Full Judgment Text
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CASE NO.:
Appeal (civil) 4406-4410 of 1996
Appeal (civil) 4759-4761 of 1998
Appeal (civil) 4395-4402 of 1996
Appeal (civil) 497-499 of 2000
Appeal (civil) 5772 of 2000
PETITIONER:
THE ASSISTANT COMMISSIONER OF INCOME TAX, MADRAS ETC. ETC.
Vs.
RESPONDENT:
THANTHI TRUST ETC. ETC.
DATE OF JUDGMENT: 31/01/2001
BENCH:
S.P. Bharucha, N. Santosh Hegde & Y.K. Sabharwal
JUDGMENT:
Bharucha, J.
L...I...T.......T.......T.......T.......T.......T.......T..J
One S.K. Adityan founded a daily newspaper called the
Dina Thanthi in 1942. On 1st March, 1954 he created a
trust called the Thanthi Trust. The property that he
settled upon trust was the business of the said newspaper as
a going concern. The objects of the Trust were to establish
the said newspaper as an organ of educated public opinion
for the Tamil reading public and to disseminate news and to
ventilate opinion upon all matters of public interest
through it. On 9th July, 1957 Adityan executed a
supplementary deed of trust that declared that the Trust was
irrevocable. On 28th July, 1961 Adityan executed another
supplementary deed of trust. Thereby he directed that the
surplus income of the Trust, after defraying all expenses,
should be devoted to the following purposes :
- establishing and running a school or college for the
teaching of journalism;
- establishing and/or running or helping to run schools,
colleges or other educational institutions for teaching arts
and science;
- establishing of scholarships for students of
journalism, arts and science;
- establishing and/or running or helping to run hostels
for students;
- establishing and/or running or helping to run
orphanages; and
- other educational purposes.
On 6th November, 1961 the Income Tax Officer proposed to
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disallow the claim of the Trust for exemption under Section
4(3)(i) of the Income Tax Act, 1922 for the Assessment Years
1955-56 to 1961-62. The Trust challenged the correctness of
the tentative decision by filing a writ petition in the High
Court of Judicature at Madras. On 25th June, 1961 the
trustees of the Trust took out an originating summons in the
High Court and therein, on 2nd March, 1962, the High Court
upheld the validity of the supplementary deed of trust and
held that the trustees of the Trust were bound to devote the
surplus income of the Trust to the purposes mentioned
therein. On 4th October, 1963 the High Court allowed the
writ petition filed by the Trust and quashed the ITOs
tentative decision (52 I.T.R. 453). The claim for
exemption made by the Trust under Section 4(3)(i) of the
1922 Act for the Assessment Years 1955-56 to 1961-62 was
thereafter allowed.
For the Assessment Years 1962-63 the claim made by the
Trust for exemption under Section 11 of the Income Tax Act,
1961 (the Act) was allowed on 28th February, 1969. The
ITO then impounded the books of accounts of the Trust
relevant to the Assessment Years 1965-66 to 1967-68 and he
demanded the production of books of account relevant to the
Assessment Years 1962-63 to 1964-65. This was the subject
matter of challenge in a writ petition filed by the Trust.
On 23rd March, 1969 the Trust was issued three notices under
Section 148 of the Act to reopen its assessments for the
Assessment Years 1965-66 to 1967-68. These notices were
challenged in a writ petition filed by the Trust. Notices
were, thereafter, issued to the Trust to reopen its
assessment for the Assessment Years 1956-57 to 1961-62 and
these were the subject matter of a writ petition filed by
the Trust. On 21st December, 1972 a Division Bench of the
High Court of Madras quashed the notices for reopening the
assessments for the Assessment Years 1956-57, 1958-59,
1960-61 and 1961-62. It upheld the notices that related to
the Assessment Years 1957-58, 1959-60, 1965-66, 1966-67 and
1967-68 (91 I.T.R. 261).
On 29th January, 1981 a Division Bench of the High Court
dismissed references under the Act in respect of the
assessment of the Trust for the Assessment Years 1968-69 and
1969-70 (137 I.T.R. 735). The High Court held :
The founder of the trust clearly evinced an intention to
create public charitable trust as seen from the preamble and
clause 3(k) of the original trust deed and the charitable
objects referred to in the schedule to the decree in C.S.
90 of 1961 have to be fulfilled from and out of the income
from the business which is directed to be held under trust
or other legal obligation. Those charitable objects fall
within the first 2 categories referred to in Section 2(15)
viz. Relief of the poor and education. It is to carry out
and fulfill those objects the business is carried on. Thus,
the primary purpose is to carry out the charitable objects
and the business is carried on as a means in the course of
the actual carrying out of that primary purpose and not as
an end in itself. While the predominant object of the trust
is the carrying out of the charitable objects referred to in
two of the three categories of charitable purposes referred
to in Section 2(15), the carrying on of the business which
is actually the property held under trust or other legal
obligation is incidental and the profit resulting from the
business can be taken to be a by-product.
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The Revenue preferred a petition for special leave to
appeal against the judgment of the High Court on the said
references. In so far as it related to the eligibility of
the Trust to claim the exemption under Section 11 of the
Act, leave was declined.
Having set out the background, we now come to the first
of the three controversies before us. It relates to Section
13(1)(bb), which was introduced into the Act with effect
from 1st April, 1977 and remained on the statute book until
omitted with effect from 1st April, 1984. The relevant
portions of Section 11 and Section 13(1)(bb) then read as
follows :
Section 11
Income from property held for charitable or religious
purpose.
(1) Subject to the provisions of sections 60 to 63, the
following income shall not be included in the total income
of the previous year of the person in receipt of the income.
(a) income derived from property held under trust wholly
for charitable or religious purposes, to the extent to
which such income is applied to such purposes in India;
Section 11(4)
For the purposes of this section property held under
trust includes a business undertaking so held,
Section 13(1)(bb)
Nothing contained in section 11 or section 12 shall
operate so as to exclude from the total income of the
previous year of the person in receipt thereof
In the case of a charitable trust or institution for the
relief of the poor, education or medical relief, which
carries on any business, any income derived from such
business, unless the business is carried on in the course of
the actual carrying out of a primary purpose of the trust or
institution.
The claim of the Trust for exemption for the Assessment
Years 1979- 80 to 1983-84 was rejected, having regard to the
provisions of Section 13(1)(bb). The rejection was
challenged in a writ petition filed by the Trust in the High
Court. The High Court upheld the contention of the Trust
(213 I.T.R. 626). This is the first decision of the High
Court that is under appeal by the Revenue.
The High Court relied upon its earlier decision in the
case of the Trust, reported in 137 I.T.R. 735, which had
become final and binding on the Revenue, namely, that the
primary purpose of the Trust was to carry out its charitable
objects and that the business is carried on only as a means
in the course of the actual carrying on purpose of the
Trust. It said that it had, therefore, no hesitation in
holding that the requirement of the last portion of Section
13(1)(bb) namely unless the business is carried on in the
course of the actual carrying out of a primary purpose of
the trust or institution is satisfied We must
also point out here that though the decision in CIT vs.
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Thanthi Trust [1982] 137 I.T.R. 735 (Mad) was rendered by
the Division Bench with regard to the assessment years
1968-69 and 1969-70 and Section 13(1)(bb) of the Act was
introduced with effect from April 1, 1977, inasmuch as the
finding rendered by the Division Bench in the said decision
is in express language of Section 13(1)(bb) of the Act, it
is not open to the Revenue to contend that the decision in
CIT vs. Thanthi Trust [1982] 137 I.T.R. 735 (Mad) will not
be applicable to the petitioners case in respect of the
assessment years in question, after the introduction of
Section 13(1)(bb) of the Act.
Section 11(4A) was introduced into the Act with effect
from 1st April, 1984. So far as it is relevant, Section 11
then read thus :
Section 11
Income from property held for charitable or religious
purpose.
(1) Subject to the provisions of sections 60 to 63 the
following income shall not be included in the total income
of the previous year of the person in receipt of the income.
(a) income derived from property held under trust wholly
for charitable or religious purposes, to the extent to
which such income is applied to such purposes in India;
.
(4) For the purposes of this section property held
under trust includes a business undertaking so held and
where a claim is made that the income of any such
undertaking shall not be included in the total income of the
persons in receipt thereof, the income tax 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, being profits and gains of business, unless
(a) the business is carried on by a trust wholly for
public religious purposes and the business consists of
printing and publication of books or is of a kind notified
by the Central Government in this behalf in the Official
Gazette; or
(b) the business is carried on by an institution wholly
for charitable purposes and the work in connection with the
business is mainly carried on by the beneficiaries of the
institution;
and separate books of accounts are maintained by the
trust or institution in respect of such business.
The Trust claimed the benefit of the exemption under
Section 11 in respect of the Assessment Years 1984-85 to
1991-92. The ITO rejected the claim. The Trust filed writ
petitions challenging the rejection. The High Court upheld
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the claim of the Trust (213 I.T.R. 639). It held that
inasmuch as the business that was carried on by the Trust
was itself held under trust for public charitable purposes
and it was carried on only for the purposes of carrying out
the charitable objects of the Trust, as had been found in
the earlier judgment, the provisions of Section 11(4A) had
no application. This is the second decision of the High
Court under appeal by the Revenue.
Section 11(4A) was substituted with effect from 1st
April, 1992 and it now read thus :@@
JJJJJJJJJJJJJJJ
Section 11(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 of 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 accounts are
maintained by such trust or institution in respect of such
business.
The ITO rejected the claim of the Trust for exemption
under the amended Section 11(4A). A writ petition was filed
in the High Court, and, relying upon the earlier decision,
the High Court quashed the orders of assessment for the
Assessment Years 1992-93, 1995-96 and 1996-97 (238 I.T.R.
635). This is the third decision under appeal by the
Revenue.
In so far as Section 13(1)(bb) is concerned, the learned
Solicitor General appearing for the Revenue, submitted that
a business, to be excepted from the clutches of Section
13(1)(bb), must be one carried on in the course of the
actual carrying out of a primary purpose of a public
charitable trust. In other words, it must be a business
carried on in the course of actually carrying out the work
of relief of the poor, education and medical relief. Any
business carried on for generating revenue, which revenue is
used for furthering the charitable purpose for which the
trust was established, is not an activity in the course of
the primary purpose of the trust and does not fall within
this exception.
Dr. Pal, learned counsel for the Trust, drew a
distinction between a business that was held under trust and
a business that was carried on by a trust. He submitted
that there was a difference between income derived from a
business that was a property or part of the corpus of a
public charitable trust and income derived from a business
which was carried on by such a trust but which was not held
under trust; in other words, there was a legal obligation
to use the income for the public charitable purpose of the
trust in the first case and not in the latter. This Court
had noted the distinction in Additional Commissioner of
Income-Tax, Gujarat vs. Surat Art Silk Cloth Manufacturers
Association (121 I.T.R. 1), Commissioner of Income-Tax,
Kerala and Coimbatore vs. P. Krishna Warriar (53 I.T.R.
176), Commissioner of Income-Tax, Kerala vs. Dharmodayam
Co. (109 I.T.R. 527). The provisions of Section 13(1)(bb)
applied only to a public charitable trust which carried on a
business that it did not hold in trust. They did not apply
to a public charitable trust, such as the Trust, which held
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the business in trust.
No judgment of this Court has been pointed out to us in
which the provisions of Section 13(1)(bb) have been
interpreted. Only passing references thereto are to be
found in some of the judgments aforementioned.
A public charitable trust may hold a business as part of
its corpus. It may carry on a business which it does not
hold as a part of its corpus. But it seems to us that the
distinction has no consequence insofar as Section 13(1)(bb)
is concerned. Section 13(1)(bb) provides, so far as is
relevant to this case, that the provisions of Section 11
shall not operate so as to include in the total income of
the previous year of a public charitable trust for the
relief of the poor, education or medical relief which
carries on any business, any income derived from such
business unless the business is carried on in the course of
the actual carrying out of a primary purpose of the trust.
Section 13(1)(bb), therefore, will apply to a public
charitable trust for the relief of the poor, education or
medical relief that carries on a business, regardless of
whether or not that business is held by the trust in trust,
that is, as a part of its corpus. Even a business that is
held by such a trust as a part of its corpus is carried on
by the trust and, therefore, Section 13(1)(bb) will apply to
such trust.
A judgment of this Court which comes closest to putting
a meaning to Section 13(1)(bb) is the concurring judgment of
R.S. Pathak, J. (as he then was) in Additional
Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth
Manufacturers Association (1980) 121 ITR 1. He said, When
it was found that judicial decisions had held the
restrictive clause (not involving the carrying on of any
activity for profit) in Section 2(15) to control the fourth
head (the advancement of any other object of general public
utility) only, and not also the first three heads (relief
of the poor, education and medical relief) in the
definition, Parliament attempted to secure its original
intent by enacting section 13(1)(bb). The two provisions
represent the mode of funding finance for working out the
purpose of the trust or institution, by deriving income from
the corpus of the trust property and also from an activity
carried on in the course of actual carrying out of the
purpose of the trust or institution. The learned Judge did
not, it will be seen, analyse Section 13(1)(bb), nor, in the
context of the case before him, was he required to. Upon
analysis, it appears to us that the words used in Section
13(1)(bb) are wide enough to control not only the profit
from an activity carried on in the course of the actual
carrying out of the purpose of the trust or institution but
also income from the corpus of the trust property if the
corpus of the trust includes a business. This is for the
reason that a trust or institution carries on the business
that is part of its corpus just as much as a trust or
institution carries on a business that is not a part of its
corpus, and Section 13(1)(bb) operates in respect of a
charitable trust or institution for the relief of the poor,
education or medical relief which carries on any business.
(Emphasis supplied).
The requirement of Section 13(1)(bb) is that the
exemption under Section 11 will not be available to such a
trust that carries on any business unless the business is
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carried on in the course of the actual carrying out of the
primary purpose of the trust, that is to say, unless the
business is carried on in the course of actually
accomplishing a primary purpose of the trust; the business
must, therefore, be carried on in the course of the actual
accomplishment of relief of the poor, education or medical
relief. As an example, a public charitable trust for the
relief of the poor, education and medical relief that
carries on the business of weaving cloth and stitching
clothing by employing indigent women carries on the business
in the course of actually accomplishing its primary object
of affording relief to the poor and it would qualify for the
exemption under Section 11.
The business that the Trust carries on is that of
running a newspaper. That business, though it is held by
the Trust as a part of its corpus, and, therefore, in trust,
does not directly accomplish, wholly or in part, the Trusts
objects of relief of the poor and education. Its income
only feeds such activity. It cannot be held to be carried
on in the course of the actual accomplishment of the Trusts
objects of education and relief of the poor. It is,
therefore, not possible to accept the argument on behalf of
the Trust that it is entitled to the exemption under Section
11.
The High Court, in the first judgment under appeal, held
that it was not open to the Revenue to contend that the
earlier decision (in 137 ITR 735) would not apply to the
case of the Trust for the assessment years in question after
the introduction of Section 13(1)(bb) of the Act because the
finding rendered in that decision was in the express
language of Section 13(1)(bb). We are unable to agree. The
earlier decision was not rendered in the context of Section
13(1)(bb). That provision was not on the statute book at
that time. That the provision employs language akin to that
employed in the earlier decision cannot mean that in a
proceeding directly related to that provision the Revenue is
barred by reason of the principles of res judicata from
contending that the income of the Trust is not exempt under
that provision.
This brings us to the second controversy, relevant to
the Assessment Years 1984-85 to 1991-92 during which period
of time sub-section (4A) of Section 11, as originally
enacted, was in operation. It was contended by the learned
Solicitor General that by reason of sub-section (4A) the
income derived from a business held under trust wholly for
charitable or religious purposes would not be included in
the total income of the previous year in the case only of
(a) a trust for public religious purposes, if the business
was of printing and publishing books or of a notified kind;
or (b) an institution wholly for charitable purposes, if the
work in connection with the business was mainly carried on
by the beneficiaries of the institution, provided that
separate books of accounts had been maintained in respect of
such business.
Learned counsel for the Trust laid emphasis on the fact
that in the Bill to introduce sub-section (4A) into Section
11, sub-section (4) thereof had been proposed to be deleted,
but it had been retained when the Bill was passed. A
business held under trust had, therefore, not been intended
to be excluded from the benefit of Section 11 by reason of
the enactment of sub- section (4A). This was also evident
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from the fact that sub-section (4A) did not mention in its
non obstante clause sub-section (4).
Sub-section (4) of Section 11 remains on the statute
book, and it defines property held under trust for the
purposes of that section to include a business so held. It
then states how such income is to be determined. In other
words, if such income is not to be included in the income of
the trust, its quantum is to be determined in the manner set
out in sub-section (4).
Sub-section (1)(a) of Section 11 says that income
derived from property held under trust only for charitable
or religious purposes, to the extent it is used in the
manner indicated therein, shall not be included in the total
income of the previous year of the trust. Sub-section (4)
defines the words property held under trust for the
purposes of Section 11 to include a business held under
trust. Sub-section (4A) restricts the benefit under Section
11 so that it is not available for income derived from
business unless (a) the business is carried on by a trust
only for public religious purposes and it is of printing and
publishing books or any other notified kind or (b) it is
carried on by an institution wholly for charitable purposes
and the work in connection with the business is mainly
carried on by the beneficiaries of the institution,
provided, in both cases, that separate books of account are
maintained by the trust or the institution in respect of
such business. Trusts and institutions are separately dealt
with in the Act (Section 11 itself and Sections 12, 12A and
13, for example). 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
sub-section (4A) of Section 11 as substituted with effect
from 1st April, 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 benefit of
Section 11 if it utilized the income of its business for the
purposes of achieving its objects.
The substituted sub-section(4A) states that the income
derived from a business held under trust wholly for
charitable or religious purposes shall not be included in
the total income of the previous year of the trust or
institution if the business is incidental to the attainment
of the objective of the trust or, as the case may be,
institution and separate books of account are maintained in
respect of such business. Clearly, the scope of sub-section
(4A) is more beneficial to a trust or institution than was
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the scope of sub- section (4A) as originally enacted. In
fact, it seems to us that the substituted sub-section (4A)
gives a trust or institution a greater benefit than was
given by Section 13(1)(bb). If the object of Parliament was
to give trusts and institutions no more benefit than that
given by Section 13(1)(bb), the language of Section
13(1)(bb) would have been employed in the substituted
sub-section (4A). As it stands, all that it requires for
the business income of a trust or institution to be exempt
is that the business should be incidental to the attainment
of the objectives of the trust or institution. A business
whose income is utilized by the trust or the institution for
the purposes of achieving the objectives of the trust or the
institution is, surely, a business which is incidental to
the attainment of the objectives of the trust. In any
event, if there be any ambiguity in the language employed,
the provision must be construed in a manner that benefits
the assessee. The Trust, therefore, is entitled to the
benefit of Section 11 for the Assessment Year 1992-93 and
thereafter. It is, we should add, not in dispute that the
income of its newspaper business has been employed to
achieve its objectives of education and relief to the poor
and that it has maintained separate books of account in
respect thereof.
Accordingly, Civil Appeals 4406-4410 of 1996, 4395-4402
of 1996, 4759-4761 of 1998 and 5772 of 2000 are allowed in
as much as they relate to the Assessment Years 1979-80 to
1991-92 and the two judgments of the Madras High Court
relating thereto (reported in 213 I.T.R. 626 and 213 I.T.R.
639) are set aside. Civil Appeals 497-499 of 2000 are
dismissed. There shall be no order as to costs.