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PETITIONER: DHARMAPOSHANAM CO.  KERALA

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, KERALA

DATE OF JUDGMENT24/07/1978

BENCH: PATHAK, R.S. BENCH: PATHAK, R.S. CHANDRACHUD, Y.V. ((CJ) DESAI, D.A.

CITATION:  1978 AIR 1443            1978 SCR  (3)1030  1978 SCC  (3) 414  CITATOR INFO :  MV         1980 SC 387  (54)

ACT: Income  Tax  Act, 1961, Sections 2(15)  and  11(1)(a)-Clause 3(b) of the Memorandum of Association shows that one of  the objects  of  the  company was "To do  the  needful  for  the promotion  of charity education, industries etc. and  public good", which is reiterated by Art. 58-The said object clause and Art. 58 later on amended dropping the word  "industries" and adding "medical relief" Whether the Kuries business  its for  charitable purposes and whether the income arising  out of  conducting  business of kuries or Chit  fund  liable  to exemption  under  Section 11(1)(a) of the  Income  Tax  Act, 1961.

HEADNOTE: The  objects  of the appellant company were  "(a)  to  raise funds  by  conducting kuries............ and (b) to  do  the needful for the Promotion of charity, education, industries, etc.   and  public  good".  Art.  58  of  the  Articles   of Association provided that "the profit left after meeting the expenses  of  the  company will be  utilised  for  promoting education, industry, social welfare and such other  purposes of  common good as are resolved by the general meeting."  On June  7, 1965 the appellant made certain alterations in  its Memorandum  of Association and its Articles of  Association, by  which the words "medic’--II relief and other matters  of public good" were substituted for the word "industries, etc. and   public  good".   The  appellant  earned  income   from conducting  kuries and money lending.  He claimed  exemption from  tax under section 11 of the Income-tax Act,  1961  for the  assessment  years 1962-63 to 1968-69.   The  claim  was rejected by the Income Tax Appellate Tribunal and the Kerala High Court also decided the question against the  appellant. The appellant appealed. Dismissing the appeals, the Court HELD : 1. It is not only clear from Sections 11(4) and 13(1) (bb) of the Income Tax Act, 1961 but also well settled  that business  is  ’property’  within  the  meaning  of   Section 11(1)(a) of the Act. [1033F] Commissioner  of Income Tax v. Krishna Warrier,  53,  I.T.R.

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176 (SC); referred to. 2.Section  2(15) of the Income Tax Act, 1961 defines  the expression  "charitable purpose" as including relief of  the poor,  education and medical relief and the  advancement  of any other object of general public utility not involving the carrying  of any activity for profit.  The residual  genera, he-,id in the definition of S. 2(15) viz.  "the  advancement of any other object of general public utility." is qualified by the restrictive words "not involving the carrying on  any activity for profit". [1034 C, D] 3.Ordinarily  profit  is  a  normal  incident  of   business activity and if the activity of    a   trust   consists   of carrying  on of a business and there are no restrictions  on itsmaking  profits, the Court would be well  justified  in assuming in the absence of    some    indication   to    the contrary that the object of the trust involves the  carrying on of an activity for profit. [1034 H, 1035 A] Sole  Trustee, Loka Sikshna Trust v. Commissioner of  Income Tax,  101, I.T.R. 234 (SC) and Commissioner of  Income  Tax, Kerala  v.  Cochin  Chamber of Commerce  and  Industry,  101 I.T.R. 796; followed. 4.Whether a trust is for charitable purposes falls to  be determined  by reference to all the object-, for  which  the trust  has  been  brought into existence.   If  the  settlor reserves to himself the Power of appointment under which  he might  appoint to non-charitable purposes, the trust  cannot claim exemption even though 10 31 the power of appointment is in fact exercised in favour of a charitable object.It would be a different case where one  or more   of  the  objects  mentioned  in  the  Memorandum   of Association,  although included therein were never  intended to  be  undertaken.If  there is-evidence  pointing  to  that conclusion clearly the Court will ignorethe object  and proceed  to consider the case as if it did not exist in  the Memorandum.  In C.I.T., Kerala v. Darmodayam Co., 109 I.T.R. 527  (SC)  it was that basis on which this  Court  proceeded when it observed that the assessee had never engaged  itself in any industry or in any other activity of public interest. [1036 F,G, 1037 A-B] Tennent  Plays Ltd., v. Commissioner of Inland  Revenue  30, Tax  Cases  107, Incorporated Council of Law  Reporting  for England and Wales v. Attorney General and (Commissioners  of lnland  Revenue,  47 Tax Cases 321 and Rex  v.  The  Special Commissioners of Income Tax, 8 Tax Cases 286; followed. Commissioner  of Income Tax, Kerala v. Dharmodayam Co.  109, 1.T.R. 527 (SC) and Dharmodayam Co. v. C.I.T. 45, I.T.R. 478 (Kerala); explained and distinguished. 5.   In the instant case: (a)The  objects "industries" and "common good"  cannot  be described as "Charitable purposes" within the meaning of  S. 2(15)  of  the  Act.  Among the  objects  contained  in  the original  unamended  sub-clause  (b) of clause  (3)  of  the Memorandum  are  objects  which,  while  referable  to   the residual  general  head  in the  definition  of  "charitable purpose"  in  section 2(15) of the Act, nonetheless  do  not satisfy  the  condition that they should  not  involve  "the carrying on of any activity for profit".  Sub clause (b)  of clause  3  contains some objects which  are  charitable  and others which are non-charitable.  They are all objects which appear  to  enjoy  an  equal status.   It  is  open  to  the appellant  in  its discretion, to apply the  income  derived from conducting kuries and from money lending to any of  the objects.  No definite part of the business or of its  income is  related to charitable purposes only.   Consequently  the

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position in regard to the assessment years 1962-63 to  1965- 66  is that the entire claim to exemption fails and no  part of the income is exempt from tax. [1035 E-G] (b)In  the amended Memorandum of Association and  Articles of  Association  no  doubt the word  "industries"  has  been dropped and the words "medical relief" have been added.  And as  regards  "common  good", Article 58  now  likens  it  to "charity, educationand medical relief".  Nonetheless, it is clear from the amended sub-clause (b)of clause (3) of the Memorandum that it forms a distinct   object from them. The words  are "other matters of public good".Consequently,  the objectstill  falls  under  the  residual  general   head mentioned in section 2(15).  Thesame       considerations apply, and the same conclusion follows,as under the original provisions  of the Memorandum and Articles  of  Association. [1036 A-C] Mohd.  Ibrahim Riza v. Commr. of Income Tax, (1930) L.R.  57 I.A.  260  and  East  India Industries  (Mad.)  P.  Ltd.  v. Commissioner of Income 7ax, Madras, 65 I.T.R. 61 1, applied.

JUDGMENT: CIVIL  APPELLATE  JURISDICTION : Civil Appeal Nos.  6-12  of 1975. From  the Judgment and Order dated 12-6-1974 of  the  Kerala High  Court  in Income Tax Reference Nos. 51-56  and  79  of 1972. S.   T. Desai and N. Sudhakaran for the Appellant. V.   S. Desai and Miss A. Subhashini for the Respondent. 1032 The Judgment of the Court was delivered by PATHAK, J. These appeals have been preferred by the assessee against  the  judgment  of  the  High  Court  of  Kerala  in references disposed of by it under section 256 of the Act. The  appellant is the Dharmaposhanam  Company  Irinjalakuda. It  is an association constituted under a licence issued  in January,   1931  by  the  then  Government  of  Cochin   and registered with limited liability under section 26(1) of the Indian  Companies  Act  1913  as  applied  to  Cochin.   The appellant  was  governed  by a  Memorandum  of  Association, Clause (3) of which provided :-               "3. The objects of the company are:               (a)   To raise funds by conducting kuries with               company  as foreman, receiving  donations  and               subscription, by lending money on interest and               by such other means as the company deem fit.               (b)   To  do the needful for the promotion  of               charity, education, industries etc. and public               good.               (c)   For  carrying  on the  business  of  the               company and for the advancement of the purpose               mentioned  above in so far as is  appropriate,               to construct buildings or to purchase or  take               on  lease  or for hire  movable  or  immovable               properties.               (d)   To   encourage  others  to  form   other               institution  with  the purpose  of  acting  in               accordance with the objects of the company.               (e)   To  do all such things as are  conducive               to the fulfilment of the above objects.               (f)   To lend money on interest to one or more               solvent  persons individually or severally  on               the  security of ornaments, landed  properties               or  other  forms  of  security  fixed  by  the

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             Directors and to borrow money to meet the need               of the company and to run other industries."               Article  58  of the  Articles  of  Association               read:-               "The  profit  of  the  company  shall  not  be               divided  among the members.  The  profit  left               after meeting the expenses of the company will               be utilised for promoting education, industry,               social  welfare  and such  other  purposes  of               common  good  as are resolved by  the  general               meeting." During   the  assessment  years  1962-63  to  1965-66,   the appellant  derived income from property, money  lending  and business  in  kuries or chit funds.   The  assessee  claimed exemption  from  tax  of the income from  kuries  and  money lending  under section 11 of the Income-Tax Act,  1961  with varying  success before the Income-tax authorities.   It  is sufficient  to  point  out  that  the  Income-Tax  Appellate Tribunal  held  that  the  assessee  was  not  entitled   to exemption.   At the instance of the appellant, the  Tribunal made  a reference to the High Court for its opinion  on  the following question of law :- 10 33 .lm15 "Whether on the facts in the circumstances of the case,  the income  of the assessee for the assessment years 1962-63  to 1965-66 was exempt under the provisions of section 11 of the Income-Tax Act? On  June 7, 1965, the appellant made certain alterations  in its   Memorandum   of  Association  and  its   Articles   of Association.   Subclauses  (b) and (f) of clause  3  of  the Memorandum now lead:               (b)   To  do the needful for the promotion  of               charity,  education, medical relief and  other               matters of public good.               (t)   To   lend  money  in  the  security   of               ornaments,  landed property or on  such  other               securities, as determined by the Directors, or               on  the  personal securities of  one  or  more               solvent  person or persons and also to  borrow               funds for the purposes of the company.               The  amended  Article 58 of  the  Articles  of               Association now provided :-               "The  profit  of  the  company  shall  not  be               divided among   the  members.  The profit left               after meeting the expenses of the   company               will  be utilised for purposes of common  good               like charity, education and medical relief  as               are resolved by the general meeting." The appellant pressed its claim for exemption under  section 1  1  of the Act before the Income-Tax authorities  for  the assessment years 1966-67 to 1968-69 also, and the claim  was allowed   by   the  Tribunal  in  view  of   the   aforesaid alterations.   At the instance of the IncomeTax  Department, the  Tribunal referred a question of law to the  High  Court for  the three assessment years in terms identical with  the question referred for the earlier assessment years.  By  its judgment  dated June 12, 1974, the High Court  answered  the question  referred for the several assessment years  in  the negative and in favour of the IncomeTax Department. On a consideration of the rival contentions of the  parties, the position appears to be this.  The appellant can  succeed in  his claim to exemption under section 1 1 (1 )(a) of  the Act if the income from the business of conducting kuries and of  money  lending  can be said to be  income  derived  from

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property  held under trust wholly for  charitable  purposes. It  is well settled that business is "property"  within  the meaning of section 11(1)(e).  C.I.T. v. Krishna Warrier (1). That is also evident from the provisions of section 11  (4), and  reference  may  be made also  to  section  13(1)  (bb). Further, it is apparent from the terms of the Memorandum  of Association  and  the  Articles  of  Association  that   the business  of conducting kuries and of money lending is  held under  trust.  The question is : Is the business held  under trust for charitable purposes ? There can be little doubt that when sub-clause (a) of clause 3 of the Memorandum says (1) 53 I.T.R. 176 (SC). 15-399 SCI/78 10 34               "To  raise  funds by conducting  kuries,  with               company  as foreman, receiving  donations  and               subscriptions by lending money on interest and               by such other means as the company deem fit". it  refers  to powers conferred on the  appellant  to  raise money  in aid of, and for the purpose of accomplishing,  the objects  mentioned  in  subclause (b) of  clause  3  of  the Memorandum.  Upto June 6, 1965 sub-clause (b) read :               "To  do  the  needful  for  the  promotion  of               charity,   education,  industries,  etc.   and               public good". Can  all  the  purposes  mentioned  in  sub-clause  (b)   be described as charitable purposes ? Section 2(15) of the  Act defines  the  expression "charitable purpose"  as  including "relief  of  the  poor, education, medical  relief  and  the advancement  of any other object of general  public  utility not  involving the carrying on of any activity for  profit." Two  objects  in  sub-clause  (b)  of  clause  (3)  of   the Memorandum  need to be considered, "industries" and  "public good".   As regards the latter, the decision on what  should be  the  "purposes of common good" was left to  the  general meeting  by  Article  58 of  the  Articles  of  Association. Having regard to the context in which these words appear  in the  Memorandum  and the Articles, they  must  evidently  be referred  to the residue general head in the  definition  in section  2(15) of the Act, that is to say, "the  advancement of  any other object of general  public  utility............ But  this  head is qualified by the restrictive  words  "not involving  the carrying on of any activity for profit."  The operation  of  an  industry ordinarily  envisages  a  profit making  activity,  and so far as the advancement  of  public good  is concerned, it is open to the appellant to pursue  a profit  making activity in the course of carrying  out  that purpose,  which of course depends on the nature and  purpose of  the  "public VW".  Nowhere do we find  in  the  material before  us  any  limiting provision that  if  the  appellant carries  on any activity in the course of actually  carrying out  those  purposes  of the trust it  should  refrain  from adopting  and  pursuing a profit making activity.   In  Sole Trustee, Loka Shikshana Trust v. Commissioner of Income-Tax, Mysore(1),  Khanna  and Gupta, JJ., dealing with a  case  in which  the assessee carried on a business in the  course  of the  actual carrying out of a primary purpose of the  trust, rejected the claim to exemption and declared :-               "The fact that the appellant trust is  engaged               in the business of printing and publication of               newspaper  and journals and the  further  fact               that  the aforesaid activity yields or is  one               likely  to  yield  profit  and  there  are  no               restrictions  on the  appellant-trust  earning

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             profits in the course of its business would go               to  show  that the purpose of  the  appellant-               trust does not satisfy the requirement that it               should  be one ’not involving the carrying  on               of any activity for profit........  Ordinarily               profit  is  a  normal  incident  of   business               activity               (1)   101 I.T.R. 234.               1035               and  if  the activity of a trust  consists  of               carrying  on  of a business and there  are  no               restrictions  on its making profit, the  Court               would be well justified in assuming in the ab-               sence of some indication to the contrary  that               the object of the trust involves the  carrying               on of an activity for profit."               Beg, J., in the same case, observed               "The  deed puts no condition upon the  conduct               of the newspaper and publishing business  from               which we could infer that it was to be on  "no               profit and no loss" basis .... That  character               (i.e.  of  the deed) is  determined  far  more               certainly  and convincingly by the absence  of               terms which could eliminate or prevent  profit               making  from  becoming the  real  or  dominant               purpose  of the trust.  It is what the  provi-               sions  of  the trust make possible  or  permit               coupled  with  what  had  been  actually  done               without  any illegality in the ;Nay of  profit               making, in the case before us, under the cover               of the provisions of the deed, which enable us               to  decipher the predominantly  profit  making               character of the trust." In a subsequent case, Commissioner of Income-Tax, Kerala  v. Cochin  Chamber  of  Commerce and  Industry(1),  this  Court extended the test to income derived from activities  carried on  in aid of, and incidental to, the primary object of  the trust.   We  may note that no attempt has been made  by  the appellant  before  us to cast doubt on the validity  of  the observations made in those two cases, and we proceed on  the footing that they convey the true content of the law. It is, therefore, apparent that among the objects  contained in  the original unamended sub-clause (b) of clause  (3)  of the  Memorandum  are objects which, while referable  to  the residual  general  head  in the  definition  of  "charitable purpose"  in  section 2(15) of the Act, nonetheless  do  not satisfy  the  condition that they should  not  involve  "the carrying on of any activity for profit." The result is  that the  objects  "industries"  and  "common  good"  cannot   be described  as "charitable purposes".  What follows  then  is this,  that the said sub-clause (b) can be said  to  contain some objects which are charitable and others which are  non- charitable.   They are all objects which appear to enjoy  an equal  status.   It  is  open  to  the  appellant,  in   its discretion,  to  apply the income  derived  from  conducting kuries  and from money lending, to any of the  objects.   No definite part of the business or of its income is related to charitable purposes only.  Consequently, in view of Mohammed Ibrahim  Raza  v. Commissioner of  Income-’Tax(2)  and  East India Industries (Madras) Private Limited v. Commissioner of Income-Tax,  Madras(3), the entire claim to  exemption  must fail and it cannot be said that any part of the income under consideration  is exempt from tax.  That is the position  in regard to the assessment years 1962-63 to 1965-66 before us. (1)  101 T.T.R. 796.

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(2)  (1930) L.R. 57 I.A. 260 (3)  65 I.T.R. 611- 1036 It has been seriously urged for the appellant that in regard to the assessment year 1966-67 to 1968-69, the position  has been  radically altered by reason of the amendments made  in the  Memorandum and the Articles of Association.   The  word "industries" has been dropped and the words "medical relief" have  been added.  And as regards "common good", Article  58 now  likens it to "charity, education and  medical  relief". Nonetheless, it is clear from the amended sub-clause (b)  of clause (3) of the Memorandum that it forms a distinct object from  them.   The words are "other matters of  public  good. Consequently,  the  object still falls  under  the  residual general   head  mentioned  in  section  2(15).    The   same considerations  apply, and the same conclusion  follows,  as under the original provisions of the Memorandum and Articles of Association. Great reliance has been placed on behalf of the appellant on Commissioner of Income-Tax, Kerala v. Dharmodayam Co.(1) and it has been seriously urged that the decision of this  Court in  that case concludes the point raised in  these  appeals. We  find it not possible to accept this.  In that case,  the income derived by the assessee from kuries was held by  this Court to be exempt under section 11 (1 ) (a) of the Act, but the  decision  proceeded almost entirely on  the  assumption that  the Kerala High Court had found in Dharmodayam Co.  V. C.I.T.  (2)  in  a case between the same  parties  that  the Kuries  business was itself held under trust for  charitable purpose, and from that the Court inferred that the  business activity  was  not undertaken by the assessee  in  order  to advance  any  object  of general public  utility.   No  such finding  has  been rendered by any High Court in a  case  to which  the appellant is a: party.  It will be  noticed  that the  Court  cautioned in its judgment in C.I.T.,  Kerala  v. Dharmodayam  Co.  (Supra)  that the  decision  was  strictly limited to the facts of that case. It  has  been  urged on behalf of the  appellant  that  what should be taken into consideration is the activity  actually conducted by the assessee, and not what is open to it  under the provisions of its Memorandum of Association.  We do  not agree.  Wheth er a trust is for charitable purposes falls to be determined by reference to all the objects for which  the trust  has been brought into existence.  See Tennent  Plays, Ltd.  v. Commissioner of Inland Revenue(3) and  Incorporated Council of Law Reporting for England and Wales v.  Attorney- General  and Commissioners of Inland Revenue(4).  In Rex  v. The  Special Commissioners of Income-Tax(5), it was  pointed out  by the Court of Appeal in England that if  the  settlor reserves to himself the power of appointment under which  he might  appoint to non-charitable purposes, the trust  cannot claim  exemption even though the power of appointment is  in fact exercised in favour of a charitable object.  It would (1)  109 I.T.R. 527 (SC) (2)  45 I.T.R. 478 (Ker.).. (3)  30 Tax Cases 107. (4)  47 Tax Cases 321. (5)  8 Tax Cases 286. 1037 be  a  different  case  where one or  more  of  the  objects mentioned in the Memorandum of Association although included therein  were never intended to be undertaken.  If there  is evidence pointing to that conclusion clearly the Court  will ignore the object and proceed to consider the case as if  it did  not  exist  in the Memorandum.   In  C.I.T.  Kerala  v.

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Dharmodayam  Co.  (Supra), it was that basis on  which  this Court proceeded when it observed that the assessee had never engaged  itself in any industry or in any other activity  of public interest. On  the  aforesaid  considerations,  we  endorse  the  final conclusion  of  the  High Court and  hold  that  it  rightly answered  the  question  referred  to  it  in  the   several references in the negative, in favour of the respondent  and against the appellant. These  appeals are dismissed with costs, limited to one  set only. S.R.                                                 Appeals dismissed. 1038