TMI Blog1982 (6) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of the students in such lines of courses as the trustees may from time to time deem fit. (b) Declaration of prizes for schools, colleges or other educational institutions. (c) Establishment and maintenance of hostels and/or boarding houses and grants of free boarding and lodging to poor and deserving students studying in any schools, colleges and educational institutions or receiving education or training and upon such terms and for such period in each case as 'The Trustees' may deem fit. (d) Grant monetary assistance including scholarships and/or loans to poor students, whom the trustees may deem to be deserving thereof, to enable them to receive such education, training and qualification as academical, professional, vocational, industrial, commercial, technical, scientific, physical, sociological, journalistic and arts and crafts and upon such terms and for such period in each case as the trustees may deem fit. (e) Supply of books, food and clothes, schools or colleges fees to poor students or grant of monetary assistance to them for such purposes. (f) The promotion of science, art, education and learning in all its branches. (g) Establishment, maintenance and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts." 2. The trustees had a discretion to keep the surplus in its present form to convert the same or part thereof and invest the same in any industry or business undertaking which they thought fit. They could also deposit with any other firm, company, corporation or bank and also obtain securities of stock and shares, etc., for completion of the objects of the trust, the trustees were given certain powers, which are normal for such accomplishment. One of the powers given was to purchase immovable properties and start any industry or any other business undertaking. Other powers were of a general nature. The first trustees were also named in the trust deed. The trust had been allowed exemption in earlier years. 3. For the assessment year 1977-78, the ITO noted that while some of the objects fall in the category of relief the poors, education or medical relief, some of the objects were objects of general public utility. The ITO passed his order on 9-10-1979, i.e., before the decision of the Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association [1980] 121 ITR 1. The ITO was of the view that insofar as the objects of the general public utility a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied the maximum marginal rate. He proceeded to compute the income at Rs, 18,250. 5. When the matter came before the AAC, it was contended before her that the provisions of sections 13(1)(bb) were not applicable to this case. It was pointed out that in this case the objects were not confined to the first three legs given in the definition of 'charitable purposes' but also to the fourth leg of general public utility. It was pointed out that the trust had been allowed exemption under section 11 in the earlier years. It was contended on behalf of the assessee that the meaning of section 13(1)(bb) was that none should make a business income out of relief the poor, education and medical relief to earn exemption under section 11 so as to bring it in consonance with the objects of general public utility. The AAC was, however, of the view that the assessee could not get benefit in view of the provisions of section 13(1)(bb), which was in force in this year. She found that the objects of the trust included relief to poor, education and medical relief, and it was an admitted position that the trust had not carried out any object of general public utility but had confined itself to reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1)(bb) in the judgment of the Supreme Court in the case of Surat Art Silk Cloth Mfrs.' Association. The relevant observations of the Supreme Court in Surat Art Silk' case are as under: "... Now section 13(1)(bb), introduced in the Act of 1961 with effect from 1st April, 1977, provides that in the case of a charitable trust or institution for the relief of the poor, education or medical relief which carries on any business, income derived from such business would not be exempt from tax unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution. Where, therefore, there is a charitable trust or institution failing within any of the first three categories of charitable purpose set out in section 2, clause (15) and it carries on business which is held by it under trust for its charitable purpose, income from such business would not be exempt by reason of section 13(1)(bb). Section 11, sub-section (4), would, therefore, have no application in the case of a charitable trust or institution failing within any of the first three heads of 'charitable purpose'. Similarly, on the construction contended on behalf of the revenue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he business is carried on in the course of the actual carrying out of a primary purpose of such a trust. He submitted that in the present case, the business of fabrication and sale of cloth could not be considered as having been carried on in the course of the actual carrying out of a primary purpose of this trust. It was further pointed out that the provisions of section 13(1)(bb) do not disentitle a business for exemption but restrict the exemption to such business, which is carried on in the course of the carrying out of a primary purpose of the trust. 10. We have carefully considered the facts of the case and the rival arguments. From the orders of the ITO as well as the AAC, one thing is clear that they have not correctly followed the provisions of section 13(1)(bb) read with section 11. Section 13(1)(bb) provides for the exclusion of business income from exemption and does not provide for the denial of exemption under section 11. Other incomes like rent and interest have still to be treated as exempt under section 11 if the income has been applied for charitable purposes as required under section 11. It was necessary for the ITO to compute the income from business and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itable 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 activity for profit which arises in the pursuit of the primary purpose of a trust created with the object of relief of the poor, education or medical relief. For instance, in the case of a trust for vocational training, it would be essential for the trust to carry on its vocation. We, therefore, recommend that law should be suitably amended to provide that where a trust for the relief of the poor, education or medical relief derives income from any activity for profit its income would be exempt from income-tax only if the said activity for profit is carried on in the course of the actual carrying out of a primary purpose of the institution. We wish to make it abundantly clear that even where a business is settled in trust, the trust should fulfil this condition if it is to enjoy tax exemption in respect of the income from such business. So far as trusts for any other object of general public utility are concerned, pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are predominantly for education, medical relief and relief to poor. It is true that there are a few objects of general public utility also mentioned. The learned counsel for the assessee has, however, not challenged the position that the trust in question is for the purpose of relief to the poor, education and medical relief. In fact, it had been stated, specifically, before the ITO that the trust has not carried out any object of general public utility. Now, the business in the present case had not been received as the corpus, but the trustees had been given power to start any business undertaking for providing finance to other objects. The plea of the assessee is that the income from this business has to be applied for charitable purposes and, having regard to the provisions of section 2(15) and the decision of the Supreme Court in Surat Art Silk Cloth Mfrs.' case, the income from business could not be exempted. We are, however, not persuaded by this argument of the learned counsel for the assessee, in view of the language used in section 13(1)(bb). As pointed out above, the substance of section 13(1)(bb) is very much different from the language used in section 2(15) regarding th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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