TMI Blog1978 (4) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... rt and that question has been referred in T.C. Nos. 780 to 789 of 1976 for the opinion of this court under s. 256(2) of the Act. The identical question referred in those cases relating to each of the same assessment years 1962-63 to 1971-72 is this : " Whether, on the facts and in the circumstances of the case, the income from the purchase and sale of handicrafts, affording monetary facilities, without setting up educational institutions or training centres for advancement of studies would constitute charitable purpose and would, as such, qualify for exemption ? " The assessee is the same in all the cases, namely, the Victoria Technical Institute, Mount Road, Madras. It is a society registered under the Societies Registration Act, 1960 (21 of 1960). In response to a notice by the ITO under s. 148 of the Act on May 6, 1966, the assessee filed a nil return on May 7, 1969, saying that it was a public trust entitled to exemption under s. 11 (1) of the Act. According to cl. 2 of the memorandum and articles of association of the assessee, the objects of the assessee are : " To impart or to assist in imparting instructions to persons of either sex in scientific or artistic princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian Women Workers Executive Committee Fund.--This fund is realised by the sale of handicrafts articles produced by women engaged in needlework--an activity for profit. 3. Library Fund.--This fund has been created for maintaining technical books on arts subjects, lodged in the Connemara Library and for purchasing new books and journals purchased from the proceeds of investments made from the fund and adding the same to the technical books on arts subjects, lodged in the Connemara Library. 4. Sri T. Madhava Rao } These funds are utilised for the Scholarship Fund } grant of scholarship to deserving } students nominated by the Principal, 5. Prince of Wales } School of Arts and Crafts, Scholarship Fund } Madras. 6. C.W.E. Prize Fund.--This fund is meant for awarding a prize to the best student from the School of Arts and Crafts, Madras. 7. Government Travelling Fund.--This fund has been created with a sum of Rs. 20,000 granted by the Government of Madras for making tours to centres of arts and crafts to make personal contacts with a view to educate craftsmen in the matter of better finish and production of new articles required for meeting the market demands. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he agreed with the ITO and dismissed the appeals holding that the income from the general fund and the South Indian Women Workers Executive Committee Fund is taxable. The assessee preferred three appeals before the Income-tax Appellate Tribunal, one for the assessment years 1962-63 to 1968-69, the other for the assessment years 1969-70 and 1970-71, and the third for the assessment year 1971-72. Before the Tribunal it was contended on behalf of the assessee that the object of the assessee-institute would fall within the ambit of " education ", that even if it did not fall within the ambit of " education ", it would fall under the category of " advancement of any object of general public utility " and the act of " buying and selling or selling on commission articles produced by handicraftsmen or otherwise " was not one of the objects of the assessee but only the means of achieving the main object and, therefore, the income from the two funds was exempt from tax, and the decision of the Mysore High Court relied upon by the authorities below was not applicable. On behalf of the revenue, it was contended before the Tribunal that the main object of the assessee did not fall under " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as right in holding that the income of the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961 ? (2) Whether, on the facts and in the circumstances of the case, the income from the purchase and sale of handicrafts, affording monetary facilities without setting up educational institutions or training centres for advancement of studies would constitute 'charitable purpose' and would, as such, qualify for exemption ? " As stated earlier, the Tribunal referred the first question alone by its order dated April 29, 1974, and the second question was referred on November 30, 1976, as per this court's order dated November 6, 1976, in T. C. P. Nos. 86 to 95 of 1976. As stated earlier, according to the assessee's memorandum and articles of association, the activities of the assessee are : (a) Establishing technical libraries, museums, colleges, schools, classes or workshops in Madras and throughout South India. (b) Making grants in aid of such technical libraries, museums, colleges, schools, classes or workshops as may be affiliated to the institute in Madras and throughout South India. (c) Training teachers of technical subjects for the whole of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accumulated or set apart is not in excess of twenty-five per cent. of the income from such property." The law governing such income has undergone a change. In the Indian I.T.Act, 1922, such income was governed by s. 4(3)(i) and prov. (b) thereto. Section 4(3) of the Act of 1922 directed that any income, profits, or gains falling within the classes specified therein shall not be included in the total income of the person receiving them. The class of income specified in cl. (i) of sub-s. (3) was : " ....... any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto." Proviso (b) to s. 4(3)(i) of the Act of 1922 stated : " Provided that such income shall be included in the total income- ....... (b) in the case of income derived from business carried on on behalf of a religious or charitable institution, unless the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back into the net of taxation. We negatived a similar contention in Commissioner of Income-tax v. Krishna Warriar [1962] 44 ITR 828 (Ker) and we see no reason to differ from what we said in that decision." The learned judge held that prov. (b) to s. 4(3)(i) was not attracted and that the income was exempt from tax and they observed that they were dealing with a case where the business itself is held under a trust for religious or charitable purpose, namely, promotion of charity, education and industry, and not with a case where the business is conducted on behalf of the religious or charitable institution. Two things have to be noticed so far as this decision is concerned. The first is that the business itself has been found to be held under a trust for religious or charitable purpose, namely, promotion of charity, education and industry, while in the present case, the business carried on by the assessee in buying and selling or selling on commission articles produced by handicraftsmen or otherwise itself has not been held under the trust for any religious or charitable purpose; but the alleged educational activities by way of granting scholarships and prizes and spending mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s fit. In other words, in the language of the earlier decision, which is binding between the parties, the business of conducting kuries was held under trust by the company; conducting kuries was not itself a purpose or object of the company; it was a property of the company." The point to be noted in this connection is that in the second Dharmodayam Company's case [1974] 94 ITR 113 (Ker), the decision of the Division Bench of the Kerala High Court in the first Dharmodayam Company's case [1962] 45 ITR 478 (Ker) which had become final by reason of the withdrawal of the appeal filed against that decision by the revenue in the Supreme Court has been held to be binding between the parties, and therefore, the business of conducting kuries was found to be held under trust by the company and conducting kuries itself was held to be not the purpose or object of the company. The second thing to be noted about this decision is that the learned judges of two different Benches of the Supreme Court- one larger and the other smaller- have expressed different opinions regarding the correctness of the view of the Division Bench of the Kerala High Court. In the decision of the larger Bench, namely, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industry for the purpose of making profit'......... In Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC) it was held by this court that though a number of objects, including the setting up of educational institutions, were mentioned in the trust deed as the objects of the trust, at the relevant time the trust was occupied only in supplying the Kannada speaking people with an organ or organs of educated public opinion. This, according to the court, was not 'education' within the meaning of section 2(15) of the Act of 1961, which expression was to be understood in the sense of systematic instruction, schooling or training. Learned counsel for the revenue relies strongly on the observation of Khanna J. at page 242 of the report 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 section 2(15) of the Act of 1961, even if the purpose of the trust is ' advancement of any other object of general public utility' it would not be considered as a charitable purpose unless the purpose does not involve the carrying on of any activity for profit. This has no application in the instant case si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f knowledge on all matters of general interest and welfare, (b) founding and running reading rooms and libraries and keeping and conducting printing houses and publishing or aiding the publication of books, booklets, magazines, etc., in Kannada and other languages with the object of educating the people, (c) supplying the Kannada speaking people with the organ or organs of educated public opinion and conducting journals in Kannada and other languages and (d) helping directly or indirectly societies and institutions which have all or any of the aforesaid objects in view. In 1935, the assets of the trust were of the value of Rs. 4,308. The trust carried on business of printing and by 1962 the net value of the assets of the trust was Rs. 1,73,571. The question was whether the income of the trust, which at the relevant time was publishing newspapers and journals, was exempt from tax under s. 11 read with s. 2(15) of the I.T. Act, 1961. Khanna J., speaking also on behalf of Gupta J., has observed in that decision (pp. 240, 241) : " The communication sent by the sole trustee to the Income-tax Officer shows that the trust at present is carrying out only the last mentioned object of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, it would be necessary to show that: (1) the purpose of the trust is advancement of any other object of general public utility, and (2) the above purpose does not involve the carrying on of any activity for profit. Both the above conditions must be fulfilled before the purpose of the trust can be held to be charitable purpose." The Supreme Court noted in that case the emphasis on the business activity of the trust and further observed (p. 243): " Ordinarily profit motive is a normal incident of business activity and if the activity of a trust consists of carrying on of a business and there are no restrictions on its making profit, the court would be well justified 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. " The next decision relied upon on behalf of the revenue is of a Division Bench of the Calcutta High Court in CIT v. Indian Chamber of Commerce [1971] 81 ITR 147 (Cal) which came up for consideration in appeal before the Supreme Court in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796. The Division Bench of the Calcutta High Court observed (p. 152) : " The expressio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or otherwise howsoever by way of profit. The learned judges have observed (pp. 804, 805) : "........ the emphasis is not on the object of public utility and the carrying on of related activity for profit. On the other hand, if in the advancement of these objects the chamber resorts to carrying on of activities for profit, then necessarily section 2(15) cannot confer cover. The advancement of charitable objects must not involve profit making activities. That is the mandate of the new amendment ...... To sum up, section 2(15) excludes from exemption the carrying on of activities for profit even if they are linked with the objectives of general public utility, because the statute interdicts, for purposes of tax relief, the advancement of such objects by involvement in the carrying on of activities for profit. " The next decision relied upon on behalf of the revenue is of the Full Bench of the Kerala High Court in Dharmaposhana Company v. CIT [1975] 100 ITR 351. There the learned judges have observed (p. 356): " Perhaps it is unnecessary to define precisely and finally the real meaning of the words 'not involving' even in this batch of cases, for, even if we apply the meanings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a company is a main object or is only an incidental object loses much of its significance. We say so because we conceive that even in cases where a business is conducted not in carrying out the objects of the company but only in aid of achieving the objects of the company if that business is so linked or connected with the objects of the company and, if the objects are such that it will fall only under ' objects of general public utility ', the charitable purpose will cease to be a charitable purpose as defined in the Act. And if the incidental object or even the purpose of the company is business, as conducting kuries is, the income or at least a specified part of it must be exclusively applicable to charitable purposes in order that income or the specified part thereof could be exempted from tax. A complete discretion in the directors to apply the funds to charitable and non-charitable purpose (which in this case would include business) would make the trust a non-charitable trust. " In that case, the main objects of the assessee-company were, inter alia, (1) to give charity, (2) to promote education, and (3) to establish or aid in the establishment of associations, etc., wi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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