1977 (8) TMI 2 - SC - Income Tax

Income derived by the assessee from the kuries is exempt from taxation under section 11(1)(a) - power to set apart reserves under article 39 will not, without more, vitiate the charitable nature of the institution - revenue s appeal dismissed

Issues Involved:
1. Exemption of income derived from kuries under section 11(1)(a) of the Income-tax Act, 1961.
2. Impact of setting apart reserves under article 39 on the charitable purpose of the institution.

Issue-wise Detailed Analysis:

1. Exemption of Income Derived from Kuries under Section 11(1)(a) of the Income-tax Act, 1961:

The core issue revolves around whether the income derived by the assessee from its kuri business is exempt under section 11(1)(a) of the Income-tax Act, 1961. This necessitates a comparative analysis of section 4(3) of the Indian Income-tax Act, 1922, and section 11 read with section 2(15) of the Income-tax Act, 1961.

Section 4(3) of the Act of 1922 provided that income derived from property held under trust for religious or charitable purposes was exempt from taxation if applied for those purposes. However, income from business carried on behalf of a religious or charitable institution was included in the total income unless it was applied wholly for the institution's purposes and either carried on in the course of the primary purpose of the institution or mainly by the beneficiaries.

Section 11(1)(a) of the Act of 1961 similarly exempts income derived from property held under trust wholly for charitable or religious purposes, to the extent it is applied to such purposes in India. Section 2(15) defines "charitable purpose" to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit.

The revenue argued that the change in the definition of "charitable purpose" in section 2(15) of the 1961 Act invalidates the Kerala High Court's decision in Dharmodayam Co.'s case [1962] 45 ITR 478 (Ker), which held that the kuri business was itself held under trust for religious or charitable purposes. The Supreme Court rejected this argument, noting that the assumption that the kuri business was conducted for advancing an object of general public utility is contrary to the finding in Dharmodayam Co.'s case. The business activity was not undertaken to advance any object of general public utility but was held under trust for religious or charitable purposes.

The court also referenced Commissioner of Income-tax v. P. Krishna Warriar [1964] 53 ITR 176 (SC), which clarified that if a business is held under trust, it falls under the substantive part of clause (i) and not under clause (b) of the proviso. The Kerala High Court's decision in Dharmodayam Co.'s case was thus upheld, concluding that the kuri business was not conducted to advance any object of general public utility.

The court distinguished the case from Indian Chamber of Commerce v. Commissioner of Income-tax [1975] 101 ITR 796 (SC), where the Chamber's activities were clearly for advancing objects of general public utility involving profit. The court noted that the facts of the instant case were different, and the assumption that the assessee was engaged in running an industry was incorrect.

Thus, the court held that the income derived by the assessee from the kuries is exempt from taxation under section 11(1)(a) of the Act of 1961.

2. Impact of Setting Apart Reserves under Article 39 on the Charitable Purpose of the Institution:

The second issue concerns whether setting apart reserves under article 39 of the assessee's memorandum vitiates the charitable purpose of the institution. Article 39 allows the company to set apart a portion of its annual net profits towards reserves for stability and bad debts, with the balance to be spent on charity, education, industry, and other public interest purposes.

The court found that the respondent-company had never engaged in any industry or other public interest activities apart from conducting kuries. The High Court observed that there was no case that the company started any industry or aimed to make a profit from such activities.

The court concluded that the power to set apart reserves under article 39 does not, without more, vitiate the charitable nature of the institution. The High Court had found that the respondent spent the income for charitable purposes, and the department would have ample opportunity to deny exemption if the situation changed.

Conclusion:

The Supreme Court confirmed the High Court's judgment, holding that the income derived by the assessee from the kuries is exempt from taxation under section 11(1)(a) of the Income-tax Act, 1961. The power to set apart reserves under article 39 does not vitiate the charitable nature of the institution. The appeals were dismissed, and the appellant was ordered to pay the respondent's costs in one set.

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