High Court Overturns Commissioner’s Decision on KPT Employees Welfare Trust Registration

Get the full picture - access the original judgement of the court order here.

Case Name:

KPT Employees Welfare Trust vs. Commissioner of Income Tax (High Court of Gujarat)

Special Civil Application No. 12659 of 2014

Date: 22nd December 2014

Key Takeaways

- The High Court emphasized the importance of interpreting the words in the context, collocation, and object of the trust.

- The court found that the Commissioner had wrongly interpreted Rule 16(C) (of Income Tax Rules, 1962).

- The court ordered the Commissioner to grant the registration to the Trust.

Issue

Did the Commissioner of Income Tax correctly interpret the provisions of section 10(23AAA) (of Income Tax Act, 1961) and Rule 16(C) (of Income Tax Rules, 1962) when denying the registration of the KPT Employees Welfare Trust?

Facts

- The KPT Employees Welfare Trust applied for registration under section 10(23AAA) (of Income Tax Act, 1961).

- The Commissioner of Income Tax, Rajkot-1, rejected the application, interpreting that contributions from the employer were not permissible.

- The Trust argued that the Commissioner had misinterpreted the provisions and that the contributions from the employer were in line with the guidelines issued by the Central Board of Direct Taxes (CBDT).

Arguments

Petitioner (KPT Employees Welfare Trust):

- The Trust was created to benefit the employees of Kandla Port Trust.

- The Commissioner misinterpreted the term "contribution" and the relevant rules.

- The Trust's clauses were in line with the CBDT guidelines.

Respondent (Commissioner of Income Tax):

- The Trust's clauses were not in consonance with the purpose of the Income Tax Act.

- Contributions from the employer were not permissible under the rules.

- The Trust's objectives created a class among equals, which was not acceptable.

Key Legal Precedents

- N.K. Jain and others v. C.K. Shah and others, AIR 1991 SC 1289:

Emphasized the importance of context in interpreting statutory provisions.

- Municipal Corporation of Delhi v. Children Book Trust, AIR 1992 SC 1456:

Discussed the meaning of "contribution" and its implications.

Judgement

The High Court quashed the Commissioner’s order, stating that the Commissioner had misinterpreted Rule 16(C) (of Income Tax Rules, 1962). The court directed the Commissioner to grant approval to the Trust by January 31, 2015.

FAQs

Q1: What was the main issue in this case?

A1: The main issue was whether the Commissioner of Income Tax correctly interpreted the provisions of section 10(23AAA) (of Income Tax Act, 1961) and Rule 16(C) (of Income Tax Rules, 1962) when denying the registration of the KPT Employees Welfare Trust.

Q2: What did the High Court decide?

A2: The High Court decided that the Commissioner had misinterpreted the rules and ordered the registration to be granted to the Trust.

Q3: What is the significance of this case?

A3: This case highlights the importance of interpreting statutory provisions in their proper context and the role of judicial review in correcting administrative errors.

Q4: What were the key legal precedents cited?

A4: The key legal precedents cited were N.K. Jain and others v. C.K. Shah and others, and Municipal Corporation of Delhi v. Children Book Trust.

Q5: What does this mean for the KPT Employees Welfare Trust?

A5: The Trust will be granted registration under section 10(23AAA) (of Income Tax Act, 1961), allowing it to benefit from the tax exemptions provided under this section.

1. By way of this petition, the petitioner-Trust has challenged the order passed by the Office of Commissioner of Income-tax, Rajkot-1, Rajkot, whereby, the application of the petitioner-Trust for registration under

section 10(23AAA) (of Income Tax Act, 1961), has been rejected.

2. Learned advocate Mr. Hemani for the petitioner trust has submitted that while considering the application for the registration under section 10(23AAA) (of Income Tax Act, 1961) read with Rule 16C(5) (of Income Tax Rules, 1962), the Commissioner has committed

grave error in interpreting the provisions of Act and Rules. The petitioner has pointed out that the Trust, the Trust-deed, which is produced at Annexure-C, is constituted for the benefit of the employees of the Kandla Port Trust (for short ‘KPT’). The words “contribution” and “Beneficiar(y/ies)” are interpreted as under:

“Contribution” means the amount contributed by the members periodically and shall include any amount allocated and contributed by KPT.

“Beneficiar(y/ies)” means member(s) of the Trust who are the serving and

retired employee(s) of Kandla Port Trust and members of the family/ dependents (as defined by Government of India in their rules for their employees) of serving/ retired/deceased.

3. The learned advocate for the petitioner

has submitted that clause 10, 11 and 46 of the

trust deed of the Trust which are objected by

the Commissioner of Income Tax. Contribution

by employer is main ground to reject in

addition to the following clauses, which read

as under

10. To aid and promote educational and

vocational learning facilities/

activities for the serving employees

and their children.

11. To advance as a loan or stipend or

grants to the Beneficiaries for the

purpose of education at approved

institutions as per criteria laid down

by the Board of Trustees.

46. The Trust is irrevocable. However,

under the orders of Government of

India, if the Trust is revoked, all

property, funds and assets remaining

after the payment of all debts and

liabilities of Trust, shall be

transferred to Kandla Port Trust.

4. Learned advocate for the petitioner has

submitted that the provisions of section

23(AAA) and Rule 16(C) (of Income Tax Rules, 1962) read as under:

“Sec. 23(AAA) (of Income Tax Act, 1961) any income received by

any person on behalf of a fund

established, for such purposes as may

be notified by the Board in the

Official Gazette, for the welfare of

employees or their dependents and of

which fund such employees are members

if such fund fulfils the following

conditions, namely:-

(a) the fund-

(i)applies its income or

accumulates it for application,

wholly and exclusively to the

objects for which it is

established; and

(ii) invests its funds and

contributions and other sums

received by it in the forms or

modes specified in sub-section(5)

of section 11 (of Income Tax Act, 1961);

(b) the fund is approved by the

[Principal Commissioner or]

Commissioner in accordance with the

rules made in this behalf.

Provided that any such approval shall

at any one time have effect for such

assessment year or years not exceeding

three assessment years as may be

specified in the order of approval;]

Rule 16(C) (of Income Tax Rules, 1962).(1) The fund shall be

formed under a trust and it shall be

evidenced by a trust deed.

(2) The contributions to the fund are

to be made by the employees by way of

periodical subscription.

(3) The application for approval of

any fund under clause (23AAA) of

section 10 (of Income Tax Act, 1961) shall be made in Form No. 9

to the Commissioner having

jurisdiction over the area or

territory in which the accounts are

kept and such application shall be

accompanied by the documents

mentioned therein.

(4) Where the Commissioner is

satisfied that all the conditions laid

down in clause (23AAA) of section 10 (of Income Tax Act, 1961)

are fulfilled in the case of the fund,

he shall record such satisfaction in

writing and grant approval to the fund

specifying the assessment year or

years for which the approval is valid

so however that such approval shall,

at one time, have effect for such

assessment year or years not exceeding

three assessment years.

(5) Where the Commissioner is

satisfied that one or more of the

conditions laid down in clause (23AAA)

of section 10 (of Income Tax Act, 1961) are not fulfilled, he

shall reject the application for

approval after recording the reasons

for such rejection in writing.”

5. It is very clear that word “contribution”

is mandatory for contribution to be made by

the employees. The interpretation put forward

by the Commissioner that employer can’t make

any payment for corpus, is misconceived. Mr.

Hemani learned advocate for the petitioner has

relied upon the meaning of word

“contribution”. The meaning of word

“contribution” in Black’s Law Dictionary,

reads as under:

Contribution. (14c)1. The right that

gives one of several persons who are

liable on a common debt the ability to

recover proportionately from each of

the others when that one person

discharges the debt for the benefit of

all; the right to demand that another

who is jointly responsible for a third

party’s injury supply part of what is

required to compensate the third

party.- Also termed right of

contribution. [Cases: Contribution].

2. One tortfeasor’s right to collect

from joint tortfeasors when- and to

the extent that- the tortfeasor has

has paid more than his or her

proportionate share to the injured

party, the shares being determined as

percentages of casual fault. [Cases:

Contribution]. 3. The actual payment

by a joint tortfeasor of a

proportionate share of what is due.

Cf. INDEMNITY. 4. Maritme law. A share

of the loss resulting from a ship’s

sacrifice of cargo, payble by each

party whose property was spared to the

party whose property was sacrificed.5

WHAR CONTRIBUTION.”

6. Mr. Hemani learned advocate for the

petitioner has relied on the decision of the

Hon’ble Supreme Court in the case of N.K. Jain

and others v. C.K. Shah and others, reported

in AIR 1991 SC 1289, to buttress the

submission that word “contribution” is not

restricted to only employers contribution and

that the object of section be given proper

interpretation, wherein, the Hon’ble Supreme

Court has held in para-16 as under:

“16. After a careful consideration

we are inclined to agree with the

learned counsel for the respondents.

In this context we may note a passage

in Knightsbridge Estates Trust Ltd. v.

Byrne and Others, [1940] 2 All ER 401

which reads thus:

"It is perhaps worth pointing out

that the words "unless the context

otherwise requires" which we find

in the consolidating Act of 1929

are not to be found in the

amending Act of 1928. I attribute

little weight to this fact, for,

in my opinion, some such words are

to be implied in all statutes

where the expressions which are

interpreted by a definition clause

are used in a number of sections

with meanings sometimes of a wide,

and sometimes of an obviously

limited, character. On the other

hand, I think due weight ought to

be attributed to the words

"otherwise requires" in the

Companies Act, 1929, and it is

incumbent on those who contend

that the definition does not apply

to sect. 74 to show with

reasonable clearness that the

context does in fact require a

more limited interpretation of the

word "debenture" then Sect. 380

has assigned to it."

The Apex Court has further held that;

In National Buildings Construction

Corporation v. Pritam Singh Gill and

Others, [ 1973] 1 SCR 40 this Court

observed as under:

"As is usual with most of the

definition sections, with the

clause, "unless there is anything

repugnant in the subject or

context. " This clearly indicates

that it is always a matter for

argument whether or not this

statutory definition is to apply

to the word "workman" as used in

the particular clause of the Act

which is under consideration, for

this word may both be restricted

or expanded by its subject matter.

The context and the subject matter

in connection with which the word

"workman" is used are accordingly

important factors having a bearing

on the question. The propriety or

necessity of thus construing the

word "workman" is obvious because

all parts of the Act have to be in

harmony with the statutory

intent." (emphasis supplied)

In Bennett Coleman & Co. (P) Ltd. v.

Punya Priya Das Gupta, [1970]I SCR 181

this Court observed thus:

"But assuming that there is such a

conflict as contended, we do not

have to resolve that conflict for

the purposes of the problem before

us.

The definition of s. 2 of the

present Act commences with the

words "In this Act unless the

context otherwise requires" and

provides that the definitions of

the various expressions will be

those that are given there.

Similar qualifying expressions

are also to be found in the

Industrial Disputes Act, 1947, the

Minimum Wages Act, 1948, the C.P.

& Berar Industrial Disputes

Settlement Act, 1947 and certain

other statutes dealing with

industrial questions. It is,

therefore, clear that the

definitions of "a newspaper

employee" and "a working

journalist" have to be construed

in the light of and subject to the

context requiring otherwise."

The above passages throw a flood

of light on the scope of

interpretation of these opening words

of Section 2 (of Income Tax Act, 1961) and it is clear that they

must be examined in the light of the

context, the title, the preamble and

all the other enacting parts of the

statute. Due weight ought to be given

to the words "unless the context

otherwise requires". The subject

matter and the context in which a

particular word is used are of great

importance and it is axiomatic that

the object underlying the Act must

always be kept in view in construing

the context in which a particular word

is used. In the Statement of Object

and Reasons of Act No. 40 of 1973 by

which Section 14(IA) (of Income Tax Act, 1961) was introduced,

it is clearly mentioned that National

Commission of Labour has recommended

that in order to check the growth of

arrears, penalties for defaults in

payment of provident fund dues should

be more stringent and the default

should be made cognizable. The concept

which prompted the Legislature to

enact this welfare law should also be

borne in mind in interpretation of the

provisions. Chagla, C.J. in Prakash

Cotton Mill. (P) Ltd. v. State of

Bombay, [1957]2 LLJ 490 observed as

under:

"No Labour legislation, no

special legislation, no economic,

legislation, can be considered by

a court without applying the

principles of social justice in

interpreting the provisions of

these laws. Social justice is an

objective which is embodied and

enshrined in our

Constitution ..... it would indeed

be startling for anyone to suggest

that the court should shut its

eyes to social justice and

consider and interpret a law as if

our country had not pledged itself

to bringing about social justice."

In Kanwar Singh v. Delhi

Administration, [1965] 1 SCR 7 it was

observed as under:

"It is the duty of the court in

construing a statute to give

effect to the intention of the

legislature. If, therefore, giving

a literal meaning to a word used

by the draftsman, particularly in

a penal statute, would defeat the

object of the legislature, which

is to suppress a mischief, the

court can depart from the

dictionary meaning or even the

popular meaning of the word and

instead give it a meaning which

will advance the remedy and

suppress the mischief."

In Vanguard Fire & Gen. Ins. Co.

v. Fraser & Ross, AIR 1960 SC 1971 it

was held that "the Court has not only

to look at words but also at the

context, the collocation and the

object of such words and interpret the

meaning intended to be conveyed by the

use of the words under the

circumstances"

7. Mr. Hemani learned advocate for the

petitioner has also relied on the decision of

the Hon’ble Supreme Court, to bring home the

submission that contribution by employer in

case of authority created under Central or

State Government legislation is not excluded

and is inclusive, in the case of Municipal

Corporation of Delhi v. Children Book Trust,

reported in AIR 1992 SC 1456, wherein, the

Hon’ble Supreme Court has held in para-81 as

under:

“81. The word “contribution” used

in the provisio must also be given its

due meaning. It cannot be understood

as donations. If that be so, a

voluntary contribution cannot amount

to a compulsive donation. If the

donor, in order to gain an advantage

or benefit, if he apprehends that but

for the contribution some adverse

consequence would follow, makes a

donation certainly it ceases to be

voluntary.”

8. Mr. Hemani learned advocate for the

petitioner has further contended that the

apprehension which has been put forward by the

Commissioner is misconceived. He has taken us

through the clauses as interpreted by the

Commissioner, being as under and according to

Mr. Hemani, it is arbitrary and without basis

and contrary to the object of the Trust and

Income Tax Act.

As per notification No. SO 672(E) dated 27.7.1995-

(1) cash benefits to a member of the

fund,-

(a) on superannuation, or

(b) in the event of his illness or

illness of his spouse or dependent

children, or

(c) to meet the cost of education

of his dependent children; or

(2) cash benefits to the dependents of

a member of the fund in the event of

the death of such member.”

As per notification no. 33/11 dated

3.6.2011-

In the said notification, in

paragraph (1), after clause (c),

the following clause shall be

interested, namely:-

(d) to meet the cost of annual

medical tests or medical checkups

of the members, his spouse and

dependent children.”

9. Mr. Hemani learned advocate for the

petitioner has also submitted that CBDT has

itself given the guidelines and clauses, and

the Trust is governed by both these clauses of

CBDT instructions.

10. Learned advocate Mr. Pranav G. Desai

appearing for the respondent has pointed out

from the trust deed that definition of

beneficiaries includes all the members who are

serving and retired employees and members of

the family or dependents of serving and

retired and deceased employees. The definition

of member clearly provides that the members

are serving and retired employees of the

trust. From the provisions of creation and

establishment of trust, it is clearly

established that the amount of Rs. 10 lacs

has been paid by the Kandla Port Trust to

concerned petitioner trust. It also provides

subsequent payment as deem fit. Further, it

is stated that the amount shall be utilised

for the purpose of managing, controlling,

utilizing and disposing of the said

fund/property for the benefits and welfare of

the beneficiaries.

11. It is further borne out that for purpose

of trust, it clearly provides that the trust

is formed to provide better health care and

educational aid to the serving and retired

employees of the trust and to the members of

the family/dependents of serving/retired/

deceased needing such help, and therefore, he

supported the order of Commissioner. Even

perusal of the aims and object of the trust,

it clearly provides for all the benefits to

the beneficiaries and creates class among

equals. It is clear from reading that certain

clause of aims and object of the trust is not

in consonance with the purpose of Income Tax

Act for claiming benefit under section

10(23AAA), particularly, clause 10 of the aims

and object of the trust in order Annexure-A

passed under Rule 16C(5) (of Income Tax Rules, 1962) read with section 10(23AAA) (of Income Tax Act, 1961) of

the Income Tax Act. In para 2, the provisions

of trust deed has been duly gone into and

after considering the provisions of trust

deed, the relevant aspects were duly noted and

show cause notice for explanation was sent,

however, the petitioner failed to satisfy the

same, particularly, with regard to the

contribution, the defence and manner of

accepting the contribution, but the aims and

objectives of the trust are not in consonance

with the objects notified under the said

Section, even clause for revocation of trust

i.e. clause 46 is also considered in order

Annexure A. Said clause in the beginning

indicates that the trust is irrevocable,

however, later part of it provides that the

trust if revoked and after the payment of all

debts and liabilities of the trust, shall be

transferred to Kandla Port Trust. Even

clause 46 is also not in consonance with the

creation/establishment of the trust, which is

stated in the clause 1 where it is

specifically provided that all the property

fund etc. completely vest into the trust and

same should only be utilized and applied for

the purpose of benefits and welfare of the

beneficiaries only. Mr. Desai further

contended that the very object of the Trust is

frustrated. He further pointed out that

section 23AAA (of Income Tax Act, 1961) will exempt them from income tax

and word “contribution” as interpreted by the

learned advocate for the petitioner is not

accepted since the employer cannot contribute.

He further contended that there is

discrimination between the retired employees

and the employees working. IN that view of the

matter, he submitted that the Commissioner has

rightly rejected the application of the

petitioner. He has relied upon the word

“beneficiaries” which is reproduced

hereinabove. He has also relied upon clause 14

which reads as under:

14. The Trust shall have periodic

contributions from its members to its

fund. It can also receive and accept

gifts, grants, aids, donations,

benefactions of any nature and kind

whatsoever for the purpose of

fulfilling its objects besides

contributions from KPT.

12. Mr. Desai learned advocate for the

respondent-authority has contended that the

order passed by the Commissioner is right and

the petition deserves to be dismissed.

13. While appreciating the facts and

interpreting the law on point, it is clear

that the very object of the trust is to see

that the employees may not have to lend their

hands before any person for money at a higher

rate of interest from outsider, and for that,

the trust is created. If we go through the

clauses no. 7 and 10, as referred to

hereinabove, they are in consonance with the

guidelines issued by the CBDT. On close

scrutiny of word “contribution”, it pre-

supposes the contribution of employee is

mandatory and other contribution by the

employer in any form is acceptable. The

finding of Commissioner is bad in law and

against the provision. In that view of the

matter, in our view, the Commissioner has

wrongly interpreted Rule 16(C) (of Income Tax Rules, 1962). In that view of the matter, the

interpretation put forward by the Commissioner

is required to be rejected.

14. The apprehension which has been emphasized

by Mr. Desai learned advocate for the

respondent that the fund, on dissolution of

Trust, will go to Kandla Port Trust, in our

view, till the last beneficiary of the Trust

remain in existence. However, only with the

order Central Government, the Trust can be

dissolved and the amount remained with the

Trust will go back to the Statutory Authority

i.e. Kandla Port Trust. Therefore, in the

facts and circumstances of the case, the

clauses are not objectionable.

13. In the premise, the present petition is

allowed. The impugned order dated 26.3.2014

passed by the Commissioner of Income Tax,

Rajkot-1, Rajkot, Annexure-A to the present

petition, is quashed and set aside. The

Commissioner of Income-Tax, Rajkot-1, Rajkot

is directed to grant approval to the

petitioner-Trust on or before 31.1.2015, from

the date on which they made application. Rule

is made absolute. No order as to costs.

(K.S.JHAVERI, J.)

(K.J.THAKER, J)