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Dharmaposhana Company Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Referred Case Nos. 51 to 56 and 79 of 1972
Judge
Reported in[1975]100ITR351(Ker)
ActsIncome Tax Act, 1961 - Sections 2(15) and 11
AppellantDharmaposhana Company
RespondentCommissioner of Income-tax
Appellant Advocate C.K. Viswanatha Iyer,; E.A. Benny and; P.V.V. Subramonim
Respondent Advocate P.A. Francis and; P.K. Ravindranatha Menon, Advs.
Cases ReferredEast India Industries (Madras) Private Ltd. v. Commissioner of Income
Excerpt:
.....years exempt under section 11 - section 11 (1) (a) speaks of income from property held wholly for charitable purposes - section 11 (1) (b) provides property held under trust in part only for charitable purposes - different considerations arise when one or other clauses of section 11 comes into operation - income actually applied for charitable purposes and which have been finally set apart are exempt under section 11 (1) (b) if property held under trust in part only - for exemption under section 11 (1) (a) property held under trust must be wholly for charitable purposes. - - , and public good. the profit left after meeting the expenses of the company will be utilised for promoting education, industry, social welfare and such other purposes of common good as are resolved by the..........(for short, ' the act '), in view of section 11 of the act exempting income derived from property held on trust for a charitable purpose, has been negatived by the tribunal and these references are at the instance of the assessee and the question referred for our opinion is :' whether, on the facts and in the circumstances of the case, the income of the assessee for the assessment years 1962-63 to 1965-66 was exempt under the provisions of section 11 of the income-tax act, 1961 ?'2. the assessee was following the calendar year as its accounting period and on june 7, 1965, the company amended its memorandum of association and articles of association. because of the amendments the tribunal held that the income from the same sources (chit funds and interest from lending money), which was.....
Judgment:

Govindan Nair, C.J.

1. These income-tax referred cases raise the same question for decision. The assessee is the same company. Income-tax Referred Cases Nos. 52, 53, 54 and 51 refer respectively to the years of assessment 1965-66, 1962-63, 1963-64 and 1964-65. The claim put forward by the assessee before the Tribunal that the income from the kuri (chit funds) and interest income earned by lending money ,are not taxable under the Income-tax Act, 1961 (for short, ' the Act '), in view of Section 11 of the Act exempting income derived from property held on trust for a charitable purpose, has been negatived by the Tribunal and these references are at the instance of the assessee and the question referred for our opinion is :

' Whether, on the facts and in the circumstances of the case, the income of the assessee for the assessment years 1962-63 to 1965-66 was exempt under the provisions of Section 11 of the Income-tax Act, 1961 ?'

2. The assessee was following the calendar year as its accounting period and on June 7, 1965, the company amended its memorandum of association and articles of association. Because of the amendments the Tribunal held that the income from the same sources (chit funds and interest from lending money), which was held to be taxable for the years 1962-63 to 1965-66, was not taxable for the years 1966-67, 1967-68 and 1968-69. At the instance of the department, the following question has been referred in relation to the years 1966-67 and 1967-68 for our opinion in Income-tax Referred Cases Nos. 55 and 56 of 1972 :

'Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under Section 11 of the Income-tax Act, 1961, for the assessment years 1966-67 and 1967-68 ?'

3. The same question has been referred to us at the instance of the department for the year 1968-69 in Income-tax Referred Case No. 79 of 1972

4. The Tribunal dealt with the assessments for all the 7 years by a common order and we propose to answer the questions referred to us for all these years by a common judgment as the point arising for decision in all these years is the same.

5. The relevant ' objects of the memorandum of association ' of the assessee before its amendment on June 7, 1965, and which applied for the purpose of assessment to tax for the years 1962-63 to 1965-66 are seen from the following clauses in the memorandum of the assessee-company :

' 3. The objects of the company are :

(a) to raise funds by conducting kuries with company as foreman, receiving donations and subscriptions, by lending money on interest and by such other means as the company deem fit.

(b) to do the needful for the promotion of charity, education, industries, etc., and public good.

(c) for carrying on the business of the company and for the advancement of the purpose mentioned above in so far as is appropriate, to construct buildings or to purchase or take on lease or for hire movable or immovable properties.

(d) to encourage others to form other institutions with the purpose of acting in accordance with the objects of the company.

(e) to do all such things as are conducive to the fulfilment of the above objects.

(f) to lend money on interest to one or more solvent persons individually or severally on the security of ornaments, landed properties or other forms of security fixed by the directors and to borrow money to meet the needs of the company and to run other industries.'

6. Article 58 of the articles of association provided :

'The profit of the company shall not be divided among the members. The profit left after meeting the expenses of the company will be utilised for promoting education, industry, social welfare and such other purposes of common good as are resolved by the general meeting.'

7. The relevant sections of the Act that we have to construe are Sections 2(15), 11(1), 11(2), 11(4) and Explanation 1 to Section 13(4). We shall only extract those portions of the sections which fall for consideration and interpretation for the purpose of disposing of these cases :

' 2. In this Act, unless the context otherwise requires,--.........

(15) 'charitable purpose' includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit.' '11. (1) Subject to the provisions of sections 60 - 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income-

(a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India ;

(b) income derived from property held under trust in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India;

(c) income derived from property held under trust-

(i) created on or after the 1st day of April, 1952, for a charitable purpose which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and

(ii) for charitable or religious purposes, created before the 1st day of April, 1952, to the extent to which such income is applied to such purposes outside India : Provided that the Board, by general or special order, has directed in either case that it shall not be included in the total income of the person in receipt of such income.

8. Explanation.--For the purposes of Clauses (a) and (b), if in the previous year, the income applied to charitable or religious purposes in India falls short of the income derived during that year from property held under trust or, as the case may be, held under trust in part, by any amount, so much of the income applied to such purposes in India during the period of three months immediately following the previous year as does not exceed the said amount may, at the option of the person in receipt of the income (such option to be exercised in writing before the expiry of the time allowed under Sub-section (1) or Sub-section (2) of Section 139, whether fixed originally or on extension, for furnishing the return of income), be deemed to be income applied to such purposes during the previous year, and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes during the immediately following previous year ....

(2) Where any income referred to in Clause (a) or Clause (b) of Sub-section (1) read with the Explanation to that sub-section is not applied or is not deemed to have been applied to charitable or religious purposes in India during the previous year but is accumulated, or finally set apart, for application to such purposes in India, such income shall not be included in the total income of the previous year of the person in receipt of the income provided the following conditions are complied with, namely:

(a) Such person specifies, by notice in writing given to the Income-tax Officer in the prescribed manner, the purpose for which the income isbeing accumulated or set apart and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years; (b) the moneys so accumulated or set apart is-

(i) invested in any Government security as defined in Clause (2) of Section 2 of the Public Debt Act, 1944, or in any other security which may be approved by the Central Government in this behalf, or

(ii) deposited in any account with the Post Office Savings Bank [including deposits made under the Post Office (Time Deposits) Rules, 1970,] or a banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in Section 51 of that Act) or a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank or a co-operative land development bank), or

(iii) deposited in an account with a financial corporation which is engaged in providing long-term finance for industrial development in India and which is approved by the Central Government for the purposes of Clause (viii) of Sub-section (1) of Section 36.........

(4) For the purposes of this section 'property held under trust' includes a business undertaking so held, and where a claim is made that the income of any such undertaking shall not be included in the total income of the persons in receipt thereof, the Income-tax Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes.'

9. Explanation 1 to Section 13(4).

'For the purposes of Sections 11 and 12 and this section, 'trust' includes any other legal obligation and for the purposes of this section ' relative' also includes a lineal descendant of a brother or sister.'

10. No distinction had been made by the Indian Income-tax Act, 1922, between the well-known charities of relief to the poor, education and medical relief on the one hand and charities resulting from the advancement of any other object of general public utility, on the other. But such a distinction has been introduced by the definition of the term ' charitable purpose ' in Section 2(15) of the Act though the definition is an inclusive one. The restriction is that the advancement of objects of general public utility should not involve the carrying on of any activity for profit. If it involved any such activity the charity will fall outside the definition of ' charitable purpose ' in Section 2(15). This change has certainly altered the law and whenever the advancement of an object of general public utility involved an activity for profit that object will cease to be a charitable purpose. So, in such cases, the income from the activity for profit cannot be exempted from tax under Section 11 of the Act. It is not easy to define the import of the words ' not involving ' occurring in the definition in Section 2(15). This court has had occasion to refer to the word ' involve ' in the decision in Commissioner of Income-tax v. Indian Chamber of Commerce, [1971] 80 ITR 615 but what this court specially decided therein was that the activity of the Indian Chamber of Commerce was not an activity for profit. Though we adverted to the word ' involve ' in the judgment, we have not attempted to delineate the scope and ambit of that word. This was unnecessary in view of the finding that the Indian Chamber of Commerce was not engaged in an activity for profit. In view of that finding the last part of Section 2(15) could not have been attracted at all. 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 ' wrapped in ', ' entwined ', ' entangled ', ' comprehending ', the claim of the assessee for exemption cannot be granted. But we would like to say a word about the real import of the expression ' not involving ' occurring in Section 2(15) of the Act. If we merely understand the word ' not involving ' as ' not wrapped in ', ' not entangled ', ' not entwined' 'not comprehending ', the result would be some what anomalous. We shall elaborate. If the charitable purpose is one of general public utility and a business is carried on which is not wrapped in with the object of general public utility or entwined or entangled with it, the latter part of Section 2(15) will not apply and so the income from the business will have to be exempted. But in case the activities in connection with the advancement of an object of general public utility are also the activities for profit the income from the activities for profit will not be exempted. Thus, if a chamber of commerce for the purpose of educating its members in trade and commerce conducted a school on business lines, the object of running the school would be charitable--advancement of industry and commerce--but the school being run as an activity for profit, the income would not be exempt. On the other hand, if the same school was financed by conducting a separate business which cannot be said to be involved with the school in the sense of wrapped in the school activity, the latter part of Section 2(15) will not be attracted and the income from the business may be exempt if the business is held under trust for the charitable purpose of advancing trade and commerce. We do not think that the legislature meant to have any such patently anomalous result. It is a well-established principle that we must understand a legislative enactment as being reasonable. We have, therefore, to assign a meaning to the word ' not involving ' which would be appropriate in the context and fortunately theword 'involve' has so many different shades of meanings that it is unnecessary to strain to find such a meaning. Webster's Third New International Dictionary gives various meanings and those include ' connect' and 'link'. These words, we think, are the apt words that are applicable for understanding the scope of the word ' involve ' in Section 2(15) of the Act. So understood, the last part of Section 2(15) would mean that when the advancement of an object of general public utility is linked or connected with an activity for profit, that object would cease to be a ' charitable purpose '. This is how, we think, that the latter part of the section must be interpreted.

11. Having reached the above conclusion, we must now turn to Section 11 of the Act. Section 11(1)(a) speaks of income from property held wholly for charitable purposes and Section 11(1)(b) of property held under trust in part only for charitable purposes. Different considerations arise when one or the other of the clauses of Sub-section (1) comes into operation. Income actually applied for charitable purposes and which have been finally set apart (Section 11(2)) are exempt under Section 11(1)(b) if the property is held under trust in part only. But in order that the exemption under Section 11(1)(a) might apply, the property held under trust must be so held wholly for a charitable purpose. And in understanding what is meant by charitable purpose, we have naturally to look at the definition in Section 2(15) of the Act though it is only an inclusive definition. When the charitable purpose is one that falls under the general clause of charities, namely, advancement of objects of general public utility, if that object is linked or connected with an activity for profit, it ceases to be a charitable purpose for the purpose of Section 11 and so the exemption under Section 11(1)(a) as well as (b) might cease to have application. But the difficulty arises when the objects for which the property is held under trust comprise charitable purposes that fall within the definition and those that fall outside the definition. Advancement of an object of general public utility when it is linked with an activity for profit will be outside Section 2(15) but it need not necessarily cease to be a charitable purpose in the general sense of the word ' charitable purpose '. But this is not enough in order to get the exemption provided by the Act and if there is no restriction in the case of a company by the memorandum of association and/or the articles of association enjoining that any specific part or quantum of the income from the property held under trust must be applied exclusively to specific charitable purposes, the trust will cease to be one for a charitable purpose. The principle is clearly stated in the decision of the Privy Council in Mohammad Ibrahim Riza Malak v. Commissioner of Income-tax, AIR 1930 PC 226 and the decision of the Supreme Court in East India Industries (Madras) Private Ltd,v. Commissioner of Income-tax, : [1967]65ITR611(SC) . For the purpose of the application of this principle charitable purposes will of course have to be understood in the general sense of including charities for the advancement of general public utility and not as defined in Section 2(15) of the Act.

12. When we now turn to the provisions in the objects clause of the company in the memorandum and the provisions in the articles of association, we find that the charitable purposes are not only those falling under the first group of the well-known charities of relief to the poor, medical relief and education but also those that fall under what we may call the general charities of general public utility. Further, the objects of the company include charitable and non-charitable purposes, charitable purpose being understood in a general sense. In the latter group of objects or purposes will fall conducting kuries, lending money on interest, and such other means as the company may decide upon. This is so notwithstanding the amendment that has been introduced in the memorandum by the amendments effected on June 7, 1965. These amendments only introduced medical relief as an additional object and altered clause 58 of the articles of association to some extent and the wording of some of the other objective clauses had also been changed. We extract the amended objects clause and the amended article 58 of the articles of association :

' 3. (b) To do the needful for the promotion of charity, education, industries, etc., and public good ....

(f) To lend money on interest to one or more solvent persons individually or severally on the security of ornaments, landed properties or other forms of security fixed by the directors and to borrow money to meet the needs of the company and to run other industries. ' '58. The profit of the company shall not be divided among the members. The profit left after meeting the expenses of the company will be utilised for promoting education, industry, social welfare and such other purposes of common good as are resolved by the general meeting.'

13. Even after the amendment it is clear that, apart from the specified charities of medical aid and of education, the objects include independent other objects falling under the last category of obiects of general public utility and what is important objects which are not charitable at all: business, conducting kuries, lending money and such other activities as may be decided upon. And since we are not able to discern any specific allocation of any part of the property or the income for ' charitable purposes ' (charitable purpose being understood in the general sense) and since the income could be applied for any purpose which will include non-charitable purpose, the decision of the Privy Council in Mohammad Ibrahim Riza Malak v. Commissioner of Income-tax, AIR 1930 PC 226 and of the Supreme Court inEast India Industries (Madras) Private Ltd. v. Commissioner of Income-tax must apply to the facts of these cases. There is no justification whatever in drawing any distinction between the years before 1966-67 and those from 1966-67. The position is the same in regard to all the years 1962-63 to 1968-69.

14. We have been referred to a number of decisions on various aspects to which we have not adverted because we do not think that those decisions are really necessary or even helpful in deciding the question before us. For instance, the distinction that is drawn between ' incidental objects' and main objects does not arise because the main objects of this company take in conducting kuries and lending money on interest which are both business activities. The only question then is whether there is any restriction or limitation introduced on the directors of the company obliging them to apply the income in its entirety or any specified part thereof for any of the charitable purposes. If there is no such thing, then the principle of the decisions in Mohammad Ibrahim Riza Malak v. Commissioner of Income-tax and in East India Industries (Madras) Private Ltd. v. Commissioner of Income-tax must apply.

15. In view of the statutory provision it was not suggested before us that business is not property and cannot be held under trust nor was it suggested by counsel for the assessee that what is carried on in the form of chit funds or by lending money is not business.

16. In the light of the above, we have to answer the questions referred to us for the first four years in the negative, that is, in favour of the department and against the assessee and the question referred to us for the subsequent years 1966-67 to 1968-69 also in the negative, that is, in favour of the department and against the assessee. We do so. We direct the parties to bear their respective costs.

17. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.


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