v. Baddeley. The assessee, on the other hand, contended that there was no distinction between a purpose falling within any of the first three heads and a purpose falling within the last head so far as the sufficiency of the public element was concerned and the same test was applicable in the case of a purpose falling within the last head as in the case of a purpose falling within the first three heads. The assessee in this connection relied on the speech of Lord Reid in Buddeleys case and also pointed out that no such distinction as was sought to be made by the revenue was justified by the language of section 4(3) (i). These rival contentions raise a very interesting question of law relating to the law of charity but for the purpose of the present reference it is not necessary to decide it since we are of the view that even if the contention of the assessee is correct and the same test is applicable for the purpose of determining the sufficiency of the public element in a case falling under the last head as in a case falling within any of the first three heads, the beneficiaries in the present case do not satisfy that test and they cannot be regarded as a section of the community.
Now, in applying the test it must be remembered that the class of beneficiaries in order to constitute a section of the public must be a well-defined and identifiable class united by a common quality or attribute which is of a public or impersonal character. There can be no doubt that having regard to the common opinion amongst the people and the conditions of Indian life, if the beneficiaries were the members of the Rana caste residing in Ahmedabad or natives of Ahmedabad, they would be section of the community since the common quality uniting them within the class would be essentially an impersonal quality. But the class of beneficiaries before us consists of two section; one comprising members of the Rana sect who are natives of Ahmedabad and the other comprising members of the Rana sect who are residing in Ahmedabad and who have been accepted by the community according to the old usage of the caste. It is difficult to see how this class of beneficiaries can be said to constitute a well defined section of the public connected together by a common quality or characteristic. It is no doubt true that two characteristics are common to the members belonging to the two sections of the class. One is that they are members of the Rana sect and the other is that they are residing in Ahmedabad. But there is a third characteristic or quality which is not common amongst them. In the first section the third characteristic or quality is that the members must be natives of Ahmedabad while in the second section, it is that they should have been accepted by the caste according to its old custom or usage. It is, therefore, not possible to say that all the beneficiaries comprised in this class are united by a common characteristic or attribute. Moreover the requirement that the members must have been accepted by the community according to its old custom or usage in order to fall within the class destroys the public character of the class. There is nothing on record to show what was the old custom or usage of the caste which regulated the admission of the other members of the caste residing in Ahmedabad into this class. If the entrance of members of the caste residing in Ahmedabad into this class is dependent on the decision of the caste to admit them, it would be impossible to say that this class of beneficiaries constitutes a well-defined section of the community united by a common impersonal characteristic or quality. It may also be noted that if there are any members of the caste residing in Ahmedabad who are not accepted by the community according to its old custom or usage, they would be outside the class of beneficiaries though they posses the two characteristics or qualities, namely, that they are members of the caste and are residing in Ahmedabad. The class of beneficiaries cannot, therefore, be regarded as a well-defined section of the community chosen out of the rest of the community by reference to some common characteristic or quality of a public or impersonal character and must be held to be a conglomeration of private individuals not forming a section of the community. We must, therefore, hold that the element of public benefit requisite to attract the applicability of section 4(3) (i) was lacking in the present case and the assessee was not entitled to claim exemption under section 4(3) (i).
Our answer to the question referred to us is, therefore, in the negative. The assessee will pay the costs of the reference to the Commissioner.
Question answered in negative.