M/S. Daulat Ram Public Trust vs Commissioner Of Income-Tax, ...
2000 Latest Caselaw 393 Del

ORDER

D.K. Jain, J.

1. In these six references, at the instance of the assessee, the Income-tax Appellate Tribunal (for short 'the Tribunal) Delhi Benches, has referred under Section 256(1) of the Income-tax Act, 1961 (for short 'the Act'), the following common question, in respect of the assessment years 1971-72, 1972-73, 1974-75 to 1977-78, for the opinion of this Court:

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee trust was not entitled to exemption u/s 11 of the Income-tax Act, 1961 for the assessment years 1971-72, 1972-73, 1974-75, 1975-76, 1976-77 and 1977-78."

2. The assessee is a trust, assessed in the status of association of persons. The trust came into existence on 12th December, 1956 under a deed of trust registered on 12th December, 1956. While completing assessment for the assessment year 1971-72, the Assessing Officer held that the assessee was a charitable trust and accordingly issued an exemption certificate under Section 15B of the Indian Income-tax Act, 1922. However, subsequently, the matter was scrutinised and as a result, a notice under Section 147(a)/148 of the Act was served on the assessee on 7th February, 1980. A fresh assessment was made under Section 143(3)/147(a) of the Act for the said assessment year. The Assessing Officer rejected the plea of the assessee that since the profits derived by it were utilised for the charitable objects for which the trust was formed, in view of the decision of the Supreme Court in Additional Commissioner of Income-tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1, its income was exempt from tax. The Assessing officer found that in the present case, the objects themselves involved an activity for profit and hence the assessee fell outside the scope of Section 2(15) of the Act. He accordingly assessed the assessee as an association of persons without granting the benefit of exemption under Section 11 of the Act on a total income of Rs. 1,58,906/- and also charged tax at the maximum marginal rate as provided under Section 164(1) of the act following the said order for the assessment year 1971-72, the Assessing Officer framed assessments for the subsequent assessment years on similar lines and brought to tax the income of the assessee at the maximum marginal rate, by re-opening the completed assessments for all the aforementioned assessment years.

3. Being aggrieved, the assessee preferred appeals to the Commissioner of Income-tax (Appeals), who, by a consolidated order for all the said assessment years, held that since some of the objects of the assesse trust were non-charitable and the trustees had discretion to utilise the funds of the trust for any one of these objects, the assessee trust was not entitled to exemption under Section 11 of the Act. The commissioner of Income-tax also rejected the contention of the assessee that the trust having been allowed exemption by the CIT (Appeals) earlier, the subordinate authority could not deny such exemption.

4. The assessee took the matter in further appeal to the Tribunal. Considering the matter in the light of the principles of law laid down by the Supreme Court in Surat Art Silk Cloth Manufacturers case (supra) and by this Court in Jaipur Charitable Trust Vs. Commissioner of Income-tax, Central, Delhi (1981) 127 ITR 620 the Tribunal felt that though some of the objects contained in clause 33 of the trust deed do fall within the ambit of "charitable purpose" as defined in Section 2(15) but there were other objects, like those enumerated in object clauses No.(x), (xii) (xiv) and (xvii), which could not be said to be charitable; all the objects were independent by themselves and the trustees had the discretion to utilise the funds of the trust for any of the objects, including the non-charitable ones, no fault can be found with the order of the CIT (Appeals). The Tribunal thus upheld the view taken by the lower authorities. On assessee's application, the aforenoted question has been referred.

5. We have heard Mr. B.N. Goswamy, learned counsel for the assessee and Mr. R.D. Jolly, learned senior standing counsel for the Revenue.

6. Invoking the principle of res judicata, it was submitted by Mr.Goswamy that while granting exemption certificate under Section 158 and Section 4(3) (i) of the 1922 Act on 1st April, 1958 with effect from assessment year 1958-59, the department had accepted that objects of the Trust were for charitable purpose, which certificate was in vogue even in the assessment year 1970-71 and subsequent years, and therefore, the Revenue could not be permitted to change its stand with effect from assessment year 1971-72 and subsequent years by re-opening the already concluded assessments, particularly when there was no change in the objects of the trust. In support, reliance was placed on a decision of the Supreme Court in Radha Swami Satsang Vs. CIT, (1992) 193 ITR 321 and of the Madras and Orissa High Courts respectively in M.A. Namazie Endowment Vs. Commissioner of Income-tax, (1988) 174 ITR 58 and Commissioner of Income-tax. Orissa Vs. Belpahar Refractories Ltd., (1981) 128 ITR 610. On merits, it was submitted that in the light of the law laid down by the Supreme Court in Surat Art Silk Cloth Manufacturers' Case (supra) the assessee was entitled to exemption from tax, because the profits derived by it were utilised for charitable objects for which the trust was formed.

7. On the contrary, while supporting the decisions of the lower authorities, it was ubmitted by Mr. Jolly, learned senior standing counsel for the Revenue, that since all the objects of the trust are independent of each other and none of them can be said to be primary or dominant object, the Tribunal was justified in applying the ratio of the decision of this Court in Jaipur Charitable Trust case (supra). It is asserted that exemption under Section 15B was granted only under 1922 Act and after the 1961 Act came into operation the trust was required to apply for exemption afresh, which was not done and, therefore, the exemption allowed under the old Act was not valid under the new Act.

8. The term "charitable purpose" has been defined in sub-section (15) of Section 2 of the Act. At the relevant time, it read as follow:

"2.15 "Charitable Purpose" 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.

The underlined ten words, though relevant for the present case, have since been omitted by the Finance Act, 1983 with effect from 1st April, 1984. These words were subject-matter of quite a debate and there was conflict of judicial opinion on its interpretation, which was set at rest by the decision of the Supreme Court in Surat Art Silk cloth Manufacturers case (supra). Various points exhaustively discussed in the said judgment, have been succinctly summarised by this Court in Jaipur Charitable Trust case (supra) , (insofar as they are relevant for this case), as under:

(a) If the primary or dominant purpose of a trust or institution is charitable, another object, which by itself may not be charitalbe but is merely ancillary or incidental to the primary or dominant purpose, would not prevent the trust or institution from being a valid charity. For instance, if in order to give effect to a charitable purpose, an incidental entry into the political domain is contemplated or if the activities of an institution in the carrying out of its main charitable purpose incidentally benefit the members of the society or the institution, this would not by itself prevent the association or institution from being a charity.

(b) If there are several object 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.

(c) The ten words underlined above qualify the expression "object of general Public utility" and not the phrase "advancement", In other words, what is inhibited by these ten words is the linking of an activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object. The words require only that the object should not involve the carrying on of any activity for profit; it is not necessary that the accomplishment of the object or the means of carry out the object should not involve an activity for profit.

(d) The words " object of general public utility not involving the carrying on of any activity for profit" cannot be Interpreted as covering a case merely on the ground that the purpose can be achieved without the trust or institution engaging itself in an activity for profit. In other words it would not be correct to interpret the expression as meaning that the object or purpose must be of such a nature that it involves the carrying on of an activity for profit, for, if such an 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 for carrying out such a purpose and thereby avoid the liability to tax. On the other hand, the correct 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. Of course if the constitution of a trust or institution itself expressly provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive then 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."

9. In Jaipur Charitable Trust's case (supra), the Court also referred to and relied upon the decision of the Supreme Court in Yogiraj Charity Trust Vs. CIT, New Delhi (1976) 103 ITR 777, wherein it was held that where there are various objects of the trust, which are all independent objects and if one of these objects cannot be described as a charitable purpose, the claim of the entire trust for exemption has to fail.

10. Thus, the basic test 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 the 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 and on the contrary, if the predominant object is the advancement of an object of general public utility, it is this object and not accomplishment or carrying out which must involve 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 of "charitable purpose" would be met and it is immaterial how the money is generated to achieve the predominant object. But at the same time, if any one of the objects, which is capable of being treated as an independent object, cannot be said to a charitable purpose, and the discretion vests in the trustees to use the funds of the trust for any one of the objects, then the trust cannot be held to be a charitable trust. We shall scrutinise the objects of the assessee trust in the light of the aforesaid broad principles and determine the question whether the assessee has been rightly denied exemption under Section 11 of the Act.

11. As noted above, the trust came into existence on the basis of deed of trust registered on 12th December, 1956. Clause 5 of the trust deed requires the trustees to promote the objects of the trust. It reads as follows:

"Income arising from the trust funds, securities and properties shall be spent by the trustees in promoting the objects of the trust in accordance with the Rules & Regulations in force from time to time."

Clause 21 of the trust deed is in the following terms:

"The account of the trust shall be opened with such bank as may be approved by the trustees. The trustees may, from time to time, purchase immovable property and other securities with the surplus funds in their hands, but the Chairman Shri D.R. Gupta will have full discretion in the matter of investments and after his death, the trustees will be guided for such investments by the next Chairman who is appointed either by the trustees or by Shri D.R. Gupta under the provisions hereafter."

12. Clause 33 of the trust deed enumerates various objects of the trust. Out of the total 35 objects so enumerated, the lower authorities have found some of the objects to be involving activity of profit and thus, non-charitable. These are:

"(ix) To establish nursing homes, maternity centres, nature care and yogic health homes in India and abroad. To run hostels for boys and girls receiving education or who are in service.

(x) To open health restaurants and health homes and to supply instructions for wholesome nourishing foods.

(xii) To open dairies and milk centres for the supply of pure milk and to provide cheap pure milk for school children and nursing mothers and to other needy people.

(xiv) To establish small-scale hand labour and mechanical industries in towns and villages to be run in cooperation with the employed labour and to participate in any general scheme of economic development of India whether agricultural, commercial or industries.

(xv) To set up self- sufficient model townships and colonies in finding cheap but decent houses for middle class working people and to provide healthy homes on cheap rent to the homeless.

(xvii) To arrange for the cheap supply and publication of useful literature and for that purpose to establish printing presses and run newspapers, magazines, periodicals and other educational literature and publish books on different subjects."

13. Having perused the various objects, spelt out in the statement of the case, for which the trust was formed, we are inclined to agree with the Revenue that there is not defined dominant charitable purpose in the Trust deed to which the said objects will serve as ancillary objects and which are meant to feed the dominant purpose i.e. charitable purpose. None of the objects can be described as either primary or a dominant object or a secondary or ancillary one. Each object is independent and distinct. The object to establish a small scale industry in town or village, either on cooperative basis or otherwise, cannot be said to be a charitable purpose which in the meaning of Section 2(15) of the Act. Similar would be the position with regard to the establishment of dairies and milk centers or establishment of health restaurants etc. Clearly some of the objects of the trust are non-charitable. Clause 21 of the trust deed gives an unfettered discretion to the Chairman of the trust to spend the funds of the trust on the purchase of immovable property or any other securities or on any of the objects of the trust, whether they are charitable or non-charitable . As held in Yogiraj Charity Trust (supra) where there are several objects of a trust some of which are charitable and some non-charitable and the trustees in their discretion are to apply the income to any of the objects, the whole trust fails and no part of income is exempt from tax, in the present case, as no part of the income of the trust has been allocated specifically for a charitable purpose, exemption under Section 11 of the Act cannot be granted to the assessee. Moreover, it is also evident from the assessment orders for the relevant assessment years that the total income of the trust comprises of only dividend and interest from the investment in securities and no part of it seems to have been applied on any specific charitable purpose. In this view of the matter, we are of the opinion that the Tribu-

nal has rightly come to the conclusion that the assessee is not entitled to exemption under Section 11 of the Act.

14. Before parting with the case, we may also deal with the contention of the assessee that the trust having been granted exemption certificate under Section 15B of the 1922 Act, in the absence of any change in the objects of the trust, the Revenue was bound by its earlier decision and should not have re-opened the same issue of exemption over again. It is true that though strictly speaking the doctrine of res judicata does not apply to the proceedings arising under the Act but the Courts have expressed the view that unless some fresh facts come to light on investigation the Income-tax Officer should not re-open the issues previously decided but on the facts of the instant case the said doctrine does not apply, in as much as noticed above, the certificate of exemption was issued under Section 15B of the 1922 Act and because of amended definition of "Charitable purpose" In Section 2(15) of the Act, it could not bind the Revenue and the Assessing Officer was competent to consider the question relating to the nature of the trust afresh. Accordingly, we reject the argument.

15. For all these reasons, our answer to the question referred is in the affirmative i.e. in favour of the Revenue and against the assessee. In the circumstances of the case, parties shall bear their own costs.