Judgment sc-2022-15-899-1065
vidhipandit.com/case/sc-2022-15-899-1065
Machine-read from a scanned report. Check the printed page before citing. Report an error.
Headnote — Supreme Court Reports (editorial summary, not part of the judgment)
Catchwords
ASSISTANT COMMISSIONER OF INCOME TAX A (EXEMPTIONS) v. AHMEDABAD URBAN DEVELOPMENT AUTHORITY (Civil Appeal No. 21762 of 2017) B Income Tax Act 1961: ss. 2(15) proviso – Tax exemption – C Claim of, by Charitable institutions advancing an object of generally public utility-GPU – ‘Charitable Purpose’ – Interpretation of – Term of “any other object of generally public utility not being charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity” – Interpretation and scope of –
Held
Assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration, “cess, or fee, or any other consideration” – However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that the activities of trade, commerce or business are connected to the achievement of its objects of GPU; and the receipt from such business or commercial activity or service in relation thereto, does not exceed 20% of total receipts of the previous year – Charging of any amount towards consideration for an activity advancing general public utility, which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto – It is only when the charges are markedly or significantly above the cost incurred by the assessee, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business” – Section 11(4A) must be interpreted harmoniously with s. 2(15), the requirement in s. 11(4A) of maintaining separate books H 899
A of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to s. 2(15), has not been breached – ss. 10(23C), 13(8), 11(4A) and 143(3). s. 11(4), 11(4A) – Business held under Trust and Trust carrying on business – Distinction between – Discussed. B ss. 2(15) – Tax exemption, claim of by the Statutory corporations, authorities or bodies; Statutory regulatory bodies/ authorities; Trade Promotion bodies, councils, associations or organizations; Non-statutory bodies-ERNET, NIXI and GS1 India; State Cricket Associations;and Private trusts as a General Public C Utility charity – Certain kinds of income or receipts, may not be characterized as derived from trade, commerce or business in relation to activities of General Public Utility, for a consideration –
Held
As regards, Statutory Authorities, corporations, or bodies receipts are prima facie to be excluded from the mischief of business or commercial receipts, since their objects are essential for advancement of public purposes/functions – However, if the consideration or amounts charged are significantly higher than the cost and a nominal mark-up, then the receipts would indicate that the activities are in fact in the nature of “trade, commerce or business” and would have to comply with the quantified limit in the proviso to s. 2(15) – For the Statutory regulators, to be considered as one with ‘charitable purpose’ eligible for exemption under the IT Act, the overall quantitative limit prescribed in the proviso to s. 2(15) (as amended from time to time) has to be complied with – Trade promotion bodies involved in advancement of objects of general public utility can claim exemption – However, income or receipts for providing the additional services would be business or commercial in nature – As regards, non-statutory bodies performing public functions, such as ERNET and NIXI are engaged in important public purposes – Fees or consideration charged by them for the purposes provided are nominal – However, their claim have to be ascertained on year to year basis – Further, GSI India is involved in advancement of general public utility, its services are for the benefit of trade and business, from which they receive significantly high receipts – Therefore, GSI India is not eligible for the exemption – Private Trusts-Tribune Trust cannot benefit from exemption offered to entities covered by s. 2(15) as the income received from
Catchwords
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 901 URBAN DEVELOPMENT AUTHORITY advertisements, constituted business or commercial receipts – Limit A prescribed in the proviso to s. 2(15) has to be adhered to for the Trust’s claim of being as a charity eligible for exemption – So far as Sports associations is concerned, matter requires further scrutiny. Interpretation of Statute : Aids to Interpretation – History of legislation, other extrinsic aids to construction of the statute, viz, speeches in Parliament and departmental circulars – Relevance of – Explained. Disposing of the appeals, the Court
Held
1.1 As regards the general test under Section 2(15) of the Income Tax Act, 1961, it is clarified that an assessee advancing general public utility cannot engage itself in any trade, commerce or business, or provide service in relation thereto for any consideration (“cess, or fee, or any other consideration”). However, in the course of achieving the object of general public utility, the concerned trust, society, or other such organization, can carry on trade, commerce or business or provide services in relation thereto for consideration, provided that (i) the activities of trade, commerce or business are connected (“actual carrying out...” inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and (ii) the receipt from such business or commercial activity or service in relation thereto, does not exceed the quantified limit, as amended over the years (Rs. 10 lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of total receipts of the previous year, w.e.f. 01.04.2016). Generally, the charging of any amount towards consideration for such an activity (advancing general public utility), which is on cost-basis or nominally above cost, cannot be considered to be “trade, commerce, or business” or any services in relation thereto. It is only when the charges are markedly or significantly above the cost incurred by the assessee in question, that they would fall within the mischief of “cess, or fee, or any other consideration” towards “trade, commerce or business”. Iit is clarified as to what kind of services or goods provided on cost or nominal basis would normally be excluded from the mischief of trade, commerce, or business. Section 11(4A) must be interpreted harmoniously with Section 2(15), with which there is no conflict. Carrying out activity in the nature of trade, commerce or business, or service in relation
Reporter's headnote (continued) and case details
899
p. 900
p. 902
A to such activities, should be conducted in the course of achieving the GPU object, and the income, profit or surplus or gains must, therefore, be incidental. The requirement in Section 11(4A) of maintaining separate books of account is also in line with the necessity of demonstrating that the quantitative limit prescribed in the proviso to Section 2(15), has not been breached. Similarly, B the insertion of Section 13(8), seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this interpretation and bring uniformity across the statutory provisions. [Para 253][1058-C-H; 1059-A- C] C 1.2 The amounts or any money whatsoever charged by a statutory corporation, board or any other body set up by the state government or central governments, for achieving what are essentially ‘public functions/services’ (such as housing, industrial development, supply of water, sewage management, supply of food grain, development and town planning, etc.) may resemble trade, commercial, or business activities. However, since their objects are essential for advancement of public purposes/ functions (and are accordingly restrained by way of statutory provisions), such receipts are prima facie to be excluded from the mischief of business or commercial receipts. However, at the same time, in every case, the assessing authorities would have to apply their minds and scrutinize the records, to determine if, and to what extent, the consideration or amounts charged are significantly higher than the cost and a nominal mark-up. If such is the case, then the receipts would indicate that the activities are in fact in the nature of “trade, commerce or business” and as a result, would have to comply with the quantified limit (as amended from time to time) in the proviso to Section 2(15) of the IT Act. [Para 253 B.1, B.2][1059-C-G] 1.3 In clause (b) of Section 10(46) of the IT Act, G “commercial” has the same meaning as “trade, commerce, business” in Section 2(15) of the IT Act. Therefore, sums charged by such notified body, authority, Board, Trust or Commission (by whatever name called) will require similar consideration – i.e., whether it is at cost with a nominal mark-up or significantly higher, to determine if it falls within the mischief of “commercial activity”. H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 903 URBAN DEVELOPMENT AUTHORITY
However, in the case of such notified bodies, there is no quantified A limit in Section 10(46). Therefore, the Central Government would have to decide on a case-by-case basis whether and to what extent, exemption can be awarded to bodies that are notified under Section 10(46). For the period 01.04.2003 to 01.04.2011, a statutory corporation could claim the benefit of Section 2(15) B having regard to the judgment of this Court in the Gujarat Maritime Board’s case. Likewise, the denial of benefit under Section 10(46) after 01.04.2011 does not preclude a statutory corporation, board, or whatever such body may be called, from claiming that it is set up for a charitable purpose and seeking exemption under Section 10(23C) or other provisions of the Act. C [Para 253, B-3, B-4][1059-G-H; 1060-A-D] 1.4 The income and receipts of statutory regulatory bodies which are for instance, tasked with exclusive duties of prescribing curriculum, disciplining professionals and prescribing standards of professional conduct, are prima facie not business or commercial receipts. However, this is subject to the caveat that if the assessing authorities discern that certain kinds of activities carried out by such regulatory body involved charging of fees that are significantly higher than the cost incurred (with a nominal mark-up) or providing other facilities or services such as admission forms, coaching classes, registration processing fees, etc., at markedly higher prices, those would constitute commercial or business receipts. In that event, the overall quantitative limit prescribed in the proviso to Section 2(15) (as amended from time to time) has to be complied with, if the regulatory body is to be considered as one with ‘charitable purpose’ eligible for exemption under the IT Act. Like statutory authorities which regulate professions, statutory bodies which certify products (such as seeds) based on standards for qualification, etc. will also be treated similarly. [Para 253, C.1, C.2][1060-D-G] 1.5 Bodies involved in trade promotion (such as AEPC), or set up with the objects of purely advocating for, coordinating and assisting trading organisations, can be said to be involved in advancement of objects of general public utility. However, if such organisations provide additional services such as courses meant
p. 904
A to skill personnel, providing private rental spaces in fairs or trade shows, consulting services, etc. then income or receipts from such activities, would be business or commercial in nature. In that event, the claim for tax exemption would have to be again subjected to the rigors of the proviso to Section 2(15) of the IT Act. [Para 253, D][1060-G-H; 1061-A-B] B 1.6 Non-statutory bodies performing public functions, such as ERNET and NIXI are engaged in important public purposes. The materials on record show that fees or consideration charged by them for the purposes provided are nominal. In the circumstances, it is held that the said two assessees are driven by charitable purposes. However, the claims of such non- statutory organisations performing public functions, will have to be ascertained on a yearly basis, and the tax authorities must discern from the records, whether the fees charged are nominally above the cost, or have been increased to much higher levels. It is held that though GS1 India is in fact, involved in advancement of general public utility, its services are for the benefit of trade and business, from which they receive significantly high receipts. In the circumstances, its claim for exemption cannot succeed having regard to amended Section 2(15). However, the Court does not rule out any future claim made and being independently assessed, if GS1 is able to satisfy that what it provides to its customers is charged on cost-basis with at the most, a nominal markup. [Para 253 E.1, E.2][1061-B-F] 1.7 So far as the state cricket associations are concerned (Saurashtra, Gujarat, Rajasthan, Baroda, and Rajkot), the matter requires further scrutiny. Accordingly, a direction is issued that the AO shall adjudicate the matter afresh after issuing notice to the concerned assessees and examining the relevant material indicated in the previous paragraphs of this judgment. Furthermore, if any consequential order needs to be issued, the same shall be done and resulting actions, including assessment orders shall be passed in accordance with the law under relevant provisions of the IT Act. [Para 253, F][1061-F-H] 1.8 So far as the appeal by assessee-Tribune Trust is concerned, despite advancing general public utility, the Trust H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 905 URBAN DEVELOPMENT AUTHORITY cannot benefit from exemption offered to entities covered by A Section 2(15) as the records reveal that income received from advertisements, constituted business or commercial receipts. Consequently, the limit prescribed in the proviso to Section 2(15) has to be adhered to for the Trust’s claim of being as a charity eligible for exemption, to succeed. Therefore, despite differing reasoning, the impugned judgment of the High Court does not call for interference. [Para 253, G][1062-A-C] 2.1 The limited relief, given by the second proviso to s. 2(15) of the Income Tax Act, 1961, to ‘general public utility’ – GPU charities (for the period 2009-2015) was that in case such GPU category charities did carry on activities undertaken in the course of actual carrying out of their GPU objects that were in the nature of trade, commerce or business, or rendered any service in relation to trade, business, etc., and collected fee, cess, or other consideration, such income could still be exempt, if it did not exceed 10,00,000 (and later, 25,00,000). By the amendment of 2015, the second proviso was deleted and two conditions were introduced, with respect to permissibility of carrying on trade, commerce, etc: (i) such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and (ii) the aggregate receipts from such activity or activities during the previous year, do not exceed twenty percent of the total receipts, of the trust or institution undertaking such activity or activities, of that previous year. [Para 136][997-C-F] 2.2 Parliamentary endeavour, was to alter the regime applicable to taxation of GPU category charities, under the IT F Act. The absolute bar imposed on GPU charities from carrying on activities in the nature of trade, commerce or business, or of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, evidences this intent. The original Section 2(15) did not allude to trade, G commerce or business, or any service in relation to such activities. It only enjoined the GPU charities from involving themselves from carrying on of any activity for profit 127 (which was
p. 906
A interpreted in Surat Art Silk). This substantial change brought about by the amendments of 2008 -2012 and 2015 is the prohibition from engaging in any kind of activity in the nature of business, commerce, or trade or any rendering any service in relation thereto, and earning income by the way of cess, fee or consideration. The express deletion of the reference to ‘activity for profit’ on the one hand, and the enactment of an expanded list of what cannot be done by GPU charities if they are to retain their characteristic as charities, is an emphatic manner in which Parliament wished to express itself. [Para 138][998-A-D] 2.3 Not every state activity resembling commerce can be considered per se exempt from union taxation, in the context of Article 289. Mere sale or lease of government property does not imply trade or business. The crucial or determinative element in the venture, so to say, is whether performance of a function is actuated by profit motive. The careful analysis of the amended proviso to Section 2(15), reveal that the prohibition applies in a four-fold manner- (a) The bar to engaging in trade, commerce or business, (b)The bar to providing any service in relation to trade, commerce or business, (c) wherein “for a fee, cess or any other consideration” is the controlling phrase for both (a) and (b) (which are collectively referred to as “prohibited activities” for brevity) E (d) irrespective of the application of the income derived from such ‘prohibited activities’. [Para 141, 142][1001-F-H; 1002-A- B] 2.4 The impermissibility of any trade, or commercial activity or service, and income, from them, was intended to be conveyed through the prohibition, in the first part of the definition of GPU charities. The necessary implication which arises is that income (received as fee, cess, or any other consideration) derived from such ‘prohibited activities’ is necessarily motivated by profit. The ordinary meaning of fee or consideration would be synonymous with something of value, usually in monetary terms. However, the use of the expression “cess” facially lends a different colour to all the three expressions. [Para 143][1002-B-D] 2.5 “Fee, cess and any other consideration” has to receive a purposive interpretation, in the present context. If fee or cess H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 907 URBAN DEVELOPMENT AUTHORITY or such consideration is collected for the purpose of an activity, by a state department or entity, which is set up by statute, its mandate to collect such amounts cannot be treated as consideration towards trade or business. Therefore, regulatory activity, necessitating fee or cess collection in terms of enacted law, or collection of amounts in furtherance of activities such as education, regulation of profession, etc., are per se not business or commercial in nature. Likewise, statutory boards and authorities, who are under mandate to develop housing, industrial and other estates, including development of residential housing at reasonable or subsidized costs, which might entail charging higher amounts from some section of the beneficiaries, to cross- C subsidize the main activity, cannot be characterized as engaging in business. The character of being ‘state’, and such corporations or bodies set up under specific laws (whether by states or the centre) would, therefore, not mean that the amounts are ‘fee’ or ‘cess’ to provide some commercial or business service. In each case, at the same time, the mere nomenclature of the consideration being a “fee” or “cess”, is not conclusive. If the fee or cess, or other consideration is to provide an essential service, in larger public interest, such as water cess or sewage cess or fee, such consideration, received by a statutory body, would not be considered “trade, commerce or business” or service in relation to those. Non-statutory bodies, on the other hand, which may mimic regulatory or development bodies - such as those which promote trade, for a section of business or industry, or are aimed at providing facilities or amenities to improve efficiencies, or platforms to a segment of business, for fee, whether charged by subscription, or specific fee, etc, may not be charitable; when they claim exemption, their cases would require further scrutiny. [Para 144][1002-D-H; 1003-A-B] 2.6 What Parliament intended – through the amendments in question was to proscribe, involvement or engagement of GPU charities, from any form (“in the nature of”) of activities that were trade, business or commerce, or engage or involve in providing services in relation to trade, business or commerce- for a fee, cess or other consideration. The inclusion of the term “in the nature of” was by design, to clarify beyond doubt, that not only H
p. 908
A business, trade or commerce, but all activities in the nature of, or resembling them, were proscribed. Likewise, service in relation to such activities, i.e., services relating, or pertaining to, such proscribed activities, too were forbidden. The reference to fee or cess, is in the opinion of the court, only to emphasize that even a statutory consideration, for a service to business, trade or commerce, would take the activity outside the definition of a GPU charity. The sense in which the expressions “cess, fee or other consideration” are used, is that if any amount, is received for trading, or business or commercial activity, or any services to such activity, then, notwithstanding their nomenclature (as fee or cess, i.e. that they are fixed under a law) the GPU charity cannot claim tax exempt status. To bring home this even more pointedly- and underline a break from the past, the application of such amounts (received in the course of trade, commerce, or business, or towards services in relation thereto) would be irrelevant, as evidenced by the term “irrespective”, in the fourth limb of reading Section 2(15). [Paras 150, 151][1006-D-H] 2.7 Section 2(15) - in the wake of its several amendments between 2008 and 2015 - can be juxtaposed with the interpretation of the unamended Section 2(15) by this Court. In Surat Art Silk’s case, the principle enunciated was that so long as the predominant object of GPU category charity is charitable, its engagement in a non-charitable object resulting in profits that are incidental, is permissible. Profits and gains from such activities which were non-charitable had to be deployed or “fed” back to achieve the dominant charitable object. The paradigm change achieved by Section 2(15) after its amendment in 2008 and as it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15). Therefore, the idea of a predominant object among several other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities. The conditions are; that such activities in the nature of trade, commerce, business H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 909 URBAN DEVELOPMENT AUTHORITY or service (in relation to trade, commerce or business for consideration) should be in the course of “actual carrying on” of the GPU object, and the quantum of receipts from such activities should be exceed 20% of the total receipts. Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read conjunctively-given the conscious use of “or” connecting the two of them. This means that if a charitable trust carries on any activity in the nature of business, trade or commerce, in the actual course of fulfilling its objectives, the income from such business, should not exceed the limit defined in sub-clause (ii) to the proviso. [Paras 152, 153][1007-A-G] 2.8 What has to be examined, therefore, is whether the business itself is held under trust or is carried on by and on behalf of the trust. Importantly Section 11(1) of the Act starts with the expression “subject to the provisions of Sections 60 to 63........”. Those provisions are in Chapter V of the Act. Section 60 provides for the consequences of a transfer of income where there is no transfer of assets. It says that where a person transfers merely the income from an asset without transferring the asset itself, he would continue to be chargeable to income tax. Section 61 provides for the consequences of a revocable transfer of assets and says that the same would be the position where a person is in receipt of income by virtue of a revocable transfer of assets. E Section 62 provides for the consequences of a transfer of assets for a specified period, and serves as an exception to Section 61. An assessee has to be divested of the asset before ceasing to be assessable in respect of the income from it. A mere direction that the income from the business shall be applied to the charitable objects of a trust, without there being a settlement of the business itself upon trust, does not result in any trust or legal obligation. [Para 163][1012-F-H; 1013-A-B] 2.9 The journey which began with Surat Art Silk’s case was interpreted in Thanthi Trust’s case to mean that the carrying on of business by GPU charity was permissible as long as it inured to the benefit of the trust. The change brought about by the amendments in questions, however, place the focus on an entirely different perspective: that if at all any activity in the nature of
p. 910
A trade, commerce or business, or a service in the nature of the same, for any form of consideration is permissible, that activity should be intrinsically linked to, or a part of the GPU category charity’s object. Thus, the test of the charity being driven by a predominant object is no longer good law. Likewise, the ambiguity with respect to the kind of activities generating profit which could feed the main object and incidental profit-making also is not good law. What instead, the definition under Section 2(15) through its proviso directs and thereby marks a departure from the previous law, is – firstly that if a GPU charity is to engage in any activity in the nature of trade, commerce or business, for consideration it should only be a part of this actual function to attain the GPU objective and, secondly – and the equally important consideration is the imposition of a quantitative standard - i.e., income (fees, cess or other consideration) derived from activity in the nature of trade, business or commerce or service in relation to these three activities, should not exceed the quantitative limit of D 10,00,000 (w.e.f. 01.04.2009), 25,00,000 (w.e.f. 01.04.2012), and 20% (w.e.f. 01.04.2016) of the total receipts. Lastly, the “ploughing” back of business income to “feed” charity is an irrelevant factor – again emphasizing the prohibition from engaging in trade, commerce or business. [Para 167][1014-A-F] E 2.10 If one understands the definition in the light of the above enunciation, the sequitur is that the reference to “income being profits and gains of business” with a further reference to its being incidental to the objects of the Trust, cannot and does not mean proceeds of activities incidental to the main object, F incidental objects or income derived from incidental activities. The proper way of reading reference to the term “incidental” in Section 11(4A) is to interpret it in the light of the sub-clause (i) of proviso to Section 2(15), i.e., that the activity in the nature of business, trade, commerce or service in relation to such activities should be conducted actually in the course of achieving the GPU G object, and the income, profit or surplus or gains can then, be logically incidental. The amendment of 2016, inserting sub clause (i) to proviso to Section 2(15) was therefore clarificatory. Thus interpreted, there is no conflict between the definition of charitable purpose and the machinery part of Section 11(4A). Further, the H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 911 URBAN DEVELOPMENT AUTHORITY obligation under Section 11(4A) to maintain separate books of account in respect of such receipts is to ensure that the quantitative limit imposed by sub-clause (ii) to Section 2(15) can be computed and ascertained in an objective manner. [Para 168][1014-F-H; 1015-A-B] 2.11 The conclusion recorded is also supported by the language of seventh proviso 142 to Section 10(23C). Whereas Section 2(15) is the definition clause, Section 10 lists out what is not income. Section 10(23C) – by sub-clauses (iv) and (v) exempt incomes of charitable organisations. Such organisations and institutions are not limited to GPU category charities but rather extend to other types of charities (i.e. the per se kind as well). C The controlling part of Section 10(23C) along with the relevant clauses (iv) and (v) seek to exclude income received by the concerned charities. However, the provisos hedge such exemption with conditions. The seventh proviso - much like Section 11(4A) and the definition - carve out an exception, to the D exemptions such that income derived by charities from business, are not exempt. The seventh proviso virtually echoes Section 11(4A) in that business income derived by a charity (in the present case, the GPU charities) which arises from an activity incidental to the attainment of its objective is not per se excluded. [Para 169][1015-B-E] E 2.12 Classically, the idea of charity was tied up with eleemosynary. However, “charitable purpose” – and charity as defined in the Act have a wider meaning where it is the object of the institution which is in focus. Thus, the idea of providing services or goods at no consideration, cost or nominal consideration is not confined to the provision of services or goods without charging anything or charging a token or nominal amount. Therefore, pure charity in the sense that the performance of an activity without any consideration is not envisioned under the Act. If one keeps this in mind, what Section 2(15) emphasizes is that so long as a GPU’s charity’s object involves activities which also generates profits (incidental, or in other words, while actually carrying out the objectives of GPU, if some profit is generated), it can be granted exemption provided the quantitative limit (of not exceeding 20%) under second proviso to Section 2(15) for receipts from such profits, is adhered to. Yet another manner of H
p. 912
A looking at the definition together with Sections 10(23) and 11 is that for achieving a general public utility object, if the charity involves itself in activities, that entail charging amounts only at cost or marginal mark up over cost, and also derive some profit, the prohibition against carrying on business or service relating to business is not attracted - if the quantum of such profits do not B exceed 20% of its overall receipts. [Para 170-172][1015-E-G; 1016-C-E] 2.13 The insertion of Section 13(8), the seventeenth proviso to Section 10(23C) and third proviso to Section 143(3) (all of which were inserted by Finance Act, 2012, but w.r.e.f. 01.04.2009), C further reinforces the interpretation of this Court, of “charitable purpose”. These provisions, form the machinery to control the conditions under which income is exempt. The effect of the seventeenth proviso to Section 10(23C) is to impose the same condition i.e., that that the trade, commerce or business activity D or service relating to trade, business or commerce, should be part of the GPU’s activities, to achieve its object of advancing general public utility. The other condition– which is drawn in as part of the exemption condition, is that if such trading or commercial activity takes place the receipts should be confined to a prescribed percentage of the overall receipts. Section 13(8) E too reinforces the same condition. [Para 174][1017-B-D] 2.14 The change intended by Parliament through the amendment of Section 2(15) was sought to be emphasised and clarified by the amendment of Section 10(23C) and the insertion of Section 13(8). This was Parliaments’ emphatic way of saying F that generally no commercial or business or trading activity ought to be engaged by GPU charities but that in the course of their functioning of carrying out activities of general public utility, they can in a limited manner do so, provided the receipts are within the limit spelt out in Clause (ii) of the proviso to Section 2(15). G [Para 175][1017-D-F]
3. The conclusions arrived at by way of this judgment, neither precludes any of the assessees (whether statutory, or non-statutory) advancing objects of general public utility, from claiming exemption, nor the taxing authorities from denying H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 913 URBAN DEVELOPMENT AUTHORITY exemption, in the future, if the receipts of the relevant year exceed the quantitative limit. The assessing authorities must on a yearly basis, scrutinize the record to discern whether the nature of the assessee’s activities amount to “trade, commerce or business” based on its receipts and income (i.e., whether the amounts charged are on cost-basis, or significantly higher). If it is found that they are in the nature of “trade, commerce or business”, then it must be examined whether the quantified limit (as amended from time to time) in proviso to Section 2(15), has been breached, thus disentitling them to exemption. [Para 253, H][1062-C-E] The Trustees of Tribune Press, Lahore v. CIT, Punjab C [1939] 7 ITR 415; Charitable Gadodia Swadeshi Stores v. CIT [1944] 12 ITR 385; CIT v. P. Krishna Warriar [1964] 8 SCR 36; CIT v. Andhra Chamber of Commerce [1965] 1 SCR 565; All India Spinners Association of Mirzapur v. CIT [1944] 12 ITR 482; Sole Trustee, Lok D Shikshana Trust v. Commissioner of Income Tax (1976) 1 SCC 254 : [1976 ] 1SCR 461; Indian Chamber of Commerce v. CIT (1976) 1 SCC 324 : [1976] 1SCR 830; Assistant Commissioner v. Surat Art Silk Cloth Manufacturers’ Association (1980) 2 SCC 31 : [1980] 2 SCR 77; Indian Chamber of Commerce v. E Commissioner of Income Tax (1976) 1 SCC 324 : [1976] 1 SCR 830; Dharmadeepti v. CIT (1978) 3 SCC 499 : [1978] 3 SCR 1038; Assistant Commissioner of Income Tax v. Thanthi Trust (2001) 2 SCC 707 : [2001] 1 SCR 727; New Delhi Municipal Council v. State of Punjab F (1997) 7 SCC 339 : [1996] 10 Suppl. SCR 472; CIT, Bombay v. Bar Council of Maharashtra (1981) 3 SCC 308 : [1981] 3 SCR542; Shri Ramtanu Cooperative Housing Society Ltd. v. State of Maharashtra (1970) 3 SCC 323 : [1971]1 SCR 719; Gujarat Industrial Development Corporation v. CIT [1997] Supp 3 SCR G 466; HSIDC v. Hari Om Enterprises (2009) 16 SCC 208 : [2008] 9 SCR 821; Commissioner of Central Excise v. Maharashtra Industrial Development Corporation 2017 SCC Online Bom 10021; Navnit Lal C. Jhaveri v. K.K. Sen [1965] 1 SCR 909; UCO Bank H
p. 914
A Calcutta v. Commissioner of Income Tax, West Bengal 1999 (4) SCC 599 : [1999] 3 SCR 635; State of Punjab v. Bajaj Electricals Ltd. [1968] SCR 2 636; Khoday Distilleries Ltd. v. State of Karnataka (1995) 1 SCC 574 : [1994] 4 Suppl. SCR 477; State of Gujarat v. M/ s. Raipur Manufacturing [1967] 1 SCR 618; Central B Excise, Bolpur v. Ratan Melting and Wire Industries (2008) 13 SCC 1 : [2008] 14 SCR 653; Greater Noida Industrial Development Authority v. Union of India & Ors 2018 Scc Online Delhi 7536; Shri Ramtanu Co- operative Housing Society Limited v. State of C Maharashtra (1970) 3 SCC 323 : [1971] 1 SCR 719; Kerala State Electricity Board v. Indian Aluminium Co. Ltd. (1976) 1 SCC 466 : [1976] 1 SCR 552; Trustees of the Port of Madras v. Aminchand Pyarelal and Ors. (1976) 3 SCC 167 : [1976] 1 SCR 721; State of Gujarat v. Mahesh Dhiarjlal Thakkar (1980) 2 SCC 322; Sodan D Singh & Ors. v. New Delhi Municipal Committee & Ors. [1989] 3 SCR 1038; T.M.A Pai Foundation and Ors. v. State of Karnataka & Ors. (2002) 8 SCC 481 : [2002] 3 Suppl. SCR 587; CIT, Madras v. M/s Madurai Mills Company Limited (1973) 4 SCC 194 : [1973] 3 SCR E 662; Karnataka Industrial Areas Development Board v. Prakash Dal Mill (2011) 6 SCC 714 : [2011] 5 SCR 26; State of Karnataka v. All India Manufacturer’s Organisation (2006) 4 SCC 683 : [2006] 1 Suppl. SCR 86; State of Tamil Nadu v. Board of Trustees of the Port of Madras [1999] 2 SCR 195; Commissioner of Income F Tax v. Gujarat Maritime Board [2007] 12 SCR 962;
State of Karnataka v. Shreyas Papers Pvt. Ltd. AIR 2006
SC 865 : [2006] 1 SCR 235; Ashoka Smokeless Coal India (P) Ltd. v. Union Of India (2007) 2 SCC 640 : [2006] 9 Suppl. SCR 954; New Delhi Municipal G Committee v. State of Punjab [1996] Supp 10 SCR 472; Physical Research Laboratory v. K.G Sharma [1997] 3SCR 733; Yogiraj Charity Trust v. CIT [1976] 3 SCR 947; Commissioner of Income Tax v. Andhra Pradesh Road Transport Corporation [1986] 1 SCR 570; Queens’s Educational Society v. CIT 2015 (8) SCC 47 H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 915 URBAN DEVELOPMENT AUTHORITY
: [2015] 3 SCR838; CST v. Sai Publication Fund [2002] A 2 SCR 743; Chameli Singh v. State of U.P & Ors. (1996) 2 SCC 549 : [1995] 6 Suppl. SCR 827; Sri. P.G. Gupta v. State of Gujarat & Ors. 1995 (1) SCALE 653; P. Vajravelu Mudaliar v. Special Deputy Collector, Madras & Ors. [1965] 1 SCR 614; Dalco Engineering Pvt. Ltd. B v. Satish Prabhakar Padhye & Ors. (2010) 4 SCC 378 : [2010] 4 SCR15; State of A.P v. H. Abdul Bakhi & Bros. [1964] 7 SCR 664; ICAI Accounting Research Foundation v. DGIT(E) 321 ITR 73 (Del); Bureau of Indian Standards v. DGIT(E) 358 ITR 78 (Del); GS1 India v. DGIT(E) 360 ITR 138 (Del); Dir. Of Supp. & C Disp. v. Board of Revenue [1967] 3 SCR 778; Barendra Prasad Ray v. ITO [1981] 3 SCR 387; State of Gujarat v. Raipur Manufacturing Co. Ltd. [1967] 1 SCR 618; Customs & Excise Commissioner v. Lord Fisher (1981) 2 All ER 147; Nabha Power Limited v. Punjab SPCL D (2018) 11 SCC 508: [2017] 14 SCR 301; State of Gujarat v. Maheshkumar Dhirajal Thakkar (1980) 2 SCC 322; Saurashtra Education Foundation v. CIT [2005] 273 ITR 139 (Guj.); Gujarat State Co-operative Union v. CIT [1992] 195 ITR 279 (Guj.); American Hotel and Lodging Association v. CBDT (2008) 10 SCC E 509 : [2008] 8 SCR 117 Victoria Technical Institute v CIT [1991] 188 ITR 57 (SC); Aditnar Educational Institution v. Addl. CIT (1997) 3 SCC 346 : [1997] 1 SCR 948; Thiagarajar Charities v. ACIT (1997) 4 SCC 724 : [1997] 3 F SCR965; Director of Income Tax v. Bharat Diamond Bourse [2003] 259 ITR 280 (SC); Visvesvarya Technological University v. Assistant Commissioner of Income Tax (2016) 12 SCC 258 :[2016] 4 SCR 362; J.K Synthetics & Another v. Union of India & Ors. 1981 SCC OnLine Del 457; Ellerman Lines v. Commissioner G of Income Tax (1972) 4 SCC 474 : [1972] 2 SCR 168; Adityapur Industrial Area Development Authority v. Union of India (2006) 5 SCC 100 : [2006] 1 Suppl. SCR 757; Commissioner of Income Tax v. Federation of Indian Chambers of Commerce and Industries [1981] H
p. 916
A 3 SCR 489; Duparquet Co. v. Evans 297 U.S. 216 (1936); Bhuwalka Steel Indus. Ltd. & Ors. v. Bombay Iron and Steel Labour Bd. & Ors. [2009] 16 SCR 618; Chief Justice of Andhra Pradesh & Ors. v. L.V.A. Dixitulu & Ors. [1979) 1 SCR 26; Lohia Machines Ltd. and Ors. v. Union of India & Ors. [1985] 2 SCR 686; B Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Company & Ors. 2018 (9) SCC 1 : [2018] 7 SCR 1191; State of West Bengal v. Union of India [1964] 1 SCR 371; Ellerman Lines Ltd. v. Commissioner of Income Tax [1972] 2 SCR 168; K.P. Verghese v. C Commissioner of Income Tax [1982] 1 SCR 629; Union of India v. Azadi Bachao Andolan [2003] Supp 4 SCR 222; CIT v. Vatika Township (2015) 1 SCC 1 : [2014] 12 SCR 1037; Keshavji Ravji & Co. and Ors. v. Commissioner of Income Tax (1992) 2 SCC 231; Commissioner of Customs v. Indian Oil Corporation D [2004] 2 SCR 511; S.K. Gupta & Anr. v. K.P. Jain & Anr. (1979) 3 SCC 54 : [1979] 2 SCR 1184; Indira Nehru Gandhi v. Shri Raj Narain and Anr. (1975) Supp. SCC 1; Kalya Singh v. Genda Lal and Ors. [1975] 3 SCR 783; Vanguard Fire and Insurance Company Ltd. E v. M/s. Fraser and Ross and Anr. [1960] 3 SCR 837; N.K. Jain and Ors. v. C.K. Shah and Ors. [1991] 1 SCR 938;G. Venkataswami Naidu v. Commissioner of Income Tax [1959] Supp 1 SCR 646; State of Tamil Nadu v. Burmah Shell Oil Storage Distribution Company of India Ltd. [1973] 2 SCR 636; State of Tamil Nadu v. Shakti F Estates [1989] 1 SCR 408; Director of Civil Supplies v. Member Board of Revenue [1967] 3 SCR 778; Renusagar Power Co. Ltd. v. General Electric Co. [1985] 1 SCR 432; Mansukhlal Dhanraj Jain v. Eknath Vithal Ogale [1995] 1 SCC 996; Doypack System (P) G Ltd. v. Union of India 1988 (2) SCC 299 : [1988] 2 SCR 962; Physical Research Laboratory v. K. G. Sharma (1997) 4 SCC 257 : [1997] 3 SCR 733; Town Investments v. Department of Environment 1977 1 ALLER 813; Brothers Etc. v. Deputy Commissioner, Raichur and Ors. [1967] 1 SCR 548; India Cement Ltd. H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 917 URBAN DEVELOPMENT AUTHORITY
& Ors. v. State of Tamil Nadu and Ors. [1989] Supp 1 A SCR 692; Vijayalashmi Rice Mill and Ors. v. Commercial Tax Officers, Palakol & Ors. (2006) 6 SCC 763 : [2006] 4 Suppl. SCR 279; The Commissioner of Income Tax, Lucknow v. U.P. Forest Corporation [1998] 2 SCR 22; Union of India & Ors. v. State of U.P. & B Ors. [2007] 12 SCR 792; Union of India v. Purna Municipal Corporation [1991] Supp 1 SCR 183; Municipal Corporation, Amritsar v. Senior Superintendent of Post Offices, Amritsar Division & Anr. [2004] 1 SCR 913; Commissioner of Central Excise, Mumbai v. Fiat India (P) Ltd. & Ors. [2012]12 SCR C 975; Commissioner of Income Tax v. Dawoodi Bohara Jamat (2014) 16 SCC 222; S.RM.M.CT.M. Tiruppani Trust v. Commissioner of Income Tax (1998) 2 SCC 584 : [1998] 1 SCR 653; Gadodia Swadeshi Stores v. Commissioner of Income Tax, Punjab [1944] 12 ITR D 385; J.K. Trust v. CIT [1985] 1 SCR 65; Thiagesar Dharma Vanikam v. CIT [1963] 50 ITR 798 Madras; Raja P.C. Lall Choudhary v. CIT, Bihar & Orissa [1957] 31 ITR 226 Patna; Director of Income Tax v. Bharat Diamond Bourse (2002) 10 SCC 392; Bangalore Water Supply and Sewage Undertaking v. A Rajappa (1978) E 2 SCC 213:[1978] 3 SCR 207; Greater Noida Industrial Development Authority v. Union of India (hereafter “GNIDA”) [2018] 406 ITR 418; CIT v. Yamuna Expressway Industrial Development Authority (2017) 395 ITR 18; Tamil Nadu Cricket Association v. Director F of Income Tax (Exemptions) & Ors. [2014] 360 ITR 633; Sahney Steel & Press Works Ltd v. Commissioner of Income Tax [1997] Supp 4 SCR 189; Commissioner of Income Tax v. Ponni Sugars 2008 (9) SCC 337 : [2008] 13 SCR570 – referred to. Halsbury’s Laws of England, Vol. 32 para 487 G
Case Law Reference [1939] 7 ITR 415 referred to Para 6 [1944] 12 ITR 385 referred to Para 6 H
p. 918
A [1964] 8 SCR 36 referred to Para 7 [1965] 1 SCR 565 referred to Para 8 [1944] 12 ITR 482 referred to Para 8 [1976] 1SCR 461 referred to Para 11 B [1976] 1SCR 830 referred to Para 13 [1980] 2 SCR 77 referred to Para 14 [1976] 1SCR 830 referred to Para 15 [1978] 3 SCR1038 referred to Para 17 C [2001] 1 SCR 727 referred to Para 22 [1996] 10 Suppl. SCR 472 referred to Para 36 [1981] 3 SCR542 referred to Para 41 [1971] 1 SCR719 referred to Para 44 D [1997] Supp 3 SCR 466 referred to Para 44 [2008] 9 SCR821 referred to Para 44 [2017] SCC Online Bom 10021 referred to Para 44 [1965] 1 SCR 909 referred to Para 45 E [1999] 3 SCR 635 referred to Para 45 [1968] SCR 2 636 referred to Para 46 [1994] 4 Suppl. SCR477 referred to Para 46
F [1967] 1 SCR 618 referred to Para 46 [2008] 14 SCR653 referred to Para 47 [2018] SCC Online Delhi 7536 referred to Para 47 [1971] 1 SCR719 referred to Para 47 G [1976] 1 SCR 552 referred to Para 47 [1976] 1 SCR 721 referred to Para 47 (1980) 2 SCC 322 referred to Para 49 [1989] 3 SCR 1038 referred to Para 49 H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 919 URBAN DEVELOPMENT AUTHORITY
[2002] 3 Suppl. SCR 587 referred to Para 49 A [1973] 3 SCR 662 referred to Para 49 [2011] 5 SCR 26 referred to Para 50 [2006] 1 Suppl. SCR86 referred to Para 50 [1999] 2 SCR 195 referred to Para 51 B [2007] 12 SCR 962 referred to Para 51 [2006] 1 SCR235 referred to Para 51 [2006] 9 Suppl. SCR954 referred to Para 51 C [1996] Supp 10 SCR 472 referred to Para 51 [1997] 3SCR 733 referred to Para 51 [1976] 3 SCR 947 referred to Para 51 [1986] 1 SCR 570 referred to Para 51 D [2015] 3 SCR838 referred to Para 51 [2002] 2 SCR 743 referred to Para 51 [1995] 6 Suppl.SCR 827 referred to Para 52 1995 (1) SCALE 653 referred to Para 52 E [1965] 1 SCR 614 referred to Para 56 [2010] 4 SCR15 referred to Para 57 [1964] 7 SCR 664 referred to Para 58 321 ITR 73 (Del) referred to Para 65 F 358 ITR 78 (Del) ) referred to Para 65 360 ITR 138 (Del) ) referred to Para 65 [1967] 3SCR 778 referred to Para 67 [1981] 3 SCR 387 referred to Para 67 G [1967]1 SCR 618 referred to Para 67 (1981) 2 All ER 147 referred to Para 67 [2017] 14 SCR301 referred to Para 75 H
p. 920
A [1980] 2 SCC 322 referred to Para 76 [2005] 273 ITR 139 (Guj.) referred to Para 80 [1992] 195 ITR 279 (Guj.) referred to Para 80 [2008] 8 SCR117 referred to Para 80 B [1991] 188 ITR 57 (SC) referred to Para 82 [1997] 1 SCR 948 referred to Para 82 [1997] 3 SCR 965 referred to Para 82 [2003] 259 ITR 280 (SC) referred to Para 82 C [2016] 4 SCR362 referred to Para 83 [1981] SCC OnLine Del 457 referred to Para 83 [1972] 2 SCR168 referred to Para 84 [2006] 1 Suppl. SCR757 referred to Para 90 D [1981] 3 SCR 489 referred to Para 98 297 U.S. 216 (1936) referred to Para 108 [2009] 16 SCR 618 referred to Para 109 [1979) 1 SCR 26 referred to Para 110 E [1985] 2 SCR 686 referred to Para 111 [2018] 7SCR1191 referred to Para 111 [1964] 1 SCR 371 referred to Para 112
F [1972] 2 SCR 168 referred to Para 119 [1982] 1 SCR 629 referred to Para 119 [2003] Supp 4 SCR 222 referred to Para 119 [2014] 12SCR1037 referred to Para 119 G (1992) 2 SCC 231 referred to Para 120 [2004] 2 SCR 511 referred to Para 121 [1979] 2 SCR 1184 referred to Para 124 (1975) Supp. SCC 1 referred to Para 124 H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 921 URBAN DEVELOPMENT AUTHORITY
[1975] 3 SCR 783 referred to Para 124 A [1960] 3 SCR 837 referred to Para 124 [1991] 1 SCR 938 referred to Para 124 [1959] Supp 1 SCR 646 referred to Para 131 [1973] 2 SCR 636 referred to Para 131 B [1989] 1 SCR 408 referred to Para 131 [1967] 3 SCR 778 referred to Para 131 [1985] 1 SCR 432 referred to Para 132 C [1995] 1 SCC 996 referred to Para 132 [1988] 2 SCR 962 referred to Para 132 [1997] 3 SCR 733 referred to Para 139 1977 1 ALLER 813 referred to Para 140 D [1967] 1 SCR 548 referred to Para 145 [1989] Supp 1 SCR 692 referred to Para 146 [2006] 4 Suppl. SCR279 referred to Para 146 [1998] 2 SCR 22 referred to Para 147 E [2007]12 SCR 792 referred to Para 148 [1991] Supp 1 SCR 183 referred to Para 148 [2004] 1 SCR 913 referred to Para 148 [2012]12 SCR 975 referred to Para 149 F (2014) 16 SCC 222 referred to Para 154 [1998] 1 SCR 653 referred to Para 154 [1944] 12 ITR 385 referred to Para 158 [1985] 1 SCR 65 referred to Para 159 G [1963] 50 ITR 798 Madras referred to Para 162 [1957] 31 ITR 226 Patna referred to Para 162 (2002) 10 SCC 392 referred to Para 170 H
p. 922
A [1978] 3 SCR 207 referred to Para 170 [2018] 406 ITR 418 referred to Para 183 (2017) 395 ITR 18 referred to Para 183 [2014] 360 ITR 633 referred to Para 222 B [1997] Supp 4 SCR 189 referred to Para 236 [2008] 13 SCR 570 referred to Para 236 CIVIL APPELLATE JURISDICTION : Civil Appeal No.21762 of 2017. C From the Judgment and Order dated 02.05.2017 of the High Court of Gujarat at Ahmedabad in Tax Appeal No.425 of 2016. With C.A. Nos. 8193, 5057 of 2012, 5058 OF 2014, 9974 of 2018, 5056 D of 2012, 4196, 4374 of 2015, 9380, 13071, 12058, 16375, 12869, 17527, 21845 of 2017, 5719, 9886, 9200, 9860, 10114 of 2018, 1643/2019, 3596, 6762, 3972, 3343, 3359, 3971, 3347, 6489, 10598, 7643, 8321, 8554, 9172, 10406, 11259, 11884 of 2018, 226, 170, 2047, 2335, 3971, 4449, 4957 of 2019, 213, 783 of 2020, 4430, 2477, 2478 of 2021; 7705, 7696, 7720, E 7780, 7717, 7707, 7698, 7699, 7695, 7719, 7703, 7718, 7700, 7701, 7702, 7721, 7723, 7722, 7704, 7708, 7724, 7709, 7710, 7711, 7725, 7726, 7712, 7727, 7713, 7714, 7728, 7754, 7730, 7733, 7734, 7735, 7738, 7741, 7742, 7743, 7745, 7753, 7697, 7729, 7715, 7731, 7732, 7716, 7736, 7737, 7739, 7740, 7744, 7746, 7747, 7748, 7749, 7750, 7751, 7752 of 2022 F N. Venkataraman, ASG, Arvind datar, Kavin Gulati, Ms. Radhika Suri, Ajay Vohra, Dhruv Agrawal, Arvind P. Datar, K. K. Chythanya, Sanjay Jhanwar, Harish N. Salve, Tushar Hemani, Manish Shah, K.V. Viswanathan, Harish Salve, Saurabh Soparkar, S. N. Bhat, Sr. Advs., G Rupesh Kumar, Ms. Gargi Khanna, Shyam Gopal, V. Chandrashekara Bharathi, Ms. Alka Agarwal, H. R. Rao, Raj Bahadur Yadav, B. V. Balaram Das, Mrs. Anil Katiyar, Mrs. Prabha Swami, Nikhil Swami, A V A Siva Kartikeya, Ms. Divya Swami, Rajat Navet, Kushagra Pandit, Pradeep K. Bakshi, Garvesh Kabra, Kumar Dushyant Singh, Rohit H Sharma, Rounak Nayak, Anshul Chowdhary, Ms. Arju Chaudhary, P. S.
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 923 URBAN DEVELOPMENT AUTHORITY
Sudheer, Gursharan H.Virk, Ms. Simranjit H.Virk, Prashanth Undurti, A Ms. Esha T, Jaymin R. Brahmbhatt, Nakul Mohta, Ms. Misha Rohatgi Mohta, Devansh Shrivastava, Johnson Subba, Mahinder Singh Hura, Jasmeet Singh, Saif Ali, Divjot Singh Bhatia, Pushpendra S. Bhadoriya, Ms. Rusheet Saluja, Ms. Mamta Chakrabarti, Yajur Bhalla, Deepak Samota, Ashish Vajpayee, Rohit Kumar Pihal, Shubham Bhalla, Manish B JP Shah, Balaji Srinivasan, Ms. Pallavi Sengupta, Shahrukh Mohammed, Ms. Kavita Jha, Anant Mann, Udit Naresh, Rohit Jain, Aniket D. Agarwal, Abhishek Kumar Singh, Pramod Dayal, Nikunj Dayal, Rahul Unnikrishnan, Dr. Rakesh Gupta, Somil Agarwal, Anshul Mittal, Ambhoj Kumar Sinha, Anand Sukumar, S. Sukumaran, Sharath S., Ajit V. Ghatikar, C Bhupesh Pathak, S. Krishnan, K. V. Mohan, R. K. Raghavan, Rajat Sharma, Tarun Gupta, Ashish Virmani, Kanu Agrawal, Ms. Bina Madhvan, Ms. Aditi Sethi, Rajat Nair, Sanjay Kumar Visen, Ms. Adira A. Nair, Ms. Babita Mishra, Rishabh Sancheti, Ms. Padma Priya, Anchit Bhandari, Sushant Rao, Ms. Saloni Bhandari, Ms. Racheeta Chawla, Vivek Singh, Rakesh Uttamchandra Upadhyay, Ms. Aarti U. Mishra, D Rishabh Kumar Pandey, Surrender Singh Manak, Mishra Saurabh, Kabir Hathi, Jatin Zaveri, Neel Kamal Mishra, D. S. Mishra, Ms. Deepanwita Priyanka, Siddharth Batra, Ms. Archna Yadav, Ms. Shivani Chawla, Chinmay Dubey, Malak Manish Bhatt, Sarim Naved, Kabir Dixit, Ms. Anshu Davar, Kamran Javed, D. P. Chaturvedi, Tarun Kumar Thakur, E Ms. Parvati Bhat, Anuj Verma, Mrs. Anuradha Mutatkar, Mehul Sharma, Karunankar Mahalik, Advs. for the appearing parties.
Judgment
The Judgment of the Court was delivered by S. RAVINDRA BHAT, J. F Index * I. Brief history of legislative changes and this court’s interpretation ................................................................ 5 A. Provisions of the Income Tax Act, 1922 ............ 5 G B. The new law: Income Tax Act, 1961 .................. 8 C. The judgment in Surat Art Silk ......................... 11
* Ed Note: Pagination in the Index is as per the original judgment. H
p. 924
A D. Relevant changes brought about to the IT Act, 1961 (Finance Act, 1983 and 1991) ......................... 17 E. The judgment in Thanthi Trust ......................... 18 F. Deletion of certain exemptions: Section 10 (20A) and Section 10 (23) .................................................. 20 B G. Amendments to Section 2 (15) by Finance Act, 2008 (w.e.f. 01.04.2009) ............................................ 21 II. Submissions of parties ............................................... 22 A. Arguments on behalf of the revenue ................ 22 C B. Arguments of the assessee-organizations ....... 26 C. Revenue’s rebuttal arguments ........................... 54 III. Analysis and reasoning ............................................ 55 A. Aids to interpretation ........................................ 62 D (i) History of the legislation ................................. 62 (ii) Other extrinsic aids to construction of the statute .................................................................. 63 B. Interpretation of Section 2(15), the definition E clause.................................................................. 70 Summation of interpretation of Section 2(15) ..... 85 C. Sections 10, 11, 12, 12A, 12AA and 13 of the IT Act ....................................................................... 86 F Distinction between business held under Trust [Section 11(4)] and Trust carrying on business [Section 11(4A)] 87 D. What kinds of income or receipts may not be characterized as derived from trade, commerce, G business or in relation to such activities, for a consideration ..................................................... 98 (i) Statutory corporations, authorities or bodies ... 98 (ii) Statutory regulatory bodies/authorities ........ 109 H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 925 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
(iii) Trade Promotion bodies, councils, associations or A organizations ....................................................... 114 (iv) Non-statutory bodies - ERNET, NIXI and GS1 India .................................................................... 116 (v) State Cricket Associations ........................... 122 B (vi) Private trusts .............................................. 135 IV.Summation of conclusions ...................................... 141 A. General test under Section 2(15) ....................... 141 B. Authorities, corporations, or bodies established by C statute .............................................................. 142 C. Statutory regulators ........................................ 143 D. Trade promotion bodies ................................. 144 E. Non-statutory bodies ...................................... 144 D F. Sports associations ........................................ 145 G. Private Trusts .................................................. 145 H. Application of interpretation ......................... 146
11. Leave granted in all matters where leave has not already been granted. C.A. No. 21762/2017 (Assistant Commission of Income Tax, Exemptions v. Ahmedabad Urban Development Authority) is taken as the lead matter.
22. Religious and charitable trusts have existed in one form or the other, tracing their origins to the instinct of benevolence, which is part of human nature. Indian philanthropy has enriched its cultural heritage, particularly in catering to the educational, medical, socio-economic, and religious needs of the people. Here its role has been supplementary to the efforts of the State, which has recognized the public utility of this impulse, and granted tax exemptions.Indian income-tax laws have favoured charities, even granted preferential treatment since 1886. The G law, while granting exemption to income from religious and charitable trusts has taken effective measures to minimise misuse of trust funds. As a result, a charitable trust loses tax exemption if certain provisions are not complied with, and if its activities do not fall under H
p. 926
A Section 10 of the Act. Such trusts also have to apply their income to the charitable objects within a specified period, maintain proper audited accounts, and invest or utilise funds in a manner so that no benefit is derived by the settlor, trustees, their relatives, or other persons. 1
33. The scope and amplitude of the definition “charitable purpose” B under the Income Tax Act, 1961 (hereafter “Income Tax Act” or “the IT Act”) has engaged the courts’ (including that of this court) attention on myriad occasions. The expression “not involving the carrying on of any activity for profit” in the last limb of the definition [Section 2(15) prior to amendment by Finance Act, 1983] was the subject of debate in no less than five judgments of this court (including that of a C five-member bench).
44. In these batch of appeals and special leave petitions, the primary question which falls for consideration is the correct interpretation of the proviso to Section 2(15)2 of the IT Act introduced by amendment w.e.f. 01.04.2009. It is necessary, at this stage, to notice that the IT Act visualized three kinds of charitable purposes: medical relief, education, and relief for the poor – which are described hereafter as “per se purposes”. To this list, Parliament has, by amendments, added other categories, such as preservation of environment (including watersheds, forests, and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and yoga. The last – or the residual purpose included by the definition - is “advancement of any other object of general public utility” (hereafter referred to as “GPU category”), which is the subject of interpretation in the present case.
55. The Director General of Income Tax for exemptions, F Commissioner of Income Tax (“CIT”) in various states, and other officials of the Income tax department (hereafter compendiously referred to as 1 Sections 11, 12, 12-A and 13 of the Income-tax Act, 1961. 2 “charitable purpose” includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of G any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity:..…” H (emphasis supplied)
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 927 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
“the revenue”) have appealed the decisions of various High Courts, which A have held that the carrying on of any trade, commerce, or business, is not a per se bar or disqualification for a GPU category charitable trust to claim to be such, precluding its tax-exempt status under the IT Act. I. Brief history of legislative changes and this court’s interpretation B A. Provisions of the Income Tax Act, 1922
66. The provisions of the erstwhile Income Tax Act, 1922 (hereafter “the old Act”) enabled tax exemption claims by trusts for their income from business activity, provided trusts were created thereon. The Privy Council in The Trustees of Tribune Press, Lahore v. CIT, C Punjab 3 (hereafter “In Re: Trustees of the Tribune”) held that the income of the Tribune Press fell within section 4(3)(i) of the old Act, and it was implied that income from the press was derived from property held under trust to maintain a newspaper, to keep up its liberal policy and to devote surplus funds to improve the newspaper. The word “property” D occurring under section 4(3)(i) of that Act was also held4 to include a business too. The old Act was amended twice with the object of eliminating and getting rid of tax exemptions for trusts, which were otherwise eligible for it. The first amendment of 1939 inserted5 a new 3 (1939) 7 ITR 415(hereafter “In Re: Trustees of the Tribune”). 4 In Commissioner of Income Tax v. P. Krishna Warriar, (1964) 8 SCR 36 : (1964) 53 E ITR 176 this court, citing and relying on In re, Trustees of the Tribune [(1939) ITR 415 PC] held that: “This Court in J.K. Trust, Bombay v. Commissioner of Income Tax, Excess Profits Tax, Bombay [(1957) 32 ITR 535] endorsed the said view and held that “property” is a term of the widest import and that business would undoubtedly be property unless there was something to the contrary in the enactment. If business was property, it could be held under trust for religious and charitable purposes. As the business of running the Arya Vaidya Sala vested under trust for religious and charitable purposes, it would fall under clause (i), if the other conditions laid down therein were satisfied.” 5 Section 4(3) of the Indian Income-tax (Amendment) Act, 1939, reads as follows: “(3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them:] (i) Subject to the provisions of clause (c) of sub-section (1) of section 16, any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto: (ia) Any income derived from business carried on on behalf of a religious or charitable institution when the income is applied solely to the purposes of the institution and- H
p. 928
A clause (ia) in the then existing provision. This provided that income derived from business carried on by or on behalf of a charitable trust or religious institution could be limited to only such business income as was derived by the trust or institution from business carried on either in the course of the carrying on of a trust’s primary purpose, or carried on mainly by the beneficiaries of the trust or institution. The Lahore High B Court in Charitable Gadodia Swadeshi Stores v. CIT6, observed: “Viewed in its proper perspective, therefore, clause (ia) can be taken to apply only such business as is carried on behalf of religious or charitable institutions which were not held under trust and not to such business as was itself held under trust or was conducted by or on behalf of such charitable or religious institutions as were held under trust. If it was intended to narrow down the scope of clause (1) so as to withdraw the exemption enjoyed by a business held under trust or conducted by or on behalf of a religious or charitable trust, the new clause should have been added as proviso to the old clause.”
77. The Act was again amended by the Finance Act, 1953 7 wherein clause (ia) was deleted from section 4(3)(i) of the old Act and instead (a) the business is carried on in the course of the carrying out of a primary purpose of the institution, or (b) the work in connection with the business is mainly carried on by beneficiaries of the institution” 6 (1944) 12 ITR 385 7 Section 4 of Finance Act, 1953 added proviso to Section 4(3)(i); it reads as follows: “Provided that such income shall be included in the total income— [(a) if it is applied to religious or charitable purposes without the taxable territories, but in the following cases, namely:— (i) where the property is held under trust or other legal obligation created before the commencement of the-Indian Income-tax (Amendment) Act, 1953 (XXV of 1953), and the income therefrom is applied to such purposes without the taxable territories; and (ii) where the property is held under trust or other legal obligation created after such commencement, and the income therefrom is applied without the taxable territories to charitable purposes which tend to promote international welfare in which India is interested, the Central Board of Revenue may, by general or special order, direct that it shall not be included in the total income;] (b) in the case of income derived from business carried on on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes of the institution and either— H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 929 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
inserted as its proviso. Parliamentary intent, in transforming old clause (ia) into a proviso to Section 4 (3)(i) was that whenever business was carried on behalf of a religious or charitable institution, the conditions prescribed in clause (b) of proviso to clause (i) had to be satisfied in addition to the general condition of exemption set out in the substantive part of clause (i). Parliament’s attempt to exempt income from business activity upon complying with other conditions - apart from those laid down in clause (i) - was interpreted by this court in CIT v. P. Krishna Warriar8 (hereafter “Krishna Warriar”). The court observed that: “The legal position may briefly be stated thus: Clause (i) of section 4(3) of the Act takes in every property or a fractional part of it held in trust wholly for religious or charitable purposes. It also takes in such property held only in part for such purposes. Business is also property within the meaning of said clause. Clause (b) of the proviso to section 4(3)(i) applies only to business not held in trust but carried on on behalf of religious or charitable institutions.” D
88. The old Act defined ‘charitable purpose’ under Section 4(3) - i.e., the definition as it stood just prior to the IT Act, 1961 coming into force (thereby replacing the old Act) - as follows: “4 (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them *** In this sub-section “charitable purpose” includes relief of the poor, education, medical relief and the advancement of any other object of general public utility, but nothing contained in clause (i) or clause (ii) shall operate to exempt from the provisions of this Act that part of the income from (i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or (ii) the work in connection with the business is mainly carried on by beneficiaries of the institution; (c) if it is applied to purposes other than religious or charitable purposes or ceases to be accumulated or set apart for application thereto in which case it shall be deemed to be the income of the year in which it is so applied or ceases to be so accumulated or set apart.]” 8 (1964) 8 SCR 36: (1964) 53 ITR 176 H
p. 930
A property held under a trust or other legal obligation for private religious purposes which does not enure for the benefit of the public.” This court had occasion to interpret the meaning of the expression “advancement of any other object of general public utility” in CIT B v. Andhra Chamber of Commerce9. The court considered previous decisions in: In Re: Trustees of the Tribune (supra) and All India Spinners Association of Mirzapur v. CIT10. Relying heavily on the decision of the Privy Council in In Re: Trustees of the Tribune (supra), this court held, in Andhra Chamber of Commerce that GPU objects included all objects promoting welfare of general public, including taking steps to oppose or urge legislation affecting trade, commerce, etc. B. The new law: Income Tax Act, 1961
99. Section 2 (15) of the IT Act (which came into force on 01.04.1962 and repealed the old IT Act) defined “charitable purpose” as follows: “(15) — charitable purpose includes 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.”
1010. The then Finance Minister, Mr. Morarji Desai, explained the rationale for the new definitionon the floor of Lok Sabha: “The definition of ‘charitable purpose’ in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving F a public purpose, get fully paid for the benefits provided by them, namely, the newspaper industry which while running its concern on commercial line can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words ‘not G involving the carrying on of any activity for profit’ should be added to the definition.”11
9 (1965) 1 SCR 565 (hereafter “Andhra Chamber of Commerce”) 10 (1944) 12 ITR 482 (hereafter “All India Spinners Association of Mirzapur”) 11 (LVI) Lok Sabha Debates., 32nd scs., p. 3073 (August 18, 1961). H
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 931 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
1111. The first major decision to interpret the new definition was A Sole Trustee, Lok Shikshana Trust v. Commissioner of Income Tax12 (hereafter “Lok Shikshana Trust”). This court turned down a contention that newspaper business, carried on with several other objects (which included setting up of educational institutions, dissemination of knowledge to the Kannada speaking public through newspaper, etc.) was charitable. B The court noticed the changed definition: “7.…The result thus of the change in the definition is that in order to bring a case within the fourth category of charitable purpose, it would be necessary to show that (1) the purpose of the trust is the advancement of any other object of general public utility, and (2) the above purpose does not involve the C carrying on of any activity for profit. Both the above conditions must be fulfilled before the purpose of the trust can be held to be charitable purpose. *** D
9. It is true that there are some business activities like mutual insurance and co-operative stores of which profit-making is not an essential ingredient, but that is so because of a self- imposed and innate restriction on making profit in the carrying on of that particular type of business. Ordinarily profit motive is a normal incidence of business activity and if the activity E 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 absence of some indication to the contrary that the object of the trust involves the carrying on of an activity for profit…….. By the use of the expression F ‘profit motive’ it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of a transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity….” G The court also rejected the submission that the “profit” referred to meant private profit. It held that the term had to be interpreted without qualification. 12 (1976) 1 SCC 254(hereafter “Lok Shikshana Trust”) H
p. 932
1212. One of the judges - Beg, J, concurred with the majority, but after noticing that the trust deed did not contain any condition on profit- making, expressed a slightly different view emphasizing that the actual activity needs to be considered, rather than the absence or existence of any condition, in the trust deed.
1313. The next decision of importance is Indian Chamber of Commerce v. CIT13. The appellant-chamber was a company registered under Section 25 of the Indian Companies Act, 1913. Its memorandum and articles of association stipulated certain broad objects, which this court agreed fell within the expression “the advancement of any … object of general public utility” in Section 2(15) of the Act. The objects were “promotional and protective of Indian trade interests and other allied service operations”. A residual clause authorised the chamber “to do all other things as may be conducive to the development of trade, commerce and industries or incidental to attainment of the above objects or any of them”. As per clauses (4) and (8) of the memorandum of association, the chamber’s member could not stand to gain personally since no portion of “income and property of the association shall be paid … directly or indirectly, by way of dividend or bonus or otherwise howsoever by “way of profit to the persons who at any time are ... members of the Association ....” On dissolution of the association, the members could not claim any share in the assets. The chamber, conceded before this court, that it “by and large, strives to advance the general trade interests of India and Indian without seeking to make profits for its members.” This F court denied the exemption claimed, holding that: “14… The attainment of that object shall not involve activities for profit. What then is an activity for profit? An undertaking by a business organisation is ordinarily assumed to be for profit unless expressly or by necessary implication or by G eloquent surrounding circumstances the making of profit stands loudly negatived. We will illustrate to illumine. If there is a restrictive provision in the bye-laws of the charitable organisation which insists that the charges levied for services of public utility rendered are to be on a ‘no profit” basis, it 13 H (1976) 1 SCC 324 (hereafter “Indian Chamber of Commerce”)
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 933 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
clearly earns the benefit of Section 2(15). For instance, a A funeral home, an S.P.C.A. or a cooperative may render services to the public but write a condition into its constitution that it shall not charge more than is actually needed for the rendering of the services, — maybe it may not be an exact equivalent, such mathematical precision being impossible in the case of variables, — maybe a little surplus is left over at the end of the year — the broad inhibition against making profit is a good guarantee that the carrying on of the activity is not for profit. As an antithesis, take a funeral home or an animal welfare organisation or a super bazaar run for general public utility by an institution which charges large sums and makes huge profits. Indubitably they render services of general public utility. Their objects are charitable but their activities are for profit… **********
16. To sum up, Section 2(15) excludes from exemption the carrying on of activities for profit even if they are linked with the objectives of general public utility, because the statute interdicts, for purposes of tax relief, the advancement of such objects by involvement in the carrying on of activities for profit. We appreciate the involved language we use, but when legislative draftsmanship declines to be simple, interpretative complexity becomes a judicial necessity. **********
21. The true test is to ask for answers to the following questions: (a) Is the object of the assessee one of general public utility? (b) Does the advancement of the object involve activities bringing in moneys? (c) If so, are such activities undertaken (i) for profit or (ii) without profit? Even if (a) and (b) are answered affirmatively, if (c)(i) is answered affirmatively, the claim for exemption collapses. The solution to the problem of an activity being one for or irrespective of profit is gathered on a footing of facts. What is the real nature of the activity? One which is ordinarily carried on by ordinary people for gain? Is there a built-in prescription in the constitution against making a profit? Has there been in practice, profit from this venture? Although, this last is a weak H
p. 934
A test. The mere fact that a service is rendered is no answer to chargeability because all income is often derived by rendering some service or other.” C. The judgment in Surat Art Silk
1414. The judgment by a larger, five-judge Bench, in Assistant B Commissioner v. Surat Art Silk Cloth Manufacturers’ Association14 (hereafter “Surat Art Silk”) was the most important decision rendered on the issue. Here a Section 25 (of the Companies Act, 1956 corresponding to Section 8 of the Companies Act, 2013) non-profit company was established. It claimed exemption as an institutionwith C charitable purposes as its objectives. The objects of the company included promoting commerce and trade in Art Silk yarn, raw silk, cotton yarn, Art Silk cloth, silk cloth, and cotton cloth, among other objects 15. Clause 5(1) of the company’s memorandum provided that its income and property wheresoever derived was to be applied “solely for the promotion of its objects as set forth in the Memorandum”; Clause D 5(2) directed that no portion of the income or property could be paid or transferred, directly or indirectly, by way of dividend, bonus, or otherwise by way of profit, to persons, who at any time are or had been members of the assessee. The Income Tax Appellate Tribunal (hereafter “ITAT”) after initial remand to the Appellate Commissioner, held that “the primary E purpose for which the assessee wasestablished was to promote commerce and trade in Art Silk and Silk Yarn and Cloth”. The ITAT made a direct reference of the issue, to this court, since a conflict existed with regard to the correct interpretation of the residual clause, i.e., institutions engaged in the advancement of objects of general public utility,
F 14 (1980) 2 SCC 31(hereafter “Surat Art Silk”) 15 The list of objects were as follows: “(a) To promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth. (b) To carry on all and any of the business of Art Silk Yarn, Raw Silk, Cotton Yarn as well as Art Silk Cloth, Silk Cloth and Cotton Cloth belonging to and on behalf of the members. (c) To obtain import licences for import of Art Silk Yarn, Raw Silk, Cotton Yarn and other raw materials as well as accessories required by the members for the manufacture of Art Silk, Silk and Cotton Fabrics. (d) To obtain export licences and export cloth manufactured by the members. (e) To buy and sell and deal in all kinds of cloth and other goods and fabrics belonging to and on behalf of the members. (n) To do all other lawful things as are incidental or conducive to the attainment of the above objects.”
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 935 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
and whether the company was entitled to be assessed as one carrying on activities that amounted to charitable purposes. This court first determined that the primary or dominant object of the company was promotion and development of trade in silk, silk cloth, yarn and other such items and that the other objects were subsidiary to this primary object. It then held that the requirement of absence of profit motive, was satisfied: “7...but this requirement was also satisfied in the case of the assessee, because the object of private profit was eliminated by the recognition of the assessee under section 25 of the Companies Act, 1956 and clauses 5 and 10 of its Memorandum. It must, therefore, be held that the income and property of the assessee were held under a legal obligation for the purpose of advancement of an object of general public utility within the meaning of section 2 clause (15).”
1515. This court then held that the words of prohibition occurring at the end of Section 2(15) were applicable to the last category of charitable institutions, i.e., those involved in the advancement of objects of general public utility. It further clarified that the prohibition applied to the object and not the advancement or attainment of the said object: “10a. It is clear on a plain natural construction of the language used by the legislature that the ten crucial words E “not involving the carrying on of any activity for profit” go with “object of general public utility” and not with “advancement”. It is the object of general public utility which must not involve the carrying on of any activity for profit and not its advancement or attainment. What is inhibited by these last ten words is the linking of activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object. It is not necessary that the accomplishment of the object or the means to carry out the object should not involve an activity for profit. That is not the mandate of the newly added words. What these words require is that the object should not involve the carrying on of any activity for profit. The emphasis is on the object of general public utility and not on its accomplishment or attainment. The decisions of the Kerala and Andhra Pradesh High Courts in CIT v. Cochin Chamber of Commerce and H
p. 936
A Industry [(1973) 87 ITR 83 : (Ker) 16 and A.P. State Road Transport Corporation v. CIT [(1975) 100 ITR 392 (AC)], in our opinion lay down the correct interpretation of the last ten words in Section 2 clause(15). The true meaning of these last ten words is that when the purpose of a trust or institution is the advancement of an object of general public utility, it is B that object of general public utility and not its accomplishment or carrying out which must not involve the carrying on of any activity for profit.”
1616. The court then went on to hold what is meant by “not involving the carrying on an activity for profit”: C “15. …The question that is necessary to be asked for this purpose is as to when can the purpose of a trust or institution be said to involve the carrying on of any activity for profit. The word “involve” according to the Shorter Oxford Dictionary means “to enwrap in anything, to enfold or envelop; to contain or imply”. The activity for profit must, therefore, be intertwined or wrapped up with or implied in the purpose of the trust or institution or in other words it must be an integral part of such purpose. But the question again is what do we understand by these verbal labels or formulae; what is it precisely that they mean? Now there are two possible ways of looking at this problem of construction. One interpretation is that according to the definition what is necessary is that the purpose must be of such a nature that it involves the carrying on of any activity for profit in the sense that it cannot be achieved without carrying on an activity for profit. On this view, if the purpose can be achieved without the trust or institution engaging itself in an activity for profit, it cannot be said that the purpose involves the carrying on of an activity for profit… ******************************** G
16. The other interpretation is to see whether the purpose of the trust or institution in fact involves the carrying on of an activity for profit or in other words whether an activity for
16 This decision was reversed in Indian Chamber of Commerce v. Commissioner of H Income Tax(1976) 1 SCC 324
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 937 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
profit is actually carried on as an integral part of the purpose or to use the words of Chandrachud, J, as he then was in Dharmodayam case [(1977) 4 SCC 75] , “as a matter of advancement of the purpose”. There must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution or to put it differently, it must be carried on in order to advance the purpose or in the course of carrying out the purpose of the trust or institution. It is then that the inhibition of the exclusionary clause would be attracted. This appears to us to be a more plausible construction which gives meaning and effect to the last concluding words added by the legislature and we prefer to accept it. Of course, there is one qualification which must be mentioned here and it is that if the constitution of a trust or institution expressly provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive, as, for example, where the purpose is specifically stated to be promotion of sports by holding cricket matches on commercial lines with a view to making profit, there would be no scope for controversy, because the purpose would, on the face of it, involve carrying on of an activity for profit and it would be non-charitable even though no activity for profit is actually carried on or, in the example given, no cricket matches are in fact organised.
1717. The next question that arises is as to what is the meaning of the expression “activity for profit”. Every trust or institution must have a purpose for which it is established and every purpose must for its accomplishment involve the carrying on of an activity. The activity must, however, be for profit in order to attract the exclusionary clause and the question therefore is when can an activity be said to be one for profit? The answer to the question obviously depends on the correct connotation of the preposition “for”. This preposition has many shades of meaning but when used with the active participle of a verb it means “for the purpose of” and connotes the end with reference to which something is done. It is not therefore enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit. Profit-making must be the end to H
p. 938
A which the activity must be directed or in other words, the predominant object of the activity must be making a profit. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be correct to describe it as an activity for profit. But where, on the other hand, an activity is carried on with the predominant object of earning profit, it would be an activity for profit, though it may be carried on in advancement of the charitable purpose of the trust or institution. Where an activity is carried on as a matter of advancement of the charitable purpose or for the purpose of carrying out the charitable purpose, it would not be incorrect to say as a matter of plain English grammar that the charitable purpose involves the carrying on of such activity, but the predominant object of such activity must be to subserve the charitable purpose and not to earn profit. The charitable purpose should not be submerged by the profit making motive; the latter should not masquerade under the guise of the former….”
17. The court took note of the judgment of Pathak, J. in Dharmadeepti v. CIT17 as well as the speech of then then Finance Minister, and further observed: E “17. ….It is obvious that the exclusionary clause was added with a view to overcoming the decision of the Privy Council in the Tribune case [AIR 1939 PC 208: In Re the Trustees of the Tribune, (1939) 7 ITR 415] where it was held that the object of supplying the community with an organ of educated public opinion by publication of a newspaper was an object of general public utility and hence charitable in character, even though the activity of publication of the newspaper was carried on commercial lines with the object of earning profit. The publication of the newspaper was an activity engaged in by the trust for the purpose of carrying out its charitable purpose and on the facts it was clearly an activity which had profit making as its predominant object, but even so it was held by the Judicial Committee that since the purpose served was an object of general public utility, it was a charitable purpose. It is clear from the speech of the Finance Minister 17 H (1978) 3 SCC 499
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 939 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
that it was with a view to setting at naught this decision that A the exclusionary clause was added in the definition of “charitable purpose”. The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where B profit making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balances the income and there is no resulting profit…..
1818. The court proceeded to quote from passages in its previous judgments, in Lok Shikshana Trust and Indian Chamber of Commerce (supra) to the effect that if the activity of a trust consists of carrying on a business and there are no restrictions on profit-making, the court could assume (in the absence of something to the contrary) that the trust’s E object involved carrying on of an activity for profit. The Constitution Bench disagreed with the approach in both the previous judgments, and observed: “19. …Now we entirely agree with the learned Judges who decided these two cases that activity involved in carrying out the charitable purpose must not be motivated by a profit objective but it must be undertaken for the purpose of advancement or carrying out of the charitable purpose. But we find it difficult to accept their thesis that whenever an activity is carried on which yields profit, the inference must necessarily be drawn, in the absence of some indication to the contrary, that the activity is for profit and the charitable purpose involves the carrying on of an activity for profit. We do not think the Court would be justified in drawing any such inference merely because the activity results in profit. It is in H
p. 940
A our opinion not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no profit no loss basis or that profit shall be proscribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried B on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a C charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable character of the purpose would not be lost.
20. If we apply this test in the present case, it is clear that the activity of obtaining licences for import of foreign yarn and D quotas for purchase of indigenous yarn, which was carried on by the assessee, was not an activity for profit. The predominant object of this activity was promotion of commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth, which was clearly an object of general public utility and profit was merely a bye- E product which resulted incidentally in the process of carrying out the charitable purpose. It is significant to note that the assessee was a Company recognised by the Central Government under Section 25 of the Companies Act, 1956 and under its Memorandum of Association, the profit arising from any activity carried on by the assessee was liable to be applied solely and exclusively for the promotion of trade and commerce in various commodities which we have mentioned above and no part of such profit could be distributed amongst the members in any form or under any guise. The profit of the assessee could be utilised only for the purpose of feeding this charitable purpose and the dominant and real object of the activity of the assessee being the advancement of the charitable purpose, the mere fact that the activity yielded profit did not alter the charitable character of the assessee. We are of the view that the Tribunal was right in taking the view that the purpose for which the assessee was established was a
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 941 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
charitable purpose within the meaning of Section 2 clause A (15) and the income of the assessee was exempt from tax under Section 11. The question referred to us in each of these references must, therefore, be answered in favour of the assessee and against the Revenue.”
1919. There was, however, a discordant note in Surat Art Silk - B A.P. Sen, J disagreed with the majority, and delivered a dissenting opinion. Explaining how there were no restrictive words or conditions, under the old IT Act, the learned judge held that the approach indicated in Lok Shikshana Trustand Indian Chamber of Commerce were correct. He felt that the previous decisions of the court were not relevant, and that if the activities of a trust involved any activity for profit or business, the organization ceased to be charitable, and that such proceeds were utilized for charitable objects, were not relevant. He also noted that “A reading of Section 2(15) and Section 11 together shows that what is frowned upon is an activity for profit by a charity established for advancement of an object of general public utility in the course of accomplishing its objects.”The same judgment also stated that: “if the object of the trust is advancement of an object of general public utility and it carried on any activity for profit, it is excluded from the ambit of charitable purpose defined in Section 2(15). The distinction is clearly brought out by the provision contained in Section 13(1)(bb) inserted by Tax Laws (Amendment) Act, 1975.” D. Relevant changes brought about to the IT Act, 1961 (Finance Act, 1983 and 1991)
2020. It is pertinent to note that the judgment in Surat Art Silk was delivered on 19.11.1979. The expression “not involving the carrying on of any activity for profit” in Section 2(15) of the IT Act, was omitted by the Finance Act, 1983, w.e.f. 01.04.1984. Prior to this, w.e.f. 01.04.1977 the following restrictive condition had been inserted18 as clause (bb), to Section 13(1)19: G “(bb) 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, 18 Through the Taxation Laws Amendment Act, 1975. 19 Section 13 - Section 11 not to apply in certain cases. H
p. 942
A unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution” This provision had the effect of excluding or excepting the operation of Section 11 (which deemed certain receipts of charitable institutions not to be part of their income). The restrictive condition in B clause (bb) was also omitted by the Finance Act, 1983, w.e.f. 01.04.1984.
2121. Below Section 11(4)20 (as it originally stood in the IT Act, 1961), Section 11(4A)21 was inserted by the Finance Act, 1983, w.e.f. 01.04.1984. Subsequently, Section 11(4A) was amended and substituted by the following provision w.e.f. 01.04.1992 (and continues to be in force): C “(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.”
20 Section 11(4) as originally enacted, reads as follows: “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.” 21 Earlier, sub-section (4A) was inserted by the Finance Act, 1983, w.e.f. 01.04.1984, F and read as follows: “(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 (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; G (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”
ASST. COMM’R OF INCOME TAX (EXEMPTIONS) v. AHMEDABAD 943 URBAN DEVELOPMENT AUTHORITY [S. RAVINDRA BHAT, J.]
E. The judgment in Thanthi Trust A
2222. This court comprehensively interpreted these provisions as they existed, in different time periods, in Assistant Commissioner of Income Tax v. Thanthi Trust22 where this court had to decide whether the assessee trust, created for establishing a 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.” could avail of tax exemption.In 1957, the settlor executed a supplementary deed making the trust irrevocable. On 28.07.1961 another supplementary deed was executed which directed that the trust’s surplus income (after defraying all expenses), should be devoted to purposes such as 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. The High Court held that exemption could be claimed by the trust. The revenue appealed. This court noticed that the appeals covered three distinct periods- (i) 1979-80 to 1983-84, (ii) 1984-85 to 1991-92, and (ii) 1992-93 to 1996-97. This court held that for the first period (1979-80 to 1983-84), the activity of running a newspaper, and the corpus held for it, by the trust, did not directly result in carrying on the educational activities mentioned in the supplementary deeds. The income was found to only feed such activity, which was not the same as carrying on in the course of actual accomplishment of the trust’s objects of education and relief of poor, and thus not entitled to exemption. For the next period (1984-85 to 1991-92), noting that Section 11(4) continued to be in existence [despite Section 11(4A) being inserted (as originally enacted w.e.f. 01.04.1984)], dealing with the expression “property held under trust”, and held that: “23....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 22 (2001) 2 SCC 707; (2001) 1 SCR 727. H
p. 944
Report an error in this judgment →
Contains information from the Indian High Court / Supreme Court Judgments dataset, licensed under CC-BY-4.0