Skip to content


Additional Commissioner of Income-tax and anr. Vs. Victoria Technical Institute - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case Nos. 383 of 1974 and 780 to 789 of 1976 (Reference Nos. 196 of 1974 and 647 to 656 of 1976)
Judge
Reported in[1979]120ITR358(Mad)
ActsIncome Tax Act, 1961 - Sections 2(15) and 11(1); Societies Registration Act, 1960
AppellantAdditional Commissioner of Income-tax and anr.
RespondentVictoria Technical Institute
Appellant AdvocateNalini Chidambaram, Adv.
Respondent AdvocateK.R. Ramamani, Adv. for Subbaraya Aiyar, Padmanabhan and Ramamani
Excerpt:
- - according to clause 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 principles which underlie the industrial and commercial occupations of the people (including especially handicrafts manufactures and agricultural labour) as well as instruction in the manual and other practice involved in the application of such principles; --this fund is meant for awarding a prize to the best student from the school of arts and crafts, madras. 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.....varadarajan, j.1. t.c. no. 383 of 1974 arises out of a reference made by the income-tax appellate tribunal, madras bench, under section 256(1) of the i.t. act, 1961, hereinafter referred to as 'the act', at the instance of the revenue. the question referred in that case for the opinion of this court is this :'whether the income derived by the assessee from its general fund and south indian women workers executive committee fund is entitled to exemption under section 11 of the income-tax act, 1961, for the assessment years 1962-63 to 1971-72 '2. the tribunal at first did not refer another question which also was included in the application of the revenue for reference to this court, but it has been ordered by this court to refer that question also for the opinion of this court and that.....
Judgment:

Varadarajan, J.

1. T.C. No. 383 of 1974 arises out of a reference made by the Income-tax Appellate Tribunal, Madras Bench, under Section 256(1) of the I.T. Act, 1961, hereinafter referred to as 'the Act', at the instance of the revenue. The question referred in that case for the opinion of this court is this :

'Whether the income derived by the assessee from its General Fund and South Indian Women Workers Executive Committee Fund is entitled to exemption under Section 11 of the Income-tax Act, 1961, for the assessment years 1962-63 to 1971-72 '

2. The Tribunal at first did not refer another question which also was included in the application of the revenue for reference to this court, but it has been ordered by this court to refer that question also for the opinion of this court and that question has been referred in T.C. Nos. 780 to 789 of 1976 for the opinion of this court under Section 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 ?'

3. 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 Section 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 Section 11(1) of the Act. According to Clause 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 principles which underlie the industrial and commercial occupations of the people (including especially handicrafts manufactures and agricultural labour) as well as instruction in the manual and other practice involved in the application of such principles; and to assist persons of either sex who are engaged in artistic, industrial or commercial occupations.

And such objects may be carried out by any or all of the following means, that is to say :

(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 South India or granting aid to teachers trained in affiliated and independent institutions.

(d) Holding examinations in technology and granting certificates of competency to those that satisfy the prescribed tests.

(e) Giving grants-in-aid to managers and teachers and technical schools, classes or workshops and giving scholarships, grant or prizes to pupils of the same.

(f) Buying and selling or selling on commission articles produced by handicraftsmen or otherwise.

(g) (i) Purchasing, taking on lease or in exchange, hiring or otherwise acquiring any immovable or movable property and any rights or privileges that the Council may think necessary for the purposes of the Institute and in particular any land, buildings, machinery, easements and plant.

(ii) Selling, leasing and otherwise dealing with any immovable property as the Council may think necessary or advisable for the purpose of the Institute,

(h) Investing the monies of the Institute not immediately required upon such securities or otherwise in such manner as may be in accordance with the regulation of the Institute.

(i) Doing all such other lawful things as are incidental or conducive to the attainment of the aforesaid objects or any of them.'

4. The assessee maintained the following funds to carry out the objects of the Institute:

1. General Fund.--This fund is the main fund of the Institute, arising out of the purchase and sale of handicrafts articles, and sale of those articles on commission--the trading activity carried on by the assessee for profit.

2. South Indian 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 RaoScholarship Fund|

|

|These funds are utilised for the grant ofscholarship to deserving students nominated by the Principal, School of Artsand Crafts, Madras.

5.Prince of Wales Scholarship Fund 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.

5. The assessee contended in its letter dated July 17, 1969, that the institute is purely a public charitable trust whose sole object is to preserve the country's artistic pursuits and that there is no sharing of profits which incidentally accrue in the course of the business. In the subsequent letter dated August 18, 1970, the assessee contended that the object of the institute falls within the concept of 'education' on the ground that the primary object of the institute is to impart instruction in handicrafts and that the institute is a charitable trust and the income realised by sale of the products made by indigenous craftsmen and skilled artisans is exempt under Section 11(1)(a) of the Act.

6. The ITO held that the object of the institute does not fall within the concept of 'education', on the ground that no training or educational institution is run by the assessee and that the object of the assessee is not a 'charitable purpose', on the ground that the object involves the carrying on of the activity for profit. In coming to this conclusion, the ITO relied upon the decision of the Mysore High Court in CIT v. Sole Trustee, Loka Shikshana. Trust : [1970]77ITR61(KAR) . In this view, the ITO held that the income arising from the General Fund and the South Indian Women Workers Executive Committee Fund is not exempt under Section 11(1)(a) of the Act, but is taxable as income arising out of an activity for profit and he included the same, as assessable income.

7 In the assessee's appeals before the AAC, one relating to the assessment years 1962-63 to 1968-69, another relating to the assessment years 1969-70 and 1970-71, and the third relating to the assessment year 1971-72, it was contended on behalf of the assessee that the ITO having found that the object of the institute was to impart instructions to various persons in certain directions, erred in holding that it did not fall within the concept of 'education', that profit is not the main or essential ingredient of the object of the Trust and that on a true interpretation of the provisions of Sections 2(15) and 11 of the Act, the activity carried on by the assessee did not disqualify it for exemption under Section 11(1)(a) of the Act, and the ITO erred in relying upon the aforesaid decision of the Mysore High Court in CIT v. Sole Trustee, Loka Shikshana Trust : [1970]77ITR61(KAR) . The AAC declined to accept these contentions and 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.

8. 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.

9. On behalf of the revenue, it was contended before the Tribunal that the main object of the assessee did not fall under 'education', but could fall only under the head 'Advancement of any other object of general public utility' and since it involved the carrying on of the activity of buying and selling or selling on commission handicrafts articles for profit, it could not be held to be a 'charitable purpose' as defined under Section 2(15) of the Act.

10. The Tribunal rejected the contention urged on behalf of the revenue and allowed the appeals. Regarding the contention that the object is 'education', the Tribunal observed :

'It is no doubt true that the appellant-institute is not running any educational institution like a school or college. But that is not the only way of imparting instructions. It is not disputed that the appellant-institute gives scholarships to students studying in the School of Arts and Crafts, Madras, though it is done from the income derived from the Fund specially constituted for that purpose. It is also seen from the report published by the institute on the occasion of its seventy-fifth anniversary that the Superintendent and other persons connected with the institute go to various places where handicrafts articles are made by artisans and advise them on improving production, method and finish, etc. Indeed it was for this purpose that the Institute approached the Government of Madras and obtained the grant of Rs. 20,000 in 1903. We are, therefore, inclined to accept the contention that the main object of the appellant-institute falls under the head 'Education'.'

11. Regarding the other contention that the object will fall under the head 'Advancement of any other object of general public utility' but it cannot be considered to be a 'charitable purpose' within the meaning of Section 2(15) of the Act, the Tribunal observed :

'It is not enough that as a matter of fact the activity of the institute results in profit. What is necessary to disentitle a trust to exemption is that the purpose should itself involve the carrying on of an activity for profit. In other words, exemption is denied where profit is the object or an essential ingredient of the trust, but not where it is merely a by-product so to say, of the activity of the trust.'

12. The revenue applied to the Tribunal for referring the following two questions for the opinion of this court, namely :

'(I) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was 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 ?'

13. 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.

14. 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 wokshops 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 South India or granting aid to teachers trained in affiliated or independent institutions.

(d) Holding examinations in technology and granting certificates of competency to those that satisfy the prescribed tests.

(e) Giving grants-in-aid to managers or teachers of technical schools, classes or workshops and giving scholarships, grants or prizes to pupils of the same.

15. The other activity of the assessee is buying and selling or selling on commission, articles produced by handicraftsmen or otherwise and doing all such other lawful things as are incidental or conducive to the attainment of the aforesaid objects or any of them. In the memorandum and articles of association these and some other items of activities are mentioned as the means of carrying out the objects of the institute, extracted on page 2 of this judgment, (see supra pp. 360-361.)

16. The facts found by the Tribunal are that the assessee is not running any educational institution like a school or a college. The assessee is giving scholarships to students studying in the School of Arts and Crafts, Madras, but this is done out of two separate funds earmarked for the purpose, namely, Sri T. Madhava Rao's Scholarship Fund and the Prince of Wales Scholarship Fund. The assessee's superintendent and other persons connected with the institute go to various places where handicrafts articles are made by artisans and advise them on improving production methods, better finish, etc. This also is done out of the grant of Rs. 20,000 made by the Government of Madras in 1903 for making tours to centres of arts and crafts for making personal contacts with a view to educate craftsmen in the matter of better finish and production of new articles for meeting the market demands.

17. Before considering the decisions cited at the Bar it is necessary to note the provisions of Section 11(1)(a) of the I. T. Act, 1961. That section lays down that :

'Subject to the provisions of Sections 60 to 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 ; and where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent. of the income from such property.'

18. The law governing such income has undergone a change. In the Indian I. T. Act, 1922, such income was governed by Section 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 Clause (i) of Sub-section (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.'

19. Proviso (b) to Section 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 income is applied wholly for the purposes of the institution and either--

(i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or

(ii) the work in connection with the business is mainly carried on by beneficiaries of the institution.'

'Charitable purpose', according to Section 2(15) of the Act of 1961 :

'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.'

20. The first decision relied upon by the learned counsel for the assessee is of a Division Bench of the Kerala High Court in Dharmodayam Co. v. CIT : [1962]45ITR478(Ker) , where the assessee-company was registered under the Cochin Companies Act. The licence granted to that company on January 21, 1919, under Section 32 of that Regulation, corresponding to Section 32 of the Companies Act, 1956, stated that the company has for its object 'the promotion of charity, education, industry, etc., and the doing of all such other things as are incidental or conducive to the attainment of the same'. The question referred to the Division Bench in that case was :

'Whether the income derived by the assessee-trust from business in kuries is exempt from tax under the provisions of Section 4(3)(i) of the Act as amended by Act 25 of 1953 for the five years 1952-53 to 1956-57 ?'

21. The object of the company, as stated in the memorandum, were :

(a) To raise funds by conducting kuries with the company as the foreman; receiving donations and subscriptions ; and by such other means as the company deems fit.

(b) To do the needful for the promotion of charity, education and industry.

22. There was no dispute in that case that the company was a charitable trust and that it, was doing business of conducting kuries or chits and advancing loans on interest. The learned judges of the Division Bench have observed in their judgment thus (p. 485) :

'It is settled law that a business itself can be held under trust for religious or charitable purposes and that the income derived from such a business will fall within the ambit of the exclusion granted by Clause (i) of Sub-section (3) of Section 4. The contention that we are called upon to decide is the contention of the department that such an income can be governed by the proviso as well and thus brought back into the net of taxation.

We negatived a similar contention in Commissioner of Income-tax v. Krishna Warriar : [1962]44ITR828(Ker) and we see no reason to differ from what we said in that decision.'

23. The learned judge held that prov. (b) to Section 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.

24. 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 monies on tours to centres of arts and crafts for making 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, are done with the monies separately provided for, namely, Sri T. Madhava Rao's Scholarship Fund and Prince of Wales Scholarship Fund from which scholarships are granted, and the money given by the Government of Madras in 1903 for making tours to centres of arts and crafts for the purpose mentioned above. The second thing to be noted is that the decision of the Division Bench of the Kerala High Court was taken by the revenue in appeal to the Supreme Court but the appeal was withdrawn, with the result that the decision of the Division Bench became final.

25. The next decision relied upon for the assessee is the second Dharmodayam Company's case, namely, CIT v. Dharmodayam Company : [1974]94ITR113(Ker) . The assessment year with which the Division Bench in that case was concerned was 1968-69, governed by the 1961 Act, while the old Act of 1922 was in force when the question for decision in the first Dharmodayam Company's case : [1962]45ITR478(Ker) arose. In the second case, the ITO assessed the income derived by the assessee by conducting kuries to tax, holding that the sole test for exemption under Section 11 of the 1961 Act was that the object on which the income was spent should be charitable and that the test was not satisfied. The AAC came to a different conclusion, holding that the earlier decision in the first Dharmodayam Company's case : [1962]45ITR478(Ker) applied to the case and the alteration in the definition of 'charitable purpose' in Section 2(15) of the new Act did not bring about any alteration in the position of the company. This view was accepted by the Appellate Tribunal. The question for consideration by the Division Bench of the Kerala High Court in the second Dharmodayam Company's case : [1974]94ITR113(Ker) was whether the income derived by the assessee was exempt under Section 11(1)(a) of the Act of 1961, and it was answered in the affirmative and in favour of the assessee. The learned judges have observed (p. 116):

'From the statement of the case and also from the memorandum of association of the company, it is clear that the raising of funds is by conducting kuries, by receiving donations and subscriptions and by such other means as the company deems 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.'

26. The point to be noted in this connection is that in the second Dharmo-dayam Company's case : [1974]94ITR113(Ker) , the decision of the Division Bench of the Kerala High Court in the first Dharmodayam Company's case : [1962]45ITR478(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, Indian Chamber of Commerce v. CIT : [1975]101ITR796(SC) it has been observed regarding the second Dharmodayam Company's case : [1974]94ITR113(Ker) , thus (p. 807) s

'Among the Kerala cases which went on the wrong test we wish to mention one, Dharmodayam : [1974]94ITR113(Ker) . The assessee-company was conducting a profitable business of running chit funds and its memorandum of association had as one of its objects 'to do the needful for the promotion of charity, education and industry'. The court found it possible on these facts to grant the benefit of Section 2(15) by a recondite reasoning. If this ratio were to hold good, businessmen have a highroad to tax avoidance. Dharmodayam : [1974]94ITR113(Ker) shows how dangerous the consequence can be if the provision were misconstrued.'

27. But in the appeal filed by the revenue against the decision in the second Dharmodayam Company's case : [1974]94ITR113(Ker) , the smaller Bench in CIT v. Dharmodayam Co. : [1977]109ITR527(SC) declined to accept the submission that the decision of the Division Bench of the Kerala High Court had been 'overruled' by the decision in Indian Chamber of Commerce v. CIT : [1975]101ITR796(SC) , Even the learned judges of the Supreme Court have held that the judgment of the Division Bench of the Kerala High Court in the earlier Dharmodayam Company's case : [1962]45ITR478(Ker) concludes the point that the kuri business is not conducted by the assessee-company in order to advance or for the purpose of advancing any object of general public utility. They have observed (at pp 533 and 535 of 109 ITR):

'It is notorious that the memoranda and articles of association of companies usually cover a variety of activities, only a few of which are in fact undertaken or intended to be undertaken. That obviates the necessity for applying for amendment of the articles from time to time and helps to rule out a possible challenge on the ground that the company has acted beyond its powers in undertaking a particular form of activity. The only activity in which the respondent is engaged over the years is the conduct of kuries. On this aspect of the matter the High Court rightly observes [Commissioner of Income-tax v. Dharmodayam Co. : [1974]94ITR113(Ker) :

'There is no case that Dharmodayam Company ever started any industry; there is also no ground for saying that the object of the company was to start an industry for the purpose of making profit' .........

In Sole Trustee, Loka Shikshana Trust v. CIT [1915] 101 ITR 234 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 since the business of kuries was not started by the respondent with the object or for the purpose of advancing an object of general public utility.'

28. It must be noted that the Supreme Court has observed in that case that the case is not governed by the last clause of Section 2(15) of the Act of 1961 and also that the judgment of the Kerala High Court in the earlier Dharmodayam Company's case : [1962]45ITR478(Ker) concludes the point that the kuri business is not conducted by the assessee in order to advance or for the purpose of advancing any object of general public utility. We will consider the question whether the object of the assessee in the present case is 'education' or whether it is only 'advancement of any other object of general public utility not involving the carrying on of any activity for profit' a little later after referring to the other decisions cited at the Bar.

29. The last decision relied upon on behalf of the assessee is of a Division Bench of this court in CIT v. Madras Stock Exchange Ltd. : [1976]105ITR546(Mad) . There it was held, on the facts of that case, that the object of the Andhra Chamber of Commerce, one of the assessees involved in that case, was clearly to promote trade and industry. The assessee-chamber of commerce had constructed a building for the purpose of locating its office and had let out a small portion which was not required for its purpose and was realising rental income. The Division Bench has observed that the letting out of its surplus place available for rent cannot be said to be carrying on any activity for profit, as conceived by Section 2(15) of the Act of 1961. This decision would not help the assessee in the present case having regard to the fact that it has been held there that the letting out of the surplus place available to the assessee for rent cannot be said to be carrying on any activity for profit as conceived by Section 2(15) of the Act of 1961.

30. Now, we shall turn to the decisions relied upon on behalf of the revenue. The first of those decisions is of the Supreme Court in Sole Trustee, Loka Skikshana Trust v. CIT : [1975]101ITR234(SC) . According to Clause 2 of the trust deed relating to that case, the object of the assessee was to educate the people of India in general and of Karnataka in particular by (a) establishing, conducting and helping directly or indirectly institutions calculated to educate the people by spread of 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 Section 11 read with Section 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 trust, namely, supplying the Kannada speaking people with an organ or organs of educated public opinion.........

The sense in which the word 'education ' has been used in Section 2(15) is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received.........what education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by normal schooling.'

31. The learned judges have held that the object of the trust was not 'education' but 'the advancement of any other object of general public utility '. In view of this decision, which has been affirmed by the decision in CIT v. Dharmodayam Co. : [1977]109ITR527(SC) and the fact that the assessee in the present case is not running any educational institution like a school or college, we are of the opinion that the object of the assessee is not 'education'. The activity of the assessee in granting scholarships to students studying in the School of Arts and Crafts, Madras, and sending its superintendent or other persons connected with the institute to various places where handicrafts articles are made by artisans for advising them on improving production methods and finish, etc., would fall only under the head 'Advancement of any other object of general public utility'. Regarding this aspect the Supreme Court has observed in the same decision, viz., Sole Trustee, Loka Shikshana Trust v. CIT : [1975]101ITR234(SC) thus (p. 242) :

'The position as it existed under the Act of 1922 was that once the purpose of the trust was relief of the poor, education, medical relief or the advancement of any other object of general public utility, the trust was considered to be for a charitable purpose. 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, even if the purpose of trust is 'advancement of any other object of general public utility', it would not be considered to be 'charitable purpose' unless it is shown that the above purpose does not involve the carrying on of any activity for profit. The result thus of the change in the definition is that in order to bring a case within the fourth category of charitable purpose, 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.'

32. 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.'

33. 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]81ITR147(Cal) which came up for consideration in appeal before the Supreme Court in Indian Chamber of Commerce v. CIT : [1975]101ITR796(SC) . The Division Bench of the Calcutta High Court observed (p. 152):

'The expression ' the advancement of any other object of general public utility not involving the carrying on of any activity for profit' plainly indicates that it is not the object of general public utility which would involve the carrying on of any activity for profit but the ' advancement' of that object. Otherwise, it will lead to a self-contradictory situation because the reason for including the object of general public utility as a charitable purpose was that it was not a charitable purpose, with a blanket cover for any object of general public utility but with the severe limitation that the advancement of an object of general public utility would not involve the carrying on of any activity for profit or else it would not be a charitable purpose within the meaning of Section 2(15) of the Income-tax Act, 1961. That, in our view, is the true import, meaning and significance of this new definition with the expression ' the advancement of any other object of general public utility not involving the carrying on of any activity for profit'. In other words, the advancement of any other object of general public utility would be a charitable purpose provided that its advancement does not involve the carrying on of any activity for profit. The wisdom behind this limitation is plain. The expression 'object of general public utility' is an expression of wide import and it was, therefore, thought necessary by Parliament in its wisdom to impose certain restrictions on the area of the object of general public utility and the area selected is that its advancement must not involve the carrying on of any activity for profit.'

34. The third decision relied upon on behalf of the revenue is of the Supreme Court in Indian Chamber oj Commerce v. CIT : [1975]101ITR796(SC) already referred to above. The question for consideration in that case turned on the meaning of 'charitable purpose' as defined in Section 2(15) of the Act of 1961. The Indian Chamber of Commerce, the assessee in that case. was a company registered under the Companies Act, 1913, and a general concluding clause in its memorandum and articles of association authorised it 'to do all other things as may be conducive to development of trade, commerce and industries or incidental to attainment of the above objects or any of them'. The income and property of the company could not be paid to any of its members by way of dividend, bonus 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.'

35. 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]100ITR351(Ker) . 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 '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 somewhat 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. Bat 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......Webster Third New Inter' national 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.'

36. The same Full Bench of the Kerala High Court has observed in CIT v. Dharmadeepli : [1975]100ITR375(Ker) :

'In view of the altered definition of the term 'charitable purpose', the question whether an object 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.'

37. 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., with the object of promoting charity, or education, etc. The objects incidental or ancillary to the attainment of the above main objects were to run kuries or chitties and the other objects were to establish, promote and carry on any other business. The assessee's claim to exemption under Section 11 of the I.T. Act, 1961, was disallowed by the learned judges.

38. The last decision relied upon on behalf of the revenue is of a Division Bench of the Kerala High Court in CIT v. India Pepper and Spice Trade Association : [1978]111ITR206(Ker) . There the learned judges have observed (p. 210):

'If the advancement of an object of general public utility is connected or linked with an activity for profit, then, the particular charity must be outside the definition of Section 2(15) and the profits arising out of that charity will not, therefore, be exempt from tax.'

39. In the present case, the assessee's object is of general public utility and it involves the carrying on of an activity for profit, as the assessee carries on the business of buying and selling or selling on commission articles produced by handicraftsmen or otherwise, and ordinarily profit motive is a normal incident of business activity. Therefore, the two conditions which must be fulfilled before the purpose of the trust can be held to be a 'charitable purpose' after the change in the definition has been brought about by the Act of 1961, namely, (1) that 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, are not together satisfied in the present case. On behalf of the assessee, it was submitted before the Tribunal that the act of buying and selling or selling on commission articles produced by handicraftsmen or otherwise is not one of the objects of the assessee but only the means to attain the main object and, therefore, the income from the two funds was exempt from tax. Therefore, it is clear that the advancement of the object of general public utility is linked or connected with an activity for profit, and that it is not a charitable purpose within the meaning of Section 2(15) of the Act. In these circumstances, with respect, we are inclined to base our decision on the decision of the Supreme Court in Indian Chamber of Commerce v. CIT : [1975]101ITR796(SC) and the other decisions mentioned above, relied upon on behalf of the revenue. We find that the object of the assessee is not a 'charitable purpose' within the meaning of Section 2(15) of the Act.

40. Accordingly, we hold (1) that the Appellate Tribunal erred in holding that the income of the assessee from the General Fund and the South Indian Women Workers Executive Committee Fund was entitled to exemption under Section 11 of the I.T. Act, 1961, and (2) that the income from the purchase and sale of handicrafts, affording monetary facilities without setting up educational institutions or training centres for advancement of studies, does not constitute charitable purpose and would not, as such, qualify for exemption and answer the questions in the negative and in favour of the revenue. The assessee shall pay the revenue's costs. Advocate's fee Rs. 500 one set.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //