Additional Commissioner of Income-Tax Gujarat, Ahmedabad Vs. Surat Art Silk Cloth Manufacturers Association, Surat [1979] INSC 244 (19 November 1979)
BHAGWATI, P.N.
BHAGWATI, P.N.
UNTWALIA, N.L.
TULZAPURKAR, V.D.
PATHAK, R.S.
SEN, A.P. (J)
CITATION: 1980 AIR 387 1980 SCR (2) 77 1980 SCC (2) 31
CITATOR INFO:
R 1981 SC1408 (1,10,12) R 1981 SC1462 (9) APL 1981 SC1765 (1) R 1981 SC1922 (8) R 1986 SC1054 (6,7,10) R 1992 SC1456 (20,73)
ACT:
Income-tax Act 1961-Sections 2 (15), 11 and 13(1) (bb)- Scope of- "Advancement of any other object of general public utility not involving the carrying on of any activity for profit" meaning.
HEADNOTE:
The assessee which was an incorporated company, carried on various activities for promotion of commerce and trade in art silk yarn, art silk cloth and silk cloth. Its other objects were to obtain licences for import of raw material needed by its members, to obtain licences for export of cloth manufactured by its members and to do all other lawful things as are incidental or conducive to the attainment of the objects. Its income and property were to be applied solely for the promotion of its objects and no portion of the income or property was to be paid or transferred directly or indirectly by way of dividend, bonus or profits to its members. In the event of its winding up or dissolution, surplus of assets over liabilities, if any, could not be distributed amongst the members but was liable to be given or transferred to some other company having the same objects as the assessee, to be determined by the members of the assessee or by the High Court which has jurisdiction in the matter.
The assessee received income by way of annual subscription from its members (the revenue conceded that this amount was exempt from tax) and commission on the basis of certain percentage of the value of licences for import of foreign yarn and quotas for the purchase of indigenous yarn.
The assessee constructed a building out of the amounts received and the rent received from the tenants was an additional source of its income.
The assessee's claim for exemption under section 11(1) of the Income Tax Act was rejected by the Income-Tax Officer on the ground that its objects were not charitable within the meaning of section 2(15) of the Act. On the other hand the Appellate Assistant Commissioner held that the assessee's income was entitled to exemption under section 11 (1) because the activities carried on by the assessee were in fulfillment of the primary purposes which did not involve the carrying on of any activity for profit. This view of the Appellate Assistant Commissioner was affirmed by the Appellate Tribunal in appeal by the revenue.
In view of the conflicting decisions amongst different High Courts on the interpretation of the words "not involving the carrying on of any activity for profit" in the definition of charitable purpose in section 2(15) of the 1961 Act the Appellate Tribunal referred to this Court, under section 257 of the Act.
78 the question whether the assessee was entitled to exemption under section 11(1) of the Act.
It was contended on behalf of the revenue that if the means to achieve or carry out the object of general public utility involve the carrying on of any activity for profit, the purpose of the trust, though falling within the description "any other object of general public utility", would not be a charitable purpose and the income from business would not be exempt from tax.
Dismissing the appeal,
HELD: (Per majority Bhagwati, Untwalia and Tulzapurkar, JJ)
1. The contention that the objects of the assessee did not fall within the category of "advancement of any other object of general public utility" and were not charitable within the meaning of section 2(15) in that its members were merely specified individuals who did not constitute a section of the public cannot be allowed to be raised in this reference. In a reference under s. 257 of the Income Tax, Act, 1961 the Tribunal is not competent to refer to this Court a question in respect of which there is no conflict of decisions amongst different High Courts nor can this Court travel beyond the particular question of law referred to it by the Tribunal on account of conflict in the decisions of the High Courts. [92 A-B]
2. (a) It is well-settled that where the main or primary objects are distributive, each and every one of the objects must be charitable in order that the trust of institution may be upheld as a valid charity. But if the primary or dominant purpose of a trust 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 it from being valid charity. [92 D-E] (b) The test which has to be applied is whether the object which is said to be non-charitable is the main or primary object of the trust or institution or it is ancillary or incidental to the dominant or primary object which is charitable.[92 F] Mohd. Ibrahim v. Commissioner of Income-tax 57 Indian Appeal 260; East India Industries (Madras) Ltd. v. Commissioner of Income-tax, 65 ITR 611= [1967]3 SCR 356;
Commissioner of Income-tax, Madras v. Andhra Chamber of Commerce, 65 ITR 722=[1965] 1 SCR 565, Commissioner of Inland Revenue v. Yorkshire Agricultural Society [1928] 1 K.B. 611; 13 Tax Case. 58; Institution of Civil Engineers v. Commissioner of Inland Revenue [1931] 16 Tax Cas. 158 (C.A.); referred to.
In the instant case the income and property of the assessee are held under a legal obligation for the purpose of advancement of an object of general public utility within the meaning of s. 2(15) of the Act. The dominant or primary purpose of the assessee is to promote commerce and trade in art silk yarn etc., which is charitable and the other objects are in the nature of powers conferred upon the assessee for the purpose of securing fulfillment of the dominant or primary purpose. They would no doubt benefit the members of the assessee but this benefit would be incidental in carrying out the main or primary purpose of the assessee.
If therefore the dominant or primary purpose of the assessee.
79 was charitable the subsidiary objects would not militate against its charitable character and the purpose of the assessee would not be any the less charitable. [93 E-G]
3. It is settled law that the words "advancement of any other object of general public utility" would exclude objects of private gain; but this requirement is also satisfied in the present case because the object of private profit is eliminated by the recognition of the assessee under s. 25 of the Companies Act. 1956 and the objects set out in clauses 5 and 10 of its Memorandum of Association [94 C-D]
4. Where the purpose of a trust or institution 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 the primary purpose of the trust or institution. But if the purpose of the trust or institution is such That it cannot be regarded as covered by the heads of "relief of the poor, education and medical relief" but its claim to be a charitable purpose rests only on the last head "advancement of any other object of general public utility" then it requires, for its applicability, fulfillment of two conditions, namely, (i) the purpose of the trust or institution must be advancement of an object of general public utility; and (ii) the purpose must not involve the carrying on of any activity for profit.
[94 G-H] M/s. Dharamdipti v. Commissioner of Income-Tax, [1978] 3 S.C.R. 1038, referred to.
5. The words "not involving the carrying on of any activity for profit" qualify or govern only the last head of charitable purpose and not the earlier three heads. [94 G]
6. The meaning of the words "not involving the carrying on of any activity for profit" added in s. 2(15) of the 1961 Act 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 which must not involve the carrying on of any activity for profit. [94 H]
7. If the argument of the Revenue that if the means to achieve the object of general public utility involve the carrying on of any activity for profit, the purpose of the trust though falling within the description "any other object of general public utility" would not be a charitable purpose and the income from business would not be exempt from tax it right it would not be possible for a charitable trust whose purpose is promotion of an object of general public utility to carry on any activity for profit at all.
[97 F-H]
8. The consequence would be that even if a business is carried on by a trust or institution for the purpose of accomplishing or carrying out an object of general public utility and the income from such business is applicable only for achieving that object, the purpose of the trust would cease to be charitable and not only income from such business but also income derived from other sources would lose the exemption. Such a far-reaching consequence was not intended to be brought about by the legislature when it introduced the words "not involving the carrying on of any activity for profit" in s. 2(15). [98 B-C] 80
9. What is inhibited by the words "not involving the carrying on of any activity for profit" 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. 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. [98 E-G] Commissioner of Income-tax v. Cochin Chamber of Commerce and Industry, 87 I.T.R. 83 and Andhra Pradesh State Road Transport Corporation v. Commissioner of Income-tax, 100 I.T.R. 392 approved.
10. If the intention of the legislature were to prohibit trusts of this nature from carrying on any activity for profit it would have made such a provision in the clearest terms that no such trust or institution shall carry on any activity for profit. [99 E-F]
11. Section 13(1)(bb) introduced in the Act with effect from April 1, 1977 provides that in the case of a charitable trust for the relief of the poor, education or medical relief which carries on any business, income derived from such business would not be exempt from tax unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution. Where, therefore, a charitable trust falling within any of the first three categories of charitable purpose set out in section 2(15) carries on business which is held in trust for the charitable purpose, income from such business would not be exempt by reason of section 13(1)(bb) and section 11(4) would, therefore, have no application in the case of a charitable trust falling within any of the first three-heads of charitable purpose. Similarly, on the construction contended for by the Revenue it would have no applicability in the case of a charitable trust falling under the last head of charitable purpose, because in such a case income from business would not be exempt since the purpose would cease to be charitable. The construction contended for by Revenue would have the effect of rendering s. 11(4) totally redundant after the enactment of section 13(1) (bb). A construction which renders a provision of the Act superfluous and reduces it to silence cannot be accepted.
[100 C-F]
12. If the language of a statutory provision is ambiguous and is capable of two constructions that construction must be adopted which will give meaning and effect to the other Provisions of the enactment rather than that which will none. [100 G]
13. 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(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 81 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. [104 D-G] Commissioner of Income-tax v. Dharmodayan Company, 109 I.T.R. 527 followed.
Indian Chamber of Commerce v. Commissioner of Income- tax (1975) 101 I.T.R. 796 wrongly decided.
The Trustees of the Tribune, (1939) 7 I.T.R. 415;
Commissioner of Income-tax v. Krishna Warrier; 53 I.T.R.
176, J.K. Trust v. Commissioner of Income-tax 32 I.T.R. 535 and Sole Trustees Lokshikshana Trust v. Commissioner of Income-tax (1975) 101 I.T.R. 234 (S.C.) referred to.
14. It has therefore to be seen 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 "as a matter of advancement of the purpose". There e Must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution that is, it must be carrying 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 ex.
Exclusionary clause would be attracted. [105 G-H]
15. Every trust or institution must have a purpose for which it is established and every purpose must for its accomplishment involve the carrying on of an activity. The activity must be for profit in order to attract the exclusionary clause. [106 D]
16. The preposition "for" in the phrase "activity for profit" has many shades of meaning but when used with the active principle of a verb it means "for the purpose of" and connotes the end with reference to which something is done.
[106 E]
17. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be collect to describe it as an activity for profit. But where 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, it would not be incorrect to say as a matter of plain English grammar that the charitable purpose involves the carrying on such activity, but the predominant object of such activity must be to subserve the charitable purpose and not to earn profit. [106 F-H] Dharamdipti v. Commissioner of Income-tax, Kerala, [1978] 3 S.C.R. 1038 referred to.
18. The 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 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 m-rely because some profit arises 82 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. The restrictive condition that the purpose should not involve the carrying on of any activity for profit would he satisfied if profit making is not the real object.[107 G-H]
19. (a) The observations in Lok Shikshana Trust and Indian Chamber of Commerce that activity involved in carrying out the charitable purpose must not be motivated by a profit objective but it must be undertaken for the purpose of advancement or carrying out of the charitable purpose are correct. But the further observation that whenever an activity is carried on which yields profit, the inference must necessarily be drawn. in the absence of some indication to the contrary, that the activity is for profit and the charitable purpose involves the carrying on of an activity for profit is not correct. [109 H; li) A-Bl (b) It is not necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on a "no profit no loss" basis or that the profit shall 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 circumstances 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 he a charitable purpose but if it is the latter the charitable character of the purpose would not be lost. [110 C-D] In the instant case, the activity of obtaining licences for import of foreign yarn and quotas for purchase of indigenous yarn was not an activity for profit. The predominant object of the activity was the promotion of commerce and trade in those commodities which was clearly an object of general public utility and profit was merely a by- product which resulted incidentally in the process of carrying out charitable purpose. The assessee's profit could he utilized only for feeding this charitable purpose. The dominant and real object of the activity being the advancement of the charitable purpose the mere fact that the activity yielded profit did not alter the charitable character of the assessee .
Per Pathak J. (concurring) In the scheme under the Income-tax Act. 1961 for exemption from income tax of income derived from property held under trust for charitable purposes, two safeguards have been provided. One arises from the limited definition of "charitable purpose" by s. 2(15), Income-tax Act, 1961.
and the other is provided by the controls imposed on the utilisation of accumulated income derived from the charitable trust or institution. The first relates to the very purpose of the trust or institution, the second to the application of the resulting income. In construing what is a "charitable purpose" under s. 2(15) of purpose Act, considerations pertinent to the application of the accumulated income should not ordinarily be taken into account. [114 F-G] The first three heads of "charitable purpose" in s. 2(15) of the Act arc defined in specific terms. namely, relief of the poor, education and medical relief. The fourth head is described generally as a residuary head. The 83 definition of "charitable purpose" with reference to the fourth head shows that the purpose is the "advancement of any other object of general public utility.. ". The charitable purpose is not the "object of general public utility", it is the advancement of the object. The definition defines "charitable purpose" in terms of an activity. An object by itself cannot connote an activity. It represents a goal towards which, or in relation to which. an activity is propelled. The element of the activity is embodied in the word "advancement". If "charitable purpose" is defined in terms of an activity, the restrictive clause "not involving the carrying on of any activity for profit" must necessarily relate to "the advancement" of the object contemplated. [115 B-C] The words "activity for profit" should be taken as descriptive of the nature of the activity. It is an activity of a kind intended of yield profit. Conversely if profit has resulted from an activity, that has does not, without anything more, classify it as an "activity for profit". [116 B-C] The requirement of section 2(15) is satisfied where there is either a total absence of the purpose of profit- making or it is so insignificant compared to the purpose of advancement of the object of general public utility that the dominating role of the latter renders the former unworthy of account. If the profit-making purpose holds a dominating role or even constitutes an equal component with the purpose of advancement of the object of general public utility, then the definition in section 2(15) is not satisfied. [116-G-H] If the purpose is charitable in reality, the mode adopted must be one which is directed to carrying out the charitable purpose. The carrying on of such a business does not detract act from the purpose which permeates it, the end result of the business activity being the effectuation of the charitable purpose. 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 falls outside the scope of the trust. If it is a business entered into for working out be purpose of the trust or institution with a view to realisation of the charitable purpose, the income therefrom would be entitled to exemption under s. 11.
Section 11(4) and section 13(1)(bb) 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 actual carrying out of the purpose or the trust or institution. [117 B-E] A distinction must be maintained between what is merely a definition of "charitable purpose" and the powers conferred for working out or fulfilling that purpose. While the purpose and the powers must correlate they cannot be identified with each other. [118 B] In the instant case the purpose of the assessee falls within the definition of section 2(15). The objects of the assessee were to promote commerce and trade, which have been held to be an object of general public utility and, there is nothing to show that the relevant sub-clause of the Memorandum of Association involves the carrying on of any activity for profit. The remaining sub-clauses enumerate powers for which the company was constituted. [118 G-H] The Trustees of the Tribune, (1939) 7 I.T.R. 415, Commissioner of Income-tax v. Andhra Chamber of Commerce (1965) 55 I.T.R. 722, referred 84 Sale Trustees, Loka Shikshana Trust v. Commissioner of Income-tax, Mysore (1975) 101 I.T.R. 234; Indian Chamber of Commerce v. Commissioner of Income-tax, West Bengal II (1975) 101 I.T.R. 796 not approved.
Per Sen, J. (dissenting) The two decisions in Sole Trustees Lok Shikshana Trust v. C.I.T. (101 ITR 234) and Indian Chamber of Commerce v.
C.I.T. (101 ITR 796) lay down the law correctly and are still good law. [119 D]
1. The words "not involving the carrying on of any activity for profit" occurring in section 2(15) of the Act quality only the fourth head of charitable purpose namely "any other object of general utility" and not the first three heads. [119 E]
2. It is the vagueness of the expression "any other object of general public utility" occurring in section 4(3)(i) of the 1922 Act which impelled Parliament to insert the restrictive word "not involving the carrying on of any activity for profit.' It is not permissible for the court to whittle down the plain language of the section. It would be contrary to all rules of construction to ignore the impact of the newly added words and to construe the definition as it the newly added words were either not there or were intended to be otiose and redundant. Such a construction would frustrate the very object of the legislation. The relative simplicity of the language brings out the necessary legislative intent to counteract tax advantages resulting from the 'so-called charities in camouflage. [119 H; 120 A- C] 3 . The restriction introduced by the definition of the term "charitable purpose" in section 2(15) is that the advancement of objects of general public utility should not involve the carrying on of any activity for profit. If it involved any such activity the charity would fall outside the definition. [120 D-E]
4. There is no statutory bar to earn exemption in respect of income derived from a business undertaking if such business undertaking is held under a trust for a charitable purpose. The first essential condition for exemption under section 11(1) is that the property from which the income is derived must be held under trust or other legal obligation. Section 11(4) gives a statutory recognition to the principle that the business is property and if a business is held in trust wholly for a charitable purpose, the income therefrom would be exempt under section 11(1) [121 B-D] In re. The Trustees of the Tribune (1939) 7 ITR 415;
All India Spinner's Association v. C.I.T. (1944) 12 ITR 482;
C.I.T. v. P. Krishna Warriar (1964) 53 ITR 176 C.I.T. v. Andhra Chamber of Commerce (1965) 56 ITR 722; J.K. Trust v. C.I.T. (1957) 32 ITR 535 referred to.
5. The restrictive words "not involving the carrying on of any activity for profit" were deliberately introduced in the definition to cut down the wide ambit of the fourth head as a measure to check avoidance of tax. Engagement in an activity for profit by religious or charitable trusts provides scope for manipulation for tax evasion. [121 F-G] 6 Even assuming that the dominant object of a trust is the promotion or 'advancement of any other object of general public utility, if it involves any activity for profit i.e. any business or commercial activity, then it ceases to be a charitable purpose within the meaning of section 2(15). In that event the profits derived from such business are not liable to exemption under section 11(1) 85 read with section 2(15). The concept of profits to feed the charity is also of no avail. That is because the concept of 'profits to feed the charity' can only arise under the first three heads of 'charitable purpose' as defined in section 2(15) of the Act, that is, "relief of the poor" "education" and "medical relief" but they are not germane in so far as the fourth head is concerned. If the fulfillment of an object of general public utility is dependant upon any activity for profit, it ceases to be a charitable purpose. A reading of section 2(15) and section 11 together shows that what is frowned upon is an activity for profit by a charity established for advancement of an object of general public utility in the course of accomplishing its objects. [126 H; 127 A-B]
7. It would be clearly inconsistent to hold that if the dominant or primary purpose was 'charity' it would be permissible for such an object of general public utility to augment its income by engaging in trading or commercial activity. [131 F]
8. If the object of the trust is advancement of an object of general public utility and it carried on an activity for profit, it is excluded from the ambit of charitable purpose defined in section 2(15). The distinction is clearly brought out by the provision contained in section 13(1)(bb) which provides that in 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, shall not be excluded from the total income of the previous year. [132 G-H]
9. If the advancement of an object of general public utility involves the carrying on of an activity for profit, it ceases to be a charitable purpose and, therefore, the income is not exempt under section ll(l)(a). In case of a trust falling under any of the first three heads of charity, namely, 'relief of the poor' 'education' and 'medical relief' it may engage in any activity for profit and the profits would not taxable if they were utilized for the primary object of the trust. In other words the business carried on by them is incidental or ancillary to the primary object namely relief of the poor, education and medical relief. The concept of 'profits to feed the charity' therefore is applicable only to the first three heads of charity and not the fourth. It would be illogical to apply the same consideration to institutions which are established for charitable purposes of any object of general public utility. Any profit-making activity linked with an object of general public utility would be taxable. The theory of the dominant or primary object of the trust cannot. therefore, be projected into the fourth head of charity, namely,, 'advancement of any other object of general public utility' so as to make the carrying on of any business activity merely ancillary or incidental to the main object. [134 A-E]
10. The restrictive words 'not involving the carrying on of any activity for profit' in the definition of "charitable purpose" in s. 2(15) must be given their due weight. Otherwise, it would have the effect of admitting to the benefits of' exemption the fourth in determinate class, namely, objects of general public utility engaged in activity for profit contrary to the plain words of s. 2(15). [134 G]
CIVIL APPELLATE JURISDICTION: Tax Reference No. 1A of 73.
Tax Reference under section 257 of the Income Tax Act 1961 made by the Income Tax Appellate Tribunal, Ahmedabad in R.A. No. 66 (AHD) of 1971-72 arising out of I.T.A. No. 1697 of 1967-68 decided on 10-9-71 Assessment year 1962-63.
86 AND Tax Reference Nos. 10-14 of 1975 Tax Reference under section 257 of the Income Tax Act, 19(1 made by the Income Tax Appellate Tribunal, Ahmedabad in R.A. Nos. 140-144/AHD/73-74 arising out of I.T.A. Nos. 2098- 2102/AHD/7172 for assessment years 1963-64 to ]97-68.
V.S. Desai (in T.R. No. 1A/73), B.B. Ahuja and Miss A. Subhashini for the Appellant.
Sanat P. Mehta, Ravinder Narain, A.N. Haskar and Shri Narain for the Respondent.
Dr. Devi Pal, P.V. Kapur, S.R. Agarwal, Praveen Kumar and R.K. Chaudhary for the Intervener (Indian Sugar Mills).
Dr. Devi Pal and D.N. Gupta for the Intervener (Bengal Chamber).
R.N. Bajoria, S.R. Agarwal and Praveen Kumar for the Intervener (Indian Chamber, Calcutta).
F.S. Nariman, N. Nettar, A.K. Sanghi and O.P. Vaish for the Intervener (Indian Chamber, New Delhi).
The Judgment of P.N. Bhagwati, N. L. Untwalia and V. D. Tulzapurkar, JJ. was delivered by Bhagwati, J. R.S. Pathak, J. gave a separate opinion and A.P. Sen, J. gave a dissenting opinion.
BHAGWATI, J. These tax references have been made by the Tribunal directly to this Court under Section 257 of the Income Tax Act, 1961 (hereinafter referred to as the Act), since there is a conflict of opinion amongst different High Courts as to the interpretation of the words "not involving the carrying on of any activity for profit" occurring at the end of the definition of "charitable purpose" in clause (15) of Section 2. Originally these references came up for hearing before a Bench of three Judges but having regard to the great importance of the question involved and the serious repercussions, which an adverse decision might have on a large number of public trusts in the country, the Bench thought it desirable to refer the cases to a larger Bench and that is how these references have now come before us.
Though the references are six in number. they relate to the same assessee and raise the same question, only the assessment years being different. The assessee is the Surat Art Silk Cloth Manufacturers Association, a company incorporated under the Indian.
87 Companies Act, 19]3. The original Memorandum of Association set out the objects for which the assessee was incorporated, but we are not concerned with it since vital amendments were made in the Memorandum with effect from 14th July, 1961 at the time when the assessee was permitted under section 25 of the Companies Act, 1956 to omit the word "limited" from its name by order of the Central Government and it is the amended Memorandum which governed the assessee during the relevant assessment years. The amended objects, so far as material, were as follows:
(a) To promote commerce and trade in Art ilk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth. Silk Cloth and Cotton Cloth.
(b) To carry on all and any of the business of Art Silk Yarn, Raw Silk, Cotton Yarn as well as Art Silk f loth, Silk Cloth and Cotton Cloth belonging to and on behalf of the members.
(c) To obtain import Licences for import of Art Silk Yarn, Raw Silk, Cotton Yarn and other Raw Mate rials as well as accessories required by the members for the manufacture of Art Silk, Silk and Cotton Fabrics.
(d) To obtain Export Licences and export cloth manu- factured by the members (e) To buy and sell and deal in all kinds of cloth and other goods and fabrics belonging to and on behalf of the Members.
(f) X X X (g) X X X (h) X X X (i) X X X (j) X X X (k) X X X (l) X X X (m) X X X (n) To do all other lawful things as are incidental or conducive to the attainment of the above objects.
Clause 5 of the Memorandum provided in sub-clause (1) that the income and property of the assessee wheresoever derived shall be applied solely for the promotion of its objects as set forth in the 88 Memorandum and sub-clause (2) directed that no portion of the income or property shall be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise by way of profit, to persons, who at any time are or have been members of the assessee or to any one or more of them or to any person claiming through anyone or more of them. What should happen to the assets in case of winding up or dissolution of the assessee, was set out in clause 10 of the memorandum and it provided that the property remaining after satisfaction of all the debts and liabilities shall not be distributed amongst the members of the assessee but shall be given or transferred to such other company having the same objects as the assessee, to be determined by the members of the assessee at or before the time of the dissolution or in default? by the High Court of Judicature that has or may acquire jurisdiction in the matter. The income and property of the assessee were thus liable to be applied solely and exclusively for the promotion of the objects set out in the memorandum and no part of such income cr property could be distributed amongst the members in any form or under any guise or utilised for their benefit either during the operational existence of the assessee or on its.
winding up and dissolution.
The assessee carried on various activities for promotion of commerce and trade in Art Silk Yarn, Silk Yarn, Art Silk Cloth and Silk Cloth. The income of the assessee was h derived primarily from two sources. One was annual subscription at the rate of Rs. 3/- per power loom collected by the assessee from its members and the other was commission calculated on the basis of a certain percentage of the value of licences for import of foreign yarn and quotas for purchase of indigenous yarn obtained by the assessee for the members. There was no dispute between the parties in regard to the first category of income derived from annual subscription collected from the members and it was conceded by the Revenue to be exempt from tax but the real controversy centered round the taxability of the second category of income. The amount collected by the assessee from the members in respect of licences for import of foreign yarn was credited in an account styled "Vahivati Kharach" while the amount collected in respect of quotas of indigenous yarn was credited in another account called "Building Fund". The assessee constructed a building out of the amount credited to the "Building Fund" during the accounting year relevant to the assessment year 1965-66 and it was let out to various tenants and the rent received .
from them augmented the income of the assessee. The assessee claimed in the course of assessment to income tax for the assessment year 1962-63 that it was an 89 institution for a charitable purpose and its income was, therefore, exempt from tax under Section 11 sub-section ( 1 ) of the Act. This claim was rejected by the Income-tax officer on the ground that the objects of the assessee were not charitable within the meaning of sec. 2 clause (15). The assessee carried the matter in appeal and, in the appeal, the view taken by the Appellate Assistant Commissioner was that the purpose of the assessee was pre-dominantly development of Art Silk Industry which was an object of general public utility, but since the Income-tax officer had not examined whether the object involved the carrying on of an activity for profit and had also not considered whether the other conditions of section 11 sub-section (1) were satisfied, the Appellate Assistant Commissioner set aside the order of assessment and remanded the case to the Income- tax officer with a direction to make a fresh assessment after considering these issues. The Tribunal on further appeal at the instance of the Revenue did not agree with the procedure adopted by the Appellate Assistant Commissioner and taking the view that the Appellate Assistant Commissioner should not have set aside the order of assessment and made an order of remand for making a fresh assessment but instead, if he wanted any further facts, he should have called for a remand report from the Income-tax officer and then disposed of the appeal by deciding whether the assessee was entitled to exemption from tax under section 11 sub-section (1), the Tribunal directed the Appellate Assistant Commissioner to submit a remand report on the question "whether the objects for which the assessee company has been established are for charitable purposes within the meaning of section 2(15) and whether it satisfies the other conditions laid down under section 11." The Appellate Assistant Commissioner in his remand report found in favour of the assessee on both the points referred to him and after considering the remand report, the Tribunal confirmed the view taken by the Appellate Assistant Commissioner that the primary purpose for which the assessee was established was to promote commerce and trade in Art Silk and Silk Yarn and Cloth as set out in sub-clause (a) of Clause (3) of the Memorandum of Association and the other subjects set out in sub- clause (b) to (e) of clause (3) were merely subsidiary objects and since the primary purpose was plainly advancement of an object of general public utility, the first part of the requirement for falling within the last head of "charitable purpose" in sec. 2 clause (15) was satisfied. The Tribunal also agreed with the Appellate Assistant Commissioner that this primary purpose for which the assessee was constituted did not involve the carrying on of any activity for profit, because whatever activity was carried on by the assessee in fulfil- 90 ment of the primary purpose was for advancement of an object of general public utility and not for profit. The Tribunal pointed 1 out that there was no dispute in regard to the fulfillment of the other conditions mentioned in section 11 and held that, in the circumstances, the income of the assessee was entitled to exemption under sub-section (1) of section 11. The Revenue, being aggrieved by the decision of the Tribunal, made an application for a reference and since there was a conflict of decisions between the Calcutta and y Mysore High Courts on the one hand and Kerala and Andhra Pradesh High Courts on the other in regard to the true interpretation of the words "not involving the carrying on of any activity for profit", the Tribunal referred the question "whether on the facts and in the circumstances of the case, the assessee is entitled to exemption under sec. 11 (1) (a) of the Income-tax Act, 1961" directly to this Court. So far as the assessment years 1963-64 to 1967-68 are concerned, the assessment proceedings followed the same pattern and the Tribunal, following its earlier decision for the assessment years 1962-63, held the assessee to be exempt from tax in respect of its income under section 11 sub- section (1) and thereupon, at the instance of the Revenue an identical question of law for each assessment year was referred by the Tribunal directly to this Court.
Now before we proceed to consider the true meaning and connotation of the words "not involving the carrying on of any activity for profit" occurring at the end of the definition of "charitable purpose" in section 2 clause (15), it will be convenient to dispose of a short contention raised on behalf of the Revenue in Tax Reference Nos. 10 to 14 of 1975. The Revenue urged that the objects for which the assessee was incorporated did not fall within the Category denoted by the words "advancement of any other object of general public utility" since the objects set out in sub- clauses (b) to (e) of clause (3) of Memorandum of Association were for the benefit only of the members of the assessee and not for the benefit of a section of the public.
It was contended that in order that a Purpose may qualify for being regarded as an object of general public utility, it must be intended to benefit a section of the public as distinguished from specified individuals. The section of the community sought to be benefitted must be sufficiently defined and identifiable by same common quality of a public or impersonal nature and where there is no such common quality uniting the potential beneficiaries into a class, the purpose would not be liable to be regarded as a "charitable purpose". The argument was that since the members of the assessee did not constitute a section of the 91 public, but were merely specified individuals, the objects set out in sub-clauses (b) to (e) of clause (3) which were meant to benefit only the members of the assessee could not be regarded as objects of general public utility and hence the assessee could not be said to be an institution for a "charitable purpose" within the meaning of section 2 clause (15).
We do not think it is open to the Revenue to urge this contention in the present References. These References having been made under section 257 on account of a conflict of decisions amongst different High Courts in regard to the true interpretation of the words "not involving the carrying on of any activity for profit" in section 2 clause (15), it is only that particular question which can be decided by this Court in these References. Section 257 provides that if, on an application made under section 256, the Tribunals of the opinion that, on account of a conflict in the decisions of High Courts in respect of any particular question of law, it is expedient that a reference should be made direct to the Supreme Court, the Tribunal may draw up a statement of the case and refer it through its President direct to the Supreme Court. It is only the particular question of law on which there is a conflict of decisions in the High Courts that can be referred by the Tribunal directly to this Court. Here in the present case the conflict of decisions amongst the different High Courts was as to what is the true scope and meaning of the words "not involving the carrying on of any activity for profit" in section 2 clause (15) and whether on account of the presence of these words, the purpose for which the assessee was constituted, though falling within the words "advancement of an object of general public utility" would not be a charitable purpose within the meaning of section 2 clause (15) and it was on account of conflict of decisions on this question that a direct reference was k made to this Court by the Tribunal. This Court cannot travel beyond the particular question of law which has been referred to it by the Tribunal on account of conflict in the decisions of the High Courts. It cannot in a direct reference deal with a question of law on which there is no conflict of decisions amongst the High Court’s because such a question would be outside the jurisdiction of the Tribunal to refer under section 257. It is possible that a situation may arise where there may be two questions of law arising from the order of the Tribunal, one in respect of which there is a conflict of decisions amongst different High Courts and the other in respect of which there is no such conflict of decisions and in such a situation it may become necessary to consider whether one single reference comprising both questions should be made to 92 the High Court or two references can be made, one to the High Court and the other to this Court. We do not wish to express any opinion on this rather intriguing question but one thing is clear that a question of law in respect of which there is no conflict of decisions amongst different High Courts cannot be referred to this Court under section 257. The contention that the objects of the assessee did not fall within the category "advancement of any other object of general public utility" and were, therefore, not charitable within the meaning of section 2 clause (15) cannot, in the circumstances, be allowed to be raised in these References.
But even if such a contention were permissible, we do not think there is any substance in it. 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. Commissioner of Income-tax and East India Industries (Madras) Ltd. v. Commissioner of Income-tax. 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 v. Andhra Chamber of Commerce(3) 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. It was on an application of this test that in Commissioner of Income-tax v. Andhra Chamber of Commerce (supra), the Andhra Chamber of Commerce was held to be a valid charity entitled to exemption from tax. The Court held that the dominant or primary object of the Andhra Chamber of Commerce was to promote and project trade, commerce and industry and to aid stimulate and promote the development of trade, commerce and industry and to watch over and protect the general commercial interests of India or any part thereof and this was clearly an object of general 93 public utility and though one of the objects included the taking of steps to urge or oppose legislation affecting trade, commerce or manufacture, which, standing by itself, May be liable to be condemned as non-charitable, it was merely incidental to the dominant or primary object and did not prevent the Andhra Chamber of Commerce from being a valid charity. The Court pointed out that if "the primary purpose be advancement of objects of general public utility, it would remain charitable even if an incidental entry into the political domain for achieving that purpose e.g. promotion of or opposition to legislation concerning that purpose, was contemplated." The Court also held that the Andhra Chamber of Commerce did not cease to be charitable merely because the members of the chamber were incidentally benefitted in carrying out its main charitable purpose. The Court relied very strongly on the decisions in Commissioner of Inland Revenue v. Yorkshire, Agricultural Society and Institution of Civil Engineers v. Commissioner of Inland Revenue for reaching the conclusion that merely because some benefits incidentally arose to the members of the society or institution in the course of carrying out its main charitable purpose, it would not by itself prevent the association or institution from being a charity. lt would be a question of fact in each case "whether there is so much personal benefit, intellectual or professional, to the members of the society or body of persons as to be incapable of being disregarded".
It is this criterion which has to be applied in the present case and if we do so, it is clear that the dominant or primary purpose of the assessee was to promote commerce and trade in Art Silk Yarn, law Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth as set out in sub-clause (a) of clause (3) of the Memorandum and the objects specified in sub-clauses (b) to (e) of clause (3) were merely incidental to the carrying out of this dominant or primary purpose. The objects set out in sub-clauses (b) to (e) of clause (3) were, in fact, in the nature of powers conferred upon the assessee. for the purpose of securing the fulfillment of the dominant or primary purpose. The Revenue, it may be conceded, is right in contending that these objects or powers in sub-clauses (b) to (e) or clause (3) would benefit the members of the assessee, but this benefit would be incidental in carrying out the main or primary purpose forming the basis of incorporation of the assessee.
If, therefore, the dominant or primary purpose of the assessee was charitable, the subsidiary objects set out in sub-clauses 94 (b) to (e) of clause (3) would not militate against its charitable character and the purpose of the assessee would not be any the less charitable. Now having regard to the decision of this Court in Commissioner of Income-tax v. Andhra Chamber of Commerce (supra), there can be no doubt that the dominant or primary purpose to promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth fell within the category of advancement of an object of general public utility. It is true that according to the decision of the Judicial Committee of the Privy Council in All India Spinners Association v. Commissioner of Income-tax, the words "advancement of any other object of general public utility" would exclude objects of private gain, but this requirement was also satisfied in the case of the assessee, because the object of private profit was eliminated by the recognition of the assessee under section 25 of the Companies Act, 1956 and clauses 5 and 10 of its Memorandum. It must, therefore, be held that the income and property of the assessee were held under a legal obligation for the purpose of advancement of an object of general public utility within the meaning of section 2 clause (15) .
But the question still remains whether this primary purpose of the assessee, namely, to promote commerce and trade in Art Silk ; Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth, and Cotton Cloth could be said to be "not involving the carrying on of any activity for profit." This question arises on the terms of section 2 clause (15) which gives an inclusive definition of "charitable purpose". It provides that "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." It is now well settled as a result of the decision of this Court in M/s.
Dharamdipti v. Commissioner of Income-tax that the words "not involving the carrying on of any activity for profit" qualify or govern only the last head of charitable purpose and not the earlier three heads. Where therefore the purpose of a trust or institution 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 the primary purpose of the trust or institution. But if the purpose of the trust or institution is such that it cannot be regarded as covered by the heads of "relief of the poor, 95 education and medical relief", but its claim to be a charitable purpose rests only on the last head "advancement of any other object of general public utility", then the question would straight arise whether the purpose of the trust or institution involves the carrying on of any activity for profit. The last head of "charitable purpose" thus requires for its applicability, fulfillment of two conditions (i) the purpose of the trust or institution must be advancement of an object of general public utility; and (ii) that purpose must not involve the carrying on of any activity for profit. The first condition does not present any difficulty and, as we have already pointed out above, it is fulfilled in the present case, because the primary purpose of the assessee, namely, promotion of commerce and trade in Art Silk Yarn, Raw Silk Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth is clearly advancement of an object of general public utility. But the real difficulty arises when we turn to consider the applicability of the second condition. What do the words "not involving the carrying on of any activity for profit" mean and what is the nature of the limitation they imply, so far as the purpose of advancement of an object of general public utility is concerned ? It would be convenient at this stage to refer briefly to the legislative history of the definition of "charitable purpose in the Income-tax law of this country, as that would help us to understand the true meaning and import of the words "not involving the carrying on of any activity for profit". These restrictive words, it may be noted, were not to be found in the definition of "charitable purpose" given in sub-section (3) of section 4 of the Indian Income-tax Act, 1922 and they were added for the first time when the present Act was enacted. What were the reasons which impelled the legislature to add these words of limitation in the definition of "charitable purpose" is a matter to which we shall presently advert. but before we do so, we may usefully take a look at the definition of "charitable purpose" in Section 4 sub-section (3) of the Act of 1922.
There, "Charitable purpose" was defined as including "relief of the poor, education, medical relief and the advancement of any other object of general public utility" without the additive words "not involving the carrying on of any activity for profit". Now it is interesting to compare this definition of "charitable purpose" with the concept of "charity" under English Law. The English Law of charity has grown round the Statute of Elizabeth, the Preamble to which contained a list of purpose regarded as worthy of protection as being charitable. These purposes have from an early stage been regarded merely as examples and have through the centuries been considered as guide 96 posts for the courts in the differing circumstances of a developing and fast changing civilization and economy.
Whenever a question has arisen whether a particular purpose is charitable, the test has always been whether it is or is not within the spirit and intendment of the Preamble to the Elizabeth Statute. The law has been developed by analogy upon analogy and it is to be found in the large case of case-law that has been built up by the courts in over the years. The result is that the concept of charity in English Law is as vague and undefined as it is wide and elastic and every time there has to be a search for analogy from the Preamble to the Statute of Elizabeth or from decided cases.
An early attempt to simplify this problem by a classification under main heads was made by Sir Samuel Romilly when he tried to subsume charitable purposes under four heads in the following summary submitted by him in the course of arguments in Morice v. Bishop of Durham "relief of the indigent, the advancement of learning, the advancement of religion and the advancement of objects of general public utility". This classification was adopted in substance by Lord Macnaghten in his classic list of charitable purposes in Special Commissioners v. Pemsel where the learned Law Lord pointed out that charity in its legal sense comprises four principal divisions: trusts for the relief of poverty, trusts for the advancement of education, trusts for the advancement of religion and trusts for other purposes beneficial to the community not falling under any of the preceding heads." It will be noticed that the first head inn the definition of "charitable purpose" both in the Act of 1922 and in the pursuant Act is taken from the summary of Sir Samuel Romilly; the second from the classification of Lord Macnaghten after omitting the word "advancement"; the third is a new head not to be found either in the summary of Sir Samuel Romilly or in the classification of Lord Macnaghten while the fourth is drawn from the last head in the summary of Sir Samuel Romilly. The definition of "charitable purpose" in Indian Law thus goes much further than the definition of charity t be derived from the English cases, because it specifically includes medical relief and embraces all objects of general public utility. In English Law it is not enough that a purpose falls within one of the four divisions of charity set out in Lord Macnaghten's classification. It must also be within the spirit and intendment of the Preamble to the Statute of Elizabeth if it is to be regarded as charitable. There is no such limitation so far as Indian Law is concerned even if a purpose is not within the spirit and intendment 97 of the Preamble to the Statute of Elizabeth, it would be charitable if it falls within the definition of "charitable purpose" given in the Statute. Every object of general public utility would, therefore, be charitable under the Indian Law, subject only to the condition imposed by the restrictive words "not involving the carrying on of any activity for profit" added in the present Act. It is on account of this basic difference between the Indian and English law of charity that Lord Wright uttered a word of caution in All India Spinners' Association v. Commissioner of Income-tax (supra) against blind adherence to English decisions on the subject. 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 decision 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.
With these prefatory observations, we may now turn to examine the crucial words "not involving the carrying on of any activity for profit". One question of semantics that was posed before us was-and that is a question which we must first resolve before we can arrive at the true meaning and effect of these words-whether these words qualify "advancement" or "object of general public utility". What is it that must not involve the carrying on of any activity for profit in order to satisfy the requirement of the definition; "advancement" or "object of general public utility ? The Revenue contended that it was the former and urged that whatever be the object of general public utility, its 'advancement' or achievement must not involve the carrying on of any activity for profit, or in other words, no activity for profit must be carried on for the purpose of achieving or attaining the object of general public utility.
The argument was that if the means to achieve or carry out the object of general public utility involve the carrying on of any activity for profit, the purpose of the trust or institution, though falling within the description "any other object of general public utility" would not be a charitable purpose and the income from business would not be exempt from tax. Now, if this argument is right it would not be possible for a charitable trust or institution whose purpose is promotion of an object of general public utility to carry on any activity for profit at all. Not only would it be precluded from carrying on a business in the course of the actual carrying out of the primary purpose of the trust or institution, out it would also be unable to carry on any business even though the business is held under trust or legal obligation to 98 apply its income wholly to the charitable purpose or is carried on by the trust or institution by way of investment of its monies for the purpose of earning profit which, under the terms of its constitution, is applicable solely for feeding the charitable purpose. The consequence would be that even if a business is carried on by a trust or institution for the purpose of accomplishing or carrying out an object of general public utility and the income from such business is applicable only for achieving that object, the purpose of the trust or institution would cease to be charitable and not only income from such business but also income derived from other sources would lose the exemption.
This would indeed be a far reaching consequence but we do not think that such a consequence was intended to be brought about by the legislature when it introduced the words 'not involving the carrying on of any activity for profit" in section 2 clause (15). Our reasons for saying so are as follows:
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 "obje
