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Tor Steel Research Foundation Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Kolkata
Decided On
Judge
Reported in(1992)42ITD39(Kol.)
AppellantTor Steel Research Foundation
Respondentincome-tax Officer
Excerpt:
.....of the business even though a clock (sic) of a trust has been given to it... in the case of this trust profit is the main object as it was when the same business was conducted by the foreign company and services are provided only to those who can afford to pay for it. in cannot certainly be said that the business acquired the characteristic of 'charitable' nature by the change in the ownership of the business.i find that the business continues to be the same as before and is conducted purely on commercial lines." it will be clear from these lines that the department has viewed with disapproval the claim that the assessee is a public charitable trust when the activities remain the same both before and after the change in the ownership of the "business". this misconception if we may say.....
Judgment:
1. These three appeals filed by the assessee pertain to the assessment years 1981-82 to 1983-84. For the assessment years 1981-82 and 1982-83, they are directed against the common order of the Commissioner of Income-tax, dated 19-2-1990, passed under Section 263 of the Income-tax Act. For the assessment year 1983-84, the appeal is directed against the order dated 24-3-1987 passed by the CIT(A) in appeal against the assessment order under Section 143(3) read with Section 164(1)/144 A of the Act. The issue in all the appeals is common; in fact, while passing the order under Section 263, the CIT has relied on and adopted the reasons, set out in the order of the CIT(A) for the assessment year 1983-84. Since the issue is common and since all the appeals were heard together on the same day, we dispose them of by a common order, for the sake of convenience.

2. The question posed before us for decision is whether the assessee-trust is liable to be assessed at the maximum marginal rate of tax under Section 164(1) of the Act as contended by the Revenue or whether it is liable to be assessed at the normal rates applicable to an Association of Persons as per Section 164(2) of the Act, a position canvassed by the assessee. We may make it clear that the assessee does not claim total exemption in respect of the income under Section 11 of the Act. It is common ground that the assessee has not complied with the elaborate procedure prescribed by Section 12 of the Act and that it has not also satisfied the stringent requirements of Section 11. What all the assessee claimed - and this is disputed by the Revenue - is that it should be assessed in the status of an AOP at the normal rate of tax, since it is a public charitable trust, as per Section 164(2).

3. A few facts have to be stated first to give a sort of a background to the case. M/s. Toristeg Steel Corporation, a company incorporated under the laws of Luxembourg, having its registered office in that country and a branch office in Calcutta, was carrying on business by turning to profit the fruits of research carried out by it in the field of specialised twisted steel called torsteel. The business consisted of granting of patent rights and rendering technical and promotional services in the matter of production of specialised steel. Another part of the business was to assist its customers in maintaining quality control and rendering promotional services. The business was being carried on, obviously, as a commercial proposition, with profit being the predominant motive, till 31-7-1973. On 1-8-1973, however, the company executed an indenture of trust, calling itself the "Settlor" and making one Dr. Prasanta Kumar Mohanty the "trustee". A sum of Rs. 10,000 was the initial contribution of the settlor towards the corpus of the trust. It was also specified that the trust fund should consist of, in addition to the sum of Rs. 10,000 settled upon trust by the settlor, all property rights, grants, endowments, donations, fees etc., including the investments, immovable property, securities etc. The intention was to hand over the business itself to the trustee. Clauses 1 and 2 provided as under:-- (1) The Trustees shall hold and stand possessed of the said sum of Rs. 10,000 and any donations, endowments, grants, property rights, effects or contributions or fees received by them and all accretions thereto and thereof including any accumulated income and the investments including immovable property and securities from time to time representing the sum (the assets for the time being of the trust being hereinafter called "the Trust Funds") upon the ends intents and purposes of the trust and with or subject to the powers provisions and declarations hereinafter contained and declared of and concerning the same, that is to say :-- 1. (a) The. trust hereby created shall be designated as "the Torsteel Research Foundation in India" (hereinafter called "the Foundation").

(b) The trustees shall hold and apply in India the capital and net income of the Trust Fund to be applied for -- (i) the review, study and development of technology, products, systems through fundamental and applied research and the rapid economic and scientific utilisation of knowledge so obtained for industrial and scientific purposes.

(ii) communication of the results, of such research and development efforts in the form of interim and final reports, norms, design, handbooks, professional papers, scientific lectures and seminars etc., on realisation of such fees from the sponsors of research and development work as the Trustees may decide from time to time.

2. (a) The Trustees shall have power to seek, accept and give donations, endowments, rights, grants, aids and payments against specific assignments for rendering technical, promotional and quality control services for the optimum utilisation of technology, know-how, processes, systems whether developed by the Foundation or others in India or outside.

(b) The Trustees shall have power to invest in India any moneys forming part of the Trust Fund in such investments including shares and debentures of bodies corporate and immovable properties as the Trustees shall in their sole discretion decide with power to transpose or vary such investments from time to time without being liable for any loss occasioned thereby.

Clause 18 made provision for the appointment of additional trustees. It further provided that if no additional trustee was appointed, Dr.

Mohanty would be entitled to exercise all the powers of the trustees.

Clause 25 gave powers to the trustees to frame rules for the governance of the trust, subject to the condition that the rules should not be inconsistent with the objects thereof. Clause 26 prescribed that no part of the Foundation's income shall enure or be employed directly or indirectly for the benefits of the settlors of the Foundation. Clause 27 provided that in the event of it becoming difficult to carry out the objects economically or if it is thought desirable to amalgamate the Foundation with some other Foundation/organisation having similar objects or if the trustees decide, for any reason, to wind up the foundation, the trustees will have to make over the trust fund to some other foundation having the same or similar objects or allow the trust to amalgamate with such other organisation. Clause 28 declared the trust to be irrevocable.

4. In the returns filed for the assessment years 1981-82 and 1982-83, the assessee declared total income of Rs. 26,350 and Rs. 43,412 respectively, in the status of "AOP". Assessments were completed charging the normal rate of tax, which the CIT thought was erroneous and prejudicial to the interests of revenue, inviting remedial action under Section 263. In the assessment completed for the assessment year 1983-84, the ITO charged tax at the maximum marginal rate, against which the assessee appealed unsuccessfully. As already stated in the opening part of this order, the CIT while passing orders under Section 263 for the assessment years 1981-82 and 1982-83 has adopted the reasoning of the CIT(A) for the assessment year 1983-84.

5. Mr. R.N. Bajoria, Ld. counsel for the assessee, supported the appeals on the following broad grounds. He first contended that the assessee was a public charitable trust within the meaning of the definition of the term "charitable object" under Section 2(15) of the Act and that it was covered by "any other object of general public utility not involving the carrying on of any activity for profit". He submitted that it was factually found by the IAC, while seized by the matter under Section 144A of the Act, that the assessee was carrying on research activities in the field of specialised twisted steel, known as "torsteel". He next contended that there was a proscription against distribution of the profits of the assessee-trust and that the case was, therefore, covered by the well-known decision of the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1, In this connection, he invited reference to Clauses (26) and (27) of the trust deed. His next point was that the predominant motive of the assessee-trust was the carrying on of an object of public utility, viz., making available to those who need them, the fruits of research in the field of torsteel manufacture and conducting seminars on the subject etc., and not profit-making, which was only incidental. He submitted that though the assessee-trust made profit, that was only because it was not practical or feasible to so fix the fees for rendering public utility services as to just cover the expenses only without leaving any surplus. In this context, he relied on the decision of the Supreme Court in CIT v. Andhra Pradesh State Road Transport Corpn. [1986] 159 ITR 1 which recognised and approved the principle that mathematical precision in the matter of fixing the fees is not practical nor desirable. He also relied on the analogy of Section 10(22A) where the condition for exemption was that the institution claiming exemption there under should exist solely for philanthropic purposes and not for purposes of profit. He pointed out that the Calcutta High Court had explained the principle in CIT v. Economic & Entrepreneurship Development Foundation [1991] 188 ITR 540. On the factual point, Mr. Bajoria invited our attention to the relevant papers in the paper book filed by him depicting the various activities in the field of research, such as conducting seminars, patenting of the inventions by the assessee's scientists etc., to show that the predominant object of the assessee was to carry on an object of general public utility.

6. Mr. D.S. Roy, Ld. departmental representative, supported the orders of the CIT and the CIT(A). In addition, he submitted that the nature and character of the income, which was hitherto being assessed as business income in the hands of the Luxembourg company, cannot change merely because there is a change in the character of the recipient thereof. He drew our attention to the figures of surplus, i.e., the excess of income over expenditure, and contended that the figures themselves would show that profit-making was the predominant motive of the assessee, and not charity. He also pointed out that under Clause 18(d) of the trust deed, Dr. Mohanty was given sweeping powers, which was inconsistent with the posture taken by the assessee that it was a public charitable trust. Lastly, he submitted that the assessment order for the assessment year 1983-84 showed that the funds of the assessee-trust are being diverted by giving such benefits to employees as premia for life assurance, medical benefits etc., which shows that the object is not charity.

7. We have carefully considered the rival submissions. We have perused the paper book, the orders of the departmental authorities and have also studied the decisions cited before us. In our opinion, the assessee is entitled to succeed in the appeals. We set out the reasons for our conclusion in the succeeding paragraphs.

8. In the present case, the Department has not questioned the validity of the trust. If the trust is valid, the only issue that survives for consideration is whether the trust is a public charitable trust with a non-profit motive. The avowed object of the assessee-trust is that of review, study and development of technology, products, systems through fundamental and applied research and the rapid economic and scientific utilisation of the knowledge so obtained for industrial and scientific purposes - Clause l(a) of the trust deed. There can be no dispute that propagation of knowledge obtained through research - in the present case, research in the field of specialised twisted steel called 'torsteel' is an object of general public utility. In fact, the departmental authorities did not seriously dispute the fact that the object simplicitor of the assessee-trust is charitable in nature; their main objection is to the fact that what was a commercial venture - pure and simple - is now claimed to be a noble object, just because the assessee is a trust. At para 7 of this order, the CIT(A) says - "There is no doubt that the business of the foreign company was a successful commercial proposition and there has been no change in the nature and mode of the business even though a clock (sic) of a trust has been given to it... in the case of this trust profit is the main object as it was when the same business was conducted by the foreign company and services are provided only to those who can afford to pay for it. In cannot certainly be said that the business acquired the characteristic of 'charitable' nature by the change in the ownership of the business.

I find that the business continues to be the same as before and is conducted purely on commercial lines." It will be clear from these lines that the department has viewed with disapproval the claim that the assessee is a public charitable trust when the activities remain the same both before and after the change in the ownership of the "business". This misconception if we may say so with respect, can be avoided if we keep in view the position of a public charity under the Income-tax Act. It is no doubt true that when the foreign company was carrying on the business it was liable to tax. But it has to be remembered that the assessee was constituted as a trust by deed dated 1-8-1973, the validity of which has not been doubted. After the coming into existence of the trust, the conception of private gain vanished.

This will be clear if regard is had to clauses 26 and 27 of the trust deed. Clause 26 lays down in strict terms that no part of the income of the Foundation shall enure or be employed for the benefit of the senior, i.e., the Luxembourg company. It goes without saying that the income cannot be enjoyed by, or made use of for the personal benefit of the trustee, in which case the trustee (Dr. Mohanty) will be liable for action for breach of trust. Clause 27 provides for the contingency of winding up, dissolution or discontinuance of the trust. In such a contingency, no part of the income or assets of the trust can be divided between the settlors or the trustees; they should be made over to a foundation or trust having similar or same objects. Clause1(b) lays down a mandate to the trustees by making it obligatory on their part to hold and apply the income of the foundation only to the avowed objects, viz., research activities. The surplus remaining after setting off the expenditure against the receipts of the foundation cannot be divided or distributed amongst the settlors, trustees or employees of the foundation. This position is also made clear in the Balance Sheet for the years in appeal. The following are the net income figures:--Year ending Asst. year Rs.30-6-1980 1981-82 26,35330-6-1981 1982-83 43,41230-6-1982 1983-84 2,39,876 It is seen from the balance-sheets that each year's surplus is taken "below the lines", added to the surplus brought forward from the earlier year and the gross figure of surplus is taken to and exhibited in the Balance Sheet under the head "Income & Expenditure A/c". The routine administrative expenses, such as, salary, bonus, etc., to staff including the scientists working for the foundation, contributions to P.F., travelling expenses, interest expenses, rates & taxes, repairs, etc., are charged to the Income & Expenditure A/c. before arriving at the surplus. Thus, it will been seen, that there is no element of private gain, which is the distinguishing feature, after the advent of the assessee as a trust with effect from 1-8-1973. The surplus is to be "ploughed back" by an express mandate contained in the indenture of trust. The departmental authorities appear to have lost sight of this aspect, which seems vital to us, in coming to the conclusion that what was admittedly a commercial venture cannot oversight cease to be so.

9. We have now to examine whether the assessee falls within the ratio of the decision of the Supreme Court in Surat Art Silk Cloth Mfrs.

Association's case (supra). It was held in that decision that the last ten words in Section 2(15) of the Act qualify only the words "any other object of general public utility"; it is the assessee's case before us that it falls within this residuary object. It was further held in that decision that it is the object of the trust that should not involve the carrying on of any activity for profit and that profit-making is not taboo so far as accomplishment of the object is concerned. In order to test whether the object itself included an activity for profit or only the accomplishment thereof, the "predominant object" theory was propounded. His Lordship, Bhagwati, J., (as he then was) said "Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit" just because profit results. The same sentiments were expressed by His Lordship Pathak J. (as he then was) when he said that if the purpose is charitable, the attainment of the purpose need not rigorously exclude any activity for profit. However, if the predominant object was profit making, even though the object is charitable, there can be no charitable purpose.

10. Applying the above test to the instant case, it is clear that the predominant object of the assessee is not profit making, but profit is only used as a means to attain the object, viz., carrying on of the research activity in specialised twisted steel and propagating the results of the research. The power given to the trustees by clause 1 (b) of the trust deed to charge research fees from persons who wish to avail of the fruits of the research activity from the assessee, as they decide from time to time, is subservient to the object contained in clause1(a). In fact, it is not an object at all as erroneously thought by the departmental authorities. It is only a power given to the trustees to ensure income for the trust so that there is no difficulty in accomplishing its object contained in clause 1 (a). This part of clause 1 (b) must be dissected from the earlier part of the said clause which speaks of communication of the results of the research and development efforts and from clause 1 (a). The departmental authorities have mixed up the means with the ends. As His Lordship Justice Balasubrahmanyan stated in Addl. CIT v. Gangabai Charities [1983] 142 ITR 718 (Mad.) (at page 735): "what the law requires is that a trust should not have any object of general public utility which involves, as an object, the carrying on of any activity for profit. The law does not frown against any activity for profit being carried on by a charitable trust as a means of furthering its objects, the objects themselves being indubitably charitable in nature." A similar "mixing up" was exposed by the Supreme Court in Andhra Pradesh State Road Transport Corpn.'s case (supra) referred to by Mr. Bajoria during the course of his argument. In that case, an argument was raised by the Revenue that even as per Section 22 of the Road Transport Corporations Act, the Corporation (assessee) was expected to carry on the operations on "business principles" and, therefore, the assessee could not be held to carry on an object of general public utility. Dealing with this contention, the Supreme Court held at page 10 of the Report, as follows : The submission founded upon Section 22 is based upon a misunderstanding of what that section provides. A road transport corporation cannot be expected or be required to run at a loss. It is not established for the purpose of subsidising the public in matters of transportation of passengers and goods. The objects for establishing a road transport corporation are those set out in Section 3 of the RTC Act which we have already reproduced above.

Section 18 shows that it is the duty of a road transport corporation to provide, secure and promote the provision of an efficient, adequate, economical and properly co-ordinated system of road transport services in the State. No activity can be carried on efficiently, properly, adequately or economically unless it is carried on on business principles. If an activity is carried on on business principles, it would usually result in profit, but, as pointed out by this court in Surat Art Silk Cloth Manufacturers Association's case [1980] 120 ITR 1 (SC), it is not possible so to carry on a charitable activity in such a way that the expenditure balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realisation but would reflect unsound principles of management. What Section 22, therefore, does when it states that it shall be the general principle of a road transport corporation that in carrying on its undertakings it shall act on business principles is to emphasise the objects set out in Section 3 for which a road transport corporation is established and to prescribe the manner in which the general duty of the corporation set out in Section 18 is to be performed. It is now firmly established by the decisions of this court in Surat Art Silk Cloth Manufacturers Association's case [1980] 121 ITR 1 (SC) and Bar Council of Maharashtra's case [1981] 130 ITR 28 (SC), that the test is What is the predominant object of the activity - whether it is to carry out a charitable purpose or to earn profit?" If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from the activity.

This decision establishes two things : (i) it is not possible to so carry on a charitable activity in such a way that the expenditure balances the income and no surplus is left and (ii) this would be impractical and also would reflect unsound principles of management. It was not suggested in the present case either before us or by the departmental authorities in their orders that the trustees had fixed the income with the object of profit-making. In the absence of such a plea, we have to only come to the conclusion that profit is only an incident in the process of accomplishment of the object of the trust and, therefore, is not the predominant motive. It, therefore, follows that the assessee's case falls squarely within the ratio laid down by the Supreme Court both in Surat Art Silk Cloth Mfrs. Association's case {supra) and in Andhra Pradesh State Road Transport Corpn.'s case (supra).

11. We may notice that the Calcutta High Court has, in CIT v. Sangit Kala Mandir Trust [1987] 166 ITR 217, held that if the primary and dominant object was of general public utility, the clause empowering the trust to carry on business should be read in the context of the main object and must be held to be ancillary and incidental to the carrying on of the main object. The principle of this decision is applicable with full force to the present case.

12. A few minor points raised by Mr. Roy for the Department have to be disposed of. He stated that Dr. Mohanty was given wide powers under Clause 18(d) of the deed of trust. But that is not correct. The said clause merely stated that he was to exercise all the powers of the trustees so long as no additional trustees were not appointed. There is nothing obnoxious about the clause. The powers conferred upon him were powers of management and day-to-day administrations of the trust. It was not suggested that he was given the powers of disposal over the income or assets of the trust towards purposes other than those stated in the objects clause of the deed of trust. The other point made was that the employees, including Mr. Mohanty, were given benefits such as insurance, medical benefits etc. This point is also not relevant in deciding the issue whether the assessee is a charitable, non-profit making trust. Even a trust, we believe, have to take good care of its employees, specially when the employees are men of letters, many of them highly trained in research studies. Even if the Revenue is of opinion that such benefits are excessive, there are provisions in the IT Act to control them, which may be invoked if the necessary conditions are present. We are not convinced that these two points argued by Mr. Roy have anything to do with the question posed for our decision.

13. We may also mention that the paper book filed by the assessee before us contains a number of pages which were devoted to proving the fact that the assessee was carrying on research activities in the field of torsteel for a long time. Paper-clippings, write-ups, messages from the Hon'ble Minister for Steel & Mines etc., are found in those pages.

We have not discussed them in detail in this order, since the fact that the assessee was carrying on these activities has not been doubted by the Department.

14. For the reasons set out above, we are of the view that the assessee is a public charitable trust assessable at the rates applicable to an Association of Persons under Section 164(2) of the Act and not at the maximum marginal rate under Section 164(1). The orders of the CIT passed under Section 263 of the Act for the assessment years 1981-82 and 1982-83 are set aside and the assessments restored for these years.

The order of the CIT(A) passed for the assessment year 1983-84 is reversed.


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