ax Reference Case No 17 of 1975
Under section 257 of the Income Tax Act 1961 made by the Income Tax Appellate Tribunal Delhi Bench in Reference Application No 92DEL71 72 arising out of ITA No1339DEL68 69
BB Ahuja and Miss ASubhashini for the Appellant
AK Sanghi and Narayan Netter for the Respondent
The following Judgments were delivered PATHAK J
In view of the majority opinion of this Court in Additional Commissioner of Income tax Gujarat vs Surat Art Silk Cloth Manufactures the reference must be answered against the Revenue and in favour of the assessee
SEN J
This direct reference under section 257 of the Income tax Act 1961 hereinafter referred to as the Act  made by the Income Tax Appellate Tribunal Delhi Bench B  at the instance of the Commissioner of Income Tax Delhi II New Delhi raises the much vexed question as to whether the words not involving the carrying on of any activity for profit in the definition of charitable purpose  contained in section 2 15 of the Act govern the word advancement  and not the words object of general public utility
493 The facts giving rise to the reference are as follows The Federation of Indian Chambers of Commerce and Industry New Delhi hereinafter referred to as the assessee  is an existing company under the 
It was registered under section 26 of that Act and permitted to omit the word Limited  from its name
It has neither any share capital nor does it distribute any dividends to its members
The entire income is expended for the fulfilment of its object
The main object of the assessee is the promotion protection and development of trade commerce and industry in India
The main objects for which the Federation has come into existence are set out in cl 3 of the Memorandum of Association which insofar as material reads 3a To promote Indian business in matters of inland and foreign trade transport industry and manufactures finance and all other economic subjects and to encourage Indian banking shipping and insurance
While cl 3a defines the primary purpose of the trust ie to promote trade and industry which undoubtedly being an object of general public utility engaged in carrying on activities without any profit motive the subsidiary objects set out in sub cls
b to z2 of cl3 are merely incidental or ancillary thereof
During the assessment year 1962 63 the relevant accounting year for which was the year ended December 31 1961 the assessee submitted a return showing its total income as nil  claiming that all its income was exempt under section 111a read with section 215 of the Act
During the assessment year in question the assessee held the Indian Trade Fair at New Delhi and derived receipts totalling Rs 7518548 from rent for space allotted temporary stalls and storage
It also received Rs 20750 by sale of season tickets and Rs 394143 by daily gate tickets
It realised deposits and advances from the participants for hotel accommodation
In the relevant accounting year the Conference of the Afro Asian Organisation for Economic Cooperation sponsored by the assessee was held at New Delhi
For organising the Conference the assessee received Rs 300000 from the Government of India as grant in aid and after meeting the expenses was left with a balance of Rs 21734638
Further the assessee received Rs 26550 as the share of profits on the sale of a book on Company Law Rs 537182 as fee for arbitration
It realised advances from its members for arbitration amounting to Rs 20000 from out of which a balance of Rs 29918 was left
The balance sheet for the 494 accounting year shows that the assessee had in excess income of Rs 229171 over the expenditure under the head income 
The contention of the assessee before the Income Tax officer was that the activities carried on by the Federation were not with the motive of earning profits but they were carried on with the object of promotion protection and development of trade commerce and industry in India and abroad
Its contention was that the dominant object for which the Federation was constituted was for promotion protection and development of the country s trade commerce and industry and the activities carried on during the assessment year in question namely the holding of the Indian Trade Fair and of sponsoring the Conference of the Afro Asian Organisation for Economic Cooperation were incidental or ancillary to the main object and therefore the income derived therefrom was exempt under section 11 1a of the Act
Reliance in support of this contention was placed on the decision of this Court in Commissioner of Income Tax vs Andhra Chamber of Commerce
In the immediately preceding assessment years 1960 61 and 1961 62 the income of the assessee was treated as exempt from tax under section 43 i of the Income Tax Act 1922
The Income Tax officer however felt that the decision of this Court in the Andhra Chamber of Commerce s case supra was no longer good law due to the addition of the words not involving the carrying on of any activity for profit in the definition of charitable purpose  in section 215 of the Act which qualify the fourth head of charity viz any other object of general public utility and therefore must be read subject to the additional statutory requirement that the object of general public utility should not involve the carrying on of any activity for profit
He accordingly raised a demand of Rs 49818 on a total income of Rs 84430 on appeal the Appellate Assistant Commissioner disagreed with the view of the Income Tax Officer and held that the activities carried on by the assessee were not profit oriented and therefore its income was exempt
The Commissioner of Income tax appealed to the Appellate Tribunal without any success
The Tribunal upheld the view of the Appellate Assistant Commissioner and held that the dominant object with which the Federation was constituted being a charitable purpose viz promotion protection and development of trade commerce and industry there being no motive to earn profits it was not engaged in any activity in the nature of business or trade and if any 495 income arose from such activity it was only incidental or ancillary to the dominant object for the welfare and common good of the country s trade commerce and industry
Thereupon the Commissioner of Income Tax applied to the Appellate Tribunal to make a reference to the High Court under sub s1 of s256 of the Act but the Tribunal in view of the conflict in the decisions of the High Courts on the construction of the expression charitable purpose  as defined in section 215 of the Act has made a reference of the following questions to this Court under section 257 of the Act for its opinion namely 1
Whether having regard to the definition of charitable purpose as contained in Section 215 read with Sections 111 and 114 charging sections and sections dealing with computation of income the assessee was liable to be taxed in respect of income relating to assessment year 1962 63  2
Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the income earned by the assessee would not come within the provisions of Section 215 read with Section 11 of the Income Tax Act 1961 and the onus that this profit was not exempt from tax would be on the Revenue  3
Whether on the facts and in the circumstances of the case the purpose of the Federation of Indian Chambers of Commerce and Industry was advancement of objects of general public utility not involving the carrying on of any activity for profit  There had been a sharp conflict of opinion between the different High courts as to the construction of the ten crucial words not involving the carrying on of any activity for profit qualifying the fourth head of charity advancement of any other object of general public utility
This Court resolved the conflict in the Sole Trustee Loka Shikshan Trust vs CIT and the Indian Chambers of Commerce vs CIT by holding that the words not involving the carrying on of any activity for profit govern the word advancement and observed that if the advancement or attainment of the object involves an activity for profit tax exemption would not be available
496 Unfortunately for the Revenue the Court has in a five Judges Bench by a majority of 4 to 1 in Addl
Commissioner of Income Tax vs Surat Art Silk Cloth Manufactures  Association reversed these two decisions in the Loka Shikshan Trust s case and the Indian Chambers of Commerce s case supra
The Court has approved of the observations of Beg J in his separate but concurring judgment in the Loka Shikshan Trust s case that if the profits must necessarily feed 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
 In other words the majority view in the Surat Art Silk s case supra was that the 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 theory of dominant or primary object of the trust has therefore been treated to be the determining factor even in regard to the fourth head of charity viz the advancement of any other object of general public utility so as to make the carrying on of business activity merely ancillary or incidental to the main object
One should have thought that the correct way to approach this question of interpretation was to give the words used by Parliament their ordinary meaning in the English language and if consistently with the ordinary meaning there was a choice between two alternative interpretations then to prefer the construction that maintains a reasonable and consistent scheme of taxation without distorting the language
When the Government did not accept the recommendation of the Direct Taxes Laws Committee in Chapter 2 Interim Report December 1977 for the deletion of the words not involving the carrying on of any activity for profit occurring in section 215 of the Act the Court has by a process of judicial construction achieved the same result
Whatever reservations one may have regarding the correctness of this interpretation of the exclusionary clause in the definition of charitable purpose in section 215 of the Act there can be no doubt that the majority decision in the Surat Art Silk s case supra is binding on us
With respect I venture to say that the majority decision has the effect of neutralising the radical changes brought about by Parliament in the system of taxation of income and profits of charities with particular reference to objects of general public utility to prevent tax evasion by diversion of business profits to 497 charities
It is the vagueness of the fourth head of charity any other object of general public utility that impelled Parliament to insert the restrictive words not involving the carrying on of any activity for profit
In my minority opinion in the Surat Art Silk s case supra I had endeavoured to give reasons why the correctness of the majority decision was open to question
There is no point in traversing the same ground over again
It was clearly inconsistent with the settled principles to hold that if the dominant or primary object of a trust was charity  under the fourth head any other object of general public utility  it was permissible for such an object of general public utility to augment its income by engaging in trading or commercial activities
In retrospect it seems that it would have been better for Parliament to have deleted the fourth head of any other object of general public utility from the ambit of the definition of charitable purpose  while enacting section 215 of the Act rather than inserted the words not involving the carrying on of any other activity for profit thereby creating all this legal conundrum
In England the Radcliffe Commission on Taxation of Profits and Income recommended in 1955 that for purposes of taxation charity should be restricted to relief of poverty advancement of education and advancement of religion and that the fourth category mentioned in the dictum of Lord Macnaghten namely trusts for other purposes beneficial to the community  should be cut out entirely
The majority in the Surat Art Silk s case supra has evolved the doctrine of dominant or primary object and there is little that we can do about it
Faced with this difficulty learned counsel for the Revenue advanced no submissions with regard to the questions referred and indeed in view of the majority decision in the Surat Art Silk s case supra the answers to the questions are self evident
The doctrine of dominant or primary object must as laid down in the Surat Art Silk s case holds the field till there is a change in the law
Undoubtedly the activities of the assessee in regard to holding of the Indian Trade Fair and sponsoring of the Conference of the Afro Asian Organisation in the relevant accounting year were for the advancement of the dominant object and purpose of the trust viz 498 promotion protection and development of trade commerce and industry in India
Learned Counsel for revenue with his usual fairness conceded that the income derived by the assessee from such activities was exempt under s111a read with s215 of the Act
It was however urged that the objects set out in sub cls
v z1 and z2 of cl3 of the Memorandum of Association of the Federation were not incidental or ancillary to the main object of the trust
The relevant sub clauses are set out below v To establish and support or aid the establishment and support of associations institutions funds trusts and convenience calculated to benefit employees of the Federation or the dependents or connections of such persons and grant pension and allowances and to make payments towards insurance and to subscribe or guarantee money for charitable or benevolent objects or for any exhibition for any public general useful object
z1 To establish a Trust or Trusts andor appoint Trustees thereof from time to time and vest the funds or the surplus income or any property of the Federation in the Trustees who shall hold and deal with the funds surplus income or property in such manner as the committee may decide
z2 To undertake and execute any Trusts the undertaking of which may seem to the Federation desirable either gratuitously or otherwise
The contention advanced cannot be accepted for the reason that no such point was ever raised at any stage of the proceedings much less before the Appellate Tribunal
Even otherwise there appears to be no substance in the contention
There is a distinction between the purpose of a trust and the powers conferred upon the trustees as incidental to the carrying out of purpose
For instance cl3v enables the establishment and support of associations institutions funds trusts and convenience calculated to benefit the employees and their dependents for making provisions for grant of pension and allowances etc
The framing of such employee benefit schemes is essential and necessary for the proper functioning of the organisation and is incidental to the carrying out of the purpose for 499 which it is constituted
I refrain from expressing any opinion whether or not the employees constitute a section of the public
For if the primary or dominant purpose of a trust or institution is charitable any other object which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity
Likewise cls3z1 and z2 which permit the establishment of a trust or trusts appointment of trustees thereof from time to time and the vesting of funds or surplus income or any property of the assessee in the trustees are nothing but powers conferred on them for the proper financial management of the affairs of the trust which are incidental or ancillary to the main purpose of the trust
The contention must therefore fail
In the result the reference under s257 of the Income Tax Act 1961 made by the Income Tax Appellate Tribunal Delhi B New Delhi must be answered against the Revenue and in favour of the assessee
There shall be no order as to costs
VENKATARAMIAH J I have had the advantage of reading the judgment prepared by my learned brother AP Sen J and I respectfully agree with his reasoning and conclusion
I share with him my doubts about the correctness of the decision in Additional Commissioner of Income tax Gujarat vs Surat Art Silk Cloth Manufacturers  Association
I would like to say a few words of my own on the subject
There can be no objection to a person spending his money on charity
But can he be charitable at the expense of others This is a question which necessarily arises when we read section 11 of the Income tax Act 1961
Section 11 as it stands now grants exemption from payment of tax on any income which would have otherwise been taxable provided 1 the property yielding income is held under trust or such other legal obligation which is brought into existence by an act of party and not by an act of law 2 the purpose of the trust is charitable which may enure to the benefit of the public or a section of the public and 3 the other conditions prescribed by the Act are satisfied
It means that if there is a diversion of property or income earning apparatus by an act of party into a charitable trust and the prescribed conditions are satisfied the income derived from it including the portion which would have gone to the public exchequer but for the trust may be spent by a person in charge of the 500 affairs of the trust on objects indicated in the trust which is a creature of its author
In effect what does it mean It means that the author of the trust is able to divert by his own will to a purpose of his own choice though charitable a large part of the income which would have been but for the trust at the disposal of the Legislature which alone has the power over the national exchequer
Whatever may have been the position in those days when the State was just a police State performing minimum functions of Government today when the State is a welfare State would it be right either morally or constitutionally to allow amounts which should legitimately form part of the revenue of the State to be dealt with by non Governmental agencies administering trusts is a question which requires examination in an appropriate case
This however is a larger question which if logically pursued may justify total deletion of the exemption accorded in the case of charitable and religious trustee
But even as the provisions now stand I feel that while construing them this Court has enlarged the meaning of charitable purpose in section 2 15 beyond what it legitimately should mean in the Surat Art Silk Cloth Manufacturers  Associations  case supra
I would like to adopt the words in the dissenting judgment of my learned brother AP Sen J in the Surat Art Silk Cloth Manufacturers  Association s case supra The judicial attitudes cannot be formed in isolation from legislative processes particularly in connection with tax avoidance provisions
 It is true that it is open to the Legislature to give encouragement to objects which it considers to be laudable by means of fiscal exemptions
At the same time it takes care to enact fresh provisions from time to time to suppress any mischief which may have resulted from the misuse of existing law
Parliament deliberately stepped in by adding the words not involving the carrying on of any activity for profit in the definition of charitable purpose in section 2 15 of the Act when the tax exemptions available to charitable and religious trusts came to be misused by some for the unworthy purposes of tax avoidance
The law had been so re structured to prevent allergy to taxation masquerading as charity
The law was thus designed by Parliament to prevent this misuse of tax exemption in the name of charity
The majority decision in the Surat Art Silk Cloth Manufacturers  Association s case supra if I may say so without meaning 501 any disrespect has virtually wiped off the restrictive words not involving the carrying on of any activity for profit occurring in section 215 thereby defeating the very object and purpose of the legislation
It is not the function of a court of law to give the words a strained and unnatural meaning
When the Government had not accepted the recommendation of the Direct Taxes Laws Committee in Chapter 2 Interim Report December 1977 for the deletion of the words not involving the carrying on of any activity for profit by suitable legislation it was impermissible for this Court by a process of judicial construction to achieve the same result
If I may adopt the words of Lord Reid in Greenberg vs IRC quoted in the minority decision in Surat Art Silk Cloth Manufacturers  Association s case supra displaying the court s concern about the prevailing attitude of tax statutes Parliament is very properly determined to prevent this kind of tax evasion and if the courts find it impossible to give very wide meanings to general phrases the only alternative may be for Parliament to do as some other countries have done and introduce legislation of a more sweeping character  Modern legislation has changed in pattern towards re casting provisions of taxation with very wide language while at the same time dealing in much more detail with some areas of law
Judges while responding to general trends of law but also reacting to the form of modern tax legislation must be prepared to take account of the context and purposes of the change brought about
It is relevant to refer to one other aspect arising out of an observation made in the course of the majority judgment in the Surat Art Silk Cloth Manufacurers  Association s case supra suggesting that the area of exemption under Indian law is much wider than what is available under English law
The relevant part of the majority judgment reads The definition of charitable purpose in Indian Law thus goes much further than the definition of charity to be derived from the English cases because it specifically includes medical relief and embraces all objects of general public utility
In English Law it is not enough that 502 a purpose falls within one of the four divisions of charity set out in Lord Macnaghten s classification
It must also be within the spirit and intendment of the Preamble to the Statute of Elizabeth if it is to be regarded as charitable
There is no such limitation so far as Indian Law is concerned even if a purpose is not within the spirit and intendment of the Preamble to the Statute of Elizabeth it would be charitable if it falls within the definition of charitable purpose given in the Statute
Every object of general public utility would therefore be charitable under the Indian Law subject only to the condition imposed by the restrictive words not involving the carrying on of any activity for profit added in the present Act
It is on account of this basic difference between the Indian and English Law of charity that Lord Wright uttered a word of caution in All India Spinners  Association vs Commissioner of Income tax 12 ITR 482 against blind adherence to English decisions on the subject
The definition of charitable purpose in the Indian Statute must be construed according to the language used there and against the background of Indian life
 If Indian life should be a true guide for the determination of questions arising in court then we should go back to our ancient treatises to find out the true meaning of charity which may be either dana or utsarga
In the case of dana the donor gives up his ownership over a thing makes another the owner of it and cannot thereafter use it nor has he any control over it
When a man makes an utsarga he no doubt gives up his ownership but gives up the thing for the benefit of all
Opinion is however divided whether as a member of the public he can also use a thing thus dedicated for the public
But in any event he would no longer have any control over the thing dedicated
How many of the so called charitable trusts satisfy the rigours of the Indian concept of charity Are there any measures by which misuse of funds belonging to charities can be effectively checked It is wrong to think that all springs of charity in India will dry up if true effect is given to section 2 15 of the Act in accordance with the minority judgment in the Surat Art Silk Cloth Manufacturers  Association s case supra
People who are truly charitable do not think of the tax benefits while making charities
One must realise 503 that even the poor who do not pay income tax can be charitable and their charities made at great personal inconvenience are commendable indeed
One need not go in search of charitable persons amongst the tax payers only
Still the majority view has got to be followed now


Summary:
The respondent assessee an existing company under the had neither any share capital nor distributed any dividend to its members and its entire income was expended for fulfilment of its objects which were the promotion protection and development of trade commerce and industry in India
During the assessment year 1962 63 the relevant accounting year for which the year ended December 31 1961 the assessee submitted a return showing its total income as nil  claiming that all its income was exempt under section 111a read with Section 215 of the Income Tax Act
During the assessment year the assessee held the Indian Trade Fair at New Delhi and derived receipts from rent for space allotted temporary stalls and storage and realised deposit and advances from the participants for hotel accommodation
In the relevant accounting year the Conference of the Afro Asian Organisation for Economic Cooperation was sponsored by the assessee and for organising the Conference the assessee received from the Government Rs 3 lakhs as grant in aid and after meeting the expenses was left with a balance of Rs 2 lakhs
It also received income by sale of books fee for arbitration etc
The balance sheet for the accounting year indicated that it had an excess of income over expenditure under the head income 
The contention of the assessee before the Income Tax Officer was that the activities carried on by the Federation were not were not motive of earning profits but that they were carried on with the object of promotion protection and development of trade commerce and industry in India and abroad and therefore the income derived by the assessee was exempt under section 111a
The Income Tax Officer held that the decision of this Court in the Andhra Chamber of Commerce s case 1965 ISCR 565 was no longer good law due to the addition of the words not involving the carrying on any activity for profit  in the definition of charitable purpose  in Section 215 of the Act which qualify the fourth head of charity viz any other object of general public utility  and therefore must be read subject to the additional statutory requirement that the 490 object of general public utility should not involve the carrying on of any activity for profit and accordingly raised a demand
On appeal by the assessee the Appellate Assistant Commissioner disagreed with the view of the Income Tax Officer and held that the activities carried on by the assessee were not profit oriented and therefore its income was exempt
The Department appealed to the Appellate Tribunal and the Appellate Tribunal upheld the view of the Appellate Assistant Commissioner and held that the dominant object with which the Federation was constituted being a charitable purpose viz promotion protection and development of trade commerce and industry there being no motive to earn profits it was not engaged in any activity in the nature of business or trade and if any income arose from such activity it was only incidental or ancillary to the dominant object for the welfare and common good of the country s trade commerce and industry
The Commissioner of Income Tax applied to the Appellate Tribunal to make a reference to the High Court under sub section 1 of section 256 of the Act but in view of the conflict in the decisions of the High Courts on the construction of the expression charitable purpose  as defined in section 215 of the Act the Tribunal made a reference to this Court under Section 257 
On the question whether the words not involving the carrying on of any activity for profit  in the definition of charitable purpose  contained in section 215 of the Act govern the word advancement  and not the words object of general public utility 
 HELD By the Court The reference must be answered against the Revenue and in favour of the assessee in the view of the majority opinion in Addl
Commissioner of Income Tax vs Surat Art Silk Cloth Manufactures 1980 I SCR 77
492 F Per AP Sen J 1
The majority view in the Surat Art Silk case was that the 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 theory of dominant or primary object of the trust has therefore been treated to be the determining factor even in regard to the fourth head of charity viz advancement of any other object of general public utility so as to make the carrying on of business activity merely ancillary or incidental to the main object
This doctrine of dominant or primary object holds the field till there is a change of law
496 C D 497 F 2
The majority decision had the effect of neutralising the radical changes brought about by Parliament in the system of taxation of income and profits of charities with particular reference to object of general public utility to prevent tax evasion by diversion of business profits to charities
It is the vagueness of the fourth head of charity any other object of general public utility that impelled 491 Parliament to insert the restrictive words not involving the carrying on of any activity for profit
496 G 497 A 3
It was clearly inconsistent with the settled principles to hold that if the dominant or primary object of a trust was charity  under the fourth head any other object of general public utility  it was permissible for such an object of general public utility to augment its income by engaging in trading or commercial activities497 B 4
When the Government did not accept the recommendation of the Direct Taxes Laws Committee in Chapter 2 for the deletion of the words not involving the carrying on of any activity for profit occurring in Section 215 of the Act it was impermissible for the Court by a process of judicial construction to achieve the same result
496 F 5
In the instant case activities of the assessee in regard to holding of the Indian Trade Fair and sponsoring of the Conference of the Afro Asian organisation in the relevant accounting year were for the advancement of the dominant object and purpose of the trust viz promotion protection and development of trade commerce and industry in India
The income derived from such activities was therefore exempt under section 111a read with section 215 of the Act
498 G 499 A 6
There is a distinction between the purpose of a trust and the power conferred upon the trustees as incidental to the carrying out of the purpose
If the primary or dominant purpose of a trust or institute is charitable any other object which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or the institution being a valid charity
498 G 499 A Per Venkataramiah J 1
It is open to the Legislature to give encouragement to objects which it considers to be laudable by means of fiscal exemptions
At the same time it takes care to enact fresh provisions from time to time to suppress any mischief which may have resulted from the misuse of existing law
Parliament deliberately stepped in by adding the words not involving the carrying on of any activity for profit in the definition of charitable purpose  in section 215 of the Act when the tax exemptions available to charitable and religious trusts came to be misused by some for the unworthy purposes of tax avoidance
The law had been so restructured to prevent allergy to taxation masquerading as charity
The law was thus designed by Parliament to prevent this misuse of tax exemption in the name of charity
500 F H 2
This Court has enlarged the meaning charitable purpose in Section 215 beyond what it legitimately should mean in the Surat Art Silk Cloth Manufacturers Association s case
It has virtually wiped off the restrictive words not involving the carrying on or any activity for profit occurring in section 215 thereby defeating the very object and purpose of the legislation
It is not the function of a court of law to give the words a strained and unnatural meaning
Judicial attitudes cannot be formed in isolation from legislative processes particularly in connection with tax avoidance provisions
500 D 501A 500E 492 3
Modern legislation has changed in pattern re casting provisions of taxation with very wide language while at the same time dealing in much more detail with some areas of law
Judges while responding to general trends of law but also reacting to the form of modern tax legislation must be prepared to take account of the context and purposes of the change brought about501 E Greenberg vs Inland Revenue Commissioners 1972 AC 109 HL referred to
When the Government had not accepted the recommendation of the Direct Taxes Laws Committee in Chapter 2 for the deletion of the words not involving the carrying on of any activity for profit by suitable legislation it was impermissible by a process of judicial construction to achieve the same result
501 B 5
People who are truly charitable do not think of the tax benefits while making charities
Even the poor who do not pay income tax can be charitable and their charities are made at great personal inconvenience
Charitable persons are not amongst the tax payers only
502 H 503 A