Commissioner of Income Tax vs Sangit Kala Mandir Trust

Dipak Kumar Sen, J.—The facts relevant and proceedings leading up to this reference are, inter alia, that Sangit Kala Mandir Trust, the asses-see, is a trust constituted by a deed of trust dated December 3, 1959. The trust was constituted for the promotion of science, literature, fine arts and sports and for other such religious, charitable, social and other objects as specified in the deed. The objects as specified under Clause 2 of the trust deed which are relevant are, inter alia, as follows :

"2(a) To advance, promote and encourage education of all kinds, literary, physical, moral, aesthetic, scientific, cultural, technical, industrial and general;

(p) To organise, hold and/or arrange to be held periodically kavi sammelans, mushairas, qawalis, dances, dramas, cinema shows, essay and story competitions, debates, recitations, symposia and other cultural and literary programmes and social gatherings for the benefit of the public and to invite poets, artists and litterateurs and other learned persons to participate therein;

(y) To collect, raise and receive subscriptions, donations and gifts, in cash or in kind for all or any of the objects hereinbefore mentioned and to apply the same in accordance with the conditions prescribed by the donors and agreed to by the trustees but not contrary to the above objects ; and......"

Clause 8 of the trust deed is as follows:

"In the course of actual carrying out of the object of the trust, the trustees shall be entitled with the trust funds to carry on such business or businesses on behalf of the trust as they may think fit from time to time and to close and restart any such business provided that all such businesses shall be carried on upon trust to utilise all profits that may be derived from such business or businesses wholly for the purposes mentioned above. Provided further that for the purpose of carrying on such business, the trustees shall be entitled to do all acts, matters and things which an ordinary businessman is entitled to do including the use of the trust funds for the purposes of such business."

In the assessment year 1971-72, the relevant accounting year ending on December 31, 1970, the assessee was assessed to Income Tax. The Income Tax Officer found that the income of the trust was exempt u/s 11 of the Income Tax Act, 1961. The Income Tax Officer further found that in the accounting year concerned, the trust in any event had no taxable income.

The Commissioner of Income Tax, on an examination of the records, came to the conclusion that the assessment as made by the Income Tax Officer was patently erroneous and prejudicial to the interests of the Revenue. The Commissioner thereupon initiated proceedings u/s 263 of the Income Tax Act, 1961, on a notice to the assessee to show cause why the assessment should not be set aside and a fresh assessment be made in accordance with law.

Representations respectively dated February 9 and 10, 1976, in writing were filed before the Commissioner. The Commissioner examined the accounts of the assessee from 1961 and found that the assessee had been carrying on only one of its objects, namely, promotion of arts and culture. He found that for the said purpose, a building had been constructed at No. 49, Shakespeare Sarani, Calcutta, to be used for the purpose of theatre, auditorium and as an entertainment hall. He found that the trustees let out the halls in the said building to different parties for various cultural programmes at fixed rates which were not less than the usual rates charged by other halls run on commercial basis. He also found that the assessee had other income by way of rent from its canteen and advertisement charges. He came to the conclusion that the object of the trust which was being implemented was the advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act, 1961. He noted that depreciation had been charged in respect of the building right from its construction and the same was treated as a business asset and as empowered by the deed, the assessee carried on business with the trust fund. Following the decisions of the Supreme Court in The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, and Indian Chamber of Commerce Vs. Commissioner of Income Tax , West Bengal II, Calcutta, , he held that in implementing its objects, the trust was involved in carrying on an activity for earning profit. The said activity consisted of letting out the halls and the building for cultural programmes at commercial rates. The Commissioner held that the trust was being actually implemented for a purpose which was not charitable and it was not entitled to exemption u/s 11 of the Act. Accordingly, the trust was not also entitled to exemption u/s 12 of the Income Tax Act, 1961, in respect of the donations received by it. The Commissioner set aside the order of assessment of the Income Tax Officer and directed the latter to make a fresh assessment in accordance with law.

Being aggrieved, the assessee preferred an appeal before the Income Tax Appellate Tribunal. It was contended on behalf of the assessee before the Tribunal that the objects of the trust as enumerated in the trust deed did not involve carrying on any activity for profit. Under Clause 8 of the deed, no doubt, the trust was empowered to carry on business with the help of the trust fund but it was also laid down in the said clause that such business could be carried on only in the course of implementing the objects of the trust and all profits arising from such business had to be applied only for the purposes of the trust.

It was contended further that the trust did not let out its halls and building on a commercial basis. On June 3, 1968, the assessee had obtained a report from a cost accountant as to what should be the normal charges of hiring which would meet the maintenance and repair of the property. It was contended that the charges for letting out the halls were on a no profit no loss basis. The charges fixed in 1968, it was contended, had not been increased year to year. It was contended that the assessee was not entitled to nor did it make any profit in the year under consideration.

It was contended that the mere fact that the assessee had shown its income or loss under the head "Business" or had recorded depreciation of its assets would not convert the activity of the assessee to an activity carried on for making profit. It was emphasised that the Commissioner himself had found that the objects of the trust were charitable but in carrying out the trust, the assessee had indulged in business activities. The decisions in the cases of Loka Sikshana Trust [1915] 101 ITR 234 and Indian Chamber of Commerce Vs. Commissioner of Income Tax , West Bengal II, Calcutta, , it was contended, were distinguishable on facts. The assessees concerned in those cases had a non-charitable commercial business before they were converted into a trust.

Contentions to the contrary were made on behalf of the Revenue. The Tribunal found as a fact that the property was being held by the assessee under a trust. The Tribunal also found and noted that the objects of the trust were of general public utilities as had been also found by the Commissioner.

On an examination of the accounts of the assessee, the Tribunal found that in the first five years of its existence, the assessee had a surplus. From the sixth year onwards, the assessee had a deficit in its accounts and its expenditure exceeded the income. This continued up to the year under appeal. The Tribunal found further that the trust had received donations for the last five years only. On an examination of the objects enumerated in the deed of trust, the Tribunal found that the objects did not contemplate the trust carrying on an activity for earning profit. All the objects of the trust and, in particular, the three objects noted earlier could be advanced and implemented without carrying on any business or activity for profit. The activity carried on by the trustees held by the Commissioner to have been carried on for earning profit was found by the Tribunal to have been carried on under Clause 8 of the trust deed. The Tribunal held that the said clause merely empowered the trustees to utilise the trust fund in any business, but the trustees were not obliged to do so. The Tribunal concluded that the activity on the basis of which the Commissioner passed his order was not one which could be said to disentitle the assessee from exemption of its income u/s 11 of the Act.

The Tribunal also found as a fact that there was no material to support the conclusion that the assessee was letting out its property at commercial rates and the Revenue could not produce any evidence to the contrary. The Tribunal noted the report of the cost accountant dated June 3, 1968, and held that the activities carried on by the assessee did not produce any profit. The Tribunal held further that the treatment of the property of the assessee in its accounts as a business asset and return of its income as a business income made no difference to the position. The Tribunal held that the income of the assessee was exempt from Income Tax u/s 11 of the Act and that it followed that donations received by the assessee were also exempt from such tax under the provisions of Section 12 of the Income Tax Act, 1961, as it stood prior to its amendment which came into effect from April 1,1973.

The Tribunal also noted a Departmental Circular No. F.No. 20/10/67-IT(AI) dated May 1, 1967, which specifically laid down that donations received by a charitable trust from the members of the public being capital receipts could not be regarded as income of the trust and for the purpose of calculating the accumulation limit should be excluded from the income. The Tribunal accordingly set aside the order of the Commissioner of Income Tax and restored the original assessment order of the Income Tax Officer.

On an application of the Revenue u/s 256(1) of the Income Tax Act, 1961, the following questions have been referred as questions of law arising out of the order of the Tribunal for the opinion of this court:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-trust was rightly held to be exempt u/s 11 of the Income Tax Act, 1961, and that the order of the Income Tax Officer was not erroneous in the sense that it was prejudicial to the interests of the Revenue ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the donations received by the trust were exempt u/s 12 of the Income Tax Act as it stood at the material time ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that even assuming that the assessee is not entitled to exemption u/s 11, donation received by it could not be treated as its income ?"

At the hearing before us, the learned advocate for the Revenue drew our attention to Clause 2(p) of the trust deed noted hereinabove and submitted that one of the objects of the trust was to hold social gatherings. He submitted that this object could not be a charitable object nor was it an object which would lead to general public utility. Accordingly, it was contended that the assessee could not be held to be a charitable trust within the meaning of Section 11 of the Income Tax Act, 1961. In support of his contentions, the learned advocate cited a decision of the Madras High Court in Addl Commissioner of Income Tax, Madras-I Vs. Gangabai Charities, . In this case, a Division Bench of the Madras High Court held that where a trust was established for charitable, religious, cultural and social purposes, the expression "cultural and social purpose" would not necessarily encompass the entire public. There might be difference of opinion as to what would be a social purpose. The definition of the purpose by user of vague phrases such as cultural and social was defective and could entitle the trustees to put the trust property to uses other than charitable.

The learned advocate for the Revenue next submitted that, in any event, there was a clear provision in the trust deed permitting the assessee to carry on business activities and the assessee had in fact done so. Therefore, it must be held that the objects of the trust permitted the assessee to carry on business and, therefore, the assessee was not entitled to any exemption from Income Tax as a charitable trust. In support of his contentions, the learned advocate for the Revenue cited the following decisions :

(a) The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, . The assessee here was a trust set up for the object of educating the people of India in general and Karnataka in particular. The object was to be carried out, inter alia, by establishing institutions for the spread of knowledge; founding and running reading rooms and libraries, conducting printing houses, publishing books, magazines, etc., in Kannada and other languages and conducting journals in Kannada and other languages for the dissemination of information and for the ventilation of public opinion on matters of general public utility.

Under a clause of the trust deed, the trustees had power to utilise monies and properties of the trust for any of the purposes of the trust.

The assessee was constituted with assets of the value of about Rs. 4,000. The assessee carried on business of printing and ultimately the net value of the assets of the trust had increased to over Rs. 1,70,000.

On these facts, the question posed before the Supreme Court was whether the income of the trust from publishing newspapers and journals was exempt from tax u/s 11 read with Section 2(15) of the Income Tax Act, 1961. On the facts, the Supreme Court held that the object of the trust was to promote general public utility. The Supreme Court, however, held that the publication of newspapers and journals by the trust involved carrying on of an activity for profit and the income of the assessee was not exempt from tax.

It was observed in the judgment of Khanna J. that if the activity of a trust consisted of carrying on of a business and there was no restriction on its making profits, the court would be justified in assuming in the absence of any indication to the contrary that the object of the trust involved carrying on of an activity for profit.

It was, however, observed in the judgment of Beg J. that if the terms of the trust permitted carrying on of an activity for profit, the same was prima facie evidence of a purpose which was not charitable. The same would indicate that the object of the trust was profit-making unless it was shown that the terms of the trust compelled the trustee to utilise the profits of business also for charity. It was observed that if the profits must necessarily feed the charitable purpose under the terms of the trust, the mere fact that the activities of the trust yielded profit would not alter the charitable character of the trust.

(b) Indian Chamber of Commerce Vs. Commissioner of Income Tax , West Bengal II, Calcutta, . In this case, the object of the assessee, an association, was found to be primarily promotion and protection of Indian trade interests and rendering of allied services for the said object and as such was an object for advancement of general public utility. Under its memorandum, no part of the income or profit of the assessee could be paid directly or indirectly by way of profit to the members even on its dissolution. The assessee derived income, inter alia, from arbitration fees, fees collected for issuing certificates and share of profits in M/s Calcutta Licensed Measurers for issue of certificates of weighment and measurement. The question which was posed before the Supreme Court on the above facts was whether the assessee was exempt from Income Tax u/s 11 read with Section 2(15) of the Act of 1961. The Supreme Court held that the activities of the assessee were carried on for earning profits and in the absence of any restriction in the memorandum and articles of association against making of profit from such activities, the income of the assessee from such activities would be exigible to Income Tax. If there were restrictive provisions in the constitution of the assessee requiring that charges were to be levied for services rendered on a no profit basis, the benefit of Section 2(15) of the Act would be attracted even if at the end of the year a surplus remained in the hands of the assessee. But an activity which yielded a profit or gain in the ordinary course must be presumed to have been for profit and gain.

(c) Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, . In this case, the assessee was registered u/s 25 of the Companies Act, 1956, and its objects were, inter alia, to promote commerce and trade in cotton, raw silk and silk yarn and cloth, to carry on business in any of the said items, to obtain import licence for import of the said items, to assist its members for manufacture and export of the said items; to buy and sell and deal in cloth and other goods and fabrics belonging to and on behalf of its members and to do all other lawful things incidental or conducive to the attainment of the above objects. The income and property of the assessee were earmarked for being applied solely and exclusively for the promotion of the above objects and no part of such income could be distributed amongst its members for their benefit at any time.

The assessee derived income, inter alia, from annual subscription collected from its members and from commission at a certain percentage on the value of licences for import of foreign yarn and cloth and on the transactions on yarn obtained by the assessee from its members. This commission was credited separately to a building account out of which a building was constructed.

A Bench of the Supreme Court consisting of five learned judges by their majority decision held that the dominant and primary purpose of the assessee was promotion of commerce and trade in specified items and the other objects specified in its memorandum were merely powers incidental to the carrying out of the said dominant and primary purpose. Such dominant and primary purpose was the promotion of general public utility and did not involve carrying on of any activity for profit within the meaning of Section 2(15) of the Income Tax Act, 1961. As such, the income of the assessee was entitled to exemption from Income Tax u/s 11 of the Act. It was held further that the words "not involving carrying on of any activity for profit" in Section 2(15) qualified or governed only the last head of charitable purpose, viz., advancement of any other object of general public utility.

It was further held that if the primary or dominant purpose of a trust was charitable, any other objects merely ancillary or incidental to the primary or dominant purpose and by itself not charitable would not preclude the trust from being charitable. When the purpose of a trust was the advancement of an object of general public utility, it is that object and not its accomplishment which must not involve the carrying on of any activity for earning profit. As long as that purpose did not by itself involve carrying on of any activity for profit, the definition u/s 2(15) of the Income Tax Act, 1961, would apply. If the purpose itself involved carrying on of an activity for profit, then it would not be a charitable purpose within the meaning of Section 2(15) of the Income Tax Act, 1961. The earlier decision of the Supreme Court in Indian Chamber of Commerce Vs. Commissioner of Income Tax , West Bengal II, Calcutta, was overruled. The observations of Beg J. in The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, were approved and those of Khanna J. in the said decision were disapproved.

The learned advocate for the assessee contended, on the other hand, that the controversy raised in the question was concluded by the facts found by the Tribunal and the decision of the Supreme Court in Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, . He reiterated the contentions of the assessee made before the Tribunal and submitted that in the instant case, the objects of the assessee as specified in the deed were objects of general public utility and have been found to be so by the authorities below including the Commissioner of Income Tax. The objects by themselves did not involve carrying on of any activity for earning profit. In any event, whatever activity was being carried on by the assessee was on a no profit no loss basis and even if an activity was carried on for earning profit, the same had to be applied exclusively for the purposes of promoting the objects of the trust and for no other purpose. The learned advocate cited the following decisions in support of his contentions.

(a) Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, . This case has been considered earlier.

(b) Commissioner of Income Tax, New Delhi Vs. Federation of Indian Chambers of Commerce and Industries, New Delhi, . In this case, the assessee, an association, was constituted to promote Indian business in inland and foreign trade, finance and other economic objects and to enlarge Indian banking, shipping and insurance. In the assessment year concerned, the assessee held a fair at New Delhi and derived receipts by way of rents for spaces allotted for display as well as for storage and from selling season and daily tickets. It also realised deposits and advances for hotel accommodation. In the same year, the assessee sponsored a conference for economic co-operation of Afro-Asian countries and received a grant-in-aid from the Government of India of Rs. 3 lakhs. After meeting the expenses of the conference, a surplus of over Rs. 2,00,000 was left in its hands. The assessee also received a share of profits from sale of a book on company law and advances and fees for arbitration.

On the facts, the Income Tax Appellate Tribunal held that the dominant object of the assessee being a charitable purpose, viz., promotion, protection and development of trade, commerce and industry and there being no motive to earn profits, the assessee was not engaged in any activity in the nature of business or trade to implement its object. If any income arose from such activity, it was only incidental or ancillary to the dominant object, viz., welfare and common good of the country''s trade, commerce and industry, and its income was, therefore, exempt from Income Tax u/s 11 of the Income Tax Act, 1961.

There was a direct reference from the decision of the Tribunal to the Supreme Court which upheld the decision of the Tribunal, following its earlier decision in Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, . It was held by the Supreme Court that the clauses in the memorandum of the assessee enabling it to undertake and execute trusts or undertakings which may seem to it to be desirable, were merely powers incidental or ancillary to the main purpose of the assessee.

(c) Commissioner of Income Tax Vs. Thanthi Trust, . In this case, the assessee was a trust constituted to take over an existing Tamil daily newspaper and to provide for its efficient running. Under the terms of the deed, the trust was also required to devote its surplus income for certain specified educational purposes. In the assessment year concerned, the assessee claimed exemption from Income Tax u/s 11 of the Act of 1961 on the ground that 75% of its income had been applied for charitable purposes. The claim of the trust was rejected by the Income Tax Officer but upheld by the Tribunal which held that the income to the extent it was spent for charitable purposes was exempt from Income Tax. On a reference, it was found by the Madras High Court that the property which was held under trust was the business itself and the entire income of the business had to be utilised for various charitable objects as specified in the trust deed which had been considered and construed by the Madras High Court in an originating summons. Merely because the assessee was carrying on an activity for profit for the purpose of carrying out charitable objects, it could not be deprived of the benefit of Section 11 of the Income Tax Act, 1961.

(d) Commissioner of Income Tax, A.P. Vs. Andhra Pradesh State Road Transport Corporation, . In this case, a Road Transport Corporation established under a statute of the State of Andhra Pradesh claimed exemption from Income Tax u/s 4 of the Indian Income Tax Act, 1922, and Section 11 of -the Income Tax Act, 1961, for the assessment years 1960-61, 1961-62 and 1962-63. The objects for which the corporation was established were, inter alia, offering advantages to the public, trade and industry by development of road transport; coordinating any form of road transport ; extending and improving the facilities for road transport in any area and providing an efficient and economical system of road transport service.

The statute under which the corporation was constituted provided, inter alia, that the undertaking of the corporation should be run on business principles. The statute empowered the corporation to issue shares and to pay dividends but, in fact, no share capital was raised ; the entire capital was provided by the Government. The statute further provided that the annual profits could be utilised for the provision of amenities to the passengers using the road transport services, welfare of labour and financing expansion programme and the remainder had to be made over to the State Government for road development.

On these facts, it was held by the Supreme Court that the corporation was entitled to exemption from tax both under the 1922 Act and the 1961 Act. The statute to the extent it empowered the corporation to act on business principles did so only for the purpose of implementation of its main objects for which the corporation was established. Though the activity of the corporation was being carried on with the object of making profits, the surplus in its hands as directed could only be utilised for the purpose and objects of general public utility.

From the facts on record, it appears to us that the finding of the Tribunal that the assessee does not carry on any activity for making profits has become final inasmuch as none of the facts found by the Tribunal has been challenged as perverse or being based on no evidence. It has been found that the assessee lets out its property on a no profit no loss basis.

Even otherwise, it appears and as has been found by the Tribunal that the primary and dominant objects of the assessee as set out in the trust deed are all objects of general public utility. On a reading of the trust deed, we find that none of the objects set out in the deed involves any activity for earning any profit. No doubt, in one of the clauses of the deed, the assessee has been empowered to carry on any business and earn profits but the same is to be read in the context of its main objects and must be held to be ancillary and incidental to the carrying on of such objects.

It is not open to the Revenue to contend at this stage that one of the objects of the charity, viz., to hold social gatherings, is not a charitable Object. The expression "social gathering" has to be read and understood in its context in item 2(p) of the objects. A social gathering, if any, to be held by the assessee is meant to be for the benefit of the public and poets, artists, litterateurs and other learned persons who are to be invited to participate therein.

The controversy raised in the question referred, in our view, is concluded by the decision of the Supreme Court in Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, , and the subsequent decisions of the Supreme Court which we have followed and applied the same, noted earlier.

For the above reasons, we hold that the assessee was entitled to claim exemption from Income Tax u/s 11 of the Act of 1961, as its income arose from properties held for charitable and religious purposes. It follows that the assessee was also entitled to claim exemption u/s 12 of the Income Tax Act, 1961, in respect of the donations received by it during the relevant accounting period.

For the above reasons, we answer the three questions referred to us all in the affirmative and in favour of the assessee.

There will be no order as to costs.

Mrs. Monjula Bose, J.

I agree.