DASA BALINJIKA SEVA SANGAM VS COMMISSIONER OF INCOME TAX (NO. 1)
2001 P T D 3197
[2401 T R 8541.
[Madras High Court (India)]
Before R. Jayasimha Babu and N. V. Balasubramanian, JJ
DASA BALINJIKA SEVA SANGAM
Versus
COMMISSIONER OF INCOME‑TAX (No. 1)
Tax Cases Nos. 1357 to 1359 of 1985 (References Nos.858 to 860 of 1985), decided on 28/04/1998.
(a) Income‑tax ‑‑‑
‑‑‑‑Exemption‑‑‑Chartitable purpose‑‑‑Charitable trust‑‑‑Objects of trust education and relief of poor‑‑‑That trustees given power to do business to achieve objects or trust‑‑‑That some profit earned in course of activities‑‑ Will not derogate from charitable nature of object‑Indian Income Tax Act, 1961, Ss.2(15) & 13.
The assessee‑trust was formed by one P who was one of the founder‑trustees of the assessee trust. He was also a partner in a firm called TPC, having a 30 per cent. share in the profits of the firm. The assessee‑trust was formed with the following objects 1‑y a deed of December 3, 1967: (a) to promote pious nature, patriotism, character, health and social reformation among the people; (b) to establish schools, library and hostels with a view to promote education among qualified students and also to provide scholarships to poor students; (c) to help the poor people, if necessary, in performing auspicious and other rites, constructing a Kalyana Mandapam attached to the temple at Annoor. The Income‑tax Officer for the assessment years 1974‑75, 1975‑76 and 1979‑80 held that the' assessee was not entitled to exemption under section 11 of the Income Tax Act, 1961, as the trust was running a chit fund business involving an activity for profit. He also held that the provisions of section 13(l)(c) of the Act had been offended since the funds of the trust were applied for the benefits of one of the trustees, viz., P, inasmuch as the firm had taken loans from the trust. He also held that under the provisions of section 13(l)(bb) of the Act, which was introduced by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1977, the assessee was not entitled to exemption for the assessment year 1979‑80. The Tribunal confirmed this. On a reference:
Held, (i) that the objects of the trust showed that the trust was formed with the objects of education and relief of the poor. A reading of the various clauses clearly showed that the clause empowering the trust to carry on the business could not be regarded as an object clause and it was only a power conferred on the trustees to carry on business. Once it was not an object of the trust, it could not be stated that the trust was carrying on business activities for profit.
Thagarajar Charities v: CIT (Addl.) (1997) 225 ITR 1010 (SC) applied.
(ii) That when the predominant object of the trust was to render help to the poor and for education and, therefore, when the predominant object was to carry out the charitable purposes, it would not cease to be a charitable trust, merely because some profits were earned during the course of carrying out the objects of the trust. That apart, this was not a case falling under the last part of clause (15) of section 2, viz., objects of general public utility, but the objects of the trust would fall within the first three items, namely, education, medical relief and relief to the poor. Hence, the qualifying words, "not involving the carrying on of any activity for profit" found in section 2(15) of the Act were not attracted to the facts of the case.
(iii) That the three transactions put against the assessee‑trust as in violation of section 13(1)(c), were normal chit and loan, which were adequately secured by way of adequate security. Hence, there was no violation of section 13(l)(c) read with section 13(2)(a) of the Act.
(b) Income‑tax‑‑‑
‑‑‑‑Exemption‑‑‑Charitable purpose‑‑‑Charitable trust‑‑--Business‑‑‑Trust carrying on separate chit fund business‑‑‑Not in course of carrying out primary objects of trust‑‑‑Trust not entitled to exemption for 1979‑80 assessment year‑‑‑Indian Income Tax Act, 1961, Ss. 11 & 13(1)(bb).
Business of the chit fund was not carried on by the assessee in the course of actual carrying out of the objects of the trust. This was not a case where the business itself was the object of the trust, as the business was not held under trust, but a case where the trustees were given power to carry on chit business. It was an independent and separate business altogether. Therefore, there was a clear violation of the provisions of section 13(1)(bb) of the Act on the facts of the case and, therefore, the assessee was not entitled to claim exemption on the income derived from chit business under section 11 of the Act, for the assessment year 1979‑80.
CIT v. Virudhunagar Hindu Nadars Abiviruthi Panchukadai Mahamai (1996) 219 ITR 303 (Mad.) applied.
CIT (Addl.) v. Surat Art. Silk Cloth Manufacturers Association (1980) 121 ITR 1 (SC) ref.
P.P.S. Janarthana Raja for the Assessee. C.V. Rajan for the Commissioner.
JUDGMENT
N.V. BALASUBRAMANIAN, J.‑‑‑The question that arises in the above tax cases is whether the assessee is entitled to exemption under section 11 of the Income Tax Act, 1961 (hereinafter to be referred as "the Act"), for the three assessment years 1974‑75, 1975‑76 and 1979‑80.
The assessee‑trust was formed by one T. Ponniah Chettiar who is one of the founder‑trustees of the assessee‑trust. He was also a partner in a firm called. T. Ponniah Chettiar & Sons having a 30 per cent. share in the profits of the firm. The assessee‑trust was formed on the following objects by a deed of December 3, 1967:
To promote pious nature, patriotism, character, health and social reformation among the people;
To establish schools, library and hostels with a view to promote education among the qualified students and also to provide scholarships to poor students.
To help the poor people, if necessary in performing auspicious and other rites. Constructing a kalyana mandapam attached to the temple at Annoor.
The Income‑tax Officer for the three assessment years in question held that the assessee was not entitled to exemption under section 11 of the Act as the trust was running a chit fund business involving an activity for profit. He also held that the provisions of section 13(l)(c) of the Act had been offended since the funds of the trust were applied for the benefits of one of the trustees, viz., T. Ponniah Chettiar. He also held that under the provisions of section 13(l)(bb) of the Act, the assessee was not entitled to exemption for the assessment year 1979‑80.
The assessee preferred an appeal before the Appellate Assistant Commissioner who held that the trust was established for charitable objects and the funds had been utilised for charitable objects and the trust was exempt under section 11 of the Act. The Appellate Assistant Commissioner also held that the funds of the trust were not diverted for any non‑charitable purpose. He also held that the Income‑tax Officer was not justified in treating the assessee trust as a non‑charitable trust and the assessee had not forfeited the exemption to which it was entitle5.
The Department carried the matter by appeal before the Appellate Tribunal and the Appellate Tribunal held that the predominant object of the trust was to earn profit and the trust was actually earning profits from chit fund business carried on by it and, therefore, the assessee was not a charitable trust entitled to exemption under section 11 of the Act. The Tribunal also held that the provisions of section 13(1;(c) were attracted on account of the Explanation thereto. The Tribunal, therefore, held that the assessee‑trust was not a trust for charitable purpose and, hence, its income was not exempt under section 11 of the Act.
Aggrieved by the order of the Appellant Tribunal, the assessee has sought for a reference and the following questions of law have been referred for our consideration:
"(1)Whether, on the facts and Iii the circumstances of the case, the Tribunal is right in law in holding that the provisions of sections 13(1)(c), 13(2)(a) and 13(3) arc applicable "
(2)Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee is not entitled to exemption under section 11 of the Income‑tax Act"?
Mr. P.P.S. Ianarthana Raja, learned counsel for the assessee, submitted that the objects of the trust clearly show that the assessee is a charitable trust and the income was applied only for charitable purposes. He submitted that though the assessee was carrying on chit fund business, its main object was charitable. He further submitted that moneys were advanced by the trust by way of security and the assessee had not forfeited the exemption under section 11 of the Act. He also submitted that the assessee was carrying on the business in furtherance of the objects of the trust and, therefore, there was no violation of section 13(l)(bb) of the Act. He also submitted that since the Tribunal has not decided the question regarding the applicability of section 13(l)(bb) of the Act, the matter should be remitted to the Appellate Tribunal.
Mr. C.V. Rajan learned counsel for the Revenue, on the other hand, submitted that the objects of the trust clearly show that the trust was formed on non‑charitable objects and one of the objects of the trust was to carry on chit business which clearly shows that the objects of the trust involve business activity for profit. He also submitted that there was a violation of the provisions of section 13(1)(c) of the Act. The further submission of learned counsel for the Revenue was that the provisions of section 13(l)(bb) of the Act are attracted for the assessment year, viz., 1979‑80, and since the business was not carried on in furtherance of the objects of the trust, the assessee was not entitled to exemption under section 11 of the Act for the assessment year 1979‑80.
We have already set out the objects of the trust. The objects of the trust, in our opinion, are charitable in nature. The objects provide for promotion of education, patriotism, establishment of educational institutions and library, to render help to poor students for the purpose of education and to render help to the poor for the relief from poverty. The objects of the trust clearly show that the trust was established for laudable charitable purposes. The objects of the trust also provide for establishment of marriage hall attached to the temple in Annoor. Learned counsel for the Revenue submitted that the marriage hall can be utilised for commercial use and, therefore, the objects of the trust cannot be regarded as charitable in nature. We are unable to agree with the contention of learned counsel for the Revenue as the object of establishment of marriage hall cannot be read in isolation, but it has to be read alongwith other objects of the trust. Further, the object also provides that the marriage hall should be attached to the temple which shows the intention of the founder of the trust was that the kalyana mandapam has to be used for public purpose. Further, the clause of the objects providing that the marriage hall should be attached to the temple shows that it is primarily intended for rendering certain social service to the people in that particular village so that the hail can be used for marriage purposes and it cannot be assumed that it was meant for commercial purposes. Therefore, on the facts of the case, we are satisfied that the object of establishment of a marriage hall cannot be read de hors other objects of the trust, but the objects, if read in the light of other objects, would show that object is also charitable in nature.
Learned counsel for the Revenue submitted that one of the objects of the trust is to collect funds by way of subscription and donation and such business trade or vocation as may be possible or feasible and, therefore, when the trust is empowered to carry on business as a part of the objects of the trust, the trust is not entitled to exemption. Here also, we are not able to agree with learned counsel for the Revenue. The objects of the trust show that the trust was formed with the objects of education and relief to the poor. The trustees have been authorised to carry on educational institutions and to grant scholarship to poor students and to meet the educational expenses of poor students. One of the objects is to render assistance to the poor people at the time of need. The trustees have been empowered to carry on business and collect funds and donations to achieve the above objects. Though the said clause is included in the "object clauses", the language employed, in our opinion, shows that it is only a power conferred on the trustees to engage in the business and to collect funds to achieve the objects of the trust. The said object is not an independent object, but a reading of the clause shows that to achieve the objects of the trust, the trustees are empowered to carry on business. In other words, to generate funds to meet the objects of the trust, the trustees have been empowered to carry on business, and, therefore, we are of the opinion that the clause is only a clause conferring powers on the trustees to card) on the business. The next clause also clearly shows that the trustees have been empowered to exchange information with other trusts for the purpose of achieving the objects of the trust and the trustees have also been empowered to do all incidental and other ancillary acts in connector with or to achieve the objects of the trust. A reading of various clause clearly shows that the clause empowering the trust to carry on the business cannot be regarded as an object clause and it is only a power conferred on the trustees to carry on the business and once it is not an object of the truss it could not be stated that the trust was carrying on business activities for profit. In other words, the business activity is only a means to achieve the objects of the trust or a media through which the trust sought to accomplish the objects of the trust and, therefore, the clause empowering the trustees to carry on business has to be read as a power conferred on the trustee and not an object of the trust.
The apex Court in Thiagarajar Charities v. Addl. CIT (1997) 225 ITR 1010, held that on a true construction of the trust deed, if one of the clauses of the trust deed, though described as one of the objects of the trust, is really a power conferred on trustees, the trust has to be regarded as a charitable trust. The apex Court held that to ascertain whether such a clause has to be regarded as an object of the trust or a power conferred on the trustees, the language of the trust deed should be taken into consideration and when the activity specified is to accomplish the objects of the trust, then, that clause can be regarded as a power conferred on the trustees. Applying the principle laid down by the Supreme Court in Thiagarajar Charities case (1997) 225 ITR 1010, we are of the opinion, it is incorrect to construe the power conferred on the trustees as the object of the trust.
The next question that arises is whether the assessee‑trust can be said to have been formed for charitable purposes within the meaning of section 2(15) of the Act. The test to find out whether the trust is entitled to exemption under section 11 read with section 2(15) of the. Act had been laid down by the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association (1980) 1 2 1 ITR 1, which was reiterated by the Supreme Court in Thiagarajar Charities v. Addl. CIT (1997) 225 ITR 1010 and the tests laid down by the Supreme Court read as under (headnote):
"The test to find out if a trust is entitled to the exemption under section 11 read with section 2(15) of the Income Tax Act, 1961, because it has been established for the advancement of an object of general public utility not involving the carrying on of any activity for profit is whether the predominant object of the activity involved in carrying out the object of general public utility is to sub serve 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. It would indeed be difficult for persons incharge of a trust or institution to so carry on the activity, that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation, but would also reflect unsound principles of management. 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. "
The objects of the trust in the instant case clearly show that the predominant object of the trust is to render help to the poor and for education and, therefore, when the predominant object is to carry out the charitable purposes, it would not cease to be a charitable trust merely because some profits are earned during the course of carrying out the objects of the trust. That apart, this is not a case falling under the last clause, viz., "object of general public utility", but the objects of the trust would fall within the first three items, namely, education, medical relief and relief to the poor. Hence, the qualifying words, "not involving the carrying on of any activity for profit" found in section 2(15) of the Act are not attracted to the facts of the case. Further, where a legal obligation is created by the creation of the trust and the legal obligation created by the trust has also been reinstated by relevant bye‑laws of the trust and under the legal obligation created by the trust deed, the trustees are obliged to spend money for charitable purposes for which the trust was formed. We are of the opinion, the test laid down by the Supreme Court in Surat Art Silk Cloth Manufacturers Association's case (1980) 121 ITR 1, as well as Thiagarajar Charities's case (1997) 225 ITR 1010 (SC), are fully satisfied on the facts of the case and trust is a charitable trust entitled to exemption under section 11 of the Act.
The next question that arises for our consideration is whether there is any violation of the provisions of section 13(1)(c) of the Act. Under section 13(1)(c) of the Act, if any part of the income of the trust or institution was used or applied for the benefit of a person referred to in subsection (3) of section 13 of the Act, then, the trust is not entitled to claim exemption under section 11 of the Act. Section 13(2)(a) of the Act, inter alia, provides that if any part of the income of the trust is lent to any person referred to in subsection (3) for any period during the previous year without either adequate security or adequate interest or both, then, such income shall be deemed to have been used or applied for the benefit of the person referred to in subsection (3). There is no dispute that Ponniah Chettiar was a founder trustee and he had substantial interest. According to the Income‑tax Officer, the firm, by name T. Ponniah Chettiar and Sons in which Ponniah Chettiar was a partner had utilised the amounts of the trust as under:
1‑11‑1973Rs.18,400
30‑3‑1974Rs.10,000
29‑4‑1974Rs.18,950
The Income‑tax Officer concluded that the funds of the assessee trust were utilised for a purpose other than the one for which the trust was formed. In so far as the amount drawn on November 1, 1973, is concerned, the firm made chit contributions to an extent of Rs.10,600 and the firm was the successful bidder, and the firm drew a sum of Rs.18,400. It is, therefore, clear that the chit amount drawn by the firm cannot be held to be the property of the assessee‑trust as the amount was drawn in the normal course of chit transaction, and it is not the case of the Revenue that the assessee manipulated the chit transactions. Similarly, in so far as the amount drawn on April 29, 1974, is concerned, it was found that no amount was drawn. As already held, the firm was declared as a successful bidder and the amount was not actually paid, but a sum of Rs.10,000 was adjusted against the loan taken by the firm on March 30, 1974, and the balance amount was adjusted month after month against future chit subscription. Therefore, in so far as the said two transactions are concerned, it is clear that the property of the trust was not diverted for any non‑charitable purposes.
As regards the sum of Rs.10,000 that amount was granted by way of loan by the assessee‑trust to the firm. According to the assessee, the firm had already made contribution of Rs.14,200 towards chit transaction and the loan was granted on the basis of adequate security as the trust had contribution of Rs.14,200 made by the firm. The Income‑tax Officer held that there was no security or there was no interest for the loan transaction which attracted the provisions of section 13(2)(a) of the Act and, therefore, the trust was not entitled to exemption. The view of the Income‑tax Officer was confirmed by the Appellate Tribunal. However, both the Income‑tax Officer and the Tribunal overlooked the fact that the case of the assessee was that the loan of Rs.10,000 was sufficiently secured by the contribution already made and the loan was granted on the basis of the security, the provisions of section 13(2)(a) of the Act are not attracted. We are of the view that the conduct of the assessee as well as the conduct of the borrower is relevant to determine whether the loan was secured by way of adequate security. There is no dispute that there was a contribution of Rs.14,200 by the firm towards chit transaction and the loan amount withdrawn by the firm was Rs.10,000. Though both the transactions are independent transactions, normally it is not possible to adjust one against the other, however, the understanding between the parties was that the loan would be covered by the contribution already made by the firm. The subsequent conduct of adjusting the bid amount against the loan amount shows that there was an understanding that the loan granted would be covered by the contribution and, therefore, the loan granted is secured by the contribution already made. Therefore, we are of the opinion that the Tribunal was not correct in holding that there was a violation of section 13(1)(c) read with section 13(2)(a) of the Act regarding the said transaction.
The next question that arises for our consideration is whether there was any violation of the provisions of section 13(1)(bb) of the Act. It arises only for the assessment year 1979‑80 as the relevant provision was inserted by section 5 of the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1977. The Income‑tax Officer held that the chit transaction carried on by the assessee‑trust was not the primary object of the trust and, therefore, there was a violation of the provisions of section 13(1)(bb) of the Act. The Appellate Assistant Commissioner held that the chit business has been done for raising funds to fulfil one of the objects of the assessee‑trust and, therefore, there was no violation of the provisions of section 13(1)(bb) of the Act. Though the Appellate Tribunal has not discussed about the applicability of the provisions of section 13(1)(bb) of the Act, the question raised before us encompasses within itself the determination of the question whether there was any violation of section 13(1)(bb) of the Act. It is relevant to notice that the Tribunal on the appeal preferred by the Revenue, held that the assessee was not entitled to exemption under section 11 of the Act and that there was a violation of the provisions of sections 13(1)(c), 13(2)(a) and 13(3). of the Act. Since the second question referred to us relates to the claim for exemption under section 11 of the Act, we are of the opinion that the question whether the assessee is entitled to exemption under section 11 of the Act has to be decided applying the provisions of section 13(1)(bb) of the Act.
Section 13(1)(bb) of the Act provides that in the case of a charitable trust for the relief of the poor, education or medical relief, which carries on any business, the income derived from such business is not exempt, unless the business is carried on in the course of actual carrying out of a primary purpose of the trust. A reading of the section clearly shows that the business must be carried on by the charitable trust to carry out the primary object of the trust. Section 13(1)(bb) of the Act provides that to claim exemption under section 11 of the Act, it is not enough that the business is carried on to feed the charity or to accomplish one of the charitable objects of the trust, but the business itself must be carried on in the course of actual carrying out of the primary object of the trust. The section can be understood by an illustration of an educational institution which is established for the purpose of promoting education and during the course of its activities as an educational institution, it may carry on a business of purchasing and selling books to the students, and if any profit is realised during the course of carrying on such business, then, it can be stated that the income derived from the business is exempt under section 11 of the Act. But, on the other hand, if a business unconnected with the objects of the trust is carried on by the trust, though the profit of the business is utilised to achieve the objects of the trust, that would not be sufficient to meet the requirement of section 13(1)(bb) of the Act. The section clearly provides that the business must be carried on in the course of actual carrying out of the objects of the trust.
In CIT v. Virudhunagar Bindu Nadars Abiviruthi Panchukadai Mahamai (1996) 219 ITR 303 (Mad.), a business was carried on by a charitable trust and this Court held that unless there are materials to hold that the business was carried on as means in the course of the actual carrying out of the main or primary object, the assessee would not be entitled to exemption under section 11 of the Act. In the instant case, the business of chit fund was not carried on by the assessee in the course of actual carrying out of the objects of the trust. It is not a case where the business itself was the object of the trust, as the business was not held under trust but it is a case where the trustees were given power to carry on chit business. The chit transaction was not carried on by the assessee in the course of actual carrying out of the primary object of the trust. As already held, it is an independent and separate business altogether. Therefore, there is a clear violation of the provisions of section 13(1)(bb) of the Act on the facts of the case and, therefore, the assessee is not entitled to claim exemption on the income derived from chit business under section 11 of the Ad, for the assessment year 1979‑80.
Accordingly, we answer the common questions of law as under:
Ist Question: It is answered in the negative and in favour of the assessee.
2nd Question:It is answered in the negative and in favour of the assessee for the two assessment years, viz., 1974‑75 and 1975‑76 and in the affirmative anti against the assessee for the assessment year 1979‑80.
In the circumstances of the case, there will be no order as to costs.
M.B.A./387/FCOrder accordingly.