Case: M/s. Thiagarajar Charities Vs. Additional Commissioner of Income Tax and Another

involves the uplift of the rural masses, and is directed for the welfare of such people. Majority of such persons belong to the poor (or poorer) segments of the society. Similarly cottage industry is associated with the idea of a small, simple enterprise or industry in which employees, work in their own houses or in a small place gathered together for the purpose, using their own equipments and is usually found in rural areas/places or so carried on, by the poor (or poorer) section of the society. In substance, the above activity, specified in cl. (1)(g) is to afford relief to the poor. We understand cl. 1(g) of the trust deed dt. 4th June, 1962 as only vesting a power in the trustees to do certain things to effectuate the main objects of the trust contained in cl. 1(a) of the Deed - to start, run, develop educational, technical, vocational and other institutions and institutes for the welfare and uplift of the general Indian public. The power so vested in the trustees under cl. (g) cannot be called as the objects of the trust. So understood, we have no hesitation to hold that the Tribunal and also the High Court erred in construing cl. (g) aforesaid as object of the trust enabling it to carry on a business with a profit motive. Looked at from a different angle, and in the alternative, it is clear that the business of purchasing and selling cotton, cotton yarn, cloth and other fibres, etc., was held under trust; the said business was started in exercise of the powers vested in the trustees under cl. 7(e) r/w cl. 32 of the resolution dt. 6th June, 1962 and in view of cl. 3 of the deed, it is the corpus of the trust in reality. It is not an object of the trust. So, it cannot be said that the trust is carrying on (business) - an activity for profit. The business-corpus-property held under trust produces or results in income, like any other property. That is all. The business is only a means of achieving the object of the trust; it is a medium through which the objects are accomplished. In this view, the entire approach made by the Tribunal as also by the High Court fails to give due effect to the trust deed as a whole and is palpably erroneous and the resultant conclusion is vitiated, in denying the exemption to the appellant-trust. We hold accordingly. 10. Counsel for the appellant-assessee drew our attention to a decision rendered by a Constitution Bench of this Court in Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association (SC) : TC 23R.195, and contended that the dominant purpose as could be gleaned from the various clauses of the trust deed is only to subserve the charitable purpose and not to earn profit and so, the appellant-assessee is entitled, in any view of the matter. [even if this case falls under the fourth limb of s. 2(25)] to the exemption under s. 11 of the Act. Our attention was invited to the following observations of Bhagwati, J. (who delivered the judgment of the majority) at pages 25-26 of the report which is to the following effect : ......... The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge 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 principle of management. We, therefore, agree with Beg J., when he said in Sole Trustee, Loka Shikshana Trust vs. CIT 1975 CTR 281 (SC) : TC 23R.161 that :If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity. The learned judge also added that the restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object. We wholly endorse these observations. We are of the view that the above test is also satisfied on the facts of this case. 11. It appears from the affidavit filed by the appellant-trust, which is available at page 142 of the paper book, that an aggregate sum of Rs. 16, 48, 030 was spent for charitable purposes during the period from 4th June, 1962 to 31st May, 1967. The purposes are aid to the various colleges, orphanages, relief to the poor and different categories or types of education. It also appears that in one of the assessment years, the amount so applied is much more than the total income. The facts available in the records go to show that the profits or amounts earned in the business fed the charitable purposes specified in the trust deed. In other words, the amounts earned had been essentially spent on charity. There can be no doubt that profit-making was not the real object of the trust.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]9. The objects of the trust have been clearly stated in paragraph 1 of the trust Deed. The main purpose and objects of the trust are education, medical relief and poor relief. In that behalf, the trust has been authorised to establish, maintain, run, etc., educational institutions, technological and other institutes for the welfare and uplift of the general Indian public, to assist in the establishment and running of hospitals, clinics and dispensaries, etc., to assist in building and erection of houses and places of residence for the poor; and to afford relief to the poor by giving food, clothing and to help them in distress during earthquake, flood, famine, pestilence, etc. In this connection, we should notice cl. 1(g) which is to the following effect :(g) To engage in, carry on, help, aid and assist and promote rural reconstruction work, cottage industry and all other matters incidental thereto in IndiaThough this sub-clause is included among the objects clause, it is, really only a power. The language employed in cl. 1(g) itself suggests that it is a power vested in the trust to engage and promote, etc., rural reconstruction work, cottage industry and all other matters incidental thereto. A three Member Bench of this Court in Dharmadeepti vs. CIT (supra) construed cl. 3(b) of the Deed in the said decision, specified among the objects clause, as one really vesting powers, incidental or ancillary to the attainment of the main objects in cl. 3(a) therein, in the Appropriate Authority. We should also bear in mind that this power is so vested in this case, to effectuate the objects contained in cl. 1(a) to establish, maintain schools, colleges, workshops industrial, technological and other institutes, etc. *of whatever description for the welfare and uplift of the general Indian public. Rural reconstruction, necessarily involves the uplift of the rural masses, and is directed for the welfare of such people. Majority of such persons belong to the poor (or poorer) segments of the society. Similarly cottage industry is associated with the idea of a small, simple enterprise or industry in which employees, work in their own houses or in a small place gathered together for the purpose, using their own equipments and is usually found in rural areas/places or so carried on, by the poor (or poorer) section of the society. In substance, the above activity, specified in cl. (1)(g) is to afford relief to the poor. We understand cl. 1(g) of the trust deed dt. 4th June, 1962 as only vesting a power in the trustees to do certain things to effectuate the main objects of the trust contained in cl. 1(a) of the Deed - to start, run, develop educational, technical, vocational and other institutions and institutes for the welfare and uplift of the general Indian public. The power so vested in the trustees under cl. (g) cannot be called as the objects of the trust. So understood, we have no hesitation to hold that the Tribunal and also the High Court erred in construing cl. (g) aforesaid as object of the trust enabling it to carry on a business with a profit motive. Looked at from a different angle, and in the alternative, it is clear that the business of purchasing and selling cotton, cotton yarn, cloth and other fibres, etc., was held under trust; the said business was started in exercise of the powers vested in the trustees under cl. 7(e) r/w cl. 32 of the resolution dt. 6th June, 1962 and in view of cl. 3 of the deed, it is the corpus of the trust in reality. It is not an object of the trust. So, it cannot be said that the trust is carrying on (business) - an activity for profit. The business-corpus-property held under trust produces or results in income, like any other property. That is all. The business is only a means of achieving the object of the trust; it is a medium through which the objects are accomplished. In this view, the entire approach made by the Tribunal as also by the High Court fails to give due effect to the trust deed as a whole and is palpably erroneous and the resultant conclusion is vitiated, in denying the exemption to the appellant-trust. We hold accordingly10. Counsel for the appellant-assessee drew our attention to a decision rendered by a Constitution Bench of this Court in Addl. CIT vs. Surat Art Silk Cloth Manufacturers Association (SC) : TC 23R.195, and contended that the dominant purpose as could be gleaned from the various clauses of the trust deed is only to subserve the charitable purpose and not to earn profit and so, the appellant-assessee is entitled, in any view of the matter. [even if this case falls under the fourth limb of s. 2(25)] to the exemption under s. 11 of the Act. Our attention was invited to the following observations of Bhagwati, J. (who delivered the judgment of the majority) at pages 25-26 of the report which is to the following effect :......... The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge 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 principle of management. We, therefore, agree with Beg J., when he said in Sole Trustee, Loka Shikshana Trust vs. CIT 1975 CTR 281 (SC) : TC 23R.161 that :If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity.The learned judge also added that the restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object. We wholly endorse these observationsWe are of the view that the above test is also satisfied on the facts of this case11. It appears from the affidavit filed by the appellant-trust, which is available at page 142 of the paper book, that an aggregate sum of Rs. 16, 48, 030 was spent for charitable purposes during the period from 4th June, 1962 to 31st May, 1967. The purposes are aid to the various colleges, orphanages, relief to the poor and different categories or types of education. It also appears that in one of the assessment years, the amount so applied is much more than the total income. The facts available in the records go to show that the profits or amounts earned in the business fed the charitable purposes specified in the trust deed. In other words, the amounts earned had been essentially spent on charity. There can be no doubt that profit-making was not the real object of the trust.