2000-VIL-295-ITAT-CTK
Equivalent Citation: ITD 079, 112, TTJ 073, 763,
Income Tax Appellate Tribunal CUTTACK
Date: 30.06.2000
SAMAJBADI SOCIETY.
Vs
ASSISTANT COMMISSIONER OF INCOME-TAX
BENCH
Member(s) : R. P. GARG., N. K. KARHAIL.
JUDGMENT
Garg, Vice-President-These appeals are by the assessee for assessment years 1974-75 to 1982-83 and since they raise common disputes, they are being disposed of by this common order for the sake of convenience.
2. In all these appeals, the common questions are -
(a) Whether the assessee is a charitable institution within the meaning of section 2(15) of the Income-tax Act and is entitled to exemption under section 11 of the said Act; and
(b) Whether the donation received is exempt under section 12 of the Act.
3. The facts are that the assessee, Samajbadi Society, came into existence on 13-7-1973 and is registered with the Registrar of Society, Orissa. Besides collecting membership fees and contributions from donations, it derived income from running a printing press and publishing a daily Newspaper at Bhubaneswar. The assessee claimed exemption under section 11 for the income on the ground that the income was applied for charitable purposes. The Assessing Officer made the assessments without considering the claim of the assessee for exemption under section I 1. When the appeals finally came up before the CIT(A) after repeated assessments made pursuant to the repeated orders of the CIT(A) setting aside the assessments, he noticed that the assessments suffered from serious infirmities not only by way of ignoring materials on departmental record but also for not examining the basic documents or causing normal enquiries and he gave an example, namely, that the Memorandum of Association of the society was never obtained on record or otherwise examined with reference to the objects for which it was formed. He, therefore, instead of setting aside the assessments again, called for a remand report pointing out that the Assessing Officer had completely overlooked the following material/facts/points:
(i) The grant of registration under section 12A;
(ii) Repeated directions of the CIT(A) to consider the claim for exemption under section 11;
(iii) Filing of the returns along with statement of accounts for all the years. The Assessing Officer sent a remand report which was treated as part of assessment by the CIT(A) superseding and substituting all assessment orders. The report enumerates the objects of the society as per clause 4 of the Memorandum of Association, the actual activity of the society as gathered from the, accounts, the assessee's claim under section 11 read with section 15, the reasons for rejecting the assessee's claim and fresh computation year wise etc. The reasons for rejection of the assessee's claim for exemption are that the activity of the society involved regular commercial venture in running a printing press and publishing a daily Newspaper for sale coupled with the actual fact of ploughing back the yields in the same business of printing and publication without any utilisation thereof for public charity and that it was not a charitable institution in view of the direct decision of the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234.
4. The CIT(A) noted in paragraph 6.2 of his order with reference to accounts of the society for these years that its activities were running a printing press and to publish and sell a Newspaper. These activities though carried out in terms of the Memorandum of the Society, both involved carrying on activities for profit, Le., business ventures conducted on commercial line. The main thrust of the assessee's arguments, he noted, was that the business profit was in furtherance of the public charity by way of dissemination of useful news and information and for ventilation of public opinion. He also observed that there was no iota of evidence that the society was fulfilling the object of training people in printing and journalism and rendering financial help through prizes and scholarships either by way of specific items of expenditure in P/L Account or entry in the books of account for all these years. Certain reports celebrating the annual day stating that the prizes were distributed to students and participants in connection with the literary or art competition were held by him to be of no use as these were the normal incidents of running a press and a Newspaper and can occur in any business organisation and that was in the nature of publicity and sales promotion to attract clients. Their engagement in running the printing press and as reporters, contributors or agents in connection with supplying news and articles are otherwise trained in the long run for such profession. The element of alleged training, he held, was the normal incidence of any business in printing and publication. A business undertaking engaging paid workers and technicians in the factory cannot be said to have imparted training to them by way of charitable dispensation and, accordingly, the business profit cannot be claimed as exempt for promoting charitable objects of public training in certain vocations. In the ultimate analysis, he held that all the activities of the Society were confined to or directly related to activity for profit involved in printing and publication and not to rendering aid and assistance to outside public to develop their talents in certain vocations. He then examined the case of the assessee in the light of the Supreme Court decisions in the cases of Sole Trustee, Loka Shikshana Trust and Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 and found that similar to the case of Sole Trustee, Loka Shikshana Trust, the dominant purpose of the society was to publish newspapers, journals etc. for promoting ideas of liberty, equality and fraternity amongst the general public. The membership is open to the public. As regards the power, he found on close reading of the relevant clauses of the Memorandum and Rules that the powers of the Managing Committee acting through its Secretary are substantially same as those of the Sole Trustee, Loka Shikshana Trust's case with regard to collection of funds, acquisition and disposal of assets, entering into commercial agreements including those for printing and publication, etc. The Managing Committee had, inter alia, powers to invest surplus funds of the society, to contract loans, deposits and rates of interest thereon and to decide the manner of execution of work and its allotment to members and employees. In other words, he held that there was no restriction on the power and authority to spend and to utilise the funds of the society in furtherance of the commercial venture of printing and publication, including remuneration to the members working for the society. This, according to him, was indirectly admitted by the counsel of the assessee when he submitted that the entire "Dharitri Parivar", i.e., persons associated in the activities of printing and publication of the society have become members of the society in the course of time. He, accordingly, held that even the following observations of Beg, J. would also go against the assessee :
'It appears to us that, with this profit making background of the trust its loosely stated objects, the wide powers of the sole trustee and the apparently profitable mode of conducting business, just like any commercial concern, disclosed not only by the terms of the trust but the statement of total expenditure and income by the trustee, it is very difficult to see what educational or other charitable purpose the trust was serving unless the dissemination of information and expression of opinions through the publications of the trust was in itself treated as the really educational and charitable purpose.'
He then held that the activities for profit in assessee's case were linked with the object of printing and publication and there was no limitation in ploughing back income only in that activity. Therefore, the purpose of public utility involving printing and publication could not be charitable and the entire income of the society would be taxable. He further observed that if sizeable profits are made from year to year, the fact of earning profit becomes relevant for the presumption that the activities were propelled by a dominant profit motive. He also held that the expenditure incurred were all in the nature of normal outgoing for running the printing press as well as publication and sale of Newspaper. As regards the application of funds for charitable purpose, he observed
'It may be mentioned that all the returns were furnished by the same Secretary of the society from the very beginning and that the annexed audit reports in Form No. 10B under section 12A(b) uniformly mentioned that the entire gross receipts during a given year has been applied for charitable purpose in that year in a mechanical manner without mentioning about the surplus and the cash balances available at the close of each year. These surrounding facts and circumstances on record would suggest that the charitable character of the society has not been established from any evidences concerning its actual conduct other than running the printing press and selling the Newspaper as a business undertaking with clear profit motive. The absolute power of dealing with the assets and income of the society as deemed expedient by the Managing Committee or its Chief Executive is decisive on the question that the institution was neither wholly nor pre-dominantly for serving any cause of general public utility. It is not the case of the assessee that any part of the income of the society was utilised or kept apart for purposes other than running the publication business. As already mentioned in para 7 above, there is no substance in the fresh pleading of the A/R that the income from business was ultimately utilised for scholarship or prizes and in giving vocational training to general public not associated with the Newspapers. In any case, the accounts for the years under consideration contained no such evidences of alleged utilisation. On facts, therefore, the principles and observations quoted from leading judgments of the Supreme Court hereinbefore are evidently applicable in the case of the society to the effect that the institution was formed and had conducted its business in printing and publication predominantly for earning profit and not wholly for the avowed charitable cause of developing mass consciousness based on certain liberal ideologies.'
On the aforesaid background, he held that the society is not entitled to exemption under section 11 read with section 2(15) of the Act and that is how the assessee is in appeal.
5. The assessee's counsel Shri S.N. Rotho submitted that the CIT(A) has mainly relied upon the majority decision of the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust in rejecting the assessee's case which has since been impliedly overruled by the decision in the case of Surat Art Silk Cloth Mfrs. Association and subsequent Fun Bench decision in the case of Thiagarajar Charities v. Addl CIT [1997] 225 ITR 1010 (SC). Profits in this case, he submitted, were not distributed but accumulated for the purpose of the trust. It is a non-profit making Organisation. He also submitted that CIT(A) having accepted that the society has the object of general public utility is not justified in denying the exemption under section 11 merely because it made profit and surplus was accumulated and, therefore, not used for charity. Based on the principle in the case of Surat Art Silk Cloth Mfrs. Association , he submitted that it is not necessary that all activities should be conducted on a no-profit basis and there should be a clause in the constitution of the trust to that effect. If the profit making is the dominant object, then only it will not be a charity, but if the profits just result, it will remain charity where the predominant object is to carry out the charitable purpose and not to earn profit. He further submitted that it is to be seen whether the carrying on of the activity which results in profit is an object or merely a power given for realising the object and if it is a latter, the object will remain charitable even if there results some profits. Alternative based on the decision of the Supreme Court in the case of Thiagarajar Charities , he submitted that the profit making apparatus was really the corpus of the property. Its use was not an object of the Trust and, therefore, the income derived from a business carried on by it, held under trust, was exempt from income-tax under section 11 of the Act. He gave lot of emphasis on the following statement of Beg, J. which has the approval in the later decisions of the Supreme Court in the cases of Surat Art Silk Cloth Mfrs. Association and Thiagarajar Charities :
'If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is more clearly than in the past the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity.'
6. The Id. Departmental Representative, on the other hand, submitted that the object should be with reference to the activity and if the activity is to make profit and not the purpose, it looses and ceases to be a charitable institution. He referred to certain observations of Supreme Court in the case of Sole Trustee, Loka Shikshana Trust at page 251. Profit, he said, though not distributed but was accumulated and, therefore, it was not to subserve the charity.
7. We have heard the parties and considered the 'rival submissions canvassed by the learned counsel of the assessee and the Department. Its objects are enumerated in clause 4 of its Memorandum of Association as under:
"4. The objects of the Society shall be:
(i) to strive for securing the ends of social justice, liberty of thought, expression, belief, faith and worship;
(ii) equality of status and of opportunity, to promote among all fraternity, assuring the dignity of the individual and the unity of the Nation
(iii) towards that end, to publish newspapers, journals, magazines, periodicals, books, pamphlets and other literary words;
(iv) to promote studies, research, investigations and experiments and to arrange lectures and seminars and render such other assistance to young and talented youth as may be in conformity with the objects of the Society;
(v) to establish educational institutions for imparting knowledge in science and humanities;
(vi) to train people in journalism, printing, publishing etc.
(vii) to purchase, take on lease or otherwise acquire land, building, machinery and other equipments;
(viii) to sale, manage, transfer, exchange, mortgage, demise, dispose of or otherwise deal with any other equipment, property whatever belonging to the Society;
(ix) to enter into agreements with authors, editors, and others in respect of their books, articles and other writings;
(x) to facilitate the working of its affiliated institutions and branches engaged in publication;
(xi) to act as publisher of any other institution or publishers or to enter into collaboration with them or others in India or in foreign countries for transacting the affairs of the Society;
(xii) to accept and receive in any manner whatever any cash or immovable property either unconditionally or subject to any special trusts created by any particular donor in furtherance of any one or more of the objects of the Society;
(xiii) to take such steps by personal or written appeals, exhibitions, public meetings, entertainments or otherwise as may from time to time be deemed expedient for the purpose of procuring contributions of the funds of the Society in the shape of donations, legacies, annual payments or otherwise,
(xiv) to solicit, obtain or accept subscriptions, donations, grants, gifts, devises, bequests and trusts from any person, firm, corporate body or institution, to give prizes, scholarships or other terminal payments, gifts or donations in furtherance of the objects of the Society;
(xv) to borrow and raise moneys with or without security or on the security of a mortgage, charge of hypothecation or pledge over all or any of the immovable or movable properties belonging to the Society in any other manner whatever,
(xvi) to draw, make, accept, endorse and discount cheques, notes or other negotiable instruments;
(xvii) for the purpose aforesaid to sign, execute the deeds as may be necessary;
(xviii) to all such other lawful acts, deeds or things as are incidental or conducive to the attainment of any of the above objects.'
Clause 3 of the Memorandum of Association incorporates a provision making the Society as a non-profit making Organisation. It states
"3. The Society shall be a non-profit making Organization.' Clause 28 of its Rules & Regulations provides for disposal of property on its dissolution. It reads as under:
"28. If, on the dissolution of the Society, there shall remain after the satisfaction of its debts and liabilities any property whatsoever not impressed with any Trusts, agreed between the Society and the Donor or Donors, the same shall not be paid or distributed among the members of the Society of any of them but shall be given to some other registered society or any institution working for the same or similar objects as those of the Society, to be determined by the votes of not less than three-fifths of the members present in person and entitled to vote at meeting convened for the purpose or in default thereof, by the principal Court of Original Civil Jurisdiction of the place in which the office of the Society is situated.'
Terms and conditions for becoming members of the Society are contained in clauses 1 to 6 of Rules & Regulations.
8. On a close reading of these objects stated in clause 4 of Memorandum of Association, leaving aside those in the nature of power, it is evident that like in the cases of The Trustees of the 'Tribune, in re [1939] 7 ITR 415 (PC), and Sole Trustee, Loka Shikshana Trust the dominant object of the assessee-society is to publish newspapers, journals, etc. for promoting ideas of liberty, equality and fraternity amongst general public. It falls in the 4th category of the definition given under section 2(15). In Sole Trustee, Loka Shikshana Trust's case, though there were four objects enumerated in the Deed of Trust, the question for consideration of Their Lordships of the Supreme Court was whether the object to supply the people with organ of educated public opinion was one for education or the object for public utility. Following Trustees of the Tribune's case, the Court held it to be the later. However as it involved carrying on activity for profit, the Court held it, to have ceased to be a charitable purpose. The Court decided this question by observing as under:--
'So far as this question is concerned, we find that the appellant-trust started with a sum of Rs. 4,308-10-9. The schedule attached to the trust deed dated April 10, 1947, shows that the assets of the trust consisted of printing machines, accessories, motor-cars, building, stocks of paper and other miscellaneous things. The total value of the assets was Rs. 2,97,558, out of which the value of the building sites and the buildings was Rs. 47,500. As against that, the liabilities of the trust amounted to Rs. 1,24,086. The net value of the assets of the trust rose in 1947 to a figure of Rs. 1,73,571-14-4. For the assessment year 1962-63, which is the year under appeal, the total receipts of the trust were of the amount of Rs. 22,55,077. The main sources of these receipts were sales of newspapers and magazines through agents, receipts on account of advertisement, receipts for job printing bills besides some other minor items. As against the receipts, the major items of expenditure were the purchase of newsprint, paper, printing types, printing and other material, the salaries and allowances of the staff, remuneration to news agencies and railway freight. There can, therefore, be no doubt that the trust has been carrying on the business of publishing newspaper and weekly and monthly magazines. The profits from the aforesaid business would also apparently account for the manifold increase in the value of the assets of the trust. The emphasis on business activity of the trust is also manifest from clauses 6, 10, 14, 16 and 18 of the trust deed reproduced above. The fact that the appellant-trust is engaged in the business of printing and publication of newspaper and journals and the further fact that the aforesaid activity yields or is one likely to yield profit and there are no restrictions on the appellant-trust earning profits in the course of its business would go to show that the purpose of the appellant-trust does not satisfy the requirement that it should be one not involving the carrying on of any activity for profit'.
It was further observed that :
'Ordinarily profit motive is a normal incident of business activity and if the activity of a trust consists of carrying on of a business and there are no restrictions on its making profit, the court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit.'
The observation that the exclusion of private profit within 10 words - 'not involving the carrying on of any activity for profit' alone was contemplated by the clause is held to be contrary to the rules of construction and to ignore the import of newly added words. The Court, however, excluded from this category the mutual insurance and co-operative stores of which profit making is not an essential Ingredient because of a self-imposed and innate restriction on making profit in the carrying on of that particular type of business.
9. Beg, J. wrote a separate judgment. Noticing the profit making background of the trust, its loosely stated objects, the wide powers of the sole trustee and the apparently profitable mode of conducting business, just like any commercial concern, disclosed not only by the terms of the trust but by the statement of total expenditure and income of the institution, he found it difficult to see what educational or other charitable purpose the trust was serving unless the dissemination of information and expression of opinions in the publications of the trust in itself was treated as really educational and charitable purpose. To read 'private' before 'profit' is quite unjustifiable as otherwise the amendment was not necessary because even before amendment, an activity for private profit was not charitable. The use of the words "for profit", according to him, shows that the involvement of profit making should be of such a degree or to such an extent as to enable the Court to infer it to be the real object. As a rule, he observed, if the terms of the trust permit its operation for profit, they become, prima facie, evidence of a purpose failing outside charity. They would indicate the object of profit making unless and until it is shown that terms of the trust compel the trustee to utilise the profits of business also for charity. This means that the test introduced by the amendment is : Does the purpose of a trust restrict spending the income of a profitable activity exclusively or primarily upon what is 'charity' in law? If the profits must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on 'charity'. If that obligation is there, the income becomes entitled to exemption and that is the most reliable test. 'Charitable purpose' is explained by him as under:
'It seems to me that a common concept or element of 'charity' is shared by each of the four different categories of charity. It is true that charity does not necessarily exclude carrying on an activity which yields profit, provided that profit has to be used up for what is recognised as charity. The very concept of charity denotes altruistic thought and action. Its object must necessarily be to benefit others rather than one's self. Its essence is selflessness. In a truly charitable activity any possible benefit to the person who does the charitable act is merely incidental or even accidental and immaterial. The action which flows from charitable thinking is not directed towards benefiting one's self. It is always directed at benefiting others. It is this direction of thought and efforts and not the result of what is done, in terms of financially measurable gain, which determines that it is charitable. This direction must be evident and obligatory upon the trustee from the terms of a deed of trust before it can be held to be really charitable.'
It was further held that the sole trustees have been given power to divert funds/income to similar other trusts whose objects were similar either fully or partially (para 17 of the Deed) and the trust, therefore, cannot be treated as wholly charitable. He further observed that the deed leaves it entirely to the sweet will of the sole trustee to decide all questions relating to policy or the way in which needs mentioned in clause 20 are to be met.
Provision for their satisfaction could be made in a manner which could be very lucrative. This is the most relevant consideration in ascertaining the purpose of the trust from the point of view of profit making. At page 259 it was observed -
'Judging from the facts set out in the trust deed itself, the sole trustee had managed to make the satisfaction of the needs mentioned above a highly profitable business. The deed puts no condition upon the conduct of the newspaper and publishing business from which we could infer that it was to be on 'no profit and no loss' basis. I mentioned this as the learned counsel for the appellant repeatedly asserted that this was the really basic purpose and principle for the conduct of the business of the trust before us. This assertion seems to be based on nothing more substantial than the trust deed itself does not expressly make profit making the object of the trust. But, as I have already indicated, the absence of such a condition from the trust deed could eliminate or prevent profit making from becoming the real or dominant purpose of the trust. It is what the provisions of the trust make possible or permit coupled with what had been actually done without any illegality in the way of profit making, in the case before us, under the cover of the provisions of the deed, which enable us to decipher the meaning and determine the predominantly profit making character of the trust.'
10. This is the decision which is found to be squarely against the assessee by CIT(A). We, however, noticed some distinguishing features. One is that there was no restriction in making profit in the case of Sole Trustee, Loka Shikshana Trust, whereas in assessee's case clause 3 specifically says that the society was non-profit making organisation. The majority decision also excluded, as aforesaid, the mutual insurance, co-operative societies etc. of which profit making is not an essential ingredient because of self-imposed and innate condition on making profit. Beg, J. observed that "The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on 'charity'. If that obligation is there, the income becomes entitled to exemption and that is the most reliable test.' This observation has subsequently been upheld by the later decision of the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association and Thiagarajar Charities. This also distinguishes the object of the assessee from that of in the case of Sole Trustee, Loka Shikshana Trust.
11. In Surat Art Silk Cloth Mfrs, Association's case, the assessee was a company under section 25 and its objects were -
(a) To promote commerce and trade in art silk yam, raw silk, cotton yam, art silk cloth, silk cloth and cotton cloth.
(b) To carry on all and any of the business of art silk yam, raw silk, cotton yam as well as art silk cloth, silk cloth and cotton cloth belonging to and on behalf of the members.
(c) To obtain import licences for import of art silk yarn, raw silk, cotton yarn and other raw materials as well as accessories required by the members for the manufacture of art silk, silk and cotton fabrics.
(d) To obtain export licences and 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) To do all other lawful things as are incidental or conducive to the attainment of the above objects.
Clause 5 of the memorandum provided in sub-clause (1) that the income and property of the assessee wheresoever derived shall be applied solely for the promotion of its objects as set forth in the memorandum and subclause (2) directed that no portion of the income or property shall be paid 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 anyone or more of them or to any person claiming through any one 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 memorandum and it provided that the property remaining after satisfaction of all the debts and liabilities shall not be distributed amongst the members of the assessee but shall 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 or property could be distributed amongst the members in any form 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 dominant object in this case was held by the Court to be as contained in clause (a); and other clauses in the objects were found to be only powers incidental to carrying out the dominant powers. That it is the object that should not involve an activity for profit and not its advancement because the object did not involve carrying on any activity for profit. Sen, J. and Pathak J., however, held that that it was the advancement and not the object that should not involve carrying on any activity for profit and, therefore, Sen, J. held that even if the dominant object is the promotion or advancement of any other object of general public utility, if it involves any activity for profit because of commercial activity, it ceases to be the charity. Pathak, J. said, if the object was charitable in reality, the mode adopted must be one which is directed to carry out charitable purpose including the business engaged in carrying out for that purpose. In carrying on such a business does not detract from the purpose which permeates it, the end result of the business activity being the effectuation of the charitable purpose.
12. Majority view is extracted as under:
"(vi) The inhibition of the exclusionary clause would be attracted if the purpose of the trust or institution in fact involves the carrying on of an activity for profit or in other words if an activity for profit is actually carried on as an integral part of the purpose of as a matter of advancement of the purpose'. There must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution or, to put it differently, 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. There is, however, one qualification; if the constitution of a trust or institution expressly provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive, there would be no scope for controversy because the purpose would, on the face of it, involve the carrying on of an activity for profit and it would be non-charitable even though no activity for profit is actually carried on.
(vii) The test which has now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But 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 some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. 'If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity.' The restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit making is not the real object.
(viii) It is not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no-profit no-loss basis or that profit shall be prescribed. Even if there is no such express provision, 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 indicate that the activity is not propelled by a dominant profit motive.'
13. Pathak, J. also added and held:
"(iv) The real question whether a trust is created or an institution is established for a charitable purpose falls to be determined by reference to the real purpose of the trust or the institution and not by the circumstances that the income derived can be measured by standards usually applicable to a commercial activity. The quantum of income is no test in itself. It may be the result of an activity permissible under a truly charitable purpose for a profitable activity in working out the charitable purpose is not excluded.'
14. In this case, the view of Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) stating that means of accomplishing or carrying out the object must be unsettled by profit making venture and even if the profit is earned wholly for an object of general public utility the profit exemption is not accepted to be a correct view by majority. At page 27 of Surat Art Silk Cloth Mfrs. Association's case the observations of Sole Trustee, Loka Shikshana Trust's case is quoted to the effect'... if the activity of a trust consists of carrying on a business and there are no restrictions on its making profit, the court would be well justified in assuming in the absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit'. And the observations in the case of Indian Chamber of Commerce is quoted to the effect that - 'An undertaking by a business Organisation is ordinarily assumed to be for profit unless expressly or by necessary implication or by eloquent surrounding circumstances the making of profit stands loudly negatived .... a pragmatic condition, written or unwritten, proved by a proscription of profits or by long years of invariable practice or spelt from some strong surrounding circumstances indicative of anti-profit motivation such a condition will nullify for charitable purpose.'
15. The majority view was thus as under:
'Now, we entirely agree with the learned judges who decided these two cases that activity involved in carrying out the charitable purpose must not be motivated by a profit objective but it must be undertaken for the purpose of advancement of carrying out of the charitable purpose. But we find it difficult to accept their thesis that whenever an activity is carried on which yields profit, the inference must 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. We do not think the court would be justified in drawing any such inference merely because the activity results in profit. It is in our opinion not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no profit no loss basis or that profit shall be proscribed. Even if there is no such express provision, 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 indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable character of the purpose would not be lost.'
16. This decision also upheld the observation of Beg, J. when he said that - "If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity.' The Id. Judges further added that the restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit making is not the real object. The Court also cautioned -'But cases are bound to arise in practice which may be on the borderline and in such cases the solution of the problem whether the purpose is charitable or not may involve much refinement and present real difficulty'. The majority view also thought it significant to note that the assessee was a company recognised by the Central Government under section 25 of the Companies Act, 1956 and under its memorandum of association, the profit arising from any activity carried on by the assessee was liable to be applied solely and exclusively for the promotion of trade and commerce in various commodities which are mentioned above and no part of such profit could be distributed amongst the members in any form or under any guise. The profit of the assessee could be utilised only for the purpose of feeding this charitable purpose and the dominant and real object of the activity of the assessee being the advancement of the charitable purpose, the mere fact that the activity yielded profit did not alter the charitable character of the assessee. In the present case, there is a specific clause 3 for assessee being a non-profit making Organisation like a company under section 25 of the Companies Act, as in the case of Surat Art Silk Cloth Mfrs. Association.
17. Then comes the case of Thiagarajar Charities, a three Judges Bench. In that case the objects were -
'(a) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment, maintenance, running, development, improvement and extension of elementary schools, secondary schools, high schools, colleges, universities, workshops, weaving, industrial, technological and other art, craft and science institutes, schools and institutions of Tamil or Sanskrit learning, hostels for the benefit of students and generally all kinds of educational institutions whether general, technical, vocational, professional or of other description whatsoever for the welfare and uplift of the general Indian public and to institute an award scholarships in India for study, research, apprenticeship for all or any of the said purposes.
(b) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment, maintenance, running, development, improvement and extension of libraries, reading rooms, recreation centres and all other facilities as are calculated to be of use in imparting education to the Indian public.
(c) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment, maintenance, dispensaries, sanatoria, maternity homes and all similar institutions as will afford treatment, cure, rest recuperation and other allied advantages in the way of alleviating the sufferings of humanity.
(d) To build, erect and construct and to aid and assist in the building, erection and construction of houses, tenements and places of residence for the poor, needy and defectives and to afford them all comforts and conveniences.
(e) To conduct poor feeding and generally to give food and clothing to the poor, needy and defectives and to afford relief to people in distress and affected by earthquake, flood, famine, pestilence and other accidents and conduct or grant donations for the support of the inmates of orphanages.
(f) To help, assist and give aid to the fathers, or other natural guardians, or near relatives of indigent and unmarried girls for the marriages of such girls.
(g) To engage in, carry on, help and assist and promote, rural reconstruction work, cottage industry and all other matters incidental thereto in India.
(h) The above objects shall be independent of each other and the board of trustees as hereinafter constituted may, from time to time, apply the trust properties in carrying out all or any of the aforesaid objects of the trust as they may deem fit.'
Then powers of the trustees were in clause 7 to the following effect:
"7. All the trustees including the managing trustee for the time being of the trust shall be referred to collectively as the board of trustees and the board of trustees shall have the following powers in regard to the investment of all or any part of the trust properties :
(a) To invest in any securities of the Central or State Government.
(b) To invest in the purchase of any leasehold or freehold lands or buildings and in the construction of any buildings on any land belonging to the trust.
(c) To invest in fixed deposits, current or other accounts in any scheduled bank.
(d) To invest in shares, debentures or bonds of any public company or corporation incorporated in India.
(e) To invest in any business undertaking of whatsoever nature to be carried on by the trust.
(f) To invest moneys in any business undertaking for the purpose of acquiring and carrying on any business undertaking, such as managing agency, selling agency or purchasing agency of any company, or corporation in India:
Provided that nothing hereinbefore contained shall be deemed to authorise any of the trustees for the time being to advance any of the trust properties as loans to any of the trustees. Such business undertaking may be carried on individually by the trust or in partnership or in combination with any other person or persons....'
Clause 32 stated that the business of the board of the trustees shall be dealt with either at the meetings of the board of trustees or by resolution in circulation. The resolution was passed to carry on the business on purchase and sale of cotton, cotton yarn, etc.
18. The Court held that the dominant object of the education, medical relief and poor relief which did not involve carrying on of any activity of profit. The business was not under that clause 1(g) and that was a mere power and not an object and it was stated under clause 7(e), read with clause 32 of the trust deed and the resolution passed for carrying on the business. The Court further held -
'We understand clause 1(g) of the trust deed dated June 4, 1962, as only vesting a power in the trustees to do certain things to effectuate the main objects of the trust contained in clause 1(a) of the deed - to start, run develop educational, technical, vocational and other institutions and institutes for the welfare and uplift of the general Indian public. The powers so vested in the trustees under sub-clause (g) cannot be called as 'the objects' of the trust. So understood, we have no hesitation to hold that the Income-tax Appellate Tribunal and also the High Court erred in construing sub-clause (g) aforesaid as an 'object' of the trust enabling it to carry on a business with a profit motive.'
The Court found that the test of Surat Art Silk Cloth Mfrs. Association is also satisfied. It observed -
'It appears from the affidavit filed by the appellant-trust, which is available at page 142 of the paper book, that an aggregate sum of Rs. 16,48,030 was spent for charitable purposes during the period from June 4, 1962 to May 31, 1967. The purposes are aid to the various colleges, orphanages, relief to the poor and different categories or types of education. It also appears that in one of the assessment years, the amount so applied is much more than the total income. The facts available in the records go to show that the profits or amounts earned in the business fed the charitable purposes specified in the trust deed. In other words, the amounts earned had been essentially spent on charity. There can be no doubt that profit making was not the real object of the trust.'
19. The assessee-society had made profit from assessment year 1974-75 onwards except in assessment year 1978-79, the details of which are as under
Assessment year Assessed Income Recomputed income/loss
1974-75 Rs. 68,360 Rs. 64,937
1975-76 Rs. 1,55,340 Rs. 98,655
1976-77 Rs. 1,50,000 (on estimate in Rs. 1,12,590
absence of return)
1977-78 Rs. 1,50,000 -do- Rs. 88,668
1978-79 Rs. 1,50,000 -do- Rs. 57,276
1979-80 Nil -do- Rs. 50,701
1980-81 Nil -do- Rs. 1,00,701
1981-82 Nil -do- Rs. 43,599
1982-83 Rs. 50,000 -do- Rs. 71,464.
The profits so made were not distributed but all accumulated for being utilised in the development of the society for carrying out its objects. Clause 28, in fact, stated that even on dissolution, the surplus assets would not be distributed to the members but given to trust/institution engaged in carrying out similar objects. In CIT v. Andhra Pradesh State Road Transport Corpn. [1986] 159 ITR 11 (SC), the Corporation established for the purpose of providing for an efficient transport system was held to have no profit making motive, though it earned income in the process. Profit making should not be in accomplishing or carrying out the objects but should be for the purpose of the trust or the object of the trust and if the object is without making an activity of profit, the trust does not cease to be a charity merely because it makes profit and involves an activity of profit in accomplishing or carrying out the object. In other words, profit making is not prohibited if it subserves the charity.
20. Beg, J. in Sole Trustee, Loka Shikshana Trust's case had advocated in detail that the question whether the trust is created for an institution established for a charitable purpose falls to be determined by reference to the real purpose of the trust or the institution and not by the circumstance that the income derived can be measured by standards usually applicable to a commercial activity. The quantum of income is no test in itself. It may be the result of an activity permissible under a truly charitable purpose for a profitable activity in working out the charitable purpose is not excluded. In Dharmaposhanam Co. v. CIT [1978] 114 ITR 463, the Supreme Court observed that whether a trust is for a charitable or religious purposes has to be determined by reference to all the objects for which the trust has been brought into existence and not merely to the activity conducted by the trust or the institution.
21. To fall an institution in the 4th and last category of charitable purpose, fulfilment of two conditions is necessary, viz., (1) the purpose of the trust must be advancement of an object of general public utility and (2) that purpose must not involve the carrying on any activity for profit. There seems to be no serious dispute in this case about the fulfilment of first condition, ie., the purpose of the trust is the advancement of an object of general public utility, viz., supplying the community with an organ of educated public opinion by publication of a Newspaper and securing the ends of social justice, liberty of thought, expression, belief, faith and worship. The equality of status and of opportunity, to promote among all fraternity assuring the dignity of the individual and the unity of the Nation. It is towards that end the assessee-society is publishing the Newspaper, Journals, Magazines, Periodicals, etc. The real question in this case which is to be decided is to scrutinise the existence of the second condition, Le., that the object should not involve the carrying on of any activity of profit. The carrying on of an activity for profit as such is not prohibited, if it was arising out of a business held under the trust or legal obligation for applying its income only to charitable purpose or was carried on for the purpose of earning profit to be utilised exclusively for feeding the charity. Sub-section (4) of section 11 provides that the property held under trust includes a business undertaking. Under this section if a claim is made that the income of such undertaking shall not be included in the total income of the persons in receipt thereof, the Assessing Officer has been given a power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment. If carrying on of any business is prohibited then there was no need for this section to exist. Again, it is now well established by the decisions of the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association and CIT v. Bar Council of Maharashtra [1981] 130 ITR 28 that the test is what is the predominant object of the activity - whether it is to carry out a charitable purpose or to cam profit? If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from the activity. This is also held in the case of Andhra Pradesh State Road Transport Corpn. In Surat Art Silk itself, the activity of obtaining licence for import foreign yarn and quota for purchase of indigenous yam carried on by the assessee was found and held not to be activity for profit within the meaning of section 2(15) of the Act. In CIT v. Madras Stock Exchange Ltd. [1981] 130 ITR 184 (SC), it was held that the receipt by a stock exchange as and by way of listing fee was not an activity of profit. In Victoria Technical Institute v. Addl CIT [1991] 188 ITR 57 (SC), it was held that the function of buying and selling or selling on commission articles produced by handicraftsmen was for carrying out the primary purpose of the Institute and not an activity for profit. In Samaritan Society v. CIT [1997] 225 ITR 652 (SC), it was found as a fact that the real object of the assesseetrust was charitable and that items 6 & 7 in the trust deed which enabled the trust to carry on business were meant merely to enable the trust to carry on its charitable objects in a more effective manner.
22. The aforesaid illustrations of the cases are all examples where the activity for profit was an independent activity and carried on to subserve the purpose of the trust. The earning was to accomplish the object of the trust. In Sole Trustee, Loka Shikshana Trust's case , the publication of Newspaper and Journals by the trust on commercial lines, on its own facts, was held to involve an activity for profit entailing forfeiture of the exemption. An example in Surat Art Silk Cloth Mfrs. Association's case was given by the Supreme Court, viz. where the constitution of the trust or institution expressly provides that the purpose shall be carried out by engaging an activity which has a predominant profit motive, as for example, where the purpose is specifically stated to be promotion of sports by holding cricket matches on commercial lines with a view to making profit there would be no scope for further controversy because the purpose would on the fact of it involve carrying on an activity for profit and it would be non-charitable even though no activity for profit is actually carried on or in the example given, no cricket matches are, in f act, organised. See in this connection the decision of Delhi High Court in the case of Jaipur Charitable Trust v. CIT [1981] 127 ITR 620, the observation at page 629 to the effect 'where on the other hand as in the present case the constitution itself provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive, the exemption would not be available even though no activity for profit is actually carried on' and the decision of Allahabad High Court in the case of Ganga Prasad Varma Memorial Society v. CIT [1982] 134 ITR 421 wherein it has been held that "It was ruled that inhibition of the exclusionary clause would be attracted if the purpose of the trust or institution in fact involves the carrying on of an activity for profit, or, in another words, if an activity for profit is actually carried on as an integral part of the purpose or as a matter of advancement of the purpose. There must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution or, to put it differently, 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."
23. The meaning of the expression 'activity for profit' has explained by the Supreme Court in Surat Art Silk Cloth Mfrs. Association's case as follows:
'The activity must, however, be for profit in order to attract the exclusionary clause and the question, therefore, is when can an activity be said to be one for profit? The answer to the question obviously depends on the correct connotation of the proposition 'for'. This proposition has many shades of meaning but when used with the active participle of a verb it means 'for the purposes of' and connotes the end with reference to which something is done. It is not, therefore, enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit. Profit making must be the end to which the activity must be directed or in other words, predominant object of the activity must be making of profit. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit. But where, on the other hand, an activity is carried on with the predominant object of earning profit, it would be an activity for profit, though it may be carried on in advancement of the charitable purpose of the trust or institution. Where an activity is carried on as a matter of advancement of the charitable purpose or for the purpose of carrying out the charitable purpose, it would not be incorrect to say as a matter of plain English grammar that the charitable purpose involves the carrying on of such activity, but the predominant object of such activity must be to subserve the charitable purpose and not to earn profit. The charitable purpose should not be submerged by the profit making motive; the latter should not masquerade under the guise of the former. The purpose of the trust, as pointed out by one of us (Pathak, J) in Dharmadeepti v. CIT [1978] 114 ITR 454 (SC) must be, essentially charitable in nature' and it must not be a covert for carrying on an activity which has profit making as its predominant object.'
No dispute is raised in this case that the publications of Newspaper and Journals by the Society were on commercial lines. The object is accomplished by publishing of Newspaper and Journals and that by itself involved an activity for profit. The dictionary meaning of the word 'involve' is 'to wrap in anything; to enfold or to envelop; to contain or imply.' When activity for profit and the object of the trust are intertwined or wraped up or enveloped together, the ten restrictive words would com e into play and the charity would cease to have exemption. Both are intermixed and interest to such an extent that it is difficult to bifurcate the two. One is not possible with-out the other. As aforesaid, in Trustees of the Tribune 's case also the objects were similar, namely, supplying the community with an organ of educated public opinion by publishing of a Newspaper which was an object of general public utility and was held to be charitable in nature even though the activity of publication of Newspaper was carried on commercial lines. This was a case before introduction of the ten restrictive words 'not involving the carrying on of any activity for profit" which were added as observed by the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association, to overcome the decision of the Privy Council in Trustees of the Tribune's case . Reasons given in Finance Minister's Speech for introducing this exclusionary clause may also be seen in this regard, which read as under :
'The definition of 'charitable purpose' in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them, namely, the newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words 'not involving the carrying on of any activity for profit' should be added to the definition.'
Because of these ten restrictive words, the explanation was not granted by the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust even though the objects of the Trustees of the Tribune's case and Sole Trustee, Loka Shikshana Trust 's case were found to be similar. In these circumstances, in our opinion, the exemption cannot be granted to the assessee in view of the Supreme Court decision in the case of Sole Trustee, Loka Shikshana Trust because of the fact that activity of publication of Newspaper was being carried on commercial lines. This principle laid down by Supreme Court in the case of Sole Trustee, Loka Shikshana Trust has not been reversed by any of the subsequent decisions by the decisions of the Supreme Court in the cases of Surat Art Silk Cloth Mfrs. Association and Thiagarajar Charities , as contended to by the learned counsel of the assessee. On the contrary, it finds support therefrom. See in this context the following observation in Surat Art Silk Cloth Mfrs. Association's case at page 23 :
'The other interpretation it to see whether the purpose of the trust or institution in fact involves the carrying on of an activity for profit or in other words whether an activity for profit is actually carried on as an integral part of the purpose or to use the words of Chandrachud, J., as he then was, in CIT v. Dharmodayam Co. [1977] 109 ITR 527 (SC), 'as a matter of advancement of the purpose'. There must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution or to put it differently, 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 exclusionary clause would be attracted. This appears to us to be a more plausible construction which gives meaning and effect to the last concluding words added by the legislature and we prefer to accept it. Of course, there is one qualification which must be mentioned here and it is that if the constitution of a trust or institution expressly provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive, as, for example, where the purpose is specifically stated to be promotion of sports by holding cricket matches on commercial lines with a view to making profit, there would be no scope for controversy, because the purpose would, on the face of it, involve carrying on of an activity for profit and it would be non charitable even though no activity for profit is actually carried on or, in the example given, no cricket matches are in fact organised."
24. In the result, we hold that (i) the object of the trust is charitable and it falls in the fourth category of the definition given under section 2(15) of the Act; (it) though it is non-profit making organisation and is registered as a charitable institution under section 12A of the Act, its activities have been on commercial lines' and it had made profit year after year; (iii) its income has not been distributed but has been accumulated and utilised in running its activity in publishing and printing; (iv) as per clause 28 of Memorandum of Association, Rules & Regulation, the surplus assets after satisfying the liability and debts cannot be distributed and is to be given to another Society having similar objects; and (v) its activities are on commercial line and, therefore, the profit motive and the object of general public utility are so intermixed, interlaced, interwoven that they cannot be separated. All these facts and circumstances show that it was a charitable institution but it loses exemption because it is hit by the ten restrictive words in the definition given under section 2(15) of the Act.
25. Before parting with this case, we wish to place it on record the efforts put in by the learned counsel of the assessee Shri S.N. Rotho and the learned Departmental Representative Shri B.B. Panigrahi in placing the facts of this case comparing these with innumerable decided cases aforesaid and legal submissions and distinctive features which enabled us to arrive at the aforesaid decision.
26. In the result, all the appeals are dismissed.
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