TaxTMI 
TaxTMI 
1997 (4) TMI 7
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....on 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 from tax under section 11 of the Income-tax Act, 1961 ? " " Whether, on a proper construction of the trust deed dated June 4, 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 consequently its income for the assessment year 1966-67 is not exempt from tax under section 11 of the Income-tax Act, 1961 ?" (emphasis supplied). The Income-tax Appellate Tribunal as also the High Court of 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 December 23, 1977 (see [1978] 114 ITR 699), in T. Cs. Nos. 182 and 252 of 1974. This court by order dated March 3, 1980, in S. L. P. Nos. 2453-2455 of 1979 granted special leave to appeal to the assessee-appellant to file the appeals from t....
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....b), in computing twenty-five per cent. of the income from any such 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 accumulation or setting apart shall not apply for the period during which the said conditions remain complied with--- (a) such persons have, by notice in writing given to the Income-tax Officer in the prescribed manner, specified the purpose for which the income is being accumulated or set apart, and the period for which the income is to be accumulated or set apart, which shall in no case exceed ten years ; (b) the money so accumulated or set apart is invested in any Government security as defined in clause (2) of section (2) of the Public Debt Act, 1944 (18 of 1944), or in any other security which may be approved by the Central Government in this behalf. (3) Any income referred to in sub-section (1) o....
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....rposes, ends and objects hereinafter following : (a) 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 elementary schools, secondary schools, high schools, colleges, universities, workshops, weaving, industrial, technological and 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 and 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, ....
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....ments of trust properties and in particular, the expression trust properties shall include any business undertaking held or carried on by the trust. 4. Sri Karumuttu Thiagarajan Chettiar shall be the first managing trustee and he shall hold office for life, unless he voluntarily relinquishes the office and thereafter the senior-most amongst the remaining authors, failing which the senior-most male lineal descendent of Sri Karumuttu Thiagarajan Chettiar shall become the managing trustee and such managing trustee shall hold office for his life. 5. The term of office of a trustee save that of the authors of the trust, their descendants as mentioned in clause 2 and the managing trustee shall be three years from the date of his appointment but he shall, in the discretion of the other trustees, be eligible for reappointment. 6. Whenever any person appointed as trustee disclaims or any such trustee either original or substituted dies or is for a continuous period of six months absent from Indian union or leaves Indian union for the purpose of residing abroad or desires to be discharged from the trust or refuses or becomes in the opinion of a principal civil court of original juri....
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....iar, Sree Karumuttu Thiagarajan Chettiar took the chair. The following resolution were unanimously passed : . . . . . 2. Resolved to undertake and carry on the business of purchase and sale of cotton, cotton yarn and cloth or other fibres both wholesale and retail and the managing trustee be and is hereby authorised to take the necessary steps in this behalf. 3. Resolved to appoint Sree T. V. Krishnamoorthy as the manager of the trust and to the business aforesaid and to authorise him to enter into contracts for purchase and sale of cotton, cotton yarn and cloth or other fibres both for ready and future delivery and to sign and execute all contracts in that behalf from time to time." (emphasis supplied). The board of trustees commenced and carried on business in the purchase and sale of cotton yarn as per the resolution of the board dated June 6, 1962, quoted hereinabove. For the assessment years 1964-65 and 1965-66, the relevant previous years being the periods from June 4, 1962, to May 31, 1963, and from June 1, 1963, to May 31, 1964, respectively, the assessee filed returns disclosing " nil " income, though, according to the profit and loss account, it had made a ....
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....or retail, which necessarily implies a motive for profit. It would not fall within the meaning of ' charitable purpose ' mentioned in section 2(15) of the Income-tax Act, 1961. In the present case, the trustees have absolute discretion to utilise the funds of the trust to the one or the other of the several objects of the trust ......" (emphasis supplied). In coming to the above conclusion, the High Court of Madras followed a Full Bench decision of the High Court of Kerala in CIT v. Dharmadeepti [1975] 100 ITR 375. It was held that the trust is a non-charitable trust and the income realised by the trust from its business in cotton, cotton yarn, cloth, etc., for the assessment years 1964-65 to 1966-67 is not exempt from tax under section 11 of the Act. We heard counsel. At the outset, we should highlight one aspect. It appears that there is some patent mistake or confusion in the approach made by the High Court. The 'trust deed dated June 4, 1962, clause 1(g) is to the following effect : " (g) To engage in, carry on, help, aid and assist and promote rural reconstruction work, cottage industry and all other matters incidental thereto in India." (emphasis supplied). The tr....
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..... CIT [1978] 114 ITR 454. So, the very basis of the decision of the High Court of Madras no longer exists. Counsel on both sides addressed elaborate arguments based on the trust deed dated June 4, 1962. The short question is, whether the objects of the trust will fall within the first three categories mentioned in section 2(15) of the Act, namely, " relief of the poor, education, medical relief " or will it fall under the fourth limb only and even so, its impact herein ? In interpreting or understanding the trust deed one has to bear in mind the basic difference between the corpus of the trust, the objects of the trust and the powers of the trustees. [See : Aditanar Educational Institution v. Addl. CIT [1997] 224 ITR 310 (SC)]. It will be useful to remember the following passages in the judgment of the Kerala High Court in CIT v. Shri Shaila Industrial and Spiritual Colony Charities [1973] 87 ITR 175 : " It drew a distinction between the objects in a memorandum of association and the powers taken in the memorandum of association to carry out those objects. Reliance had been placed on a decision of the Court of Appeals in North of England Zoological Society v. Chester Rural....
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....e also Pennington's Company Law (Sixth edition), page 13 ; Palmer's Company Law (Twenty-fifth edition), vol. I, paragraph 2.606, wherein the law has been discussed in detail]. The objects of the trust have been clearly stated in paragraph 1 of the trust deed. The main purpose and objects of the trust are education, medical relief and poor relief. In that behalf, the trust has been authorised to establish, maintain, run, etc., educational institutions, technological and other institutes for the welfare and uplift of the general Indian public ; to assist in the establishment and running of hospitals, clinics and dispensaries, etc. ; to assist in building and erection of houses and places of residence for the poor ; and to afford relief to the poor by giving food, clothing and to help them in distress during earthquake, flood, famine, pestilence, etc. In this connection, we should notice clause 1(g) which is to the following effect : (g) To engage in, carry on, help, aid and assist and promote rural reconstruction work, cottage industry and all other matters incidental thereto in India. " Though this sub-clause is included among the " objects clause ", it is, really only a po....
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....was started in exercise of the powers vested in the trustees under clause 7(e) read with clause 32 of the resolution dated June 6, 1962, 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. So, it cannot be said that the trust is carrying on (business) -- an activity for profit. The business -- corpus -- property held under trust -- produces or results in income, like any other property. That is all. The business is only a " means " of achieving the " object " of the trust ; it is a medium through which the " objects " are accomplished. In this view, the entire approach made by the Appellate Tribunal as also by the High Court fails to give due effect to the trust deed as a whole and is palpably erroneous and the resultant conclusion is vitiated, in denying the exemption to the appellant-trust. We hold accordingly. Counsel for the appellant-assessee drew our attention to a decision rendered by a Constitution Bench of this court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1, and contended that the dominant purpose as could be gleaned from the various clauses of the trust deed is only t....