# DIRECTOR OF INCOME TAX v. M/S. BHARAT DIAMOND BOURSE

- **Citation:** [2002] Supp. 5 S.C.R. 95
- **Court:** Supreme Court of India
- **Decided:** 2002
- **Bench:** Ruma Pal, B.N. Srikrishna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/director-of-income-tax-v-m-s-bharat-diamond-bourse-18998
- **Pages:** 21

## Headnote

B
Income Tax Act, 1961; Sections 2(15), II, 13 & 260(A):
Charitable Institution-Benefits of exemption under Section I/-
Entitlement to-Held, since the dominant purpose of establishment of the C
assessee-lnstitution being charitable, assessee entitled to benefits under Section
I I of the Act.
Charitable Institutions-Lending of money to its founder without
security-Benefits of exemption under Section I I-Effect on-Held, since
assessee lent certain income to prohibited category of person without adequate D
security and interest, benefit of exemption under Section I I was lost in view
of provisions under Section I 3(/)(c)(ii) of the Act.
Constitution of India, 1950; Article 136-Appeal-Finding of facts
recorded by Subordinate Courts-Interference-Generally finding of facts by E
Courts below not disturbed unless it is perverse-Under the facts and
circumstances of the case, correct finding of facts recorded by revenue
authorities were reversed by the Tribunal and affirmed by the High Court on
perverse reasoning-Hence set aside.
Words & Phrases:
'Founder', 'Foundation '-Meaning of in the context of Section I 3(3)( a)
and I 3(3)(c) of Income Tax Act, 1961.
F
Respondent-assessee, a company limited by guarantee was
incorporated under Companies Act. It was an institution established G
wholly for charitable purposes and a non-profit Organisation and as such
registered under the provisions of the Income Tax Act. Assessee claimed
benefits of exemption under Section 11 of the Act for the assessment years
1989-90 and 1990-91. Assessing Officer denied the exemption on the
ground that objects of assessee institution were not charitable purposes H
95
96
SUPREME COURT REPORTS (2002] SUPP. 5 S.C.R.
A and assessee had breached the condition under Section 13 as well.
Appellate authority confirmed the order of Assessing Officer. However,
Tribunal allowed the appeals and High Court affirmed it. Hence these
appeals.
Ii was contended for the Revenue that since activities of assessee fell
B outside the definition of charitable purpose it was not entitled to the benefit
of Section 11 of the Act; and that since assessee lent its income to the
founder of Institution without appropriate security, assessee lost the benefit
of exemption under Section 11 of the Act.
C
On behalf of respondent-assessee, it was submitted that the
judgment/order of the Tribunal which was affirmed by High Court, ought
not to be disturbed by the Supreme Court in appeal under Article 136 of
the Constitution of India; and that since 'B' was merely signatory to the
Memorandum of Association of the Company, he could not be considered
as founder of the Institution.
D
Allowing the appeal, the Court
HELD: I.I. The setting up of the Diamond bourse had a great impact
on the diamond export trade. The export turn over of diamonds gradually
increased during the relevant period and consequently the country had
E benefited by increased earning of foreign exchange. On the basis of these
facts, the Revenue Authority granted registration to the appellant as an
institution established for charitable purposes within the meaning of
Section 2(15) of the Act. These earnings must be treated as ancillary to
the dominant purpose for which the Diamond Bourse were established.
F
fl04-C-EI
1.2. Applying the dominant purpose test to the objects of the
respondent-assessee there is no escape from the conclusion that it is validly
recognized as an institution established for charitable purpose. The predominant objectives are charitable purposl". Thus the Tribunal as well as
G the High Court rightly held that the assessee was rightly registered under
Section 11 by treating it as an institution established for charitable purpose
within the meaning of Section 2(15) of the Act. 1106-B; Fl
Additional Commissioner of Income Tax, Gujarat, Ahmedabad v. Surat
Art Silk Cloth Manufacturers' Association, Surat, (19801 2 SCC 31, relied
H on.
DIRECTOR OF INCOME TAX v. BHARAT DIAMOND BOURSE
97
C/Tv. Andhra Chamber of Commerce, (19

## Text

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DIRECTOR OF INCOME TAX
A
v.
M/S. BHARAT DIAMOND BOURSE
DECEMBER I 6, 2002
[RUMA PAL AND B.N. SRIKRISHNA, JJ.]
B
Income Tax Act, 1961; Sections 2(15), II, 13 & 260(A):
Charitable Institution-Benefits of exemption under Section I/-
Entitlement to-Held, since the dominant purpose of establishment of the C
assessee-lnstitution being charitable, assessee entitled to benefits under Section
I I of the Act.
Charitable Institutions-Lending of money to its founder without
security-Benefits of exemption under Section I I-Effect on-Held, since
assessee lent certain income to prohibited category of person without adequate D
security and interest, benefit of exemption under Section I I was lost in view
of provisions under Section I 3(/)(c)(ii) of the Act.
Constitution of India, 1950; Article 136-Appeal-Finding of facts
recorded by Subordinate Courts-Interference-Generally finding of facts by E
Courts below not disturbed unless it is perverse-Under the facts and
circumstances of the case, correct finding of facts recorded by revenue
authorities were reversed by the Tribunal and affirmed by the High Court on
perverse reasoning-Hence set aside.
Words & Phrases:
'Founder', 'Foundation '-Meaning of in the context of Section I 3(3)( a)
and I 3(3)(c) of Income Tax Act, 1961.
F
Respondent-assessee, a company limited by guarantee was
incorporated under Companies Act. It was an institution established G
wholly for charitable purposes and a non-profit Organisation and as such
registered under the provisions of the Income Tax Act. Assessee claimed
benefits of exemption under Section 11 of the Act for the assessment years
1989-90 and 1990-91. Assessing Officer denied the exemption on the
ground that objects of assessee institution were not charitable purposes H
95
96
SUPREME COURT REPORTS (2002] SUPP. 5 S.C.R.
A and assessee had breached the condition under Section 13 as well.
Appellate authority confirmed the order of Assessing Officer. However,
Tribunal allowed the appeals and High Court affirmed it. Hence these
appeals.
Ii was contended for the Revenue that since activities of assessee fell
B outside the definition of charitable purpose it was not entitled to the benefit
of Section 11 of the Act; and that since assessee lent its income to the
founder of Institution without appropriate security, assessee lost the benefit
of exemption under Section 11 of the Act.
C
On behalf of respondent-assessee, it was submitted that the
judgment/order of the Tribunal which was affirmed by High Court, ought
not to be disturbed by the Supreme Court in appeal under Article 136 of
the Constitution of India; and that since 'B' was merely signatory to the
Memorandum of Association of the Company, he could not be considered
as founder of the Institution.
D
Allowing the appeal, the Court
HELD: I.I. The setting up of the Diamond bourse had a great impact
on the diamond export trade. The export turn over of diamonds gradually
increased during the relevant period and consequently the country had
E benefited by increased earning of foreign exchange. On the basis of these
facts, the Revenue Authority granted registration to the appellant as an
institution established for charitable purposes within the meaning of
Section 2(15) of the Act. These earnings must be treated as ancillary to
the dominant purpose for which the Diamond Bourse were established.
F
fl04-C-EI
1.2. Applying the dominant purpose test to the objects of the
respondent-assessee there is no escape from the conclusion that it is validly
recognized as an institution established for charitable purpose. The predominant objectives are charitable purposl". Thus the Tribunal as well as
G the High Court rightly held that the assessee was rightly registered under
Section 11 by treating it as an institution established for charitable purpose
within the meaning of Section 2(15) of the Act. 1106-B; Fl
Additional Commissioner of Income Tax, Gujarat, Ahmedabad v. Surat
Art Silk Cloth Manufacturers' Association, Surat, (19801 2 SCC 31, relied
H on.
DIRECTOR OF INCOME TAX v. BHARAT DIAMOND BOURSE
97
C/Tv. Andhra Chamber of Commerce, (1965) 55 ITR 722, relied on. A
Commissioner of Inland Revenue v. Yorkshire Agricultural Society, (1928)
I KB 611 and Institution of Civil Engineers v. Commissioner of Civil Revenue
119321 J KB 1491, referred to.
2.J. In the previous year relevant to the assessment year 1989-90, B
the assessee had advanced certain amount to one 'B' without entering into
a written agreement with him. The said 'B' was one of the signatories to
the Memorandum of Association of the Assessing Company and also the
Honorary Secretary of the Institution. For this reason, the assessing officer
was of the view that he was a person belonging to the prohibited category
within the meaning of Section 13(3)(a) and 13(3)(cc) and since income or C
property of the institution had been lent to such a person for any time
during the previous years relevant to Assessment Years 1989-90 and 199091, without adequate security and adequate interest, the legal fiction in
sub-section (2) of Section 13 would come into play and the income or
property of the institution shall, for the purpose of Clause (d) of sub-section D
(1) of Section 13, be deemed to have been applied for the benefit of the
prohibited category of persons under sub-section (3). Consequently, the
benefit of exemption under Section 11 was lost by reason of Section
13(1)(c)(ii). (106-H; 107-BI
2.2. The Assessing Officer was of the view that certain amount of E
money received by 'B' had been utilized by him for investment in his name
in the property, though there might have been a tacit understanding that
the assessee would be given business premises on the lease. On examination
of documents, it is noticed that 'B' was not the builder, nor did he own
any suitable premises at that point of time. As a matter of fact, he was F
intending to buy premises for his own purposes. The terms of the lease
are not found on record. Admittedly, the terms were not even recorded
in an agreement. It strains one's credulousness that seasoned businessmen
parted with a large sum of money to 'B' without any agreement under
which the amount was being paid and without setting the terms of the
lease. As on the date on which the money was paid to 'B', it was neither G
intended as deposit for lease of premises, nor was it intended as deposit
to be paid to the builder. There is no evidence that any premises were
procured or agreed to be procured in the name of the Bourse from any
builder. If at all there was any substance in the story that 'B' was merely
negotiating on behalf of the assessee for procurement of suitable premises, H
98
SUPREME COURT REPORTS (2002] SUPP. 5 S.C.R.
A the lease for the premises, the ownership of the premises or the lease rights
would be in favour of the respondent assessee with the builder as lessor
or seller. The assessing officer was, therefore, justified in concluding that
the amount, when it was paid to 'B', was clearly intended for his buying
the premises in the building which in turn, may have been made available
by way of a sub-lease to the respondent. If this be so, then the payment to
B 'B' could hardly be a deposit. The stand of the respondent is completely
belied by 'B's' statement made pursuant to the summons under Section
131 of the Act. 1108-C-D; 110-H; 111-AI
2.3. After the assessment order was made, the assessee must have
C realised that the amount paid to 'B' was treated as an amount lent without
adequate security or interest. Hence there was an attempt to place on
record documents to make it appear that the amount had been paid as
deposit. The material on record clearly suggests that the amount paid to
'8' did not carry the stamp of a deposit but was merely intended to enable
him to purchase a property in his own name. To that extent the conclusion
D of the assessing officer that it was a colourable transaction appears to be
justified. 1111-C-DI
2.4. The Tribunal accepted the facile explanation given by the
assessee, perhaps manufactured post facto the assessment order, without
critical appraisal. The entire agreement between '8' and the assessee was
E supposed to be an oral agreement, which was supposed to have been
terminated orally with 'B' being orally called upon to return the money
with interest of 12% which he refused to pay. This story does i:iot ring
true and could not have been accepted by any reasonable person,
instructed in law. 1111-H; 112-AI
F
2.5. The Tribunal's conclusions on the issue of lending of money to
'B' are perverse and need to be interfered with. The conclusion arrived
at by the assessing officer and the appellate authority is affirmed to the
effect that certain amount of money was lent to 'B' for substantial periods
during the previous years pertaining to the relevant assessment years,
G without .interest and without adequate security. 1112-DI
3.1. The meaning of expression "Founder" highlighted by the assessee
is with reference only to an institution of eleemosynary. Eleemosynary is
a charitable object intended to provide for relief from distress to humans
based on Christian values. In the case of the assessee, it is not recognized
H as a 'charity' as its predominant object is an "object of general public
>·
DIRECTOR OF INCOME TAX v. BHARAT DIAMOND BOURSE
99
value". The test to ascertain the founder of an institution for eleemosynary A
need not be valid to ascertain the founder of an institution of other kinds.
The expression "founder of the institution" used in Section 13(1 )(a) means
that the person concerned should be the originator of the institution, or
at least one of the persons responsible for the coming into existence of the
institution. Contribution of money is not an inexorable test of a person B
being a "founder" though, it might happen often that person who
originates an institution may often also fund it. In the case of the assessee,
it is found that 'B' along with several others, founded the company as all
of them were subscribers of its Memorandum of Association. It is by their
acts that the company got incorporated under the provisions of the
Companies Act and was thus born. May be that 'B' did not contribute C
any money, apart from the guarantee given as the company is one limited
by guarantee. That hardly makes any difference to the situation and 'B'
would very much answer the description "founder of an institution" used
in Section 13(3)(a) of the Act. That there may be others also is irrelevant
and immaterial for the purpose of this appeal. In fact, a reading of Section
13(3) and the contrast between clauses (a) and (b) brings home the D
distinction made. by the Act between the founder of the institution and
the person who has made substantial contribution to the institution.
(113-F, G; 114-D-GI
Black 's Dictionary of law, 4th Edition; Corpus Juris Secundum, Volume E
XXXVJ/, page 37; Concise Oxford Dictionary, New Seventh Edition, Page 388
and The Collins Cobuild English Dictionary, New Edition, Page 670, referred
to.
4. 'B' was a founder of the assessee institution and during the
previous years relevant to the assessment years 1989-90 and 1990-91, a F
substantial amount of money was lent to 'B' without adequate security
or interest. Consequently, the assessee would lose the benefit under Section
I I of the Act by falling within the mischief of Section 13(3)(a) read with
Section 13(1)(c)(ii) of the Income Tax Act, 1961. (114-H; JJS-A(
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 82I I of G
2001.
WITH
Civil Appeal No. 8212 of 2001.
H
JOO
SUPREME COURT REPORTS [2002] SUPP. 5 S.C.R.
A
From the Judgment and Order dated 21.3.2000 of the Bombay High
Court in ITA No. 255 of 2000.
R.P. Bhat,. Prateek Jalan and B. V. Bairam Das, for the Appellant.
Sohrab E. Dastur, B.V. Jhaveri and R.B. Hathikhanwala, for the
B Respondent.
The Judgment of the Court was delivered by
SRIKRISHNA, J. These appeals arise out of the judgments of the
High Court of Bombay dismissing the appeals filed by the Revenue under
C Section 260-A of the Income Tax Act, I 96 I (hereinafter referred to as 'the
Act') Civil Appeal No. 82 I 1/200 I pertains to assessment year I 989-90 while
Civil Appeal No. 8212/2001 pertains to the assessment year 1990-91. Since
the issues, fact and law are common, both the appeals are disposed of by this
common judgment.
D
The respondent-assessee is incorporated as a Company limited by
guarantee under the Companies Act, I 956 and is a non-profit service
organization. For the assessment years I 989-90 and I 990-9 I returns were
filed by 'the assessee along with audited Income and Expenditure Accounts
and Balance Sheets for the relevant previous years. The assessee claimed the
E benefit of Section I I of the Act on the ground that it was an institution
established wholly for 'charitable purposes' within the meaning of Section
2( 15) of the Act and had been registered as such under Section 13 of the Act.
The Assessing Officer (hereinafter referred to as the 'AO') denied the benefit
of Section 11 on two grounds. First, he held that the respondent-assessee was
a Diamond Bourse and as such its objects were not 'charitable purpose'
F within the meaning of Section 2(15) of the Act. Secondly, he took the view
that, even if so, the assessee had breached the conditions under Section I 3
and as such was liable to be denied the benefit of Section 11. The assessee
carried the matter in appeals to the Commissioner of Income Tax (appeals)
who confirmed the orders of the A.O. Further appeals were carried to the
G Income Tax Appellate Tribunal. The Tribunal came to the conclusion that the
objects for which the respondent-assessee was established were 'charitable
purpose' within the meaning of Section 2(15) of the Act and that there was
no breach of the provisions of Section 13. In this view of the matter, the
tribunal allowed the appeals of the assessee for both assessment years and
reversed the orders of the two authorities below. Being aggrieved thereby,
H the Department carried appeals to the High Court under Section 260(A) and
-
•
DIRECTOR OF INCOME TAX v. BHARAT DIAMOND BOURSE [SRIKRISHNA, J.) lO l
these appeals have been dismissed.
Shri R.P. Bhat, learned senior counsel for the revenue, urges two grounds
in support of the appeal:
(I) The assessee was not entitled to benefit of Section 11 of the Act.
(2) Even if the assessee was to be treated as an institution entitled
A
B
to the benefit of Section 11 of the Act the assessee lost that
exemption by lending Rs. 70 lakhs during the previous year
relevant to the assessment year 1989-90 and 1990-91 to Bharat
Shah, the founder of the institution. The exemption was lost by
reason of Section 13(2)(a) read with Section 13(3)(a) of the Act. C
Section 1 l(l)(a) of the Act provides that income derived from property
under trust wholly for charitable or religious purposes, to the extent to which
such income is applied to such purposes in India, shall not be included in the
total income of the previous year of the person receiving the income. .
Section 12 provides that any voluntary contributions received by an
institution established for charitable purposes shall, for the purposes of Section
11, be deemed to be income derived from property held under trust wholly
for charitable or religious purposes and the provisions of Sections 11 and 13
shall apply accordingly.
Section 12A provides for registration of the trust or institution in the
appropriate form.
Section I 2AA deals with the procedure for such registration.
D
E
Section 13 enumerates the contingences under which the exemption F
available under Section 11 is lost.
Section 13(I)(c)(ii) is relevant and reads as under:-
"Section 13(1)-Nothing contained in Section 11 or Section 12 shall
operate so as to exclude from the total income of the previous year
of the person in receipt thereofG
xxx
xxx
xxx
(c) in the case of a trust for charitable or religious purposes or a ·
charitable or religious institution, any income thereof-
(i)
if such trust or institution has been created or established after H
102
A
SUPREME COURT REPORTS (2002) SUPP. 5 S.C.R.
the commencement of this Act and under the terms of the trust
or the rules governing the institution, any part of such income
enures, or
(ii) if any part of such income or any property of the trust or the
institution (whenever created or established) is during the previous
B -
year used or applied.
directly or indirectly for the benefit of any person referred to in subsection (3 ).
Section 13(2) provides as under .......... :-
C
"(a) if any part of the income or property of the trust or institution
is, or continues to be, lent to any person referred to in sub-section (3)
for any period during the previous year without either adequate security
or adequate interest or both;
D
E
F
(b )-(h) xxxxxx"
The relevant provision of Section 13(3) is:-
"The persons referred to in clause (c) of sub-section (I) and subsection (I) and sub-section (2) are the following namely:-
( a) the author of the trust or the founder of the institution.
(b)
(c)
(cc) any trustee of the trust or manager (by whatever name called) of
the institution;
(d)
(e)
(f)
Section 2(15) of the Act defines "Charitable purpose" as including
G relief of the poor, education, medical relief, and the advancement of any
other object of general public utility.
In order to decide the first question, the circumstances under which the
appellant-assessee came into existence are required to be noticed. The diamond
exporters in India had formed a Diamond Exporters Association for facilitating
H export of diamonds. There was need for setting up a diamond bourse in
DIRECTOR OF INCOME TAX"· BHARAT DIAMOND BOURSE [SRIKRJSHNA, J.] J QJ
.Bombay with customs clearance facilities which would facilitate the export A
of diamonds and make the trade more competitive in the international market.
In 1984 the Central Government acc<ipted the proposal made by the said
association to set up a diamond bourse in Bombay. The Minerals and Metals
Trading Corporation of India Ltd. (a Central Government Undertaking) agreed
to co-ordinate the administrative steps and the bourse was to be named as B
suggested by the Ministry of Commerce as 'Bharat Diamond Bourse'. A
decision to set up the same was taken up by the Government of India in the
Ministries of Finance and Commerce with the object of encouraging and
increasing the export of polished diamonds from India.
The city of Bombay had been traditionally the headqtta!1ers of diamond C
trade and exports, though the main business center was located in a congested
locality. The International Airport in Bombay is situated in Sahar, Andheri,
in North Bombay. The bond distance between the center of activity of the
diamond trade and the international airport made it highly inconvenient and
cumbersome for operations of the diamonds export trade from the point of
view of transportation, security and customs clearance. It was, therefore, D
decided with the concurrence of the Central Government to have a custom
clearance facility opened at Diamond Plaza near Opera House as a customs
area for the purpose of storage and clearance of diamonds. There was also
the question of security since diamonds and gems imported and exported in
small packets in large quantities had to be transported over long distances. E
The Registrar of Companies was moved for a certificate of incorporation
of the assessee company which was done on 18th August, 1984. On 22nd
November, 1984 the Collector of Customs, Bombay issued a notice under
Section 8 of the Customs Act approving the MMTC · situated at Diamond
Plaza Building near Opera House as a 'Customs Area' for the purpose of p
storage and clearance of diamonds, gem etc. On the same day, another
notification was issued under Section 45(1) of the Customs Act approving
MMTC as the Custodian of the imported cargo of such goods until their
clearance in accordance with the provisions of the Customs Act. It was also
notified that MMTC would be the custodian with regard to the export cargo
until they are trans-shipped and handed over to the airlines at Sahar G
International Airport Bombay. When MMTC was appointed as the custodian,
it had incurred expenditure on behalf of Bharat Diamond Bourse to the extent
of about Rs. 81 lakhs for setting up of the Bourse. On 31 August, 1984 the
Managing Committee of the assessee resolved to treat the expenses incurred
by MMTC as a loan which was to be returned with interest @ 6% per annum. H
104
SUPREME COURT REPORTS [2002] SUPP. 5 S.C.R.
A MMTC had taken certain premises on leases in the Diamond Plaza which
was sub-leased to the assessee on the same terms and conditions except for
the deposit. The principle object of establishment of the bourse was to facilitate
the diamond trade so that maximum revenue could be earned by way of
fo~eign exchange and also to make the diamond trade more competitive at
the international level.
B
On 15th December, 1987 an agreement was arrived at between MMTC
and the assessee under which it was agreed that, from I st April, 1988, service
charges would be collected by the assessee and not by MMTC, and from that
date the bourse would meet its own obligations towards its staff, their expenses
C etc. and· so on. Under the said agreement the operations of the Bourse were
taken over from the MMTC.
The setting up of the Diamond Bourse had a great impact on the diamond
export trade. The total value of parcels cleared through the bourse increased
from Rs. 2231 crores in 1985-86 to Rs. 11261 crores in the year 1991-92.
D These figures indicate that the export tum over of diamonds gradually increased
during the relevant period and consequently the country had benefited by
increased earning of foreign exchange.
On the basis of these facts, the Revenue Authority granted registration
to the appellant as an institution established for charitable purposes within
E the meaning of Section 2(15) of the Act. Though the assessee does earn
certain income by reason of hiring of locker facilities as incidental to the
ma.in custom clearance facilities made available to members as well as nonmembers, and debits the expenses incurred in respect of customs department,
transport charges, security charge and rent for the premises these earnings
F must be treated as ancillary to the dominant purpose for which the Diamond
Bourse were established.
The revenue authorities have concurrently held that, taking an overall
view, the dominant objects of the assessee are charitable as the dominant
object is one of general public utility and, therefore, the assessee is entitled
G to be registered as an institution established for charitable purpose within the
meaning of Section 2(15) of the Act.
The learned senior counsel for the revenue, however, relied on the
judgements of this Court in the Case of Delhi Stock Exchange v. CIT, (225
!TR, page 235) and the judgment of the Patna High Court in the case of
H Bihar State Forest Development Corporation v. CIT (224 ITR, page 757) to
,.
DIRECTOR OF INCOME TAX v. BHARAT DIAMOND BO URSE [SRIKRISHNA, J .] ) 05
contend that the activities of the assessee bourse fall out side the definition A
of 'charitable purpose', even though the bourse might have been registered
as an institution established for charitable purpose within the meaning of
Section 2( 15) of the Act.
The decision of the Constitutional Bench of this Court in Additional
Commissioner of Income Tax, Gujarat Ahmedabad v. Surat Art Silk Cloth B
Manufacturers' Association, Surat, [ 1980] 2 SCC 31 really clinches the issue.
The assessee in Surat Art Silk case was an association established to promote
commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn Art Silk Cloth,
Silk Cloth and Cotton Cloth. Its objects, as evidenced from the Memorandum
of Association, included, inter alia, carrying on business in Art Silk Yarn, C
Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth, and Cotton Cloth belonging
to and on behalf of its members as well as buying and selling and dealing in
all kinds of cloth and yarn belonging to and on behalf of its members. The
Constitutional Bench of this Court held that, ifthere are several objects of the
institution, some of which are charitable and some non-charitable, and the
trustees or the managers in their discretion may apply the income of the D
institution of those objects, the trust or institution would not be liable to be
regarded as charitable and no part of its income would be exempted from tax.
Where the main or primary objects are distributive, each and every one of the
object must be charitable in order that the trust be held as a valid charity. But,
if the primary or dominant purpose of the institution is charitable and another E
which, by itself, may not be charitable, but is merely ancilliary or incidental·
to the primary or dominant object, it would not prevent the institution from
validly being recognized as a charity. The test to be applied is, whether the
object which is said to be non-charitable is the main or primary object of the
trust or institution or it is ancilliary or incidental to the dominant object
which is charitable. Reiterating its earlier view in C/Tv. Andhra Chamber of F
Commerce, (1965) 55 ITR 722 the Supreme Court said in Surat.Art Silk case
(supra) that if the primary purpose is advancement of objects for general
public utility, the institution would remain charitable, even if an incidental
non-charitable object for achieving that purpose was contemplated. In the
case of Andhra Chamber <if Commerce (supra) it was held that a Chamber of G
Commerce did not cease to be charitable merely because the members of the
chamber were incidentally benefited in carrying out its main charitable purpose.
This Court approvingly followed the ratio in the case of Commissioner of
Inland Revenue v. Yorkshire Agricultural Society, (1928) I KB 611 and
Institution of Civil Engineers v. Commissioner of Civil Revenue, (1932) I KB
149 for reaching the conclusion that merely because some facilities incidentally H
106
SUPREME COURT REPORTS [2002] SUPP. 5 S.C.R.
A arose to the members of a society or institution in the course of carrying out
its main charitable purpose, that by itself would not prevent the institution
from being a charity.
All subsequent judgments have noticed and followed the judgment of
the Constitutional Bench in Surat Art Silk (supra) and the dominant purpose
B test evolved therein and applied them to the facts before them. Applying this
dominant purpose test to the objects of the respondent-assessee it appears to
us that there is no escape from the conclusion that it is validly recognized as
an institution established for charitable purpose. The assessee's pre-dominant
objects are:
c
"(i) To establish common facilities required to promote exports of
diamonds from India and to provide for this purpose trading
halls and other utilities at a central place for Indian Exporters
and Overseas buyer to carry on trade and commerce in diamonds
'>l:'ith speed and in secure conditions.
D
(ii) To establish and promote effective liaison between diamond trade
E
and industry in India and abroad with a view to promoting their
sales from India in International market.
(iii) To promote, advance protect and develop trade, commerce and
industry in India relating to exports and imports of diamonds and
(iv) To develop India as Modem and sophisticated diamond market
by establishing and maintaining an international trading centre in
India for all those engaged as manufacturers, traders, exporters
and importers, brokers/commission agents of diamonds."
F
These being the pre-dominant objectives, we agree with the view taken
by the Tribunal as well as the High Court that the assessee was rightly
registered under Section 11 by treating it as an institution established for
charitable purpose within the meaning of Section 2(15) of the Act.
The next question which needs our attention is, whether the tribunal
G was right in its conclusion that the assessee did not lose the benefit of the
exemption under Section 11.
The assessing officer took the view that the assessee lost its benefit
under Section 11 under the following circumstances:
H
Jn the previous years relevant to the assessment year 1989-90, the
DIRECTOR OF INCOME TAX v. BHARAT DIAMOND BOURSE [SRIKRISHNA.J_] 107
assessee had advanced an amount of Rs. 70 lakhs to one Bharat Shah without A
interest and security and even without entering into a written agreement with
the said Bharat Shah. The said Bharat Shah was one of the signatories to the
Memorandum of Association of the Assessing Company and also the Honorary
Secretary of the Institution. For this reason, the assessing officer was of the
view that Bharat Shah was a person belonging to the prohibited category B
within the meaning of Section 13(3}(a) and 13(3)(cc) and since income or
property of the institution had been lent to such a person for any time during
the previous years relevant to Assessment Years 1989-90 and 1990-91, without
adequate security and adequate interest, the legal fiction in sub-section (2) of
Section 13 would come into play and the income or property of the institution
shall, for the purpose of Clause (d) of sub-section (1) of Section 13, be C
deemed to have been applied for the benefit of the prohibited category of
persons under sub-section (3). Consequently, the benefit of exemption under
Section 11 was lost by reason of Section 13(l)(c)(ii).
Two issues, therefore, arise for our consideration:
(A). Was the sum of Rs. 70 lacs lent to Bharat S. Shah without
adequate interest of security and;
(B) Whether Bharat S. Shah can be said to be t~e founder of the
institution within the meaning of sub-section (a) or manager within
D
the meaning qf sub-Section (cc) of Section 13(3) of the Act.
E
Issue (A)
The explanation of the assessee for making payment to Bharat S. Shah
is quite involved. According to the assessee, the amount of Rs. 70 lakhs paid
to Bharat Shah was not lent to him but was given as a deposit for procurement F
of appropriate premises for the assessee. That there was neither security, nor
interest, is admitted. The assessee's explanation is that the premises in which
the assessee was housed was inadequate and, therefore, it was on the look out
for more suitable premises. A suitable premises was under construction in the
vicinity and Bharat Shah, one of the members of the assessee Bourse, who
was knowledgeable in such matters, was authorised to negotiate for buying G
such premises from the builder. Interestingly, the asessee has nowhere
disclosed the name of the builder, nor the terms under which the premises
were to be acquired/leased. The reason for the money not being handed over
directly to the builder is explained by the assessee by saying that it preferred
to trust Bharat S. Shah as his credibility and solvency were beyond doubt. H
108
SUPREME COURT REPORTS (2002] SUPP. 5 S.C.R.
A For this reason, the assessee preferred to keep the money deposited with the
said Bharat Shah with the object of procurement of suitable premises as an<!
when the building became ready.
The assessing officer issued summons under Section 131 of the Income
Tax Act to Bharat Shah and, in response to the summons, he made a statement
B in writing by letter dated .7.2. 1992. According to Bharat Shah, he had received
Rs. 70 lacs as part payment from the assessee during the year ending March
31, 1989 towards deposit of lease money in respect of renting one full floor
in the premises at Diamond Village, Gamdevi to Bharat Diamond Bourse to
house the customs, custodian and other facilities of the assessee. According
C to Bharat Shah, he, his family members and business associates had entered
into agreement to purchase the entire 1 1th floor in the building known as
"Diamond Village" at Gamdevi, Bombay towards which they had already
paid Rs. 1.24 cro~es to the builder and that they had decided to give 1he said
floor on rent to the assessee on terms and conditions "to be mutually decided"
on completion of the floor. The Assessing Officer was of the view that the
D money received by Bharat Shah had been utilized by him for investment in
his name in the property, though there might have been a tacit understanding
that the assessee would be given business premises on the I 1th floor on lease.
Therefore, upon appraisal of the entire transaction, the A.O. concluded that
the funds of the assessee trust had been made over to Bharat Shah for ulterior
E motives, though disguised as a genuine transaction of deposit for a lease.
Hence, the A.O. was of the view that the transaction amounted to lending
money of the institution to Bharat Shah without adequate ·security or interest.
This finding of the Assessing Officer, which was affirmed by the appellate
authority, has been reversed by the tribunal.
F
Mr. Dastur, learned senior counsel for the assessee strenuously urged
that the tribunal is the last fact finding body, that the finding of fact recorded
by the tribunal, which has been affirmed by the High Court, ought not to be
disturbed by the Court under Art. 136. As a principle, this Court does not
disturb findings of fact unless the findings of fact are perverse. It appears to
G us th is is one of those exceptional cases where the correct conclusion recorded
. by the assessing officer, and affirmed by the appellate authority, has been
reversed by the tribunal on account of perverse reasoning, as we shall presently
see. It is difficult to believe that the Assessee, a limited company, could take
a corporate decision of handing over a large sum to the extent of Rs. 70 lakhs
to anyone without proper documentation Mr. Dastur placed before us some
H such document in an effort to persuade us that everything was above board.
DIRECTOR OF INCOME TAX v. BHARAT DIAMOND BOURSE [SRI KRISHNA, J.) ) 09
We shall scan them.
By a resolution dated 11.2.1988 the managing committee of the assessee
Bourse resolved to constitute a Committee of select alternate accommodation
of around 12000 sq. ft. and to decide all connected matters. The actual
resolution reads:
"Resolved further that at the unanimous decision of the Committee the
Bharat Diamond Bourse will pay a deposit upto Rs. 30 lacs to the owners/
builders after taking all action considered necessary to protect the interest of
the Bourse." (emphasis ours)
A
B
On 27th April, 1988, a letter was addressed to Bharat S. Shah by the C
Vice President of the Bourse in which it was expressed that the managing
committee of the Bourse was desirous or renting one full floor in the Diamond
Village at 55, Gamdevi to house the Customs, Custodian and other facilities
of the Bourse and that it was agreeable to pay Rs. 20 per sq. ft. of super built
up area and to pay a deposit of rent for 5 years interest free, all the outgoings D
including Municipal Tax would be on the account of the Bourse and, if there
was a Central Air-conditioning, the Bourse would pay contribution separately
for cost and maintenance thereof. After having said this a request made to
Bharat S. Shah "will you please now negotiate on behalf of the owners of the
premises and draw up the necessary documents in our favour. In order to
facilitate your working, the Bourse will provide you adequate amount as per E
clause above. When the documentation is ready, money may be handed over
to them with a receipt".
On 28th November, 1988, the following note confirming the arrangement
was made:
"The Managing Committee of the Bourse in its meeting held on
I Ith February, 1988 had decided to take on lease alternate
accommodation of about 12000 sq. ft. in the viccinity of Opera House
for housing all the infrastructural facilities preferably on one floor.
F
The Managing Committee has also decided to pay deposit to the G
owner/builders of the new premises after taking all action considered
necessary to protect the interest of the Bourse. As per the above
decision we have so far paid an amount of Rs. 50 lacs to Shri Bharat
S. Shah. The Total deposit would be around Rs. 120 lacs.
At present we have around Rs. 20 lacs in the current account with H
110
SUPREME COURT REPORTS [2002) SUPP. 5 S.C.R.
A
the Bank. As these fonds are not immediately required for payment
of any other expenditul'e, it is proposed to pay an amount of Rs. 20
lakhs to Shri Bharat S. Shah as an advance for the new premises. If
this advance is paid, the total advance will stand at Rs. 70 lacs."
On 6th December, 1988, Bharat Shah was paid a sum ·of Rs. 20
B
lacs which was acknowledged by him "towards deposit of lease money
in respect of second floor premises of the building 'Diamond Village'
which on completion has to be rented to Bharat Diamond Bourse."
On December 19.1989 a letter was addressed to Bharat Shah confirming
that the assessee had paid an amount of Rs. 70 lakhs towards deposit of lease
C of second floor premise of the building Diamond Village.
On the strength of these documents, it was urged that an amount of
Rs. 70 lacs paid to Bharat Shah was only by way of deposit for procurement
of suitable premises to house the activities of the Bourse. As we have already
D notice, Bharat Shah was not the builder, nor did he own any suitable premises
at that point of time. As a matter of fact, the was intending to buy premises
for his own purposes. The receipt given by him on 6.12.1988 merely stated
that he had received an amount of Rs. 20 lacs "towards deposit of lease
money" in respect of second floor premises of the Building "Diamond Village".
On 6th December, 1988 there was no premises owned by him in Diamond
E Village. The terms of the lease are nowhere to be .found on record. Admittedly,
the terms were not even recorded in an agreement. It strains one's
credulousness that seasoned businessmen parted with a large sum of Rs. 70
lakhs to Bharat Shah without any agreement under which the amount was
being paid and without settling the terms of the lease. This in itself should
have been sufficient for the Assessing Officer to take a different view as to
F the real nature of the transaction.
As on the date on which the money was paid to Bharat Shah, it was
neither intended as deposit for lease of premises, nor was it intended as
deposit to be paid to the builder. There is no evidence that any premises were
G procured or agreed to be procured in the name of the Bourse from any
builder. The builder's name is not known till today. If at all there was any
substance in the story that Bharat Shah was merely negotiating on behalf of
the assessee for procurement of suitable premises, the lease for the premises
the ownership of the premises or the lease rights would be in favour of the
respondent assessee with the builder as lessor or seller. The assessing offic,er
H was, therefore, justified in concluding that the amount of Rs. 70 lacs, when
DIRECTOR OF INCOME TAX v. BHARAT DIAMOND BOURSE [SRIKRISHNA, J.] 111
it was paid to Bharat shah, was clearly intended for his buying the premises' A
in Diamond Plaza building which in turn, may have been made available by
way of a sub-lease to the respondent. If this be so, then the payment to Bharat
Shah could hardly be a deposit. The stand of the respondent is completely
belied by Bharat Shah's statement made pursuant to the summons under
Section 131 of the Act.
The learned counsel for the assessee has made available to us a note
prepared with regard to the transaction, which according to him was also
made available to the Tribunal. It appears to us that the tribunal has, hook,
line and sinker, accepted all that is stated therein without .critical examination.
B
What transpired thereafter is also of interest. After the assessment order C
was made on 2.3.1992, the assessee must have realised that the amount paid
to Bharat Shah was treated as an amount lent without adequate security or
interest. Hence, there was an attempt to place on record documents to make
it appear that the amount had been paid as deposit.