TMI Blog1981 (4) TMI 9X X X X Extracts X X X X X X X X Extracts X X X X ..... eral public utility as did not at all involve the carrying on of any activity for profit and, therefore, a ' charitable purpose ' within the meaning of section 2(15) of the I.T. Act, 1961 ? (iii) Whether the Tribunal was right under the law in holding that the onus of proving that the income which the assessee claimed to be exempt was in fact not exempt lay on the department and assuming but not admitting that it was right in holding so, whether the Tribunal was correct in holding that the department had failed to discharge the onus placed on it under the law ? " There is a conflict in the decisions of the High Courts in respect of questions of law as suggested by the applicant. The view expressed by the Calcutta High Court in the recent decision of CIT v. Indian Chamber of Commerce [1971] 81 ITR 147 is different from the view taken by the Kerala High Court in the case of CIT v. Indian Chamber of Commerce [1971] 80 ITR 645. The questions of law arising out of the order of the Tribunal are of great importance and as such we draw up a statement of the case and refer it direct to their Lordships of the Supreme Court through the President, Income-tax Appellate Tribunal, under s. 257 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly or indirectly. (k) To attain those advantages by united action which each member may not be able to accomplish in its separate capacity. (l) To have power to establish offices or agencies within or outside India or appoint agents there in order to carry out the objects mentioned above. (m) To help in the organisation of chambers of commerce or commercial association in different commercial centres of the country. (n) To convene when thought necessary commercial conference at such place and at such time as may be determined. (o) From time to time to borrow or raise moneys which may be required for the purpose of the Federation upon bonds, debentures, bills of exchange, promissory notes or other obligations for securities of the Federation or by mortgage or charge of the Federation's property. (p) To accept receive, purchase, take on lease or hire or otherwise acquire any movable or immovable property or any rights or privileges necessary or convenient for the purposes of the Federation at such terms and conditions as may be though fit or expedient. (q) To construct or alter or keep in repair any buildings required or used by or for the Federation and to pull down or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the surplus income or any property of the Federation in the trustees who shall hold and deal with the funds, surplus income or property in such manner as the committee may decide. (z-2) To undertake and execute any trusts the undertaking of which may seem to the Federation desirable either gratuitously or otherwise. (z-3) To draw, make, accept, discount, execute and issue bills of exchange, promissory notes, bills of lading, warrants, debentures and other negotiable instruments or securities. (z-4) And generally to do all other things incidental to the attainment of the above objects : Provided that the company shall not support with its funds, or endeavour to impose on or procure to be observed by its members or others, any regulation or restriction which if any object of the company would make it a Trade Union. According to cl. 4 of the memorandum of association, income and property of the Federation, whensoever derived, shall be applied solely towards the promotion of the objects of the Federation as set forth in this memorandum of association and no portion thereof shall be paid or transferred directly or indirectly, by way of dividend, bonus or otherwise by way of profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the assessee had a closing balance with the Bank of Baroda at Rs. 299.18. It received grant-in-aid from Government amounting to Rs. 3,00,000 in respect of the conference of Afro-Asian Organisation for Economic Co-operation for the period from September, 1961, to December 31, 1961, and after meeting expenses the Federation had a balance of Rs. 2,17,346.38. 5. In the proceedings for assessment of tax for the accounting year relevant to the assessment year 1962-63, the assessee claimed exemption of income under s. 11(1)(a) of the I.T. Act, 1961, and as such filed the income-tax return at nil figure. By relying upon the phrase " not involving the carrying on of any activity for profit " as contained in s. 2(15) of the I.T. Act, 1961, the ITO held that the principle decided by the Supreme Court in CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 would no more govern in deciding the issue of the present case. She thus hold that the income of the assessee was not exempt from income-tax and determined the total income of the assessee at Rs. 84,436. 6. When the assessee went in appeal before the AAC, he, mainly relying upon the decision of the Income-tax Appellate Tribunal, A-Bench, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) of the I.T. Act, 1961. He further urged that even if the whole property or income is held under charitable trust, so long as any of the objects vitiates the object of charitable purpose, the entire income attracts tax. He further submitted that under the provisions of the I.T. Act the onus lies upon the assessee to prove that it comes within the exempted provisions of the Act. Thus, the departmental representative led the Tribunal through the definition of charitable purpose as contained in s. 2(15) of the Act. It was also stated by him that the definition of " charitable purpose " is an inclusive one and it 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 ". He also stated that there is a comma after each of the first three purposes but under the residuary head of charitable purpose after the word " and " there is no comma and the clause is " the advancement of any other object of general public utility not involving the carrying on of any activity for profit". Thus, the argument of the revenue was that in an advancement of any object of general pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Federation and if profits arose, they were incidental or ancillary to the dominant object for the welfare and common good of the country's business and business communities and associations which were the members of the Federation. It was further stated that the restaurant was run not for the purpose of making profit but for the purpose of carrying on exhibition which itself was for the welfare of the business community. Secondly, he argued, that when the dominant object could not be fulfilled without the ancillary objects which were referred to by the departmental representative, the assessee was entitled to get exemption. It was further submitted by him that even assuming that the purpose was to earn profit, the profit was to be understood in a commercial sense, a sense which no commercial man would misunderstand. He referred to pages 727, 730 and 732 of the Supreme Court decision in the case of CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722. By referring to the observations, the learned counsel for the assessee contended that when the principal or dominant objects of the Federation are to promote and protect trade, commerce and industry in India, it could not be said tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial body should take into consideration matters of common knowledge, matters of common report, history of the times and may assume every state of fact which can be conceived at the time of legislation. (4) It is not only the phraseology of the provisions of the statute that governs the situation but the effect of law is the decisive factor. 10. The departmental representative also relied upon the punctuation mark for interpretation of " charitable purpose " as contained in s. 2(15) of the Act. The Tribunal, relying upon the observations of the Supreme Court in A. K. Ghose v. Arabinda Bose, AIR 1952 SC 369, 383, held that the punctuation mark is a minor element in the construction of a statute. It also held that the statement of objects and reasons attached to a Bill was to be excluded while construing the terms of a statute. Hence, it held that the objects of the Act cannot decide the principle in a statute. After considering the provisions of s. 2(15), charging ss. 4, 5 and 11 and sections dealing with the computation of income beginning from s. 15 up to s. 59, the Tribunal held that it would be appropriate to take a commonsense approach in interpreting the meaning of the word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular by establishing, conducting and helping directly or indirectly institutions calculated to educate the people by spread of knowledge on all matters of general interest and welfare, founding and running reading rooms and libraries and keeping and conducting printing houses and publishing or aiding the publication of books, leaflets, pamphlets, magazines and other objects with the object of educating the people. Yet as this trust conducted the printing press and published a daily paper, their Lordships held that though the main object of the trust is supplying the Karnatak people with an organ of educated public opinion, yet as the income of the trust is largely from newspaper, the trust involved a commercial activity for profit and as such the trust would not be entitled to the benefit of s. 11(1)(a) read with s. 2(15) of the Act. In other words the Mysore High Court did not accept the principle of dominant object of a trust in interpreting the provisions of ss. 2(15) and I I of the Act. The result is that if the ancillary object involves an activity for profit, then the income of the trust is not exempt from incometax. In Konstam's Income Tax, 12th Edn., it is stated at p. 80, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities of the assessee amounted to trade, business or profit or loss in activities involving profit. The object clause of the memorandum of association is based on the doctrine of ultra vires. The object clause requires that the company should devote itself only to the objects set out in the memorandum to delimit and identify the objects in such plain and unambiguous manner as that the reader can identify the field of activities within which the corporate activities are to be confined. And it is the function of the courts to see that the company does not move in a direction away from that field. The object clauses state the powers of the company and they state negatively that nothing shall be done beyond that ambit and that no attempt shall be made for any other purpose than that which is so specified. The theory of ultra vires thus confines the corporate action within narrow limits. In order to avoid the rigour of the doctrine, there has grown up a practice of registering the memorandum of association containing a profusion of object and powers. It is well settled that the words of the statute are the best guide and the tax cannot be levied by implication and the tax mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .11 states: " 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 or religious 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 such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India ; and where any such income is finally set apart for application to such purposes in India, to the extent to which the income so set apart is not in excess of twenty-five per cent. of the income from the property held under trust in part." According to s. 11(4): " For the purposes of this section 'property held under trust ' includes a business undertaking so held, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en was) in the case of Consolidated Tea & Land Co. (India) Ltd. v. CWT [1970] 76 ITR 589 (Cal), words like ideas have a certain association which is provided by the context, the object and purpose of the statute in which they were used. These lines of thought as stated above do appear to be appropriate in considering the meaning of the word " profit " in the commercial sense. It has been stated by the learned counsel for the assessee that holding of industrial fair by the Federation is not the annual feature as in the course of 25 years only twice it held such fairs., It was stated that income from books on company law is not a commercial feature and it is for the purpose of carrying out other ancillary objects of the Federation. The articles and memorandum of association of this Federation do not authorise it to carry on canteens nor do they authorise it to carry on business of publishing books and magazines for the purpose of trade. Object clauses as relied upon by the revenue do not smack of any activity which is carried on by any business undertaking. Left to such articles and memorandum, the Federation would have engaged in unauthorised and illegal activities because an ultra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke a commonsense approach in interpreting the meaning of the word " profit " in which it has been used in s 2(15) of the Act, as commonsense approach is not always to be abjured in the interpretation of a taxing statute. Thus, in the language of Shah J., in Parimisetti Seetharamamma v. CIT [1965] 57 ITR 532 (SC), it can be stated that when the I.T. Act does not provide that whatever is received by an assessee must be regarded as income liable to tax and when the receipt is sought to be taxed as income the burden lies upon the department to prove that it is within the taxing provision and the department has not been able to prove this in the instant case. Besides cl. 3 of the memorandum of association, we are to consider all other clauses of the memorandum of association, viz., clauses 4, 5, 8 and 9, each clause throwing light on the other and reading the clauses as a whole we cannot infer that the activity of the assessee involves activity for profit of business, trade or adventure in the nature of trade and that its activity is that of a business undertaking. 11. On these facts the following questions of law are referred to the Supreme Court: " 1. Whether having regard to the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cl. 3 of the memorandum of association which, in so far as material, reads: 3. (a) To promote Indian business in matters of inland and foreign trade, transport, industry and manufactures, finance and all other economic subjects and to encourage Indian banking, shipping and insurance. While cl. 3(a) defines the primary purpose of the trust, i.e., to promote trade and industry which undoubtedly being an object of general public utility engaged in carrying on activities without any profit motive, the subsidiary objects set out in sub-cls. (b) to (z-2) of cl. 3 are merely incidental or ancillary thereof. During the assessment year 1962-63, the relevant accounting year for which was the year ended December 31, 1961, the assessee submitted return showing its total income as " nil " claiming that all its income was exempt under s. 11(1)(a) read with s. 2(15) of the Act. During the assessment year in question, the assessee held the Indian Trade Fair at New Delhi and derived receipts totalling Rs. 75,18,548 from rent for space allotted, temporary stalls and storage. It also received Rs. 20,750 by sale of season tickets and Rs. 3,94,143 by daily gate tickets. It realised deposits and adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement that the object of general public utility should not involve the carrying on of any activity for profit. He accordingly raised a demand of Rs. 49,818 on a total income of Rs. 84,430. On appeal, the AAC disagreed with the view of the ITO and held that the activities carried on by the assessee were not profit oriented and, therefore, its income was exempt. The Commissioner appealed to the Appellate Tribunal without any success. The Tribunal upheld the view of the AAC and held that the dominant object with which the Federation was constituted being a charitable purpose, viz., promotion, protection and development of trade, commerce and industry, there being no motive to earn profits, it was not engaged in any activity in the nature of business or trade, and, if any income arose from such activity, it was only incidental or ancillary to the dominant object for the welfare and common good of the country's trade, commerce and industry. Thereupon, the Commissioner applied to the Appellate Tribunal to make a reference to the High Court under sub-s. (1) of s. 256 of the Act, but the Tribunal, in view of the conflict in the decisions of the High Courts on the construction of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e character of the trust". In other words, the majority view in the Surat Art Silk case was 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. The theory of dominant or primary object of the trust has, therefore, been treated to be the determining factor, even in regard to the fourth head of charity, viz., the advancement of any other object of general public utility, so as to make the carrying on of the business activity merely ancillary or incidental to the main object. One should have thought that the correct way to approach this question of interpretation was to give the words used by Parliament their ordinary meaning in the English language and if, consistently with the ordinary meaning, there was a choice between two alternative interpretations, then to prefer the construction that maintains a reasonable and consistent scheme of taxation without distorting the language. When the Government did not accept the recommendation of the Direct Taxes Laws Committee in Chap. 2 (Interim Report, December, 1977) for the deletion of the words " not involving the carrying on of any a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctrine of dominant or primary object and there is little that we can do about it. Faced with this difficulty, learned counsel for the revenue advanced no submissions with regard to the questions referred and indeed in view of the majority decision in Surat Art Silk case [1980] 121 ITR 1 (SC), the answers to the questions are self-evident. The doctrine of dominant or primary object must, as laid down in Surat Art Silk case, hold the field till there is a change in the law. Undoubtedly, the activities of the assessee in regard to holding of the Indian Trade Fair and sponsoring the Conference of the Afro-Asian Organisation in the relevant accounting year were for the advancement of the dominant object and purpose of the trust, viz., promotion, protection and development of trade, commerce and industry in India. Learned counsel for the revenue, with his usual fairness, conceded that the income derived by the assessee from such activities was exempt under s. 11(1)(a) read with s. 2(15) of the Act. It was, however, urged that the objects set out in sub-cls. (v), (z-1) and (z-2) of cl. 3 of the memorandum of association of the Federation were not incidental or ancillary to the main objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper financial management of the affairs of the trust which are incidental or ancillary to the main purpose of the trust. The contention must, therefore, fail. In the result, the reference under s. 257 of the I.T. Act, 1961, made by the I.T. Appellate Tribunal, Delhi-B New Delhi, must be answered against the revenue and in favour of the assessee. There shall be no order as to costs. VENKATARAMIAH J.-I have had the advantage of reading the judgment prepared by my learned brother, A. P. Sen J., and I respectfully agree with his reasoning and conclusion. I share with him my doubts about the correctness of the decision in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC). I would like to say few words of my own on the subject. There can be no objection to a person spending his money on charity. But can he be charitable at the expense of others ? This is a question which necessarily arises when we read s. 11 of the I.T. Act, 1961. Section 11, as it stands now, grants exemption from payment of tax on any income, which would have otherwise been taxable, provided (1) the property yielding income is held under trust or such other legal obligation which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... press any mischief which may have resulted from the misuse of the existing law. Parliament deliberately stepped in by adding the words " not involving the carrying on of any activity for profit " in the definition of charitable purpose in s. 2(15) of the Act, when the tax exemptions available to charitable and religious trusts came to be misused by some for the unworthy purposes of tax avoidance. The law had been so re-structured to prevent allergy to taxation masquerading as charity. The law was thus designed by Parliament to prevent this misuse of tax exemption in the name of charity. The majority decision in Surat Art Silk Cloth Manufacturers Association case [1980] 121 ITR 1 (SC), if I may say so without meaning any disrespect, has virtually wiped off the restrictive words " not involving the carrying on of any activity for profit " occurring in s. 2(15), thereby defeating the very object and purpose of the legislation. It is not the function of a court of law to give the words a strained and unnatural meaning. When the Government had not accepted the recommendation of the Direct Taxes Laws Committee in Chap. 2 (Interim Report, December, 1977) for the deletion of the words " n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t only to the condition imposed by the restrictive words 'not involving the carrying on of any activity for profit' added in the present Act. It is on account of this basic difference between the Indian and English law of charity that Lord Wright uttered a word of caution in, All India Spinners' Association v. CIT [1944] 12 ITR 482 (PC) against blind adherence to English decisions on the subject. The definition of 'charitable purpose' in 'the Indian statute must be construed according to the language used there and against the background of Indian life. " If Indian life should be a true guide for the determination of questions arising in court, then we should go back to our ancient treatises to find out the true meaning of charity which may be either dana or utsarga. In the case of dana the donor gives up his ownership over a thing, makes another the owner of it and cannot thereafter use it nor has he any control over it. When a man makes an utsarga, he no doubt gives up his ownership but gives up the thing for the benefit of all. Opinion is, however, divided whether as a member of the public he can also use a thing thus dedicated for the public. But, in any event, he would no lon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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