COMMISSIONER OF INCOME TAX, Appellant, and TRUSTEES OF THE ABDUL GAFFOOR TRUST

090-NLR-NLR-V-60-COMMISSIONER-OF-INCOME-TAX-Appellant-and-TRUSTEES-OF-THE-ABDUL-GAFFOOR-TRUST.pdf


Commissioner of Income Tax 'll. Trustees bf the Abdul Oaffoor Trust 361
1958 Present: H. N. G. Fernando, J., and Sinnetamby, J.
COMMISSIONER OE INCOME TAX, Appellant, and TRUSTERSOF THE ABDUL GAFFOOR TRUST, Respondent
8. G. 3—Income Tax Case Stated B. R. A.J248
Income tax—Res judicata—Applicability of its principles to decisions of Boardof Review—Trust—Income derived therefrom—Exemption from income tax—“ Charitable trust ”—“ Public benefit ”—•“ Public character”—Trusts Ordinance(Gap. 72), ss. 99,100—Income Tax Ordinance (Cap. 188), ss. 7 (1) (c), 64, 66,69, 71, 72, 73, 74, 75.
The Board of Review constituted under the Income Tax Ordinance performsmerely administrative, and not judicial, functions ; the principles of res judicataare not, therefore, applicable to its decisions. Accordingly, its decision onappeal against the assessment made on the trustees of immovable propertyfor a particular year of assessment does not operate as res judicata in respect ofsubsequent years upon the question whether the inoome of the trustees isincome of a “ trust of a publio character established solely for charitablepurposes ” within the meaning of seotion 7 (1) (a) of the Income Tax Ordinance.
Income from a trust of a public character established solely for charitablepurposes cannot be exempted from income tax under section 7 (1) (c) of theIncome Tax Ordinance if the trust offends the rule against perpetuities and isnot a “ charitable trust ” as defined in section 99 of the Trusts Ordinance.
A trust created for “the advancement of education” but which is not“ for the benefit of the public or a section of the public” is not a “charitabletrust ”.
In construing the expression “ for the benefit of the public or a section ofthe public ” in seotion 99 of the Trusts Ordinance the test is whether, althougha class or section of the publio is designated in the trust instrument, membersof that class or section can, as such, qualify for the benefit.
The trustees of certain immovable property were required by the trustinstrument to apply the income from the property for all or any of the variousobjeots of the trust as they in their “ absolute and uncontrolled discretion ”might select. Clause (b) of the instrument directed the trustees to applyspecified sums of money monthly for the education of “ deserving youths of theIslamic faith ”. The trustees were, however, directed to give preference to“ deserving male descendants ” of the grantor’s family. Moreover they weregiven absolute discretion to refrain from utilising the income except for thepurposes of the education of such descendants.
Held, that clause (b) of the trust instrument did not contain the element ofpublic benefit which should characterise a charitable trust as defined in seotion 99of the Trusts Ordinance. The trust therefore did not qualify for exemptionfrom income tax under section 7 (1) (c) of the Income Tax Ordinance.
Held further, that the income of the trust was not exempt from income taxbecause the trust failed to attain the qualification of “ publio character ”required by section 7 (1) (c) of the Income Tax Ordinance.
(^ASE stated under the Income Tax Ordinance.
M. Tiruchelvam,- Acting Solicitor-General, with V. Tmnekoon, SeniorCrown Counsel, and Mervyn Fernando, Crown Counsel, for the Assessor-Appellant.
– -LX
2—J. N. B 1854—1,693 (5/69)
362
H. N. G. FERNANDO, J.—Commissioner of Income Tax v. Trustees
of the Abdul Gaffoor Trust
H. V. Perera, Q.C., with H. W. Jayeivardene, Q.C., N. R. M. Daluwatteand D. E. V. Dissanayake, for the Assessee- Respondents.
Cur. adv. wit.
November 26,1958. H. N. G. Fernando, J.—
By a conveyance No. 1832 of 24th December 1942 one N. D. H. AbdulGaffoor conveyed certain immovable property to four persons, referredto in the document and in this judgment as “ the Trustees ”, upon certaintrusts declared in an instrument No. 1833 of the same date. It isnecessary for the purposes of considering the question arising uponthis Case Stated to set out in extenso some of the provisions of thisinstrument:—
2. “ The Trustees shall stand possessed of the trust property withthe power to let lease and manage the same or any part or portionthereof and shall apply the nett rents profits dividends and incomethereof (after payment thereout of all rates taxes and other outgoingsand after reserving a sum of One Thousand Rupees (Rs. 1,000) a monthfor the proper upkeep repair and maintenance of the trust property)for all or any of the purposes following as the Board in its absoluteand uncontrolled discretion may decide that is to say
(а)A sum not exceeding one thousand rupees (Rs. 1,000) a monthfor the remuneration of the Trustees and the expenses incurred bythem in connection with the administration of the trust ….
(б)A sum not exceeding in all one thousand rupees (Rs. 1,000)a month for the education instruction or training in England orelsewhere abroad of deserving youths of the Islamic Faith in suchprofessions vocations occupations industries arts or crafts tradesemployments subjects lines or any other departments of learning orhuman activity whatsoever as the Board may in its aforesaiddiscretion decide in the case of each such deserving youth with a likediscretion in the Board from time to time to change modify or alteror completely discontinue in the case of each such youth either theobject or objects of instruction education or training selected forhim by the Board (from among the objects enumerated above) orthe place or places or countries whereat such education trainingor instruction is being given from time to time. The Board mayunder a like discretion partially or wholly discontinue any assistanceit may have given or may be giving in the case of any of such youths.It shall be lawful for the Board out of the said sum to pay for orprovide the whole or any part of the cost of any such youth goingabroad from or in returning to Ceylon once or oftener as the Boardmay under such discretion aforesaid from time to time decide. The
H. N. G. FERNANDO, J.—Commissioner of Income Tone v. Trustees 363
of the Abdul Qaffoor Trust
recipients of the benefits provided for in this clause shall be selectedby the Board from the- following classes of persons and in thefollowing order:—
male descendants along either the male or female line of theGrantor or of any of his brothers or sisters failing whom
youths of the Islamic Faith not being male descendantsas aforesaid of the Grantor or of his brothers or sisters bom ofMuslim parents of the Ceylon Moorish Community permanentlyresident in the City of Colombo (wherever such youths may havebeen or be resident from time to time) fading whom
youths of the Islamic Faith not being male descendants asaforesaid of the Grantor or of his brothers or sisters bom of Muslimparents of the Ceylon Moorish Community permanently residentanywhere else in the said Island of Ceylon other than in Colombo(wherever such youths may have been or be resident from timeto time)
… .
… .
….
(/) A sum not exceeding one thousand rupees (Rs. 1,000) a monthto be accumulated from month to month and distributed for charityonce a year during the month of Ramalhan
(g) any surplus or any sums not expended on any of the aboveobjects shall be credited to a reserve fond to be used in such pro-portions to such extents at such time or times and from time to timeand in such manner as the Board may in its absolute and uncontrolleddiscretion decide (1) for the purpose of meeting any unforeseenexpenditure or contingency in connection with the trust property(2) in furtherance of all or any one or more of the various objects ofthe trust (3) for educating in a secondary school or secondary schoolsin Ceylon poor deserving boys of the Islamic Faith born of Muslimparents permanently resident in Ceylon (wherever such boys mayhave been or be resident from time to time) and (4) for the reliefof poverty distress or sickness amongst members of the Islamic Faithin Ceylon.
PROVIDED however that during the lifetime of the Grantorthe Trustees shall apply the nett rents profits dividends and incomeof the trust property for such purposes and in such manner as the ■Grantor in his absolute discretion whether such purposes shall fallwithin the objects specified in any provision above or not may throughthe Board direct. The Board shall not be nor be liable to bequestioned regarding or asked the grounds or reasons for any decision
364 H. N. G. FERNANDO, J.—Commissioner of Income Tax v. Trustees
of the Abdul Gajfoor Trust
of the Board in regard to any of the matters provided for in sab-clauses (b) (c) (d) (e) (/) and (g) of this Clause it being the aim intentionand object of These Presents that the Board and every memberthereof shall at no time be liable to have their decisions or theirgrounds or reasons in regard to such matters revised discussed goneinto challenged modified or altered in any manner howsoever byany person body authority or Court. ”
In connection with the assessment of the income of the Trustees totax under the Income Tax Ordinance for the year of assessment 1949-50,the Board of Review constituted under the Income Tax Ordinance(Cap. 188) held, on 22nd December 1954, upon an appeal preferred by theTrustees, that the income was income of a “ Trust of a public characterestablished solely for charitable purposes ” and was therefore exemptfrom tax in terms of Section 7 (1) (c) of the Ordinance. On that occasionno application was made to the Board by the Commissioner to state acase on any question oi law for the opinion of this Court.
In respect, however, of the years 1950/51, 51/52, 52/53, 53/54, 54/55,the Assessor again made assessments on the basis that the income of theTrustees was not exempt from tax and these assessments were upheldby the Commissioner. The Trustees appealed against these assessmentsto the Board of Review which made Order dated 19th February 1957,again holding that the income of the Trustees is exempt under Section7 (1) (c) of the Ordinance. The Board has now, upon the application ofthe Commissioner, stated a case for the opinion of this Court in thefollowing terms :—“ The creator of the trust, N. D. H. Abdul Gaffoor,having died on 1st November 1948, can the terms of the trust deedNo. 1833 of 24th December 1942 be construed in accordance with thefacts as they exist at the time it becomes necessary to construe it forIncome Tax purposes, or must it be construed for such purposes only inaccordance with the facts existing at the date it was executed ? ”.
Having regard to the matters which have been argued before us,I am of opinion that the questions arising for our determination would bebetter formulated thus:— 1
(1) Does the decision dated 22nd December 1954 of the Board ofReview constituted under the Income Tax Ordinance on appealagainst the assessment made on the Trustees for the year ofassessment 1949/50, operate as res judicata in respect ofsubsequent years upon the question whether the income of theTrustees is income of a “ trust of a public character establishedsolely for charitable purposes ” within the meaning of Section7 (1) (c) of the Income Tax Ordinance ?
• (2) Is the income derived from the property described in the scheduleto the instrument No. 1833 of 24th December 1942, exempt fromtax for the years of assessment 1950/51, 51/52, 52/53, 53/54,54/55, under Section 7 (1) (c) of the Income Tax Ordinance asbeing the income of trust of a public character establishedsolely for charitable proposes ?
H. N. G. FERNANDO, J.—Commissioner of Income Tax v. Trustees 366
of the Abdul Qaffoor Trust
With regard to the first of the two questions we have to decide, theSolicitor General relies on the decision of this Court in The AttorneyGeneral v. VaUycmma Atchie The. question which there arose waswhether a decision of the Board of Review of Income Tax, to the eifectthat the estate of a certain deceased person was not joint property ofa Hindu undivided family, operated as res judicata in subsequentproceedings where the point for determination was whether .the sameproperty was the joint property of the family for the purposes of Section 73of the Estate Duty Ordinance. Howard C. J. (with whom Wijeyewardene J.agreed) held that “ the decision of the Board of Review can be regardedas final and conclusive as between the Crown and the assessee as to thelatter’s income in regard to the particular year, but not as to futureyears
It is contended for the Trustees that that decision should notbe followed, or alternatively that its true ratio decidendi was that thequestion decided by the Board of Review was not the same question whichsubsequently arose in the Estate Duty case. There would seem to besome ground for the alternative argument, for Howard C.J. refers to thecircumstance that the decision which was relied on as creating an estoppelby means of res judicata had been given in a matter arising under theIncome Tax Ordinance and not in a matter arising under the Estate DutyOrdinance. In the present case, the question we are now asked to decideis whether the trust is one of the description specified in Section 7 (1) (c)of the Income Tax Ordinance, and since it is clear that that very questionhad been answered by the Board in favour of the Trustees, the decisionin Valliamma Atchie’s case may be distinguishable.
For this reason it is desirable that we consider the matter afresh withoutregarding Valliamma Atchie’s1 case as having already decided it.
An assessment to income tax is in the first instance made by an assessorunder Section 64 of the Ordinance and the assessment is scrutinized,amended, and then signed (Section 66) by an Assistant Commissioner,who thereafter gives notice of the assessment to the person chargeable.Against this assessment the assessee can appeal to the Commissioner ofIncome Tax who is empowered (Section 69) “ to confirm, reduce, increase,or annul the assessment ”. The right of appeal to the Board of Reviewfrom the Commissioner’s determination is conferred by Section 71;after certain preliminaries, the appellant gives notice of appeal to theBoard against the Commissioner’s determination. At such an appeal,the assessee may be heard in person or by an authorised representativeand the assessor or some other person authorised by the Commissionerattends in support of the assessment. After hearing the appeal, theBoard “shall confirm, reduce, increase, or annul the assessment” asdetermined by the Commissioner 'on appeal, or as referred by him underSection 72. as the case may be, or may remit the case to the Commissionerwith the opinion of the Board thereon ”. Where a case is so remitted bythe Board the Commissioner shall revise the assessment as the opinionof the Board shall require.
1 (1944) 45 N. L. R. 230.
2*—J. N. R 1854 (6/59).
»
305 H. N. G. FERNANDO, J.—Commissioner of Income Tax v. Trustees
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Section 74 provides that the decision of the Board shall be final, butenables the appellant or the Commissioner to apply to the Board to statea case on a question of law for the opinion of the Supreme Court. So faras a determination -of the Board of Review is concerned, the effect ofSection 75 is that an assessment as regards the assessable income assessedthereby, as determined by the Board on appeal, is final and conclusive,for all purposes of this Ordinance as regards the amount of such assessableincome, if such assessment is not subsequently altered or has not to bealtered by or in consequence of the ultimate decision of the SupremeCourt or of the Privy Council upon a case stated on a question of law.
The main point for determination is whether the Board of Reviewperforms judicial and not merely administrative functions, for, if theBoard’s decision on appeal is merely administrative, it would not operateto create an estoppel by means of res judicata. Having regard to thoseprovisions of the Ordinance to which I have referred above, the functionsof the Board of Review are properly comparable with those of the Boardestablished under the Australian Income Tax Assessment Act, and whichwere considered in the Privy Council case of Shell Company of Australia v.The Federal Commissioner of Taxation b In the Australian Act as wellas in the Ceylon Ordinance the provisions for the making of assessmentsand for the making of appeals therefrom, including appeals to the Boardof Review, would seem to be no more than expeditious administrativemachinery for determining each year the assessable income upon whichtax is to be levied for that year. No doubt the Board of Review isexpected to act in a judicial manner, and an appeal might well raise,as it did in the present case, questions of law for determination by theBoard ; but as was pointed out in the Shell Company case1 “an adminis-trative tribunal may act judicially, but still remains an administrativetribunal as distinct from a Court, strictly so called ”, Their Lordshipsof the Privy Council held in that case that the Board under the AustralianAct was not exercising the “ judicial power ” of the Commonwealth.Can it be said, nevertheless, that such a Board is a “ court of competentjurisdiction ” for the purposes of the principles of res judicata ?
The decision of the English Court of Appeal in the case of TheCommissioners of Inland Revenue v. Snealh2 is directly of assistance.Under the English Income Tax Act of 1918 there was a right of appealto the Special Commissioners after preliminaries not substantially differentfrom the steps prescribed by the Ceylon Ordinance. But it was heldthat what the Special Commissioners had to determine was the amountof the assessment which should be made upon the facts of the case beforethem. Lord Hanworth M.R. thought it difficult to attribute to sucha determination of an assessment in amount, the decision of a lis interpartes. The reasons which underlie this view of the functions of a statutoryauthority set up for taxation purposes were stated by Greer L.J. asfollows:—“ I think the estimating authorities, even when an appeal ismade to them, are not acting as judges deciding litigation between the
1 {1931) A. C. 275.
1 {1932) 2 K. B. 362.
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subject and the Crown. They are merely in the position of valuers,' -whose proceedings are regulated by statute to enable them to make’ an estimate of the income of the taxpayer, for the particular year inquestion. The nature of the legislation for the imposition of taxes makingit necessary that the statute should provide for some machinery wherebythe taxable income is ascertained, that machinery is set going separatelyfor each year of tax and, though the figure determined in one year is finalfor that year, it is not final for any other purpose. It is final not asa judgment inter partes, but as the final estimate of the statutory esti-mating body. No lie comes into existence until there has been a finalestimate of the income which determines the tax payable. There can beno lis until the rights and duties are ascertained and thereafter questionedby litigation. It would be unfortunate if we were compelled to arriveat any other result, because it might well be in one year the taxpayermight not think it worthwhile to challenge the decision of theCommissioners for that particular year, though it might in later yearsprove to be worth his while to contest their view. On the other hand,it is equally likely that there may be many cases in which the Crownwould be quite prepared to make concessions in one year, whereas theymight rightly conclude in subsequent years that it would not be in theinterests of the taxpayers generally that they should make such aconcession. ”
I would with respect adopt these observations. Section 75 of ourOrdinance gives finality to a determination of the Board as regards theassessable income assessed thereby, that is to say, as regards the amountof the income for the year to which the determination relates, and not asregards income for subsequent years. Moreover, there is the provisionin Section 72 whereby the Board of Review may even take the place ofthe Commissioner and hear an appeal preferred to that officer, and theprovision in Section 73 that the Board’s hearings shall be in camera.These features of the statutory provisions weigh considerably against theview that the Board was intended to function as a court to decide litigationbetween the subject and the Crown.
Counsel for the Trustees relied on a statement in Spencer-Bower 1 inwhich “ Income Tax Commissioners and authorities ”• are included ina class of Civil tribunals whose decisions are stated to operate as resjudicata. I find however that none of the cases cited by the learnedauthor were concerned with the question whether decisions of suchCommissioners would so operate. The case of Hoisted v. TheCommissioner of Taxation 2 also does not assist the Trustees, for the■decision which was there held to operate as res judicata was one of theHigh Court of Australia and not of any statutory Board or Commissioners.
I would for the reasons stated answer in the negative the first question .which we are called upon to decide.
The second question which this Court has to answer is the substantial ■question in the case—-is the income of the trust exempt from income tax ?
The Doctrine of lies Judicata, 1924, by Spencer Bower at page 14.
(1926) A, C. 155.
368 H. N. G. FERNANDO, J.—Commissioner of Income Tax v. Trustees
of the Abdul Qaffoor Trust
I was at first impressed by the argument for the Trustees thatthe answer is to be ascertained only from a consideration of paragraph
of Section 7 (1) of the Income Tax Ordinance, that is to say, bydeciding whether or not the trust firstly is of a public character andsecondly is one established solely for “ charitable purposes ” as definedin the interpretation section (Section 2). Whether the last mentioneddefinition should he regarded as being exhaustive, or whether (becauseof the use of the word “ includes ”) other purposes generally consideredcharitable are also included within its scope, the objects of the presenttrust are prima facie within the definition, for each of them is either foreducation or for the relief of poverty. There is nothing, it is said, inparagraph (c) of Section 7 (1) or in the definition of “ charitablepurposes ”, indicative of an intention that a purpose must be “ legally ”charitable, which is the characteristic required by the law of Englandin similar cases.
The question whether the trust is of a public character inav be difficultto answer, but the meaning of the expression should be clear, and littleadvantage is to be gained from a study of English cases, save those inwhich the ordinary significance of “ public character ” has been examined.Much reliance was placed on the observations of Lord Wright in thePrivy Council decision of All India Spinners Association v. The Com-missioner of Income Tax1:— "… the Indian Act must beconstrued on its actual words and is not to be governed by Englishdecisions on the topic …. English decisions have no bindingauthority on its construction and though they may sometimes afford helpor guidance, cannot relieve the Indian Courts from their responsibilityof applying the language of the Act to the particular circumstances thatemerge under conditions of Indian life
Having regard to the terms of paragraph (c) of Section 7 (1) of ourOrdinance it is urged that these observations would apply equally incases where the interpretation of that paragraph is involved.
The Solicitor-General argues, however, that the expressions “publiccharacter ” and “ charitable purposes ” are not the only expressionswhich we have to construe. We have first to consider whether thereis in this case a “ trust ”. The term “ trust ” cannot be understoodin any loose or colloquial sense, and can denote only such a trust as iscontemplated in the Trusts Ordinance ; although the disposition in thiscase may apparently fall within the scope of the definition of “ trust ” inSection 2 of that Ordinance, the matter does not end there; havingregard to Section 110 of the Trusts Ordinance the trust now underconsideration will be void as offending the rule against perpetuities, unlessit is a “ charitable trust ” (Section 110(5)). Accordingly, the preliminary' question we must decide is whether the “ trust ” is a “ charitable trust ”as defined in Section 99 of the Trusts Ordinance ; and for that purposewe do have to construe that definition.
The argument of the Solicitor-General is in my opinion perfectly sound,and I need make but one further comment: the Legislature could surely1 31 A. I. R. (P. C.) 88 at page 91.
H. N. G. FERNANDO, J.—Commissioner of Income Tax v. Trustees 369
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not have contemplated the grant of tax exemptions for “ trusts ” whichhave no legal validity or existence under the special law relating totrusts which had earlier been enacted in the Trusts Ordinance. I shallnow set out a summary of the principal reasons relied on for the argumentthat the trust in question is not a “ charitable trust ” as defined in■Section 99.'•
Paragraph 2 of the instrument confers on the Board (constituted byparagraph 9) an absolute and uncontrolled discretion to make decisionsconcerning the utilisation and application of the income of tlfe trustproperty for all or any of the purposes enumerated in the various clausesof that paragraph. This discretion is reinforced (if reinforcement wereneeded) in the Proviso at the end of paragraph 2, whereby the Grantordeclares his intention and object that any such decision of the Board mustnot be revised or challenged. Although then, clause (b) purports todirect or authorise the application of sums not exceeding Rs. 1,000 permonth for the education instruction or training abroad of deserving youthsof the Islamic faith—a designation which might well denote an intention•on the part of the Grantor to benefit a section of the public—theconstruction that the object is to benefit the public must be rejected upona consideration of the aforementioned discretionary power and of thedirections of the Grantor contained in clause (b). The argument is that,upon a construction of the whole clause, the Board is direoted to givepreference to deserving descendants of the Grantor’s family, and furtherthat, sinoe there is no obligation cast on the Board to apply moneys ineach and every year for the purposes specified in the clause, the Board canin its discretion refrain from utilising the specified monthly sums exceptfor the purposes of the education of such descendants. The Solicitor-General sought to underline his argument by reference to clause (g) ofparagraph 2. The Board, he said, would not be acting in breach of thetrust if surpluses, accumulated either after application of income annuallyfor the several purposes mentioned in clauses (b) to (/) or even by theexpedient of remaining “ inactive’ ’ with respect to the purposes specifiedin clauses (c) to (/), are kept in the reserve fund and applied solely ormainly for the education of family descendants. He pointed to theprovisions in sub-clause (2) of clause (g) whereby the reserve fund canbe used, in “ absolute and uncontrolled discretion ”, “ in furtherance ofall or any one or more of the various objects of the trust ”, which hesaid would render unquestionable the right of the Board to aj>ply thereserve fund only for the object specified in clause (b), and in so doingto prefer family descendants exclusively. His submission in brief wasthat no benefit under clause (6) is assured to deserving youths of theIslamic faith as such, and that in effect, if not also in intention, • thebenefit is or can properly be restricted to family descendants. At theleast, having regard to the imperative direction for the selection of“ deserving male descendants ”, the provision that, failing them,beneficiaries of the “ public class ” would be eligible is of a remote andindirect nature, so that the element of “ public benefit ” required bySection 99 is not present. Hence, assuming that the gift in clause (b)is for a purpose mentioned in the definition of “ charitable trust ”, namely,
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“ the advancement of education ”, the trust fails to satisfy the requirementin the definition that it must be for the benefit of the public or a sectionof the public.
The expressions. “ public ”, “ public benefit ”, and “ benefit of thepublic ”, occurring in statutory provisions, have often to be construed bythe Courts. It seems to ine that the first step in the process of inter-pretation is to ascertain the ordinary grammatical meaning of theexpression. In its ordinary meaning, “ public ” would mean “ of,concerning, the people as a whole ” and also “ open to, shared by thepeople In addition the term carries with it a connotation opposed to“ private ”, which ordinarily means “ not open to the public ” or “ one’sown, individual or personal If then it can be said that the contempla-ted benefit is of a “ private ’’nature, it may lack the characteristic of beingpublic even though it may in certain events be available to the public.
I note also at this stage that the definition in Section 99 of the TrustsOrdinance does not require a trust to be solely for the public benefit, so-that a trust which is essentially or substantially for the publicbenefit may reasonably be considered to fall within the definition.•Let me take, the case of the landlord of a block of flats who-maintains a playing field, the use of which is regulated by somedocument which entitles the children of the tenants to play thereon all such days as their parents may freely decide, and provides furtherthat children of members of the public may use the field on other days.The man in the street or a city official might well come in time to regardthe playing field as “ public ”, if in practice it has habitually been usedby the “ privileged ” children-only on specified days each week and beenavailable for public use on other days. But if the matter is consideredin limine, at a time when it is not clear that other children can everenjoy a benefit, the rights of these others are merely theoretical anduncertain. A right to use a playing field would not be theoretical anduncertain, if the only restriction as to user is that a child must firstsatisfy some authority that he is proficient at cricket or football, for thenthe designated section of the public would consist of all children whosatisfy the test of proficiency at cricket or football. But in the exampleI have taken, there is a right of preference dependent on a qualificationwhich cannot be fulfilled by any child of a member of the public, as duck,and there is no certainty or assurance that children of members of thepublic can benefit.
It is in this ordinary and reasonable sense that I would in the firstinstance construe the expression “ for the benefit of the public or a sectionof the public “ —so that the test is whether, although a class or sectionof the public is designated in the instrument, members of that class orsection can, as such, qualify for the benefit. Applying this test to theterms of the present instrument it would seem at the least doubtfulwhether the test is satisfied. The answer to the question whetherdeserving youths of the Islamic faith are as such qualified to receiveeducational assistance under clause (6), can only be “ Yes, but only ifmoneys remain available from 'the specified sum of Rs. 1,000 per monthor from apportionments from the reserve fund after providing for the
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education of such deserving family descendants as the Board may decid .to assist, and furthermore only if the Board in its absolute discretio •,desires to educate Islamic youths who are not family descendant®.If that he the correct answer, then clause (6) does not contain the elementof public benefit which should characterise a charitable trust. I alsoseriously doubt whether, having regard to the uncertainty of the rightsof the general class of youths, the clause can even be regarded as beingessentially or substantially for the benefit of a section of the public.
I have referred already to the dictum of Lord Wright in the IndianSpinners Association case1 which generally speaking must be borne inmind by Judges in Ceylon when concerned with the interpretation oflanguage in enactments of the Ceylon Legislature. Nevertheless, theexpression “ for the benefit of the public or a section of the public ” hadbeen employed so frequently in judgments in England dealing withcharitable trusts, that it is difficult to resist the impression that theexpression was used in our Ordinance to denote the same concept as inEnglish Trust I,aw.
The following passage from Tudor on Charities has often been citedwith approval“ In the first place it may be laid down as a universalrule that the law recognises no purpose as charitable unless it be ofa public character. That is to say, a purpose must, in order to becharitable, be directed to the benefit of the community or a section of thecommunity ”.
In the judgment of the Privy Council in Verge v. Somerville 2 LordWrenbury said :— “ . . . .to ascertain whether a gift constitutesa valid charitable trust so as to escape being void on the ground ofperpetuity, a first inquiry must be whether it is public, whether it is forthe benefit of the community or for am appreciably important class of thecommunity ”. In his observations in the case of Oppenheim v. TobaccoTrust Go. 3 Viscount Simonds lays down the same test in similarlanguage :—“ It is a clearly established principle of the law of charitythat a trust is not charitable unless it is directed to the public benefit.This is sometimes stated in the proposition that it must benefit thecommunity or a section of the community. Negatively it is said that a trustis not charitable if it confers only private benefits ”.
Since the language of the Ceylon Trusts'Ordinance so nearly corresponds■with the language in which the test invariably applied in England isphrased, it is legitimate, if not necessary, to consult those authoritiesin England in which the test has been applied in cases similar to thatunder consideration. Trusts which can .benefit relatives or descendantsof a settlor came in for exhaustive examination by Lord Greene inPoweU v. Compton 4 and the views and conclusions there expressed by theMaster of the Rolls were approved by the House of Lords in Oppenheim’scase 3, subject only to the dissenting opinion of Lord MacDermott. Itwould seem to be settled law in England that a trust for the relief of
1 31 A. I. R. (P. G.) 88 at page 91.8 (1951) 1 A. E. R. 31.
* (1924) A. G. 496.‘* (1945) Oh. D. 123.
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poverty would be regarded as charitable even if the benefit is restrictedto kin of the settlor; but the validity of such trusts has recently beendoubted and it is clear that the cases are regarded as anomalous and willhave no bearing except upon trusts for the relief of poverty. Clause (6)of the present instrument is in any event not of this class, its object beingeducation, and not the relief of poverty.
There are then the so-called “ founder’s kin ” cases, in which theEnglish Courts had for long recognised trusts for the endowment ofeducational institutions as being charitable notwithstanding the reservationof benefits to descendants or relatives of the settlor. Lord Greene inCompton’s case1, after examination of the earlier authorities, doubtedthe correctness of the proposition in Tudor (at page 30) that “ bequestsfor the education of the donor’s descendants and kinsmen at schoolsand colleges are valid bequests ”. With respect, it seems to me that theauthorities only support the view that the trust in such a case would beconstrued as being one to some particular college or foundation upontrust to educate descendants there. The instrument I am now consideringcannot be so construed, there being no specified educational institutiondesignated for the purpose of the trust. The trust in Be Compton1itself was for the education of Compton and Powell and Montaguechildren and was held not to be charitable on the ground that “ a giftfor the education of descendants of named persons must be regardedas a family trust and not as one for the benefit of a section of thecommunity, on any fair view of what that phrase may mean ”. LordGreene thought that, “ a gift under which the beneficiaries are definedby reference to a purely personal relationship to a named proposituscannot on principle be a valid charitable gift ” (at page 131).
The only earlier case on comparable facts was that of Re Rayner 4,a decision of Eve J. which was disapproved by the Court of Appeal andsubsequently doubted by Viscount Simdnds and Lord Normand inOppenheim’s case s.
Before referring to a subsequent decision upon which Mr. Perera verystrongly relied and which the Board of Review has applied, it would beuseful to summarise his arguments.
The proper mode of interpretation of clause (6), it is said, would beto ascertain the primary object of the disposition. .The primary object hereis “the education instruction and training of deserving youths of theIslamic faith bom of Muslim parents of the Ceylon Moorish communitypermanently resident in Ceylon”. (I should mention that thelimitation to the Ceylon Moorish community is derived from referencesto that community in sub-clauses II and III of clause (6). Mr. Pereraconcedes that having regard to these limiting references the class intendedto be benefited is not the wider class “ deserving youths of the Islamicfaith ” simplioiter but rather the narrower class I have just described.)This class I will assume for the purpose of discussion to be “ a section ofthe public ”. The further argument is that the “ order of selection ”
111945) Oh. D. 123.* 122 L. T. 577.
3 {1951) 1. A. E. JR. 31.
H. N. G. FERNANDO, J.—Commissioner of Income Teas v. Trustees 373
of the Abdul Qqffoor Trust
set down in the latter part of clause (6) merely confers a right of preferenceon such deserving youths of the Islamic faith as are also descendants ofthe family of the Grantor. A descendant who does not belong to theprimary class would not be eligible for the benefit and even a descendantwho does so belong may only be selected if he is deserving; preferencefor him on the ground of his being a descendant is contemplated, butonly if he is in other respects as deserving of the benefit as other youthsof the primary class. Such a right of preference does not, it is said,detract from the public character of the primary object of clause (b).
The counter to the Solicitor Generats argument as to the combinedeffect of clauses (&) and (g) was that the right of preference for familydescendants will be available only in respect of the sum not exceedingBs. 1,000 per month specified in clause (b) and not in the event of surplusesor accumulations in the reserve fund 'being utilised for the purposesmentioned in clause (6). The ground of this distinction is that thereference in clause (g) to the “ various objects of the trust ” would denotein this context, not the whole “ scheme ” set out in clause (6), but onlythe primary object of the disposition in that clause. This distinction, it isargued, is apparent in clause (6) itself, for the order of selection is prescribedonly for “ the recipients of the benefits provided for in this clause ”, that isto say, the monthly one thousand rupee benefit, and would not apply whensurpluses are used for the education abroad of Muslim youths. Moreover,the exclusion of the order of selection is also implicit in clause (g) itselfwhere the language “ in such manner as the Board may in its absoluteand uncontrolled discretion decide ” enables the Board to disregard themanner of selection contemplated in clause (b). It is urged also thatthe discretion conferred on the Board is of a fiduciary character and thatthe intention therefore is that the Board will not so act as to defeator unduly diminish the benefits intended to be conferred on the primaryclass of beneficiaries. The English decision in support of these argumentsis that of BeKoettgen1 decided by Upjohn, J. which needs very close con-sideration. The objects of the trust set up in that case were thusdefined :—“ The persons eligible as beneficiaries under the fund shall bepersons of either sex who are British bom subjects and who are desirousof educating themselves or obtaining tuition for a higher commercialcareer but whose means are insufficient or will not allow of their obtainingsuch education or tuition at their own expense ; in selecting beneficiariesit is my wish that the charity trustees shall give a preference to anyemployees of John Batt & Co. (London), Ltd., or any members of thefamilies of such employees; failing a sufficient number of beneficiariesunder such description then the persons eligible shall be any personsof British birth as the charity trustees may select. Provided that thetotal income to be available for benefiting the preferred beneficiariesshall not in any one year be more than seventy-five per cent, of thetotal available income for such year ”.
It was conceded that the trust was for a charitable purpose, namelythe advancement of education, and was as to twenty-five per cent, of theincome a valid charitable trust. But the validity of the trust as to
1 (1954) 1 A. B. B. 581.
374 H. N. G. FERNANDO, J.—Oommissioner of Income Tax v. Trustees
of the Abdul Oaffoor Trust
seventy-five per cent, of the income was challenged on the ground thatthe provisions for the application of the income did not have the requisitedegree of public benefit. Upjohn J. was of opinion that the desire of thetestatrix to prefer the members of the families of the named firm mustbe read in an imperative sense. But he did not attach much significanceto the possible practical effect of the preference clause:—“ In someyears there might be sufficient members of that limited class to fill theseventy-five per cent, available for them, and in other years there mightnot be. The evidence, as I have said, is inconclusive on this point.The time may come when John Batt & Co. (London) Ltd. ceases tocarry on business, and in that event the income of the whole trust fundmust be applied for the benefit of the primary class which fulfilsqualifications contained in sub-clause (d)
That view of the “ facts ” probably explains why the learned Judgerejected the construction (against a trust) that the public could only %benefit when the preferred class of beneficiaries failed. He was satisfiedthat the first sentence in paragraph (d) of the instrument specified theprimary class of beneficiaries and that the primary trust was not invali-dated by the provisions for the selection from a narrower group althoughthat provision was imperative.
1 must assume the correctness of the view taken on the facts, thoughit was formed apparently without strict regard to the dictum of ViscountSimonds in Oppenheim’s case l, “ it must not I think be forgotten thatcharitable institutions enjoy rare privileges and that the claim to comewithin that privileged class should be clearly established ”. But I havewith great respect to disagree with the view that the recital in the forefrontof paragraph (d) of a desire to benefit a section of the public, takentogether with the probability that benefits will accrue to that section,will constitute the section as the primary class, irrespective of thelimitation of the element of public benefit, which the subsequentimperative requirement of preference for a special group imposes. If theorder in which a settlor’s wishes are set down can properly be regardedas significant for the purpose of ascertaining his primary object, thenwould the Koettgen 8 disposition have been construed differently had thedesignation of British bom subjects occurred only after the preferenceclause ?
•Whatever the form or arrangement of a disposition, its primary objectcan be ascertained only after examination of all its provisions, and if theprimary object as so ascertained is the benefit of the public, then anysubsequent inquiry as to whether the object is invalidated by anyparticular provision is idle, for account would already have been taken *of the significance of all such provisions. Why then did Upjohn J. makesuch a subsequent inquiry ? The reason, I think with much respect, isthat he had not taken the provision for selection into account beforedeciding which was the primary class of beneficiaries. The same erroris inherent in the mode of construction suggested on behalf of the Trusteesin this case.
1 (1951) 1A.E.R. 31.* (1954) 1 A. B. R. 5S1.
H. N. G. FERNANDO, J.—Commissioner of Income Tax v. Trustees 375
of the Abdul Oaffoor Trust
In the Koettgen1 case the following summary of. the earlier law fromthe judgment of Jenkins L.J. in Be Scarisbrick’s Will Trusts2 wascited:—6
It is a general rule that a trust or gift in order to be charitable in
the legal sense must be for the benefit of the public or some section ofthe public; ….
An aggregate of individuals ascertained bj reference to some
personal tie (e.g. of blood or contract) such as the relations of aparticular individual, the members of a particular family, the employeesof a particular firm, the members of a particular association, does notamount to the public or a section thereof for the purposes of the generalrule;
It follows that according to the general rule above stated a trustor gift under which the beneficiaries or potential beneficiaries areconfined (that is an important word) to some aggregate of individualsascertained as above is not legally charitable even though its purposesare such that it would have been legally charitable if the range ofpotential beneficiaries had extended to the public at large or a sectionthereof (e.g. an educational trust confined as in Be Compton to thelawful descendants of three named persons, or, as in Oppenheim ».Tobacco Securities Trust Co., Ltd. to the children of employees offormer employees of a particular company) ; ”.
The judgment of Jenkins L.J. in Scarisbrick’s case continued as follows :—
“ (iv) There is, however, an exception to the general rule in thattrusts or gifts for the relief of poverty have been held to be charitableeven though they are limited in their application to some aggregate ofindividuals ascertained as above, and are, therefore, not trusts or giftsfor the benefit of the public or a section thereof. This exceptionoperates whether the personal tie is one of blood (as in the numerousso-called “<fpor relations ” cases, to some of which I will presentlyrefer) or of contract ”.
To judge from the comment of Upjohn J. that “ confined ” in the thirdparagraph of the summary is an important word, it would seem that theparagraph was assumed to be authority for the proposition that theelement of public benefit is negatived only when the potential beneficiariesare confined to some aggregate of individuals, and not when some suchaggregate is preferred to other members of the public. But thedecision in Scarisbrick’sa case was not concerned with any suchdistinction ; the only question it decided was that the line of authoritiesrecognising the validity of “ poverty ” trusts for poor relatives appliednot only to “permanent” trusts, but also to trusts for immediatedistribution. Neither the facts nor the law under consideration in thatcase rendered it necessary for the Court to make any observation relevant
1 (1954) 1 A. E.B. 581.
* (1951) 1 A. E. B. 822.
376 H. N. G. JTSBNANDO, ^.^Commissioner of Income Tax v. Trustees
of the Abdul Gajfoor Trust
to the problem which subsequently arose in re Koettgen. In stating hisproposition (iii), Jenkins L.J. recorded the principle of earlier decisions(Be Compton), merely for the purpose qf pointing thereafter (in hisproposition (iv)) to the exception to that principle, which was anexception directly relevant to the case he had to decide. In sucha context, there was no need for the learned Lord Justice, either expresslyor by implication, to approve or disapprove a disposition, the beneficiariesunder which are a group of individuals, together with, but havingpreference before, a section of the public'. I would not, therefore, attachany special significance to his use of the word “ confined ”. Indeed,if “ confinement ” of the benefit is to be regarded as the proper test,a disposition for the education of ten British bom subjects nine of whommust at all times be relatives of the settlor, would have to be construedto be a valid charitable trust. That example, to my mind, reduces sucha test to an absurdity. The converse example, namely, where one out often beneficiaries must always be a family descendant, will of coursepresent difficulty, though such a trust might properly be regarded asbeing essentially or substantially for the benefit of the public and thereforevalid, in application perhaps of the maxim de minimis non curat lex.
■ Before leaving the Koettgen case I would observe that there has been aninclination on the part of some Judges (Lord Mac Dermott in Oppenheim’scase was one of them) to look with some degree of favour on trust forthe benefit of employees of particular organisations, presumably becausethere might be some justification for the view that modem businessorganisations are so large and employ such numerous personnel that theemployees of such organisations can fairly be regarded as a section of thepublio. If that were the view which moved Upjohn J. to regard asunimportant the preference clause in Koettgen’s case, 1 would not forpresent purposes need to disagree with it. But that consideration apart,an examination of the decisions which have been brought to- our noticesatisfies me that Koettgen’s case was one of first instance and that thedecision cannot be justified as being based on precedent. For reasonsalready stated I do not propose to follow it, but at the least it can properlybe distinguished on the ground that a preference olause in favour offamily descendants was not there involved. The English cases do nottherefore lead me to a conclusion in any way different from that reaohedon first impression upon consideration of the ordinary meaning of theexpression “ for the benefit of the public or a section of the public”.
I would hold therefore that the purpose mentioned in clause (b) ofparagraph 2 of the Trust instrument before me is not one which satisfiesthe requirement of “ public benefit ”, prescribed in Section 99 of theTrusts Ordinance, and that the instrument does not create a validtrust.
Counsel for the Trustees did not argue that the income intended by thesettlor to be utilised under clauses (c) to (/) of the instrument can beregarded as being income of a separate trust and therefore entitled toexemption from tax. Indeed having regard to the powers exercisableby the Board under paragraph (g), and the uncontrolled discretion torestrict the use of the income and of the reserve fund for the purposes
H. N. G. FERNANDO, J.—Commissioner of Income Tax v. Trustees 377
of the Abdul Qaffoor Trust
mentioned in paragraph (6), one can well understand why no questionof separation was raised in these proceedings. I am not called upontherefore to make any further observations with regard to it.
I have considered the Trust instrument on the basis that the trust doesnot qualify for the tax exemption unless it comes within the scope of thedefinition in Section 99 of the Trusts Ordinance. But even if . that is anerroneous basis, I would hold that the income of the trust is not exemptfrom tax because the Trust fails to attain the qualification of “ publiccharacter ” required by paragraph (c) of Section 7 (1) of the Income TaxOrdinance. The argument for the Trustees that this requirement wassatisfied was founded upon the decision in re Koettgen or at least uponcorresponding reasoning. In my opinion, “ public character ” meansmuch the same thing as “ for the benefit of the public or a section of thepublic ”. The “ private nature ” of the benefit conferred by paragraph
, and by paragraph (g) read in conjunction therewith, takes the trustout of the class denoted by the expression “ trust of a public characterEven if (contrary to the view I hold) it be proper to regard the trust inthis case as a valid charitable trust on the analogy of the “ poor relations ”or “ founder’s kin ” cases in England, the tax exemption provision cannot-apply in the absence of the element of “ public character ” required bythat provision.
Among other matters raised by the Solicitor-General there are two uponwhich some expression of opinion would perhaps be desirable. Oneargument was that the trust does not fall within the description of a “ trustestablished solely for charitable purposes ” ; in fact the question asformulated by the Board of Review in the Case Stated was the sameas that raised in this argument of the Solicitor-General. Briefly stated,the point argued is that the exemption only applies to a trust which iscreated or set up solely for charitable purposes and which contemplatesthe application of the income only for such purposes right from theinception of the trust, in the present case the purposes were not alwayscharitable for the reason that the Proviso at the end of clause 2 requiresthe Trustees, during the lifetime of the Grantor, to apply the incomefor such purposes as the Grantor may direct.
I cannot agree that such a significance should be given to the word“ established ”. In the first place it would seem that for grammaticalpurposes it is necessary to use some verb in conjunction with the word“ trust ”, for else the expression “ trust solely for charitable purposes ”simpliciter might have been ungrammatical. Seoondly, I agree withthe argument for the Trustees that the language in Section 7 (1) (e) is onlyintended to denote a trust having for the time being legal effect oroperation, its purposes being solely charitable. Any other view of thematter would have anomalous and even absurd results.
Another objection taken by the Solicitor-General was that the purposespecified in clause (/) is not for the benefit of the public. He relied inthis connection on decisions, such as that in the Australian case of
1 (1954) 1 A. E. R. 581.
378 H. N. (J. FERNANDO, J.—Commissioner of Income Tax v. Trustees
of the Abdul Gajfoor Trust
Dunne, v. Byrne 1 decided by the Privy Council, which have held thatdispositions generally “ for religious purposes ” or “ for charitablepurposes ” to be determined in the discretion of a trustee are not charitabletrusts because the trustee would be entitled to apply money for purposescommonly, though not legally, regarded as charitable. In the presentcase, however, although the Board enjoys a discretion, the purposespecified is “ charity once a year during the month of RamalhamThe Board of Review recorded evidence as to the significance to Muslimsof the month of Ramalham and to the practice of the distribution of almsduring that month enjoined by the religion of Islam. The Board ofReview was I think entitled on that evidence to decide as it did, that“ charity ” in clause (/) means only the relief of the poor. The Trusteeswould not therefore he entitled to utilise money under clause (/) except forpurposes properly charitable within the meaning of Section 99 of theTrusts Ordinance and the definition in Section 2 of the Income Tax• Ordinance.
The Solicitor-General relied also on some observations of ViscountSimonds in Inland Revenue Commissioners v. Baddeley 2 in which hedoubted whether “ a trust can qualify as a charity within the fourthclause in Commissioners for Special Purposes of the Income Tax v. Pemsel3if the beneficiaries are a class of persons, not only confined to a particulararea, but selected from within it by reference to a particular creed ”.The present trust is distinguishable on the ground that the dispositionshere are not of the fourth class but clearly for education and the reliefof poverty, and the observations of the learned Lord Chancellor areprobably not applicable in this case. It is to be noted also that thelearned Lords who concurred in the decision ultimately given desistedfrom expressing any opinion on the point made by the Lord Chancellor.In any event the judgment of the Privy Council in the Indian SpinnersAssociation case4 would be sufficient authority for the Courts in Ceylonto interpret the intention of the Ceylon Legislature by reference to theparticular circumstances and conditions of life in this country. I thinkthat there can be no question, having regard to such circumstances andconditions, that the members of the Moorish community in Colombo or inCeylon, being of the Islamic faith, would constitute a section of the publicfor the purposes of the relevant law and that a trust for their benefitwould be one of a public character.
Apart then from the arguments based upon the true construction ofparagraph (b) of the instrument, and of paragraph (g) read in relationto paragraph (6), there are in my opinion no other grounds for holdingthat the income of the trust is not entitled to exemption from income tax.
In the result, I answer in the negative the second question whichwe are invited to decide. The Respondents must pay the costs of theseproceedings which I would fix at Rs. 2,100.
Sinnetamby, J.—I agree.
Appeal allowed.
(1891) A. C. 531.
31 A. I. S. (P. C.) 88 at page 91.
» (1912) A. G. 407.
* (1955) 1 A. E. B. 525.