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TMI Blog2000 (6) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... poses. The Assessing Officer made the assessments without considering the claim of the assessee for exemption under section I 1. When the appeals finally came up before the CIT(A) after repeated assessments made pursuant to the repeated orders of the CIT(A) setting aside the assessments, he noticed that the assessments suffered from serious infirmities not only by way of ignoring materials on departmental record but also for not examining the basic documents or causing normal enquiries and he gave an example, namely, that the Memorandum of Association of the society was never obtained on record or otherwise examined with reference to the objects for which it was formed. He, therefore, instead of setting aside the assessments again, called for a remand report pointing out that the Assessing Officer had completely overlooked the following material/facts/points: (i) The grant of registration under section 12A; (ii) Repeated directions of the CIT(A) to consider the claim for exemption under section 11; (iii) Filing of the returns along with statement of accounts for all the years. The Assessing Officer sent a remand report which was treated as part of assessment by the CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The element of alleged training, he held, was the normal incidence of any business in printing and publication. A business undertaking engaging paid workers and technicians in the factory cannot be said to have imparted training to them by way of charitable dispensation and, accordingly, the business profit cannot be claimed as exempt for promoting charitable objects of public training in certain vocations. In the ultimate analysis, he held that all the activities of the Society were confined to or directly related to activity for profit involved in printing and publication and not to rendering aid and assistance to outside public to develop their talents in certain vocations. He then examined the case of the assessee in the light of the Supreme Court decisions in the cases of Sole Trustee, Loka Shikshana Trust and Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 and found that similar to the case of Sole Trustee, Loka Shikshana Trust, the dominant purpose of the society was to publish newspapers, journals etc. for promoting ideas of liberty, equality and fraternity amongst the general public. The membership is open to the public. As regards the power, he found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by a dominant profit motive. He also held that the expenditure incurred were all in the nature of normal outgoing for running the printing press as well as publication and sale of Newspaper. As regards the application of funds for charitable purpose, he observed 'It may be mentioned that all the returns were furnished by the same Secretary of the society from the very beginning and that the annexed audit reports in Form No. 10B under section 12A(b) uniformly mentioned that the entire gross receipts during a given year has been applied for charitable purpose in that year in a mechanical manner without mentioning about the surplus and the cash balances available at the close of each year. These surrounding facts and circumstances on record would suggest that the charitable character of the society has not been established from any evidences concerning its actual conduct other than running the printing press and selling the Newspaper as a business undertaking with clear profit motive. The absolute power of dealing with the assets and income of the society as deemed expedient by the Managing Committee or its Chief Executive is decisive on the question that the institution was nei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but if the profits just result, it will remain charity where the predominant object is to carry out the charitable purpose and not to earn profit. He further submitted that it is to be seen whether the carrying on of the activity which results in profit is an object or merely a power given for realising the object and if it is a latter, the object will remain charitable even if there results some profits. Alternative based on the decision of the Supreme Court in the case of Thiagarajar Charities , he submitted that the profit making apparatus was really the corpus of the property. Its use was not an object of the Trust and, therefore, the income derived from a business carried on by it, held under trust, was exempt from income-tax under section 11 of the Act. He gave lot of emphasis on the following statement of Beg, J. which has the approval in the later decisions of the Supreme Court in the cases of Surat Art Silk Cloth Mfrs. Association and Thiagarajar Charities : '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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash or immovable property either unconditionally or subject to any special trusts created by any particular donor in furtherance of any one or more of the objects of the Society; (xiii) to take such steps by personal or written appeals, exhibitions, public meetings, entertainments or otherwise as may from time to time be deemed expedient for the purpose of procuring contributions of the funds of the Society in the shape of donations, legacies, annual payments or otherwise, (xiv) to solicit, obtain or accept subscriptions, donations, grants, gifts, devises, bequests and trusts from any person, firm, corporate body or institution, to give prizes, scholarships or other terminal payments, gifts or donations in furtherance of the objects of the Society; (xv) to borrow and raise moneys with or without security or on the security of a mortgage, charge of hypothecation or pledge over all or any of the immovable or movable properties belonging to the Society in any other manner whatever, (xvi) to draw, make, accept, endorse and discount cheques, notes or other negotiable instruments; (xvii) for the purpose aforesaid to sign, execute the deeds as may be necessary; (xviii) to all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned, we find that the appellant-trust started with a sum of Rs. 4,308-10-9. The schedule attached to the trust deed dated April 10, 1947, shows that the assets of the trust consisted of printing machines, accessories, motor-cars, building, stocks of paper and other miscellaneous things. The total value of the assets was Rs. 2,97,558, out of which the value of the building sites and the buildings was Rs. 47,500. As against that, the liabilities of the trust amounted to Rs. 1,24,086. The net value of the assets of the trust rose in 1947 to a figure of Rs. 1,73,571-14-4. For the assessment year 1962-63, which is the year under appeal, the total receipts of the trust were of the amount of Rs. 22,55,077. The main sources of these receipts were sales of newspapers and magazines through agents, receipts on account of advertisement, receipts for job printing bills besides some other minor items. As against the receipts, the major items of expenditure were the purchase of newsprint, paper, printing types, printing and other material, the salaries and allowances of the staff, remuneration to news agencies and railway freight. There can, therefore, be no doubt that the trust has been carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read 'private' before 'profit' is quite unjustifiable as otherwise the amendment was not necessary because even before amendment, an activity for private profit was not charitable. The use of the words "for profit", according to him, shows that the involvement of profit making should be of such a degree or to such an extent as to enable the Court to infer it to be the real object. As a rule, he observed, if the terms of the trust permit its operation for profit, they become, prima facie, evidence of a purpose failing outside charity. They would indicate the object of profit making unless and until it is shown that terms of the trust compel the trustee to utilise the profits of business also for charity. This means that the test introduced by the amendment is : Does the purpose of a trust restrict spending the income of a profitable activity exclusively or primarily upon what is 'charity' in law? 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atedly asserted that this was the really basic purpose and principle for the conduct of the business of the trust before us. This assertion seems to be based on nothing more substantial than the trust deed itself does not expressly make profit making the object of the trust. But, as I have already indicated, the absence of such a condition from the trust deed could eliminate or prevent profit making from becoming the real or dominant purpose of the trust. It is what the provisions of the trust make possible or permit coupled with what had been actually done without any illegality in the way of profit making, in the case before us, under the cover of the provisions of the deed, which enable us to decipher the meaning and determine the predominantly profit making character of the trust.' 10. This is the decision which is found to be squarely against the assessee by CIT(A). We, however, noticed some distinguishing features. One is that there was no restriction in making profit in the case of Sole Trustee, Loka Shikshana Trust, whereas in assessee's case clause 3 specifically says that the society was non-profit making organisation. The majority decision also excluded, as aforesaid, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the property remaining after satisfaction of all the debts and liabilities shall not be distributed amongst the members of the assessee but shall be given or transferred to such other company having the same objects as the assessee, to be determined by the members of the assessee at or before the time of the dissolution or in default, by the High Court of Judicature that has or may acquire jurisdiction in the matter. The income and property of the assessee were thus liable to be applied solely and exclusively for the promotion of the objects set out in the memorandum and no part of such income or property could be distributed amongst the members in any form or under any guise or utilised for their benefit either during the operational existence of the assessee or on its winding up and dissolution. The dominant object in this case was held by the Court to be as contained in clause (a); and other clauses in the objects were found to be only powers incidental to carrying out the dominant powers. That it is the object that should not involve an activity for profit and not its advancement because the object did not involve carrying on any activity for profit. Sen, J. and Pathak J., howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. 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. '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 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. (viii) It is not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no-profit no-loss basis or that profit shall be prescribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive.' 13. Pathak, J. a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the absence of some indication to the contrary, that the activity is for profit and the charitable purpose involves the carrying on of an activity for profit. We do not think the court would be justified in drawing any such inference merely because the activity results in profit. It is in our opinion not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no profit no loss basis or that profit shall be proscribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable character of the purpose would not be lost.' 16. This decision also upheld the observation of Be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, hostels for the benefit of students and generally all kinds of educational institutions whether general, technical, vocational, professional or of other description whatsoever for the welfare and uplift of the general Indian public and to institute an award scholarships in India for study, research, apprenticeship for all or any of the said purposes. (b) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment, maintenance, running, development, improvement and extension of libraries, reading rooms, recreation centres and all other facilities as are calculated to be of use in imparting education to the Indian public. (c) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment, maintenance, dispensaries, sanatoria, maternity homes and all similar institutions as will afford treatment, cure, rest recuperation and other allied advantages in the way of alleviating the sufferings of humanity. (d) To build, erect and construct and to aid and assist in the building, erection and construction of houses, tenements and places of residence for the poor, needy a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trustees shall be dealt with either at the meetings of the board of trustees or by resolution in circulation. The resolution was passed to carry on the business on purchase and sale of cotton, cotton yarn, etc. 18. The Court held that the dominant object of the education, medical relief and poor relief which did not involve carrying on of any activity of profit. The business was not under that clause 1(g) and that was a mere power and not an object and it was stated under clause 7(e), read with clause 32 of the trust deed and the resolution passed for carrying on the business. The Court further held - 'We understand clause 1(g) of the trust deed dated June 4, 1962, as only vesting a power in the trustees to do certain things to effectuate the main objects of the trust contained in clause 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 powers so vested in the trustees under sub-clause (g) cannot be called as 'the objects' of the trust. So understood, we have no hesitation to hold that the Income-tax Appellate Tribunal and also the High Court erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iding for an efficient transport system was held to have no profit making motive, though it earned income in the process. Profit making should not be in accomplishing or carrying out the objects but should be for the purpose of the trust or the object of the trust and if the object is without making an activity of profit, the trust does not cease to be a charity merely because it makes profit and involves an activity of profit in accomplishing or carrying out the object. In other words, profit making is not prohibited if it subserves the charity. 20. Beg, J. in Sole Trustee, Loka Shikshana Trust's case had advocated in detail that the question whether the trust is created for an institution established for a charitable purpose falls to be determined by reference to the real purpose of the trust or the institution and not by the circumstance that the income derived can be measured by standards usually applicable to a commercial activity. The quantum of income is no test in itself. It may be the result of an activity permissible under a truly charitable purpose for a profitable activity in working out the charitable purpose is not excluded. In Dharmaposhanam Co. v. CIT [1978] 114 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the test is what is the predominant object of the activity - whether it is to carry out a charitable purpose or to cam profit? If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from the activity. This is also held in the case of Andhra Pradesh State Road Transport Corpn. In Surat Art Silk itself, the activity of obtaining licence for import foreign yarn and quota for purchase of indigenous yam carried on by the assessee was found and held not to be activity for profit within the meaning of section 2(15) of the Act. In CIT v. Madras Stock Exchange Ltd. [1981] 130 ITR 184 (SC), it was held that the receipt by a stock exchange as and by way of listing fee was not an activity of profit. In Victoria Technical Institute v. Addl CIT [1991] 188 ITR 57 (SC), it was held that the function of buying and selling or selling on commission articles produced by handicraftsmen was for carrying out the primary purpose of the Institute and not an activity for profit. In Samaritan Society v. CIT [1997] 225 ITR 652 (SC), it was found as a fact that the real object of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trust or institution or, to put it differently, it must be carried on in order to advance the purpose or in the course of carrying out the purpose of the trust or institution." 23. The meaning of the expression 'activity for profit' has explained by the Supreme Court in Surat Art Silk Cloth Mfrs. Association's case as follows: 'The activity must, however, be for profit in order to attract the exclusionary clause and the question, therefore, is when can an activity be said to be one for profit? The answer to the question obviously depends on the correct connotation of the proposition 'for'. This proposition has many shades of meaning but when used with the active participle of a verb it means 'for the purposes of' and connotes the end with reference to which something is done. It is not, therefore, enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit. Profit making must be the end to which the activity must be directed or in other words, predominant object of the activity must be making of profit. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Privy Council in Trustees of the Tribune's case . Reasons given in Finance Minister's Speech for introducing this exclusionary clause may also be seen in this regard, which read as under : 'The definition of 'charitable purpose' in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them, namely, the newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words 'not involving the carrying on of any activity for profit' should be added to the definition.' Because of these ten restrictive words, the explanation was not granted by the Supreme Court in the case of Sole Trustee, Loka Shikshana Trust even though the objects of the Trustees of the Tribune's case and Sole Trustee, Loka Shikshana Trust 's case were found to be similar. In these circumstances, in our opinion, the exemption cannot be granted to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urth category of the definition given under section 2(15) of the Act; (it) though it is non-profit making organisation and is registered as a charitable institution under section 12A of the Act, its activities have been on commercial lines' and it had made profit year after year; (iii) its income has not been distributed but has been accumulated and utilised in running its activity in publishing and printing; (iv) as per clause 28 of Memorandum of Association, Rules Regulation, the surplus assets after satisfying the liability and debts cannot be distributed and is to be given to another Society having similar objects; and (v) its activities are on commercial line and, therefore, the profit motive and the object of general public utility are so intermixed, interlaced, interwoven that they cannot be separated. All these facts and circumstances show that it was a charitable institution but it loses exemption because it is hit by the ten restrictive words in the definition given under section 2(15) of the Act. 25. Before parting with this case, we wish to place it on record the efforts put in by the learned counsel of the assessee Shri S.N. Rotho and the learned Departmental Repr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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