PETITIONER:
COMMISSIONER OF INCOME TAX, WEST BENGAL
Vs.
RESPONDENT:
TOLLYGUNGE CLUB LTD.
DATE OF JUDGMENT15/03/1977
BENCH:
BHAGWATI, P.N.
FAZALALI, SYED MURTAZA
CITATION:
1977 AIR 1343 1977 SCR (3) 225
1977 SCC (2) 790
ACT
Income-tax Act, 1922--S. 15B-Diversion of income or
diversion of source--Charity surcharge whether
income--Obligation in the nature of trust, how to be creat-
ed.
HEADNOTE
The assessee was a Company limited by guarantee anti
owned a Social end Sports Club one of whose. activities
consisted of conducting horse. races with amateur riders.
It charged for admission into-the enclosure of the club
admission fee 10 the guests introduced by the members of the
club as well as to the members of the public. It also
charged a surcharge of eight annas solely earmarked for
local charities. That was done pursuant to a resolution
passed at the meeting of the General Body providing that the
surcharge of eight annas on the entrance ticket should be
earmarked for local charities.
The Income Tax Officer prior to the assessment year 1960-61
did not treat the receipts on account of surcharge as trad-
ing receipts of the assessee and bring them to tax as income
of the assessee. While making the assessment for the as-
sessment year 1960-61, the Income Tax Officer took the view
that the receipts on account of surcharge were revenue
receipts in the hands of assessee and they could not be
excluded from the total income of the assessee merely on the
ground that they were applied for charitable purposes. It
was common ground that the amounts received by way of sur-
charge had in fact been disbursed to local charities. The
Income Tax Officer treated the receipts on account of sur-
charge as income of the assessee and allowed rebate under s.
15B in respect of the amounts actually disbursed in favour
of local charities. The Appellate Assistant Commissioner
confirmed the order of the Income Tax Officer on the ground
that a person who wished to gain admission to the enclosure
of the club had to pay the surcharge whether he was willing
to contribute to the charity or not and the amount of the
surcharge was therefore a part of the price charged by the
assessee for admission and it was accordingly a revenue
receipt in the hands of the assessee. On further appeal,
the Tribunal held that the surcharge was levied on admission
ticket for the purpose of charity and hence the receipts in
respect of the surcharge were not income of the assessee at
the point of time when they reached its hands and being
earmarked for charity they never belonged to the assessee.
The High Court on a reference made by the Tribunal
agreed with the view taken by the Tribunal holding that
since the surcharge was charged by the assessee and paid by
the race goers for the specific purpose of being applied to
local charities pursuant to, the resolution passed by the
general meeting of the assessee, there was at the time of
receipts of the amounts in respect of the surcharge, a
legally enforcible obligation on the assessee to apply them
to local charities and those amounts accordingly did not
reach assessee as its income but were diverted to local
charities before they reached the assessee.
Dismissing the appeal,
HELD: (1) Income tax is a tax on income. Every re-
ceipt by the assessee is not necessarily income in his
hands. It is only when it bears the character of income at
the time when it reaches the hands of the assessee that it
becomes exigible to tax. [228 E]
London County Council v.Attorney General [1901] AC 26.
226
(2) The assumptions of the Revenue that the surcharge
was received as part of the price for admission to the dab
enclosure and that there was no legally enforcible obliga-
tion on the assessee to spend the amounts on charity are
erroneous. The admission to the enclosure was the occasion
and not the consideration for.the surcharge taken from the
race-goers. It is not a correct analysis of the nature of
the legal relationship to say that there was nothing more
than a mere desire or intention on the part of the assessee
to apply the amounts received on account of surcharge to the
local charities without any legally enforcible obligation.
The resolution was passed at the general meeting of the
assessee and pursuant to that resolution the surcharge was
paid by the race-goers and received by the assessee for the
specific purpose of being applied to local charities. The
surcharge when paid was clearly impressed with an obligation
in the nature of trust for being applied tot the benefit of
local charities. A trust may be created by any language
sufficient to show the intention and no technical words are
necessary. [228 H, 229 A, C, D&G]
C.I.T v. Thakar Das Bhargava, 40 I.T.R. 301, followed.
(3) In the present case, the surcharge being impressed
with an obligation the nature of trust for being applied to
local charities was by this obligation diverted before it
reached the hands of the assessee and at no stage it became
a part of the income of the assessee. The amount of sur-
charge never reached the assessee as parts of its income.
[230 G-H]
C.I.T. v. Sitaldas Tirathdas, 41 I.T.R. 367, followed.
JUDGMENT
CIVIL APPELLATE JURISDICATION: Civil Appeal No. 578
of 1972.
(From the Judgment and Order dated 17-4-1969 of the
Calcutta High Court in Income Tax Reference No. 71/65)
S.C. Manchanda and R.N. Sachthey, for the appellant.
Sukumar Mitra, D.N. Mukherjee and N.R. Chaudhary, for
the respondent.
The Judgment of the Court was delivered by
BHAGWATI, J. This is an appeal on a certificate of
fitness granted by the High Court of Calcutta under section
66A, sub-section (2) of the Indian Income-tax Act, 1922.
The facts giving rise to the appeal are few and may be
briefly stated as follows.
The assessee is Tollygunge Club Ltd., a company limited
by guarantee, and it owns a social and sports club one of
whose activities consists of conducting Gymkhana races, that
is, horse races with .amateur riders. It charges for admis-
sion into the enclosure of the Club at the time of the
races, admission fee to the guests introduced by the members
of the Club as well as to the members of the public. There
is no dispute between the parties that the admission fee
received by the assessee constitutes trading receipt in the
hands of the assessee exigible to tax. But it appears that
on 28th February, 1945 a resolution was passed at the meet-
ing of the General Body of the Club for levying a surcharge
of eight annas over and above the admission fee., the pro-
ceeds of which were to go to the Red Cross Fund. This
resolution was subsequently varied by another resolution
dated 30th January, 1950 and the new resolution provided
that the surcharge of eight annas on entrance ticket should
be earmarked "for local charities and not solely for the
Indian Red Cross". The assessee
227
accordingly issued to every entrant to the enclosure on the
race course two tickets, one an admission ticket for admis-
sion to the enclosure of the Club and the other, a separate
ticket in respect of the surcharge of eight annas for local
charities. The slip in respect of the surcharge of eight
annas was in the following term:
"Surcharge on admission to
The Tollygunge Gymkhana Races
for Local Charities
Rs. 4/8 Enclosure Surcharge
RS. -/8/-"
The receipts from the surcharge were not credited to the
profit and loss account but they were carried directly to a
separate account styled ’Charity Account’. These receipts
on account of surcharge were not treated as trading receipts
of the assessee and were not brought to tax as income of
the assessee in the assessment years perior to the assess-
ment year 1960-61. But while making assessment for the
assessment year 1960-61, the Income Tax Officer took the
view that receipts on account of surcharge were revenue
receipts in the hands of the assessee and they would not be
excluded from the total Income of the assessee merely on the
ground that they were applied for charitable purposes. It
may be pointed out at this stage that it was not dis-
puted before the Revenue authorities that the amounts rea-
lised by way of surcharge had been disbursed to local chari-
ties and in fact a list was filed showing the local chari-
ties in whose favour such disbursement had been made. The
Income Tax Officer treated the disbursement of the amounts
received on account of surcharge as application of the
income belonging to the assessee and he accordingly included
these receipts in the total income of the assessee, but
allowed rebate under section 15B on the amounts actually
disbursed in favour of local charities during the account-
ing year. This view taken by the Income Tax Officer was
affirmed on appeal by the Appellate Assistant Commissioner
who held that a person who wished to gain admission to the
enclosure of the Club on any racing day had to pay the
surcharge whether he was willing to contributes to the
charity or not and as such the amount of the surcharge was
a part of the price charged by the assessee for admission to
the enclosure and it was, therefore, a revenue receipt in
the hands of the assessee. This was followed by a further
appeal to the Tribunal and this time the assessee was suc-
cessful. The Tribunal held that the surchange was
levied on admission tickets for the purpose of charity
and hence the receipts in respect of the surcharge were not
income of the assessee at the point of time when they
reached its hands and being "earmarked for charity", they
"never belonged to the assessee" and were hence not includi-
ble in the taxable income of the assessee. The Tribunal
accordingly directed that the receipt of the surcharge
credited to the charity account should be deleted from
the total income of the assessee.
228
The Commissioner then moved the Tribunal for stating a
case to the High Court on the question of law which arose
out of the. order of the Tribunal. The Tribunal was of the
opinion that a question of law did arise out of its order
and hence it formulated a question in the following terms:
"Whether, on the facts and in the circum-
stances of the case, the Appellate Tribunal
was right in holding that the assessee’s
receipts from the surcharge levied on admis-
sion tickets for purposes of charity could not
be included in the assessee’s taxable income
for the assessment year 1960-617",
and referred it to the High Court for its opinion. The
High Court agreed with the view taken by the Tribunal and
held that since the surcharge on admission tickets was
charged by the assessee and paid by the race-goers for
the specific purpose of being applied to local charities
pusuant to the resolution passed by the general meeting of
the assessee, there was, at the time of receipt of the
amounts in respect of the surcharge, a legally enforceable
obligation on the assessee to apply them to local charities
and those amounts accordingly did not reach the assessee as
its income but were diverted to local charities before
they reached the assessee. The correctness of this deci-
sion is questioned by the Commissioner in the present
appeal under section 66A, sub-section (2) of the Act.
It is familiar learning and yet Lord Magnaughten had to
draw our attention to it in London County Council v. Attor-
ney General (1) that income tax is a tax on income.
It is what reaches the assessee as income that is in-
tended to be charged to tax under the Act. Every receipt
by the assessee is not necessarily income in his hands. It
is only when it bears the character of income at the time
when it reaches the hands of the assessee that it be-
comes exigible to tax. The quest on which, wherefore,
arises for determination here is whether the amounts re-
ceived on account of surcharge reached the hands of the
assessee as its income. The argument of the Revenue was
that these amounts were received by the assessee as part of
the price for admission into the enclosure of the Club and
merely because the assessee expressed its desire or inten-
tion to apply them to local charities, they did not cease to
be the income of the assessee. This argument is based on
two assumptions: first, that the amounts .on account of
surcharge were received as part of the price for admission
to the Club enclosure, and secondly, that it was merely a
voluntary desire on the part of the assessee to use these
amounts for private charities and there was no legally
enforceable obligation on the assessee to do so. These two
assumptions are in a way inter-related, each depending on
and to some extent supporting the other, but in our view
neither of them is well founded. It is not correct to say
that merely because surcharge is levied from every race-goer
who wants admission to the enclosure of the Club, it becomes
a part of the price for admission. The
(1) [1901] A.C.26.
229
test is not whether every race-goers seeking admittance to
the enclosure of the Club is required to pay the surcharge
but what is it for which the surcharge is taken. Is it
taken as part of the price for admission, or for some
other purpose, such as, benefit of local charities ? Sup-
pose every race-goer seeking admittance to the Club
enclosure were told that in addition to the price of the
admission ticket he would have to contribute a certain
amount to a recognised charity, could it be contended that
the amount which he is required to contribute to
charity--and we are deliberately using the word ’re-
quired’ because otherwise he would not be able to secure
admittance to the Club enclosure is part of the price for
admission ? the surcharge is undoubtedly a payment which a
race-goer is required to make in addition to the price of
admission ticket if he wants to witness the race from the
Club enclosure, but on that account it does not become part
of the price for admission. The admission to the enclosure
is the occasion and not the consideration for the surcharge
taken from the race-goer. It is true that but for this
insistence on payment of the surcharge at the time of admis-
sion to the enclosure, the race-goer might not have paid any
amount for local charities. But that does not render the
payment of the surcharge involuntary, because it is out of
his own volition that he seeks admittance to the enclosure
and if he wants such admittance, he has to pay not only the
price of the admission ticket but also the surcharge for
local charities. The surcharge is clearly not a part of the
price for admission but it is a payment made for the specif-
ic purpose of being applied to local charities. Secondly,
it is not a correct analysis of the nature of the legal
relationship, to say that there was nothing more than mere
desire or intention on the part of the assessee to apply
the amounts received on account of surcharge to local
charities, without any legally enforceable obligation bind-
ing it to do so. We may straightaway concede that if
nothing more had been done by the assessee than merely
passing a resolution deciding to utilise a part of the
admission fee received by it to charitable purposes, no
legal obligation would have been created obliging the asses-
see to utilise this amount for the purpose of charity. Such
a resolution would have left it open to the assessee to
alter it or to rescind it and it would have been nothing but
an expression of the desire or intention of the assessee to
apply the amount for charitable purposes. But here a resolu-
tion was passed at the general meeting of the. assessee for
levying the surcharge for local charities and pursuant to
this resolution, the surcharge was paid by the race-goers
and received by the assessee for the specific purpose of
being applied to local charities. The surcharge when paid
was clearly impressed with an obligation in the nature of
trust for being applied for the benefit of local charities.
It is settled law, as observed, by this Court in C.I.T. v.
Thakar Das Bhargava (1) that a trust may be created by
any language sufficient to show the intention and no techni-
cal words are necessary and it may even be created by the
use of words which are primarily words of condition. The
only requisites which must be satisfied are that there
should be "purposes independent of the donee to which the
subject-matter of the gift is required to be applied
(2) 40 I.T.R. 301.
230
and an obligation on the donee to satisfy those purposes".
When the race-goers paid the surcharge to the assessee, they
did so far a specific purpose ,and thereby imposed an
obligation on the assessee to utilise it for local chari-
ties.
The question then arises whether this obligation to
utilise the surcharge for local charities was an obligation
to apply the surcharge to local charities after it reached
the assessee as its income or it was diverted for being
applied to local charities before it was resolved by the
assessee. Did it involve an application by the assessee
of a part of its income to local charities, or was it rather
an allocation of a receipt for local charities before it
became income in the hands of the assessee ? The true test
for determining this question is, to use the words of Hi-
dayatullah, J., in C.I.T. v. Sitaldas Tirathdas(1) whether
the amount sought to be deducted, in truth, reaches the
assessee as his income. The learned Judge proceeded to
explain this test in the following words:
"In our opinion, the true test is whether the
amount sought to be deducted, in truth, never
reached the assessee as his income. Obliga-
tions, no doubt, there are in every case, but
it is the: nature of the obligation which is
the decisive fact. There is a difference
between an amount which a person is obliged to
apply but of his income and an amount which by
the nature of the obligation cannot be said to
be a part of the income of the assessee.
Where by the obligation income is diverted
before it reaches the assessee, it is. de-
ductible : but where the income is required
to be applied to discharge an obligation
after such income reaches the assessee, the
same consequence, in the law, does not
follow. It is the first kind of payment
which can truly be excused and not the second.
The second payment is merely an obligation to
pay another a portion of one’s own income,
which has been received and is since applied.
The first is a case in which the income never
reaches the assessee, who even if he were to
collect it, does so, not as part of his in-
come, but for and on behalf of the person to
whom it is payable. In our opinion, the
present case is one in which the wife and
children. of the assessee who continued to be
members of the family received a portion of
the income of the assessee, after the asses-
see had received the income as his own. The
case once is one of application of a portion
of the income to discharge an obligation and
not a case in which by an overriding charge
the assessee became only a collector of
another’s income".
It is clear on the application of this test that in the
present case, the surcharge being impressed with an obliga-
tion in the nature of trust for being applied to local
charities was by this obligation diverted before it reached
the hands of the assessee and at no stage, it became a part
of the income of the assessee. When the assessee received
the amounts on account of surcharge, they were ’impressed
with a legal
(1) 41 I.T.R 367.
231
obligation to be applied for the benefit of local charities
and they never reached the assessee as part of its income.
The case clearly fell within the rule in Raja Bijoy Singh
Dudhuria v.C.I.T.(1) and the surcharge received by the
assessee could not be regarded as income assessable to
tax.
Before we end the discussion of this question, we must
refer to the decision of this Court in Thakar Das Bharga-
va’s case (supra) on which strong reliance was placed on
behalf of the Revenue. The assessee in this case was an
advocate who agreed to defend certain accused persons in a
criminal trial on condition that he would be provided with a
sum of Rs. 40,000/- for creating a public charitable trust.
When the trial was over, the assessee-was paid a sum of Rs.
32,500/- and he created a trust of that amount by exe-
cuting a trust deed. The question arose whether this
sum of Rs. 32,500/- was liable to be taxed as part of the
professional income of the assessee. This question was
answered by the High Court in favour of the assessee but the
view taken by the High Court was reversed by this Court on
appeal. This Court pointed out that the findings of the
Tribunal clearly showed "that the persons who paid the sum
of Rs.32,500/- did not use any words of an imperative nature
creating a trust or an obligation. They were anxious to
have the services of the assessee in Farrukhnagar case; the
assessee was at first unwilling to give his services and
later he agreed, proposing that he would himself create a
charitable trust out of the money paid to him for defend-
ing the accused persons in the Farrukhnagar case." Con-
siderable reliance was placed by this Court on the recital
in the trust deed where the assessee had said "that he was
receiving his professional income as an advocate accruing
after June 1944 for payment of taxes and charity and accord-
ingly when he received his professional income in the
Farrukhnagar case he created a charitable trust out of the
money so received." It was also emphasised by this Court
that it was not stated any where "that the persons who paid
the money created a trust or imposed a legally enforceable
obligation on the assessee" and even in the affidavit made
by the assessee there was "no suggestion that the persons
who paid the money created the trust or imposed an obliga-
tion on the assessee" and it was "the asessees own voluntary
desire that he would create a trust out of the fees paid to
him for defending the accused persons in the Farrukhnagar
case" and "such a voluntary desire on the part of the asses-
see created no trust, nor did it give rise to any legally
enforceable obligation". This Court accordingly held that
"the money when it was received by the assessee was his
professional income, though the assessee had expressed a
desire earlier to create a charitable trust out of the money
when received by him". It wilt be seen from what is stated
above’ that when the accused person paid a sum of RS.
32,500/- to the assessee, they paid it by way of fees and
they did not impose any obligation on the assessee that this
amount should be utilised only for the purpose of charity.
It was merely a voluntary desire on the part of the assessee
that he would create a trust out of the amount of fees paid
to him and until the
(1) [1933] 1 I.T.R. 135 A.I.R. 1933 P.C. 145. 16--240SC1/77
232
trust was created by the assessee, there was no legal obli-
gation to utilise that amount for charity. That is why this
Court held that the amount when received by the assessee was
income in his hand and the creation of trust was merely
application of the amount after it reached his hands as his
income. This Court by approving the following observations
of the Appellate Assistant Commissioner that "if the accused
persons had themselves resolved to create a charitable
trust in memory of the professional aid rendered to them by
the appellant and had made the assessee trustee for the
money so paid to him for that purpose, it could, perhaps,
be argued that the money paid was earmarked for charity ab
initio but of this there was no indication anywhere" clearly
suggested that if the money paid by the accused persons had
been "earmarked for charity ab initio" it would have been
possible to say that they had made the assessee trustee for
the money so paid to him and in that event the conclusion
would have been that the money did not reach the hands of
the assessee as his income. Here, the surcharge paid by the
race-goers was earmarked for local charities ab initio and
the surcharge was received by the assessee with a legal
obligation to apply it to local charities. The decision of
this Court in Thakar Das Bhargava’s case (supra), therefore,
far from militating against the contention of the assessee,
supports it.
We must accordingly hold that the High Court was right
in answering the question referred to it in favour of the
assessee and in this view, the appeal must stand dismissed
with costs.
P.H.P. Appeal dismissed.
233