018-NLR-NLR-V-76-Mrs.-M.-CROOS-RAJ-CHANDRA-Appellant-and-COMMISSIONER-OF-INLAND-REVENUE-Resp.pdf
102 WEERAMANTRY, J.—Croos Raj Chandra v. Commissioner of Inland Revenue
1968 Present : H. N. G. Fernando, C.J., and Weeramantry, J.Mrs. M. CROOS RAJ CHANDRA, Appellant, andCOMMISSIONER OF INLAND REVENUE, Respondent
S. C. 4/1965—Income Tax Case Stated No. BRA 323
Income Tax Ordinance (Cap. 242), as amended by Income Tax (Amend-ment) Act—Section 9 (A) (3)—Profits of a business—Meaning ofexpression “ carried on in the course of the actual carrying out ofa primary purpose”—Section 2 (c) (d)—“Charitable institution”—•“ Charitable purpose ”—Whether the word trustee includes anexecutor who is a trustee—Income Tax Ordinance (Cap. 242),ss. 2, 26 (1).
A testator, by his last Will and testament of 14th December 1899,set apart for specified charitable purposes large extents of agri-cultural land. He directed his executors to work and improve theselands and expend the income for the charitable purposes. Oneof the specified charitable purposes was the provision of dowriesto necessitous girls.
Held, (i) that the Will created a “charitable institution” for“ charitable purposes ” within the meaning of section 2 (c) (d) ofthe Income Tax Ordinance (Cap. 242) as amended by the IncomeTax (Amendment) Act.
that, for the purposes of the amending Act, the word trusteeincludes an executor who is a trustee.
that the management of the agricultural properties was notbusiness “ carried on in the course of the actual carrying out of aprimary purpose” of the trust within the meaning of section 9 (A)(3) of the Income Tax Ordinance as amended by the Income Tax
! (Amendment) Act. The income, therefore, derived from the trustfrom agricultural property or any part of it was not exempt fromtax in terms of section 9 (A) (3).
CaSE stated under the Income Tax Ordinance.
H. W. Jayewardene, Q.C., with Annesley Perera and MarkFernando, for the assessee-appellant.
R. S. Wanasundera, Senior Crown Counsel, for the respondent.
Cur. adv. vult.
August 17, 1968. Weeramantry, J.—
One John Leo de Croos by his last will and testament No. 4691of 14th December 1899 set apart for charitable purposes somelarge extents of agricultural land belonging to him. He directedhis executors to work and improve these lands, manage them ina husband-like manner and expend the income for the charitable
WEERAMANTRY, J.—Groos Raj Chandra v. Commissioner of Inland Revenue 103
purposes specified by him. These purposes included the provi-sion of dowries to poor girls irrespective of religion, nationality,caste or class, the dowry in each case to be between Rs. 100 andUs. 1,000 at the discretion of the executors.
For the years of assessment 1959/60, 1960/61, and 1961/62,assessments of income tax were made on the assessee as trustee■of the trust so set up. The assessee appealed against theseassessments to the Board of Review raising inter alia the questionwhether the income of the trust was exempt from income tax interms of section 7 C (3) of the Income Tax Ordinance as amendedby the Income Tax (Amendment) Act No. 44 of 1958. This sectionnow appears as section 9 (A) (3) of the Income Tax Ordinanceas amended by the Income Tax (Amendment) Acts.
The Board of Review held against the assessee on this questionand our opinion is sought on two matters of law, namely whetherthe income derived by the trust from agriculture is exempt fromtax under section 7 C (3) of the Income Tax Ordinance or underthe 3rd proviso to section 26 (1). Only the first of these twoheads of exemption was. relied on by the assessee.
The statutory provision referred to is as follows : —
“If the profits of a business carried on By a charitableinstitution are applied solely to a charitable purpose of thatinstitution and either the business is carried on in the courseof the actual carrying out of a primary purpose of that insti-tution or the work in connection with the business is mainlyperformed by beneficiaries of that institution, such profitsshall be exempt from the tax. ” I
I have italicised the words which particularly concern us in thecase. .
The expressions “ charitable institution ” . and “ charitablepurpose ” have been defined in the amending Act. The first ofthese expressions has been defined as meaning the trustee ortrustees of a trust or a corporation or an unincorporate body ofpersons established for a charitable purpose only or engagedsolely in carrying out a charitable purpose (section 2 (c) of theIncome Tax (Amendment) Act Cap. 242). The trust in questionwould therefore be a charitable institution for the purpose ofthis section. The expression “ charitable purpose ” has also beendefined in terms comprehensive enough to include' the purpose ofthis trust.
Some difficulty would appear at first sight to be created by thedefinition of trustee appearing in the original Ordinance. Theexpression is there defined as including any trustee, guardian,
104 WEERAMANTRY, J.—Croos Raj Chandra v. Commissioner of Inland Revenua
curator, manager or other person having the direction, control, ormanagement of any property on behalf of any person but asexcluding executors from the class of trustees. The definition inthe main Ordinance expressly states however that it applies onlyunless the context otherwise requires (section 2) . The context inwhich the word trustee appears in the definitions in the amend-ing Ordinance seems to require an interpretation other than inthe sense of the definition contained in the main Ordinance andwe therefore proceed on the footing that for the purpose of theamendment, the word trustee includes an executor who is atrustee. The view that the trusteee in this case is a charitableInstitution for the purpose of the definition we are consideringtherefore remains unaffected.
The assessee must in order to qualify for the exemption set outin this sub-section show that the income in respect of which heseeks exemption is the profit of a business “ carried on in thecourse of the actual carrying out of a primary purpose ” of thetrust. The question before us then is whether the management ofagricultural properties is business “ carried on in the course ofthe actual carrying out of a primary purpose ” of the trust. Theprimary purpose of the trust is clearly constituted,, by itscharitable objects such as the provision of dowries to necessitousgirls.
It is submitted to us on behalf of the assessee that the manage-ment of these agricultural properties is an undertaking carriedosa in the course of the actual carrying out of this purpose,inasmuch as the testator has imposed a duty on his executor ofmanaging these properties and of using their income for thespecified charitable purposes. It is submitted that these charitablepurposes cannot be fulfilled unless the properties are managedand income derived therefrom, so that the management issomething done in the course of carrying out this primarypurpose of the trust.
It seems to us that had this been the intention of the legisla-ture it could very clearly have so stated by using the expression“ for the purpose of ” instead of “ in the course of ”. No doubtthe words “ in the course of ” may in certain contexts be givena somewhat liberal interpretation so as to gather in matters notliterally occurring “ in the course of ” the object or proceeding towhich the words relate. An illustration which readily comes tomind from the sphere of delict is that of a taxi-driver on his wayhome for lunch, who may in a sense be said to be acting “ in thecourse of ” his employment for the purpose of fixing liability onhis employer for tortious acts committed during this period. Suchan interpretation does not however seem appropriate when whatis alleged to be done “ in the course of ” providing dowries for
WEERAMANTRY, J.—Croos Raj Chandra v. Commissioner of Inland Revenue 105
poor girls is the management of an agricultural land. It seemsmoreover that should such an interpretation of the expression“ in the course ofbe even remotely possible, it is completelyshut out by the word “ actual ” which occurs immediately beforethe words “ carrying out of the primary purpose The wordactual ” carries with it the idea of a physical identification of theactivity in question with the carrying out of the primary purposeof the charity ; and no such identification is conceivable betweenthe provision of dowries to poor girls and the management of anagricultural property. The word “ actual ” has been designedlyused by the legislature to emphasise that what it contemplates isnot the carrying out in a notional sense or by way of a figure ofspeech but the actual carrying out. A workman on his way toand from lunch may in a manner of speaking be said to be acting** in the course of ” carrying out his employment but by no stretchof language could be said to be “ in the course of the actualcarrying out ” of his employment.
It seems to us therefore that the' assessee fails both on accountof the words “ in the course of ” and on account of the wordactual ” occurring in the statute, to both of which expressionswe must attach their ordinary meaning.
Indeed, if the assessee’s contention is to succeed the words from“ and either ” up to the word “ institution ” as appearing in thesub-section would be rendered virtually inoperative, and such aview is clearly untenable.
The type of business contemplated by this legislation is notdifficult to visualize. The running of booksellers shops in pursu-ance of the object of diffusing religious literature *, or the running,by trustees of a temperance organisation, of a canteen servingnon-alchoholic drinks2 would furnish illustrations of the type ofbusiness contemplated, if the proceeds are applied solely tosuch purpose. With more pointed reference to the purpose of thischarity one may visualise an information bureau in regard to thegirls in a particular district conducted as an aid to the trustees inarriving at their decisions. Should such a bureau earn income byproviding information to any member of the public, such income,if devoted to the charitable purpose of the trust, would no doubtbe exempt in terms of this provision. There is a clear identifica-tion between the carrying on of such businesses and the carryingout of the purposes of the trusts in question, which is totallylacking as between the management of an agricultural propertyand the provision of dowries to poor girls. 1
1 Ronstam, Income Tax, 12th ed., S. 311.
* Trustees of the Dean Leigh Temperance Canteen v. Commissioner of InlandRevenue (195?) 38 Tax Cos. 318.
106 WEERAMANTRY, J.—Croos Raj Chandra v. Commissioner of Inland Revenue
The type of exemption contemplated is perhaps best understoodin the light of the decision in Brighton College v. Marriott In.that case a public school was taken over by a company the princi-pal object of which was to provide a general education inconformity with the doctrines of the Church of England—anobject admittedly charitable. The surplus income was devoted tothe improvement of the school and could not in any way bedivided among the members of the Company. It was neverthelessheld that the company was carrying on a trade and that thesurplus of receipts over expenditure was not exempt fromtaxation under section 37 (1) (b) of the Income Tax Act, 1913and section 30 of the Finance Act, 1921 which was the legislationthen prevailing.
By the Income Tax Act, 1918, income tax was chargeable underSchedule D in respect of the annual profits or gains arising oraccruing to any person (including a corporation) from any trade,profession, employment or vocation. Section 37 of the Act grantedexemption from tax under Schedule D in respect of any yearlyinterest or other annual payment forming part of the income ofany charity. Section 30 of the Finance Act, 1921 granted furtherexemptions from income tax under Schedule D in respect of theprofits of a trade carried on by any charity if the work inconnection with the trade was mainly carried on by beneficiariesof the charity and the profits were applied solely to the purposesof the charity—a provision corresponding to the second headof exemption in section 9 (A) of our Act.
These provisions did not clearly cover the case of a businesscarried on by a charity in the course of actually carrying out itsobjects and this decision highlighted the need for a further headof exemption to provide for such a case. The legislature thereforeenacted the necessary provision by section 247 of the Act of 1927,in terms which have been taken into the first head of exemptionunder our section, and are now re-enacted in section 448 (1) (C)of the English Income Tax Act of 1952.
The Brighton College case therefore illustrates the type ofbusiness which the exemption we are now considering wouldcover and clearly brings out the need for a coincidence betweenthe carrying on of the business and the carrying out of theprimary purpose of the charity.»
It is of interest to observe, though it does not in any way affectthis conclusion, that the Ceylon provision came upon our statutebook in entirely different circumstances from its English counter-part. Whereas in England this provision was introduced in order 1
1 1926 A. O. 192 H. L.
WEERAMANTR.Y, J.—Croos Raj Chandra v. Commissioner of Inland Revenue 107 •
to create an additional head of exemption, in Ceylon it came in as.a limitation of the exemption existing under the earlier law, for.prior to its enactment section 7 (1) (D) Income Tax Ordinanceprovided a liberal exemption in respect of the income of anyinstitution or trust of a public character established solely forcharitable purposes. The exemption was unqualified arid*therefore covered all cases where a trust established solely for acharitable purpose carried on a business and earned profitsthereby.
A brief reference is called for, in conclusion, to the correspond-ing tax provisions in India, in view of the stress laid by theassessee on certain decisions of the Indian High Courts.
In India section 4 (3) (1) of the Income Tax Act of 1922provided inter alia that the Act was not applicable to any incomederived from property held under trust or other legal obligationwholly for religious or charitable purposes.
However, by Act 7 of 1939 a further clause was inserted afterclause 4 (3) (1) and numbered 4 (3) (la), which provided thatincome derived from a business carried on on behalf of a religiousor charitable institution would be exempt from tax when theincome was applied solely to the purposes of the institution, and
a business was carried on in the course of the carrying
out of a primary purpose of the institution, or
the work in connection with the business was mainly
carried on by beneficiaries of the institution.
It will be seen that this new sub-section, corresponding to thesection we are now cpnsidering was introduced without any repealof the general exemption previously prevailing and without anyindication that it was intended in any way to narrow down thescope of that general provision. Both sections therefore existedside by side and when questions arose as to whether a particularbusiness fell within the limited exemption in section 4 (3) (la),there was always the general exemption in section 4 (3) (1) onwhich the assessee could fall back, as the word “ property ” insection 4 (3) (1) was considered to include a business or sharein a business. Thus in C. G. S. Stores v. I. T. Commissioner1, itwas held that what had already been included in section 4 (3)
had not in any way been removed by the insertion of theadditional clause in 4(3) (la), which should be considered
rather as an addition to the list of exemptions. So also inCommissioner of Income Tax. v. Breach Candy Swimming BathTrust1, although the court had some difficulty in bringing the
1 1944 A. I. R. Lahore 465.
a 1955 A. 1. R. Bombay 250.
108 WEERAMANTRY, J.—Grooa Raj Chandra v. Commissioner of Inland Revenue
business in question within the scope of section 4 (3) (la) itnevertheless held the income to be exempt from tax as it wouldfall under section 4 (3) (1).
By way of contrast it will be seen that in Ceylon the generalexemption contained in section 7 (1) (d) of the Income Tax Actwas repealed by section 8 of the Income Tax (Amendment) Actand that the provision we are now considering was inserted aspart of a new section numbered 9 (A). When therefore an itemof income does not fall within the strict terms of the head ofexemption we are now considering, there is no possibility offalling back upon the provisions of a general exempting clause.
The further question whether, in the application of section 4 (3)(la), there should be a restriction to businesses which are anintegral activity of the trust itself, is apparently the subject ofdivided authority in India. In the Breach Candy Swimming BathTrust Case already referred to, the view was taken that section 4(3) (la) was restricted to a business which was integral activityof the trust itself. This view was however departed from in
J.K. Trust, Bombay v. Commissioner of Income Tax.1.
It is not necessary however to go further into this matter forthe reason that the Indian provision under consideration in thesecases did not contain the word “ actual ” which appears in theCeylon enactment. There can be little doubt that had the word■“actual” appeared in this Indian provision the view that thebusiness need not be an integral activity of the trust may wellhave been modified.
For these reasons, the Indian authorities cited have not createdany difficulty in the way of the view we have formed, namely,that there should be a close identification between the carryingon of the business and the carrying out of the primary purposeof the trust. We therefore answer the question whether incomederived from the trust from agricultural property or any part ofit is exempt from tax in terms of section 7 (C) (3) (now section 9(A) (3)) in the negative. It is not necessary for us to answerthe question whether exemption is available under the 3rdproviso to section 26- (1) of the Income Tax Ordinance as thisground of exemption was not relied on by the assessee at thehearing before us.
In the circumstances of this case we make no order as to thecosts of this reference.
H. N. G Fernando, C.J.—I agree.
Appeal dismissed.
1 1958 A. I. R. Bombay 191.