MITSUI STEAMSHIP CO. LTD.

C.I.T. WEST BENGAL, II CALCUTTA

February 7, 1975.

[H. R. KHANNA AND A. C. GUPTA, JJ)

Indian Incc>me-tax Act (11 of 1922) s. 10(2)(xv) and Indian Income-tax 1ct (43 of 1961) s: 40, cl. (ii) (a) as amended by Amendment Act of l9i2~

Tax 011 property paid by ow11er-cum-trader-If deductible expenditure.

The appellants, non-resident companies wit;1 registered offices in Japan, had been assessed to income-tax for the assessment years 1956-1961 under the Indian lncome-tax Act, 19.22 in respect .of their Indian earnings. In the assessment proc~0dmgs they claimed as dedt•ct1ble allowance, under s. 10(2) (xv), the tax paid by them on their business assets under the local tax law in force in Japan. But the Income-tax Officer rejected the claim. The Appellate Assistant Commissioner, however, allowed the claim and his order was confirmed by the Tribunal. On reference, the High Court, on a consideration of the various provisions of the Japanese statute, held that under the Japanese law it was the ownership of the assets that was material and not their actual user in business, and relying on the decision of this Court in Tran//lcore Titanium Product Ltd. v. C.l. T. Kew/a ( 60 I.T.R. 277), decided in favour of the Revenue.

Allowing the appeal to tliis Court,

HELD: ( l) In Indian Aluminium Co. Ltd. v. C.l.T. West Be11gal (84 I.T.R.

735) this Court held that the test adopted in the Travancore Tita11i11111 case, that to be a permissible deduction there must be a direct and intimate connection between the expend itL<re and the business, that is, between expenditure and the character of the assessee as a trader, and not as owner of the asset~, even if they arc assets of the business, ''needs to be qualified by stating that 1f th~ expenditure is laid out by the assessee as owner-cum-trader, and the expenditure is really incidental to the carrying on of his business, it must be treated tzi have been laid oct by him as a trader and as incidental to bis business. [470H-47 Jq

(2} The Income-tax Act, 1961, was amended by the Income-tax Amendment Act, 1972. The amendments were introduced to restore the position established in Travancore Titanium cas~ namely, that Wealth Tax paid by an assessee in respect of his business assets was not deductible as a business expense in computing the assessee 's income from his business, which was virtually overruled by the later decision in the Indian Aluminium Company case. But the amendments do not appear to touch the principle laid down in the later case, that where a person has a dual capacity of a trader-cum-owner, and be pays tax in respect of property which is used for the purpose of the trade, the payment mu, t be taken to be in the capacity of a trader. The Amendment Act only adds the sum paid on account of wealth tax to the list of amounts no: deductible in computing the assessee's income from business. Therefore. any amount paid by the assessee on account of a tax other than the wealth-tax on his business assets would be outside the scope of the Amending Act and would continue 'to be governed by the law laid c:own itt the Indian A/11mini11m case.

The ex!'lanation in s. 40 of ih~ Income-tax Act, 1961, which s. 4 of the Amndment Act adopts for the purpose of that 'ection defines wealth tax to include, illler alia, besides wealth tax chargeable under the Indian Wealth Tax Act, 1957, "any tax of a similar character chargeable under any Jaw in force in any counry outside India.

[4710-E; 4720-G]

(3) But, unlike the Wealth-tax in India the municipal property tax in apan is a local tax imposed on certain specified properties by the city! town <; r v1lla.e

in which the. property is located.

The Indian. Wealth. Tax 1.s, a national. tax chargeable on the net wealth of the person with certatn sµecmed exempt10ns.

The difference in the manner of determination of the taxable basis of the properlie; aml the r.t'.es of ta1rntion emphasize the basic difference between :lr: two taxes notwi1h>ianding ce:tain points of similarity. [473H-474Bl

 ( 4) The facts also disclosed that the assets blonging lo the appellant:; were used by them in their business during the relevant prev10us years andalso that the payment of tax under the Japanese law was incidental to th~ carr; mg on of the business of the assessee.

[473A-B1

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1072 to B 1079 of 1970.

Fro~ the judgment and order date<l th~ 1st July, 1969 cif the Calcutta High Court in Income Tax References Nos. 170, 17 4, 175, 186 and 184. 189, 177 & 176 of 1964.

Scl; in Chaudhuri (in C.As. Nos. 1076-1079;70), T. A. Nwwichandran and D. N. Gupfll, for the appellants (In all the appeals). s. C. Manchanda, (ln C.As. Nos. 1076-1079) s. P.

Nayar and R. N. Sachthey, for the respondent (In all the appeals).

The Judgment of e Court was delivered by

Gu PTA, J .-These/ two groups of appeals, brought Qn certificates granted by the Highi Court t Calcutta, arise out of two rferens

under sec. 66(2) of the lndian Income-Tax Act, 1922 mvolvrng similar questions of law. /

Mitsui Steamship Co. ltd,. appellant in Civil Appeals Nos. 1072-1075 of 1970 and M/s. Kawasaki Kisen Kaisha Ltd., appellant in Civil Appeals Nos. 1076-1079 of 1970, are both non-resident shipping companies having their registered offices in Japan.

Civil Appeals Nos. 1072-1075 of 1970 relate to assessment years 1957-.

58, 1958-59, 1959-60 and 1960-61 for which the previous years were the financial years ending on the 31st March, 1957, 1958, 1959 and 1960 respectively Civil Appeals Nos. 1076-1079 of 19/0 relate to assessment years 1956-57, 1957-58, 1958-59 and 1959-60, the corresponding previo.us years being the financial years ending on the 31st March 1956, 1957, 1958 and 1959 respectively. The appellant in each case had been assessed to income-tax for the years mentioned above u; idcr the Indian Income-Tax Act, 1922 (hereinafter l'.eferred to as the Act of 1922) in respect of its net Indian earnings.'. In the assessment proceedings the appellant companies had claimed as deductib:e allowance under sec. 10(2) (xv) of the Act of 1922 the

x paid by them on tht:ir business assets under the Local Tax Law Ill force in Japan. The Income-tax Officer rejected the claim on the view that the incidence of tax uD.der the Japanese law falls on the

ssessee companies in their capacity as the owners of the business

asets and not as traders. On appeal preferred by the assessees , the Appellate Assistant Commissioner took the view that the tax onid under the Local Tax Law in Japan was an allowable expenditure

Under sec. 10(2 l (xv) of the Act of 1922. The Tribunal also affirmed the view taken by the Appellate Assistant Commissioner overruling

te contention raised on behalf of the' revenue that the miture of tax

A imposed by the Japanese statute was similar to the wealthrtax payable in India which was not permissible deduction under sec. 10(2) (xv).

In Civil Appeals Nos. 1_072-75 of 1970 the question referred under sec .. 66(2) was :

"Whether on the facts and in circumstances of the case, the property tax and vessels tax paid by the assessee in - Japan on its land, buildings and other tangible assets and ships were allowable as deduction under sec. 10(2)(xv) of the Income-Tax Act, 1922 ?"

Jn Civil Appeals Nos. 1076-1079 of 1970 the question referred tvas :

"Whether on the facts and in the circumstances of the case the property tax paid by the assessee in Japan on its vessels was allowable as deduction under sectio:ii 10(2) (xv) of the Income-Tax Act, 1922 ?"

The two questipns, though worded a little differently, depend for their answers on a correct appreciation of the character of the Japanese tax.

The High Court on a consideration of the various provisions of the Japase statute held that under the Local Tax Law in Japan it was the ownership of the assets that was material and not their actual user in business, and relying on the decision of this Court in Travancore Titanium Product Ltd. v. Commissioner of Income-tax, Kerala( 1)

answered the question referred to it' in both cases in, the negative and in favour of the revenue. 'In the case of Travancore Titanium Product Ltd. ( 1) this Court was considering the question whether a sum paid as wealth-tax was deductible from the profits and gains of the assessee's business under sec. 10(2) (xv) of the Act of 1922. In hod ing that the amount of tax paid on the net wealth of an assessee under the Wealth-Tax Act was not a permissible deduction. this Court observed: ·

"The expenditure must be incidental to the business and must be necessitated or justified by commercial expediency.

It must be directly and intimately connected with the business and be laid out by the tax-payer in his character as a trader.

To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business, i.e., between the expenditure and the character of the assessee as a trader, and not as owner of assets, even if they are assets of the business."

The Judgment of the High Court mainlv turned on Article 341 ( 4) of the Japanese statute. From an English translation of the statute filed before the tribunal it appears t]iat the statute is divided into

(l) 60 J.T.R. 277

four Books. All the Articles to •.•:hich we will refer for the purpose of these appeals are in Chapter III, Section 2 of Book Four which

contains Artic:le 341 to 7 46.

Chapter III bears the heading "Ordinary Taxes of City, Town or Village" and Section 2 deals with "Municipal Property Tax .. " Article 341 defiaes certaini terms concerning municipal property tax, and in so far as it is relevant for the present purpose, it reads as follows :

''With respect to municipal property tax, the terms listed in the following items shall havt< the definition given to them under the: respective items :

(1) Property : Land, houses and depreciable assets;

(2) Lands : x x x

(3) Houses : x x x

( 4) Depreciable assets : Assets (excluding the mining rights, fishing right, patent right and other depreciable intangible property) other than land and house which can be used for business purpose and the amount of depreciation of which is included in the loss or m:cessary expenditures in the computation of income as provided for in the Corporation Tax Law or the Income-Tax Law (including the pro1perty similar to those properties which are owned by the person upon whom the corporation tax or the income itax has not been imposed). However, automobiles and bicycles which are the objects of the automobile tax, and bicycles and carts which are the objects of the cart tax respectively shall be excluded;"

Referring to the definition of 'depreciable assets' the High Court pointed out that under the Japanese law the assets which could be used for business purpose were subjected to tax arld it was not ·: required that !these assets should in fact be used for business purpose . . The High Court took the view .that the tax paid by the assessees under the Japanese law was in their capacity as owners of the aissets and not as traders, and applying the. tet adopted in the Travancore Titanium case (supra) the High Court held that the tax paid by the assessees under the Local Tax Law in Japan was riot deductible as a busines expense under the Act of !922.

Travcncore Titanium Product case(!) was decided by a Division Bench of this Court in the year 1966. The impugned orders of the High Court in the two references out of which these appeals arise were both made in 1969. In 1972 a larger Benj::h of this Court expressed the view in the case of Indian Aluminium Co. Ltd. v. Com" missioner of Income-Tax, West Bengal(2) that the test adopted in

T__ravan_c_01:__~ __ Ti!f!!!!1!1!_1_ Prod1!ct case(1) that to be permissible deduc-

(J) 60 J.T.R. ?.77. i ·

(2) 84 J.T.R. 735.·

A tion thete must be a direct and intimate connection between the ex- . penditure and the bus1ness, i.e., between the expenditure and the · chaq1cter of the assessee as a trader, and not as owner of assets, even . . if they are assets 0f the business "needs to be qualified by stating that

• 0 •. , if the expenditure is laid out by the assessee as owner-cumtrader, 'D'. and the expenditure is really incidental to the carrying on of his B businss, it must be treated to have been laid out by him as a trader

and as incidental to his business". It was held in In4ian Aluminium Company's case( 1) that the wealth-tax paid on assets held by the assessee for the purpose of his business, was deductihle as a business , expense in computing the assessee's income from business.

Within a few months of the decision in Indian Aluminium Com~ pany's case( 1) which was rendered on March 29, 1972, Income Tax (Amendment) Odinance 1972 (7 of 1972) was promulgated on July 15, 1972 with the object of barring, in the computation of total income in respect of certain assessment years prior to the assessment year 1962-63, deduction of amounts paid on account of wealth-tax.

The Ordinance was later repealed and replaced by the Income-Tax (Amendment) Act, 1972 (41 of 1972) containing similar provisions.

D The Amendment Act which received the asseJlit of the President on August 28. 1972 sought to restore, as the Statement of Objects and Reasons says, the position established in the case of Travancore Titanium Products Ltd. v. Commissioner of Income-tax, (supra) which was virtually overruled by the later decision in Indian Aluminium Co. Ltd. v. Commissioner of Income tax,(1) that wealthtax paid by an assessee ill respect of his business assets was not deductible as a business expense in computing the assessee's income from business. Section 2 of the Amendment Act inserted with retrospective effect a new sub-clause (iia) in clause (a) of section 40 of the Income-Tax Act, 1961 which specifies the amounts not dedueti-

ble inl computing the income chargeable under the head "Profits and gains of business or profession". Subiclause (iia) adds to the list of amounts not to be deducted "Any sum paid on account of wealthtax". To this sub-clause an explanation was added extending th.e meaning of the expression Wealth-tax for the purpose of the subclause. The Explanatio!l reads:

"Explanation.-For the purposes of this sub-clause, "wealth-tax means wealth-tax chargeable under the Wealth-

1x Act, 1957 (27 of 1957), or any tax of a similar charac- . ter chargeable under any law in force in any country outside India or any tax chargeable under such law with reference to the value of the assets of, or the capital employed in, a busi*ss or profession carried on by the n_ssessee, whether or not the debts of the business cir profes, h sion are allowed as a deduction in computing the amount with reference to Which such tax is charged, but does not include any tax chargeable with reference to the value of any Particular asset of the business or profession;"

(I) 84 T.T.R. 735.

SUPREME C9URT REPORTS

(1975) 3 S.C.R.

Section 4 of the Amendment Act which bears directly on the appeals before us provides: ·

"4. Wea/, thtax not deductible in complting the. totl income for certain assessment years.-Nothmg contamed m

the Indian Income-tax A.ct, 1922 ( 11 of 1922), sh al; be deemed to authorise or shall be deemed ever to ha vc authorised, any dedution in the computation of the income of any assessee chargeable under the head "Profits and gains of business, profession or vocation" or "Inome from other sources" for the assessment year commencmg on the 1st day of April, 1957, or any.subsequent assessment year, of section 40 of the principal Act."

To this section also an explanation was added saying :

"Explanation.·-For the purposes of this, section, "wealth-tax" shall have the same meaning as is assigned to it in the Explanation to sub-clause (iia) of clause (a) of section 40 of the principal Aot."

Section 5 of the Amendment Act contains a saving clause to which it is not necess.ary to rder for the purpose of these appeals.

We have mentioned earlier the assessment years concerned in the instant appeals. The que1; tion is, what is the effect of the . Income>-· Tax (Amendment) Act, 1972 on these appeals. The amendments introduced do not appear to touch the principle laid down in Indian Aluminium Company's case (supra) that when a person has a dual capacity of a trader-cum-owner, and he pays tax in respect of property w'hich is used for the purpose of 1trade, the payment must be taken to be in the capacity of a trader. The Amendment Act only adds the sum paid on account of wealth tax to the list of amounts not deductible in computing the assessee's income from business.

Therefore, any amount paid by the assessee on account of a tax other than the wealth.-tax on his business assets would be outside the scope of the Amendment Act and would continue <to be governed by the law laid down in Indian Aluminium Company's case (supra).

The explanation to the n, ew sub-clause ( iia) inserted in section 40 of the Income-Tax Act, 1961 which section 4 of the Amendment Act adopts for the purposes of that section, defines "wealth-tax" to include, inter alia, besides wealth-tax chargeable under the Wealth- Tax Act. 1957, "any tax of a similar character chargeable under any law in. force in any country outside India". The only contention raised before us on behalf of the revenue was that the nature of the tax paid by the assessees in Japan an their business assets is similar ro the wealth-tax payable under the Wealth-Tax Aot. 1957.

This leads to a comparison of the two statutes, Wealth-Tax Act. 1957 and the Local Tax Law of Japan. to find out whether they are of a similar charndter. The supplementary statement of case drawn nn bv the

T, ribunal pursuant to an order of this Court dated April 11. 1973 discloses that the assets belongingto-tbe appellants with which we

are concerned in these appeals were all used by them in their busines_s during the relevant previous years and also thait the payment 9f tax under the Japanese law was incidental to the carrying .on of the business of the assessees.

From an examination of the provisions contained in Book Four of the Japanese statute, it appears to us that there is a basic difference between the Wealth-Tax Act, 1957 and 1the Local Tax Law of Japan.

Wealth tax in: India is charged on the net wealth of the assessee. Net wealth as defined in sec. 2(m) of the Wealth-Tax Act, 1957 means, broadly. the aggregate value of all the assets, wherever located, belonging to the assessee minus the total amount of the debts, with certain exceptions, owned by him. Generally speaking, by the value of an asset, other than cash_,_ is mea!llt its . market value. 'Asse's' has been defined in clause (e) of sec. 2 of the Act as including property of every description, moveable or immoveable, with certain specified exemptions. Wealth-tax in India is a national tax charged by the Central Government. The municipal property tax in Japan is imposed on prope1; ty as defined ill/ Article 341 (1). In this definition, property includes only land, houses and depreciable assets and not property of every description. Depreciable assets has been defined in Article 341 ( 4), inter alia, as assets other than la<ad and house which can be used for business purpose, but these assets again exclude all depredable intangible property and property which are the objects of other taxes like automobiles, bicycles and carts. Article 342 lays down t'i:it the municipal property tax shall be imposed on property by the city, town or village in which the property concerned is located and provides that with respect to vessels, vehicles and other objects similar in nature which are included in depreciable assets, the city, town. :rnd village in which the principal port of anchorage or regular

kcp :1~ place is located shall be the city, town or village authorised to i pose 1the municipal property tax. Further, it appears that under the Japanese law, tax is charged at the standard rate of 1.4 per cent on the value of the property computed in the manner laid down in

th~ sta1 ute providing the taxable basis, and in certain special cases

it rr/ay go up to 2.5 per cent, which is the maximum; in India, the rates of wealth tax vary, increasing progressively with the am0unt of net w:::11th of the assessee.

The broad features of the two statutes we have noted above reveal their basic dissimilarity. Unlike the wealth tax in India, the munidpal property tax of Japan is a local tax imposed on certain specified properties by the city, town or village in which the proprties arc located. The wealth tax is a national tax chargeable on tAe

net wealth of a person with certain specified exemptions. The difference in the manner of determination of the taxabe basis of the: properties and the rates of taxation emphasize the basic difference between the two taxes. Of course, there are certain points of similarity between the two laws, as there must be, both being taxing sta.tutes, but these similarities do not remove the fundamental difference in the aim, object and the basic structure of the two Acts.

Accordingly we allow the appeals, discharge the answers given by the High Court to the questions referred to it in these two cases, and answer the questiions in the affirmative and in favour .of the

assesees. In the circumstances Qf the case we direct the parties to bear their own costs both here and -in the High Court.

V.P.S.

Appeals allowed.

MITSUI STEAMSHIP CO. LTD

I.T. WEST BENGAL, II CALCUTTA

February 7, 1975

H. R. KHANNA

A. C. GUPTA, JJ

s. 10(2)(xv)

s. 10(2)

Japan

Travancore

Income-tax Act, 1961

Income-tax Amendment Act, 1972

Travancore Titanium

Indian Aluminium Company

s. 40

Income-tax Act, 1961

s. 4

Indian Wealth Tax Act, 1957

India

CIVIL APPELLATE JURISDICTION

Calcutta High Court

Chaudhuri

T. A. Nwwichandran

D. N. Gupfll

C. Manchanda

P.

Nayar

R. N. Sachthey

sec. 66(2)

Income-Tax Act, 1922

Mitsui Steamship Co. ltd

Kawasaki Kisen Kaisha Ltd.

Indian Income-Tax Act, 1922

sec. 10(2)

sec. 10(2 l (xv)

sec. 10(2)

sec. 10(2)(xv)

Income-Tax Act, 1922

Income-Tax Act, 1922

Travancore Titanium Product Ltd.

sec. 10(2)

Wealth-Tax Act

Article 341

Section 2

Section 2

Article 341

Travcncore Titanium Product

In4ian Aluminium Company

Indian Aluminium Com~ pany

March 29, 1972

July 15, 1972

August 28. 1972

Section 2

section 40

Income-Tax Act, 1961

Section 4

1st day of April, 1957

section 40

section 40

Section 5

section 40

Income-Tax Act, 1961

section 4

Wealth-Tax Act

April 11. 1973

Wealth-Tax Act, 1957

sec. 2(m)

Wealth-Tax Act, 1957

sec. 2

Central Government

Article 341

Article 341

Article 342


ST ATE OF MAHARASHTRA & ORS.

THE SALVATION ARMY, WESTERN INDIA TERRITORY

February 10, 1975

[K. K. MATHEW, P. N. BHAGWATI AND N. L. UNTWALIA, JJ.]

Bombay Public T_rusts Act, 1950, ss. 57 and 58 and Rule 32 of rules framed under Act-Difference between tcx and fee-Liability for co11tributio11 by public trust at 2% of gross income-If tax or fee.

Section 57(1) of the Bombay Public Trusts Act, 1950 states that there shall be established a Fund to be, called the 'Public Trusts Administration Fund' and that the fund shall vest. in the Charity Commissioner appointed under the Act.. One of the amounts which o to make the Fund is the contribution made by a public trust under s. 58. Section 58 as amended by Amending Act, 1962, provides that in the case of a public trust, other than a dharmada, the contribution shall be at the prescribed rate on the gross annual income. Gross annual income is defined to mean the gross income from all sources, in:luding donations and offerings excluding, inter alia payments made with a specific direction that the paymet made shall form part of the corpus of the public trust.

Rule 32 of the rules made under the Act prescribed the rate of 2 % of the gross annual income, In the Amending Act, provision was made in s. 4 for retrospective operation of the provisions of the Act and the rule. ·

The respondent was registered as a public limited company under the Indian Companies Act, 1913, and also under the Bombay Public Trusts Act, 1950. In the years 1954, 1955 and 1956 it received certain sums from its international organisation.

Upon these amounts and other collections in India, in 1963, the respondent was called upon to pay the contribution of 2% as required by s. 58 of the Act read with r. 32. The respondent thereupon filed a writ petition in the High Court challenging the levy. The High Court held that though the levy was a fee in the beginning, it assumed the character of a tax by the end of 31 March, 1958, when there wa> a substantial surplus with the Fund, and that thereafter the levy was illegal and ulira vires as the actual levy was made after it assumed the character of a tax. ";,.,.-:.

In appeal to this Court, HELD : ( 1) The respondent has an independent legal personality as it was registered under the Companies Act, and so, the amounts which it received cannot but be regarded as donations coming within purview of s. 58 and.· r. 32.

[487C-D] . ,

2(a) A tax is a compulsory exaction of money by a public authorify fora public purpose enforceable by law and is not a payment for any speci{\c service. rendered. The levy of a tax is for the purpose of general revenue, which, when collected, for~ part of the public revenues of the. State. !here is. no element of quid pro quo between the tax payer and the public uthonty. A fe~1 h!>ever, is generally defined to be a charge for a special service ren, dered to "lpd1V1duals bv the government or. some other agency like a local authonty or statutory corporation. The amount of fee levied is supposed to be based on the exl?enes incurred in rendering the services though, in many cases, the costs are arb1tarily assessed. Fees are generally uniform but absence of uniformi<y is not a criterin on which alone it can be said that the levy is in the nature of a !&if. As m fee 1s. regarded as a sort of return or consideration for services rendere4 it is necess3; rY "1• that the levy of a fee should be correlated to the expenses incurred, in Jendriqg ,· the services. It is also generally necessary. that the paymnts demanded for ten,.-~. dering services must be set apart or specifically appropriated .for that purpose .. and that they should not be merged in the general revenue o! the State to e speRr-· for general public purposes. It may not, however, be possible to prove m every case that the fees colle:ted always approximate to the expenses that mre incuri:e<t,• in rendering the particular kind of services or in performing any. particular wort.· \for the benefit of certain individuals.

[481E-482C] . •. . . ·

-·-·.·

SUPREME COURT REPORTS [1975] 3 s.c.R.

In the present case, the revenue expenditure, is about 62 % of the amount of revenue. receipts. from 1953 to 1970. As there is approximate correlation, the levy is in the nature of a fee.

[484B-C]

Hingir-Rampur Coal Co. Ltd. v. The State of Orissa [196112 S.C.R. 537 at 549, H. H. Sudhundra Tirtha Swamiar v. Commissioner for Hmdu Religious & Chairtab/e Endowments, Mysore, (1963] Supp. 2 S.C.R. 302 at 323; The Commis sioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Tirtha Swamiar of Shirur Mutt [1954] S.C.R. 1005 at 1037, 1040, Mahant Sri Jagamzath Rwnanuj Das and Arother v. The State of Orissa and Another [1954] S.C.R. 1046 at 1053, Ratilal Panachand Gandhi v. The State of Bomba; y [1954] S.C.R. 1055 at 1075.

Nagar Mahapa/ika, Varanasi v.

Durga Das Bhattacharya & Others, [19681 3 S.C.R. 374, at 385; and Government of Madras v. Zenith Lamp and E/ectric11/ Lrd. (1973] 1 S.C.C. 162, referred to.

Delhi Cloth and General Mills Co. Ltd. v. Chief Commissioner, Delhi [1970] 2 S.C.R. 348, at 354,_ followed. ·

. (b) A review of the relevant provisions in the Act leads to the condusion that the provisions are enacted with a. view that public trusts are administered for the purpose intended by the authors of the trust and for preserving the trust properties from waste and misappropriation by trustees. Taking precautionary measures to see that public trusts are administered for the purposes intended by the authors of the trust and exercising control and supervision with a view to preserve the trust properties from being wasted or misappropriated by tmstees are certainly special services for the benefit of the trust Therefore. it could not be contended that no siie:ia.J benefits were or are being conferred L"pon the public trust in administenng the provisions of the Act. [484F-H]

(3) The ervices are mostly rendered by the officers of the Charity Organisation. With the proliferation of public \rusts in the State it became necessary to expand the charity organisation and to increase the staff for supervision and control. It also became necessary to have more regional offices for the more . elfective and immediate supeI'.Vision and control.

The expenditure in constmcting htiil<lings for locating th:: head office and regional offices and the increase in a!lowances or other amencties to the staff have also to be included in the costs of the services. When there is surplus it cannot immediately be said that thi: surplus must necessarily go in reduction of the rate of contribution to be J.evied thereafter. It would neither be expedient nor prudent to lay down any abstract proposition that whenever there is surplus in a particular year or years that the surplus must always be taken into consideration and the rate of the contribution should be reduced for the next year or subsequent years.

An organbation like the one in question may have to incur capital expenditure for the better allowances or other amenities to the staff have also to be included in the costs of administration of the trust and it might not be able to foresee all the contin.c:ncies in which such expenditure will have to be incurred for the more efficient wo; king of the organisation.

But. at the same time, when it is seen that after taking into

acount the capital and other expenditure necessary for the efficient fu11ciionit1g of the organisation for the better administration of the trust. a very larr.e surplus is still left, then the question wili arise whether it is permissible for the organisation to continue the levy at the same rate which would only result in further surplus and to invest this surrlus solely for earning income or to divert the surplus for other obiccts, though charitable in nature.

Such levy for investment or diversion of the surplus would not be consistent with the principles b-hind the levy of a fee. No hard and fast rule applicable in all contingencies c:in be formulated.

While it is not necessary that all available surplus should always go in reducing the rate of contribution for subsequent years, the organisation cannot be allowed to accumulate unreasonable amounts, that is, amounts which may not reasonably be required for the proper and efficient working of the organisation in a foreseeable foture.

In drawing the line, the Court will have . to look into the nature oli the organisation, the potentiality for its growth .. the multiplication in its work consequent on its expansion for rendering the service:> visualised by the Act and the necessity for capital expenditure in the near future .as also the amount of levy collected or expected to be collected in a year. [485C-

486CJ .

(a) In tho present case, !hero Wll8 an available surplus which waa used for

purcbasin~ a bailding. Even accordin& to the High Court investment of the i; urplus in building<; or locating the head and regional offices cannot be said to be c!iersion of the surplus for purposes alien to the object of the organisation namely, the better administration of the trust.

Therefore, it could not be said that by the end of March 1958, when there was rome iiUrplus, the contribution had assumed the character of a tax.

[486G-E]

(b) But, by tho end of March, 1970, there was a surplus of Rs.- 54 lacs.

The rate of fee' at. 2% cannot continue, thereafter, without taking into account

the corpus of Rs. 54 lacs and the income therefrom. If the Organisation ia allowea to go'\on increasing its surplus year after year out of the amount of fee collected under s. 58 of the Act it would demonstrate that the fee levied waa unjustifiably dlSproportionate to the service rendered. The contribution at the rato of 2 % on tho gross 'incomo atter 31st March, 1970, undoubtedly assumed the character of tax as that merely augmented the income of the Charity Organi- 1ation. Therefore, beforo levyin~ any fee or determining its rate after 1970 the Charily Organisation Ii.as to balan<:e its budget.

[486G-487A]

( 4) The High Court was of tho view that the levy of contribution was 11/Jra vires at the time tho leY:v was made because it ceased to be a fee and became a tax. By virtue of the retrospective operation of the amended s. 58 as provided in ~. 4 of the Amending Act, the respondent became liable to pay contribution in respect of the 3 donations in the year in which they were received, that is, in 195-4, 19.55 and 1956. Therefore, even on the basis of the reasoning of the High Court that the levy assumed the character of a tax after 3 lst March,

1958, it could not be held that the levy of contribution in those years became exonerated from tho liability. The fact that the actual levy was made after t 962 would not mll¢ any difference in the liability to pay the contribution R.'I the liability was incurred when tho Ievv had not assumed tho character of tax even according to tho Hi~ Court. [4870-H]

( 5) (a) Tho respondent, therefore, is liable to pay contributions in respect o( 1hc three sums and tho High Court was wrong in quashing the orders passed.

1487H]

(b) After 31st March, 1970, the levy at 2% of the gross income cannot be justified as a fee. [487Hl

(c) This doe1 not mean that no levy of contribution was permissible therc- :tfter. It only means that in levying a fee thereafter 1t should have correlation with the services, taking into consideration tho exhtonco of tho surplus fund aoJ th~ income therefrom.

[488A-B]

( d) Rule 32 is ultra iires.

[488B]

C1vrL APPELLATE JuRismcnoN : Civil Appeals Nos. 487 and 488 of 1973.

From the judgment and order dated the 31st January, 1972 of

th~. Bombay High Court in 0.S. No. 38 & 39 of 1971.

Niren De, .Attorney General of India, S. Bapti:Jta and

M. N.

Shroff, for the appellants. (in both the appeals).

P. P. Khambatta, Ashok Desai, A. G. Meneses, and K. John, for the respondents. (In C.A. No. 487 /73).

As/wk Desai, A. G. Meneses and K. J. John, for the respondent Nos. 1, 2 & 4--8 (In C.A. No. 488/73).

 T. Civil Appeal No. 487 of 1973

MATHEW J.-The respondent in this appeal is the Salvation Army, Western India Territory. It is a part of the world-wide orl!llnisation . known as the Salvation Army.

Th~ headquarters of thQ 0rganisation is lo-423SCll75 . . .

SUPREME COUAT REPORTS

(1975) 3 1;.c.R.

in London. The organisation in India was registered as a public~ limited company under the Indian Companies Act, 1913, having obtained a licence to carry on its activities without suffixing the word •Jimited' after its name. It is also registered under the Bi1)IDbay Public Trusts Act, 1950 (hereinafter called the 'Act') and carries on various charitable activities. The Company has its headquarters in Bombay. The fund:s of the Company are administered under the Articles of Association bv a Board consisting of a General, a Chiet of Staff and various other officers. The accounting year of the Compainy is from 1st of October to the 30th of September of each year.

In the years ending 30-9-1954, 30-9-1955 and 30-9-1956, the respondent received three sums from the international organisation, namely, Rs. 1,97,302/-, Rs. 2,50,228-14-0 and Rs. 2,67,732-15..0.

Besides these amounts, the respondent had made collections in India.

Upon all these amounts the respondent was called upon to pay a contribution 6f 2 per cent as required by s. 58 of, the Act read with rule 32 of the Bombay Public Trust Rules.

The respoildent claimed exemption from liability to pay contribution upon the three donations.

Appellant No. 3 disallowed the claim. The respondent's appeal against the order wacs dismisse, d by appellant No. 4.

The respondent thereupon filed a writ pertition in the High Court of Bc.mibay for a declaration that the provision for levy of contribution contained in s.58 of the Act and rules 32 and 33 of the Rules as also th~: provisions of sections 2 and 4 of the Maharashtra Act 29 of 1962 (hereinafter referred to as the "Amending Act of 1962") were beyond the powers of the Stare L•egislature and that the levy of contribution on the three donations was therefore illegal. The respondent also prayed for quashing the orders passed by appellants 3 and 4 disallowing its claim for exemption from levy o~ contribution upon the aforesaid sums.

A learned Single Judge of the High Court held that the levy was bad as it was not a fee but tax.

Against this decision, an appeal was preferred before the Division Bench by the appellants. The Bench came to the conclus!on that though the levy of 2 per cent on the gross income of the publtc trusts was a fee in the beginning, it assumed the character 0£ a tax by the end of 31st March, 1958 as there was a surplus of Rs. 30,44,541 by that time and therefore the levy assumed the character of tax. and wa_, illegal from that date. The Court further held that the levy of contribution on the three donations was ultra vires as the actual levy was made after it assumed the character of a tax. It is against iliis judgment that this appeal has been filed on the basis of certi:fi.cat.c granted by the High O>urt.

The Act was brought into force from 14-8-1950. The object of the Act is to re_gulate and make better provision for the administra~ tion of public religious and charitable trusts in the State of Bombay.

Section 57(1) states that there shall be established a fund to be called the Public Trusts Administration Fund and that the Fund shall vest in the Charity Olmmissioner appointed under the Act. Oause.s (a) to (() of sub-section (2) of the section specify the amounts which go to

make the fund. Of these, clause (b) concerns the contribution made under s.58.

Section 58 was amended by the Amending Act of 1962 and the Amending Act came into force on 27-8-1962. That section, at all times, prescribed that every public trust shall pay to the Public Trusts Administration Fund annually such 'contribution on such date and in such manner as may be prescribed. The contribution to be paid was originally fixed by rule 32 which was also amended by the Amending Act of 1962.

Section 58 as it originally stooa provided ti t the contribution prescribed under the section shall, in the case of ublic trusts other than dhannada, be fixed at rates in proportion to t e gross annual, income of such public trust and the Explanation stat .d that, for the purpose of thei section, the gross annual income shfill include gross income £rom all sources in a year excluding donation given or offering made with a specific direction that they shall form part of the corpus of the public trust.

Rule 32(1) of the Bombay Public Trus~ Rules, 1951, framed under s.84, clause (b), provided that every pub'lic trust other than a trust exclusively for the purpose of secular tftlucation imparted by a recognised institution or exclusively for tlle purpose of medical relief shall pay annually to the Public Trust$ Administration Fund out of its property or funds a c:ontribultion at the rate of 2 per cent of its :gross annual income or, where the public trust is a dharmada, its gross annual collection or receipts. In sub-rule (3) of Rule 32, it was provided that in calculating the gross annual income or receipts for the purpose of assessing the contributiml. the following deduction shall be allowed:

"donations given with specific directions that they shall form part of the corpus (vide Explanation to s.58)."

By a Government notification dated 3-12-1953, rule 32 was amended. The provision for levy of contribution was substantially 1the same as in sub-rule (n of Rule 32 but the amended sub-rule (3) of Rule 32 was as follows:

"(3) In calculating the gross annual income of a Public Trust, or where the public trust is a dhannada, its gross annual collection or receipts, for the purpose of assessing the contribution, the following deductions shall be allowed, namely:" and clause (iiii) oorresponding to the original clause (iii) of Rule 32

(3) ran as follows :

"donation received during the year from any sources."

This rule was patently ultra vires of s.58 itself, for, the Explanation to s.58 excluded donations given or offerings made with a specific direction that they shall tlotm part of the corpus of the public trust.

But Clause (iii) of Rule 32(3), after its amendment in 1953, excluded all donations received during the year from any source. The state

SUPREME COURT REPORTS (1975] 3 i!l.C.R.

legislature th<refore passed the Amending Act of 1962 which in.serted certain provisions of Rule 32 of the Rules as substantive provisions in the Bombay Public Trust Act, 1950. The legislation amended s.58 itself and the amended section was substituted for the old sc::ctioii.

The amended section, so far as it is material, provides :

"58(1) Subject to the provisions of this section, every public trust shall pay to the Public Trusts Administration Fund annually such contribution at a rate or rates not ex· ceeding five per cent of the gross annual income, or as the case may be, of the gross collection or receipt, on such date, and in such manner, as may be prescribed.

The contribution prc!SCiibed under this section shall :

(i) in the case of a dharmada, be fixed at a rate or rates on

the gross annual collection or receipts of the dharmada.

(ii) in the case oli other public trusts, be fixed at a rate or rates on the gross annual income of such public trust.

Explanation( O. For the purpose of this sub-section 'gross annual income' means gross ru.come from all. sources in a year (including all donations and offerings),. but does not include any payment made or anything: given with a specific direction that it shall form part of

the corpus of the public trust, ~1or include any deductions which the State Government may allow by rules .......... ".

Provision was also made fo1 the period durirtg which Rule 32 remained in operation and therefore s.4 of the Amending Act of 1962 provided for retrospective operation of the provisions of the Act. Section 4 provides :

"The substitution of section 58 in the princir-al Act by section 2 of this Act shall be and shall always be deemed to have been made iin the principal Act and the provisions of clause (iii) of sub-rule (3) of rule 32 of the Bombay Public Trust Rules, 1951, shall be deemoo to have been deleted from the date on which those rules came into force; and accordingly, rule 32 of these rules as amended shall be deemed always to have been validly made and to have full effect, as if it had been duly made under the principal Act as amended by this Act and anything done or action taken under that Rule shall be deemed to have been validly done or taken.'' An amendment was also effected by the Act itself in Rule 32 by deleting clause: (iii) of sub-rule (3) of Rule 32.

The validity of these amendments was not challenged before this Court.

The two main questions which arise for consideration in this appeal are : ( 1) whether the levy of contribution under s. 58 read with rule 32(3) was a tax from the inception of the levy or whether, although the levy was a fee in its inception, it assumed the chara1cter

of tax in any subsequent year by reason of the accumulation-ef-the

surplus of the income over the expenditure, and (2) whether the levy of contribution on the three donations was justified.

As already stated, the learned Single Judge was ofl the view that the levy was in the nature of a tax from its inception for the reason that the contribution levied had no correlation to the services rendered. The learned Judge in taking this view was largely intluenced by the statement of the income and expenditure of the charity organisation contained in Exhibit I for the years from 1953 to 1970. The learned Judge said that the ratio of revenue expenditure to the receipt every year was 53.33 per cent on an average and that there was always a surplus of about 47 per cent after meeting all the annual recurring expenditure, that accumulation to the extent of 47 per cent oh an average every year had ultimately brought about the result that even after meeting the total expenditure, the &urplus came to Rs. 44,60,973 on 31-3-1965, that it was augmented further to Rs. 84,49,473 by 31-3-1970 and therefore the levy was at all times a tax and was beyond the power of the legislature. He further held that the respondent was not liable to pay contribution in respect of the three amounts.

On appeal, the Division Bench, after considering the distinction between a fee and a tax as laid down by this Oourt came to the conclusion that the contribution at the rate of 2 per cent of the income of the trusts was a fee till the end of March 31, 1958 aI!d that, on account of the accumulation of surplus to the tune of Rs. 30,44,541 by the end of the year 1958, it assumed the character of a tax and therefore, after 31st March 1958, the levy became ultra vires the powers of the legislature.

Now th~ fii'St questiunfor -consideration-is~.What is the.nature of a fee ? It is idle to parade the familiar learning on the question of the distinction between a tax and a fee.

A tax is a compulsory exaction of money by a public authority for a public purpose enforceable by law and is not a payment for any specific service rendered.

The levy of a tax is for the purpose of general revenue which when collected forms part of the public revenues of the State.

There is no element of quid pro quo between the tax payer and the public authority. A fee is generally defined to be a charge for a special , service rendered to individuals by the government or some other agency like a local authority or statutory corporation.

The amount pf fee levied is supposed to be based on the expenses incurred by the Government or the agency n rendering the service thou&h in many cases the costs are arbitrarily assessed.

Fees are ordmarily uniform but absence of uniformity is not a criterion on which alone

it can be said that a levy is in the nature of tax. In the case of a fee, no account is taken of the varying abilities of different recipients of the service to pay.

As a fee is regarded as a sort of return or consideration for services rendered, it is necessary that the levy of fees should be correlated to the expenses incurred by the agency in rendering the services. "If the special service rendered is distinctly and primarily meant for the benefit of a specified class or area the

SUPREME COURT REPORTS [1975] 3 s.c.R.

fact that in benefiting the specified class or area the state as a whole may ultimately and indirectly be benefited would not detract from the character of the levy as a fee." ( 1). It is also generally necessary that the payments demanded for rendering of such services must be set apart or specifically appropriated for that purpose and that they should not be merged in the general revenue of the State to be spent for general public purposes. It may not be possible to prove in every case that the fees that are collected by the Government or the agency always approximate to the expenses that are incurred by it in rendering the particular kind ofl services or in performincr any particular work for the benefit of certain individuals. "A levy fn the nature of a fee does not cease to be of that character merely because there is an element of compulsion o:r coerciveness present in it, nor is it a postulate of a fee that it must have direct relation to the actual services rendered by the authority to individual who obtains the benefit of the service.

If with a view to proviide a specific service, levy is imposed by law and expenses for maintaining the service are met out of the amounts collected there being a reasonable relation between the levy and the expenses incw-recl for rendering the service, the levy woul.d be in the nature of a fee :and not in the nature of a tax."(%) That there is correlation between the levy and the services can be proved by showing that on the face of the legisla, tivc provision itself, the collections are not merged in th': general revenue but arc set apart and appropriated for rendering !these services. Thus, two elements are essential in order that a payment may be regarded as a fee.

In the firsf place, it must be levied in consideration of certain services which the individuals accept either willingly or unwillinly and in the second place, the amount collected must be earmarked to meet the expenses of rendering these services and must not go to the general revenue o:r: the state to be spent for general public purposes.(1)

In Nagar Mahapaliga, Vara11asi v. Durga Das Bhattacharya & Others( 4 ) the question was whether a certain by-law under which the owners of rickshaws were liable to pay an annual sum of Rs 30/- and the drivers a sum of Rs. 51par took the character of a fee. In the course of the judgment the Court said :

"The High Court was of the opinion that the amount of Rs. 68,000 spent for paying the bye-lanes and Rs. 20,000 for lighting of stre<ets and lanes cannot be considered to have been spent in rendering services to the rickshaw owners and rickshaw drivers. The reason was that

(I) seeHinglr-RaTTl()ur-Coal Co. Lt. v. The State of Orissa [1961 ]2 S. C. R. 537 at

S49.

(2) soc H. H. Sudhundra Thlrtha Swamlar v. Commis!lontr for Hindu Rel/g/ou.i & Charitable Endowments Mysore, (1963) Supp. 2 S. C. R. 302, at 323.

(3) ~1e C?lnmlnlonr, Fli,111, Religious E11d1wment!, Madras v. Sri Lakshmindra Thlrtha Swamfar of Shirur M ult. [1954] S. C. R. 1005, at 1037, 1040; M ahant Sri lagannath Ramanuj DIU and Another v. The State of Orissa and Another, [I 954] S. C; R. 1046 at 10S3; and Ratilal Panachand Gandhi the State of Bombay [19S44 S. C. R.

10.S.S, at 107S.

(4). [1968] 3. S. C. R. 314, at 38.S.

.•. .o

MAHARASHTRA v. sALVATION ARMY (Mathew, J.) 483

under s. 7(a) of the Act it was the statutory duty of the Municipal Board to light public streets and places and under

cl. {it) of the same section to construct and maintain public streets, culverts etc. The expenditure under these two items was incurred by the Municipal board in the discharge of its statutory duty and it is manifest that the licence fee cannot be imposed for reimbursing the cost of ordinary municipal services which the Municipal Board was bound under the statute to provide to the general public (see the decision of the Madras High Court in India Sugar and Refineries Ltd.

v. The Municipal Council, Hospet (l.L.R. 1943 Madras 521)." In Delhi Cloth and General Mills Co. Ltd. v.

Chief Commissumer, Delhi ( 1) the point for consideration was whether the amount payable for renewal of licence to run the fuctory i.n question was a fee or tax. The Court observed :

"The High Court further found, which finding being of fact, must be considered as final that 60% of the amount of licence fees which were being realized was actually spent on services rendered to the factory owners. It can, therefore, hardly be contended that the levy of the licence fee was wholly unrelated to the expenditure incurred out of the total realization." In Government of Madras v. Zerith Lamp and ElectricalTtd.(~), this Court considered, in the context of levy of Court fees, the relevant facturs which might be taken into consideration in adjudging whether the levy was a fee or tax. The Court said :

"While levying fees the appropriate legislature is competent to take into account all relevant factors, the value of the subject-matter of the dispute, the steps necessary in the pro.- secution of a suit or matter, the entire cost of the upkeep of courts and officers administering civil justice, the vexatious nature of a certain type of litigation and other relevant matters."

In the light of this discussion, let us see whether the levy here was a fee and if it was a fee at the inception, whether, by reason of the accumulation of surplus, it. became a tax in any subsequent year.

According to exhibit 1, the total receipts from all sources from the year 1953 to the year 1970 came to Rs. 2,20,78,080/-. According to the statement given by the Attorney General during the course of' argument the total contribution under s.58 of the Act came to Rs. 1,73,56,874/- treating the figures of total receipts in the years 1953 to 1956 as receipts only under s.58. There is a mistake in the figure of the chart given by the Attorney General for the years 1963, 1964 1965 and 1966. Substituting the correct figures fur those years which tally with the earlier chart given by the Attorney General, also during the course of the argument, the amount of revenue receipts

(1) [1970] 2 S. C. R. 348, at 3S4.

(2) [1973) 1 S. C. R. 162.

WPUME COURT REPORTS

[1975) 3 S.C.R.

under s. 58 would come to Rs. 1,90,19,978/( insteap of Rs. l,'73,56,- 874/-.

The: total revenue expenditure from 1953 to 1970 according to exhibit 1 is Rs. 1,17,86,443/-. Although in exhibit 1 the total revenue expendituri; is shown to be 53.33 per cent of the total of Rs. 2,20,78,080/- actually the percentage has to be calculated with reference to the figure of Rs. 1,90, U ,9181-. Calculating on that basis, the percentage will come to about 62. On the basis of the decision of this Court in the Delhi Cloth and General Mills case (supra) the levy was in the nature of fee as the expenditure was 62 per cen• of the contributions fovied and as there was appro:Umate correlation.

It was, however, argued on behalf of the respondent on the basis of the decisions in Corporation of Calcutta v. Liberty Cinema( 1) and Nagar Mahapalika, Varanasi v. Durga Das Bhattacharya (supra) that the exercise of the power of supervision and control of public trusts under the provisions of the Act would not be special services, that performance of the statutory functions a.nd duties U'ilder the Act is owed to the public and cannot be regarded as special benefits to the public trusts in the statt for which a fee oan be exacted as consideration.

The object of the Act as seen from its preamble is to regulate' and make better provisions for the administration of public religious and charitable trusts rn. the State of Bomtfay. Chapter IV of the Act provides for registration of public trusts. Chapter V deals with submission of the budgets by the trustees of certain trusts and maintenance of accounts.

Chapter V-A concerns the investment of public trust money and restrictions on alienations of trust property. Chapter VI deals with control.

It mak•es provisions for supervision and control over public trusts, for issuing directions by the Commissioner, for sus.pen· sion •and removal of trustees and for protection of charities in general.

A review of the relevant provisions in these chapters can only lea.d . to the conclusion that the provisiO'n.s are enacted with a view that public trusts are administered for the purpose intended by the authors of the trusts and for preserving the trust properties from waste and misappropriation by trustees. Taking precautio!l'ary measures to see that public trusts are administered for the purposes intended by the authors of the trusts and exercising control and supervision with a view to preserve the trust properties from berag wasted or misappropriated by trustees are certainly special services for tqe benefit of the trust. 111.erefore. there is no substance in the argument that no special benefits were or are being conferred up on the public trusts in administt:rins the provisions of the Act. .

The question then is whether, by reason ot the accumulation of iurplus from 19.53 O'awards, the levy of contribution became a tax and if it became a tax, the point of time at which the levy assumed that character. It is not dispute that the collections by way of contribution exceeded the expenditure from 1953 onwards.

The respondent submitted tlrat surplus must be taken into consideration in determining the character of the levy. Relying upon the decisions in Mukundaraya v. State of Mysore( I) and Dal, pathbhai Hemchand v. Chansma Municipality,(') the respondent contended

(I) [1965) 2 S. C, R. 477.

that the benefit of the surplus should go to those who have to pay the contributions and that ihe rate of the levy should at any rate be reduced o as to Il1aintain the just relation between the levy and the services. In other words, the argument was that if it is found that the fee imposed resulted in surplus, the rate of the subsequent imposition should correspondingly be reduced so that it may be commensurate with the expenses ihat are to be incurred in connection with the services.

As we said, the fee must, as far practically as possible, be commensurate with the services rendered.

One should not seek for any mathematical accuracy in these matters but be content with rough approximations.

The services are mostly rendered by the officers of the Chariiy Organisation.

With the proliferation of public trusts in the State it became necessary to expand the Charity OrganisatiO'a and to increase the staff for supervision and control. It also became necessary to have more regional offices for the more effective and immediate supervision a',1d control.

The expenditure in constructing buildinwi for locating the head office and regional offices and the increase in the allowances oi other amenities to the staff have also to be included in the costs of the services. When there is surplus, it cannot immediately be said that the surplus must necessarily go in reduction of the rate of contribution to be levied thereafter. We thiilk that it would neither be expedient nor prudent to lay down any abstract'proposition that whcne.vc there is surplus in a particular year or a number of yC'ar~. that surplus must always be taken into consideration and the rate of the .contribution should be reduced for the next year or subsequrnt years.

An organisation like the one in question may have to incur capieal expend iturc fer the better administration of the trusts and it might not be able to foresee an the contingencies in which such expe'Dditurc will have to be incurred for thr more efficient working ot

the orranisation.

Thi<> Court ha.s expr1; sslv stated in the Delhi Cloth and General Mills case (supra)" that services worth 61 per cent of contribution would be sufficient quid pro quo to make a lt:"y a fee.

So, when we find that in this case the organiS'ation has been rendering services worth 62. per cent of the contributiO'il, it cannot per se be said that there is no correlation between the fee levied and the services rendered. But at the same time when it is seen that after taking into account the capital and other expenditure necessary for the efficient functioning of the orga•niS'ation for the better administration of the trusts, a large surplus is still left, then the question will arise whether it is permissible for the organisation to continue the levy at the same rate which will only result in further surplus and to invest this surplu~ solely for earning income or to divert the surplus for other objects, though charitable in nature. We do not thhk any such levy for investment or diversion of the surplus would be consistent with the principle behind the levy of a fee.

Whili: we do not think it necessary that all available surplus in a year or for some years should always go in for reducing the rate of contribution for the subsequent year. or year8,

. ---·-------......:.-

(I) A.I.R. [19601 Mysore 18.

(2) A.I, R. [1968] Gujarat 38.

SUPREME COURT REPORTS (1975] 3 , il.C.R.

we are of the view that the organisatio11 cannot be allowed to accumulate an unreasonable amount unreasonable in the sense that the amount might not be re1asonably required for the proper and efficient working of the organisation in a foreseeable future.

No hard and fast rule appltcable i'il all contingencies can be formulated. The Court will have to draw a line somewhere when the surplus mut be taken into considerarion for reducing the levy of contribution. In drawingi rhe line, the Court will have to look into the nature of the organisation. the poteutiality for its growth, the multiplication in its work coasequent on its expansion for rendering the services visualized by the Act and the nccessily for capital exrenditure in the near future, as also the amount of hvy collected or expected to be collected in a year. As already stated, the Division Bench was of the view that the

tage when the surplus must be taken into account to determine the character of the levy was reached by the end of March, 31, 1958 when the available surplus came to Rs. 30,44,541/-. The Division Bench was alive to the desirability of locating the head office and regional offices in buildings to be owned by the organisat10n and incurring of capital expenditure in that behalf.

The Charity Organisatioa has purchased a building worth about Rs. 30 lakhs.

Even according to the Division Bench, investment of the surplus in buildings for locating) the head and regiona.l offices cannot be said to be diversion of the surplus for purposes alien to the object of the orga•aisation, namely, the better administration of the trusts. Therefore, we do not think that the contribution had assumed the character of a tax at the end of March, 1958.

The surplus in the account of the Public Trusts Administmtiou Fund at the end of March, 1970, was Rs. 84,49,473/- after meetinl§ the capital expeuditure of Rs. 17,46,794/- ir:curred during the years 1953 to 1970. In the: figure of Rs. 84,49,473 /- is included the figur~ of Rs. 7,06,016/-, the accumulated balances under the repealed enactments tran~.ferred to the Public Trusts Administration Fund, plus interest of Rs. 7,13,004/- on the said figure vide exhibit No. 3. Even deducting the Rs. l.4 lakhs from Rs. 84 lakhs, the surplus in the 11ccount of the Public Trusts Administration Fund at the end of March,

1970, was Rs. 70 lakhs. Allowi'ag the capital expenditure of R::;. 30 Iakhs on the buildings said to have been purchased by the Charify' Organisation, the surplus was Rs. 40 lakhs. As we said, as a matter of principle, expenses for service should be correlated to the contribution levied under s. 58 of the Act. And the capiral expenses sbould be met from the surplus fonds including the sum of Rs. 14 fakhs

(receipt under s. 61 plus interest thereon: Total: Rs. 14 lakhs). The surplus at the end of March, 197.0 bei',1g Rs. 40 lakhs or, to be more accurate, Rs. 54 lakhs, the rate of fee at 2 per cent cannot continue in any event after March, 1970 without taking into account the corpus of Rs. 54 Jakhs oand the income therefrom. We think that the contribution at the rate of 2 per cent on the gross h1come of the trusts after March 31, 1970 onwards undoubtedly assumed the character of a. tax as tbat merely augmented the income of the Charity Organisation. If the Organisation is allowed to go on increasing its surplus year after year out of the amount of fee collected under s. 58 of the Act, it would

demonstrate that the fee levied was unjustifiably disproportionate to

MAHARASHmA v. SALVATION ARMY (Mathew, J.) 487

the service nMdered.

We are, therefore, of the opinion that before levying any fee or determining its rate after March, 1970. the Charity Organisation has to balance its budget in the light of this judgment.

The respondent raised two contentions before the High Co-urt with respect to its liability to pay contribution in respect of the three amounts in questi<Yil.

It was first contended that these amounts were not received by way of donations, and, second, that at the time when the respondent was sought to be made liable for contributi0n on these amounts, the levy lrad ceased to be fee and had assumed the character of tax. The respondent made a return of these amounts on 8-1-1960 on the basis that it was \lot liable to pay contribution on these amounts.

No decision was taken on this return until 10-6-1963 and on that date a notice of demand was nmde for contribution in respect of these

amount~.

The respondent has an independe'at legal personality a~ it was registered under the Companies Act and so the amounts which it received cannot but be regarded as dO'aations coming within the purview of s. 58 of the Act and Rule 32.

The Division Bench held that these amounts wern donations made by the international organimtion in London to the respondent. We think that the High Court was right. ·

As already stated, the Amending Act came into force on 17-8-1962. The Division Bench was of the view that the levy of contribution on these amounts W<>.S ulira vires for the reason that at the time the levy was made it had ceased to be a fee and become a tax. We do not think that the High Court was right. No doubt, the demand for contribution was made only after the Amending Act came 'into force. But by virtue of the retrospective operation of the amended s. 58 as provided in s. 4 of the Amending Act, the respondent became liable to pay contribution in respect of the three donations ra the years in which they were received.

It may be recalled that these three ' amounts were received by the respo\)<lent in the years 1954, 1955 and

1956. By virtue of the deeming provision in s. 58 as amended, these donations became exigible to pay the contribution in the relevant years.

We do not understand how these amounts which became exigible to levy Of contribution in those years by virtue of the deeming provisions in s. 58 became exonerated for the liability even on the basis of the reasoning of the Division Bench that the levy assumed the character of a tax after 31st March, l958. The fact that the actual levy was nmde after 1962 would not make any difference in the liability of the respondent to pay the contribution in respect of these amounts as tho liability was incurred when the levy had ;1ot assumed thP. character of tax even according to the Division Bench.

We, therefore, hold that the respondent is liable to pay contnoutions ir respect of the three sums and that the Division Bench went wrong in quashing the orders passed by appelku.ts 3 and 4 upholdintt the levy of contributi<Y11 on these sums. We also hold that after 31st March, 1970, the levy at the rate of 2 per cent of the gross income of the trust cannot be justified as a fee.

This does not mean that no

SUPREME COURT REPORTS

( 197 5) 3 S.C.R.

levy of contribution was pcnnissible thereafter. We only say that any A levy thereafter should have correlation with the services, taking into consideration the existence of the surplus fund which was not immediately required for further expenditure by way of services including' capital expenditure. We declare that levy of cont:-ibution at the rate of 2 per cent of the annual gross income of the trusts became levy of tax after 31st March, 1970 and was without the authority of !•aw.

Since there was a prayer in the writ petition to declare Rule 32 as B ultra vires, we think that the respondent is entitled to this relief'.

We allow the appeal to the. extent indicated but make no order as tu .:os~.

Civil Appeal No. 488 vf 1973

lo this appeal, the points for consideration are practically the ame.

For the reasons we have given in our judgment in Civil Appeal No. 487 of 1973. we do not think that the Division Bench was justified in holding that the resp<Yildent W'lS not liable to pay contribution in respect of the donations in question here and in quashing the order dated 30th March, 1965. We, therefore, allow the appeal subject to the declaration of the: nature of the levy after 31st March, 1970, made in the judgment in Civil Appeal No. 487 of 1973. We make no order

a~ to eost5.

A ppea/ £ii/owed.

V.P.S.

ST ATE OF MAHARASHTRA & ORS

February 10, 1975

K. K. MATHEW

P. N. BHAGWATI

N. L. UNTWALIA, JJ.

ss. 57 and 58

Section 57(1)

Bombay Public Trusts Act, 1950

s. 58

Section 58

Amending Act, 1962

s. 4

Bombay Public Trusts Act, 1950

India

s. 58

31 March, 1958

Companies Act

s. 58

SUPREME COURT REPORTS [1975] 3 s.c.R.

Nagar Mahapa

[1970] 2 S.C.R. 348

s. 58

31st March, 1970

s. 58

C1vrL APPELLATE JuRismcnoN

Niren De

S. Bapti

M. N.

Shroff

P. P. Khambatta

Ashok Desai

A. G. Meneses

K. John

K. J. John

MATHEW

Salvation Army, Western India Territory

Indian Companies Act, 1913

IDbay Public Trusts Act, 1950

Bombay

1st of October to the

30th of September of

s. 58

High Court of Bc.mibay for

sections 2 and 4

31st March, 1958

Section 57(1)

Section 58

Section 58

Public Trusts Administration Fund

Section 4

section 58

section 2

Bombay Public Trust Rules, 1951

s. 58

31st March 1958

s. 7(a)

Madras High Court

[1970] 2 S. C. R. 348

[1973) 1 S. C. R. 162

s. 58

Chapter IV of the Act

Chariiy Organisation

Delhi Cloth and General Mills

March, 31, 1958

Charify' Organisation

s. 58

s. 61

March 31, 1970

s. 58

Companies Act

s. 58

London

s. 58

s. 4

s. 58

s. 58