Dharmaposhanam Co. Kerala vs Commissioner Of Income Tax, Kerala

Supreme Court24 July 1978R.S. Pathak · Y.V. Chandrachud · D.A. Desai

SCC(1978) 3 SCC 414
Neutral1978 INSC 113
AIRAIR 1978 SC 1443
SCR[1978] 3 SCR 1030

Ratio decidendi

The rule this decision rests on

Where a trust's objects clause contains both charitable and non-charitable purposes having apparently equal status, and the trust has discretion to apply its income to any of those objects with no definite part of income restricted to charitable purposes alone, the entire income fails to qualify for exemption under section 11(1)(a) of the Income Tax Act, 1961, even where some of the listed objects are individually charitable in nature. For purposes of determining whether a trust qualifies for exemption under section 11(1)(a), the court must have regard to all the objects set forth in the trust instrument, not merely the activity actually undertaken; a settlor or trustee who retains discretionary power to apply funds to non-charitable purposes cannot claim exemption merely because the power has been exercised in favour of charitable objects, unless there is clear evidence that certain listed objects were never intended to be undertaken, in which case those objects may be disregarded. Business constitutes "property" within the meaning of section 11(1)(a) of the Income Tax Act, 1961. Under section 2(15) of the Income Tax Act, 1961, the residual general head of "charitable purpose"—"the advancement of any other object of general public utility"—is qualified by the restrictive condition "not involving the carrying on of any activity for profit"; ordinarily profit is a normal incident of business activity, and where a trust carries on a business with no restrictions preventing it from making profits, the court is justified in presuming that the object involves carrying on an activity for profit, unless some indication to the contrary exists. The words "public good" or "common good" in a trust instrument, when appearing alongside specified charitable objects and left to the discretion of a general meeting to determine, fall under the residual general head of charitable purpose in section 2(15) and are subject to the same qualification that they must not involve an activity for profit.

Written by Miss Lucy from the judgment below, not taken from a headnote.

Judgment

As delivered

PETITIONER:DHARMAPOSHANAM CO. KERALA

Vs.

RESPONDENT:COMMISSIONER OF INCOME TAX, KERALA

DATE OF JUDGMENT24/07/1978

BENCH:PATHAK, R.S.BENCH:PATHAK, R.S.CHANDRACHUD, Y.V. ((CJ)DESAI, D.A.

CITATION:1978 AIR 1443 1978 SCR (3)10301978 SCC (3) 414CITATOR INFO :MV 1980 SC 387 (54)

ACT:Income Tax Act, 1961, Sections 2(15) and 11(1)(a)-Clause3(b) of the Memorandum of Association shows that one of theobjects of the company was "To do the needful for thepromotion of charity education, industries etc. and publicgood", which is reiterated by Art. 58-The said object clauseand Art. 58 later on amended dropping the word "industries"and adding "medical relief" Whether the Kuries business itsfor charitable purposes and whether the income arising outof conducting business of kuries or Chit fund liable toexemption under Section 11(1)(a) of the Income Tax Act,1961.

HEADNOTE:The objects of the appellant company were "(a) to raisefunds by conducting kuries............ and (b) to do theneedful for the Promotion of charity, education, industries,etc. and public good". Art. 58 of the Articles ofAssociation provided that "the profit left after meeting theexpenses of the company will be utilised for promotingeducation, industry, social welfare and such other purposesof common good as are resolved by the general meeting." OnJune 7, 1965 the appellant made certain alterations in itsMemorandum of Association and its Articles of Association,by which the words "medic'--II relief and other matters ofpublic good" were substituted for the word "industries, etc.and public good". The appellant earned income fromconducting kuries and money lending. He claimed exemptionfrom tax under section 11 of the Income-tax Act, 1961 forthe assessment years 1962-63 to 1968-69. The claim wasrejected by the Income Tax Appellate Tribunal and the KeralaHigh Court also decided the question against the appellant.The appellant appealed.Dismissing the appeals, the CourtHELD : 1. It is not only clear from Sections 11(4) and 13(1)(bb) of the Income Tax Act, 1961 but also well settled thatbusiness is 'property' within the meaning of Section11(1)(a) of the Act. [1033F]Commissioner of Income Tax v. Krishna Warrier, 53, I.T.R.176 (SC); referred to.2.Section 2(15) of the Income Tax Act, 1961 defines theexpression "charitable purpose" as including relief of thepoor, education and medical relief and the advancement ofany other object of general public utility not involving thecarrying of any activity for profit. The residual genera,he-,id in the definition of S. 2(15) viz. "the advancementof any other object of general public utility." is qualifiedby the restrictive words "not involving the carrying on anyactivity for profit". [1034 C, D]3.Ordinarily profit is a normal incident of businessactivity and if the activity of a trust consists ofcarrying on of a business and there are no restrictions onitsmaking profits, the Court would be well justified inassuming in the absence of some indication to thecontrary that the object of the trust involves the carryingon of an activity for profit. [1034 H, 1035 A]Sole Trustee, Loka Sikshna Trust v. Commissioner of IncomeTax, 101, I.T.R. 234 (SC) and Commissioner of Income Tax,Kerala v. Cochin Chamber of Commerce and Industry, 101I.T.R. 796; followed.4.Whether a trust is for charitable purposes falls to bedetermined by reference to all the object-, for which thetrust has been brought into existence. If the settlorreserves to himself the Power of appointment under which hemight appoint to non-charitable purposes, the trust cannotclaim exemption even though10 31the power of appointment is in fact exercised in favour of acharitable object.It would be a different case where one ormore of the objects mentioned in the Memorandum ofAssociation, although included therein were never intendedto be undertaken.If there is-evidence pointing to thatconclusion clearly the Court will ignorethe object andproceed to consider the case as if it did not exist in theMemorandum. In C.I.T., Kerala v. Darmodayam Co., 109 I.T.R.527 (SC) it was that basis on which this Court proceededwhen it observed that the assessee had never engaged itselfin any industry or in any other activity of public interest.[1036 F,G, 1037 A-B]Tennent Plays Ltd., v. Commissioner of Inland Revenue 30,Tax Cases 107, Incorporated Council of Law Reporting forEngland and Wales v. Attorney General and (Commissioners oflnland Revenue, 47 Tax Cases 321 and Rex v. The SpecialCommissioners of Income Tax, 8 Tax Cases 286; followed.Commissioner of Income Tax, Kerala v. Dharmodayam Co. 109,1.T.R. 527 (SC) and Dharmodayam Co. v. C.I.T. 45, I.T.R. 478(Kerala); explained and distinguished.5. In the instant case:(a)The objects "industries" and "common good" cannot bedescribed as "Charitable purposes" within the meaning of S.2(15) of the Act. Among the objects contained in theoriginal unamended sub-clause (b) of clause (3) of theMemorandum are objects which, while referable to theresidual general head in the definition of "charitablepurpose" in section 2(15) of the Act, nonetheless do notsatisfy the condition that they should not involve "thecarrying on of any activity for profit". Sub clause (b) ofclause 3 contains some objects which are charitable andothers which are non-charitable. They are all objects whichappear to enjoy an equal status. It is open to theappellant in its discretion, to apply the income derivedfrom conducting kuries and from money lending to any of theobjects. No definite part of the business or of its incomeis related to charitable purposes only. Consequently theposition in regard to the assessment years 1962-63 to 1965-66 is that the entire claim to exemption fails and no partof the income is exempt from tax. [1035 E-G](b)In the amended Memorandum of Association and Articlesof Association no doubt the word "industries" has beendropped and the words "medical relief" have been added. Andas regards "common good", Article 58 now likens it to"charity, educationand medical relief". Nonetheless, it isclear from the amended sub-clause (b)of clause (3) of theMemorandum that it forms a distinct object from them. Thewords are "other matters of public good".Consequently, theobjectstill falls under the residual general headmentioned in section 2(15). Thesame considerationsapply, and the same conclusion follows,as under the originalprovisions of the Memorandum and Articles of Association.[1036 A-C]Mohd. Ibrahim Riza v. Commr. of Income Tax, (1930) L.R. 57I.A. 260 and East India Industries (Mad.) P. Ltd. v.Commissioner of Income 7ax, Madras, 65 I.T.R. 61 1, applied.

JUDGMENT:

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 6-12 of1975.

From the Judgment and Order dated 12-6-1974 of the KeralaHigh Court in Income Tax Reference Nos. 51-56 and 79 of1972.

S. T. Desai and N. Sudhakaran for the Appellant.V. S. Desai and Miss A. Subhashini for the Respondent.

1032The Judgment of the Court was delivered byPATHAK, J. These appeals have been preferred by the assesseeagainst the judgment of the High Court of Kerala inreferences disposed of by it under section 256 of the Act.The appellant is the Dharmaposhanam Company Irinjalakuda.It is an association constituted under a licence issued inJanuary, 1931 by the then Government of Cochin andregistered with limited liability under section 26(1) of theIndian Companies Act 1913 as applied to Cochin. Theappellant was governed by a Memorandum of Association,Clause (3) of which provided :-

"3. The objects of the company are:

(a) To raise funds by conducting kuries withcompany as foreman, receiving donations andsubscription, by lending money on interest andby such other means as the company deem fit.

(b) To do the needful for the promotion ofcharity, education, industries etc. and publicgood.

(c) For carrying on the business of thecompany and for the advancement of the purposementioned above in so far as is appropriate,to construct buildings or to purchase or takeon lease or for hire movable or immovableproperties.

(d) To encourage others to form otherinstitution with the purpose of acting inaccordance with the objects of the company.

(e) To do all such things as are conduciveto the fulfilment of the above objects.

(f) To lend money on interest to one or moresolvent persons individually or severally onthe security of ornaments, landed propertiesor other forms of security fixed by theDirectors and to borrow money to meet the needof the company and to run other industries."

Article 58 of the Articles of Associationread:-

"The profit of the company shall not bedivided among the members. The profit leftafter meeting the expenses of the company willbe utilised for promoting education, industry,social welfare and such other purposes ofcommon good as are resolved by the generalmeeting."

During the assessment years 1962-63 to 1965-66, theappellant derived income from property, money lending andbusiness in kuries or chit funds. The assessee claimedexemption from tax of the income from kuries and moneylending under section 11 of the Income-Tax Act, 1961 withvarying success before the Income-tax authorities. It issufficient to point out that the Income-Tax AppellateTribunal held that the assessee was not entitled toexemption. At the instance of the appellant, the Tribunalmade a reference to the High Court for its opinion on thefollowing question of law :-

10 33.lm15"Whether on the facts in the circumstances of the case, theincome of the assessee for the assessment years 1962-63 to1965-66 was exempt under the provisions of section 11 of theIncome-Tax Act?

On June 7, 1965, the appellant made certain alterations inits Memorandum of Association and its Articles ofAssociation. Subclauses (b) and (f) of clause 3 of theMemorandum now lead:

(b) To do the needful for the promotion ofcharity, education, medical relief and othermatters of public good.

(t) To lend money in the security ofornaments, landed property or on such othersecurities, as determined by the Directors, oron the personal securities of one or moresolvent person or persons and also to borrowfunds for the purposes of the company.

The amended Article 58 of the Articles ofAssociation now provided :-

"The profit of the company shall not bedivided among the members. The profit leftafter meeting the expenses of the companywill be utilised for purposes of common goodlike charity, education and medical relief asare resolved by the general meeting."

The appellant pressed its claim for exemption under section1 1 of the Act before the Income-Tax authorities for theassessment years 1966-67 to 1968-69 also, and the claim wasallowed by the Tribunal in view of the aforesaidalterations. At the instance of the IncomeTax Department,the Tribunal referred a question of law to the High Courtfor the three assessment years in terms identical with thequestion referred for the earlier assessment years. By itsjudgment dated June 12, 1974, the High Court answered thequestion referred for the several assessment years in thenegative and in favour of the IncomeTax Department.On a consideration of the rival contentions of the parties,the position appears to be this. The appellant can succeedin his claim to exemption under section 1 1 (1 )(a) of theAct if the income from the business of conducting kuries andof money lending can be said to be income derived fromproperty held under trust wholly for charitable purposes.It is well settled that business is "property" within themeaning of section 11(1)(e). C.I.T. v. Krishna Warrier (1).That is also evident from the provisions of section 11 (4),and reference may be made also to section 13(1) (bb).Further, it is apparent from the terms of the Memorandum ofAssociation and the Articles of Association that thebusiness of conducting kuries and of money lending is heldunder trust. The question is : Is the business held undertrust for charitable purposes ?

There can be little doubt that when sub-clause (a) of clause3 of the Memorandum says(1) 53 I.T.R. 176 (SC).

15-399 SCI/7810 34"To raise funds by conducting kuries, withcompany as foreman, receiving donations andsubscriptions by lending money on interest andby such other means as the company deem fit".it refers to powers conferred on the appellant to raisemoney in aid of, and for the purpose of accomplishing, theobjects mentioned in subclause (b) of clause 3 of theMemorandum. Upto June 6, 1965 sub-clause (b) read :

"To do the needful for the promotion ofcharity, education, industries, etc. andpublic good".

Can all the purposes mentioned in sub-clause (b) bedescribed as charitable purposes ? Section 2(15) of the Actdefines the expression "charitable purpose" as including"relief of the poor, education, medical relief and theadvancement of any other object of general public utilitynot involving the carrying on of any activity for profit."Two objects in sub-clause (b) of clause (3) of theMemorandum need to be considered, "industries" and "publicgood". As regards the latter, the decision on what shouldbe the "purposes of common good" was left to the generalmeeting by Article 58 of the Articles of Association.Having regard to the context in which these words appear inthe Memorandum and the Articles, they must evidently bereferred to the residue general head in the definition insection 2(15) of the Act, that is to say, "the advancementof any other object of general public utility............But this head is qualified by the restrictive words "notinvolving the carrying on of any activity for profit." Theoperation of an industry ordinarily envisages a profitmaking activity, and so far as the advancement of publicgood is concerned, it is open to the appellant to pursue aprofit making activity in the course of carrying out thatpurpose, which of course depends on the nature and purposeof the "public VW". Nowhere do we find in the materialbefore us any limiting provision that if the appellantcarries on any activity in the course of actually carryingout those purposes of the trust it should refrain fromadopting and pursuing a profit making activity. In SoleTrustee, Loka Shikshana Trust v. Commissioner of Income-Tax,Mysore(1), Khanna and Gupta, JJ., dealing with a case inwhich the assessee carried on a business in the course ofthe actual carrying out of a primary purpose of the trust,rejected the claim to exemption and declared :-

"The fact that the appellant trust is engagedin the business of printing and publication ofnewspaper and journals and the further factthat the aforesaid activity yields or is onelikely to yield profit and there are norestrictions on the appellant-trust earningprofits in the course of its business would goto show that the purpose of the appellant-trust does not satisfy the requirement that itshould be one 'not involving the carrying onof any activity for profit........ Ordinarilyprofit is a normal incident of businessactivity(1) 101 I.T.R. 234.

1035and if the activity of a trust consists ofcarrying on of a business and there are norestrictions on its making profit, the Courtwould be well justified in assuming in the ab-sence of some indication to the contrary thatthe object of the trust involves the carryingon of an activity for profit."

Beg, J., in the same case, observed"The deed puts no condition upon the conductof the newspaper and publishing business fromwhich we could infer that it was to be on "noprofit and no loss" basis .... That character(i.e. of the deed) is determined far morecertainly and convincingly by the absence ofterms which could eliminate or prevent profitmaking from becoming the real or dominantpurpose of the trust. It is what the provi-sions of the trust make possible or permitcoupled with what had been actually donewithout any illegality in the ;Nay of profitmaking, in the case before us, under the coverof the provisions of the deed, which enable usto decipher the predominantly profit makingcharacter of the trust."

In a subsequent case, Commissioner of Income-Tax, Kerala v.Cochin Chamber of Commerce and Industry(1), this Courtextended the test to income derived from activities carriedon in aid of, and incidental to, the primary object of thetrust. We may note that no attempt has been made by theappellant before us to cast doubt on the validity of theobservations made in those two cases, and we proceed on thefooting that they convey the true content of the law.It is, therefore, apparent that among the objects containedin the original unamended sub-clause (b) of clause (3) ofthe Memorandum are objects which, while referable to theresidual general head in the definition of "charitablepurpose" in section 2(15) of the Act, nonetheless do notsatisfy the condition that they should not involve "thecarrying on of any activity for profit." The result is thatthe objects "industries" and "common good" cannot bedescribed as "charitable purposes". What follows then isthis, that the said sub-clause (b) can be said to containsome objects which are charitable and others which are non-charitable. They are all objects which appear to enjoy anequal status. It is open to the appellant, in itsdiscretion, to apply the income derived from conductingkuries and from money lending, to any of the objects. Nodefinite part of the business or of its income is related tocharitable purposes only. Consequently, in view of MohammedIbrahim Raza v. Commissioner of Income-'Tax(2) and EastIndia Industries (Madras) Private Limited v. Commissioner ofIncome-Tax, Madras(3), the entire claim to exemption mustfail and it cannot be said that any part of the income underconsideration is exempt from tax. That is the position inregard to the assessment years 1962-63 to 1965-66 before us.(1) 101 T.T.R. 796.

(2) (1930) L.R. 57 I.A. 260(3) 65 I.T.R. 611-1036It has been seriously urged for the appellant that in regardto the assessment year 1966-67 to 1968-69, the position hasbeen radically altered by reason of the amendments made inthe Memorandum and the Articles of Association. The word"industries" has been dropped and the words "medical relief"

have been added. And as regards "common good", Article 58now likens it to "charity, education and medical relief".

Nonetheless, it is clear from the amended sub-clause (b) ofclause (3) of the Memorandum that it forms a distinct objectfrom them. The words are "other matters of public good.Consequently, the object still falls under the residualgeneral head mentioned in section 2(15). The sameconsiderations apply, and the same conclusion follows, asunder the original provisions of the Memorandum and Articlesof Association.

Great reliance has been placed on behalf of the appellant onCommissioner of Income-Tax, Kerala v. Dharmodayam Co.(1) andit has been seriously urged that the decision of this Courtin that case concludes the point raised in these appeals.We find it not possible to accept this. In that case, theincome derived by the assessee from kuries was held by thisCourt to be exempt under section 11 (1 ) (a) of the Act, butthe decision proceeded almost entirely on the assumptionthat the Kerala High Court had found in Dharmodayam Co. V.C.I.T. (2) in a case between the same parties that theKuries business was itself held under trust for charitablepurpose, and from that the Court inferred that the businessactivity was not undertaken by the assessee in order toadvance any object of general public utility. No suchfinding has been rendered by any High Court in a case towhich the appellant is a: party. It will be noticed thatthe Court cautioned in its judgment in C.I.T., Kerala v.Dharmodayam Co. (Supra) that the decision was strictlylimited to the facts of that case.

It has been urged on behalf of the appellant that what should be taken into consideration is the activity actually conducted by the assessee, and not what is open to it under the provisions of its Memorandum of Association. We do not agree. Wheth er a trust is for charitable purposes falls to be determined by reference to all the objects for which the trust has been brought into existence. See Tennent Plays, Ltd. v. Commissioner of Inland Revenue(3) and Incorporated Council of Law Reporting for England and Wales v. Attorney- General and Commissioners of Inland Revenue(4). In Rex v. The Special Commissioners of Income-Tax(5), it was pointed out by the Court of Appeal in England that if the settlor reserves to himself the power of appointment under which he might appoint to non-charitable purposes, the trust cannot claim exemption even though the power of appointment is in fact exercised in favour of a charitable object. It would (1) 109 I.T.R. 527 (SC) (2) 45 I.T.R. 478 (Ker.)..

(3) 30 Tax Cases 107.

(4) 47 Tax Cases 321.

(5) 8 Tax Cases 286.

1037 be a different case where one or more of the objects mentioned in the Memorandum of Association although included therein were never intended to be undertaken. If there is evidence pointing to that conclusion clearly the Court will ignore the object and proceed to consider the case as if it did not exist in the Memorandum. In C.I.T. Kerala v. Dharmodayam Co. (Supra), it was that basis on which this Court proceeded when it observed that the assessee had never engaged itself in any industry or in any other activity of public interest.

On the aforesaid considerations, we endorse the final conclusion of the High Court and hold that it rightly answered the question referred to it in the several references in the negative, in favour of the respondent and against the appellant.

These appeals are dismissed with costs, limited to one set only.

S.R. Appeals dismissed. 1038

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