Income-tax---

----Charitable purposes, definition-of---Tests---Dominant object of institution relief of the poor and not to earn profit---Income of institution entitled to exemption---Indian Income Tax Act, 1961, Ss.2(15) & 11.

When the purpose of a trust or institution is relief of the poor education or medical relief, the requirement of the definition of charitable purpose would he fully satisfied even if an activity for profit is carried on in the course of the actual carrying primary purpose of the trust or institution. Section 2(15) of the Indian Income Tax Act, 1961, dearly states that to constitute a "charitable purpose" the purpose of making profit must be excluded. The requirement is satisfied where there is either a total absence of the purpose of profit-making or it is so insignificant compared to the purpose of advancement of the object of general public utility that the dominating role of the latter renders the former unworthy of account. If the profit-making purpose holds a dominating role or even constitutes an equal component with the purpose of advancement of the object of general public utility then clearly the definition in section 2(15) is not satisfied.

Held, that, in the instant case, the association had been established for rehabilitating economically handicapped women and destitute by giving them suitable employment. It had set. up an ancillary unit to the H.M.T. Watch Factory, which resulted in the assessee providing employment to 79 women drawn from the weaker sections of the society. The dominant object of the assessee in the instant case was not to earn profit, but to carry on charitable activities. Its income was entitled to exemption under section 11.

SC.I.T. (Addl.) v. Surat Art Silk Cloth Manufacturers Association (1980) 121 ITR 1 (SC) and C.I.T. v. Andhra Pradesh State Road Transport Corporation (1986) 159 ITR 1 (SC) applied.

Yogiraj Charity Trust v. C.I.T. (1976) 103 ITR 777 (SC) ref.

H. Raghavendra Rao and M. V. Seshachala for the Commissioner.

K.S. Ramabhadran and K. Gajendra Rao for the Assessee.

JUDGMENT

K. SHIVASHANKAR BHAT, J: --For the assessment years 1981-82 and 1980-81, the following questions have been referred for our consideration under section 256 of the Income Tax Act, 1961:

"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee is a charitable institution and that its objects constitute a charitable purpose as defined in section 2(15) of the Income Tax Act, 1961?

(2) Whether the Appellate Tribunal is correct in not applying the decision of the Supreme Court in the case of Yogiraj Charity Trust v. C.I.T. (1976) 103 1TR 777, even though the assessee is a mixed trust existing for not only for charitable purposes but also for non-charitable and non-religious purposes and clause 4(j) of the memorandum of association gives wide discretion to carry out any of the objects to the exclusion of all other objects and the assessee can purse only object

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the predominant object of the assessee-trust is to carry out charitable purposes having regard to clause 4(i) of the memorandum of association?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that rule 1(t) of the Rules governing the association supports the inference that the predominant object of the trust is rehabilitation of destitute and handicapped women even though the said rule does not in any way modify clause 4(i) of the memorandum of association?

(5) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the assessee is entitled to exemption under section 11 of the Income-tax Act, 1961?"

In substance the question is whether the assessee is a charitable organisation whose dominant activity is charitable and earning a profit is only incidental. The relevant facts have been summarized by the Appellate Tribunal, which could be usefully repeated here:

4. Object of the association.--The following shall be the objects of the association:--

(a) To undertakes ancillaries to major industries.

(b) To undertake welfare programmes for the benefit of women and children and the handicapped.

(c) To undertake activities and development programmes to improve the economic and social conditions of women and children, the socially, economically and physically handicapped.

(d) To undertakes other measures designed to encourage the spirit and practice of thrift, self-help and mutual help of women and children.

(e) To undertake welfare activities for the promotion of moral, educational and physical improvement.

(f) To organise training facilities to improve the efficiency of the trainees.

(g) To purchase, construct and alter buildings and maintain them suitable for the purpose of the association. .

(h) To encourage cooperative movement.

(i) To obtain contracts from the Government, public bodies or others and get them executed with the help of the employees.

(j) To do all things as are incidental or conducive to the attainment of any or all the above objects.

The association has been registered under section 12-A of the Income Tax Act, 1961 (for short, "the Act"), by the Commissioner of Income-tax, Bangalore, vide his order dated November 17, 1977. The membership is open to all communities and creeds and is open only to women above 18 years, who accept the objects and rules of the association. Its management is looked after by a managing committee whose founder President is Sindh. B.K. Saraswathamma, who incidentally, was the Chairman, Karnataka State Social Welfare Advisory Board, Bangalore, in 1975. In her letter dated February 4, 1975, addressed to the then Minister of Industries, Government of India, New Delhi, Smt. Sarawathamma as Chairman, Karnataka State Social Welfare Advisory Board, requested for the establishment of an ancillary assembly unit to the Hindusthan Machine Tools Watch Factory, Bangalore, for rehabilitating economically handicapped women and destitute by. giving them suitable employment. In 1976, a feasibility report for setting up of an ancillary unit to the Hindusthan Machine Tools Watch Factory was prepared and an agreement was entered into by the Executive Director. Hindusthan Machine Tools Watch Factory, with 1 assessee on October 6, 1976, with the objective of setting up an ancillary unit for assembly of watches from components of hand-wound types of watches manufactured by the Hindusthim Machine Tools It was agreed that the services of experts from the Hindusthan Machine Tools would be made available to the ancillary unit for imparting technical know-how for the assembly for watch components. Clause 10 of the agreement provided for payment by Hindusthan Machines Tools for services rendered by the association of a sum of Re.l per watch for casing assembly and Rs.4.50 per watch for complete assembly of watch from the components. For setting up the assembly unit, the assessee received a grant of Rs.l lac from the Central Social Welfare Board, New Delhi, and further grants of Rs.18,750 and Rs.16,350 under the socio-economic programme of the Central Social Welfare Board in 1975 and 1970. For setting up its ancillary unit, two `A' type sheds were allotted by the Karnataka State Small Industries Corporation in the Peenya Industrial Estate in 1977. In that year it employed 52 women drawn up from the weaker sections of the society, who were given vocational training in Hindusthan Machine Tools Watch Factory at Bangalore.

The Appellate Tribunal also has referred to a letter of the Chairman, Karnataka State Social Welfare Advisory Board, dated February 4, 1975, recommending the setting up of the ancillary unit to the Hindusthan Machine Tools Watch Factory which resulted in the assessee providing employment to 79 women drawn from the weaker sections of the society. The Appellate Tribunal also referred to the decision of the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association (1980) 121 ITR 1 and upheld the claim of the assessee.

In the aforesaid decision, it was pointed out that the dominant or primary purpose of the organisation shall have to be considered and, in the said case, the dominant or primary purpose of the assessee was promotion of commerce and trade in art silk, etc. which was an object of public utility not involving the carrying on of any activity for profit. When the purpose of a trust or institution is relief .of the poor, education or medical relief, the requirement of the definition of charitable purpose would be fully satisfied even if an activity for profit is carried on in the course of the actual carrying out of the primary purpose of the trust or institution. At page 33, Pathak, J. (as he then was) observed thus:

"Therefore, for a purpose to fall under the fourth head of charitable purpose', it must constitute the advancement of an object of general public utility in which the activity of advancement must not involve a profit-making activity. The word `involving' in the restrictive clause is not without significance. An activity is involved in the advancement of an object when it is enwrapped or enveloped in the activity of advancement. In another case, it may be interwoven into the activity of advancement, so that the resulting activity has a dual nature or is twin- faceted. Since we are concerned with the definition of `charitable purpose', and the definition defines in its entirety a `purpose' only, it will be more appropriate to speak of the purpose of profit-making being enwrapped or enveloped in the purpose of the advancement of an object of general public utility or, in the other kind of case, the purpose of profit-making being interwoven into the purpose of the advancement of that object giving rise to a purpose possessing a dual nature or twin facets. Now, section 2(15) clearly says that to constitute a `charitable purpose' the purpose of profit-making must be excluded. In my opinion, the requirement is satisfied where there is either a total absence of the purpose of profit-making or it is so insignificant compared to the purpose of advancement of the object of general public utility that the dominating role of the latter renders the former unworthy of account. If the profit-making purpose holds a dominating role or even constitutes as equal component with the purpose of advancement of the object of general public utility, then clearly the definition in section 2(15) is not satisfied. When applying section 11 is open to the tax authority in an appropriate case to pierce the veil of what is proclaimed on the surface by the document constituting the trust or establishing the institution, and enter into an ascertainment of the true purpose of the trust or institution. The true purpose must be genuinely and essentially charitable."

The same principle was followed by the Supreme Court again in CIT v. Andhra Pradesh State Road Transport Corporation (1986) 159 ITR 1. The assessee, there, was the State Road Transport Corporation which substantially carries on transport operations. However, it was held that the dominant purpose of the activity was not to earn profit and whatever amount was left over after utilisation for the purpose set out in the relevant legislation, was to be made over to the State Government for the purpose of road development and the said amount should be utilised only for the purpose for which it was entrusted to the State Government. In the circumstances, the predominant object of the activity was held to be charitable and not an activity to earn profit. In fact, earning of profit may be inevitable to achieve the primary object of the trust--a fact recognised by the Supreme Court in Surat Art Silk's case (1980) 121 ITR 1 as could be seen from a reading of page 48 (121 ITR 1).

We have no hesitation in agreeing with the conclusion reached by the Appellate Tribunal that the dominant object of the assessee in the instant cases is not to earn profit but to carry on charitable activities.

In the result, the questions are answered in the affirmative and against the Revenue.

M.B.A./169/T.F

Reference answered.