M/S. Thiagarajar Charities, Madurai v. The Additional Commissioner Of Income-Tax And Anr

MIS. THIAGARAJAR CHARITIES, MADURAI v. THE ADDITIONAL COMMISSIONER OF INCOME-TAX AND ANR. APRIL 24, 1997 [K. S. PARIPOORNAN, K. VENKATASWAMI AND B.N. KIRPAL, JJ.) Income-Tax Act, 1961-Section ll-Exemption-CJ1aritable Trust-Mode of determination-Main objects of Tmst were educational, medi-C cal relief and relief to the poo~ther clauses of the Trust-Deed enumerates as its objects: to assist and promote rural reconstruction work, cottage industry and all other matters incidental thereto-Held, the power of the Trustees to effectuate the aforesaid objects should not be mistaken for the objects of the Trust-The business of purchasing and selling cotton, cotton yam, cloth and D fibres etc., held, corpus of the Trust and the real object was to afford 'relief to the poor'-So, profit making was not the real object of the Trust and the assessee Trust was entitled to exemption. -The appellant was a Trust and was assessed to income tax. Pursuant to its resolution, the Board of Trustees commenced and carried on the E business in the purchase and sale of cotton yarn. The assessee filed its Income-tax returns disclosing "nil" income, though, according to the profit and loss account, it had made a profit. The assessee claimed that the business carried on by it was one held under Trust and since the Trust was for charitable purposes, it income was exempt under section 11 of the Income Tax Act, 1961. The income-Tax-Of· fleer rejected the claim. But in appeal, the Appellate Assistant Commis· sioner upheld the plea of the assessee and directed the Income· Tax-Officer to grant exemption. In further appeal, the appellate Tribunal concluded that the object G in the Trust-Deed involved carrying on of an activity of profit and held that the income derived by the assessee from the business carried on by it, though, held under the Trust, could not be said to be exempted from tax under Section 11 of the Act. On a Reference, the High court agreed with the view of the Tribunal and held the Trust to be a non-charitable· H 965 A Trust. Hence this appeal. Allowing the appeal, this Court HELD : 1.1. The High Court had wrongly assumed that it is in B pursuance of clause l(g) of the Trust Deed, the business of purchasing and selling cotton, cotton yarn etc. was carried on by the Trust. It is patent that there has been a mix-up of the clauses of the Trust Deed and clauses of the Resolution of the Board. As per clause 3 of the Trust Deed the business so started and carried on was corpus of the Trust. Clause l(g) of the Deed had nothing to do with such business. A misreading and C misunderstanding of the vital clauses of the Trust Deed and the Resolution of the Trust Board have resulted in the wrong approach and conclusion of the High Court. [978-B-D] Dharamdeepti v. Commissioner of Income-Tax, Kera/a, 114 ITR 454 D and Commissioner of Income-Tax, Kera/a v. Slzri Shaila And Spiritual Colony Chan.ties, 87 ITR 175, relied on. 970 1.2. In interpreting or understanding a Trust Deed one has to bear in mind the basic difference between the corpus of the trust, the object of the Trust and the power of the Trustees. The language employed in clause E 1 (g) itself suggests that it is a power vested in the Trust to engage and promote rural reconstruction work, cottage industry and all matters in-cidental thereto. In substance, the activities specified in clause 1 (g) is to afford "relief to the poor". Clause l(g) of the Trust-Deed only vests power in the Trustees to do certain things to effectuate the main object of the F Trust contained in clause 1 (a) of the Deed • to start, run, develop educa· tional, technical, vocational and other institutions and institutes for the welfare and uplift of the general public. The power so vested in the trustees under clause (g) cannot be called as "the object" of the Trust. So, the Income· Tax Appellate Tribunal and also the High Court erred in constru-ing clause (g) as "object" of the Trust enabling it to carry on a business G with profit motive. It is clear that the business of purchasing and selling cotton, cotton yarn, cloth and other fibres etc. was held under the Trust and in view of clause 3 of the Deed it is the corpus of the Trust in reality. It is not an object of the Trust. The business is only a "means" of achieving the "object of the Trust; it is a medium through which the object is H accomplished. [978-G; 980-G-H; 981-D-H] THIAGARAIAR CHARITIESv. ADDL. err. [PARIPOORNAN,J.] 967 Aditanar Educational Institution v. Additional Commissioner of Ill-come Tax, (1980) 121 ITR 1, relied on. 2. The facts available on record show that the profits or amount earned in the business had been essentially spent on charity. There can be no doubt that the profit making was not the real object of the Trust. As such, the income derived by the assessee from the business carried on hy it, held under the Trust, is exempt from income tax under section 11 of the Income- Tax Act. [983-E] CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 482- 484 of 1980. From the Judgment and Order dated 23.12.78 of the Madras High Court in Tax Nos. 182 and 252/74 and Reference Nos. 58 and 128 of 1974. T.A. Ramachandran and Janki Ramachandran for the Appellant. B.S. Ahuja, S.N. Terdol and B.K. Prasad for the Respondents. The Judgment of the Court was delivered by PARIPOORNAN, J. The appellant is a trust. The Trust was created on 4.6.1962. The trust called "Thiagarajar Charities", is an assessee to income tax. In this batch of appeals, we are concerned with the three E assessment years 1964-65, 1965-66 and 1966-67. A common question of law arises for consideration herein. The Income-tax Appellate Tribunal referred two identical questions of law for the above three years, to the High Court of Madras for its decision. The question of law referred for the above three years are as follows : "Whether on a proper construction of the trust deed dated 4.6.62, the Tribunal was right in holding that the objects of the trust are not for charitable purposes within the meaning of the said expression as defined in Section 2(15) of the Income tax Act, 1961, and that consequently its income for the assessment years 1964-65 and 1965-66 is not exempt G from tax under Section 11 of the Income tax Act, 1961?" "Whether on a proper con~truction of the trust deed dated 4.6.1962 the Tribunal was right in holding that the objects of the trust are not for Charitable purposes within the meaning of the said expression as defined in Section 2(15) of the Income-tax Act, 1961, and that conse- quently its income for the assessmelll year 1966-67 is not exempt from tax under Section 11 of the Income tax Act, 1961 ?" (emphasis supplied} 2. The Income-tax Appellate Tribunal as also the High Court of B Madras held that the income derived by the assessee from the business carried on by it, though held under a trust could not be said to be exempt from tax under Section 11 of the Income-tax Act. The High Court rendered the decision by a common judgment dated 23.12.1977 in T.C. Nos. 182 and 252/74. This Court by order dated 3.3.1980 in S.L.P. © Nos. 2453-2455/79 granted special leave to appeal to the assessee-appellant to file the appeals C from Lhc judgment of the Madras High Court aforesaid. That is how the present appeals are before us. 3. The short question that arises for our consideration in this batch of cases is, whether the appellant-assessee-trust is entitled to exemption under Section 11 read with Section 2(15} of the Income-tax Act, 1961, as D the relevant provisions stood then. 2(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". Section 11, as originally enacted, was couched in the following terms : "(1} Subject to the provisions of sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income - (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where a11y such income is accumulated for application to such purposes i11 india, to the extent to which the income so accumulated is not in excess of twenty five per cent of the income from the property or rupees ten thousand, whichever is higher, (b) income derived from property held under trust in part only for such purposes the trust having been created before the commencement of this Act, to the extent to which such THIAGARAIAR CHARITIES v. ADDL. C.l.T. [PARIPOORNAN, J.] 969 income is applied to such purposes in India; and where any A such income in finally set apart for application to such purposes in India, to the extent to which the income so set apart 1:r not in excess of twenty-five per cent of the income from the property held under trust in part; ( c) income from property held under trust - (i) Created on or after the 1st day of April, 1952, for charitable purposes which tends to promote international welfare in which India is interested, to the extent to which such income is applied to such purposes outside India, and (ii) for charitable or religious purposes, created before the lst day of April, 1952, to the extent to which such income is applied to such purposes outside India; Provided that the Board, by general or special order, has D directed in either case that it shall not be included in the total income of the person in receipt of such income. Explanation. - For the purposes of clauses (a) and (b), in computing twenty-five per cent of the income-(rom any such E property as is referred to in the said clauses for any previous year, the income from such property for the year immediately preceding the previous year may be adopted, if that income is higher than the income for the previous year. (2) Where the persons in receipt of the income have complied with the following conditions, the restriction specified in clause (a) or clause (b) of sub-section (1) as respects ac-cumulation or setting apart shall not apply for the period during which the said conditions remain complied with -