Charitable exemption requires a binding restriction on profits; lawful dividend distribution defeats section 11 relief claim.

Exemption under section 11 read with section 2(15) depends on income being subject to a binding legal obligation to be applied exclusively or essentially to charity; a merely charitable object is insufficient if profits could lawfully be distributed as dividends to shareholders. The later amendment of the articles restricting dividend distribution operated only prospectively, and recognition provisions or advisory letters did not create the necessary legal restraint. The analysis distinguishes cases where shares were not issued and dividend distribution was legally impossible.

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Issues: Whether the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961, read with section 2(15), when its income from property could, prior to the 1973 amendment of its articles, be distributed by way of dividends to shareholders and was not legally bound to be applied exclusively to charitable purposes.

Analysis: Exemption under section 11 requires that the income of the property be held under trust or legal obligation for charitable purposes, and the test is whether the trust or arrangement restricts the use of profits exclusively or essentially for charity. The assessee's objects may have been charitable in character, but at the relevant time there was no legal prohibition against distributing profits as dividends to shareholders. The later amendment of the articles in December 1973 introduced such a restriction only prospectively. The provisions concerning recognition of stock exchanges and the Government's advisory letters did not create a legal obligation preventing dividend distribution. The reasoning in the Road Transport Corporation case did not assist the assessee because, unlike that case, shares had been issued here and dividend distribution was legally permissible.

Conclusion: The assessee was not entitled to exemption under section 11 read with section 2(15) of the Income-tax Act, 1961.

Ratio Decidendi: Exemption for charitable purposes is unavailable unless the income is subject to a binding legal obligation to be applied exclusively or essentially to charity; a mere charitable object is insufficient where profits may lawfully be distributed to shareholders.

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