TMI Blog1979 (11) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 Companies Act, 1913. 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 s. 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 silk 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 centred 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 institu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involve the carrying on of any activity for profit, because whatever activity was carried on by the assessee in fulfilment of the primary purpose was for advancement of an object of general public utility and not for profit. The Tribunal pointed out that there was no dispute in regard to the fulfilment of the other conditions mentioned in s. 11 and held that, in the circumstances, the income of the assessee was entitled to exemption under sub- s. (1) of s. 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 Mysore High Courts on the one hand and the 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 s. 11(1)(a) of the I.T. 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 dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be decided by this court in these references. Section 257 provides that if, on an application made under s. 256, the Tribunal is of the opinion that, on account of a conflict in the decisions of the 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 s. 2, cl. (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 s. 2, cl. (15), and it was on account of conflict of decisions on this question that a direct reference was made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC). 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 CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC), 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 protect 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 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 liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary objects set out in sub-cls. (b) to (e) of cl. (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 CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722, 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. CIT [1944] 12 ITR 482, 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 s. 25 of the Companies Act, 1956, and cls. 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 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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-s. (3) of s. 4 of the Indian I.T. 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 s. 4, sub-s. (3), of the Act of 1922. There, " charitable purpose " was defined as inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 to 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 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, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he primary purpose of the trust or institution, but it would also be unable to carry on any business even though the business is held under trust or legal obligation to 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 s. 2, cl. (15). Our reasons for saying so are as follows : It is clear on a plain natural constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y such business is carried on, the purpose of the trust or institution would cease to be charitable and not only the income from such business but the entire income of the trust or institution from whatever source derived, would lose the tax exemption. The result would be that no trust or institution established for promotion of an object of general public utility would be able to engage in business for fear that it might lose the tax exemption altogether and a major source of income for promoting objects of general public utility would be dried up. It is difficult to believe that the legislature could have intended to bring about a result so drastic in its consequence. If the intention of the legislature were to prohibit a trust or institution established for the promotion of an object of general public utility from carrying on any activity for profit, it would have provided in the clearest terms that no such trust or institution shall carry on any activity for profit, instead of using involved and obscure language giving rise to linguistic problems and promoting interpretative litigation. The legislature would have used language leaving no doubt as to what was intended and not le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head of " charitable purpose " because according to the contention of the revenue, even if a business is held under trust by a charitable trust or institution for promotion of an object of general public utility, income from such business would not be exempt since the purpose would cease to be charitable. The construction contended for on behalf of the revenue would thus have the effect of rendering s. 11, sub-s. (4), totally redundant after the enactment of s. 13(1)(bb). We do not think we can accept such a construction which renders a provision of the Act superfluous and reduces it to silence. If there is one rule of interpretation more well settled than any other, it is that if the language of a statutory provision is ambiguous and 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 give none. The construction which we are placing on s. 2, cl. (15), leaves a certain area of operation to s. 11, sub- s. (4), notwithstanding the enactment of s. 13(1)(bb) and we must, therefore, in any event, prefer that construction to the one submitted on behalf of the revenue. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dual meanings when the emphasis is shifted from ' advancement' to ' object ' used in section 2(15), we are clear in our minds that by the new definition the benefit of exclusion from total income is taken away where in accomplishing a charitable purpose the institution engages itself in activities for profit. The Calcutta decisions are right in linking activities for profit with advancement of the object. If you want immunity from taxation, your means of fulfilling charitable purposes must be unsullied by profit-making ventures. The advancement of the object of general public utility must not involve the carrying on of any activity for profit. If it does, you forfeit. The Kerala decisions fall into the fallacy of emphasizing the linkage between the objects of public utility and the activity carried on. According to that view, whatever the activity, if it is intertwined with, wrapped in or entangled with the object of charitable purpose even if profit results therefrom, the immunity from taxation is still available. This will result in absurd conclusions. Let us take this very case of a chamber of commerce which strives to promote the general interests of the trading community. If i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nk, for reasons already discussed, that this view is incorrect and we cannot accept the same. We have already examined the language of s. 2, cl. (15), and pointed out how the plain natural meaning of the words used by the legislature in that definitional clause does not accord with the contention of the revenue. We have said enough on the subject and nothing more need be said about it. It is enough to point out that in a subsequent decision in CIT v. Dharmodayam Company [1977] 109 ITR 527 (SC), which came by way of an appeal from the judgment of the Kerala High Court, this court itself has, in effect and substance, departed from this view and adopted the same construction which has commended itself to us. The question which arose in this case was whether the income from business of conducting kuries carried on by the assessee was exempt from tax. The contention of the revenue was that since the assessee was an institution established for promoting an object of general public utility and this purpose was sought to be achieved out of the income of the business of conducting kuries, the last concluding words of s. 2 cl. (15), were attracted and the income of the assessee was disenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive 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 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. We may point out that even in Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC), a decision which, as we shall presently point out, does not commend itself to us on another point, the same interpretation has been accepted by this court. We must then proceed to consider what is the meaning of the requirement that where the purpose of a trust or institution is advancement of an object of general public utility, such purpose must not involve the carrying on of any activity for profit. The question that is necessary to be asked for this p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpretation is to see whether the purpose of the trust or institution in fact involves the carrying on of an activity for profit or in other words whether an activity for profit is actually carried on as an integral part of the purpose or to use the words of Chandrachud J., as he then was, in Dharmodayam's case [1977] 109 ITR 527 (SC), " as a matter of advancement of the purpose ". There must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution or to put it differently, it must be carried 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 exclusionary clause would be attracted. This appears to us to be a more plausible construction which gives meaning and effect to the last concluding words added by the legislature and we prefer to accept it. Of course, there is one qualification which must be mentioned here and it is that if the constitution of a trust or institution expressly provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive, as, for example, where the purpose is specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trust, as pointed out by one of us (Pathak J.) in Dharmadeepti v. CIT [1978] 114 ITR 454 (SC) must be essentially charitable in nature " and it must not be a cover for carrying on an activity which has profit-making as its predominant object. This interpretation of the exclusionary clause in s. 2, cl. (15), derives considerable support from the speech made by the Finance Minister while introducing that provision. The Finance Minister explained the reason for introducing this exclusionary clause in the following words : " The definition of 'charitable purpose ' in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them, namely, the newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words ' not involving the carrying on of any activity for profit ' should be added to the definition. " It is obvious that the exclusionary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity. " The learned judge also added that the restrictive condition " that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object. " (emphasis supplied). We wholly endorse these observations. The application of this test may be illustrated by taking a simple example. Suppose the Gandhi Peace Foundation which has been established for propagation of Gandhian thought and philosophy which would admittedly be an object of general public utility, undertakes publication of a monthly journal for the purpose of carrying out this charitable object and charges a small price which is more than the cost of the publication and leaves a little profit, would it deprive the Gandhi Peace Foundation of its charitable character ? The pricing of the monthly journal would undoubtedly be made in such a manner that it leaves some profit for the Gandhi Peace Foundation, as, indeed, would be done by any prudent and wise management, but that cannot have the effect of polluting the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit. " And to the same effect, observed Krishna Iyer J. in Indian Chamber of Commerce's case [1975] 101 ITR 796, 804 (SC) when he said : " An undertaking by a business organisation is ordinarily assumed to be for profit unless expressly or by necessary implication or by eloquent surrounding circumstances the making of profit stands loudly negatived ... a pragmatic condition, written or unwritten, proved by a proscription of profits or by long years of invariable practice or spelt from some strong surrounding circumstances indicative of anti-profit motivation such a condition will nullify for charitable purpose. " Now, we entirely agree with the learned judges who decided these two cases 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. But we find it difficult to accept their thesis that whenever an activity is carried on which yields profit, the inference must necessarily be dra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charitable purpose, the mere fact that the activity yielded profit did not alter the charitable character of the assessee. We are of the view that the Tribunal was right in taking the view that the purpose for which the assessee was established was a charitable purpose within the meaning of s. 2, cl. (15), and the income of the assessee was exempt from tax under s. 11. The question referred to us in each of these references must, therefore, be answered in favour of the assessee and against the revenue. The revenue will pay the costs of the assessee in two sets : one in Reference Case No. 1A of 1973 and the other in Reference Cases Nos. 10- 14 of 1975. PATHAK J.-- To the judgment prepared by my learned brother Bhagwati J., I propose to add a separate judgment, persuaded by the considerable importance of the question which arises and because of a somewhat different perspective in which the point appears to me. The controversy in these references centres on the true interpretation of the words " not involving the carrying on of any activity for profit " in the definition of the expression " charitable purpose " by s. 2(15) of the I.T. Act, 1961. The preceding enactment, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition in such cases, the Select Committee felt that the words 'not involving the carrying on of any activity for profit should be added to the definition. " The new scheme, besides re-defining " charitable purpose ", added a second safeguard directed to protecting the grant of the tax benefit at another point. A new set of provisions controlled the utilisation of the accumulated income derived from the charitable trust or institution. Section 11 of the Act, in its material provisions, as originally framed declared : " (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-- (a) income derived from property held under trust wholly for charitable...... purposes, to the extent to which such income is applied to such purposes in India ; and, where any such income is accumulated for application to such purposes in India, to the extent to which the income so accumulated is not in excess of twenty-five per cent. of the income from the property or rupees ten thousand, whichever is higher ; (b) income derived from property held under trust in part only for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the institution or of a person who had made a substantial contribution to such trust or institution or of a relative of such author, founder or contributor. The net of restrictive provisions in relation to the utilisation of the income of the trust or institution was tightened still further by successive amendments to the Act. It was relaxed in one particular, that to earn the exemption the money accumulated or set apart could alternatively be deposited in a Post Office Savings Bank account or a banking company to which the Banking Regulation Act, 1949, applies, or a banking co-operative society, or was deposited with a financial corporation providing long term finance for industrial development in India and approved by the Central Government for the purposes of s. 36(1)(viii). A notable amendment, inserted as cl. (bb) in s. 13(1), provided that the exclusion of the income derived from any business carried on by a charitable trust or institution for the relief of the poor, education or medical relief, was not permissible unless " the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution ". This amendment, brought in wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose, the definition defines purpose in terms of an activity. When Sir Samuel Romilly, in the course of his argument in Morice v. Bishop of Durham [ 1805] 10 Ves 522, 532 summarised the main heads of charity, they included " relief of the indigent, the advancement of learning, the advancement of religion, and the advancement of objects of general public utility ". Note the sense of action of something to be done in relation to an object. When Lord Macnaghten adopted the classification of charitable purposes in Special Commissioners for purposes of Income-tax v. Pemsel [1891] 3 TC 53, 96 (HL) he spoke of " 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 ". In the Indian law, the relief of poverty and the advancement of education were embodied as " relief of the poor " and " education ". Medical relief was added. And for the fourth head, with which we are concerned, the language, an echo of Sir Samuel Romilly's classification, referred to " the advancement of any other object of general public utility.........". It w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose of profit-making being enwrapped or enveloped in the purpose of the advancement of an object of general public utility or, in the other kind of case, the purpose of profit-making being interwoven into the purpose of the advancement of that object giving rise to a purpose possessing a dual nature or twin facets. Now, s. 2(15) clearly says that to constitute a " charitable purpose ", the purpose of profit-making must be excluded. In my opinion, the requirement 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 clearly the definition in s. 2(15) is not satisfied. When applying s. 11, it is open to the tax authority in an appropriate case to pierce the veil of what is proclaimed on the surface by the document constituting the trust or establishing the institution, and enter into an ascertainment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The quantum of income is no test in itself. It may be the result of an activity permissible under a truly charitable purpose for, as has been observed, a profitable activity in working out the charitable purpose is not excluded. I am unable to agree, with respect, with all that has fallen from H. R. Khanna and A. C. Gupta JJ. in Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) that the terms of the trust must impose restrictions on making profits, otherwise the purpose of the trust must be regarded as involving the carrying on of a profit-making activity. On the contrary, I find myself in agreement with Beg J. to the extent that he says, in the same case, that it is the genuineness of the purpose, that it is truly charitable, which determines the issue. It seems necessary to me that a distinction must constantly 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. Reference may, of course, be made to the nature and width of the powers as evidence of the charitable or non-charitable n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue will pay the costs of the assessee in two sets, one in Tax Reference Case No. 1A of 1973 and the other in Tax References Cases Nos. 10 to 14 of 1975. SEN J.-- I have had the advantage of reading the judgment prepared by my learned brother, Bhagwati J. I regret my inability to share the view expressed by him as to the construction of the expression " charitable purpose " as defined in s. 2(15) of the I.T. Act, 1961. I am of the opinion that the two decisions in Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) and Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) lay down the correct law and still hold good. In the definition of " charitable purpose ", contained in s. 2(15) of the Act of 1961, the words " not involving the carrying on of any activity for profit ", which did not find place in the Act of 1922, qualify only the fourth head of charitable purpose, viz., " any other object of general public utility ", and not any of the first three heads. The definition of " charitable purpose " in s. 2(15) is in these terms : " 2. (15) ' charitable purpose' includes relief of the poor, education, medical relief, and the advancement of any other objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the charity will fall outside the definition of charitable purpose in s. 2(15). This change has radically altered the law and whenever the advancement of an object of general public utility involved an activity for profit that object will cease to be a charitable purpose. So, in such cases, the income from the activity for profit cannot be exempted from tax under s. 11 of the Act. The object of this addition of the restrictive words " not involving the carrying on of any activity for profit " was to clearly overcome the decision in In re Trustees of the Tribune [1939] 7 ITR 415 (PC), All India Spinners' Association v. CIT [1944] 12 ITR 482 (PC) and J. K. Trust v. CIT [1957] 32 ITR 535 (SC). All these cases arose under s.4(3)(i) of the Act of 1922, which did not include the words " not involving the carrying on of any activity for profit ", and they are no longer good law. There is a distinction between " a business held under trust " and " a business carried on by or on behalf of the trust ". Section 11(1) exempts income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India. Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, however, thought that it will not be desirable to ban an activity for profit which arises in the pursuit of the primary object of the trust created with the object of relief of the poor, education or medical relief. A study made by the Department of Company Affairs of 75 trusts, of which 62 were charitable, showed that the business houses creating the trusts had mostly appropriated the trust funds for their own businesses. Considering the problem of tax avoidance through formation of charitable and religious trusts, the Public Accounts Committee in a recent report observed that " while trusts fulfil a laudable social objective, they have also been used as a device to avoid tax ". The Committee also took note of the fact that out of 45 trusts connected with industrial houses and having a corpus of Rs. 24.11 crores, the investments by 32 trusts in concerns connected with the industrial houses were 50 per cent. or more of their funds. In some cases, it was noticed that the investment in such concerns amounted to as much as 90 per cent. of the funds of the trusts. In other words, the big business houses established their own " charitable trusts " because they find it financially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e carrying on of any activity for profit, but the advancement of that object. Otherwise, the Calcutta High Court held that " it would lead to a contradictory situation and be destructive of the limitation which Parliament in its wisdom thought it necessary to impose. It further observed that that was the only way to avoid a conflict between ss. 11 and 2(15), specially with the provisions of ss. 11 (1)(a) and 11(4). This court resolved the conflict in Loka Shikshana Trust [1975] 101 ITR 234 and Indian Chamber of Commerce [1975] 101 ITR 796 by holding that the words " not involving the carrying on of any activity for profit " govern the word " advancement " and not the words " object of general public utility " and observed that if the advancement or attainment of the object involves an activity for profit, tax exemption would not be available. The words " charity " and " charitable purpose " must be construed in their legal or technical sense which is different from their popular meaning. Charity is a word of art, of precise and technical meaning and an exhaustive definition of charity in the legal sense has never been attempted. The cases in which the question of charity has come ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in 1896 that Lord Lindley and other Law Lords held in Macduff's case [1896] 2 Ch 451 (CA) that the words " general public utility " were very wide in their scope, that every object of public utility was not necessarily a " charitable purpose ", and yet 22 years later in 1918, when the Expln. to s. 4(3) of the Indian Income-tax Act, 1922, was placed on the statute book, the Indian legislature while practically adopting Lord Macnaghten's phraseology in enumerating the first three heads of the definition, described the fourth as "advancement of other objects of general public utility ", without any restriction or qualification whatever. The courts, therefore, felt it their duty to give full effect to the plain meaning of the words used in s. 4(3) of the Act of 1922. In s. 4(3) the legislature deliberately refrained from qualifying in any way the words " any other object of general public utility ", and there was nothing in the context which indicated that it was intended to give them a restricted meaning. It was, therefore, not open to the courts or other authorities whose duty it was to interpret the section, to cut down the plain and comprehensive meaning of the words used, simp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was brought in. The main object was to take away the element of business " from " charity ". The then Finance Minister while introducing the Bill had said : " The definition of 'charitable purpose ', in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid from the benefits provided by them, namely, the newspaper industry, which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words ' not involving the carrying on of any activity for profit ' should be added to the definition." The words " not involving the carrying on of any activity for profit have changed the picture completely, and the decision of the Privy Council in Trustees of the Tribune [1939] 7 ITR 415 and All India Spinners' Association [1944] 12 ITR 482, as well as that of this court in Radhaswami Satsang Sabha [1954] 25 ITR 472, J.K. Trust v. CIT [1957] 32 ITR 535 and CIT v. Andhra Chamber of Commerce [1965] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By claiming exemption of tax, the trust funds had over the years, swelled from about Rs. 4,000 to nearly Rs. 2 lakhs. During the assessment year in question, the total receipts of the trust were of the tune of Rs. 22 lakhs. It was entirely a commercial activity and there was not even a semblance of spending any part of the income on the object of education by way of granting scholarships or providing means of education and so on. The court laid down that if the object of the charitable trust is advancement of any object of general public utility, any income derived by it from any activity for profit, will not be entitled to exemption under s. 11 of the Act, having regard to the words " not involving the carrying on of any activity for profit ", introduced in the definition of the term " charitable purpose " as contained in s. 2(15). Khanna J., speaking for the court, pointed out that as a result of the addition of the words " not involving the carrying on of any activity for profit ", at the end of the definition in s. 2(15) of the Act, even if the purpose of the trust is " advancement of any other object of general public utility ", it would not be considered to be " charitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trust in that case to be actually engaged in an activity for profit. I shall, however, deal with the observations later as they create some difficulty. The matter was put beyond the pale of controversy by the court in Indian Chamber of Commerce [1975] 101 ITR 796 (SC). The assessee was a chamber of commerce. Its objects were to promote and protect trade interests and other allied service operations falling within the expression " the advancement of any other object of general public utility. " The chamber derived income from (i) arbitration fees levied by it, (ii) fees collected for issuing certificates of origin, and (iii) share in the profits made by issuing certificates of weighment and measurement. The question was whether the activities of the chamber being activities carried on for profit, in the absence of any restriction in its memorandum and articles of association against the making of profit from such activities the income of the chamber from those activities was liable to income-tax or was exempt from income-tax under s. 11 read with s. 2(15). Krishna Iyer J., speaking on behalf of himself, Gupta and Fazal Ali JJ., referred to the legislative history, the evil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purpose " in such a manner that " we do not burke any word " treat any expression as redundant " or " miss the accent of the amendatory phrase ". He struck a note of warning regarding the " possibility of obscurity and " dual meanings " by shifting of emphasis from " advancement " to object " used in s. 2(15). The emphasis is not on the object of public utility and the carrying on of a related activity for profit. On the other hand, if in the advancement of these objects, the trust resorts to carrying on of activities for profit, then necessarily s. 2(15) cannot confer cover. The advancement of charitable objects must not involve profit-making activities. That, according to him, is the mandate of the new law. In reaching that conclusion he observes : " In our view, the ingredients essential to earn freedom from tax are discernible from the definition, if insightfully, actually read against the brooding presence of the evil to be suppressed and the beneficial object to be served. The policy of the statute is to give tax relief for charitable purpose, but what falls outside the pale of charitable purpose ? The institution must confine itself to the carrying on of activities which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat would be clearly against the whole scheme of the Act. I need hardly say that, if the altered definition of " charitable purpose " in s. 2(15) were to be applied, according to the well-known canons,of construction, no such point would for a moment be arguable. There can be no doubt that Parliament wanted to bring about a change in the law to prevent tax avoidance by diversion of business profits to pseudo charities. Surely, it cannot be said that Parliament did not mean, what it intended to achieve, by introducing the restrictive words " not involving the carrying on of any activity for profit ". It clearly meant to prevent tax-free profits from being ploughed back in business. But it is said that the law is different; and the point upon which the case must turn cannot be more distinctly put than was put by Beg J. in his judgment in Loka Shikshana Trust [1975] 101 ITR 234 (SC). The observations of Beg J. have given rise to a controversy that the condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object; and that if the terms of the trust permit the carrying on of business activity for pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived 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. It seems that the attention of Beg J., in Loka Shikshana Trust [1975] 101 ITR 234 (SC) was not drawn to the fact that he was dealing with a case falling under the fourth head of charity " advancement of any other object of general public utility ", the ambit of which was restricted by the qualifying clause " not involving the carrying on of any activity for profit ", and, therefore, there was no occasion for him to observe, " if the profits must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust ". These considerations can only arise under the first three heads of charity, viz., " relief of the poor ", " education " and " medical relief ". In CIT v. Dharmodayam Co. [1977] 109 ITR 527 (SC), Dharmaposhanam Co. v. CIT [1978] 114 ITR 463 (SC) and Dharmadeepti v. CIT [1978] 114 ITR 454 (SC), the court had occasion to deal with the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gical and, indeed, difficult 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, viz., " advancement of any other object of general public utility ", so as to make the carrying on of a business activity merely ancillary or incidental to the main object. In fact, if any other view were to prevail, it would lead to an alarming result detrimental to the revenue. The whole object of inserting the restrictive words " not involving the carrying on of any activity for profit " in the stricter definition of " charitable purpose " in s. 2(15) to make the range of favoured activity less flexible than it had been hitherto before, i.e., to prevent big business houses from siphoning off a substantial portion of their income in the name of charity, would be defeated. The danger of permitting diversion of business profits, which was sought to be prevented by Parliament is but apparent. In my opinion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailing attitude to tax statutes, saying (at p.137) : " Parliament is very properly determined to prevent this kind of tax evasion and, if the courts find it impossible to give very wide meanings to general phrases, the only alternative may be for Parliament to do as some other countries have done, and introduce legislation of a more sweeping character ........." It is legitimate to look at the state of law prevailing leading to the legislation so as to see what was the mischief at which the Act was directed. This court has on many occasions taken judicial notice of such matters as the reports of parliamentary committees, and of such other facts as might be assumed to have been within the contemplation of the legislature when the Acts in question were passed. In CIT v. Sodra Devi [1958] SCR 1; [1957] 32 ITR 615 (SC), the question before the court was as to the construction of s. 16(3) of the Indian I.T. Act, 1922. After finding that the word " individual " occurring in the aforesaid sub-section was ambiguous, Bhagwati J. observed : In order to resolve this ambiguity therefore we must of necessity have resort to the state of the law before the enactment of the provisions ; the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the proviso." Adopting the recommendation of the Select Committee, Parliament inserted the words " not involving the carrying on of any activity for profit " in the definition of the expression " charitable purpose " in s. 2(15) of the Act. The report of the Public Accounts Committee made a comprehensive study of the problem and indicated the magnitude of avoidance of tax through formation of charitable trusts, and considered whether the words " not involving the carrying on of any activity for profit " should be deleted, but recommended against its deletion. The Direct Taxes Enquiry Committee (otherwise known as the Wanchoo Committee) considered the question whether the restriction of trusts in the matter of engaging in activities for profit should be removed and made the following recommendations : " It is in this background that we addressed ourselves to the question as to whether religious or charitable trusts enjoying tax exemption should be permitted to carry on any activity for profit. Indubitably, engagement in activity for profit by such trusts provides scope for manipulations for tax avoidance. We, however, consider that it will not be desirable to ban an activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingle object under the fourth category, even though all the important objects fall under the first three categories. We, therefore, recommend deletion of the words 'not involving the carrying on of any activity for profit' occurring in section 2(15)." The Government, however, has not accepted the recommendation. I fail to comprehend when the recommendation has not been acted upon by the Government by suitable legislation, how this court can by a process of judicial construction achieve the same result. Fears expressed at the Bar that this harsh measure enacted by Parliament has shrivelled and dried up many genuine charities, does not take into account that it had to step in when the tax exemptions available to charitable and religious trusts started being misused for the unworthy purposes of tax avoidance. The law has been so re-structured to prevent allergy to taxation masquerading as charity. It cannot be disputed that many business houses have abused the provision relating to exemption from tax by carrying on activities for profit as a means for expansion and consolidation of business, which was sought to be justified as in furtherance of charity, i.e., charity became a big ..... X X X X Extracts X X X X X X X X Extracts X X X X
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