Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX, NEW DELHI
Vs.
RESPONDENT:
FEDERATION OF INDIAN CHAMBERS OF COMMERCE & INDUSTRIES, NEWD
DATE OF JUDGMENT15/04/1981
BENCH:
PATHAK, R.S.
BENCH:
PATHAK, R.S.
SEN, A.P. (J)
VENKATARAMIAH, E.S. (J)
CITATION:
1981 AIR 1408 1981 SCR (3) 489
1981 SCC (3) 156 1981 SCALE (1)637
ACT:
Income Tax Act 1961, S. 52(15) and 11(1) (a)-
’Charitable object’-Object of general public utility-’Not
involving the carrying on of any activity for profit’-
Meaning of-Primary or dominant purpose of trust or
institution to be charitable-’Purpose’ of trust-’Powers’
conferred on trustees for carrying out the purpose-
Distinction between.
HEADNOTE:
The respondent assessee an existing company under the
Companies Act, 1956 had neither any share capital nor
distributed any dividend to its members and its entire
income was expended for fulfilment of its objects, which
were the promotion, protection and development of trade,
commerce and industry in India.
During the assessment year 1962-63, the relevant
accounting year for which the year ended December 31, 1961
the assessee submitted a return showing its total income as
’nil’ claiming that all its income was exempt under section
11(1)(a) read with Section 2(15) of the Income Tax Act.
During the assessment year, the assessee held the Indian
Trade Fair at New Delhi and derived receipts from rent for
space allotted, temporary stalls and storage and realised
deposit and advances from the participants for hotel
accommodation. In the relevant accounting year, the
Conference of the Afro-Asian Organisation for Economic
Cooperation, was sponsored by the assessee and for
organising the Conference, the assessee received from the
Government Rs. 3 lakhs as grant-in-aid and after meeting the
expenses, was left with a balance of Rs. 2 lakhs. It also
received income by sale of books, fee for arbitration etc.
The balance sheet for the accounting year indicated that it
had an excess of income over expenditure under the head
’income’.
The contention of the assessee before the Income Tax
Officer was that the activities carried on by the Federation
were not were not motive of earning profits, but that they
were carried on with the object of promotion, protection and
development of trade, commerce and industry in India and
abroad, and therefore the income derived by the assessee was
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exempt under S. 11(1)(a).
The Income Tax Officer, held that the decision of this
Court in the Andhra Chamber of Commerce’s case [1965]
I.S.C.R. 565 was no longer good law due to the addition of
the words ’not involving the carrying on any activity for
profit’ in the definition of ’charitable purpose’ in Section
2(15) of the Act which qualify the fourth head of charity
viz. ’any other object of general public utility’ and,
therefore, must be read subject to the additional statutory
requirement that the
490
object of general public utility should not involve the
carrying on of any activity for profit, and accordingly
raised a demand.
On appeal by the assessee, the Appellate Assistant
Commissioner disagreed with the view of the Income Tax
Officer and held that the activities carried on by the
assessee were not profit-oriented and, therefore, its income
was exempt.
The Department appealed to the Appellate Tribunal, and
the Appellate Tribunal upheld the view of the Appellate
Assistant Commissioner and held that the dominant object
with which the Federation was constituted being a charitable
purpose viz., promotion, protection and development of
trade, commerce and industry, there being no motive to earn
profits, it was not engaged in any activity in the nature of
business or trade, and, if, any income arose from such
activity, it was only incidental or ancillary to the
dominant object for the welfare and common good of the
country’s trade, commerce and industry.
The Commissioner of Income-Tax applied to the Appellate
Tribunal to make a reference to the High Court under sub-
section (1) of section 256 of the Act, but in view of the
conflict in the decisions of the High Courts on the
construction of the expression ’charitable purpose’ as
defined in section 2(15) of the Act the Tribunal made a
reference to this Court under Section 257 .
On the question whether the words ’not involving the
carrying on of any activity for profit’ in the definition of
’charitable purpose’ contained in section 2(15) of the Act,
govern the word ’advancement’ and not the words ’object of
general public utility’.
^
HELD: [By the Court]
The reference must be answered against the Revenue and
in favour of the assessee, in the view of the majority
opinion in Addl. Commissioner of Income Tax v. Surat Art
Silk Cloth Manufactures, [1980] I S.C.R. 77. [492 F]
[Per A.P. Sen, J.]
1. The majority view in the Surat Art Silk case was
that the 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. The theory of dominant
or primary object of the trust, has, therefore, been treated
to be the determining factor, even in regard to the fourth
head of charity, viz. advancement of any other object of
general public utility, so as to make the carrying on of
business activity merely ancillary or incidental to the main
object. This doctrine of dominant or primary object holds
the field till there is a change of law. [496 C-D, 497 F]
2. The majority decision had the effect of neutralising
the radical changes brought about by Parliament in the
system of taxation of income and profits of charities, with
particular reference to "object of general public utility"
to prevent tax evasion, by diversion of business profits to
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charities. It is the vagueness of the fourth head of charity
"any other object of general public utility" that impelled
491
Parliament to insert the restrictive words "not involving
the carrying on of any activity for profit". [496 G-497 A]
3. It was clearly inconsistent with the settled
principles to hold that if the dominant or primary object of
a trust was ’charity’ under the fourth head ’any other
object of general public utility’, it was permissible for
such an object of general public utility to augment its
income by engaging in trading or commercial activities.[497
B]
4. When the Government did not accept the
recommendation of the Direct Taxes Laws Committee in Chapter
2 for the deletion of the words "not involving the carrying
on of any activity for profit" occurring in Section 2(15) of
the Act, it was impermissible for the Court by a process of
judicial construction to achieve the same result. [496 F]
5. In the instant case, activities of the assessee in
regard to holding of the Indian Trade Fair and sponsoring of
the Conference of the Afro-Asian organisation in the
relevant accounting year were for the advancement of the
dominant object and purpose of the trust, viz. promotion,
protection and development of trade, commerce and industry
in India. The income derived from such activities was
therefore exempt under S. 11(1)(a) read with S. 2(15) of the
Act. [498 G-499 A]
6. There is a distinction between the "purpose" of a
trust and the "power conferred upon the trustees" as
incidental to the carrying out of the purpose. If the
primary or dominant purpose of a trust or institute is
charitable, any other object which is merely ancillary or
incidental to the primary or dominant purpose, would not
prevent the trust or the institution being a valid charity.
[498 G, 499 A]
[Per Venkataramiah, J.]
1. It is open to the Legislature to give encouragement
to objects which it considers to be laudable by means of
fiscal exemptions. At the same time, it takes care to enact
fresh provisions from time to time to suppress any mischief
which may have resulted from the misuse of existing law.
Parliament deliberately stepped in by adding the words "not
involving the carrying on of any activity for profit" in the
definition of ’charitable purpose’ in section 2(15) of the
Act, when the tax exemptions available to charitable and
religious trusts came to be misused by some for the unworthy
purposes of tax avoidance. The law had been so restructured
to prevent allergy to taxation masquerading as charity. The
law was thus designed by Parliament to prevent this misuse
of tax exemption in the name of charity. [500 F-H]
2. This Court has enlarged the meaning "charitable
purpose" in Section 2(15) beyond what it legitimately should
mean in the Surat Art Silk Cloth Manufacturers Association’s
case. It has virtually wiped off the restrictive words "not
involving the carrying on or any activity for profit"
occurring in S. 2(15), thereby defeating the very object and
purpose of the legislation. It is not the function of a
court of law to give the words a strained and unnatural
meaning. Judicial attitudes cannot be formed in isolation
from legislative processes, particularly, in connection with
tax avoidance provisions. [500 D, 501A, 500E]
492
3. Modern legislation has changed in pattern re-casting
provisions of taxation with very wide language, while at the
same time dealing in much more detail with some areas of
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law. Judges while responding to general trends of law, but
also reacting to the form of modern tax legislation, must be
prepared to take account of the context and purposes of the
change brought about.[501 E]
Greenberg v. Inland Revenue Commissioners [1972] A.C.
109 (HL) referred to.
4. When the Government had not accepted the
recommendation of the Direct Taxes Laws Committee in Chapter
2 for the deletion of the words "not involving the carrying
on of any activity for profit", by suitable legislation, it
was impermissible by a process of judicial construction to
achieve the same result. [501 B]
5. People who are truly charitable do not think of the
tax benefits while making charities. Even the poor who do
not pay income tax can be charitable and their charities are
made at great personal inconvenience. Charitable persons are
not amongst the tax payers only. [502 H-503 A]
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Tax Reference Case No. 17
of 1975.
Under section 257 of the Income Tax Act, 1961 made by
the Income Tax Appellate Tribunal, Delhi Bench in Reference
Application No. 92/DEL/71-72 arising out of I.T.A.
No.1339/DEL/68-69.
B.B. Ahuja and Miss A.Subhashini for the Appellant.
A.K Sanghi and Narayan Netter for the Respondent.
The following Judgments were delivered:
PATHAK, J. In view of the majority opinion of this
Court in Additional Commissioner of Income-tax, Gujarat v.
Surat Art Silk Cloth Manufactures, the reference must be
answered against the Revenue and in favour of the assessee.
SEN, J. This direct reference under s. 257 of the
Income tax Act, 1961 (hereinafter referred to as ’the Act’)
made by the Income Tax Appellate Tribunal Delhi Bench ’B’ at
the instance of the Commissioner of Income Tax, Delhi II,
New Delhi raises the much vexed question as to whether the
words "not involving the carrying on of any activity for
profit" in the definition of ’charitable purpose’ contained
in s. 2 (15) of the Act, govern the word ’advancement’ and
not the words ’object of general public utility.
493
The facts giving rise to the reference are as follows:
The Federation of Indian Chambers of Commerce and Industry,
New Delhi-hereinafter referred to as ’the assessee’ is an
existing company under the Companies Act, 1956. It was
registered under s. 26 of that Act and permitted to omit the
word ’Limited’ from its name. It has neither any share
capital nor does it distribute any dividends to its members.
The entire income is expended for the fulfilment of its
object. The main object of the assessee is the promotion
protection and development of trade, commerce and industry
in India.
The main objects for which the Federation has come into
existence are set out in cl. 3 of the Memorandum of
Association which, insofar as material, reads:
3.(a) To promote Indian business in matters of
inland and foreign trade, transport, industry and
manufactures, finance and all other economic subjects
and to encourage Indian banking, shipping and
insurance.
While cl. 3(a) defines the primary purpose of the
trust, i.e. to promote trade and industry which undoubtedly
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being an object of general public utility engaged in
carrying on activities without any profit motive, the
subsidiary objects set out in sub-cls. (b) to (z2) of cl.3
are merely incidental or ancillary thereof.
During the assessment year 1962-63, the relevant
accounting year for which was the year ended December 31,
1961 the assessee submitted a return showing its total
income as ’nil’ claiming that all its income was exempt
under s. 11(1)(a) read with s. 2(15) of the Act. During the
assessment year in question, the assessee held the Indian
Trade Fair at New Delhi and derived receipts totalling Rs.
75,18,548 from rent for space allotted, temporary stalls and
storage. It also received Rs. 20,750 by sale of season
tickets and Rs. 3,94,143 by daily gate tickets. It realised
deposits and advances from the participants for hotel
accommodation. In the relevant accounting year, the
Conference of the Afro-Asian Organisation for Economic
Cooperation, sponsored by the assessee, was held at New
Delhi. For organising the Conference, the assessee received
Rs. 3,00,000 from the Government of India as grant-in-aid
and after meeting the expenses, was left with a balance of
Rs. 2,17,346.38. Further, the assessee received Rs. 265.50
as the share of profits on the sale of a book on Company
Law, Rs. 5,371.82 as fee for arbitration. It realised
advances from its members for arbitration amounting to Rs.
20,000 from out of which a balance of Rs. 299.18 was left.
The balance-sheet for the
494
accounting year shows that the assessee had in excess income
of Rs. 2,291.71 over the expenditure under the head
’income’.
The contention of the assessee before the Income Tax
officer was that the activities carried on by the Federation
were not with the motive of earning profits, but they were
carried on with the object of promotion, protection and
development of trade, commerce and industry in India and
abroad. Its contention was that the dominant object for
which the Federation was constituted was for promotion,
protection and development of the country’s trade, commerce
and industry and the activities carried on during the
assessment year in question, namely, the holding of the
Indian Trade Fair and of sponsoring the Conference of the
Afro-Asian Organisation for Economic Cooperation were
incidental or ancillary to the main object, and, therefore,
the income derived therefrom was exempt under s. 11 (1)(a)
of the Act. Reliance in support of this contention was
placed on the decision of this Court in Commissioner of
Income-Tax v. Andhra Chamber of Commerce. In the immediately
preceding assessment years 1960-61 and 1961-62, the income
of the assessee was treated as exempt from tax under s. 4(3)
(i) of the Income Tax Act, 1922.
The Income Tax officer, however, felt that the decision
of this Court in the Andhra Chamber of Commerce’s case
(supra) was no longer good law due to the addition of the
words "not involving the carrying on of any activity for
profit" in the definition of ’charitable purpose’ in s.
2(15) of the Act which qualify the fourth head of charity,
viz., "any other object of general public utility", and,
therefore, must be read subject to the additional statutory
requirement that the object of general public utility should
not involve the carrying on of any activity for profit. He
accordingly raised a demand of Rs. 49,818 on a total income
of Rs. 84,430 on appeal, the Appellate Assistant
Commissioner disagreed with the view of the Income Tax
Officer and held that the activities carried on by the
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assessee were not profit-oriented and, therefore, its income
was exempt. The Commissioner of Income-tax appealed to the
Appellate Tribunal without any success. The Tribunal upheld
the view of the Appellate Assistant Commissioner and held
that the dominant object with which the Federation was
constituted being a charitable purpose, viz., promotion,
protection and development of trade, commerce and industry,
there being no motive to earn profits, it was not engaged in
any activity in the nature of business or trade, and, if any
495
income arose from such activity, it was only incidental or
ancillary to the dominant object for the welfare and common
good of the country’s trade, commerce and industry.
Thereupon, the Commissioner of Income Tax applied to
the Appellate Tribunal to make a reference to the High Court
under sub-s.(1) of s.256 of the Act, but the Tribunal, in
view of the conflict in the decisions of the High Courts on
the construction of the expression ’charitable purpose’ as
defined in s. 2(15) of the Act, has made a reference of the
following questions to this Court under s. 257 of the Act,
for its opinion, namely:
1. Whether having regard to the definition of
charitable purpose as contained in Section 2(15) read
with Sections 11(1) and 11(4), charging sections and
sections dealing with computation of income, the
assessee was liable to be taxed in respect of income
relating to assessment year 1962-63 ?
2. Whether on the facts and in the circumstances
of the case, the Tribunal was right in law in holding
that the income earned by the assessee would not come
within the provisions of Section 2(15) read with
Section 11 of the Income-Tax Act, 1961 and the onus
that this profit was not exempt from tax would be on
the Revenue ?
3. Whether on the facts and in the circumstances
of the case, the purpose of the Federation of Indian
Chambers of Commerce and Industry was advancement of
objects of general public utility not involving the
carrying on of any activity for profit ?
There had been a sharp conflict of opinion between the
different High courts as to the construction of the ten
crucial words "not involving the carrying on of any activity
for profit" qualifying the fourth head of charity
"advancement of any other object of general public utility".
This Court resolved the conflict in the Sole Trustee, Loka
Shikshan Trust v. C.I.T. and the Indian Chambers of Commerce
v. C.I.T. by holding that the words "not involving the
carrying on of any activity for profit" govern the word
"advancement" and observed that if the advancement or
attainment of the object involves an activity for profit,
tax exemption would not be available.
496
Unfortunately for the Revenue, the Court has, in a
five-Judges Bench, by a majority of 4 to 1, in Addl.
Commissioner of Income Tax v. Surat Art Silk Cloth
Manufactures’ Association reversed these two decisions in
the Loka Shikshan Trust’s case and the Indian Chambers of
Commerce’s case (supra). The Court has approved of the
observations of Beg, J. in his separate but concurring
judgment in the Loka Shikshan Trust’s case that "if the
profits must necessarily feed 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." In other words, the majority view in the
Surat Art Silk’s case (supra) was that the condition that
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the purpose should not involve the carrying on of any
activity for profit would be satisfied if profit-making is
not the real object. The theory of dominant or primary
object of the trust has, therefore, been treated to be the
determining factor, even in regard to the fourth head of
charity, viz., the advancement of any other object of
general public utility, so as to make the carrying on of
business activity merely ancillary or incidental to the main
object.
One should have thought that the correct way to
approach this question of interpretation was to give the
words used by Parliament their ordinary meaning in the
English language and if, consistently with the ordinary
meaning, there was a choice between two alternative
interpretations, then to prefer the construction that
maintains a reasonable and consistent scheme of taxation
without distorting the language. When the Government did not
accept the recommendation of the Direct Taxes Laws Committee
in Chapter 2 (Interim Report, December, 1977) for the
deletion of the words "not involving the carrying on of any
activity for profit" occurring in s. 2(15) of the Act, the
Court has by a process of judicial construction achieved the
same result.
Whatever reservations one may have regarding the
correctness of this interpretation of the exclusionary
clause in the definition of charitable purpose in s. 2(15)
of the Act, there can be no doubt that the majority decision
in the Surat Art Silk’s case (supra) is binding on us. With
respect, I venture to say that the majority decision has the
effect of neutralising the radical changes brought about by
Parliament in the system of taxation of income and profits
of charities, with particular reference to "objects of
general public utility" to prevent tax evasion, by diversion
of business profits to
497
charities. It is the vagueness of the fourth head of charity
"any other object of general public utility" that impelled
Parliament to insert the restrictive words "not involving
the carrying on of any activity for profit". In my minority
opinion in the Surat Art Silk’s case (supra) I had
endeavoured to give reasons why the correctness of the
majority decision was open to question. There is no point in
traversing the same ground over again. It was clearly
inconsistent with the settled principles to hold that if the
dominant or primary object of a trust was ’charity’ under
the fourth head ’any other object of general public
utility’, it was permissible for such an object of general
public utility, to augment its income by engaging in trading
or commercial activities.
In retrospect it seems that it would have been better
for Parliament to have deleted the fourth head of "any other
object of general public utility" from the ambit of the
definition of ’charitable purpose’ while enacting s. 2(15)
of the Act rather than inserted the words "not involving the
carrying on of any other activity for profit", thereby
creating all this legal conundrum. In England, the Radcliffe
Commission on Taxation of Profits and Income recommended in
1955 that for purposes of taxation, charity should be
restricted to relief of poverty, advancement of education
and advancement of religion and that the fourth category
mentioned in the dictum of Lord Macnaghten, namely, "trusts
for other purposes beneficial to the community’ should be
cut out entirely.
The majority in the Surat Art Silk’s case (supra) has
evolved the doctrine of dominant or primary object and there
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is little that we can do about it. Faced with this
difficulty, learned counsel for the Revenue advanced no
submissions with regard to the questions referred and
indeed, in view of the majority decision in the Surat Art
Silk’s case (supra) the answers to the questions are self-
evident. The doctrine of dominant or primary object must, as
laid down in the Surat Art Silk’s case, holds the field till
there is a change in the law. Undoubtedly, the activities of
the assessee in regard to holding of the Indian Trade Fair
and sponsoring of the Conference of the Afro-Asian
Organisation in the relevant accounting year were for the
advancement of the dominant object and purpose of the trust,
viz.,
498
promotion, protection and development of trade, commerce and
industry in India. Learned Counsel for revenue with his
usual fairness, conceded that the income derived by the
assessee from such activities was exempt under s.11(1)(a)
read with s.2(15) of the Act.
It was, however, urged that the objects set out in sub-
cls. (v), (z1) and (z2) of cl.3 of the Memorandum of
Association of the Federation were not incidental or
ancillary to the main object of the trust. The relevant sub-
clauses are set out below:
(v) To establish and support or aid the
establishment and support of associations,
institutions, funds, trusts and convenience, calculated
to benefit employees of the Federation or the
dependents or connections of such persons, and grant
pension and allowances, and to make payments towards
insurance, and to subscribe or guarantee money for
charitable or benevolent objects or for any exhibition
for any public, general, useful object.
(z1) To establish a Trust or Trusts and/or appoint
Trustees thereof from time to time and vest the funds
or the surplus income or any property of the Federation
in the Trustees who shall hold and deal with the funds,
surplus income or property in such manner as the
committee may decide.
(z2) To undertake and execute any Trusts the
undertaking of which may seem to the Federation
desirable either gratuitously or otherwise.
The contention advanced cannot be accepted, for the
reason that no such point was ever raised at any stage of
the proceedings, much less before the Appellate Tribunal.
Even otherwise, there appears to be no substance in the
contention. There is a distinction between the "purpose" of
a trust and the "powers" conferred upon the trustees as
incidental to the carrying out of purpose. For instance
cl.3(v) enables the establishment and support of
associations, institutions, funds, trusts and convenience
calculated to benefit the employees and their dependents,
for making provisions for grant of pension and allowances
etc. The framing of such employee benefit schemes is
essential and necessary for the proper functioning of the
organisation and is incidental to the carrying out of the
purpose for
499
which it is constituted. I refrain from expressing any
opinion whether or not the employees constitute a "section
of the public". For, if the primary or dominant purpose of a
trust or institution is charitable, any other object which
is merely ancillary or incidental to the primary or dominant
purpose, would not prevent the trust or institution from
being a valid charity. Likewise, cls.3(z1) and (z2) which
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permit the establishment of a trust or trusts, appointment
of trustees thereof from time to time and the vesting of
funds or surplus income or any property of the assessee in
the trustees, are nothing but powers conferred on them for
the proper financial management of the affairs of the trust
which are incidental or ancillary to the main purpose of the
trust. The contention must, therefore, fail.
In the result, the reference under s.257 of the Income
Tax Act, 1961 made by the Income Tax Appellate Tribunal,
Delhi-B, New Delhi, must be answered against the Revenue and
in favour of the assessee. There shall be no order as to
costs.
VENKATARAMIAH, J. I have had the advantage of reading
the judgment prepared by my learned brother A.P. Sen, J. and
I respectfully agree with his reasoning and conclusion. I
share with him my doubts about the correctness of the
decision in Additional Commissioner of Income tax, Gujarat
v. Surat Art Silk Cloth Manufacturers’ Association. I would
like to say a few words of my own on the subject.
There can be no objection to a person spending his
money on charity. But can he be charitable at the expense of
others? This is a question which necessarily arises when we
read section 11 of the Income-tax Act, 1961. Section 11 as
it stands now grants exemption from payment of tax on any
income, which would have otherwise been taxable, provided
(1) the property yielding income is held under trust or such
other legal obligation which is brought into existence by an
act of party and not by an act of law, (2) the purpose of
the trust is charitable which may enure to the benefit of
the public or a section of the public and (3) the other
conditions prescribed by the Act are satisfied. It means
that if there is a diversion of property or income earning
apparatus by an act of party into a charitable trust and the
prescribed conditions are satisfied, the income derived from
it (including the portion which would have gone to the
public exchequer but for the trust) may be spent by a person
in charge of the
500
affairs of the trust on objects indicated in the trust which
is a creature of its author. In effect what does it mean? It
means that the author of the trust is able to divert by his
own will to a purpose of his own choice, though charitable,
a large part of the income which would have been, but for
the trust, at the disposal of the Legislature which alone
has the power over the national exchequer. Whatever may have
been the position in those days when the State was just a
police State performing minimum functions of Government,
today when the State is a welfare State would it be right
either morally or constitutionally to allow amounts which
should legitimately form part of the revenue of the State to
be dealt with by non-Governmental agencies administering
trusts is a question which requires examination in an
appropriate case. This, however, is a larger question which,
if logically pursued, may justify total deletion of the
exemption accorded in the case of charitable and religious
trustee.
But even as the provisions now stand, I feel that while
construing them, this Court has enlarged the meaning of
"charitable purpose" in section 2 (15) beyond what it
legitimately should mean in the Surat Art Silk Cloth
Manufacturers’ Associations’ case (supra).
I would like to adopt the words in the dissenting
judgment of my learned brother A.P. Sen J. in the Surat Art
Silk Cloth Manufacturers’ Association’s case (supra):
"The judicial attitudes cannot be formed in
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isolation from legislative processes, particularly, in
connection with tax avoidance provisions."
It is true that it is open to the Legislature to give
encouragement to objects which it considers to be laudable
by means of fiscal exemptions. At the same time it takes
care to enact fresh provisions from time to time to suppress
any mischief which may have resulted from the misuse of
existing law. Parliament deliberately stepped in by adding
the words "not involving the carrying on of any activity for
profit" in the definition of charitable purpose in section 2
(15) of the Act, when the tax exemptions available to
charitable and religious trusts came to be misused by some
for the unworthy purposes of tax avoidance. The law had been
so re-structured to prevent allergy to taxation masquerading
as charity. The law was thus designed by Parliament to
prevent this misuse of tax exemption in the name of charity.
The majority decision in the Surat Art Silk Cloth
Manufacturers’ Association’s case (supra), if I may say so
without meaning
501
any disrespect, has virtually wiped off the restrictive
words "not involving the carrying on of any activity for
profit" occurring in section 2(15), thereby defeating the
very object and purpose of the legislation. It is not the
function of a court of law to give the words a strained and
unnatural meaning.
When the Government had not accepted the recommendation
of the Direct Taxes Laws Committee in Chapter 2 (Interim
Report, December, 1977) for the deletion of the words "not
involving the carrying on of any activity for profit", by
suitable legislation, it was impermissible for this Court by
a process of judicial construction to achieve the same
result. If I may adopt the words of Lord Reid in Greenberg
v. IRC quoted in the minority decision in Surat Art Silk
Cloth Manufacturers’ Association’s case (supra) displaying
the court’s concern about the prevailing attitude of tax
statutes:
"Parliament is very properly determined to prevent
this kind of tax evasion and, if the courts find it
impossible to give very wide meanings to general
phrases, the only alternative may be for Parliament to
do as some other countries have done, and introduce
legislation of a more sweeping character... "
Modern legislation has changed in pattern towards re-
casting provisions of taxation with very wide language,
while at the same time dealing in much more detail with some
areas of law. Judges, while responding to general trends of
law, but also reacting to the form of modern tax
legislation, must be prepared to take account of the context
and purposes of the change brought about.
It is relevant to refer to one other aspect arising out
of an observation made in the course of the majority
judgment in the Surat Art Silk Cloth Manufacurers’
Association’s case (supra) suggesting that the area of
exemption under Indian law is much wider than what is
available under English law. The relevant part of the
majority judgment reads:
"The definition of "charitable purpose" in Indian
Law thus goes much further than the definition of
charity to be derived from the English cases, because
it specifically includes medical relief and embraces
all objects of general public utility. In English Law
it is not enough that
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a purpose falls within one of the four divisions of
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charity set out in Lord Macnaghten’s classification. It
must also be within the spirit and intendment of the
Preamble to the Statute of Elizabeth if it is to be
regarded as charitable. There is no such limitation so
far as Indian Law is concerned even if a purpose is not
within the spirit and intendment of the Preamble to the
Statute of Elizabeth, it would be charitable if it
falls within the definition of "charitable purpose"
given in the Statute. Every object of general public
utility would, therefore, be charitable under the
Indian Law, subject only to the condition imposed by
the restrictive words "not involving the carrying on of
any activity for profit" added in the present Act. It
is on account of this basic difference between the
Indian and English Law of charity that Lord Wright
uttered a word of caution in All India Spinners’
Association v. Commissioner of Income-tax (12 I.T.R.
482) against blind adherence to English decisions on
the subject. The definition of "charitable purpose" in
the Indian Statute must be construed according to the
language used there and against the background of
Indian life."
If Indian life should be a true guide for the
determination of questions arising in court, then we should
go back to our ancient treatises to find out the true
meaning of charity which may be either dana or utsarga. In
the case of dana the donor gives up his ownership over a
thing, makes another the owner of it and cannot thereafter
use it nor has he any control over it. When a man makes an
utsarga, he no doubt gives up his ownership but gives up the
thing for the benefit of all. Opinion is, however, divided
whether as a member of the public he can also use a thing
thus dedicated for the public. But in any event, he would no
longer have any control over the thing dedicated. How many
of the so called charitable trusts satisfy the rigours of
the Indian concept of charity? Are there any measures by
which misuse of funds belonging to charities can be
effectively checked?
It is wrong to think that all springs of charity in
India will dry up if true effect is given to section 2 (15)
of the Act in accordance with the minority judgment in the
Surat Art Silk Cloth Manufacturers’ Association’s case
(supra). People who are truly charitable do not think of the
tax benefits while making charities. One must realise
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that even the poor who do not pay income tax can be
charitable and their charities made at great personal
inconvenience are commendable indeed. One need not go in
search of charitable persons amongst the tax payers only.
Still the majority view has got to be followed now.
N.V.K.
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