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TMI Blog2006 (6) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... State of Madras, the Administrative General of the State of Madras and the Secretary and Treasurer of State Bank of India as Trustees. The main object of the Club was to encourage and maintain the social interconnection between Europeans and Indians for promotion of sports such as tennis and other indoor games and past-time for the purpose of entertainment and amusements, educational, instructive or otherwise and such other purposes. The Willingdon Club acquired the property known as Willingdon premises bearing Door No. 1/4, Marshalls Road, Egmore, Chennai for a sum of Rs. 2 lakhs. The activities of the club became ineffective over the years, due to significant political and social changes brought about by the Indian Independence. Subsequently, in the year 1971 a new organization was created under the name of 'The Willingdon Charitable Trust'. The said organization constituted a society by a resolution passed on 27-2-1971 for the proper utilization of the property and for the fulfilment of the objects of the trust and for promoting other objects consistent with the needs of modern times and the said trust was registered under the Societies Registration Act, 1860. The trustees of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic. 9. To act as Trustees and Managers of any institution of trust having similar objects in fit and proper cases. 10. To construct and maintain any buildings of works necessary or convenient for the purpose of the Trust. 11. To incorporate with itself any institution, society of association having objects wholly or in part, similar to those of the Trust and are of a charitable nature enuring for the benefit of the public and to cooperate with any person or body of persons in aid of such object, provided such object is of a charitable nature enuring for the benefit of the public. 12. To do such other lawful acts and things as may be necessary or incidental and conducive to the attainment of the above aims and objects of any of them." 5. The assessee-trust owned property viz., "The Willingdon" which consists of land admeasuring 187 grounds. The assessee initially built a commercial complex and three floors admeasuring about 45100 sq.ft. between 1990 and 1992 for a total sum of Rs. 3.5 crores as loan taken from M/s. Indian Bank. Thereafter, the assessee constructed additional floor area of 9105 sq.ft. for which a loan of Rs. 58.29 lakhs was received from M/s. Indian Bank. Again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules read with section 11(2) of the Act for accumulation of its income starting from the assessment year 1996-97 ending with the previous year 31-3-2001 i.e., 2000-01 to construct a college for women in Madras. The assessee along with Form 10 filed other details such as investment/deposit of the accumulated income in the modes specified under section 11(5) of the Act. Accordingly, the assessee claimed exemption under section 11 of the Act to the income mentioned as above for all these years. In view of these facts, the Assessing Officer in all these years, examined the issue as to whether, the assessee is doing charitable activities within the meaning of section 2(15) of the Act, so as to allow or not to allow exemption under section 11 of the Act. Considering the main activity of the assessee to run the two auditoriums, which are let out for marriages, exhibitions and other social and religious functions and the ladies hostel, the Assessing Officer found that these activities are commercial in nature. Further, he considered the resolution passed in 1992 by the Board of the Trustees of the assessee-trust and he has gone through the entire rent chart including the donations and am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant from the running of the auditorium is earmarked for construction of college for women in Chennai cannot itself make a commercial activity a charitable purpose. (iv) The activity of running auditoriums is not incidental to the objects of the appellant as it is a commercial activity earning huge profits. As observed by the Madras High Court in the case of CIT v. Sivakasi Hindu Nadar Uravin Murai (217 ITR 118), the predominant object of a charitable trust should be charitable purpose and not to earn profit, whereas in the case of the appellant, the predominant object is running of the auditoriums." 7. The Assessing Officer also examined another aspect as to whether these two auditoriums are a 'property held in trust' or not. He held that the running of a ladies hostel could not either be an object of the trust or incidental to the objects as the said activity was not incorporated as an object of the trust. Therefore, he held that these activities are totally independent from the objects of the trust. For this, he has given the following reasons: "(i) The property was not settled by the founders of the trust as corpus. (ii) The property was not donated to the trust by any othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 11(4A) of the Act. The Assessing Officer further held that the assessee did not satisfy the said conditions for the following reasons: "(i) Firstly, the business if any carried on by a trust should be incidental to the attainments of the objectives of the trust. In the present case, the activity of letting out the auditoriums cannot be considered as incidental to the objects as it is an independent and commercial activity. The word "incidental" means depending upon or pertaining to something else primary, that is something incidental to the main purpose. In the case of Gayathri Women Welfare Association, the Karnataka High Court found that the said association set up an ancillary unit for assembling HMT watches and since it provided employment to a number of women, the activity of setting up of the ancillary unit was considered as "incidental" to the objects of the said association. In the case of the appellant, however, the same thing cannot be said as the activity of letting out the auditoriums is not a primary and incidental activity. (ii) Secondly, a trust should maintain separate books of account in respect of income from the business activity. In the present case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion i.e., section 11(4) and not according to section 11(4A) of the Act. In view of this, if there is income over and above the income admitted is computed as per the provisions of the Income-tax Act, then such excess income could be taxed under section 11(4) of the Act. But the Assessing Officer interpreted the provisions of sections 11(4) and 11(4A) of the Act in a different manner. It was the contention of the assessee that any income from a property, being business held in trust, will be eligible for exemption under section 11 of the Act provided conditions in sub-section 11(4A) are satisfied but even if the twin conditions of the section 11(4A) of the Act are satisfied, excess of income computed over and above the income shown in the accounts will have to be taxed as income which is applied for other than charitable purposes. This interpretation of the Assessing Officer was not acceptable to the assessee on the ground that the property in question was donated by another trust to it and, therefore, though the auditoriums were constructed by it, the property should be considered as property held in the trust. The assessee relied on the decision of the Hon'ble Apex Court in Asstt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom various persons using the auditoriums but it does not receive any corpus donations from these persons. It was also contended that it collects rent for the use of the halls in that auditoriums and collecting rent for the provisions of various amenities. It spent money received from the rent etc. to the upkeep and maintenance of the auditoriums and spent the donations received towards expenditure for the charitable purposes. The excess of income over expenditure is incidental and is not a profit in the hands of the assessee as the businessmen would understand it in the commercial sense. Further, it was submitted that the assessee has been carrying on the charitable activities and the Department has been treating the assessee as a charitable trust for income-tax purposes for the past several years. The ld. counsel for the assessee submitted that the funds were accumulated for which Form 10 was filed by the assessee and the purpose shown therein was 'construction of women's college at Gandhi Nagar, Adayar, Chennai'. He further stated that even while running a women's hostel, donations are collected apart from the rent and these funds were utilized for charitable purposes exclusivel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjects of the trust. Thus it is clear that the carrying on of activities in question is within the objects and powers of the trust in terms of sub-clause 3(10) of the Memorandum of Association. The Assessing Officer also observed the properties are not held in trust for the reason that these properties were not in existence with the erstwhile "The Willingdon". The submission of the appellant is that the property originally belonging to the "The Willingdon" was made over and given to it as per Court order and it holds it in trust from it's inception in view of the fact that the building that existed at the time of transferring to the appellant is in a dilapidated condition and the appellant has to demolish the same partly and construct various buildings. The Assessing Officer further observed that these properties are not used for the objects of the erstwhile "The Willingdon" is not correct, since he ought to have appreciated that the appellant has filed Form No.10 and has specifically mentioned that the income of the trust is accumulated for the construction of a college at Gandhi Nagar, Adyar, Chennai. As it is clear from sub-clause 3(1), the main object of the trust is education ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) Whether the properties viz., Raja Muthiah Hall, Rani Meyammai Hall and Ladies Hostel are held in trust? (b) Whether the assessee's activities are authorized in its objects? (c) Whether the activities undertaken by the assessee are incidental activities to the objects? (d) What is the nature of income? (e) Whether the conditions laid in sub-section 4 of section 11 or sub-section 4A of section 11 are attracted, if so what is the result? (ii) With regard to the first two issues whether the properties i.e., two auditoriums and ladies hostel are held in trust and whether such activities are authorized by the objects of the trust, it may be seen that the appellant was vested with a property in a dilapidated condition and the appellant constructed the present buildings which are used for the purposes detailed above. In view of the Assessing Officer, the above properties are not held in trust for the reason that such properties were not settled/donated to the appellant as a corpus by the founders of the trust or by any of the donors, etc. and that neither the activities undertaken by the appellant are authorized in the objects of the trust nor they are incidental to such objects. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nical personnel such as civil engineers, electrical engineers, etc. He further stressed the fact that there is no landlord and tenant relationship and, therefore, the income cannot be charged under the head "House Property" and it is to be necessarily assessed as business income like income from a lodge or a hotel. The Assessing Officer further stressed the fact that running the auditoriums is a commercial business activity. (vii) As regards the last issue whether the appellant satisfied conditions under section 11(4) or 11(4A) of the Income-tax Act, it is stated that since the activities undertaken by the appellant are business activities and since the appellant has not maintained separate books of account in respect of such activities, it has to be held that the appellant has not satisfied with the provisions of section 11(4A) of the Income-tax Act." 12. First of all, going through the aims and objects of the trust, it is seen that the assessee can construct any buildings for the purpose of the trust. The expression, 'for the purpose of the trust' means that the trust is empowered to construct any buildings, inter alia, to achieve the objects of the trust as enumerated in sub-c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered as incidental to the attainment of the objects. We do not agree with the reasoning given by the Assessing Officer that the properties are not held in trust and running the auditoriums is neither an activity as per the objects or incidental to the objects in holding that running of the auditoriums is independent and commercial/business activity for the reason that the hire charges received are high and the activity of letting out of the auditoriums and the related amenities are being carried out in a systematic and business manner. We also do not agree with the finding of the Assessing Officer that apart from collecting rent for the auditoriums and the related amenities, the assessee also collected donations which should become part of the business income. It is seen from the Resolution passed in 1992 for charges of the auditoriums as well as the ladies hostel, that the rate of hire of auditoriums and the related amenities have been fixed by taking into account the locality and the extent of space let out, the amenities/facilities provided and so on. It is a fact that hire charges have been fixed on a prudent basis so as to recoup the cost of the asset and if in that proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pared to the purpose of advancement of the object of general public utility that the dominating role of the latter renders the former unworthy of account. If the profit making purpose holds a dominating role or even constitutes an equal component with the purpose of advancement of the object of general public utility, then clearly the definition in section 2(15) is not satisfied. When applying section 11, it is open to the tax authority in an appropriate case to pierce the veil of what is proclaimed on the surface by the document constituting the trust or establishing the institution, and enter into an ascertainment of the true purpose of the trust or institution. The true purpose must be genuinely and essentially charitable. Now, the definition of a purpose is a thing apart from the mode or method employed for carrying out the purpose. Yet the nature of the purpose controls in some degree that mode which is open for carrying it out. If the purpose is charitable in reality, the mode adopted must be one which is directed to carrying out the charitable purpose. It would include, in my opinion, a business engaged in for carrying out the charitable purpose of the trust or institution. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit making activity. On the contrary, I find myself in agreement with Beg J. to the extent that he says, in the same case, that it is the genuineness of the purpose, that it is truly charitable, which determines the issue. It seems necessary to me that a distinction must constantly be maintained between what is merely a definition of "charitable purpose" and the powers conferred for working out or fulfilling that purpose. While the purpose and the powers must correlate, they cannot be identified with each other. Reference may, of course, be made to the nature and width of the powers as evidence of the charitable or non-charitable nature of the purpose. For the Same reason, I am compelled, with respect, to hold that the observations of Krishna Iyer J., speaking for the court, in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC) do not accord with what I believe to be a true construction of section 2(15). If that decision can be justified, it can be only on the basis that in the opinion of the court the true purpose of the trust or institution was essentially charitable. I am unable to accept the proposition that if the purpose is truly charitable, the attainment of the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The expressions refer to entities differently constituted. It is thus clear that the newspaper business that is carried on by the trust does not fall within sub-section (4A). The trust is not only for public religious purposes so it does not fall within clause (a). It is a trust not an institution, so it does not fall within clause (b): It must, therefore, be held that for the assessment years in question the trust was not entitled to the exemption contained in section 11 in respect of the income of its newspaper. We now address the third controversy, which relates to subsection (4A) of section 11 as substituted with effect from 1-4-1992. The learned Solicitor-General submitted that while the substituted sub-section (4A) gave trusts and institutions a wider latitude than the earlier sub-section (4A), it had still to be construed to mean that a trust or institution would not get the benefit of section 11 unless the business it carried on was carried on in the course of the actual carrying out of a primary purpose of the trust or institution. Dr. Pal, on the other hand, submitted that the substituted sub-section (4A) was couched in wide language and a trust was entitled to the bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the total income of the persons in receipt thereof, the [Assessing] Officer shall have power to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment; and where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess shall be deemed to be applied to purposes other than charitable or religious purposes. (4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to any income of a trust or an institution, being profits and gains of business, unless the business is incidental to the attainment of the objectives of the trust or, as the case may be, institution, and separate books of account are maintained by such trust or institution in respect of such business." The Hon'ble Apex Court in Thanthi Trust's case has dealt with the issue regarding the applicability and scope of sub-section (4A) of section 11 as amended with effect from 1-4-1992 and the Hon'ble Apex Court has held that provision is more beneficial to the trust or institution than was the scope of the section before the amendment with effect from 1-4-1992. After ..... X X X X Extracts X X X X X X X X Extracts X X X X
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