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Bengal National Chamber of Commerce and Industry Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 454 of 1973
Judge
Reported in[1978]111ITR514(Cal)
ActsIncome Tax Act, 1961 - Sections 2(15) and 11
AppellantBengal National Chamber of Commerce and Industry
RespondentCommissioner of Income-tax
Appellant AdvocateDebi Pal and ;P.K. Pal and ;M. Seal, Advs.
Respondent AdvocateSuhas Sen and ;Ajit Sen Gupta, Advs.
Cases ReferredC) (Indian Chamber of Commerce v. Commissioner of Income
Excerpt:
- .....that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them, namely, the newspaper industry, which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. in order to prevent the misuse of this definition in such cases, the select committee felt that the words 'not involving the carrying on of any activity for profit' should be added to the definition.'24. learned counsel for the assessees has argued that the construction aforesaid which he has suggested fits in with the object for which the amendment was made. the whole purpose of the amended definition, according to learned counsel, was to restrict.....
Judgment:

Sankar Prasad Mitra, C.J.

1. This is a reference under Section 256(1) of the Income-tax Act, 1961. The assessment years involved are 1965-66 to 1968-69. The relevant accounting years are the calendar years 1964, 1965, 1966 and 1967, respectively.

2. By the memorandum of association adopted on June 17, 1940, the Bengal National Chamber of Commerce & Industry (hereinafter referred to as 'the Chamber'), took over the assets and liabilities and rights and privileges of the unincorporated chamber established in 1887. The new chamber was to function in all respects in continuation of the unincorporated chamber.

3. According to the statement of the case the objects of the association are set out in Article III of the said memorandum and the principal object was the advancement of an object of general public utility as envisaged by Section 11 of the Income-tax Act, 1961, read with Section 2(15) thereof. Article IV of the memorandum stated that the objects of the chamber extended to the whole of India and West Bengal in particular. Articles V and IX of the memorandum stated that the income and property were to be applied solely for the promotion of the objects set forth in the memorandum and no portion thereof even on the winding up or dissolution wasto go to any of its members. The articles of association providing for the qualifications of the members, etc., were also adopted at a meeting held on June 17, 1940. There were to be five classes of members.

4. On August 13, 1946, a deed of trust was executed between the chamber and the assessees, namely, trustees of the Bengal National Chamber of Commerce & Industry. By this deed certain properties, which fell tinder the Calcutta Improvement Trust Scheme in Mission Row Extension, were to be held in trust for advancing the purposes of the chamber. Under Clause 7 of the deed the assessees could let out any portion of the building which would be constructed on the property. According to Clause 14, the assessees were to make over to the chamber ordinarily 75 per cent. of the net collection from the trust properties with certain exceptions.

5. In the assessment years in question the assessees earned income from rent by letting out the properties vested in it under the deed of trust. The assessees filed returns showing 'nil' income claiming that such income was exempt as being from a charitable trust under the provisions of Section 11 of the Income-tax Act, 1961. The Income-tax Officer accepted the contention of the assessees that the principal object was the advancement of the objects of general public utility. He, however, held that the assessees were not entitled to any exemption as it was carrying on an activity for profit. The Income-tax Officer brought to tax the assessees' total income assessable under the head 'Property' in the years under consideration. The total income varied from Rs. 43,625 to Rs. 69,404.

6. The Appellate Assistant Commissioner accepted the assessees' plea that the income was entitled to exemption. The Appellate Assistant Commissioner relied on the judgment of the Kerala High Court in Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645. But before we come to this judgment let us first set out the provisions of Section 2(15) of the Income-tax Act, 1961. It runs thus :

''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.'

7. Then we come to Section 11. The provisions of Section 11, relevant for our purposes, are as follows:

'11. Income from property held for charitable or religious purposes.--(1) 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 for application to such purposes in India, to the extent to which the income soaccumulated is not in excess of twenty-five per cent. of the income from the property or rupees ten thousand, whichever is higher ;......

(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 and accordingly chargeable to tax within the meaning of Sub-section (3).'

8. The Kerala High Court in the decision cited above has held that in order to take an object of general public utility outside the scope of the definition in Section 2(15) of the Income-tax Act, 1961, on the ground that it involves carrying on of an activity for profit, that object must involve the carrying on of an activity for profit. 'Involve', according to the Kerala High Court, means comprise or imply and the object must, therefore, imply carrying on of any activity for profit. It is not sufficient if there is some activity carried on which results in profit. There must be an activity in the form of business because the activity must be for profit and that activity for profit must be involved in the objects of general public utility. Even when an activity is in furtherance of the objects of a trust and even if such activity results in profits, the definition will not be attracted, unless the objects involved the carrying on of an activity for profit.

9. The Kerala High Court, therefore, linked up activity for profit with object. The Appellate Assistant Commissioner in the reference before us has relied on this view of the Kerala High Court and has agreed with the assessees that the income from rents of the portions of the property let out which was utilised in the manner aforesaid was exempt from payment of income-tax.

10. The matter then went to the Tribunal. Before the Tribunal the department relied on the Calcutta High Court's decision reported in : [1971]81ITR147(Cal) (Commissioner of Income-tax v. Indian Chamber of Commerce). A Division Bench of this court, consisting of P.B. Mukharji C.J. and T.K. Basu J., has held that the proper interpretation of the definition of 'charitable purpose' in Section 2(15) of the Income-tax Act, 1961, is to consider the expression 'not involving the carrying on of any activity for profit' as qualifying the expression 'the advancement of any other object of general public utility' and not other classes of charitable purpose mentioned in that section like relief of the poor, education and medical relief. In other words, this court is of the view, that the advancement ofany 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. This court has said that Parliament has thought it necessary 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 o'n of any activity for profit.

11. This court was dealing with the case of the Indian Chamber of Commerce. It has been observed that though the normal objects of the chamber may be held to be objects of general public utility, any profit that may be derived from its activities in the form of :

(i) arbitration fees,

(ii) fees for issuing certificates of origin, and

(iii) fees for weighment and measurement for the benefit of traders in general;

are the result of activities carried on for profit within the meaning of Section 2(15) of the Act and the incomes from such activities are not exempt from tax under Section 11 of the Act.

12. It is to be noted that this court's view aforesaid was expressed upon consideration of the provisions of both the sections, viz., Section 2(15) and Section 11.

13. Before the Tribunal the assessees' counsel submitted that the assessees only derived income under the head 'property' and had no income from business and, as such, they did not carry on any activity for profit and their case fell outside the purview of the restriction in the amended definition in Section 2(15) of the Income-tax Act, 1961. The assessee's counsel relied on the Kerala High Court's judgment [1971] 80 ITR 645 in support of his contention.

14. The Tribunal observed that it was clear that the qualifying words 'not involving the carrying on of any activity for profit' referred only to the charitable purpose which is 'advancement of any other object of general public utility' and not other charitable purposes such as relief of the poor, education or medical relief. The Tribunal further observed that in the appeals before it the qualifying words were applicable as the objects of the chamber were for the advancement of other objects of general public utility. The Tribunal relied upon the Calcutta High Court's decision [1971] 80 ITR 147 and proceeded to observe that the property under trust was let out for the advancement of the objects of the chamber and the restrictive portion of Section 2(15) would be applicable to the case of the assessees if the letting out of the property was an activity for profit.

15. The Tribunal drew a distinction between the words 'activity,' and 'trade' or 'business' on the basis of the decision referred to above. The Tribunal was of the view that, ordinarily, a trade or business was set upwith a profit motive. The Tribunal said that income from property was assessable under Section 9 even if that income had been earned by letting out shops and stalls by an assessee where the shops and stalls had been developed by buying and developing landed properties. The Tribunal was of the view that to determine the nature of the receipts and to determine whether they were of income nature it had to be considered whether there was any organised effort on the part of the assessee to derive any surplus by utilisation of its assets or otherwise. If there was any such organised effort it would involve the carrying on of an activity for profit. In such circumstances, says the Tribunal, there would be' an activity for profit even in the case of earning income from letting out the property. The Tribunal observed that the property was held by the assessees for advancement of the object of the chamber and it was well envisaged that the property should be utilised by renting out, etc., to obtain the maximum surplus and there was, therefore, an organised effort to obtain a surplus from the property and that it involved the carrying on of an activity for profit.

16. In the Tribunal's view it did not matter under what head the surplus was assessed. The Tribunal came to the conclusion that as the assessees were carrying on an activity for profit its income from property was not entitled to any exemption. The Tribunal accordingly allowed the departmental appeals for all the years and restored the assessment orders of the Income-tax Officer.

17. The following questions of law have been referred to us:

'(1) Whether, on the facts and in the circumstances of the case, and on a correct interpretation of the memorandum of association of the Bengal National Chamber of Commerce and Industry and the deed of trust executed on the 13th August, 1946, the Tribunal was right in holding that the assessee was carrying on an activity for profit ?

(2) If the answer to question No. 1 is in the affirmative then, whether, on the facts and in the circumstances of the case and on a correct interpretation of the memorandum and articles of association of the Bengal National Chamber of Commerce and Industry and the deed of trust executed on the 13th August, 1946, the property was held under trust wholly for charitable purposes within the meaning of Section 2(15) and Section 11(1) of the Income-tax Act, 1961, and exemption from tax could be claimed in respect of the income from the said property ?'

18. We should observe at the outset that the Income-tax Officer accepted the assessee's contention that the principal object of the assessees was the advancement of the objects of general public utility. The question for determination, therefore, is whether the assessees, despite the above finding, can come within the definition of 'charitable purpose' in Section 2(15) of the Income-tax Act, 1961.

19. Learned counsel for the assessees has argued before us that in order to bring a case within the fourth category of charitable purpose as defined in Section 2(15) it is necessary to establish :

(a) that the purpose of the trust is advancement of any other object of public utility, and

(b) that the above purpose does not involve the carrying on of any activity for profit.

20. Learned counsel says that both the conditions must be fulfilled before the purpose of the trust can be held to be 'charitable'. Learned counsel submits that in deciding whether the purpose of the trust involves the carrying on of an activity for profit one has to ascertain whether the activity which has resulted in the income has been resorted to or indulged in with the motive to earn profit or with the motive to earn income to feed the charities only. In the first case, submits learned counsel, the second condition aforesaid is not fulfilled. In the second case, it is fulfilled. This construction, says learned counsel, of Section 2(15) fits in with the object for which Section 2(15) was amended.

21. It has to be observed that in the Indian Income-tax Act, 1922, there was an Explanation to Section 4(3) and the Explanation was as follows :

'In this subjection 'charitable purpose' includes relief of the poor, education, medical relief and the advancement of any other object of general public utility.'

22. The words 'not involving the carrying on of any activity for profit' were introduced in the Income-tax Bill of 1961 which subsequently became an Act. From the Finance Minister's speech it appeared that the Government was accepting the recommendations of the Select Committee to which the Bill was referred. One of the recommendations was :

'The Committee is of opinion that the advancement of an object of general public utility which involves the carrying on of any activity for profit should not come within the ambit of the charitable purpose.' [See Gazette of India, Extraordinary, Part II, Section 2, page 677(4)].

23. The Finance Minister in his speech in the House explicated the reason for the restrictive condition. He said :

'The definition of 'charitable purpose' in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them, namely, the newspaper industry, which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words 'not involving the carrying on of any activity for profit' should be added to the definition.'

24. Learned counsel for the assessees has argued that the construction aforesaid which he has suggested fits in with the object for which the amendment was made. The whole purpose of the amended definition, according to learned counsel, was to restrict exemption to a genuine public charitable trust.

25. Learned counsel for the assessees argues further that the test is that if the income of the trust feeds charitable purposes only then even if the activities of the trust yield an income such activities are without any profit motive because the trust is a genuine public charitable trust. It is not the intention of the legislature that a charitable trust cannot earn any income from business or property. Section 11(1)(a) read with Section 11(4) specifically provides that an income of a charitable trust from a business undertaking is allowed exemption provided that such income is applied only for such charitable purpose and the other conditions of the section are satisfied. Therefore, if a charitable trust earns any income from property or from business with the only and sole purpose of feeding the charity, the trust will none the less, says learned counsel, be for a charitable purpose and such activities which have yielded the income are not tainted with any profit motive. In other words, the carrying on of the activity of business must not be with the dominant intention to make profit only.

26. The arguments of learned counsel for the assessees are attractive, but in view of the two recent decisions of the Supreme Court we are unable to uphold them. The first decision is reported in : [1975]101ITR234(SC) (Sole Trustee, Loka Shikshana Trust v. Commissioner of Income-tax). The second decision is reported in : [1975]101ITR796(SC) (Indian Chamber of Commerce v. Commissioner of Income-tax).

27. In the first decision the Bench consisted of Khanna, Beg and A.C. Gupta JJ. In the second decision the Bench consisted of Krishna Iyer, A. C. Gupta and Fazal Ali JJ.

28. In Loka Shikshana Trust case : [1975]101ITR234(SC) , Khanna J., at page 242, has observed :

'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.'

29. With this view of Khanna J., A.C. Gupta J. has agreed.

30. Beg J. has delivered a separate but concurring judgment. His Lordship has said at page 255 :

' The wprd ' involve ' does not, it seems to me, necessitate the bringing out of the profit motive of an activity expressly in the deed of trust as wassuggested by the learned counsel for the appellant. The dictionary meaning of the word 'involve' is: 'to envelop; to entangle ; to include ; to contain; to imply' (See The Shorter Oxford English Dictionary, III edition, page 1042). All profit making, even as a mere by-product, would have been covered by the word ' involving ', which is of wide import, if this word had stood alone and by itself without further qualifications by the context. The use of the words 'for profit', however, shows that the involvement of profit making should be of such a degree or to such an extent as to enable us to infer it to be the real object. As a rule, if the terms of the trust permit its operation 'for profit', they become, prima facie, evidence of a purpose falling outside charity. They would indicate the object of profit making unless and until it is shown that terms of the trust compel the trustee to utilise the profits of business also for charity. This means that the test introduced by the amendment is: Does the purpose of a trust restrict spending the income of a profitable activity exclusively or primarily upon what is 'charity' in law? If the profits must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on 'charity'. If that obligation is there, the income becomes entitled to exemption. That, in our opinion, is the most reliable test.'

31. Learned counsel for the assessees before us has placed strong reliance on the above observation of Beg J. He has submitted to us that in every case one has to look into the genuineness of the purpose. It is not enough that the trust is making a profit. If it can be shown that the profit that is made is not utilised for any purpose other than feeding of the charity itself, then the income would enjoy the protection of Section 2(15).

32. It is clear from the observations of Khanna and Beg JJ., quoted above, that the approaches of the two learned judges were not the same. Khanna J.'s view which is supported by A. C. Gupta J. appears to be a restricted one.

33. The second judgment in the case of Indian Chamber of Commerce : [1975]101ITR796(SC) was on an appeal from the judgment of the Calcutta High Court we have already cited. Krishna Iyer J. has delivered the judgment. The Calcutta High Court's view we have referred to already has been supported by Krishna Iyer J. Krishna Iyer J. has also considered the views of Khanna and Beg JJ. in the earlier judgment. At page 803 Krishna Iyer J. says :

'Taking a close-up of Section 2(15) with special emphasis on the last concluding words, we have to interpret 'charitable purpose' in such manner that we do not burke any word, treat any expression as redundantor miss the accent of the amendatory phrase. So viewed, an institution which carries out charitable purposes out of income 'derived from property held under trust wholly for charitable purposes' may still forfeit the claim to exemption in respect of such takings or incomes as may come to it from pursuing any activity for profit. Notwithstanding the possibility of obscurity and of dual meanings when the emphasis is shifted from 'advancement' to ' object' used in Section 2(15), we are clear in our minds that by the new definition the benefit of exclusion from total income is taken away where in accomplishing a charitable purpose the institution engages itself in activities for profit. The Calcutta decisions are right in linking activities for profit with advancement' of the object. If you want immunity from taxation, your means of fulfilling charitable purposes must be unsullied by profit-making ventures. The advancement of the object of general public utility must not involve the carrying on of any activity for profit. If it does, you forfeit. The Kerala decisions fall into the fallacy of emphasizing the linkage between the objects of public utility and the activity carried on. According to that view, whatever the activity, if it is intertwined with, wrapped in or entangled with the object of charitable purpose even if profit results therefrom, the immunity from taxation is still available. This will result in absurd conclusions.'

34. At page 805 Mr. Justice Krishna Iyer observes :

'We will illustrate to illumine. If there is a restrictive provision in the bye-laws of the charitable organisation which insists that the charges levied for services of public utility rendered are to be on a 'no profit' basis, it clearly earns the benefit of Section 2(15). For instance, a funeral home, an S.P.C.A. or a co-operative may render services to the public but write a condition into its constitution that it shall not charge more than is actually needed for the rendering of the services,--may be it may not be an exact equivalent, such mathematical precision being impossible in the case of variables,--may be a little surplus is left over at the end of the year--the broad inhibition against making profit is a good guarantee that the carrying on of the activity is not for profit. As an antithesis, take a funeral home or an animal welfare organisation or a super-bazar run for general public utility by an institution which charges large sums and makes huge profits. Indubitably they render services of general public utility. Their objects are charitable but their activities are for profit. Take the case of a blood bank which collects blood on payment and supplies blood for a higher price thereby making profit. Undoubtedly, the blood bank may be said to be a general public utility but if it advances its public utility by sale of blood as an activity for (making) profit, it is difficult to call its purpose charitable. It is just blood business.'

35. At page 808, Mr. Justice Krishna Iyer has said :

'The true test is to ask for answers to the following questions: (a) Is the object of the assessee one of general public utility (b) Does the advancement of the object involve activities bringing in moneys? (c) If so, are such activities undertaken, (i) for profit, or (ii) without profit Even if (a) and (b) are answered affirmatively, if Clause (i) is answered affirmatively, the claim for exemption collapses. The solution to the problem of an activity being one for or irrespective of profit is gathered on a footing of facts. What is the real nature of the activity One which is ordinarily carried on by ordinary people for gain Is there a built-in-prescription in the constitution against making a profit Has there been in practice, profit from this venture ?, although this last is a weak test. The mere fact that a service is rendered is no answer to charge-ability because all income is often derived by rendering some service or other.'

36. It is abundantly clear that Mr. Justice Beg has taken a broad view, Mr. Justice Khanna, a restricted view and Mr. Justice Krishna Iyer, a still more restricted view. Mr. Justice Krishna Iyer's judgment is an unanimous decision of the Supreme Court to which, incidentally, Mr. Justice Gupta was also a party.

37. Tf we apply the tests laid down by Mr. Justice Krishna Iyer to the instant case, we find that the trustees have acquired land, they have constructed a house on the land and portions of the house have been let out by them. They derive rents regularly and 75 per cent. of the rents after meeting various expenses are handed over to the chamber for its objects of general public utility. On these facts, in view of Mr. Justice Krishna lyer's tests, it cannot be said that the advancement of the object of general public utility does not involve activity for profit.

38. Learned counsel for the assessees has urged that the judgment of the Supreme Court in the case of the Indian Chamber of Commerce : [1975]101ITR796(SC) renders nugatory the relevant provisions of Section 11 of the Income-tax, Act, 1961, which we have quoted above. It is not for us to examine the validity of this contention. We agree with the Tribunal's view that the assessee in the instant case cannot claim exemption from income derived from property.

39. Our attention has been drawn to a decision of the Madras High Court reported in : [1976]105ITR546(Mad) (Commissioner of Income-tax v. Madras Slock Exchange Ltd.] which has considered both the judgments of the Supreme Court. But, in view of the observations of the Supreme Court we have quoted above, it is difficult for us in the instant reference to take any other view.

40. Our answer, to the questions referred to us are as follows :

Question No. 1 : Yes, in favour of the revenue.

Question No. 2 : No, in favour of the revenue.

41. There will be no order as to costs.

Deb, J.

42. I agree.


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