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Judgment
P.K. Mishra, J.—The question before us is, whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that
the assessee-trust is entitled to claim exemption u/s 11 read with section 2(15) of the income tax Act, 1961 (""the Act""). The assessee is a society,
registered under the Societies Registration Act and also registered as a public charitable institution with the Commissioner u/s 12A of the Act. It
sought exemption as stipulated u/s 11 read with section 2(15). The ITO, however, declined to grant exemption to it on the ground that it received
income from hire of furniture and a Kalyana Mandapam, which according to him, was an activity for profit. The AAC declined to interfere with the
order of the ITO. The assessee appealed to the Tribunal. According to the statement of the case, the Tribunal went through the objects of the trust
and found them to be clearly charitable. It did not find any element of business activity for profit in any of the objects. It found that there was no
separate hire of furniture apart from letting out the Kalyana Mandapam, along with which the furniture was also let out. The Tribunal, accordingly,
has held that the objects and activities of the assessee revealed that it was engaged in public utility services like running educational institutions,
libraries, etc. According to it, the assessee is entitled to exemption u/s 2(15) read with section 11.
The Tribunal culled out the principles to be applied in a case where exemption is claimed by institutions for charitable purpose and under the
head ''Advancement of an object of general public utility'' as available in the judgments of the Supreme Court in the cases of The Sole Trustee, Lok
Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, ; Indian Chamber of Commerce Vs. Commissioner of Income Tax , West
Bengal II, Calcutta, and Commissioner of Income Tax, Kerala Vs. Dharmodayam Co., and noted the principles therein as follows:
The principles that emerge from decisions are:
(i) The criteria based on which trusts were held to be for the charitable purpose under the provisions of section 4(3)(1) of the Indian income tax
Act, 1922 do not apply under the 1961 Act, section 11 read with section 2(15).
(ii) Where the trust carried on business, there could be distinct kinds of cases; one: where the business done is the charitable purpose of the trust;
two : where the business is only an asset of the trust.
(iii) If the trust is one which has as its assets or as one of several properties held by it as business so as to feed a charity but the carrying on of the
business or the service to the public from the business is not claimed as charity, that does not by itself make the objects of the trust not a charitable
purpose.
(iv) But if the charitable purpose itself coming under the head ''Advancement of an object of general public utility'' involves the carrying on of an
activity for profit, the income may become taxable.
In Sole Trustee Loka Shikshana Trust''s case (supra), the charitable purpose claimed was publication of newspaper so as to ''improve the
knowledge of the Kannada speaking people'', this latter purpose cannot be achieved except by running the business of newspaper. In Indian
Chamber of Commerce''s case (supra), the charitable purpose aimed at was the promotion and protecting of the interest of Indian trade, such
promotion being done through arbitration, issuing certificates of origin, issue of certificates of weighment and measurement, etc., for which fees
were collected. Apart from those activities, such as publication of papers, setting up arbitration, issue of certificates, etc., there was no other object
of general public utility in these trusts. It was not a case of the trust carrying on some activity such as business, the goods sold by the business or
the service rendered by it itself not being claimed as charitable, earning income therefrom and applying the income for certain purposes claimed to
be charitable.
(v) Even where the serving of the purpose of general public utility involves an activity for profit, the exemption would be available in certain cases.
Their Lordships of the Supreme Court in Indian Chamber of Commerce''s case (supra) cautioned against a false dilemma to talk of activity for
profit as against activity rendered free. The true demarcating line lies in between. ""If, therefore, advancement of general public utility involved
activity for profit, but was of such an extent as to balance its activities on a no-profit-no-loss basis, subject to the limitation that mathematical
attainment of a strict no profit or loss being non-attainable there is some marginal excess or deficit that does not render the trust non-charitable"".
The Tribunal, on that basis, has stated:
A natural corollary of the above tests is that the question whether a trust is for a charitable purpose or not should be determined once and for all
having in view its objects and not sources of income. If some of its sources of income involve activities for profit, such as running of business, that
would constitute at best a property of the trust and would not affect its charitable or otherwise nature. In determining whether the assessee is
entitled to exemption u/s 11, the nature or type of the source of income of the trust is, therefore, not relevant.
Before saying whether the Tribunal is right or wrong, we may state that the Supreme Court, in the case of Additional Commissioner of Income
Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, , where the assessee carried on various activities for the promotion of commerce
and trade in art silk yarn, silk yarn, art silk cloth and silk cloth, considered the question referred to it directly, whether, on the facts and in the
circumstances of the case, the assessee was entitled to exemption u/s 11(1)(a). The Constitution Bench, by a majority of 4 : 1, has pointed out:
...The law is well-settled that if there are several objects of a trust or institution, some of which are charitable and some non-charitable and the
trustees or the managers in their discretion are to apply the income or property to any of those objects, the trust or institution would not be liable to
be regarded as charitable and no part of its income would be exempt from tax. In other words, where the main or primary objects are distributive,
each and every one of the objects must be charitable in order that the trust or institution might be upheld as a valid charity; vide Mohd. Ibrahim v.
CIT [1930] LR 57 IA 260 and East India Industries (Madras) Private Limited Vs. Commissioner of Income Tax, Madras, . But if the primary or
dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or
incidental to the primary or dominant purpose, would not prevent the trust or institution from being a valid charity; vide Commissioner of Income
Tax, Madras Vs. Andhra Chamber of Commerce, . The test which has, therefore, to be applied is whether the object which is said to be non-
charitable is a main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable....
The definition of ''charitable purpose'' in the Indian statute must be construed according to the language used there and against the background of
Indian life. The English decisions may be referred to for help or guidance but they cannot be regarded as having any binding authority on the
interpretation of the definition in the Indian Act.
Speaking on the last ten crucial words in clause (15) of section 2, the majority judgment of the Bench has said:
It is clear on a plain natural construction of the language used by the Legislature that the ten crucial words ''not involving the carrying on of any
activity for profit'' go with ''object of general public utility'' and not with ''advancement''. It is the object of general public utility which must not
involve the carrying on of any activity for profit and not its advancement or attainment. What is inhibited by these last ten words is the linking of
activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object. It is not necessary
that the accomplishment of the object or the means to carry out the object should not involve an activity for profit. That is not the mandate of the
newly added words. What these words require is that the object should not involve the carrying on of any activity for profit. The emphasis is on the
object of general public utility and not on its accomplishment or attainment.....The true meaning of these last ten words is that when the purpose of
a trust or institution is the advancement of an object of general public utility, it is that object of general public utility and not its accomplishment or
carrying out which must not involve the carrying on of any activity for profit.
The Supreme Court has further observed:
This court thus held in no uncertain terms that if a business is held under trust or legal obligation to apply its income for promotion of an object of
general public utility or it is carried on for the purpose of earning profit to be utilised exclusively for carrying out such charitable purpose, the last
concluding words in section 2, clause (15), would have no application and they would not deprive the trust or institution of its charitable character.
What these last concluding words require is not that the trust or institution whose purpose is advancement of an object of general public utility
should not carry on any activity for profit at all but that the purpose of the trust or institution should not involve the carrying on of any activity for
profit. So long as the purpose does not involve the carrying on of any activity for profit, the requirement of the definition would be met and it is
immaterial how the monies for achieving or implementing such purpose are found, whether by carrying on an activity for profit or not....
On the question, what is the meaning of the requirement that where the purpose of a trust or institution is advancement of an object of general
public utility, such purpose must not involve the carrying on of any activity for profit, the Supreme Court has pointed out:
The activity for profit must, therefore, be intertwined or wrapped up with or implied in the purpose of the trust or institution or in other words, it
must be an integral part of such purpose. But the question again is what do we understand by these verbal labels or formulae; what is it precisely
that they mean? Now there are two possible ways of looking at this problem of construction. One interpretation is that according to the definition
what is necessary is that the purpose must be of such a nature that it involves the carrying on of an activity for profit in the sense that it cannot be
achieved without carrying on an activity for profit. On this view, if the purpose can be achieved without the trust or institution engaging itself in an
activity for profit, it cannot be said that the purpose involves the carrying on of an activity for profit. Take, for example, a case where a trust or
institution is established for the promotion of sports without setting out any specific mode by which this purpose is intended to be achieved. Now,
obviously, promotion of sports can be achieved by organising cricket matches on free admission or on no-profit-no-loss basis and equally it can be
achieved by organising cricket matches with the predominant object of earning profit. Can it be said in such a case that the purpose of the trust or
institution does not involve the carrying on of an activity for profit, because promotion of sports can be done without engaging in an activity for
profit? If this interpretation were correct, it would be the easiest thing for a trust or institution not to mention in its constitution as to how the
purpose for which it is established shall be carried out and then engage itself in an activity for profit in the course of actually carrying out of such
purpose and thereby avoid liability to tax. That would be too narrow an interpretation which would defeat the object of introducing the words ''not
involving the carrying on of any activity for profit''. We cannot accept such a construction which emasculates these last concluding words and
renders them meaningless and ineffectual.
The other interpretation is to see whether the purpose of the trust or institution in fact involves the carrying on of an activity for profit or in other
words, whether an activity for profit is actually carried on as an integral part of the purpose or to use the words of Chandrachud, J., as he then
was, in Commissioner of Income Tax, Kerala Vs. Dharmodayam Co., , ''as a matter of advancement of the purpose''. There must be an activity
for profit and it must be involved in carrying out the purpose of the trust or institution or to put it differently, it must be carried on in order to
advance the purpose or in the course of carrying out the purpose of the trust or institution. It is then that the inhibition of the exclusionary clause
would be attracted. This appears to us to be a more plausible construction which gives meaning and effect to the last concluding words added by
the Legislature and we prefer to accept it. Of course, there is one qualification which must be mentioned here and it is that if the constitution of a
trust or institution expressly provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive, as, for
example, where the purpose is specifically stated to be promotion of sports by holding cricket matches on commercial lines with a view to making
profit, there would be no scope for controversy, because the purpose would, on the face of it, involve the carrying on of an activity for profit and it
would be non-charitable even though no activity for profit is actually carried on or, in the example given, no cricket matches are in fact, organised.
On the question of what is the meaning of the expression ''activity for profit'', the majority judgment has said:
The answer to the question obviously depends on the correct connotation of the proposition ''for''. This proposition has many shades of meaning
but when used with the active participle of a verb it means ''for the purpose of and connotes the end with reference to which something is done. It
is not, therefore, enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit. Profit-making
must be the end to which the activity must be directed or in other words, the predominant object of the activity must be making of profit. Where an
activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an
activity for profit. But where, on the other hand, an activity is carried on with the predominant object of earning profit, it would be an activity for
profit, though it may be carried on in advancement of the charitable purpose of the trust or institution. Where an activity is carried on as a matter of
advancement of the charitable purpose or for the purpose of carrying out the charitable purpose, it would not be incorrect to say as a matter of
plain English grammar that the charitable purpose involves the carrying on of such activity, but the predominant object of such activity must be to
subserve the charitable purpose and not to earn profit. The charitable purpose should not be submerged by the profit-making motive; the latter
should not masquerade under the guise of the former. The purpose of trust, as pointed out by one of us (Pathak, J.) in Dharmadeepti, Alwaye,
Kerala Vs. Commissioner of Income Tax, Kerala, must be ''essentially charitable in nature'' and it must not be a cover for carrying on an activity
which has profit-making as its predominant object....
...The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general
public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose,
though an object of general public utility, would cease to be a charitable purpose. But, where the predominant object of the activity is to carry out
the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the
activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would
indeed be difficult for persons in-charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no
resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management.
The Constitution Bench has pronounced that it is not at all necessary that there must be a provision in the constitution of the trust or institution
that the activity shall be carried on, on no-profit-no-loss basis or that profit shall be proscribed. Even if there is no such express provision, the
nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding
circum-stances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether
having regard to all the facts and circumstances of the case, the dominant object of the activity is profit-making or carrying out a charitable
purpose. If it is the former, the purpose would not be a charitable purpose, but if it is the latter, the charitable character of the purpose would not
be lost. This, however, involves in each case, an examination of not only the objects of the trust, but also how the monies earned by the trust are
utilised. Before granting exemption, it is necessary to see whether the trust has genuinely carried out charitable purpose and it is not masquerading
under the guise of a charitable purpose.
By a majority of two Judges in the subsequent judgments in the cases of Commissioner of Income Tax, Bombay Vs. Bar Council of
Maharashtra, and Commissioner of Income Tax, New Delhi Vs. Federation of Indian Chambers of Commerce and Industries, New Delhi, the
Supreme Court has reiterated the above observations in Surat Art Silk Cloth Manufacturers'' Association''s case (supra). A.P. Sen, J., who has
given a dissenting judgment in Surat Art Silk Cloth Manufacturers'' Association''s case (supra) and Venkataramiah, J. have followed the majority
judgment in Surat Art Silk Cloth Manufacturers'' Association''s case (supra), but expressed strong reservations to the views of the majority in the
said case, in these words:
Sen, J. ""Unfortunately, for the Revenue, the Court has, in a five Judges Bench, by a majority of 4 to 1 in Additional Commissioner of Income Tax,
Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, reversed these two decisions in The Sole Trustee, Lok Shikshana Trust Vs. The
Commissioner of Income Tax, Mysore, and the Indian Chamber of Commerce Vs. Commissioner of Income Tax , West Bengal II, Calcutta, . The
Court has approved of the observations of Beg, J. in his separate but concurring judgment in the Loka Shikshana Trust''s case (supra) (page 256)
''if the profit must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not
alter the charitable character of the trust''. In other words, the majority view in the Surat Art Silk''s case was that the condition that the purpose
should not involve in the carrying on of any activity for profit would be satisfied if profit-making is not the real object. The theory of dominant or
primary object of the trust has, therefore, been treated to be the determining factor, even in regard to the fourth head of charity, viz., the
advancement of any other object of general public utility'', so as to make the carrying on of the business activity merely ancillary or incidental to the
main object.
One should have thought that the correct way to approach this question of interpretation was to give the words used by Parliament their ordinary
meaning in the English language and if, consistently with the ordinary meaning, there was a choice between two alternative interpretations, then to
prefer the construction that maintains a reasonable and consistent scheme of taxation without distorting the language. When the Government did not
accept the recommendation of the Direct Taxes Laws Committee in Chapter 2 (Interim Report, December 1977) for the deletion of the words
''not involving the carrying on of any activity for profit'' occurring in section 2 (15) of the Act, the Court has, by a process of judicial construction,
achieved the same result.
Whatever reservations one may have regarding the correctness of this interpretation of the exclusionary clause in the definition of the ''charitable
purpose'' in section 2(15) of the Act, there can be no doubt that the majority decision in Additional Commissioner of Income Tax, Gujarat Vs.
Surat Art Silk Cloth Manufacturers Association, is binding on us. With respect, I venture to say that the majority decision has the effect of
neutralising the radical changes brought about by Parliament in the system of taxation of income and profits of charities, with particular reference to
''objects of general public utility'' to prevent tax evasion, by diversion of business profits to charities. It is the vagueness of the fourth head of charity
''Any other object of general public utility'' that impelled Parliament to insert the restrictive words ''not involving the carrying on of any activity for
profit''. In my minority opinion in the Surat Art Silk''s, case I had endeavoured to give reasons why the correctness of the majority decision was
open to question. There is no point in traversing the same ground over again. It was clearly inconsistent with the settled principles to hold that if the
dominant or primary object of a trust was ''charity'' under the fourth head ''Any other object of general public utility'', it was permissible for such an
object of general public utility, to augment its income by engaging in trading or commercial activities"".
Venkataramiah, J.--""There can be no objection to a person spending his money on charity. But can he be charitable at the expense of others? This
is a question which necessarily arises when we read section 11 of the income tax Act, 1961. Section 11, as it stands now, grants exemption from
payment of tax on any income, which would have otherwise been taxable, provided (1) the property yielding income is held under trust or such
other legal obligation which is brought into existence by an act of party and not by an act of law, (2) the purpose of the trust is charitable which
may enure to the benefit of the public or a section of the public, and (3) the other conditions prescribed by the Act are satisfied. It means that if
there is a diversion of property or income-earning apparatus by an act of party into a charitable trust and the prescribed conditions are satisfied,
the income derived from it (including the portion which would have gone to the public exchequer but for the trust) may be spent by a person in-
charge of the affairs of the trust on objects indicated in the trust which is a creature of its author. In effect what does it mean? It means that the
author of the trust is able to divert by his own will to a purpose of his own choice, though charitable, a large part of the income which would have
been, but for the trust, at the disposal of the Legislature which alone has the power over the national exchequer....
The Tribunal has, however, postulated that in determining whether the assessee is entitled to exemption u/s 11, the nature or type of the sources of
income of the trust is not relevant, correctly but, has gone wrong in granting exemption only on the basis that the object clauses of the
memorandum of association made obligatory upon it to carry on the general public utility activities like educational institutions, libraries, etc., and
inferred that, there is nothing in these clauses to show that the assessee is obliged to carry on general public utility like educational institutions,
libraries, etc., on a purely commercial basis and not on the marginal no-profit-no-loss basis as laid down in Indian Chamber of Commerce''s case
(supra). The error is obvious. The Tribunal has not taken into account the manner in which the activities for advancing the charitable purpose are
being carried on and the surrounding circumstances, which alone would show that the activities are not propelled by a dominant profit motive. This
law has to be applied to answer in all cases of claim of exemption u/s 11 read with section 2(15) where, having regard to all the facts and
circumstances of the case, the dominant object of the activity is profit-making or carrying out a charitable purpose. The reference is answered
accordingly. No costs.