TMI Blog1997 (4) TMI 7X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Appellate Tribunal referred two identical questions of law for the above three years to the High Court of Madras for its decision. The questions of law referred for the above three years are as follows : " Whether, on a proper construction of the trust deed dated June 4, 1962, the Tribunal was right in holding that the objects of the trust are not for charitable purposes within the meaning of the said expression as defined in section 2(15) of the Income-tax Act, 1961, and that consequently its income for the assessment years 1964-65 and 1965-66 is not exempt from tax under section 11 of the Income-tax Act, 1961 ? " " Whether, on a proper construction of the trust deed dated June 4, 1962, the Tribunal was right in holding that the objects of the trust are not for charitable purposes within the meaning of the said expression as defined in section 2(15) of the Income-tax Act, 1961, and that consequently its income for the assessment year 1966-67 is not exempt from tax under section 11 of the Income-tax Act, 1961 ?" (emphasis supplied). The Income-tax Appellate Tribunal as also the High Court of Madras held that the income derived by the assessee from the business ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tside India, and (ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India : Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income. Explanation. --- For the purposes of clauses (a) and (b), in computing twenty-five per cent. of the income from any such property as is referred to in the said clauses for any previous year, the income from such property for the year immediately preceding the previous year may be adopted, if that income is higher than the income for the previous year. (2) Where the persons in receipt of the income have complied with the following conditions, the restriction specified in clause (a) or clause (b) of sub-section (1) as respects accumulation or setting apart shall not apply for the period during which the said conditions remain complied with--- (a) such persons have, by notice in writing given to the Income-tax Officer in the prescribed manner, specified the purpose for which the income is being accumulated or set apart, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forth. And whereas for such charitable purposes, the authors have set apart a sum of Rs. 11,000 (rupees eleven thousand only) and declare hereby that the said sum shall form the nucleus of the trust. NOW THIS INDENTURE WITNESSETH AS FOLLOWS : 1. The authors hereby create a public charitable trust hereinafter referred to as Thiagarajar Charities (hereinafter referred to as ' the trust ') for the purposes, ends and objects hereinafter following : (a) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment, maintenance, running, development, improvement and extension of elementary schools, secondary schools, high schools, colleges, universities, workshops, weaving, industrial, technological and other art, craft and science institutes, schools and institutions of Tamil or Sanskrit learning, hostels for the benefit of students and generally all kinds of educational institutions, whether general, technical, vocational, professional or of other description whatsoever for the welfare and uplift, of the general Indian public and to institute and award scholarships in India for study, research, apprenticeship for all or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re mentioned and all and every other moneys and properties gifted, conveyed and transferred to the trust by any person whatsoever for the purpose of carrying out the objects of the trust hereby created and shall also include any income derived by the investment of trust properties and all additions, accretions, accumulations and augmentations thereto including any profit on realisation of investments of trust properties and in particular, the expression trust properties shall include any business undertaking held or carried on by the trust. 4. Sri Karumuttu Thiagarajan Chettiar shall be the first managing trustee and he shall hold office for life, unless he voluntarily relinquishes the office and thereafter the senior-most amongst the remaining authors, failing which the senior-most male lineal descendent of Sri Karumuttu Thiagarajan Chettiar shall become the managing trustee and such managing trustee shall hold office for his life. 5. The term of office of a trustee save that of the authors of the trust, their descendants as mentioned in clause 2 and the managing trustee shall be three years from the date of his appointment but he shall, in the discretion of the other trustees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-31 of the paperbook, is to the following effect : " True copy of the resolution dated June 6, 1962 True copy of the resolution passed by the board of trustees at the meeting held on 6th June, 1962 ' Meenakshi ', Tirupparankundram Road, Madurai, at 1 a.m. Present : 1. Sree Karumuttu Thiagarajan Chettiar 2. Sri T. Sundaram Chettiar 3. Sree T. Manickavasagam Chettiar, Sree Karumuttu Thiagarajan Chettiar took the chair. The following resolution were unanimously passed : . . . . . 2. Resolved to undertake and carry on the business of purchase and sale of cotton, cotton yarn and cloth or other fibres both wholesale and retail and the managing trustee be and is hereby authorised to take the necessary steps in this behalf. 3. Resolved to appoint Sree T. V. Krishnamoorthy as the manager of the trust and to the business aforesaid and to authorise him to enter into contracts for purchase and sale of cotton, cotton yarn and cloth or other fibres both for ready and future delivery and to sign and execute all contracts in that behalf from time to time." (emphasis supplied). The board of trustees commenced and carried on business in the purchase and sale of cotton yarn as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so carrying on an activity for profit." (emphasis supplied). The High Court proceeded further and held as follows : " In the present case the object mentioned in clause (g) is one of general public utility and it involves the carrying on of activity for profit, namely, the business of purchasing and selling cotton, cotton yarn and cloth and other fibres, wholesale or retail, which necessarily implies a motive for profit. It would not fall within the meaning of ' charitable purpose ' mentioned in section 2(15) of the Income-tax Act, 1961. In the present case, the trustees have absolute discretion to utilise the funds of the trust to the one or the other of the several objects of the trust ......" (emphasis supplied). In coming to the above conclusion, the High Court of Madras followed a Full Bench decision of the High Court of Kerala in CIT v. Dharmadeepti [1975] 100 ITR 375. It was held that the trust is a non-charitable trust and the income realised by the trust from its business in cotton, cotton yarn, cloth, etc., for the assessment years 1964-65 to 1966-67 is not exempt from tax under section 11 of the Act. We heard counsel. At the outset, we should highlight one aspect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the income realised by the trust from its business of cotton, cotton yarn, etc., is not exempt from tax under section 11 of the Act. The High Court of Madras came to the conclusion, as it did, based on a Full Bench decision of the High Court of Kerala in CIT v. Dharmadeepti [1975] 100 ITR 375. The said decision was reversed by this court in Dharmadeepti v. CIT [1978] 114 ITR 454. So, the very basis of the decision of the High Court of Madras no longer exists. Counsel on both sides addressed elaborate arguments based on the trust deed dated June 4, 1962. The short question is, whether the objects of the trust will fall within the first three categories mentioned in section 2(15) of the Act, namely, " relief of the poor, education, medical relief " or will it fall under the fourth limb only and even so, its impact herein ? In interpreting or understanding the trust deed one has to bear in mind the basic difference between the corpus of the trust, the objects of the trust and the powers of the trustees. [See : Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310 (SC)]. It will be useful to remember the following passages in the judgment of the Kerala High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eated as powers distinct from the primary objects of the company and they are meant to enable the real purposes being achieved. The memorandum, in question is one wherein there has been a mingling of real objects with powers. The real objects disclose charitable purposes and the powers taken are merely to carry out the objects." (emphasis supplied). [See also Pennington's Company Law (Sixth edition), page 13 ; Palmer's Company Law (Twenty-fifth edition), vol. I, paragraph 2.606, wherein the law has been discussed in detail]. The objects of the trust have been clearly stated in paragraph 1 of the trust deed. The main purpose and objects of the trust are education, medical relief and poor relief. In that behalf, the trust has been authorised to establish, maintain, run, etc., educational institutions, technological and other institutes for the welfare and uplift of the general Indian public ; to assist in the establishment and running of hospitals, clinics and dispensaries, etc. ; to assist in building and erection of houses and places of residence for the poor ; and to afford relief to the poor by giving food, clothing and to help them in distress during earthquake, flood, famin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the High Court erred in construing sub-clause (g) aforesaid as an " object " of the trust enabling it to carry on a business with a profit motive. Looked at from a different angle, and in the alternative, it is clear that the business of purchasing and selling cotton, cotton yarn, cloth and other fibres, etc., was held under trust ; the said business was started in exercise of the powers vested in the trustees under clause 7(e) read with clause 32 of the resolution dated June 6, 1962, and in view of clause 3 of the deed it is the " corpus " of the trust in reality. It is not an object of the trust. So, it cannot be said that the trust is carrying on (business) -- an activity for profit. The business -- corpus -- property held under trust -- produces or results in income, like any other property. That is all. The business is only a " means " of achieving the " object " of the trust ; it is a medium through which the " objects " are accomplished. In this view, the entire approach made by the Appellate Tribunal as also by the High Court fails to give due effect to the trust deed as a whole and is palpably erroneous and the resultant conclusion is vitiated, in denying the exemption to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object.' We wholly endorse these observations." (emphasis supplied). We are of the view that the above test is also satisfied on the facts of this case. It appears from the affidavit filed by the appellant-trust, which is available at page 142 of the paperbook, that an aggregate sum of Rs. 16,48,030 was spent for charitable purposes during the period from June 4, 1962, to May 31, 1967. The purposes are aid to the various colleges, orphanages, relief to the poor and different categories or types of education. It also appears that in one of the assessment years, the amount so applied is much more than the total income. The facts available in the records go to show that the profits or amounts earned in the business fed the charitable purposes specified in the trust deed. In other words, the amounts earned had been essentially spent on charity. There can be no doubt that profit-making was not the real object of the trust. In the light of the above, we answer the question referred to the High Court in favour of the assessee and against the Revenue. We hold that the income deri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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