# [1980] 2 S.C.R. 77

- **Citation:** [1980] 2 S.C.R. 77
- **Court:** Supreme Court of India
- **Decided:** 1979-11-19
- **Bench:** P. N. Bhagwati, N. L. Untwalia, V. D. Tulzapurkar R. S. Pathak, A. P. Sen
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/1980-2-s-c-r-77-7923
- **Pages:** 64

## Headnote

Income-tax Act 1961-Sections 2 (15), 11 and 13(1)' (bb)-Scope of-
.. Advancement of any other objectr of general public utility not involving the
-carrying on oj any activity for profit" nzeaning.
The assessee which was an incorporated company, carried on
various
activities for promotion of commerce and trade in art silk yarn, art silk cloth
and silk cloth.
Its other objects were to obtain licences for import of raw
material needed by its members, to obtain licences for export of cloth manufactured by its members and to do all other lawful things as are incidental or
conducive to the attainment of the objects. Its income and property were to
be applied solely for the promotion of its objects and no portion of the income
or property was to be paid or transferred directly or indirectly by way of
dividend, bonus or profits to its meinbers.
In the event of its winding up or
<lissolution, surplus of assets over liabilities, if any, could not be distributed
amongst the members but was liable to be given or transferred to some other
company having the same objects as the assessee, to be determined
by the
n1embers of the assessee or by the fligh Court which has jurisdiction in the
matter.
The assessee recieved incon1e by
way of annual
subscription fro1n
its
men\bers (the revenue conceded that this amount was exempt from tax) and
commission on the basis of certain percentage of the value of licences for
import of foreign yarn <ind quotas for the purchase of indigenous yarn. The
assessee constructed a building out of the. amounts received and the rent received from the tenants was an additional source of its income.
The assessee's claim for exemption
under section 11(1) of the·
JncomcTax Act ~·as rejected by the Income-Tax Officer on the ground that its objects
'"'ere not charitable within the meaning of section 2(15) of the Act.
Oil the
-other hand the Appellate Assistant Commissioner held that the
~ssessee's
income was entitled to exemption under section 11 ( 1) because the activities
carried on by the assessee were in fulfilment of the primary purposes
\Vhich
did not involve the carrying on of any activity for profit. This view of the
Appellate· Assistant Commissioner was affirmed by the Appellate Tribunal in
appeal by the revenue.
,
In view of the conflicting decisions amongst different High Courts on the
interpretation of the words "not involving the carrying on of any activity for
profit" in the definition of charitable purpose in section 2(15) of the 1961 Act
the Appellate Tribunal referred to this Court, under section 257 of the Act,
I
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B
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78
SUPREME COURT REPORTS
[ 1980] 2 S.C.R'
Athe question v. hether the as..<:essee was entitled to exen1ption under ~ection 11 ( l )'
of the Act.
It was contended on behalf of the revenue that if the means to achieve or
carry out the object of general public utility involve the carrying on of any
aciivity for profit, the purpose of the trust, though falling within· the description
"any other object of general public utility"; would not be a charitable purpqse·
B
and the income from business would not be exempt from tax.
Dismissing the appeal,
•
HELD : (Per majority Bhagwati, Untwalia and Tulzapurkar, JJ)
1. The e-0ntention that the .objects of the assessee did not fall
\Vithin
the
C
cate,gory of "advancen1ent of. any other object of general public
utility" and
\Vere not charitable 'Within the meaning of section 2(15) in that it£
members
v.·ere merely specified individuals who did not constitute a section of the public
cannot be allowed to be raised in this reference.
In a reference under s. 257
of the Inco1nc Tax; Act 1961 the TribunM is not competent to refer to this
Court a question in respect of which there is no conflict of decisions among.st
different High Courts nor can this Court travel beyond the particular questioff
D
of fa\\' referred to it by the Tribunal on account of conflict in the decision_<; of
the High Court•.
[92 A-Bl
2. (a) It is well-settled that where the main o

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ADDITIONAL COMMISSIONER OF INCOME-TAX
GUJARAT, AHMEDABAD
v.
77
SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATION,
SURAT
November 19, 1979
[P. N. BHAGWATI, N. L. UNTWALIA, 'V. D. TULZAPURKAR
R. S. PATHAK AND A. P. SEN, JJ.]
Income-tax Act 1961-Sections 2 (15), 11 and 13(1)' (bb)-Scope of-
.. Advancement of any other objectr of general public utility not involving the
-carrying on oj any activity for profit" nzeaning.
The assessee which was an incorporated company, carried on
various
activities for promotion of commerce and trade in art silk yarn, art silk cloth
and silk cloth.
Its other objects were to obtain licences for import of raw
material needed by its members, to obtain licences for export of cloth manufactured by its members and to do all other lawful things as are incidental or
conducive to the attainment of the objects. Its income and property were to
be applied solely for the promotion of its objects and no portion of the income
or property was to be paid or transferred directly or indirectly by way of
dividend, bonus or profits to its meinbers.
In the event of its winding up or
<lissolution, surplus of assets over liabilities, if any, could not be distributed
amongst the members but was liable to be given or transferred to some other
company having the same objects as the assessee, to be determined
by the
n1embers of the assessee or by the fligh Court which has jurisdiction in the
matter.
The assessee recieved incon1e by
way of annual
subscription fro1n
its
men\bers (the revenue conceded that this amount was exempt from tax) and
commission on the basis of certain percentage of the value of licences for
import of foreign yarn <ind quotas for the purchase of indigenous yarn. The
assessee constructed a building out of the. amounts received and the rent received from the tenants was an additional source of its income.
The assessee's claim for exemption
under section 11(1) of the·
JncomcTax Act ~·as rejected by the Income-Tax Officer on the ground that its objects
'"'ere not charitable within the meaning of section 2(15) of the Act.
Oil the
-other hand the Appellate Assistant Commissioner held that the
~ssessee's
income was entitled to exemption under section 11 ( 1) because the activities
carried on by the assessee were in fulfilment of the primary purposes
\Vhich
did not involve the carrying on of any activity for profit. This view of the
Appellate· Assistant Commissioner was affirmed by the Appellate Tribunal in
appeal by the revenue.
,
In view of the conflicting decisions amongst different High Courts on the
interpretation of the words "not involving the carrying on of any activity for
profit" in the definition of charitable purpose in section 2(15) of the 1961 Act
the Appellate Tribunal referred to this Court, under section 257 of the Act,
I
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B
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E
G
H
78
SUPREME COURT REPORTS
[ 1980] 2 S.C.R'
Athe question v. hether the as..<:essee was entitled to exen1ption under ~ection 11 ( l )'
of the Act.
It was contended on behalf of the revenue that if the means to achieve or
carry out the object of general public utility involve the carrying on of any
aciivity for profit, the purpose of the trust, though falling within· the description
"any other object of general public utility"; would not be a charitable purpqse·
B
and the income from business would not be exempt from tax.
Dismissing the appeal,
•
HELD : (Per majority Bhagwati, Untwalia and Tulzapurkar, JJ)
1. The e-0ntention that the .objects of the assessee did not fall
\Vithin
the
C
cate,gory of "advancen1ent of. any other object of general public
utility" and
\Vere not charitable 'Within the meaning of section 2(15) in that it£
members
v.·ere merely specified individuals who did not constitute a section of the public
cannot be allowed to be raised in this reference.
In a reference under s. 257
of the Inco1nc Tax; Act 1961 the TribunM is not competent to refer to this
Court a question in respect of which there is no conflict of decisions among.st
different High Courts nor can this Court travel beyond the particular questioff
D
of fa\\' referred to it by the Tribunal on account of conflict in the decision_<; of
the High Court•.
[92 A-Bl
2. (a) It is well-settled that where the main or primary objects are distributive, each and every one of the objects must be charitable in order that the
trust of institution may be upheld as a valid charity.
But if the
primary or
dominant pu1po~·e of a trust is charitable another object which by itself may
E
not be charitable but which is merely ancillary or incidenlal to the primary or
dominant purpose would not prevent it from being valid charity.
[92 D-E]
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(h) The test which has to be· applied is whether the object which is said to·
be non-chari~able is the main or primary object of the trust or institution or it
Ls ancillary or incidental to the dominant or primary object which is charitable.
'X_
[92 Ff
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Mohd. Ibrahim v. Commissioner of lncon1e-tax 51 Indian App~al 260; Easr
lnd;a Industries (Madras) Ltd. v. Co1nn1issioner of lnconze-tax, 65 ITR 611=
[1967] 3 SCR 356; Comn1issioner of Income-tax, Madras v. Andhra Cha1nber
of Con1merce, 65 ITR 722=[1965] 1 SCR 565. Con1missioner of l11Tand Revenue
v. Yorkshire Agricultural Society [1928] 1 K.B. 611; 13 Tax Cas. 58; Institution
of Civil Engineers v. Conunissioner of Inland Rei•enue [1931] 161 Tax Cas. 158:
(C.A.); referred to.
In the instant case the incoilJ.e and property of the assessee are held under
a legal obligation for the purpose of advancement of an object Of general public
utility within the meaning of s. 2(15) of the Act.
The dom~nant or primary
purpose of the assessee is to promote commerce and trade in art silk yarn etc.,
v.·hich is charitable and the other objects are in the nature of powers conferred'
upon the assessee for the purpose of securing fulfilment of the
dominant or
primary purpose.
They would no doubt benefit the· members of the assesseebut this benefit v:ould be incidenta-1 in carrying out the main or primary purpose
of the assessee.
If therefore the dominant or· primary purpose of the asses~ce
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COMMISSIONER OF INCOME-TAX V. SURAT ART SILK
79
was charitable the. subsidiary objects would not militate against its charitable
A
.character and ther purpose of the assessee would not be any the less charitable.
[93 E-G]
3. It is settled law that the words "advancement of any
other object
of
general public utility" would exclude objects of private gain; but this require·
ntent is also satisfied in the present case because the object _of
private profit
is eliolinated by the recognition of the assessee under s. 25 of the Companies
Act, 19:56 and the objects set out in clauses 5 and 10 of its 1-Iemorandum of
As&ociation.
[94 C·D]
4. Where the purpose of a trust or institution is relief of the poor, education
or medical relief, the requirement of the definition of
"charitable
purpose"
would be fully satisfied even if an activity for profit is carried on in the course
of the actual carrying out of the primary purpose of the trust or institution.
But if the purpose of the !Just or institution is such that it cannot be regarded
'~ covered by the heads of "relief of the poor, education arid medical relief''
but its claim to be a charitable purpose rests only on the last head "advancen1ent of any other object of general public utility" then it requires,
for
ifa
applicability, fulfilment of two conditions, namely, (i) the purpose of the t;ust
-Or institution must be advancement of an object of general public utility; and
(ii) the purpose must not involve the carrying on of any activity for profit.
[94 G-H]
M/s. Dfu:tranulipti v.
('.on1111issioli'er of Incon1e-tax, [197R] 3 S.C.R. 1038,
referred to.
5. The words "not involving the carrying on of any activity for
profit"
qualify or govern only the last head of charitable purpose art<l not the earlier
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three heads.
[94 G]
F.
6. The meaning of the words "not involving the carrying on of any activ~fy
for profit" added in ~. 2(15) of the 1961 Act is that when the purpose of a
trust or institution is the advancement Of an object of general public utility it is
that object of general public utility and not its accomplishment which must not
involve the carrying on of any activity for profit.
[92 H]
7. If the argument of the Revenue that if the means to achieve the object
of general public utility involvi;: the carrying on of any activity for profit, the
purpose of the trust though falling within the description "any other object of
_general public utility" •vould not be a charitable purpose and the inconie from
business would nOt be exempt from tax it right it would not be possible fo;· a
charitable trust
whose purpose is promotion of an object of general
public
utility to carry on any activity for profit at all.
[97 F-H]
8. The consequence would be that even if a business is carried on by
n
trust or institution for the purpose of accomplishing or carrying out an obje~ l
of general public utility and the income from such business is applicable only
for achieving that object, the purpose of the trust would cease to be charitable
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and not only income from such business but also income derived from other
sources \Vould lose the exemption. Such a far-reaching consequence was not
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intended to be brought about by the legislature when it introduced the words
"not involving the carrying on of any activity for profit" in s. 2(15). [98 B·CJ
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80
SUPREME COURT REPORTS
[1980] 2 S.C.R.
A
9. \Vhat is inhibited by the words "not involving the carrying on of any
activity for profit" is the linking of an activity for profit with the
object of
general public utility and not its linking \Vith the accomplishment or carrying
out of the object.
It is not necessary that the accomplishment of the object.
or the means to carry out the object should not involve an activity for profit.
That is not the mandate of the· newly added words.
\Vhat these words require
is that the object should not involve the carrying on of any activity for profit.
IS
The emphasis is on the object of general public utility and not on its accomplishment or attainment.
[98 E-G]
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Conunissioner of lnconie-tax v. Cochin ChaTnber of Conunerce and Indus.-
try, 87 I.T.R. 83 and Andhra PradeiSh State Road Transport Corporation v.
c:onunissioner of /ncon1e-tax, 100 I.T.R. 392 approved.
10. If the intention of the legislature were to prohibit trusts of this nature
from carrying on any activity for profit it \vould have made such a provision
in the cl':'.an.~st terms that no such trust or institution shall carry on any activity
for profit.
[99 E-F]
11. S.:c!ion 13(1) (bb) introduced in the ~!\ct with effect from April I, 1977
provides that in the case of a charitable trust for the relief of the poor, education or n1cdical relief which carries on any business, income derived •rom such
businl:'.ss would not be exe1npt from tax untess· the business is carried on in the
cour,e of the actual carry:ng out of a prim;:ny purpose of the trust or institution.
\Vhere, therefore, a charitable trust falling 'vithin any of the first three
cate::;ories of charitable purpose set out in section 2(15) carries
on business
\Vhich is he!? in trust for the charitable purpose, incon1e fr6m such business
\vould not be exi:n1pt by rt"ason of section 13 ( 1) (bb) and section 11 (4) would,
therefore, have no application in the ca<;e of a charitablc trust falling \vithin any
of th,~ fhst three-heads of charitable purpose.
Si1nilarly, on the construction
i;on'cncLd for by the H.evcnue it \Vould have no applicability in the case of a
ch:ll"ii:iblc trtL<;t falling under the last hi:-ad of charitable purpose. because
in
.'·uch ;1 c:1!:ic income from business would ·not be exempt since th~ purpose would
c·:ase to be c.h<!ritabk.
The construction contended for by
Revenue
\Vould
hav..:
th~ effect of renderings. 11(4) totally redundant after th.: et~actment of
section 13(l)(bb).
A construction which rt'nd...-:rs a
p;·ov1s1on.
the Act
superfluous and reduces it to silence cannot be accepted.
[100 C-!']
12. If the language of a statutory provision is an1biguou3 ;::r,,.:! is c<1pable
of 1 \VO coibtructions that constrUction must be adopted which VI ii." gi\·,: meaning
anJ effect to the other provisions of the enactment rather than !l:al ·which \Vill
gn·e none.
[100 G]
! 3. lf a bu~in::ss is held under trust or legal· obligation to ar·i!y its inco1ne
fc:· pron1otion of a:-i object of general public utility or it is carried on for the
purpose of earning profit to be utilised exclusively for
carrying
out such
charitable purpose, the last concluding words in section 2(15) ¥iOUld have no
arplication and they ·would not deprive the trust or institution of its charitable
char::icter.
What these last concluding words require is not that the
trust or
institution whose purpose is advancement of an object of general public utility
should not carry on any activity for profit at all but that the purpose' of the
trust or institution should not involve the carrying on of any activity for profit.
So }(lng as the purpose does not involve the carrying on of any activity for
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COMMISSIONER OF INCOME-TAX V. SURAT ART SILK
81
l{Jrofit, the requirement of the definition would be met and it is immaterial how
A
·the monies for achieving or implementing such purpose are found, whether by
·carrying on an activity for profit or not.
[104 D-G]
•,
Coniniissioner of Inco111e-tax v. DharnioJ(,yan Co•n,rJany, 109 I.T.R. 527
J
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.followed.
Indian Chamber of Conimerce v. Comn1issio11er of Income-tax (1975) 101
l.T.R. 796 wrongly decided.
The Trustees of the Tribune, (1939)
7
I.T.R.
415; Con1missioner of
Income-tax v. Krishna Warrier; 53 I.T.R .. 176, J. K. Trust v. Co1nmissioner of
Jncome-tax 32 I.T.R. 535 and Sole 'Trustees LokshikJhana Trust v. Commissioner
of Income-tax (1975) IOI l.T.R. 234 (S.C.) referred to.
14. It has therefore to be seen \vh.:ther the· purpose of the trust or .institution
in fact involves the carrying on of an activity for ;profit or in other words
\Yhether an activity for profit is actually carried on as an integral part of the
purpose "as a matter of advancement of the purpose''. There
111ust
be an
atlivity for profit and it i:nust be involved in carrying out the purpose of the
trust or institution that is, it must be carried on in order to advance the
purpose or in the course of carrying out the purpose of the trust or institution.
It is then that the inhibition of the ex;:lusionary clau~e would be attracted.
[105 G-H]
15. Every trust or institution must have a purpose for which it is established
and every purpose must for its acco-mp'.ishI!lent involve the carrying on of an
activity.
Th~ activity must b:: for p:-ofit ~n order to attract the
exclusionary
clause. [106 DJ
16. The preposition "for" in the phrase ''activity for
profit"
has
many
shades of meaning but when used with the active participlci of a verb it nicans
"for the purpose of" and connotes the end with reference to \Vhich something
"' done. [106 E]
17. \Vhere an activity is not pervaded by profit motive but is
carried
on
pri1narily for serving the charitable purpos:-, it would not b.: correct to describe
it as an activity for profit.
But where an activity is carried on with the predon1inant object of -earning profit, it would be. an activity for profit, though it
inay be carried on in advancement of the char:table purpose of the trust or
institution.
Where an activity is carried 0'.1 as a n1atter of advancement of th~
charitable purpose, it would not be incorrect to say as
a
matter of plain
English grammar that the charitabJ.;! purpose involves the ..::arrying on uf finch
activity, but the predominant. object of such activity must be to subservc
the
-charitable purpose and not to e:lrn profit.
[106 F-H]
Dhar111adipti v. Con1111issioner of lncon1e-tax, Kcrala, [1978] 3 S.C.R. 1038
referred to.
18. The test to be applied is \vhether the predon1inant object of the activity
involved in carrying out the object of general public utility is to subserve thl
·charitable purpose or to earn profit.
Where the predominant object
of
the
activity is to carry out the charitable purpose and not to earn profit, it would
not lose its character of a charitable purpose merely because 5:0me profit arises
B
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B
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82
SUPREME COURT REPORTS
[198Uj 2 S.C.R.
from the acttv1ty.
The exclusionary clause does not require that the activity
must be carried on in such a manner that it does not result in any profil. The
restrictive condition that the purpose should not involve the carrying on of any
activity for profit would be satisfied if ·profit makinK is n'ot the rfal obj(c/.
[107 G-H]
19. (a) The observations in Lok Shik.\hana Trust and Indian Chan1bcr
of
Co1n111erce that activity involved in currying out the charitable purpose
must
not be motivated by a profit objective but it must b·~ undertaken for the purpose
of advancement or canying out of the charitable purpose arc correct.
But the
further observation that' v..·hencvcr an activity is cnrried on which yields profit,
the inference n1ust necessarily be drawn. in the absence of some indication to
the contrary, that the activity is for profit and the charitable purpose involves
the carrying on of an activity for profit is not correct.
[109 H; 110 A-B]
( b) It is not necessary that there ·must be a provision in the constitution of
the trust or institution that the, activity shall be carried on a "no profit no loss"
basis or that the profit shall proscribed.
Even if there is no ~uch express
pro\ision, the nature of the charitable purpose, the manner in which the activity
for advancing the charitable purpose is being carried on, and the surrounding
circumstances may clearly intlicate that the activity is not propelled by a dominant profit motive.
What is necessary to be considered
is
\Vhether
haYing
regard to all the facts and circun1stances of the case, the dominant object of the
activity i~ profit making or carrying out a charitable purpo~e. If it
is
the
forn1er the purpose would not be a charitable purpose but if it is the latter the
charitable character of the purpose would not be lost.
[110 C-D]
In the instant case, the activity of obtaining licences for import of foreign
yarn and quptas for purchase of indigenous yarn v.ras not an activity for profit.
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The predominant object of the activity was the promotion. of con1merce
and
trade in those comn1odities which was clearly an object of general
public
utility and profit was merely a by-product which resulted incidentally in
the
process of carrying out charitable purpose.
The assessee's profit
could
be
utilized only for fee;ding this charitable· purpose. The don1inant and real object
of the activity being the advancement of the charitable purpose the mere fact
, \
. that the activity yielded profit did not alter the charitable
character~ of the
F
assessee.
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Per Pathak J. (concurring)
Jn the scheme under the Income-tax Act. 1961 for exemption fro1n incometax of income derived from prop:!rty held under trust for charitable purposes,
t\vo safeguards have been provided.
One arises from the limited definition of
"charitrible purpose'' by s. 2(15), Income-tax Act, 1961. and the other is provided by the controls imposed on th_e utili~ation of accun1ulat<:d income J.eriv.!d
from the charitable trust or institution.
The first relates to the very purpose of
1'he t1ust or institution. the 5ccond to the application of the resulting incon1e.
Ini
l 011struing \vhat is a ''charit;tble purpose'' under s. 2( 15) of the Act considl!taii11ns pertinent to the application of the accumulated income should not 01dinarily be taken into account.
[114 F-G]
The first three heads of "charitable purpose" in s. 2(15) of the
Act are
Uefincd in specific terms, namely, relief of the poor, education
and
medicat
relief.
The fourth head is described generally as a residuary head.
The
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COMMISSIONER OF INCOME-TAX V. SURAT ART SILK
83
definition of "charitable purpose" with ;eference to the fourth head shows that
the purpose is the "advancement of
any
other object
of
general
public
utility ...... ".
The charitable purpose is not the "object of
general
public
utilrty··. it is the advancement of the object.
The definition defines "charitahle
purpose" in terms of an activity.
An object by itself cannot connote an activity. It represents a goal towards which, or in relation to which, an rtctivity
is prope1led. The elemo::nt of the activity is embodied in the word "<i.Jvancemenf'. If "charitable pnrpose" is defined in tern1s of ari activity, the
re5trictive clause ••not involving the carrying on of any activity
for
profit"
must
necessarily relate to "the advancement'' of the object cQnternplated.
[115 B-CJ
The words "activity for profit" should be taken as descriptive cf the nature
of the activity.
It is an activity of a kind intended to yield profit.
Conversely
if pt·ofit ha! resulted from an act~vity, that does not. without anything
more,
classify it as an "activity for profit".
[116 B-C]
The !"equirement of section 2(15) is satisfied where there is either a total
absence of the purpose of profit-making or it is so insignificant compared to the
purpose of advancement of the object of general public utilit1l that the don1inating role of the latter renders the former unworthy of account. If the profit-making purpose holds a dominating role or e>Vcn constitutes an equal comA
e
ponent with the purpose of advancement of the object of general phblic utility,
I)>
then the definition in section 2(15) i~ not satisfied.
[116-G-H]
If the purpJOse is charitable in reality, the mode adopted n1ust be one which
is directed tcr carrying out the charitable purpose.
The carrying on of such a
business does not detract from the purpose which permeates it, the end result
of the business r:·~tivity being the effectuation of t'he charitable pu"pose.
A. bri'llness activity carried on not with a view to carrying out the charitable purpose
of the trust but which is related to a non·charitable purpose falls outside the
scope of the trust. If it is a business entered into for working out the purp1)se
of the trust or institution with a vie\v to realisation of the chariable
purpoSe,
the income therefrom would be entitled to exemption under
s.
11. Section
11(4) and section 13(1)(bb) represent the mode of finding llnance for working
out the purpose of the trust or institution by deriving income from the c1rplls
of the trust property and also from an activity carded on in the course of actual
carrying out of the purpose of the· trust or institution_
[117 B-Ej
A distinction must be maintained bet¥;reen what is
n1erely a definition of
"charitable purpose'' and the powers conferred for working out or fulfilling thnt
purpose.
\Vhile the purpose and the powers
must
corr,~late they oonnot b~~
identified with each other. [118 Bl
In the instant case the purpose of the asses~ee falls within the definition of
section 2(15)_ The object~ of the assessee were to promote commerce and trade,
which have been held to be an object of general public utility and, there
i~
nothing to show that the reJe,·ant sub-clause of the ~1cmorandum of Association
involves the carrying on of any activity for profit.
The remaining sub-clauses
enum~rate powers for which the company was constituted.
[118 G·HJ
The
Trust~es of tht1_ Tribune, (1939) 7 I.T.R. 415, Co1nmissioner of
Income Tax v. Andhra Cha111ber of Conunerce (1965) 55 I.T.R., 722, referred
to.
F
G
H
84
SUPREME COURT REPORTS
[1980] 2 S.C.R.
.A
Sale Trustct', Loka Shikshana Trust v. Commissioner of Incon1c-tax, ~Jysore
(1975) 101 I:f.R. 234;
Indian Chan1ber of Conimcrce
v.
Conunfssioner of
Incon1e-tax, Wesr Bengal II (i975) 101 I.1-.R. 796, not approved.
Per Sen, J. (dissenting)
The hvo decisions in Sole Trustee Lok Sikshana Trust v. C.I.T. (101 ITR
234) and Inclian Chambers of Commerce v. C.l.T. (IOI !TR 796) lay down the
·n
la\v correctly and are still good law.
[119 D]
·c
E
G
1. The words "not involving the carrying on of any activity for profit'' occuring in section 2(15) of the A.ct qualify only the fourth head of charitable purpose namely "any other object of general utility" and not the first three heads.
[119 El
2. It is the vagueness of the expression "any other object of general public
utility'' occuring in section 4(3)(i) of the 1922 Act \vhich impelled Parliament
to insert the restrictive word "not involving the carrying on of any activity for
profit."'
It is not pcrrnissiblr for the court to whittle down the plain la-nguage
of the section.
lt would be contrary to all rules of construction to ii;ncire the
impact of the newly added \vords and to construe the definition as if the newly
added \VOrds \\-\~re either not there or were intended to be otiose and redundant.
Such a construction would frustr-ate the very
object of
the legislation.
The
relative simplicity of the laJlguagc brings out the necessary legisJative intent to
counteract t:ix riclvnntag~s rc~ulting from the ~-called chnrities in canlouflage.
[I 19 fl; 120 A-CJ
3. The rc;triction introduced by the
dcfiniti ... 1n
of the
term . ·'ch<i.ritnbk:
purpL)Se" in section 2(15) is th:it the advnncem•:nt of objects of f"Cneral public
utility should not involve the carrying on of any activity for p:o!lt.
Tf
it
involved any su1.:h activity the charity \vould fall outside th;; d~finatiou [120 0-El
4: There is no statutory bar to earn exen1rtion in 1~<;pect of incdme derived
from a busines<; undertaking if such busines:<; undertakin~; is held l'nder a trust
for a charitable purpose.
The first essential condition for exemption under section 11 ( 1) is that the pro pc rty fro1n ·\vhich the inco:i1·: i'-, derived mt11t be held
under trust or olher legal ubligation.
Section 11 ( 4 f
gi1·,·~. a statuhJry recugnition .:o the principle that 1hc l:usiness is proi'crty and if a Jtr,in::ss
i::
held
1n
trust \vheliy for n ch:iritabi.' purpo:;c, the inCO'.i1c th,_·,·c.::1,1n1 \!.'oul1'. b: c\.:mpt
und;;r section 11(1).
ll21 B-D]
Tn re. 1/ie Tr115tec o/ tile Tribune (1939) 7 lTR 41.5:
All f;;,'ir ~~·?b"·1c1·,1'
Association v. C./.T. (1944) 12 ffR 482; C.I.t. v. P. i{r:'shna IVc··;;or (1964J
53 lTR 176 C.l. T. v. A ndiu a Cf!{unber of Co11u11crc!' l 1 C65) 56 l i-R 722; JK
Tn15t v. CIT (1957) 32 1.TR 535 referred to.
5. The restrictive \\'Or,!.) ''not involving the carrying on of ~ny :1cth·ity for
profit" were delibi.:rrit::ly inti,:duccd in the dcfinilio:i tu cl1~ down thr; i".:de a111bit
of the fourth head as a nlea<;ure to check avoidance of tax.
Enga_gement in an
activity for profit by rcligiou~ or chriritable trusts provides scope for mnnipulalion for tax eva~ion. [121 F-Gj
6. Even as~tnning that the dominant object of a trust is the prornotion
or
'advancen1ent of any other object of general public utility,' if it
involves
any
activity for profit i.e. riny business or commerc.ial activity, then it ceases to be a
charitable purpose within the m1zaning of section 2( 15). In that event the profits derived from such business are not liable to exemption undt:":r sc:ction 11 ( 1)
,
•
•
f
\
•
COMMISSIONER OF INCOME-TAX V. SURAT ART SILK
S 5
read with section 2(15). The concept of profits to feed the charity is also of
no avail. That is because the concept of 'profits to feed the charity' can only
arise under the first three heads of 'charitable purpose' as defined
in section
2(15) of the Act, that is, "relief of the poor" "education" and "medical
relief" but they a~e not germane in so far as the fourth head is concerned.
It
the fulfilment of an object of general public utility is dependent upon _any
acti~
vity for profi!, it ceases to be a charitable purpose. A reading of section 2(15)
nnd section 11 together shows that what is
froWned
upon is an activity for
profit by a charity established for advancement of an object of general public
utility in the course of accon1pJishing its objects. [126 Ir; 127 A-B]
7. It would be clearly inconsistent to hold that if the dominant or primary
purpose was 'charity' it would be permiSsible for such an object of general public utility to augment its income by engaging in trading or commercial activity.
.
[131 F]
8. If the object of the trust is advancement of an object of general public
utility and it carried on any activity for profit, it is excluded from the ambit of
charitable purpose defined in section 2(15). The distinction is clearly brought
out by the provision contained in section 13(1)(bb) which provides that in case
of a. charitable tru'lt or institution for the relief of the poor, education or medi·
cal relief which carries on any business, any income derived from such business,
unless the ·business is carried on in the course of the actual carrying out of
a primary purpose of the trust or institution, shall not be excluded from the
total income of the previous year.
[132 G-H]
9. If the advancement of an object of general public utility involves the
carrying on of an activity for profit, it ceases to bre a charitable purpose and,
therefore, the income is not exempt under section 11 ( 1) (a). In case of a trust
falling under any of the first three heads of charity, namely, 'relief of the poor'
'education' and 'medical relief' it may· engage in any activity for profit and the
proJir.s would n1.·t be laxable if lhey were utilized for the primary object of the
trust. In other words the business carried on by them is incidental or ancillary
to the primary object namely relief of the poor, education and medical relief.
The concept of 'profits to feed the charity' therefore is applicable only to the
first three heads of charity and not the fourth.
It would be illogical to apply
the same consideration to institutions which are, established for charitable purposes of any object of general public utility. Any profit-making activity linked
with an object of gener·al public utility \vould be taxable. The theory of the
dominant or primary object of the trust cannot, therefore, be projected into the
fourth head of charity, namely, 'advancemen.t of any other object of general
public utility' &o as to rnakt' the carrying on of any business activity merely
ancillary or inciden!al to the main object. [134 A-E]
IC5. The restrictive words 'not involving the carrying on of any activity for
profit' in the definition of "charitable purpose" in s. 2(15) must be given theii
due weight_.
Otherwise, it would have the effect of admitfng to the benefits of
exemption the fourth indeterminate class, namely, objects of general public
utility engaged in activity for profit ·contrary to· the plain ~ords of s. 2(15).
[134 GJ
CIVIL APPELLATE JURl5DICTION: Tax Reference No. lA ol 1973.
Tax Reference under Section 257 of the Income Tax Act,
! 961 made by the Income Tax Appellate Tribunal, Ahmedabad
lJll R.A. No. 66 (AHD) of 1971-72 arising out of LT.A. No .. 1697
of 1997-68 decided on 10-9-71 Assessment year 1962-63.
'
D
HG
SUPREME COURT REPORTS
[1980] 2 S.C.R.
AND
Tax Reference Nos. 10-14 of 1975
Tax Reference under section 257 of the Ircome Tax Act, I 961
made by the Income Tax Appellate Tribunal, Ahmedabad in RA.
Nos. 140-14.J/AHD/73-74 arising out of LT.A. Nos.
2098-2102/
~ AHD/7172 for assessment years 1963-64 to _1967-68.
n
V. S. Desai (in T. R. No. IA/73), B. B. Ahuja and
Miss A.
Subhashini for the Appellant.
Sanat P. Melita, Ravinder Narain, A. N. Hasklir and Shri Narain
for the Respondent.
Dr. Devi Pal, P. V. Kapur, S. R. Agarwal, Prnvecn Kumar and
R. K. Chaudhary for the Intervener (Indian Sugar Mrlls l.
Dr. Devi Pal and D. N. Gupta for the Intervener (Bengal Chamber).
R. N. Bajoria, S. R. Agarwal and Praveen Kum(Ir for th~ Intervener (Indian Chamber, Calcutta).
F. S. Nariman, N. Nettar, A. K. Sanghi and 0. P. Vaish for
the Intervener (Indian Chamber, New Delhi).
The Judgment of P. N. Bhagwati, N. L. Untwalia
and
V. D.
E
Tulzapurkar, JJ. was delivered by Bhagwati, J.
R. S. Pathak. J. gave
a separate Opinion and A. P. Sen, J. gave a dissenting Opinion.
BHAGWATI, J.
These tax references have been made
by the
Tribunal directly to this Court under Section 257 of the
Income
Tax Act, 1961 (hereinafter referred to as the Act), since there is a
:F
conflict of opinion amongst different High Courts as to the interpretation of the words "not involving the carrying on of. any activity
for profit" occurring at the end of the
definition
of
"charitable
purpose" in clause (15) of Section 2.
Originally these references
came up for hearing before a Bench of three Judges
but having
regard to the great importance of the question involved
and
the
·G
serious repercussions, which an adverse decision might have on a
large number of public trusts in the country, the Bench thought it
desirable to refer the cases to a larger Bench and that is how these
references have now come before us.
Though the references arc six in number. they relate to
the
B
same assessee and raise the same questivn, only the assessment years
being different.
The assessee is the Surat Art Silk Oath Manufacturers Association, a company incorporated under the Indian-
•
•
·.~
•
l
1
CIJl\lMISSIONER OF INCOME-TAX V. SURAT ART SILK
87
(lJhagwati, J.)
Companies Act, 1913. The original Memorandum of Association set
out the objects for which the assessee was incorporated, but we are
not concerned with it since vital amendments were
made
in
the
Memorandum with effect from 14th July, 1961 at the time when
the assessee was permitted under section 25 of the Companies Act,
1956 to omit the word "limited" from its name by order of the
Central Government and it is the amended Memorandum which governed the assessee during the relevant assessment years.
The amended objects, so far as material, were as follows :
(a) To promote commerce and trade in Art Silk Yarn,
Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth
and Cotton Cloth.
(b) To carry on all and any of the busi.ness of Art Silk
Yarn, Raw Silk, Cotton Yarn as well as Art Silk
Cloth, Silk Cloth and Cotton Cloth belonging to and
on behalf of the members.
A
B
c
(c) To obtam 1mpon Licences for import of Art Silk
D
Yarn, Raw Silk, Cotton Yarn and other Raw Materials as well as accessories req<Ji.tec by the members
for the manufacture of Art Silk, Silk
and Cotton
Fabrics.
( d) 'To obtain Export Licences wd export cloth manufactured by the members.
(e) To buy and sell and deal in all kinds of cloth and
other goods and fabrics belonging to and on behalf
of the Members.
(f)
x
x
x
(g)
x
x
x
(h)
x
x
x
(i)
x
x
x
(j)
x
x
x
(k)
x
x
x
(I)
x
x
x
(m)
x
x
x
(n) To do all other lawful things as are mcidental or
conducive to the attainment of the above objects.
E
f
G
·Clause 5 of the Memorandum provided in sub-clause ( 1)
that the
H
lincome and property of the assessee wheresoever derived shall be
.applied solely for the promotion of its objects as set forth in ' the
\
c
D
E
F
G
H
88
SUPREME COURT REPORTS
[1980] 2 s.c.R.
Memorandum and sub-clause (2) directed that no portion
of the
income or property shall be pard or transferred, directly or indirectly,
by way of dividend, bonus or otherwise by way of profit, to persons,.
who at any time are or have been members of the assessee or to·
any one or more of them or to any person claiming through anyone
or more of them. What should happen to the assets in case of winding up or dissolution of the assessee, was set out in clause 10 of the
~morandum and it provided that the property remaining after satisfaction of all the debts and liabilities shall not be distributed amongst
the members of the assessec but sha\i be given or transferred to such
other company having the same objects as the assessee, to be determined by the members of the assessee at or before the time of the
dissolution or in default, by the High Court of Judicature that has
or may acquire jurisdiction in the matter.
The income and property
of the assessee were thus liable to be applied solely and exclusively
for the promotion of the objects set out in the Memorandum
and
no part of such income er property could be distributed amongst the·
members in any fom1 or under any guise or utilised for their benefit
either during the operational existence of the assessee or on
its.
winding up and dissolution.
The assessee carried on various activities for promotion. of commerce and
trade in
Art
s:.Jk Yarn,
Silk Yarn,
Art Silk
Cloth
and
Silk
Cloth.
The
income
of
the
asse,see
was.
derived primarily from
two
sources.
One
was
annual subscription at the rate of Rs. 3/- per power
loom
collected
by the assessee from its members and the other was commission calculated on the basis of a certain percentage of the value
of licences for import of foreign yarn and quotas for purchase of
indigenous yam obtained by the assessee for the members.
There
was no dispute between the parties in regard to the first category of
income derived from annual subscription collected .from the members
and it was conceded by the Revenue to be exempt from tax but the
real controversy centred round the taxab'Hty of the second
category
of income. The amount collected by the assessee from the members
in respect of licences for imoort of foreign yarn was credited in an
account styled "Vahivati Kharach" while the amount collected in
respect of flUOtas of indigenous yarn was credited in another account
called "Building Fund".
The assessee constructed a building out of
the amount cred:ted to the "Building Fund" during the
accounting
year relevant to the assessment year 1965-66 and it was let out to
various tenants and the rent received . from
them
augmented
the
income of the assessee. The assessee claimed in the course of assessment to ihcome tax for the assessment year 1962-63 that it was an
.(
I
,
•
COMMISSIONER OF INCOME-TAX V. SURAT ART SILK
89
(Bhagwati, /.)
institution for a charitable purpose and its income was, therefore,
exempt from tax under Section
11 sub-section ( 1)
of the
Act.
This claim was rejected by the Income-tax Officer on the ground that
the objects of the assessee were not charitable within the meaning of
sec. 2 clause (15). The assessee carried the matter in appeal and,
in the appeal, the view taken by the Appellate Assistant Commissioner
was that the purpose of th·~ assessee was pre-dominantly development
of Art Silk Industry which was an object of general public utility,
but since the Income-tax Officer had not examined whether the object
involved the carrying on of an activity for profit and had also
not
considered whether the other conditions of section 11 sub-section (1)
were satisfied, the Appellate Assistant Commissioner set aside the
order of assessment and remanded the case to the Income-tax Officer
A
c
with a direction to make a fresh assessment after considering these
issues.
The Tdbunal on further appeal at
the
instance of the
Revenue did not agree with the procedure adopted by the Appellate .
Assistant Commissioner and taking the
view
that the Appellate
Assistant Commissioner should not have set aside the order of
D
assessment and made an order of remand for making a fresh assessment but instead, if he wanted any further facts, he should
have
called for a remand rpport from the Income-tax Officer and then
disposed of the appeal by deciding whether the assessee was entitled
to exemption from tax under section 11 sub-section ( 1), the Tribunal
directed the Appellate Assistant Commissioner to submit a remand
report on the question "whether the objects for which the assesseecompany has been established are for charitable purposes within the
meaning of section 2(15) and whether it satisfise the other conditions
laid down under section 11." The.