TMI Blog1992 (4) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... s valued at ₹ 5,96,870. In the year 1970 the appellant-Corporation served a notice on the respondent proposing that the ratable value of the building should be revised. On 1st February, 1973 the Deputy Assessor and Collector of the appellant-Corporation passed an order to the effect that the ratable value of the property be revised and enhanced to ₹ 16,29,750. The Deputy Assessor and Collector held that the respondent had not proved its charitable character. Further, the user of the property did not go to prove that the property was used for the charitable purpose and the same cannot be exempt from tax. Aggrieved by this order dated 1.2.1973, a writ petition under Articles 226 and 227 of the Constitution was filed before the High Court of Delhi in C.W. No.318 of 1974. The claim of the respondent, who figured as the petitioner therein, was that the withdrawal of exemption from the payment of General Tax previously enjoyed on portions of the property was wrong. It was contended that the case of the Trust was covered by Section 115(4) proviso of the Act; proviso exempts buildings from the payment of General Tax if exclusively occupied and used by a society for charit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istration Act, 1860. When there was a proposal by the Deputy Assessor and Collector to assess the Society for the General Tax, the appellant-Society claimed that it was a Society for charitable purpose and, therefore, no tax could be levied on its building since the exemption under subsection (4) of Section 115 of the Act would be applicable to it. This contention was rejected. The ultimate order of assessment is of 4th of November, 1988 whereby the respondent imposed the property tax of ₹ 5,32,683 by assessing the rateable value. The appellant-Society filed a suit and sought interim injunction but the Senior Sub-Judge was of the view that the subject-matter of the suit being ₹ 5,32,683 he could not entertain the suit. Therefore, on 24.12.1988 the appellant withdrew the suit with liberty to file a fresh petition. There upon, the appellant-Society filed Civil Writ Petition NO.263 of 1989 challenging the assessment order dated 4th November, 1988 in the High Court of Delhi. That was heard by a Division Bench. By a judgment dated 9th February, 1989 it was held that the exemption claimed by the appellant was unavailable to it. Therefore, the case was not covered by Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ckground. He draws our attention to Section 4 of Delhi School Education Act, 1973, which prescribes the conditions under which a School could be recognised. Again Section 5 provides for scheme of management. Section 17(3) makes it obligatory on the Manager to file with the Directory a full statement of the fees to be levied by the school. It further provides that no fee shall be levied except with the prior approval of the Director. No fee in excess of the fee specified by the Manager could be levied. Section 18(3) talks of recognition under aided school fund. The Rules made under the Delhi School Education Act, 1973 also have a great bearing. Rule 50 lays down elaborately the conditions for recognition. Clause (i) of the said Rule requires that the School is run by a Society. Clause (iv) says that the school shall not be run for profit to any individual or group or association. Clause (ix) stipulates that the School building shall not be used for any other purpose. Chapter XIV of the Rules deals with the School funds. Rule 172 requires the Trust or the Society not to collect fees. Rules 173 stipulates the requirement for the maintenance of the School fund. It inter alia p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to its actual transactions in any particular year or group of years. When the proviso uses the words supported wholly or in part by voluntary contributions , the test for ascertaining the same would be: (i) Does a Society rely upon voluntary contribution ultimately to meet the deficits, if any which may arise in its capital or revenue account? (ii) Does the Society rely upon voluntary contributions to finance its capital outlays to the extent such outlays exceed its savings and borrowings ? The test is essentially qualitative in nature. It is that test which is commanded for acceptance by us. The learned counsel further states that the advantages of applying the qualitative test would be: (i) By a series of decisions it has been held that mere generation of profits would not detract from the charitable nature of society so long as the profits continue to feed the charity and are not diverted to either non-charitable or private purpose. (ii) It would conform to the interpretation adopted by English Courts on similar expressions used in statute which are pari materia. (iii) It would afford a definite and a reliable test for identifying the exempt societies. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself from other enactments. The legislative intent is to narrow down the clauses of exemption. The Municipal General Tax is an annual tax. The question of assessability to such tax or exemption will, therefore, have to be determined each year. Therefore, unless and until the society satisfies the assessing authority that it fulfills the conditions for exemption in respect of that particular year, it cannot claim exemption as a rule. Therefore the facts in each case will have to be ascertained in each year. Similar is the method adopted under the Income Tax Act in respect of assessment of societies under Sections 11 to 13 of the said Act or even with regard to exempting donations to charitable societies under Section 80G. One other method will be to decide with reference to the overall position of the society or body over a period of 4 or 5 years. This was the method adopted in Brighton College v.Marriott (H.M. Inspector of Taxes) (10 Tax Cases 213). Similar was the test adopted in the case of Southwell (Surveyor of Taxes) v.The Governors of Holloway College (3 Tax Cases 386) while determining whether it fell within the concept of a charitable school within the meaning of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct does not create the school into a specific juristic entity different from the society. The Act only makes regulations in the matter of running the school and the service conditions of the employees. Indeed, the Act itself imposes a condition that the school must be run by a society or a body under Rule 50. Further, the Managing Committee of the school shall act under the control and supervision of the society which runs the school. Consequently, if the funds of the school were transferred to the society, it would only amount to transfer of funds from one account to another, both under the control of the same society. Under Section 115(4) if the society were to run education as a trade or business, even in such a case, the benefit of exemption will be lost, as laid down in Brighton College case (supra). It cannot be urged as an axiomatic proposition that imparting education would be a charitable purpose per se. Pemsel s case (supra) no doubt continues to hold the field in England. A careful reading of the judgement will disclose that there must be an element of public benefit or philanthropy that was what was stressed by each of the Law Lord. Therefore, while applying the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be shown that the society is supported by the voluntary contribution. Where the activity of the society generates income to support itself and, therefore, the society does not any longer depend on the voluntary contribution, certainly the exemption should be made unavailable. From this point of view, the finding, that even if it receives a small contribution irrespective of the fact whether it is able to support or not, is not the correct test. It is this aspect of the matter which requires to be clarified and the law settled by this Court. Mr. G.B. Pai, learned counsel for the respondent-Trust submits that the broad purpose of Section 115 is to exempt charity. There may be two types of voluntary contributions: (i) From the Society (ii) From third parties The object of the Section is to help the charitable institution. The sine qua non is non-distribution of profit. Once that test is answered the rest becomes immaterial. In support of this submission, the case in P.C. Raja Ratnam Institution v. Municipal Corporation of Delhi and others, [1990] Supp. SCC 97 is relied on. Lastly, it is submitted that the proviso must be read down to find out as to the income is realis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we think it necessary to provide the background in relation to the municipality and the power of taxation. Every municipality is a local self-government. Therefore, in order that it may sustain itself a power of taxation has been delegated to municipal bodies. The taxes are local taxes for local needs. Such taxes must obviously differ from one municipality to another. It is impossible for the Legislature to pass statutes for the imposition of such taxes in local areas. In a democratic set up the municipalities which need the proceeds of these taxes for their own administration, it would be but proper to leave to these municipalities the power to impose and collect taxes. The local authorities do not act as Legislature when they impose a tax but they do so as the agent of State Legislature. The powers and the extent of these powers must be found in the statute which creates them with such powers. Local bodies being subordinate branches of government activities are democratic institutions managed by the representatives of the people. They function for public purpose. They bear the burden of government affairs in local areas as they are required to carry on local self-government. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s or portions thereof or if in respect of such lands and buildings or portions thereof, any rent is derived. Sub-section (6) of Section 115 provides:- (6) Where any portion of any land or building is exempt from the general tax by reason of its being exclusively occupied and used for public worship or for a charitable purpose such portion shall be deemed to be a separate property for the purpose of municipal taxation. Therefore, after providing for exemption under subsections (4) and (5) Section 115 categorises cases, which will lose the exemption under sub-section (4). Again, subsection (6) clarifies that a part of a building in the occupation of society may not be entitled to exemption though the other part is clearly exempt. By a reading of the above, it is clear that sub-section (4) of Section 115 provides that general tax shall be levied in respect of all lands and buildings except those lands and buildings or part of lands and buildings which are exclusively occupied and used (i) for public worship or (ii) by society or body for charitable purpose. The conditions for claiming exemption under sub-section (4) are:- (i) The lands and buildings or portions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which may be realised by the school for other specific purpose, and (c) any other contributions, endowments, gifts and the like. Sub-section (4) states as under:- (4)(a) income derived by unaided schools by way of fees shall be utilised only for such educational purposes as may be prescribed; and (b) charges and payments realised and all other contributions, endowments and gifts received by the school shall be utilised only for the specific purpose for which they were realised or received. Rule 50 of the Rules framed under this Act stipulates the conditions for recognition. The important conditions for our purpose are:- (i) the school is run by a society registered under the Societies Registration Act, 1860 (21 of 1860), or a public trust constituted under any law for the time being in force and is managed in accordance with a scheme of management made under these rules; (iv) the school is not run for profit to any individual, group or association of individuals or any other persons; and (ix) the school buildings or other structures of the grounds are not used during the day or night for commercial or residential purposes (except for the purpose of reside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees collected by such school may be utilised by its managing committee for meeting capital or contingent expenditure of the school, or for one or more of the following educational purposes, namely:- (a) award of scholarships to students; (d) establishment of any other recognised school, or (c) assisting any other school or educational institution, not being a college, under management of the same society or trust by which the first mentioned school is run. In this background, we will consider whether education per se is a charitable purpose and its application to the appellant-society. The case relied on strongly is Pemsel (supra). The dictum of Lord Macnaghten at page 96 is as follows :- 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. The trusts last referred to are not the less charitable in the eye of the law because incidentally they benefit the rich as well as the poor, as indeed every charity that deserves the name must do, eit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the terms of the trust deed, they may use the property of the company only in a particular way and must not make use of the assets of the company for the purpose of a profitmaking concern. I find that they are strictly bound by the trusts of the trust deed, and that those trusts are charitable trusts. It seems to me, therefore, that while nominally the property of the company is held under the provisions of the memorandum and articles of association, in actual fact the property of the company is regulated by the terms of the memorandum and articles of association plus the provisions of the trust deed, and, therefore, the company is restricted in fact in the application of its property and assets and may apply them for the charitable purposes which are mentioned in the trust deed. Relying on this passage it is contended on behalf of the appellant that the position is exactly the same in the instant case. The submission is where the society s building houses, the school which is imparting education, it being a charitable purpose, the exemption would apply. We will consider this aspect of the matter after referring to the Indian cases. In The Trustees of the Tribune (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) it was observed at page 289: A settlor or a donor may make a charity by setting up an institution and also providing funds by which those who take advantage of the institution can do so without paying any charge ; or we may have a case where the charity may not go to those limits and one may confine his charity to merely setting up the institution and providing that those who wish to take advantage of the institution must pay reasonable charges for the same. In both cases the setting up of the institution would be a charitable object if the institution serves a purpose of general public utility. The only essential factor to determine whether it is a charity or not would be whether there is any private gain by the setting up of the institution. If the gain derived by running the institution continues to be impressed with the trust which is a charitable trust, then it is immaterial whether the institution is run as a commercial institution or not, but if in the running of the institution profits are made and the profit goes to any private individual or if the institution is intended for any private gain, then undoubtedly the running of the institution could not be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in connection with hospitals and other institutions; I think the essential idea conveyed by them is that the payments are a gratuitous offering for the benefit of others, and not the price of an advantage purchased by the contributor. But this case is not helpful because it turned on the meaning of voluntary . The test according to the appellant to determine voluntary contributions is qualitative and not quantitative. We will examine the correctness of this submission. The Delhi Municipal Corporation Act of 1957 in so far as it grants an exemption under Section 115(4) makes a departure from the other statutes of similar kind. As a matter of fact, the learned counsel have provided us with the relevant provisions of the various municipal statutes of the other States. Only the Delhi Municipal Corporation Act and Kerala Act adopt this pattern of exemption. Therefore, unlike the other Acts relating to municipalities of the various other States, the legislative intent appears to be to narrow down the nature of exemption. It cannot be gainsaid that the municipal general tax is an annual tax. Therefore, normally speaking, the liability for taxation must be determined with re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying any dividend or bonus to its members. The learned counsel for the appellant and the intervener would urge that on the basis of Cane (Valuation Officer) and Another (supra) (1961(2) Queen s Bench Division 89) the position in the instant case is the same. At Page 121 the following observation is found: One, I think, that enriches the corporation itself or relieves it of a burden or furthers its objects or powers. In the light of the above discussion, we will analyse the position in the context of the Delhi School Education Act and the Rules, since the school is regulated by these statutory provisions. The school no doubt is run by a regis tered society as required under Rule 50. It is managed in accordance with the scheme of management as provided under the Rules. However, Rule 59 sub-rule 2(q) which has already been extracted clearly lays down that the managing committee shall be subject to the control and supervision of the trust or society by which the school is run. Rule 177 which we have quoted above requires the utilisation of the income only for the purpose mentioned in that rule. Therefore, it would be clear that the rules do not contemplate the transfer of funds fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. It has already been seen that the Delhi School Education Rules nowhere contemplate transfer of funds from the school to the society. Certainly, such contributions cannot amount to voluntary contributions. The transfer of funds are in disregard of the rules and run counter to Rule 177 quoted above. We cannot, by any process of reasoning, hold that these are voluntary contributions received by the society. The Delhi School Education Act does not create the school entity a specific juristic entity different from the society. Where under rule 59(2)(q) of the Rules it is provided that the managing committee shall be subject to the control and supervision of the society by which the school is run, it means that school is a part and parcel of the society. Where, therefore, the funds are transferred, even calling the contribution from the school to the society, would be nothing more than transfer oneself. In fact, we do not find under the Delhi School Education Act any provision by which the school is made a separate juristic entity. There is another way of looking at the matter. The school being a separate entity, premises occupied by the school will belong to it and not to the soci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. The very fact that the tax payer society has claimed depreciation in the income and expenditure account of the school shows that what they are preparing is not the income and expenditure account, but a Profit and Loss Account as is done in commercial establishments. Depreciation is not an expendi ture but is only a deduction @ certain percentage of the capital assets for arriving at profits and gains of the business. In view of the foregoing discussions I have no hesitation to decline exemption from payment of general tax in respect of the property known as Green Field School, A-2 Block, S.J.D.A New Delhi. Accordingly, all property taxes are payable by the tax payer. The High Court correctly appreciated the law and held as under in C.W.P. No.263 of 1989 reported in AIR 1989 Delhi 266: At our instance, Mr Bhasin brought on record the balancesheets of the school for the years 1981 to 1987-88 and that of the society for the years from 1978-79 to 1984-85. It was stated that balance sheets of the petitioner society for subsequent years were not ready. If reference is made to the income and expenditure account of the school for the year ending 31.3.1988 it would be seen th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uildings where trade or business is carried on and profits are made and are applied to charitable purposes then that portion shall, for purposes of municipal taxation, be deemed to be a separate property. In other words, this part of the lands or buildings will qualify for relief. But the other part will be subject to tax. This is the idea of making a part of the lands or buildings a separate property so that the entire building does not get the exemption. The trade portion is subjected to tax, and the charity portion is not subjected to tax. Trade or business can be present in both subsections( 4) and (5) of section 115. But, if the profits of income of trade or business is devoted to a charitable purpose and no part thereof is distributed among the members as dividends or bonus, then that trade or business is a mean to an end. It is charity. But, if there is a trade or business carried on in a land or building and its profits are not applied to a charitable purpose, sub-section(6) says that part of the land or building where a trade or business is carried on or from rent is derived, will be subject to tax. Applying the above propositions, it would only, at best, make the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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