TMI Blog1987 (3) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... for student members, at least once a week. Article 20 gives power to the managing committee to reject any application for membership without assigning any reasons. Article 39 gives, on dissolution, power to the managing committee, thus : "In the event of the dissolution of the club, the property of the club shall be sold and the proceeds thereof shall be made over to some charitable or educational institution as decided upon by a majority of all the members of the club entitled to vote." The other articles are not necessary for the purpose of this case and hence they are omitted. Rule 4 of the Rules framed under article 25 of the constitution of the club provides for payment of entrance fees and subscriptions for ordinary members; the entrance fee is Rs. 25 and the subscriptions Rs. 50, and for student members or lady members, the entrance fee is Rs. 15 and the subscription, Rs. 10. Rule 7 provides regular riding fees-for ordinary members, the fee is Rs. 2 per ride and for student members or lady members, Re. 1 per ride. The other rules are not necessary and hence they are omitted. The Income-tax Officer for the assessment year 1969-70 issued notice under section 148 of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-club satisfied the requirement of the definition of charitable purpose excluding the exclusionary clause under section 2(15) of the Act. With regard to the second contention of the Revenue, that though the assessee may be held to be imparting training in sports for charitable purpose, since it involves in itself an activity for profit, the exclusionary clause excludes the exemption accorded under section 11(1)(a) of the Act, the Appellate Tribunal held that profit-making is not the real object. The club is utilising racing for the purpose of generating funds. It is further held that there is a fundamental distinction between an object which itself involves an activity for profit and an activity carried on for the purpose of achieving the objects which are otherwise charitable. In the second category, it held, the means are adopted to feed the charity. To put it differently, it held, if an activity for profit has to be undertaken so as to fulfil the objects, then only the exclusionary clause applies. It also held that promotion of racing is not an activity for profit. Promotion of racing can be achieved by simply training the members of the club. It is not obligatory on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and sole object of the assessee is to conduct races and it is a commercial activity. The object of racing and conducting races are not ancillary or incidental activities. Racing itself is one of the main objectives. When there are several objects, some charitable and others non-charitable, if the management is given absolute discretion to incur the expenditure for any one of the purposes, it is not a charitable purpose. Racing being one of the main objects, it ceases to be charitable. Therefore, the exclusionary clause gets attracted and the club is not entitled to exemption. In support thereof, he placed reliance on certain decisions which we would advert to at appropriate places. At first blush, though the contentions of Sri Murthy were attractive and alluring and we were inclined to accept them, but on a deeper probe, we found it difficult to accede to any of the contentions raised by him. The first contention of Sri Murthy is that since the activities of the club, viz., promotion or popularisation of riding, mounted sports, racing and polo compendiously called equestrian games and imparting training in the art of horsemanship, are exclusively confined to the members of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well-being includes receiving training in the art of horsemanship. Racing can be promoted as a sport without betting. The object envisaged in article 2 appears to be to encourage racing as part of equestrain games or sports. To the student and women members, riding or racing inculcates endurance and a means to achieve success or health building or to be agile. It may be a hobby to some or some may take to profession as jockeys. The club established a training school with expert trainees with nominal fee. Equestrian games indisputably contribute to physical well-being and robust health to promote or encourage activities which are calculated to usher in a healthy society. Racing is also necessary concomitant of mounted sports, riding and polo. Therefore, imparting training to any member of the society, be it by a club or an association, which specializes in promoting and popularising the above art of horsemanship, is intended for the benefit of general public. The immediate question, therefore, is whether the club restricted its membership only to a specified class of the public. It is true that there is discretion given, under article 20 of the constitution of the club, to the mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Film Chamber of Commerce [1981] 129 ITR 22 (Mad), though services were mainly confined to the members of the associations, it was held by the Madras High Court that the advantage to the members is only incidental and that a benefit is sought to be given to the general public and, therefore, the object is of general public utility. We respectfully agree. In CIT v. Breach Candy Swimming Bath Trust [1955] 27 ITR 279 (Bom), Chagla C.J., speaking for the Bench, held thus (p. 288): " The object of setting up the swimming bath especially in modern times is obviously to advance public health; and, as we pointed out, one must not forget that access to this swimming bath is open to a section of the public. It is true that the only section of the public that could be benefited by this bath would be the European public in Bombay but it is well settled that an object of public utility need not be an object in which the whole of the public is interested. It is sufficient if a well-defined section of the public benefits by the object, and the object of the trust in the case before us was to benefit clearly a defined section of the public living in Bombay." Though in Scottish Flying Club Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in a particular country or province. It is sufficient if the intention is to benefit a section of the public as distinguished from specified individuals. " Therefore, when the object is for the general public utility, it need not necessarily be for the benefit of the whole of the public. In Breach Candy Swimming Bath Trust's case [1955] 27 ITR 279 (Bom), the benefits are confined to a specified section of the European public and among them there is no prohibition for admission. The ratio with equal force applies to the facts in this case. The benefit to the individual members is incidental, flowing from their membership but not exclusively confined to them. It is open to every eligible member to apply for admission and receive training. If the benefit is intended to percolate to discernible section of the general public, the concept of general public utility is discernible therefrom and is satisfied. The criterion prescribed under the fourth clause of section 2(15) of the Act is attracted and thereby it becomes an object of general public utility. The next contention of Sri Murthy is that the club is neither a trust nor an association nor an institution constituted for a char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Government is given power to grant exemption by a notification published in the Official Gazette. That does not mean that if an association or institution establishes that the games or sports under its control, supervision, regulation or encouragement are of general public utility, it cannot, as of right, seek exemption under section 1l(1)(a) of the Act. Power under section 10(23) is one of discretion given to the Government. It may give exemption or refuse to accord exemption. If an assessee is otherwise entitled to exemption under law or under any other relevant provision of the Act like the one under section 1l(1)(a), it is always open to the assessee to satisfy the authorities of its/his entitlement and seek exemption. Therefore, the doctrine of mutuality is incompatible with the scheme of the Act. It is to be remembered that the Legislature is aware of the existence of section 10(23) and section 11 (1)(a) of the Act. If the Legislature intended to exclude the application of section 1l(1)(a) of the Act to sports, we would expect to find an express mention in that regard in section 1l(1)(a) itself. The Legislature is always prompt to introduce explanations or excepti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 980] 121 ITR 1. In that case, the assessee, a company incorporated under the Companies Act, 1913 after certain vital amendments in its memorandum of association, was registered under section 25 of the Companies Act. Its objects as amended were: (a) to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth ; and clauses (b) to (e) provide the objects which are incidental to the business connected therewith. The contention raised was that since the assessee involved itself in an activity for profit, the exclusionary clause in section 2(15) of the Act is attracted and thereby section 11 of the Act is not applicable. Bhagwati J., as he then was, speaking for himself, Untwalia J. and Tulzapurkar J. with whom Pathak J., as he then was, agreed but wrote separate judgment, considered the objects and held thus (p.. 17): " It is clear on a plain natural construction of the language used by the Legislature that the ten crucial words 'not involving the carrying on of any activity for profit' go with 'object of general public utility 'and not with 'advancement'. It is the object of general public utility which must not involve the carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 left its intention to be gathered by doubtful implication from an amendment made in the definition clause and that too in language far from clear.... (p. 22) What these last concluding words require is not that the trust or institution whose purpose is advancement of an object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose involves the carrying on of such activity, but the predominant object of such activity must be to subserve the charitable purpose and not to earn profit. The charitable purpose should not be submerged by the profit-making motive; the latter should not masquerade under the guise of the former. The purpose of 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 section 2, clause (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said in Sole Trustee, Loka Shikshana Trust's case [1975] 101 ITR 234, 256 (SC) that : `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. The test now is, 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'. We wholly endorse these observations. " In re Trustees of the Tribune [1939] 7 ITR 415 (PC), the purpose of the trust envisaged a commercial activity-newspaper charges rates to its readers and advertisers at ordinary commercial rates. While considering the question whether it is entitled to claim exemption under section 4(3) of the Indian Income-tax Act, 1922 (XI of 1922), the Privy Council held that the newspapers and press were not established for private profits. The object of the trust was to supply the public with an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. The true purpose must be genuinely and essentially charitable." Therefore, in the light of the above law, we have to see what is the object and purpose of the club and whether the profit derived is incidental to advance the object and purpose of the club, or its main purpose is to earn profits in carrying on racing. The restrictive clause must be, as held by the Supreme Court, read along with " the advancement of any other object of general public utility ". The object of the club is to impart training to its members in equestrian games to make them perfect in the art of horsemanship. Its object is not conducting races as such. It is not in the nature of carrying on any business activity. The imparting of training in the art of horsemanship especially to student members is the purpose. So, the restrictive clause must be read with the advancement of the art of horsemanship which is of general public utility and not with the object of racing as such. The charitable purpose is imparting training in equestrian games to make the trainee acquire perfection and proficiency in the art of equestrian games. Horsemanship is an essential part of the game. Without acquiring proficiency in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable trust that carries on business for mobilising funds cannot be granted the benefit of section 11 of the Act. In Breach Candy Swimming Bath Trust's case [1955] 27 ITR 279 (Bom), selling eatables, etc., and deriving income therefrom is only incidental to running of the swimming pool and is exempt from taxation. This ratio applies to the facts of this case too. Therefore, the contention of the Revenue that the assessee is engaged in the activity of earning profits is devoid of force and conducting races is only a fund-raising activity as a means to achieve the end of promoting equestrian games. Its primary and dominant object is only promotion of equestrian games. The assessee had applied the surplus only for the purpose of equestrian activities. It is also of necessity to note that article 39 of the club provides that on dissolution of the club, the general body has to sell the property and make over the sale proceeds to any charitable or educational institution as decided upon by a majority of the members of the club. Thereby, no member of the club has any direct or incidental personal advantage in the property of the club. The entire property has to be made over to any charit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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