1980 (2) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Entitlement to exemption under Section 11 of the Income-tax Act, 1961, read with Section 2(15) for the assessment years 1967-68 to 1970-71.
2. Basis for the Tribunal's finding that one of the objects of the trust was to own property and carry on business or activity for profit.

Detailed Analysis:

1. Entitlement to Exemption under Section 11 of the Income-tax Act, 1961:
The primary issue in both Income-tax References Nos. 14 of 1975 and 29 of 1976 pertains to whether the income of Umaid Charitable Trust, Pali-Marwar, is entitled to exemption under Section 11 of the Income-tax Act, 1961, read with Section 2(15) for the assessment years 1967-68 to 1970-71. The trust had earned commission as area managers of M/s. Laxmi Cement Distributors (P.) Ltd. but did not show this income in its return, claiming it was derived from a business undertaking held under trust for charitable purposes.

The Income Tax Officer (ITO) disagreed and assessed the income derived from the business activity. The Appellate Assistant Commissioner (AAC) allowed the appeal for the assessment years 1967-68 to 1969-70, holding that the trust was entitled to exemption under Sections 2(15) and 11. However, the Income-tax Appellate Tribunal reversed this decision, stating that the business undertaking carried on by the trust was one of its objects, thereby disqualifying it from exemption.

The High Court referred to the Supreme Court's decision in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1, which clarified that if the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character as a charitable purpose merely because some profit arises from the activity. The High Court concluded that the trust's activities were not motivated by a profit objective but were undertaken to advance charitable purposes. Therefore, the trust was entitled to exemption under Section 11.

2. Basis for Tribunal's Finding on Profit-Making Object:
The second issue involved the Tribunal's finding that one of the objects of the trust was to own property and carry on business or activity for profit. The High Court emphasized the distinction between the objects of the trust and the powers conferred on the trustees to achieve those objects. The trust deed's primary purpose was for charitable activities such as relief of the poor, advancement of education, medical relief, promotion of science, art, and literature, and any other object of general public utility.

The High Court noted that the powers conferred on the trustees, such as holding and managing business undertakings, were incidental to achieving the trust's charitable objects. The Court rejected the revenue's argument that these powers indicated a profit-making objective. The Court also dismissed the revenue's contention that the trustees had discretion to utilize the income for non-charitable purposes, clarifying that all objects and purposes enumerated in the trust deed were charitable.

The High Court concluded that the Tribunal's finding was based on an incorrect interpretation of the trust deed and that the predominant object of the trust was not profit-making but charitable purposes. Consequently, the High Court held that the trust was entitled to the benefits of Section 2(15) and Section 11 of the Income-tax Act.

Conclusion:
The High Court answered the questions referred to it in the affirmative, in favor of the assessee (Umaid Charitable Trust) and against the revenue. The applications under Section 256(2) of the Act were dismissed as infructuous, and each party was left to bear its own costs.