1979 (11) TMI 1 - SC - Income Tax

Surat Art Silk Association: Income Tax Exemption for Charitable Purpose

Additional Commissioner of Income-Tax, Gujarat Versus Surat Art Silk Cloth Manufacturers Association (And Other References)

The Supreme Court held that the income of the Surat Art Silk Cloth Manufacturers Association was exempt under Section 11(1)(a) of the Income-tax Act, ... Claim for exemption under s. 11(1) - activities of promotion of commerce and trade - object is for general public utility - exemption entitled Issues Involved:1. Interpretation of 'not involving the carrying on of any activity for profit' in the definition of 'charitable purpose' under Section 2(15) of the Income-tax Act, 1961.2. Whether the income of the assessee, Surat Art Silk Cloth Manufacturers Association, is exempt under Section 11(1)(a) of the Income-tax Act, 1961.Detailed Analysis:1. Interpretation of 'not involving the carrying on of any activity for profit':Background and Legislative History:The definition of 'charitable purpose' under Section 2(15) of the Income-tax Act, 1961, 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.' This definition was amended from the Indian Income-tax Act, 1922, which did not include the restrictive words 'not involving the carrying on of any activity for profit.'Judicial Analysis:- The Supreme Court noted that the words 'not involving the carrying on of any activity for profit' qualify the last head of 'charitable purpose' and not the earlier three heads. This means that for purposes other than relief of the poor, education, or medical relief, the advancement of any other object of general public utility must not involve the carrying on of any activity for profit.- The Court emphasized that the purpose of the trust or institution must not involve the carrying on of any activity for profit. The focus is on whether the object of general public utility is intertwined with an activity for profit, not merely on the means of accomplishing the object.- The Court rejected the revenue's argument that any activity for profit, even if incidental to the primary purpose, would disqualify the trust from being considered charitable. The Court clarified that the object itself must not involve profit-making, though incidental profit from activities carried out to achieve the charitable purpose does not disqualify the trust.Precedents and Interpretations:- The Court referred to the decisions in CIT v. Cochin Chamber of Commerce and Industry and Andhra Pradesh State Road Transport Corporation v. CIT, which correctly interpreted that the object of general public utility must not involve the carrying on of any activity for profit.- The Court disagreed with the interpretation in Indian Chamber of Commerce v. CIT, which suggested that any profit-making activity disqualifies the trust from being charitable.2. Whether the income of the assessee is exempt under Section 11(1)(a):Facts and Findings:- The assessee, Surat Art Silk Cloth Manufacturers Association, was established to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth, and cotton cloth.- The primary purpose of the assessee was to promote commerce and trade, which is an object of general public utility.- The income of the assessee was derived from annual subscriptions and commissions from import licenses and quotas, which were used exclusively for the promotion of its objects and not distributed among its members.Tribunal's Decision:- The Tribunal found that the primary purpose of the assessee was charitable and did not involve the carrying on of any activity for profit. The Tribunal held that the income of the assessee was exempt under Section 11(1)(a).Supreme Court's Judgment:- The Supreme Court upheld the Tribunal's decision, stating that the dominant purpose of the assessee was charitable, and the incidental profit-making activities did not disqualify it from being a charitable institution.- The Court emphasized that the income and property of the assessee were applied solely for the promotion of its objects, and no part of such income or property was distributed among its members.Separate Judgment by Pathak J.:- Pathak J. added that the purpose of the trust must genuinely and essentially be charitable, and the mode of achieving the purpose, including business activities, must be directed towards carrying out the charitable purpose.- He reiterated that the income from a business held under trust for a charitable purpose is exempt under Section 11(1), provided it is used exclusively for the charitable purpose.Dissenting Opinion by Sen J.:- Sen J. disagreed with the majority view, asserting that the decisions in Sole Trustee, Loka Shikshana Trust v. CIT and Indian Chamber of Commerce v. CIT laid down the correct law.- He emphasized that the restrictive words 'not involving the carrying on of any activity for profit' must be given their due weight and that any profit-making activity linked with an object of general public utility would be taxable.Conclusion:The Supreme Court concluded that the primary purpose of the assessee was charitable and did not involve the carrying on of any activity for profit. Therefore, the income of the assessee was exempt under Section 11(1)(a) of the Income-tax Act, 1961. The revenue was directed to pay the costs of the assessee in two sets.