TMI Blog1993 (3) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... ness, any Income derived from such business unless the business was carried on in the course of the actual carrying out of a primary purpose of a Trust or Institution will not be excluded from the total income of the previous year of the person in receipt thereof" 4. This means that the assessee-trust will not be entitled to claim exemption for the income if it was found to be carrying on any business from which the income was derived. Admittedly, the assessee-trust had been settled with two Cinemas, Jamshedpur Talkies Karim Talkies. According to the ITO the provision contained in the aforesaid section 13(1)(bb) disentitled the assessee-trust from claiming exemption from taxability in respect of the income derived from the business of the carrying on of two cinemas, named above, He supported his finding with the observations made by Their Lordships of Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1. According to the ITO, none of the primary objects of the trust as Illustrated in the deed of the trust originally executed in the year 1945 but later on modified and supplemented by rectificatory and supplementary deeds of 1953 and 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired on its own volition. According to their lordships, embargo was placed only on the Trusts claiming to be Public Charitable Trusts who were found carrying on any business or acquiring any business, on their own. Such trusts could not claim exemption from taxability in respect of the income derived from such business as they themselves engaged in to carry on those businesses or acquired such businesses. But where the business what treated as a property had been settled under the Trust by the Settlor, the income derived from such business was not affected by the aforesaid provision contained in section 13(1)(bb). Therefore, the claim of the assessee-trust for exemption in respect of income derived from running of the two cinemas which were settled under the Trust for carrying out the various objects of the trust by the Settlor in 1945 could not be denied. The trust has not acquired the business nor initiated carrying on of the business. The trust came into effect only because two cinema houses treated as property were settled under the Trust by the author of the Trust. 6. Having considered the rival submissions, we are unable to persuade ourselves that the plea of revenue can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pronouncements of this court in J.K. Trust v. CIT [1957] 32 ITR 535 and CITv. P. Krishna Warrier [1964] 53 ITR 176. Section 11. sub-section (4), merely gave statutory recognition to this principle. Now section 13(1)(bb), Introduced in the Act of 1961 with effect from 1st April, 1977, provides that in the case of a charitable trust or institution 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, there is a charitable trust or Institution failing within any of the first three categories of charitable purpose set out in section 2, clause (15) and it carries on business which is held by it under trust for its charitable purpose, income from such business would not be exempt by reason of section 13(1)(bb). Section 11, sub-section (4), would therefore, have no application in the case of a charitable trust or institution falling within any of the first three heads of 'charitable purposely'. Similarly, on the construction contended for on behalf of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e carrying on of any business by any trust unless the business is carried on by the beneficiaries. It was with this consideration that sub-section (4A) was added to section 11. These changes brought about in sections 2(11) and 13(1)(bb) as well as in the insertion of subsection (4A) in section 11 was to overcome the effect of Supreme Court's decision in the passage extracted above. Besides it is a well known dictum that any doubt arising from the interpretation of law has to be resolved in favour of the tax-payer--and more so in the case of Public Charitable Trust to which the doctrine of cypress applies. However, where can a doubt still survive when that doubt had been already resolved by Supreme Court itself in the aforesaid passage in its judgment in Surat Art Silk. Therefore, in our view in clause (bb) is not applicable to the facts of the case for the years of appeal The Trust is not running a business of its volition. The assessee Trust is based on the running of a business which was settled by the author of the Trust as a property. Therefore, we have got to hold that the revenue is not correct in its approach when it held that the claim for exemption made out by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made over his cinema as brought out in the arrangement made with M/s. Kapurchand Pvt. Ltd. and M/s. Ruhee Enterprises to two close relatives of the Trustee, namely, Mrs. Shamsun Nissa Begum and Mr. Syed Ashfaque Karim. The two persons constituted a partnership M/s Ruhee Enterprises. Mrs. Shamsun Nissa Begum was the wife of the Trustee, Mr. S.M. Shafiq and Syed Ashfaque Karim was his son. Referring in particular to the provisions contained in section 13(1)(c)(ii), he made out that both the income and the property of the trust was used and applied for the benefit of Mrs. Shamsun Nissa Begam and Syed Ashfaque Karim who combined together and formed a partnership to which management of the two talkies was made over. The trust had entered into an agreement with M/s. Kapurchand Pvt. Ltd. under which the buildings styled as Jamshedpur Talkies and Karim Talkies with all furniture, affixture and plants and machineries were let out to M/s Kapurchand Pvt. Ltd. at a consolidated weekly hire charges of Rs.6,000 per week, i.e., Rs.3,000 for each talkies for the said two cinemas. M/s Kapurchand Pvt. Ltd. in its turn entered into an agreement with M/s Ruhee Enterprises, Jamshedpur for management an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred to clause (g) of sub-section (2) in particular and said that there was no diversion of any income or property of the trust. What has been made over to M/s. Ruhee Enterprises was only the management of the two cinemas. They had not been given any lien over the income or the property or corpus of the trust. M/s. Kapurchand Pvt. Ltd. had appointed Ruhee Enterprises to manage and look after the running of the two cinemas only. They were accountable for all the receipts. Two persons were entitled to get fixed the sum every week to meet the expenses while they had to, give a full account of all the receipts to M/s. Kapurchand Pvt. Ltd. who was to exercise all out supervision over the functioning of M/s. Ruhee Enterprises in managing and running of the two cinema houses. His finding is contained in para 30 of his order which is reproduced below: "There is force in the aforesaid contentions of the appellant's representative. The ITO has not placed any material on the record to establish that there was diversion of any income or property of the Trust to M/s. Ruhee Enterprises. It could have at best been argued in this case that there was any income which was indirectly passed on by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement with M/s. Kapurchand Pvt. Ltd. to ensure the accomplishment of twin purposes one to obtain monetary gain from the running of the two cinemas and the other to make arrangement for their management. M/s. Kapurchand Pvt. Ltd. in turn appointed M/s. Ruhee Enterprises to manage and run the cinema houses. It was purely business arrangement which could not be looked at as diverting either income or corpus by the trust to M/s. Ruhee Enterprises for their benefit. 11. We have looked into the facts of the case and carefully considered the rival submissions made out by both parties. We are of the view that the revenue has not been able to make out a case to establish that the property or income of the trust has been made over to M/s Ruhee Enterprises where two persons closely related to the Trustee, are partners, We would go with the revenue to hold that the arrangement brought about put M/s Ruhee Enterprises incharge and in control of the management of the two talkies. A dispassionate consideration of the facts. however, does not lead us to hold that the transfer of control and management to Ruhee Enterprises was for its benefit. On the facts of the case, we are obliged to hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the gains and strain undergone by him cannot be considered excessive or coloured by any extra business consideration. Therefore, we are unable to hold that any of the clauses of sub-section (2) of section 13 can be depended upon to lead one to a finding that the Trust had diverted a part of its income or corpus in favour of any person who was related to the Trust. The few judicial pronouncements which we have gone through in this connection do not suggest that sub-section (2) puts a complete embargo on the employment of such persons as are referred in sub-section (3) of section 13 for carrying out any genuine or bona fide purpose of the Trust. What is intended by different sub-clauses of sub-section (2) is that neither the property nor the income of the trust is diverted to any such person who is referred in sub-section (2) is for his benefit and to the detriment of the Trust. As we brought about that two cinemas have been under the control and management of M/s Ruhee Enterprises where the partners were closely related to the Trustee was not with the motive of ensuring any gain to these persons but to ensure smooth management and running of the two cinemas held under the trust. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying out of a primary purpose of the trust or institution.'" 3. The relevant facts in the case under consideration are that the assessee is a charitable institution (trust) and the income of the trust according to the provisions of the trust deed has to be applied primarily for purposes of education, running of schools and part of the income has to be applied for relief of the poor. The provisions of section 13(1)(bb) are applicable only if the trust has carried on any business from which income is derived and the trust is a charitable one for one of the three purposes, viz., for the relief of the poor, education or medical relief. The trust under consideration has admittedly carried on business by running two cinemas and is having the income therefrom. Further this trust is also for the relief of the poor and education as mentioned above. Prima facie, in the facts of the case the assessee-trust falls within the mischief of section 13(1)(bb). The cinema business clearly has not been carried on in the course of the actual carrying out of primary purpose of the trust, which, as mentioned above is relief of the poor and education. Thus, the other condition for the application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and the rival submissions. The lordships of Supreme Court have already held in Ahmedabad Rana Caste Association v. CIT [1971], 82 ITR 704 that to serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind or even all persons living in a particular country or province. It is sufficient if the intention is to benefit a section of the public as distinguished from a specified individual. Thus it has already been held by Supreme Court that if a section of the society or public is benefited the trust is charitable and does not cease to be so. Here the trust was for the purpose of running a school meant for Mohamedan boys. This trust was not meant for specified individual. It was meant for a section of the public and hence it was a charitable trust and only on this account it cannot be held to be a religious trust also. I, therefore, do not agree with the decision of CIT (Appeals). Moreover, provisions of section 13(1)(bb) are also applicable to charitable and religious trusts as has been stated in the Commentary of Income-tax Law by eminent Author, Shri N.A. Palkhivala. He has mentioned at page 295 as under: "This section applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the amendment of the definition of charitable purpose given in section 2(15) of the IT Act and held that where the object of the trust was of 'general public utility' and the predominant object of the activity was to carry out charitable purposes and not to earn profit it would not lose its character of a charitable purpose merely because some profit arose from the activity. The definition of charitable purpose as given in section 2(15) of the IT Act is as under: "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." 9. The Supreme Court in Surat Art Silk Cloth Mfrs. Association's case were considering only the interpretation of the definition of charitable purpose vis-a-vis the last head, viz.,'any other object of general public utility'. The other three heads were not under consideration before them in that case. In fact, the Supreme Court held in that case in connection with the provisions of section 13(1)(bb) as under: "Now section 13(1)(bb), introduced in the Act of 1961 with effect from 1-4-1977 provides that in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. There is absolutely no doubt that the cinema business was carried on not in the course of carrying out the primary purpose of the trust as mentioned above. Here taking an these facts and opinion of learned Authors Chaturvedi Pithisaria into consideration, I am of the opinion that the CIT (Appeals) was not correct in holding that the benefit of tax exemption would be available to the assessee in respect of income from business as well. I also do not agree with my learned brother that the benefit of tax exemption is available to the assessee in spite of the provisions of section 13(1)(bb). 10. Second issue to be considered is as to whether the assessee would lose the benefit of exemption according to the provisions of section 13(1)(c)(ii), The provisions of section 13(1)(c)(ii) are quoted below: "(c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income therefrom-- (i) if such trust or institution has been created or established after commencement of this Act and under the terms of the trust the rules governing the institution, any part of such enures or (ii) if any part of such income or any property of the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-82 Rs.34242 Assessment year 1982-83 Rs.28484 -------------------------------------------------------------- The above figures do not show in my opinion, that the huge profit going to the firm which has only this business represents reasonable remuneration for the exertion of these two partners of Ruhee Enterprises. One partner is a lady. There is no evidence put forward at any stage to show that any one or both of these persons possess any special qualification (technical or otherwise) which entitled them to such income or by which they could have earned profit remuneration on such a scale even elsewhere. The management and the control of the two cinema houses is fully in the household of the trustee. It is not known as to what was the technical/academic qualifications of these two persons. By these facts alone, I am of the opinion that provisions of section 13(1)(c)(ii) apply fully and it has to be held that these two persons are deriving benefit from the trust directly or indirectly. The conditions for the application of section 13(1)(c)(ii), in my opinion, are satisfied fully and the benefit of exemption has to be withdrawn in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 255(4): "1. Whether. on the facts and in the circumstances of the case, the income of the trust derived from running of the two Cinema Houses settled under the Trust by the Truster was not saved by the application of sub-section (4) of section 11 from the effect of the provisions contained in section 13(1)(bb) of the Income-tax Act, 1961? 2. Whether, on the facts and in the circumstances of the case, the claim of the assessee-trust for exemption of its income from taxability was hit by the provisions contained in section 13(1)(c)(ii)?" Registry while sending the above will send the records of the case. THIRD MEMBER ORDER Opinion under section 255(4) of I.T. Act P.J. Goradia, Accountant Member - Because of the difference between the learned two Members, who heard the appeals, a reference was made under section 255(4) of the Act on the following two questions:-- "(1) Whether, on the facts and in the circumstances of the case, the income of the trust derived from running of the two Cinema houses settled under the Trust by the Truster was not saved by the application of sub-section (4) of section 11 from the effect of the provisions contained in section 13(1)(bb) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee heads. He further took into consideration newly inserted section 13(1)(bb) of the Act inserted by the Taxation Laws Amendment Act, 1975 w.e.f. 1-4-1977 and which remained operated till 31-3-1983. Section 13(1)(bb), as it stood at the relevant time, reads as under: "(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." 5. Considering the language of section 13(1)(bb) the Assessing Officer was of the view that exclusion of the income derived from any business carried on by a charitable trust for the purpose of education in this case was not permissible unless the business was carried on in the course of actual carrying out of a primary purpose of the trust. The manner in which such pursuit of business can be undertaken was likened to picking up of flowers on the way to a temple for worship and the pursuit excluded maintaining a frame for temple worship and it was not enough that the profit of any business carried on by the trust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer to grant exemption under section 11. Aggrieved by this order of the Commissioner (Appeals), the revenue preferred an appeal before the Tribunal; whereas the assessee also preferred cross objection, both raising legal contentions on the basis of changed law because of introduction of section 13(1)(bb) of the Act. 8. In the orders passed by the two learned Members there is no dispute with regard to the above crucial facts stated by Assessing Officer. The learned Judicial Member held the view that section 13(1)(bb) did not apply where the business itself was originally settled under a trust and in this case, as I have pointed out earlier, even the Assessing Officer has admitted that the business as also the property of the two cinemas were held as trust property. He further was of the view that though controversy before the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association was in respect of interpretation of section 2(15) of the Act, yet their Lordships of the Supreme Court took into consideration the subsequent amendment made by insertion of section 13(1)(bb) of the Act and opined that where section 11(4) was attracted. provisions of section 13(1)(bb) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf is in conflict with object of the trust. Regarding the decision of the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association he relied upon the observations made by the Assessing Officer. 12. In my opinion the view expressed by the learned Accountant Member is the correct view and, therefore, I hold that the Income of the trust derived from running of the two cinema houses settled under trust was not saved by the application of sub-section (4) of section 11 from the effect of the provisions contained in section 13(1)(bb) of the Act. Firstly, I will deal with the confusion created on account of the decision in the case of Surat Art Silk Cloth Mfrs. Association. It was the case of the trust established for the residuary purpose, that is to say, advancement of any other object of general public utility, where admittedly the activity carried on for profit was an activity while fulfilling the object of general public utility. Therefore, this activity was undertaken by the trust in the course of actually carrying out of primary purpose of the trust. Because of this, the Supreme Court while considering the language of section 13(1)(bb) opined that the trust did not lose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer stated above, where it is clearly mentioned the activity for profit has to be carried on in the course of actually carrying out of primary purpose of the trust even where the business is settled in trust. On going through the commentary in various books on Income-tax Law, especially Sampath Iyengar's Law of Income-tax and Chaturvedi and Pithisaria's Income-tax Law, this view, as I have taken, is expressed in clear terms. 13. I shall now deal with the contentions factual and legal raised by the learned counsel, Mr. Jain: (i) Cinema houses are the trust property, it was submitted as against the submission of learned Departmental Representative, Mr. Mukhejee that it is not known at what point of time two cinema houses came in possession of the trust. From the question raised for my opinion itself, it is clear that both the learned Members had no doubt about the two cinema houses having been settled under the trust and, therefore, this point does not need any more elucidation. (ii) It was contended that section 13(1)(bb) prohibited activity undertaken for profit and did not apply to religious trust. This contention will enlarge the point of reference and this is not permissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to persons in scientific or artistic principles which underlie the Industrial and commercial occupations of the people (including especially handicraft manufacturers and agricultural labour) as well as instruction in the manual and other practice involved in the application of such principles and the like. One of the means of carrying out the object was buying and selling or selling on commission articles produced by handicraftsmen or otherwise. The question was whether the income of the society was exempt under section 11. On a reference, the High Court held that the society's object was one of general public utility and relying upon decision in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) it was held that its advancement was linked or connected with an activity for profit and, therefore, did not qualify for exemption. This decision of High Court was revised by the Supreme Court by holding that there was nothing to show that the function of buying and selling articles produced by handircraftsmen was otherwise than in the carrying out of the primary purpose. Therefore, the principle laid down in this case also, if applied to the facts of the case, as discussed above, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... completed and agreements are treated as genuine without there being any variation in the incomes declared. The learned Accountant Member has pointed out that one of the two partners of the sub-lessee firm was a lady and it was not known whether one or both of the partners possessed any special qualifications. This aspect is not relevant in view of the above findings. Moreover, it is not denied that they did engage themselves in attending to the business and devoted time and energy and also undertook the incidental risk that is normal in running the business of any type. It is further stated by him that the management and the control of the two cinemas is fully in the household of the trustee. This aspect alone, on the face of the facts considered by the ld. Judicial Member, cannot advance the case of the revenue. Moreover realities of life have also to be kept in mind because even when the management and control is in the hands of close relatives. yet there are attendant risks which need not be elaborated. 15. I must clarify for the purpose of proper understanding that question No. 1 as is referred proceeds on admission of both my learned brothers that not only section 11(4) app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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