Commissioner of Income Tax vs Virudhunagar Hindu Nadars Abiviruthi Panchukadai Mahamai

Abdul Hadi, J.—In these two tax case references, preferred by the revenue u/s 256 of the income tax Act, 1961 (''the Act''), the assessee is common, and the former tax case relates to the assessment year 1979-80 and the latter to 1980-81. The question referred in both the cases is the same, though the question is worded slightly differently in each of the two cases and it is enough if the question of law referred in Tax Case No. 648 of 1985 is set out. It is as follows:

Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption u/s 11 of the income tax Act notwithstanding the fact that the case is hit by the provisions of section 13(1)(bb) of the income tax Act, 1961?

In other words, the question is whether the income of the assessee-trust is entitled to exemption u/s 11, despite what is contained in section 13(1)(bb) of the Act. The assessee is a society, registered under the Societies Registration Act and its objects as found in its memorandum of association are as follows:

...to run the Virudhunagar Hindu Nadars'' Abivirudhi Panjukadai Mahamai and to develop it and thereby,

(i) to provide relief of the poor, education and medical relief;

(ii) to establish and maintain educational institutions...to give aid to educational institutions;

****

(x) to establish and run income earning industries to achieve the three main objects of our society, viz., to provide relief of the poor, education and medical relief.

The society is in existence for the past 150 years or so. Clauses 3 and 4 of the rules and regulations of the society run as follows:

The funds of the society shall comprise its income from the Mahamai contributed by its members as fixed by the general body from time to time, the rent and other incomes from the properties owned by the society, the cooly receipts of the cotton ginning machinery owned by the society and donations.

Mahamai shall be collected at such rates as may be fixed by the society from time to time in respect of lint, kappas, groundnut, chillies, grains and other agricultural produce brought for sale or purchased from up-country places or within Virudhunagar.

In relation to the case, Tax Case No. 648 of 1985, the first two authorities have held that although the said society is a charitable institution, it derives income from the business of running a ginning factory and cooly receipts from decortication of groundnut seeds and accordingly attracted section 13(1)(bb). In Tax Case No. 451 of 1986, though the first authority held in the same way, the first appellate authority in its order dated 22-2-1984, followed the Tribunal''s order dated 24-6-1983, in relation to the assessment year 1979-80 (i.e., in relation to Tax Case No. 648 of 1985), and held in favour of the assessee. So, for the assessment year 1979-80, while the assessee preferred appeal to the Tribunal for the assessment year 1980-81, the revenue preferred the appeal.

The incomes of the assessee in 1979-80 and 1980-81 as found in the assessment orders are as follows:

1979-80

1980-81

Rs.

Rs.

From the abovesaid decortication

+ 41,028

+ 58,350

From the abovesaid ginning

- 10,816

+ 59,757

Panjukadai Mahamai

- 27,344

�

Total income

+ 2,870

+ 1,18,116

Thus, while in 1979-80, the total income being below the taxable limit, there was no tax in 1980-81, the total levy including surcharge was Rs. 58,886 (together with Rs. 23,520 by way of interest u/s 217(1)(a) of the Act).

Thus, virtually the question is whether the abovesaid business income from decortication and ginning are disentitled from exemption in view of section 13(1)(bb). The said section 13(1)(bb) was introduced with effect from 1-4-1977, and was deleted with effect from 1-4-1984. So, it has to be seen whether the abovesaid business income of the assessee cannot be exempted in view of section 13(1)(bb) which runs as follows:

Section 11 not to apply in certain cases.-(1) Nothing contained in section 11 shall operate so as to exclude from the total income...

(a) and (b) ****

(bb) In the case of a charitable trust or institution for the relief of the poor, education or medical relief, which carries on any business, any income derived from such business, unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution.

The first two authorities in relation to the case in Tax Case No. 648 of 1985 held that the abovesaid business of ginning and decorticating were not "carried on in the course of the actual carrying out of primary purpose of the trust or institution" and hence, was not exempt. The first authority in relation to the case in Tax Case No. 451 of 1986 also held so, though the first appellate authority therein differed, favouring the assessee. While dealing with this question, the Tribunal, in its order dated 24-6-1983 (in relation to the first of the two cases), inter alia, observed as follows:

Obviously, the business carried on by the assessee is not in the course of the actual carrying out of the primary objects of the trust. If we ignore the provisions of section 11(4), it would appear that the assessee is hit by section 13(1)(bb). However, looking to the facts of the case, it appears that the object of the trust is charity and the business itself is held under trust for purposes of charity....

It is thus clear that the assessee is entitled to exemption u/s 11 itself.

While so, the Tribunal, in the other order dated 20-3-1985, in relation to the second of the two cases followed its earlier above-referred order dated 24-6-1983, and upheld the exemption.

In the above context, the argument of the learned counsel for the revenue before us is that when the Tribunal itself has held that "the business carried on by the assessee is not in the course of the actual carrying out of the primary objects of the trust," the Tribunal erred in granting exemption, contrary to section 13(1)(bb). But, the learned counsel for the assessee argues that since the Tribunal has also held that the above said "business (of the assessee) itself is held under trust for purposes of charity," it should be held that section 13(1)(bb) is satisfied, in view of the Supreme Court decisions in Commissioner of Income Tax, Kerala Vs. Dharmodayam Co., . In this connection, he also relies on Commissioner of Income Tax Vs. Dharmodayam Company, ; Commissioner of Income Tax Vs. Thanthi Trust, and Thanthi Trust Vs. Assistant Commissioner of Income Tax, In this connection, the learned counsel for the revenue points out that those decisions will not help the assessee since there is no material in the present case to hold that the abovesaid business of decorticating and ginning is carried on "as a means in the course of the actual carrying out of a primary purpose" of the abovesaid trust.

We have considered the rival submissions. The case of Commissioner of Income Tax, Kerala Vs. Dharmodayam Co., arose u/s 4(3)(i) of the Indian income tax Act, 1922, which no doubt corresponds to section 11 of the 1961 Act. Further, it must be noted that while in the 1961 Act (till the introduction of the Finance Act, 1983, with effect from 1-4-1984) the term ''charitable purpose'' defined u/s 2(15) includes relief of the poor, education, medical relief and the advancement of any other object of general public utility, not involving the carrying on of any activity for profit, under the 1922 Act, income derived from a business carried on for the purpose of advancing an object of general public utility was excludible from the assessee''s total income, even if such advancing involved the carrying on of an activity for profit, if the income was applied wholly for the purposes of the institution and either the business was carried on in the course of the actual carrying out of a primary purpose of the institution or the work in connection with the business was mainly carried on by the beneficiaries of the institution. In Commissioner of Income Tax, Kerala Vs. Dharmodayam Co., which only affirmed the decision in Commissioner of Income Tax Vs. Dharmodayam Company, the assessee derived income from the business of kuries (chits), apart from interest on security and income from property. In that context, the Supreme Court held taking into account what is contained in proviso (b) to the said section 4(3)(i), that the said kuries, business itself was held under a trust for religious or charitable purposes and hence, the said business activity cannot be taken as undertaken by, or on behalf of the assessee and so the income derived by the assessee from the said kuries was exempt from taxation.

In Surat Art Silk Cloth Mfrs. Association''s case (supra), which arose under the 1961 Act, the Supreme Court held that the dominant or primary purpose of the assessee therein was to promote commerce and trade in art silk yarn, etc., and that the said purpose was an object of public utility, not involving the carrying on of any activity for profit, within the meaning of section 2(15) of the Act and that the assessee was entitled to exemption u/s 11. It also held, following Dharmadeepti, Alwaye, Kerala Vs. Commissioner of Income Tax, Kerala, that the words "not involving the carrying on of any activity for profit" qualify only the last head of charitable purpose, viz., "advancement of any other object of general public utility" and not the earlier three heads, viz,, (1) relief of the poor; (2) education and (3) medical relief and that where, therefore, the purpose of a trust is relief of the poor, education or medical relief, the requirement of the definition of ''charitable purpose'' would be fully satisfied, even if an activity for profit is carried on in the course of the actual carrying out of a primary purpose of the trust.

What the learned counsel for the revenue submits in the present case is that since admittedly the present case would not fall under the abovesaid last head of charitable purpose, but would only fall under the preceding three heads, the assessee will not get exemption since obviously in the present case, the abovesaid business activity in ginning and decortication is not in the course of the actual carrying out of the primary purpose of the trust, viz., to run the Virudhunagar Hindu Nadars'' Abivirudhi Panjukadai Mahamai or even to provide, relief of the poor, education or medical relief.

In this connection the following passage in Surat Art Silk Cloth Mfrs. Association''s case (supra), we also find, is significant:

...A business activity carried on not with a view to carrying out the charitable purpose of the trust but which is related to a non-charitable purpose or constitutes an end in itself falls outside the scope of the trust, and indeed may betray the fact that the real purpose of the trust is not essentially charitable. If it is a business entered into for working out the purpose of the trust or institution, that is to say, in the course of, and with a view to, the realisation of the charitable purpose, the income therefrom will be entitled to exemption u/s 11. In this connection, it is appropriate to note that section 11(4) specifically defines ''property held under trust'' as including a business undertaking. Moreover when it was found that judicial decisions had held the restrictive clause in section 2(15) to control the fourth head only, and not also the first three heads in the definition; Parliament attempted to secure its original intent by enacting clause (bb) in section 13(1). The two provisions represent the mode of finding finance for working out the purpose of the trust or institution, by deriving income from the corpus of the trust property and also from an activity carried on in the course of the actual carrying out of the purpose of the trust or institution."

[Emphasis supplied]

In the light of the abovesaid observation of the Supreme Court, we see great force in the argument of the learned counsel for the revenue. No doubt in Commissioner of Income Tax Vs. Thanthi Trust, this Court found on the facts of the said case thus:

In the case on hand the property held under trust is the business itself and the business is carried on only, and exclusively, for carrying out the charitable objects set out....

...The primary purpose is to carry out the charitable objects and the business is carried on as a means in the course of the actual carrying out of that primary purpose and not as an end in itself. While the predominant object of the trust is the carrying out of the charitable objects referred to in two of the three categories of charitable purposes referred to in section 2(15), the carrying on of the business which is actually the property held under trust or other legal obligation is incidental, and the profit resulting from the business can be taken to be a by-product. In view of the said decision of the Supreme Court in Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, it is not possible to accept the case of the revenue that the trust in this case cannot claim the benefit of exemption u/s 11 merely because it carries on a commercial activity for profit...."

[Emphasis supplied]

In Commissioner of Income Tax Vs. Thanthi Trust, the assessee was one Thanthi Trust and in Thanthi Trust Vs. Assistant Commissioner of Income Tax, ) also, the same Thanthi Trust was the assessee and in that latter case also it was held that in view of the categorical finding in Commissioner of Income Tax Vs. Thanthi Trust, that the primary purpose of the assessee-trust was to carry out the charitable objects and that the business was carried on as a means in the course of actual carrying out of a primary purpose of the trust, the requirement of the last portion of section 13(1)(bb) was satisfied by it. Therefore, in Thanthi Trust Vs. Assistant Commissioner of Income Tax, also it was held that section13(1)(bb) could not stand in the way of the assessee therein claiming the benefit of the exemption u/s 11(1).

But, in the present case, there is no material at all to show that the above-said ginning and decorticating businesses are carried on as a means in the course of the actual carrying out of a primary purpose of the trust. Therefore, we have to hold that since the facts found herein are not as in the abovesaid Thanthi Trust cases, neither Surat Art Silk Cloth Mfrs. Association''s case (supra), nor Commissioner of Income Tax Vs. Thanthi Trust, and Thanthi Trust Vs. Assistant Commissioner of Income Tax, ) would help the assessee in the present case.

No doubt, clause 10 of the objects of the present trust as mentioned above, speaks as one of its objects, the establishment and running of income earning industries to achieve the ''three main objects'' of the said society that is, to provide relief to the poor, education and medical relief, but the Tribunal itself observes that the abovesaid clause 10 remains dormant. Further, in the initial portion of the above-referred to objects of the assessee''s society, as found in its memorandum of association, it is as follows:

...to run the Virudhunagar Hindu Nadar''s Abivirudhi Panjakadai Mahamai and to develop it and thereby,

(I) to provide relief of the poor, education and medical relief....

From this it appears that the primary object of the abovesaid trust is to run the abovesaid Panjakadai Mahamai and to develop it, and that thereby only relief of the poor, education or medical relief are to be provided. Thus, it may be said that providing relief of the poor, education and medical relief are not primary objects but secondary. But, however, in the abovesaid clause 10, these three are mentioned as "three main objects of our society". From this it may appear that these three are also main objects of the society. Thus, even assuming that the abovesaid three objects, viz, providing relief to the poor, education and medical relief are the primary objects of the assessee, there is no material in the present case to hold that the abovesaid decorticating business and ginning business are carried on by the assessee as means in the course of the actual carrying out of the said main or primary objects. On the contrary, as already indicated, the Tribunal itself, at one place, finds that the business carried on by the assessee is not in the course of the actual carrying out of the primary objects of the trust. No doubt the Tribunal also observes in a later sentence, that the said business itself is ''property held under trust'' as stated in section 11(4). Then, after quoting section 11(4), the Tribunal straightaway comes to the conclusion that the assessee is entitled to exemption u/s 11 itself, but it is not known how it comes to the said conclusion. No doubt, it refers to J.K. Trust, Bombay Vs. Commissioner of Income Tax, Excess Profits Tax, Bombay City, , in this regard, but, the said decision has only held that a business itself can be property held by a trust and that its income is excludible to the extent and manner applicable to the other incomes. Section 11(4) also says that the said business income has to be determined "in accordance with the provisions of this Act". This also shows that section 13(1)(bb) also, it being one of the provisions of the Act, has to be taken note of in determining the said business income, when the trust is for any of the abovesaid first three heads of charitable purposes u/s 2(15), as in the present case. The net result is, the revenue succeeds in these tax case references. No doubt, the question referred to this Court, in both the tax cases is not happily worded since the latter clause therein, viz, "notwithstanding the fact that the case is hit by the provisions of section 13(1)(bb) of the income tax Act, 1961", is not appropriate. In both the cases, there is no necessity for the said latter clause and we retain only the former part of the question as set out in paragraph 1 above, and we answer the said question in the negative and in favour of the revenue. No costs.