1. The assessee is a public charitable trust created by a deed dated 30-7-1960. The assessee was granted exemption under Section 11 of the Income-tax Act, 1961 ('the Act') from year to year until the assessment year 1977-78 when for the first time exemption under Section 11 was denied to the assessee by invoking Section 13(1)(bb) of the Act enacted by the Taxation Laws (Amendment) Act, 1975. The denial came in the wake of certain additions to the trust property which, according to the income-tax authorities, brought the trust, within the mischief of the above provision. The additions consisted of a cinema theatre donated by the settlor himself named Prabhat Cinema situated in Ulhasnagar on 15-2-1966. The assessee-trust gave the theatre on licence to Rajshri Associates on 17-2-1977. On appeal, the Commissioner (Appeals) confirmed the ITO's orders. According to him, the assessee was carrying on cinema business in the years under appeal and such business was not carried on in the course of the actual carrying out of a primary purpose of the trust. Hence, these appeals before the Tribunal.
2. The learned counsel for the assessee has pointed out that the assessee is a public charitable trust created under a properly drawn out deed and that it carries out a charitable purpose cannot be disputed. The deed of trust does not authorise the trustees to carry on any business or any activity in the nature of a business even though there was no negative clause as regards this matter. After the receipt of the theatre as a donation, the assessee has not carried on any business of running the theatre. The theatre itself did not function as such up to 1977. It was not run by the owner from whom the donor had purchased the theatre or the donor himself or even the assessee-trust.
It was given on lease to others. Referring to the several clauses of the lease agreement, the learned counsel has pointed out that the provisions made it clear that the lease was a purely part time hiring out of certain assets. The hiring out was done on a play time basis.
The assessee having got a ready-made theatre as a donated asset, the trustees were bound to get the maximum income from the trust fund for the benefit of the cestui que trust. The assessee could find no one who would take the theatre for the whole day and for all shows. Agreement and leasing out were, therefore, done with the present lessee for a part of the period. For the remaining period, the assessee retained the right and could lease out the theatre to other parties. As a matter of fact, this was never done. It was in order to protect the trust property that the assessee had maintained the control and management over them. This was also necessitated by the fact that the assessee could get a lessee only for part of the available play time. In order to protect the assets, the assessee had to engage his own staff. When the asset could be leased out to two or more lessees, if the assessee had not engaged his own staff and supervisors, it would have been difficult to fix the responsibility. With different lessees if there be no control and management by the assessee the machinery and other assets of the assessee could be damaged. The assessee could not as a landlord in the interest of the trust property have left the possession, protection and maintenance of such property and furniture and fixture therein and also the full control, protection and operation of the equipments to the particular licensee in the present case. The mere fact, therefore, that the assessee had control over the conduct of the theatre, cannot be held as a reason for holding that the assessee was carrying on any business by itself. Referring to the power the donor has invested in the assessee to carry on the business, if necessary, it is pointed out that this is a matter of general precaution and as a matter of fact, the assessee did not carry on any business but held the cinema house only as an investment and not a business asset. This did not, in any way, conflict with the power the trustees gave the assessee to invest amounts in any business.
3. According to the learned counsel, the factual details of the case conclusively prove that the assessee-trust was holding this asset only as an investment and not as a business proposition. The theatre itself was not utilised by the donor himself even for a day for running or exhibiting cinema. The assessee itself did not use it for the exhibition of films. In the hands of the assessee, the theatre could not be called a commercial asset in the sense it is understood commercially or even by the judicial decisions. Reference is made in this connection to the decision in the cases of Seth Banarsi Das Gupta v. CIT  106 ITR 559 (All.), Narain Swadeshi Wvg. Mills v. CIT  26 ITR 765 (SC), Nalinikant Ambalal Mody v. CIT  61 ITR 428 (SC), and New Savan Sugar & Gur Refining Co. Ltd. v. CIT  74 ITR 7 (SC). In the last case stress was laid on the fact that there was no nexus between the production of the factory and the royalty received by the assessee. These decisions and also the decision in the case of Sultan Bros. (P.) Ltd. v. CIT  51 ITR 353 (SC) clearly pointed out to the intention of the assessee as an important factory in coming to a decision as to whether a business is carried on or not. The decision in the case of CIT v. D.L. Kanhere  92 ITR 535 is a clear case of a lease of a cinema house considered in a binding decision of the Bombay High Court. Reference is made also to the decisions in the cases of East India Housing & Land Development Trust Ltd. v. CIT  42 ITR 49 (SC), Karanpura Development Co. Ltd. v.CIT  44 ITR 362 (SC) and CITv. Ajmera Industries (P.) Ltd.  103 ITR 245 (Cal.). The objects, powers and intention of the owner of the asset have to be seen for the purposes of a decision on this point.
The decisions in the cases of Croft (Inspector of Taxes) v. Sywell Aerodrome Ltd.  10 ITR (Suppl.) 96 (CA) and Common v. Rotunda Hospital, Dublin (Governors) 7 TC 517 relied upon by the Commissioner (Appeals) actually support the assessee's case.
4. For the department, stress is laid on the orders of the authorities below. Under Section 13(1)(bb) introduced with effect from 1-4-1977 the test to be applied is whether the assessee was carrying on a business except in the circumstances mentioned therein. In the present case, the donor acquired the theatre as a commercial asset. He donated the commercial asset to a trust created by him. It, thus, continued to be a commercial asset even in the hands of the trust. Clause (1) of the agreement conferred on the trust not only a right to carry on a business but also a duty to do so. The trust deed also authorises the trustees to make investment in business which normally should include running a business as well. The management and control of the theatre was exclusively with the licensor. Here was a case of continuous activity which in the hands of any one would amount to a business activity. Part of the agreement, thus, rested with the assessee and only a passive part of it thereof, namely, acquiring the income rested with the lessee. Reference is made in this connection to Clauses 4(a) and 4(6) of the agreement. The assessee was also in receipt of income from extra shows, slides, advertisement in the cinema all of which constituted a clear carrying on of a specific business. The assessee had applied for licence from the various authorities for all these activities and got the same. The fact of acquiring the licence itself indicated the assessee's intention to use this trust property as a commercial asset. Relying on Section 2(13) of the Act, it is pointed out that the assessee was clearly running the business of exhibiting the films. It is alternatively contended that the letting out of business premises in a running condition at any rate constituted business.
5. The question beforelis lies in a narrow field. It has a twofold aspect and from either of these, we have no hesitation in coming to the conclusion that the provisions of Section 13(1)(bb) cannot be applied to the case. The first arises from the nature and attributes of a trust and the second from the nature of the source the income derived from which is taxed.
6. The assessee is a public charitable trust created by a deed dated 30-7-1960 and recognised as such by the Charity Commissioner and other authorities including the Income-tax Department, which granted exemption under Section 11 from year to year. The law relating to the trusts clearly prohibits any alteration or modification of the nature and the objects of a trust from what the author of the trust intended and clearly specified them to be except under directions from the Court and in special circumstances. If, therefore, any modification of the nature of the trust, onerous or otherwise, and inconsistent with the original object is attributed to the trust, the presumption is that it cannot be accepted. In the presence case the trust had certain assets and certain objects. The assets did not involve carrying on of a business as a property or investment. If, therefore, Section 13(1)(bb) was in the statute book at the lime the trust was created, certainly the trust would not have come within the mischief of that section. The implications of invoking Section 13(1)(bb) are so large that in an unfortunate case its application could even destroy the trust. The trustees entrusted with certain functions in a fiduciary capacity could not be a party to such destruction of the trust. If, therefore, any activity is started by the trustees or imposed on the trustees, which leads to such a result they are bound not to accept them. In other words, no onerous responsibility which strikes at the root of the objects of the trust can be accepted by the trustees.
7. It is against the above background that we have to see the effect of the assessee-trust accepting a donation. On 15-2-1966, the original settlor of the trust who had acquired a cinema theatre gave it as a donation to the trust. The cinema theatre itself was not an active or working one, was in a dilapidated condition and seems to have been acquired by the settlor in an auction. He remodelled the cinema theatre, made it fit to be run for exhibition of films and in that condition donated it to the trust. The clauses of the agreement transferring the cinema theatre to the trust laid down several rights and duties on the trustees but in view of their clearly fiduciary capacity, all these responsibilities, rights and duties would be subordinate to the prime interest of the trust itself. Even if, therefore, the agreement authorises the trustees to run the cinema theatre as a business to the extent that it is inconsistent with their fiducial duties to protect the interests of the trust, they cannot do so. In fact, in the present case, facts clearly indicate that neither the settlor nor the trustees of their own ran the cinema theatre for the purpose of exhibiting films. An asset received as a donation by the trust while it should not conflict with its interests or objects should certainly be utilised by the trustees for the good of the trust. If a business is run, it can lead to a profit; it can as well lead to a loss. In the latter case, if the loss goes beyond certain limits, it can even wipe off the original trust funds. The trustees cannot by accepting an onerous donation be a party to this. Even if, therefore, the original trust deed permitted the trustees to carry on a business--which we are not sure, the trust deed permits them to do--such a responsibility cannot be accepted by them through the medium of a new donation. The fact that such donation was made by the original settlor makes no difference. The moment the original settlement is completed, the settlor has nothing to do with the trust and any donation given by him would stand in the same position as a donation by a stranger. Prima facie, therefore, the trustees could not have, whatever be the provisions of the deed of a donation, accepted responsibility for running a business.
8. Secondly, if the trustee was not subject to the provisions of Section 13(1)(bb) it cannot accept a donation, on account of which it comes under that Section 13(1)(bb) and deprives the trust of exemption from tax to which it was earlier entitled and which the settlor perhaps expected it to have. If, therefore, the result of the donation is attraction of the provision of Section 13(1)(bb) with the consequent chance of the trust property being eroded, not only on account of the fluctuation of the fortunes after business but also by the levy of tax, such a donation also cannot be accepted by the trustees. From very point of view, therefore, we have no hesitation in holding that if the result of taking a donation and a property leads to loss in business or levy of tax with the consequent likelihood of the erosion of the trust property, the trustees cannot be regarded as accepting such an obligation. Neither in the trust deed nor in the agreement taking over the cinema theatre, are there provisions which go against our above view. Any imposition of a duty or right on the trustees by an interpretation of the deed would, therefore, be erroneous if it is inconsistent with the deed of trust such clauses involving the trust or trustees should be treated as non-existent.
9. On the question of the source of the income also we accept the assessee's claim. Neither the donor nor the trustees as such have started or continued the business of exhibiting films in the theatre.
It cannot, therefore, be stated that the assessee was dealing with this asset as if it were for a commercial or business purpose in its hand and so should continue to use the asset in the same manner. This is mentioned because in some of the decisions strongly relied on by the department, the question was whether a business activity carried on by the assessee was continued or not even though he has leased out or otherwise made machinery, plant, etc., ava4ilable to others. Those decisions do not apply to the present case. The question whether an asset is a commercial asset or not itself is a complex one depending not only on the nature of the asset or the use to which it can be put but also the person or persons owning or dealing with it. Thus, a building may be purely residential and not commercial in the hands of a person who lives there. It could be termed commercial if a business is carried on there. In our view, therefore, there is no magic in classifying an asset as commercial or otherwise ignoring the attendant circumstances such as the ownership, use to which it is put, etc.
Merely because exhibiting films in a theatre could be a business, ownership of a theatre cannot be regarded as involving the owner in a business. The decisions also supply examples where obviously assets used for business have been given out on lease and treated as such.
Section 56 of the Act clearly provides for leasing out machinery, plant, etc. There is, therefore, nothing inconsistent in law in the owner of even a business asset dealing with it not as a businessman but as a mere owner.
10. In the circumstances of the present case, the assessee has only leased out the asset at stipulated rent to others. A scrutiny of the agreement in this regard made by the assessee and other exhibitors of films does not lead to any conclusion that the assessee is itself exhibiting the films. An argument was raised on behalf of the department to support its case of a business carried on by the assessee relying on the fact that employees were appointed by the assessee for running the theatre, licence was taken by them, etc. In our view, these do not prove that the assessee itself did the business. If a cinema theatre is to be run on lease, certainly it must have a licence for exhibition of films. The licence is generally given to the owner of the premises. It would be imprudent on the Contrary for the owner of a cinema theatre not to have a permanent licence for himself but to depend on any temporary licence for exhibition of films owned by a person who wants to let out his theatre. In fact we are not sure that the licence would be even issued to persons who do not own premises or have taken on lease premises for exhibition of films. This point, therefore, does not go against the assessee's claim. The evidence indicates that the assessee has been able to let out the theatre only for some of the shows. It was pointed out that they could not find a lessee who would take the lease of the theatre for all shows and for all days. This has not been proved to be wrong. Be that as it may, leasing out the asset to whomsoever is available cannot make the lease a matter of carrying on the business. It still remains a lease. It is against this context that the assessee has claimed that in order to ensure the safety of the machinery, etc. It has to engage its own employees and technicians. Otherwise, as correctly claimed responsibility for loss of damage cannot clearly be fixed on a lessee who takes the theatre on hire for part of the time or when there are more than one lessee utilising the theatre in succession. The employment of its own personnel, taking of the licence and the consequent acceptance of the liability to pay entertainment tax, etc., would fall, in our view, only within taking prudent steps to maintain an asset in the best money earning form. That cannot make the assessee a person running the business. It may be mentioned that even during the free time when the lessees are not utilising the theatre, no case of the assessee exploiting the theatre as a business has been brought to our notice. The fact that as an aid to the running business of a theatre, stalls were let out or advertisement space was let out would not change the nature of the activity as can be inferred otherwise. An important point to note is that under the present arrangement, the assessee cannot make a loss at any time. If the assessee were to run a business, loss is possible. Apart from this being contrary to the objects of the trust, it may certainly be destructive of the assets of the trust. Factually, therefore, we have to hold that the assessee is not carrying on a business but has only let out the asset for fetching the maximum lease income.
11. The decisions also support the assessee's case. That the intention of the assessee to make good income out of the asset and not to do business is a relevant criterion, is clear from the decisions in the cases of New Savan Sugar & Gur Refining Co. Ltd. (supra) and Sultan Bros. (P.) Ltd. (supra). The decision of the Bombay High Court in the case of D.L. Kanhere (supra) directly deals with the case of a cinema lease and fully supports the assessee's stand. The decision in the case of Karanpura Development Co. Ltd. (supra) lays down that the objects, powers and intention of the assessee have to be seen in arriving at a decision about the activity of the assessee. Both on facts and in the light of the principles laid down by the decisions, we hold that the assessee-charitable trust does not carry on a business and would not be caught by the provisions of Section 13(1)(bb).