Case: Commissioner Of Income Tax Vs. Dharmodayan &amp; Co., Kerala

The assessee in these appeals is a company which was registered under the Cochin Companies Act and later under the Indian Companies Act, 1956. The sources of income of the assessee are interest on securities, income from property and kuries or chit funds. For the assessment years 1952-53 to 1956-57, in making its returns of income, the assessee did not show the income from kuries on the ground that it was exempt under section 4(3)(i) of the Indian Income-tax Act, 1922, and that the proviso to that section had no application as the business of kuries was not carried on " on behalf of a religious or charitable institution " but was the trust business of the assessee itself. This contention was rejected by the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal but, on a reference under section 66(1) of the Act of 1922, the High Court of Kerala in Dharmodayam Co. v. Commissioner of Income-tax [1962] 45 ITR 478     held that that the business of kuries was itself held by the assessee under a trust for religious or charitable purposes and that it could not be said that the business was conducted " on behalf of " the religious or charitable institution. Therefore, according to the Division Bench which decided that case, the proviso to section 4(3)(i) was not attracted and the income from kuries in so far as it was applied for religious or charitable purposes was exempt from tax. The revenue brought the matter in appeal to this court but it withdrew the appeal with the result that the decision of the High Court became final The instant case arose after the Income-tax Act of 1961 came into force, the assessment year being 1968-69. The Income-tax Officer declined to grant exemption in respect of the income derived by the assessee from its kuri business but that order was set aside by the Appellate Assistant Commissioner whose judgment was confirmed by the Appellate Tribunal. These two authorities held that despite the amendment introduced by the Act of 1961 in section 2(15), the earlier decision would apply and the assessee was, therefore, entitled to claim exemption in regard to its income from kuriesThe Tribunal, at the instance of the revenue, referred the following two questions for the opinion of the High Court" 1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the income derived by the assessee is exempt under section 11(1)(a) of the Income-tax Act, 1961 ?2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that setting apart reserves under article 39 of the assessees memorandum did not vitiate the charitable purpose of the institution ? "The assessee also filed two writ petitions in the High Court challenging, by one writ petition, a notice for reopening an assessment and by the other, a notice calling upon it to file a return. The High Court answered both the questions in favour of the assessee, allowed the writ petitions and quashed the notices. These appeals by special leave are directed against the judgment and orders of the High CourtOn the first of the two questions referred to the High Court for its opinion it becomes necessary to consider comparatively the relevant provisions of section 4(3) of the Indian Income-tax Act, 1922, as it existed when the Kerala High Court decided the Dharmodayam Co.s case [1962] 45 ITR 478 (Ker)   on December 20, 1961, and the provisions contained in the relevant part of section 11 read with section 2(15) of the Income-tax Act, 1961.

Reasoning:
It is undeniable that the law governing exemption from taxation of income derived from property held for religious or charitable purposes has undergone significant changes after the enactment of the Act of 1961But we are unable to accept the submission made by Mr. Ramamurthi on behalf of the revenue that by reason of the change brought about by the Act of 1961 in the definition of the expression " charitable purpose ", the judgment of the Kerala High Court in Dharmodayams case [1962] 45 ITR 478 (Ker)   is not good law and that the decision therein cannot any longer govern the question whether income received by the assessee by conducting the kuries is exempt from taxation. The entire argument is built around the words " advancement of any other object of general public utility not involving the carrying on of any activity for profit " which occur in the definition of " charitable purpose " contained in section 2(15) of the Act of 1961, particular emphasis being laid by counsel on the expression " not involving the carrying on of any activity for profit ". This argument assumes that the respondent is running the kuries as a matter of advancement of an object of general public utility. If that were so, it would have been necessary to inquire whether conducting the kuri business involved the carrying on of any activity for profit. The answer, perhaps, to that inquiry might have been in the affirmative since speaking generally, the conduct of a business involves the carrying on of an activity for profit. But the assumption that the respondent is running the kuri business as a matter of advancement of an object of general public utility or for that purpose is plainly contrary to the finding of the Kerala High Court in Dharmodayam Co.s case [1962] 45 ITR 478 (Ker)  , that the kuri " business itself is held under a trust for religious or charitable purposes ". It is a necessary implication of this finding that the business activity was not undertaken by the respondent in order to advance any object of general public utility. The decision of the Kerala High Court was challenged by the revenue in an appeal filed in this court, but that appeal was withdrawn by it. The relevant legislative provision has certainly undergone a change, but the nature of the respondents activity remains what it was when the Kerala High Court gave its judgment in Dharmodayam Co.s case [1962] 45 ITR 478 (Ker)  . It will, therefore, be erroneous to say, as contended by Mr. Ramamurthi on behalf of the revenue, that the Kerala judgment has lost its validity. That judgment, in our opinion, concludes the point that the kuri business is not conducted by the respondent in order to advance or for the purpose of advancing any object of general public utilityIt is undisputed that the respondent-company, which was registered on January 21, 1959, under the Cochin Companies Act, has never engaged itself in any industry or in any other activity of public interest. It is notorious that the memoranda and articles of association of companies usually cover a variety of activities, only a few of which are in fact undertaken or intended to be undertaken. That obviates the necessity for applying for amendment of the articles from time to time and helps to rule out a possible challenge on the ground that the company has acted beyond its powers in undertaking a particular form of activity. The only activity in which the respondent is engaged over the years is the conduct of kuries. On this aspect of the matter the High Court rightly observesAfter referring to the judgment of this court in the earlier case, the Kerala High Court took the view that the income in respect of which exemption was claimed was not excludible from the total income of the assessee since the assessee had commenced a business for the purpose of advancing an object of general public utility involving the carrying on of an activity for profit. The main argument advanced before the Kerala High Court was that the true purpose of the business, as gleaned from all the circumstances of the case, was to afford medical relief and not the advancement of an object of general public utility. The High Court rejected that argument and held that the preparation and sale of ayurvedic medicines cannot be said to be an activity in the nature of medical relief. As explained earlier, in the instant case the last clause of section 2(15) of the Act of 1961, which is described in various judgments as the fourth category falling within the terms of that section, has no applicationThis has no application in the instant case since the business of kuries was not started by the respondent with the object or for the purpose of advancing an object of general public utilityHaving given our most anxious and respectful consideration to the judgment in the case of Indian Chamber of Commerce [1975] 101 ITR 796 (SC) we find ourselves unable to accept this submission.The facts of the instant case were not before the court in the case of Indian Chamber of Commerce [1975] 101 ITR 796 (SC) and it is evident from the passage extracted above that the test applied by the Kerala High Court was held to be wrong on the assumption that the case fell under the last clause of section 2(15) of the Act of 1961, which was the only part of section 2(15) relevant for deciding the case of Indian Chamber of Commerce [1975] 101 ITR 796 (SC). Considering further that the word " industry " has been italicised in the passage extracted above, it is plain that the court assumed that the assessee was engaged in running an industry. We have endeavoured to point out that, on the facts of the case, it is impossible to hold that the last clause of section 2(15) has any application and that, in the light of the activities of the respondent spread over the past several years, no importance can be attached to clause 39 of its articles of association which enables it " to do the needful for the promotion of ......... industry ". With great deference, therefore, we are unable to read the decision in the case of Indian Chamber of Commerce [ 1975] 101 ITR 796 (SC) as overruling the judgment which is under appeal before us. The court was not even apprised there that this appeal was pending against the decision of the Kerala High CourtWe are, therefore, of the opinion, strictly limiting ourselves to the facts of the case and for the reasons mentioned above, that the income derived by the assessee from the kuries is exempt from taxation under section 11(1)(a) of the Act of 1961The second question presents no difficulty. The apprehension that in exercise of the power conferred by article 39 of the articles of association,  the general meeting may set apart the entire profit or a substantive part of it for reserves is unfounded. If and when the affairs of the respondent take that shape, the department will have ample powers and opportunity to deny the exemption to the respondent. For the time being it is enough to state that the High Court has found that the respondent has spent the income for charitable purposes. The answer to the second question must, therefore, be that the power to set apart reserves under article 39 will not, without more, vitiate the charitable nature of the institution.