TaxTMI 
TaxTMI 
2000 (6) TMI 127
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....on the ground that the income was applied for charitable purposes. The Assessing Officer made the assessments without considering the claim of the assessee for exemption under section I 1. When the appeals finally came up before the CIT(A) after repeated assessments made pursuant to the repeated orders of the CIT(A) setting aside the assessments, he noticed that the assessments suffered from serious infirmities not only by way of ignoring materials on departmental record but also for not examining the basic documents or causing normal enquiries and he gave an example, namely, that the Memorandum of Association of the society was never obtained on record or otherwise examined with reference to the objects for which it was formed. He, therefore, instead of setting aside the assessments again, called for a remand report pointing out that the Assessing Officer had completely overlooked the following material/facts/points: (i) The grant of registration under section 12A; (ii) Repeated directions of the CIT(A) to consider the claim for exemption under section 11; (iii) Filing of the returns along with statement of accounts for all the years. The Assessing Officer sent a remand r....
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....s are otherwise trained in the long run for such profession. The element of alleged training, he held, was the normal incidence of any business in printing and publication. A business undertaking engaging paid workers and technicians in the factory cannot be said to have imparted training to them by way of charitable dispensation and, accordingly, the business profit cannot be claimed as exempt for promoting charitable objects of public training in certain vocations. In the ultimate analysis, he held that all the activities of the Society were confined to or directly related to activity for profit involved in printing and publication and not to rendering aid and assistance to outside public to develop their talents in certain vocations. He then examined the case of the assessee in the light of the Supreme Court decisions in the cases of Sole Trustee, Loka Shikshana Trust and Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 and found that similar to the case of Sole Trustee, Loka Shikshana Trust, the dominant purpose of the society was to publish newspapers, journals etc. for promoting ideas of liberty, equality and fraternity amongst the general public. The memb....
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....relevant for the presumption that the activities were propelled by a dominant profit motive. He also held that the expenditure incurred were all in the nature of normal outgoing for running the printing press as well as publication and sale of Newspaper. As regards the application of funds for charitable purpose, he observed 'It may be mentioned that all the returns were furnished by the same Secretary of the society from the very beginning and that the annexed audit reports in Form No. 10B under section 12A(b) uniformly mentioned that the entire gross receipts during a given year has been applied for charitable purpose in that year in a mechanical manner without mentioning about the surplus and the cash balances available at the close of each year. These surrounding facts and circumstances on record would suggest that the charitable character of the society has not been established from any evidences concerning its actual conduct other than running the printing press and selling the Newspaper as a business undertaking with clear profit motive. The absolute power of dealing with the assets and income of the society as deemed expedient by the Managing Committee or its Chief Execu....
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....g is the dominant object, then only it will not be a charity, but if the profits just result, it will remain charity where the predominant object is to carry out the charitable purpose and not to earn profit. He further submitted that it is to be seen whether the carrying on of the activity which results in profit is an object or merely a power given for realising the object and if it is a latter, the object will remain charitable even if there results some profits. Alternative based on the decision of the Supreme Court in the case of Thiagarajar Charities , he submitted that the profit making apparatus was really the corpus of the property. Its use was not an object of the Trust and, therefore, the income derived from a business carried on by it, held under trust, was exempt from income-tax under section 11 of the Act. He gave lot of emphasis on the following statement of Beg, J. which has the approval in the later decisions of the Supreme Court in the cases of Surat Art Silk Cloth Mfrs. Association and Thiagarajar Charities : 'If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will....
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.... of the Society; (xii) to accept and receive in any manner whatever any cash or immovable property either unconditionally or subject to any special trusts created by any particular donor in furtherance of any one or more of the objects of the Society; (xiii) to take such steps by personal or written appeals, exhibitions, public meetings, entertainments or otherwise as may from time to time be deemed expedient for the purpose of procuring contributions of the funds of the Society in the shape of donations, legacies, annual payments or otherwise, (xiv) to solicit, obtain or accept subscriptions, donations, grants, gifts, devises, bequests and trusts from any person, firm, corporate body or institution, to give prizes, scholarships or other terminal payments, gifts or donations in furtherance of the objects of the Society; (xv) to borrow and raise moneys with or without security or on the security of a mortgage, charge of hypothecation or pledge over all or any of the immovable or movable properties belonging to the Society in any other manner whatever, (xvi) to draw, make, accept, endorse and discount cheques, notes or other negotiable instruments; (xvii) for the pu....
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....t decided this question by observing as under:-- 'So far as this question is concerned, we find that the appellant-trust started with a sum of Rs. 4,308-10-9. The schedule attached to the trust deed dated April 10, 1947, shows that the assets of the trust consisted of printing machines, accessories, motor-cars, building, stocks of paper and other miscellaneous things. The total value of the assets was Rs. 2,97,558, out of which the value of the building sites and the buildings was Rs. 47,500. As against that, the liabilities of the trust amounted to Rs. 1,24,086. The net value of the assets of the trust rose in 1947 to a figure of Rs. 1,73,571-14-4. For the assessment year 1962-63, which is the year under appeal, the total receipts of the trust were of the amount of Rs. 22,55,077. The main sources of these receipts were sales of newspapers and magazines through agents, receipts on account of advertisement, receipts for job printing bills besides some other minor items. As against the receipts, the major items of expenditure were the purchase of newsprint, paper, printing types, printing and other material, the salaries and allowances of the staff, remuneration to news agencies a....
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....f the trust in itself was treated as really educational and charitable purpose. To read 'private' before 'profit' is quite unjustifiable as otherwise the amendment was not necessary because even before amendment, an activity for private profit was not charitable. The use of the words "for profit", according to him, shows that the involvement of profit making should be of such a degree or to such an extent as to enable the Court to infer it to be the real object. As a rule, he observed, if the terms of the trust permit its operation for profit, they become, prima facie, evidence of a purpose failing outside charity. They would indicate the object of profit making unless and until it is shown that terms of the trust compel the trustee to utilise the profits of business also for charity. This means that the test introduced by the amendment is : Does the purpose of a trust restrict spending the income of a profitable activity exclusively or primarily upon what is 'charity' in law? If the profits must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The t....
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....fit and no loss' basis. I mentioned this as the learned counsel for the appellant repeatedly asserted that this was the really basic purpose and principle for the conduct of the business of the trust before us. This assertion seems to be based on nothing more substantial than the trust deed itself does not expressly make profit making the object of the trust. But, as I have already indicated, the absence of such a condition from the trust deed could eliminate or prevent profit making from becoming the real or dominant purpose of the trust. It is what the provisions of the trust make possible or permit coupled with what had been actually done without any illegality in the way of profit making, in the case before us, under the cover of the provisions of the deed, which enable us to decipher the meaning and determine the predominantly profit making character of the trust.' 10. This is the decision which is found to be squarely against the assessee by CIT(A). We, however, noticed some distinguishing features. One is that there was no restriction in making profit in the case of Sole Trustee, Loka Shikshana Trust, whereas in assessee's case clause 3 specifically says that the society ....
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....issolution of the assessee, was set out in clause 10 of memorandum and it provided that the property remaining after satisfaction of all the debts and liabilities shall not be distributed amongst the members of the assessee but shall be given or transferred to such other company having the same objects as the assessee, to be determined by the members of the assessee at or before the time of the dissolution or in default, by the High Court of Judicature that has or may acquire jurisdiction in the matter. The income and property of the assessee were thus liable to be applied solely and exclusively for the promotion of the objects set out in the memorandum and no part of such income or property could be distributed amongst the members in any form or under any guise or utilised for their benefit either during the operational existence of the assessee or on its winding up and dissolution. The dominant object in this case was held by the Court to be as contained in clause (a); and other clauses in the objects were found to be only powers incidental to carrying out the dominant powers. That it is the object that should not involve an activity for profit and not its advancement because the....
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....se 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. 'If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity.' The restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit making is not the real object. (viii) It is 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 prescribed. 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 on and the surrounding circumstances may clearly i....
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....ver 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 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 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 charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable charac....
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....d other art, craft and science institutes, schools and institutions of Tamil or Sanskrit learning, hostels for the benefit of students and generally all kinds of educational institutions whether general, technical, vocational, professional or of other description whatsoever for the welfare and uplift of the general Indian public and to institute an award scholarships in India for study, research, apprenticeship for all or any of the said purposes. (b) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment, maintenance, running, development, improvement and extension of libraries, reading rooms, recreation centres and all other facilities as are calculated to be of use in imparting education to the Indian public. (c) To establish, maintain, run, develop, improve, extend, grant donations for and to aid and assist in the establishment, maintenance, dispensaries, sanatoria, maternity homes and all similar institutions as will afford treatment, cure, rest recuperation and other allied advantages in the way of alleviating the sufferings of humanity. (d) To build, erect and construct and to aid and assist in the build....
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....or in combination with any other person or persons....' Clause 32 stated that the business of the board of the trustees shall be dealt with either at the meetings of the board of trustees or by resolution in circulation. The resolution was passed to carry on the business on purchase and sale of cotton, cotton yarn, etc. 18. The Court held that the dominant object of the education, medical relief and poor relief which did not involve carrying on of any activity of profit. The business was not under that clause 1(g) and that was a mere power and not an object and it was stated under clause 7(e), read with clause 32 of the trust deed and the resolution passed for carrying on the business. The Court further held - 'We understand clause 1(g) of the trust deed dated June 4, 1962, as only vesting a power in the trustees to do certain things to effectuate the main objects of the trust contained in clause 1(a) of the deed - to start, run develop educational, technical, vocational and other institutions and institutes for the welfare and uplift of the general Indian public. The powers so vested in the trustees under sub-clause (g) cannot be called as 'the objects' of the trust. So u....
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....; Rs. 1,50,000 -do- Rs. 88,668 1978-79 Rs. 1,50,000 -do- Rs. 57,276 1979-80 Nil -do- Rs. 50,701 1980-81 Nil -do- Rs. 1,00,701 1981-82 Nil &nb....
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.... viz., (1) the purpose of the trust must be advancement of an object of general public utility and (2) that purpose must not involve the carrying on any activity for profit. There seems to be no serious dispute in this case about the fulfilment of first condition, ie., the purpose of the trust is the advancement of an object of general public utility, viz., supplying the community with an organ of educated public opinion by publication of a Newspaper and securing the ends of social justice, liberty of thought, expression, belief, faith and worship. The equality of status and of opportunity, to promote among all fraternity assuring the dignity of the individual and the unity of the Nation. It is towards that end the assessee-society is publishing the Newspaper, Journals, Magazines, Periodicals, etc. The real question in this case which is to be decided is to scrutinise the existence of the second condition, Le., that the object should not involve the carrying on of any activity of profit. The carrying on of an activity for profit as such is not prohibited, if it was arising out of a business held under the trust or legal obligation for applying its income only to charitable purpose ....
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....o accomplish the object of the trust. In Sole Trustee, Loka Shikshana Trust's case , the publication of Newspaper and Journals by the trust on commercial lines, on its own facts, was held to involve an activity for profit entailing forfeiture of the exemption. An example in Surat Art Silk Cloth Mfrs. Association's case was given by the Supreme Court, viz. where the constitution of the trust or institution expressly provides that the purpose shall be carried out by engaging 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 further controversy because the purpose would on the fact of it involve carrying on 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 f act, organised. See in this connection the decision of Delhi High Court in the case of Jaipur Charitable Trust v. CIT [1981] 127 ITR 620, the observation at page 629 to the effect 'where on the other hand as in the present case the co....
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....he 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. The purpose of the trust, as pointed out by one of us (Pathak, J) in Dharmadeepti v. CIT [1978] 114 ITR 454 (SC) must be, essentially charitable in nature' and it must not be a covert for carrying on an activity which has profit making as its predominant object.' No dispute is raised in this case that the publications of Newspaper and Journals by the Society were on commercial lines. The object is accomplished by publishing of Newspaper and Journals and that by itself involved an activity for profit. The dictionary meaning of the word 'involve' is 'to wrap in anything; to enfold or to envelop; to contain or imply.' When activity for profit and the object of the trust are intertwined or wraped up or enveloped together, the ten restrictive words ....
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....rat Art Silk Cloth Mfrs. Association and Thiagarajar Charities , as contended to by the learned counsel of the assessee. On the contrary, it finds support therefrom. See in this context the following observation in Surat Art Silk Cloth Mfrs. Association's case at page 23 : 'The other interpretation it 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 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 CIT v. Dharmodayam Co. [1977] 109 ITR 527 (SC), '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 c....