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Punjab National Bank and Ors. Vs. Surendra Prasad Sinha

Supreme Court Of India Criminal Appeal /254/1992

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A PUNJAB NATIONAL BANK AND ORS.

SURENDRA PRASAD SINHA

APRIL

20,

1992

[K. RAMASWAMY AND B.P. JEEVAN REDDY, JJ.]

...--

Limitation Act, 1963-Section 3-Whether bars the right to which a

remedy related--Right to

enforce debt by judicial process-Scope of-Time

barred

debt-Realisation of-Filing of suit to recover debt-Creditor's obliga- _,,,

c ti oh. .....

Penal Code, 1860-Section 40~Action in terms of a con-

tract-Whether amounts to criminal breach

of trust or misappropria-

tion-creditor in possession of security-Adjustment of debt due from

security-Justification of.

Penal Code, 1860-Sections 409, 109/114--Complaint petition-Main-

tainability-Duty of Magistrate, indicated-Accused to be legally responsible

for the offences charged-Magistrate's satisfaction of prima facie

case-criminal justice-Objects

of.

On 5.5.1984, the Bank-appellant No.1, gave a loan of Rs.15,000 to one

S.N. Dubey. The respondent and his wife executed a Security Bond, as

guarantors

and

hande(l over a Fixed Deposit Receipt for a sum of Rs.

24,000 which was valued at Rs.41,292 on its maturity on 1.11.1988.

F The principal debtor defaulted making payment of the debt. When

the respondent's F.D. matured, the Manager of the Bank (appellant

No.5)

adjusting a sum of Rs.27,037.60 due and payable by the principal debtor

as on December

1988 and the balance sum of

Rs.14,254.40 was credited to

the S.B. Account of the respondent.

The respondent filed a private complaint against the appellants in

the Court of Addi. Chief Judicial Magistrate u/ss.409,109/114, IPC, alleging

that the debt became barred

by limitation as on 5.5.1987; that the liability

of the respondent being co-extensive with

that of the principal debtor, his

liability also stood extinguished as on 5.5.1987;

that without taking any

H action to recover the amount from the principal debtor within the period

528

P.N.B. v. S. P. SINHA 529

of limitation, on 14.1.1989, the Branch Manager credited to his S.B. A

Account only RS.14,254.00 on the maturity of his F.D.R. and thereby the

appellants criminally embezzled the amount.

The appellants filed this Criminal Appeal

by special leave

challeng

ing the High Court's order declining to quash the complaint filed by the

respondent u/ss. 409, 109/114, IPC. · B

Allowing the appeal of the Bank, this Court,

HELD : 1.01. The rules of limitation are not meant to destroy the

rights of the parties. Section 3 of the Limitation Act only bars the remedy, C

but does not destroy the right which the remedy relates to. The right to the

debt continues to exist notwithstanding the remedy is barred

by the

limitation.

Only exception in which the remedy also becomes barred by

limitation is the right is destroyed. [532E-F]

L02. Though the right to enforce the debt by judicial process is D

barred, the right to debt remains. The time 'i>arred debt does not cease to

exist

by reason of s.3. That right can be exercised in any other manner than

by means of a suit. The debt is not extinguished, but the remedy to enforce

the liability

is destroyed. [532G] 1.03. What s.3. refers is only to the remedy but not to the right of the E

creditors. Such debt continues to subsists so long as it is not paid. It is

not obligatory to

file a suit to recover the debt. [532G-H]

2.01. Action in. terms of the contract expressly or implied is a

negation

of criminal breach of trust defined in

s.405 and punishable under

s.409 I.P.C. It is neither dishonest, nor misappropriation. [533C]

2.02. The creditor when he is in possession of an adequate security,

the debt due could

be adjusted from the security, in his possession and

custody.

[533A] 2.03. The bank had in its possession the F.D.R. as guarantee for due

payment of the debt and bank appropriated the amount towards the debt

due and payable

by the principal debtor.

[5330)

2.04. The respondent and his wife stood guarantors to the principal

debtor, jointly executed the security bond and entrusted the F .D.R. as

530 SUPREME.COURT REPORTS [1992) 2 S.C.R.

security to adjust the outstanding debt from it at maturity. Therefore,

though the remedy to recover the debt from the principal debtor is barred

by limitation, the liability still subsists. In terms of the contract the bank

is entitled to appropriate the debt due

and credit the balance

amount to

the saving bank account of the resp?ndent. Thereby the appellant did not

act in violation of any law,

nor converted the amount entrusted to them

dishonestly for any purpose. [533B-C]

3.01. The Magistrate without adverting whether the allegation in the

complaint

prima facie makes out an offence charged for,

obvi(msly, in a

mechanical manner, issued the process against all the appellants. The

High Court committed grave

error in declining to quash the complaint on

the finding

that the Bank acted prima facie high handedly. [533E]

3.02. Judicial process should not be an instrument of oppression or ·~

needless harassment. The complaint was laid impleading the Chairman,

D the Managing Director of the Bank by name and a host of officers. There

lies responsiblity

and duty on the Magistracy to find whether the

con

cerned accused should be legally responsible for the offence charged for.

Only on satisfying that the law casts liability or creates offence, against

the juristic person

or the persons impleaded, then only process would be

issued. At that stage

the court would be circumspect and judicious in

exercising discretion

and should take all the relevant facts and

cir

cumstances into consideration before issuing process, least it would be an

instrument in the hands of the private complainant as vendetta to harass

the persons needlessly. Vindication of majesty of justice

and maintenance

of law

and order in the society are

the prime objects of criminal justice

but it would not be the means to wreak personal vengeance. [533F-534A]

CRIMINAL APPELLATE JURISDICTIO~ : Criminal Appeal No.

254of1992.

From the Judgment and Order dated 25.6.1991 of the Madhya

G Pradesh High Court in Misc. Criminal Case No. 1701of1991.

G.L. Sanghi, Dhruv Mehta, Aman Vachher and S.K. Mehta for the

Appellants.

H The Judgment of the

Court was delivered by

P.N.B. v. S. P. SINHA [K RAMASWAMY, J.] 531

-;f.

K. RAMASWAMY, J. Special leave granted. A

Though the respondent was served on July 29,1991, neither appeared

in person, nor ti.rough counsel. The facts set OUL in the complaint eloquent-

ly manifests on its face a clear abuse of the process of the court to harass

the appellants. The respondent, an Advocate and Standing Counsel for the

first appellant filed a private complaint in the court of Addi. Chief Judicial

Magistrate, Katni

C.C. No.933/91 for offences under s.409 and ss.109/114

I.P.C.

The facts stated in the complaint run thus :

..--- c

The first appellant's branch at Katni gave a loan of Rs.15,000 to one

).-

Sriman Narain Dubey on May 5, 1984 and the respondent and his wife

Annapoorna stood as guarantors, . executed Annexure 'P' "security bond"

and handed .over Fixed Deposit Receipt for a sum of Rs.24,000 which

would mature on November

l, 1988. At maturity its value would be at Rs.

41,292. The principal debtor committed default in payment of the debt.

maturity, the Branch Manager, 5th appellant, Sri V.K. Dubey, adjusted a

sum of Rs. 27,037.60 due and payable by the principal debtor as on

December,

1988 and the balance sum of

Rs.14,254.40 was credited to the

Saving Banks Account of the respondent. The respondent alleged that the

debt became barred by limitation as on May 5, 1987. The liability of the

respondent being co-extensive with that of the principal debtor, his liability

also stood extinguished

as on May 5, 1987. Without taking any action to

recover the amount from the principal debtor within the period of limita-

tion, on Janua1y

14, 1989,

Sri D.K. Dubey, the Branch Manager, intimated

that only Rs.14,254.40 was credited to his Saving Bank Account No.3763.

The entire amount at maturity, namely Rs.41,292 ought to have been

credited to his account and despite repeated demands made by the respon-

dent it

was not credited. Thereby the appellants criminally embezzled the

said amount. The first appellant with a dishonest interest to save themsel-

ves from the financial obligation neglected to recover the amount from the

principal debtor and allowed the claim to be barred limitation and embez-

zled the amount entrusted by the respondent. The appellant 2 to 6 abated

the

commission of the crime in converting the amount of Rs.27,037.40 to

its own use in violation of the specific direction of the respondent. Thus

they committed the offences punishable under s.409 and ss.109 and 114

I.P.C.

532 SUPREME COURT REPORTS [1992) 2 S.C.R.

The security bond, admittedly, executed by the respondent reads the

material parts thus :

"We confirm having handed over to you by way of

security against your branch office Katni F.D. Account

No.77/83 dated

November

1, 1983 for Rs. 24,000 in the

event of renewal of the said Fixed

Deposit Receipt as security for

the. above loan."

"We confirm .... the F.D.R.

will continue to remain with the bank as security here". "The amount due

and other charges, if

any, be adjusted and appropriated by you from the

proceeds of the said F.D.R. at any time before, on or its maturity at your

discretion, unless the loan

is otherwise fully adjusted from the dues on

demand

in writing made by you ... "

"We give the bank right to credit the

balance to our saving banks account or

any other amount and adjust the

amount due from the borrowers out of the

same". "We authorise you and

confirm that the F.D.R. pledged a security

for the said loan shall also be

security including the surplus proceeds thereof for any other liability and

the obligation of person and further

in favour of the bank and the bank

shall be

entitl~d to retain/realise/utilise/appropriate the samr: without ref-

D erence to us."

Admittedly, as the principal debtor did not repay the debt, the bank

as creditor adjusted at maturity of the F.D.R., the outstanding debt due to

the bank

in terms of the contract and the balance sum was credited to the Saving Banks account of the respondent. The rules of limitation are not

meant to destroy the rights of the parties. Section 3 of the Limitation Act

36 of 1963, for short "the Act" only bars the remedy, but does not destroy

the right which the remedy relates to. The right to the debt continues to

exist notwithstanding the remedy

is barred by the limitation.

Only exception

in which the remedy also becomes barred

by limitation is that right itself

is destroyed. For example under s.27 of the Act a suit for possession of any

property becoming barred

by limitation, the right to property itself is

destroyed. Except in such cases which are specially provided under the

right to

which remedy relates in other case the right subsists. Though the

right to enforce the debt

by judicial process is barred under s.3 read with

G the relevant Article in the schedule, the right to debt remains. The time

barred debt does not cease to exist

by reason of s.3. That right can be

exercised

in any other manner than by means of a suit. The debt is not

extinguished, but the remedy to enforce the liability

is destroyed. What s.3

refers is only to the remedy but not to the right of

t4e creditors. Such debt

continues to subsists so long

as it is not paid .

.It is not obligatory to file a

H suit to recover the debt. It is settled law that the creditor would be entitled

P.N.B. v. S. P. SINHA [K. RAMASWAMY, J.] 533

to adjust, from the payment of a sum by a debtor, towards the time barred A

debt. It is also equally settled law that the creditor when he is in possession

of an adequate security, the debt due could be adjusted from the security

in his possession and custody. Undoubtedly the respondent and his wife

stood guarantors to the principal debtor, jointly executed the security bond

and entrusted the F.D.R. as security to adjust the QUtstanding debt from it

at maturity. Therefore, though the remedy to recover the debt from the

principal debtor

is barred by limitation, the liability still subsists. In terms

of the contract the bank

is entitled to appropriate the debt due and credit

the balance amount to the saving bank account of the respondent. Thereby

the appellant did not act

in violation of any law, nor converted the amount

entrusted to them dishonestly for any purpose. Action

in terms of the

contract expressly or implied

is a negation of criminal breach of trust

defined in

s.405 and punishable under s.409 I.P.C. It is neither dishonest,

nor misappropriation. The bank had in its possession the fixed deposit

receipt as guarantee for due payment of the debt and the bank ap

propriated the amount towards the debt due and payable

by the principal D

debtor. Further, the F.D.R. was not entrusted during the course of the

business of the first appellant

as a Banker of the respondent but in the

capacity as guarantor. The complaint does not make out any case much

le!>s prim a f acie case, a condition precedent to set criminal law in motion.

The Magistrate without adverting whether the allegation

in the complaint

prima facie makes out an offence charged for, obviously, in a mechanical

manner, issued the process against all

the' appellants. The High Court

committed grave error in declining to quash the complaint on the finding

that the Bank acted

prima fade high handedly.

It is also salutary to note that judicial process should not be an F

instrument of oppression or needless harassment. The complaint was laid

impleading the Chairman, the Managing Director of the Bank

by name and

a host of officers. There lies responsibility and duty on the Migistracy to

find whether the concerned accused should be legally responsible for the

offence charged

for. Only on satisfying that the law casts liability or creates

offence against the juristic person or the persons impleaded· then only G

process would be issued. At that stage the court would be circumspect and

judicious

in exercising discretion and should take all the relevant facts and

circumstances into consideration before issuing process lest it would

be an

instrument

in the hands of the private complaint as vendetta to harass the

persons needlessly. Vindication of majesty of justice and maintenance of

, H

534 SUPREME COURT REPORTS {1992] 2 S.C.R.

A law and order in the society are the prime objects of criminal justice but

it would not be the means to wreak personal vengeance. Considered from

any angle

we find that the respondent had abused the process and laid

complaint against

all the appellants without any prim a f acie case to harass

them for vendetta.

B The appeal is accordingly allowed and the complaint is quashed.

V.P.R. Appeal allowed.

•

]

' -:+

MUNICIPAL CORPORATION OF DELHI ETC. A

CHILDREN BOOK TRUST ETC.

APRIL

21, 1992

[S.

MOHAN AND G. N. RAY, JJ.] B

Del/ti Municipal Corporation Act, 1957 :

Sections 115(4)(a) Proviso

& Explanation, 115(5) and

(6)--Property

tax-Levy and assessment of-General tax in respect of lands and buildings - C

Exemption-Grant of-To land and buildings occupied and used by society

for 'charitable

purposes'-Conditions to be fulfilled-'Charitable purpose'

Meaning of-Whether includes imparting education-Society 'supported

whol-

ly or in part by voluntary contribution'-Tests for detennination-Wliat

are-Exemption

tax-Not available 'if any trade or business is carried on

in such land or building'-lnterpretation of expression-Part of land and D

building-When becomes entitled to exemption.

Delhi School Education Act, 1973: Sections

4, 5, 17(3) and 18(3).

Delhi School Education Rules, 1973: Rules

50, 59(2)(g), 172, 173 and

177.

Property Tax liability under nm11icipal corporation of a registered

society running a recognised private· unaided school-Conditions to be ful

fille<k:-Sotiety not found to b~ supported substantially by voluntary contrib~

tions-Not entitled to tax exemption.

Words and Phrases : 'charitable purpose'-Meaning of.

In Civil Appeal

No.2805 of 1980 the Respondent, a Trust registered

under the Societies' Registration Act 1960 owned the property. From the

year 1964-65, only a part of the property was subject to the General Tax

in accordance with the provisions of the Delhi Municipal Corporation Act. G

For the said year, the value of the property was assessed at Rs. 8,51~480.

In the year 1970, the appellant-Munieipal Corporation served a notice on

the .Trust propos.ing

that the

rateable value of the building should be

revised. On February 1, 1973, the Deputy Assessor and Collector passed

an order to the effect that the rateable value of the property be revised and H

535

536 SUPREME COURT REPORTS [1992] 2 S.C.R.

A enhanced to Rs.16,29,750. The Deputy Assessor and Collector held that the

Respondent

had not proved its charitable character, and further the user

of the property did not

go to prove that the property was used for

charitable purposes and that the same cannot

be exempt from tax.

Aggrieved by the aforesaid order, the Trust filed

a Writ Petition

under Articles 220 and 227 of the Constitution and contended that the

withdrawal of exemption ~rom the payment of General ·Tax previously

enjoyed on portions of the property

was wrong, and that the case was

covered

by Section 115 (4)

p"°oviso of the Delhi Municipal Corporation Act

which provides for exemption from the payment of General Tax

ex·

C elusively occupied and used by a society for charitable purposes.

A Single Judge allowed the Writ Petition,

and held that the Trust

would

be entitled to claim exemption from payment of tax under Section

115 (4) for all the portions occupied by it except that which is occupied by

the Press, viz., the basement area of 11217 sq. ft. for which a monthly rental

D value has been assessed at

Rs.14,021.25 and an area of 2000 sq. ft. on the

ground floor rear portion for which the monthly rental value has been fixed

at Rs.3,462.50. In the result, the order of the Deputy Assessor and Collec

tor was quashed to that extent and the matter was remitted back for

disposal.

Aggrieved, the Corporation appealed and a-Division Bench held that

because' of .the mandatory provisions of Section 115(4)

no part of the

premises in occupation of the press in the basement and the area of

2000

sq. ft. in the ground Door rear portion for which the monthly rental value

has been fixed at Rs.17,483.75 could be exempt from tax and partly allowed

the appeal of the Corporation.

The appellant society in

C.A. No.228 of

1990 filed a suit and sought

interim injunction, questioning the proposal by the Deputy Assessor and ,r..

Collector assessing the society for the General Tax but the Senior sub- ·

G judge being of the view that the riubject matter of the suit being Rs.5,32,683

the suit could not be entertained. Thereupon, the appellant wit~ the '-

suit, and filed a writ petition in the High Court challenging the as~essment

order. The writ petition was heard by a Division Bench which held that the

exemption cl~inied by the appellant was unav~ilable to it, that the case was

not covered by seetion 115(4) of the Act and finding no infirmity in the Jll'"

H order of assessment dismissed the writ petition in limine.

MUNICIPAL CORPN. v. BOOK TRUST 537

In the appeals to this Court, it was contended on behalf of the A

Municipal Corporation that Section 115(4) is a peculiar· section which

provides

for relief to those societies or bodies on charitable support either

fully or in part, and that the proviso to the said

Section distinguishes itself

from

other enactments, in that the

legislat~ve intent is to narrow down the

clauses of exemption. To claim exemption it must be shown that the society

is supported by voluntary contribution. Where the activity of the society

generates income to

support itself and, therefore, the society does not any

longer depend on the voluntary contribution, the exemption

should cer

tainly be made unavailable, It was further contented that the Municipal

General Tax is

an annual tax, and that the question of assessability to such

tax

or exemption will, therefore, have to be determined each year and that

unless and until the

Society satisfies the assessing authorities that it fulfils

the conditions for exemption in respect

that particular year, it cannot

claim exemption as a rule and, therefore,,the facts in each case will have

to be ascertained in each year.

It was shown that the method adopted under

the Income Tax Act in

~espect of the assessment of societies under Sections D

11 and i3 of the said Act or even with regard to exempting donations to

charitable societies under Section 80(G) was similar.

On behalf of the Societies which owned the buildings which were

assessed

to tax, it was contended, that the society owns a building, which houses· the school recognised under the Delhi School Education Act 1973 E

and the Rules made thereunder, and, therefore, the issue is whether the

·building which houses the school is exempt from tax, and that the test to

be applied under Section 115(4) are two in principle, viz., (i) society must

be a charitable society, and (ii) use must be for a charitable purpose, and

it was submitted that the proviso to section 115(4) does not lay down the

quantitative test in relation to voluntary contribution but only qualitative

test.

It was further contended that education per se is a charitable purpose

and, therefore, even

irthe the school charges a fee, that would be irrelevant.

The memorandum of objects and the bye-laws of the society have to be

seen,

and if the object is a charitable one, that would be enough, it makes

little difference

as to how the funds

are utilised, if the profits continue to G

feed the charity, the mere occurance of profits would not detract from the

charitable nature of the enterprise. It was further contended that in

construing

the scope of

Section 115(4), the several provisions of the Delhi

School Education Act, and the Delhi School Education Rules 1973 also

538 SUPREME COURT REPORTS (1992) 2 S.C.R.

A have a great bearing, and that the proviso to section 115(4) prescribes the

qualitative test for identifying charitable societies.

On behalf of the intervenors • petitions in W.P.No.1754 of 1979 • the

Court's attention was

drawn to Section 115(4) and it was submitted that

the exemption would be available only if the lands or buildings or portions

B thereof should be in exclusive occupation and use and such user must be

by a society or body for charitable purposes, and charitable purpose

includes education, relief· of poor

and medical relief and the society is

supported wholly

or in part by voluntary contributions and applies its

profits for furthera~ce of and to promote the objects of the society and

C that it does not pay dividend or bonus to its members. It was also

contended

that education per se is charity and that the voluntary support talked of under the section must be qualitative in nature and not quantita

tive.

On the questions :

(i) Whether the society or body

is occupying and using the land and

building for a charitable purpose within the meaning of section 115(4)?

(ii) What is the meaning of the expression 'supported wholly or in

part by voluntary contribution?'

(iii)

~ether any trade or business is carried on in the premises

within the meaning of section 115(5)?

Dismissing both the appeals, the Court,

F HELD: 1. (i) Every municipality is a local

self-goverm1:1ent. There-

fore, in order that it may sustain itself a power of taxation has been

delegated to municipal bodies. The taxes are local taxes for local needs.

Such taxes must obviously differ from one municipality to another.

It is

impossible for the Legislature to pass statute for the imposition of such

G taxes in local areas. In a democratic set

up the municipalities which need

the proceeds of these taxes for their

own administration, it would be but

proper to

leave to these municipalities the power to impose and collect

taxes.

(554

~-555 A]

(ii) The lacal authorities do not act as Legislature when they impose

H a tax but they do so as the agent of State Legislat'(e. The powers and the

·j

MUNICIPAL CORPN. v. BOOK TRUST 539

extent of these powers must be found in the statute which creates them A

with such powers. [SSS BJ

(iii) Local bodies being subordinate branches of governmental ac·

tivities are democratic institutions managed by the representatives of the

people. They function for public purpose. They bear the burden of govern

ment affairs in local areas as they are required to carry on local self· B

government. The power of taxation is a necessary adjunct to their other

powers. There are various kinds of taxes provided under each Municipal

Act, the important being property tax. [SSS CJ

(iv) The Delhi Municipal Act after providing for exemption under C

Section 11S(4) and (S) categorises cases, which will lose the exemption

under sub-section (4). Again, sub-section

(6) clarifies that a part of a

building in the occupation of a society may not be entitled to exemption

though the other part is clearly exempt.

[SS7 BJ

(v) 'Charity' in its legal sense comprises

four principal divisions: D

trusts for the relief of poverty, trusts for the advancement of education,

trusts for the advancement of religion

and trusts for other purposes

beneficial

to the community not

falling under any of the preceding heads.

The underlying idea

of charity is the involving of an element of

philanthropy or something derived from pity, and has been from early

times the fundamental of the concept of charity.

[S61 D, FJ E

Special Commissioners of Income Tax v. Pemsel, 3 Tax

Cases 53 at

96, rt:ferred to.

(vi) Thus, if education is run on commercial lines, merely because it

is a school, it does not mean it would be entitled to the exemption under

Section

11S(4)

of the Act. (562 BJ

(vii) Where the predominant object is to subserve charitable purpose

and not to earn profit it would be a charitable purpose. [56S DJ

17ie King v.The Commissioners for Special Purposes of the Income Tax G

(S Tax Cases 408); The Abbey Malvern Wells Ltd. v. Minister of Town and

Country Planning, [1951] (2) All England Law Reports 1S4 at 161; The

Tntstees of the 'Tribune' (1939 (VU) Income Tax Reports 415); All India

Spinners' Association v. Commissioner of Income-Tax. Bombay (12 Income

Tax Reports

1944 482); Commissioner of Income-Tax, Bombay

Cicy v.Breach H

540 SUPREME COURT REPORTS [1992] 2 S.C.R.

A Candy Swimming Bath Trust, Bombay (21 Income Tax Reports 1955 279 at

pages 288-289) and Addi. C.I. T., Gujarat v. Surat Alt Silk Cloth Manufac

tures Association (121 Income Tax Reports 1980 Page 1 at Pages 11 at.d

24), referred to.

(viii) Merely because education is imparted in the school, that by

itself, cannot be regarded as a charitable object. Today, education has

acquired a wider meaning. If education is imparted with a profit motive,

to hold, in such a case as charitable purpose, will not

be correct. (565 F]

(ix) The rulings arising out of Income-tax Act may not be of great

C help because in the Income-tax Act 'charitable purpose' includes the relief

of the poor, education,

medical relief and. the advancement of any other

object or general public utility. The advancement of any other object of

general public utility is not found under the Delhi Municipal Corporation

Act. In other words, the definition is narrower in scope. [565 G]

2. (i) The Delhi Municipal Corporation Act of 1957 in so far as it

grants an exemption under

Section 115(4) makes a departure from the other

statutes of similar kind. Only the Delhi Municipal Corporation Act and

Kerala Act adopt this pattern of exemption. Therefore, unlike the other Acts

relating to municipalities of the various other States, the legislative intent

E appears to be to narrow down the nature of exemption. [566 D-EJ

(ii) It cannot be gainsaid that the Municipal general tax is an annual

tax. Therefore, normally speaking, the liability for taxation must be deter

mined wi_th reference to each year. In other words, the society claiming

F exemption will have to show that it fulfils the conditions for exemption

each year.

If it shows, for example, that for its support it bas to depend

on, either wholly

or in part, voluntary contributions, in that particular

year, it may

be exempt. But where in that year, for its support, it need not

)

depend on voluntary contributions at all or again if the society produces

surplus income

and excludes the dependence on voluntary contributions,

G it may cease to be exempt.

Of course, the word 'support' will have to mean

sustenance of maintenance.

(566 F-GJ

(iii) The reasonable way of giving effect to this exemption, will be to tak~ each case and ass.ess for a period of five years and find out whether

H the society or body depends on voluntary contributions. Of course, at th·e

>--

MUNICIPAL CORPN. v. BOOK TRUST 541

end of each five year period the assessing authority could review the A

position. [566 HJ

(iv) The test must be whether the society could survive without

receiving voluntary contributions, even though it may have some income

by the activiti~s of the society. The word 'part' must mean an appreciable

amount

and not an insignificant one. The 'part' in other words, must be B

substantial part. What is substantial would depend upon the fact and

circumstances of each case.

(567 B-C]

(v) The word 'contribution' used in the proviso must also be given

its due meaning. It cannot be understood as donations. If that be so, a

voluntary contribution cannot amount to a compulsive donation.

If the

donor, in order to gain an advantage

or benefit, if he apprehends that but

for: the contribution some adverse consequence would follow, makes a

donation certainly it ceases to be voluntary.

[567 DJ

(vi) The test to be applied is not merely qualitative but quantitative D

well. [567 EJ

(vii) Under the Delhi School Education Act no provision is f0\1Dd by

which the school is made a separate juristic entity. (569 DJ

The school being a separate entity, premises occupied by the school E

will belong to it and not to the society. Therefore, the society cannot clai.m

to be in exclusive occupation and use of the land and building in question.

[569 EJ

(viii) Section 115(4) of the Act covers those cases where a part of the

land

or building is used for trade or business or for getting rental income F

_therefrom. That part undoubtedly will be subject to tax. Suppose, there is

another portion of the same lands or buildings where trade or business is

carried on and profits are made and are applied to charitable purposes

then

that portion shall, for purposes of municipal taxation, be deemed to

be a separate property. In other words, this

part of the lands or buildings G

will qualify for relief. But the other part will be subject to tax. The trade

portion is subjected to tax.

(572 C-DJ

3. Trade or business can be present in both sub-sections (4) and (5)

of section 115. But,Jf the profits or income of trade or business is devoted

to a charitable purpose

and no part thereof is distributed among

the· H

542 SUPREME COURT REPORTS (1992] 2 S.C.R.

A members as dividends or bonus, then that trade or business is a means to

an end. It is charity. But, if there is a trctde or business carried on in a

land

or building and its profits are not applied to a charitable purpose,

sub-section

(6) says that that part of the land or building where a trade

or business is carried on or from which rent is derived, will be subject to

tax.

[S72 E-F]

In the instant case, though the society running the school has a

charitable purpose, beyond that it does not strengthen its case as it fails

_answer the test that it is supported wholly or in part by voluntary

contributions.

[572 G]

CIVIL APPELLATE

JURISDICTION: Civil Appeal No. 2805 of

1980.

From the Judgment and Order dated 29.2.1980 of the Delhi High

Court in L.P.A. No.102 of 1974.

AND

Civil Appeal No. 228 of 1990.

From the Judgment and Order dt. 3-2-89 of the Delhi High Court in

E C.W.P. No. 263 of 1989.

B.Sen, R.K. Maheshwari and Vineet Maheshwari for the Appellant

in C.A.No.2805 of 1980 and Respondent in C.A. No.228 of 1990.

Barish N. Salve, Anil Mallick, Vineet Kumar and Vijay Bhasin for

F the Appellant in C.A.228 of 1990.

G .B. Pai, Ms. U ma Mehta Jain for the Respondent in C.A.2805 of 1980 .

. Barish N. Salve, Rajiv Shakdhar, Ms. Rita Bhalla, S.S. Shroff for S.A.

Shroff & Co. Dr. A.M. Singhvi and R.Sasiprabhu for the Interveners.

The Judgment of the Court was delivered by

MOHAN, J. Both these appeals can be dealt with under common

judgment since the scope of Section 115(

4) Delhi Municipal Corporation

Act,

1957 (hereinafter referred to as the. Act) alone arises. However, it is

H necessary to state the facts of each case separately.

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.] 543

CWIL APPEAL NO. 2805 OF 1980

The property known as Nehru House, No.4 Bahad'Qt-Shah Zafar

Marg, New Delhi is owned by respondent (Childern Boot Trust). It is a

society registered under the Society's Registration Act, 1960.

From the year 1964-65 only a part of property was subject to the

General Tax

in accordance with the provisions of the Act. For the said year

the value

of the property was assessed at

Rs.8,51,480 while the portion of

the property which was exempt was valued at Rs.5,96,870.

In the year 1970 the appellant-Corporation served a notice on the

respondent proposing that the rateable value

of the building should be

revised.

On 1st February, 1973 the Deputy Assessor and Collector of the

appellant-Corporation passed an order to the effect that the rateable value

of the property be revised and enhanced to Rs.

16,29,750. The Deputy D

Assessor and Collector held that the respondent had not proved its

charitable character. Further, the user

of the property did not go to prove

that the property was used for the charitable purpose and the

same cannot

be exempt from tax. Aggrieved by this order dated 1.2.1973, a writ petition

under Articles 226 and 227 of the Constitution was filed before the High

Court of Delhi in C.W. No.318 of 1974. The claim of the respondent, who E

figured as the petitioner therein, was that the withdrawal of exemption

from the payment of General Tax previously enjoyed on portions

of the

property was wrong. It was contended that the case

of the Trust was

covered

by Section 115( 4) proviso of the Act; proviso exempts buildings

from the payment of

General Tax if exclusively occupied and used by a F

society for charitable purpose. The learned Single. Judge (Rajinder Sachar,

J.) allowed the writ petition. He held that the Trust would be entitled to

claim total exemption for the payment of tax under Section 115( 4) of the

Act for all the portions occupied by it except which

is occupied by the press

namely the basement area of 11217 sq.

ft. for which a monthly rental value G

has been assessed at

Rs.14.021.25 and an area of 2000 sq. ft. on the ground

floor rear portion for which the monthly rental value has been fixed at

Rs.3,462.50. Even from this rental Vjllue the Trust was entitled to claim

exemption in the proportion

of the income accruing to it from the publi

cation

of children books etc. In the result, the impugned order of the

Deputy Assessor and Collector was quashed to the above exent and the

544 SUPREME COURT REPORTS [1992] 2 S.C.R.

A mattter was remitted to him to dispose of in accordance with law and in ~

the light of the observations made in the judgment.

Aggrieved by the judgment

L.P.A. No.102 of 1974 was preferred by

the appellant to the Division Bench of the said Court.

By a judgment and

order dated 29th February,

1980 it was held inte; alia as under:-"Suffice it is. to say that 'education' cannot be understood

in the limited sense of teaching being given

by holding classes

by delivery of lectures. The acquisition of information or

knowledge, from whatever source and in

any manner has to be

regarded

as education. The

Library, Dolls Museum and holding

of exhibitions help in providing an opportunity to acquire

information and knowledge. Premises used for such purposes

would be regarded

as being used for education and thus for

charitable purpose."

. In this view the Division Bench held that, because of the mandatory

provisions of sub-section (5) of Section 115 no part of the premises in

occupation of the press in the basement and the area of 2,000 sq. ft. on the

ground floor rear portion for which the monthly rental

value has been fixed

at Rs.17,483.75 could

be exempt from tax. The judgment of the learned

Single Judge in this regard could not be sustained. The result being, the

appeal of the appellant-Corporation

was allowed partly.

Under these cir

cumstances, the Municipal Corporation of Delhi has come up in appeal.

By an order dated 26.11.80 special leave was granted. Hence Civil Appeal No.2805 of 1980.

CIVIL APPEAL NO. 228 OF 1990

The appellant-Society is registered under the Society's Registration

Act~ 1860. When there was a proposal by the Deputy Assessor and Collec

tor fo assess the Society for the General Tax, the appellant-Society claimed

G that it was a Society for charitable purpose and, therefore, no tax cowd be

levied on its building since the exemption under sub-section (

4) of Section

115 of the Act would be applicable.to it. This contention was rejected. The

ultimate order of assessment

is of 4th of November,

1:988 whereby the

respondent imposed the property tax of Rs.5,32,683

by assessing the rate-

H able value.

-..j_.

.)..

l .

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.) 545

The appellant-Society filed a suit and sought interim injunction but A

the Senior Sub-Judge was of the view that the subject-matter of the suit

being Rs.5,32,683 he could not entertain the suit. Therefore, on 24.12.1988

the appellant withdrew the suit with liberty to file a fresh petition. There

upon, the appeallnt-Society filed Civil Writ Petition No.263 of 1989

challlengi.ng the assessment order dated 4th November, 1988 in the High B

Court of Delhi. That was heard by a Division Bench. By a judgment dated

9th February,

1989 it

·was held that the exemption claimed by the appellant

was unavailable to it. Therefore,. the case was not covered

Section 115(4)

of the Act. Accordingly, finding no infirmity in the order

of assessment the

writ petition was dimissed

in limine. By an order dated 23rd January,

1990

special leave having been granted, this appeal is before us. C

We will now advert to the arguments addressed in Civil Appeal

No.228 of 1990 since the main arguments were addressed by Mr. Harish

Salve, learned counsel for the appellant. The appellant is a Public School

called Green field School. It is recognised under Delhi School Education

Act,

1973 and the Rules made thereunder. The conditions for recognition D

are:-

(i) The society must run the

School.

(ii) The School must maintain its accounts.

The Society in this case owns a building. Therefore, the building

which houses the School, whether exempt from tax, is the issue. The tests

to be applied under Section 115{ 4) are two in principle.

(i) Society must be a charitable Society.

(ii) Use must be for a charitable purpose.

In the submission of the learned counsel, the proviso does ·not lay

down the quantitative test

in relations to voluntary contribution but only

qualitative test. G

Education per se is a charitable purpose. Therefore, even if the School charges a fee, that would be irrelevant. The Society must satisfy the

following conditions:

(i) That it

is supported by voluntary contributions; H

546 SUPREME COURT REPORTS [1992) 2 S.C.R.

A (ii) applies its own income to promote its objects; and

(iii) it does not pay dividend to any other members.

Two classes of societies could be thought

of.

B (i) Where members receive full value for their contribution.

(ii) Society for private gain.

For the application of

Section 115( 4) two tests are:

(i)

In relation to explanation education per se charity.

(ii) In relation to the proviso, distributive in nature.

Therefore, one has to look at the memorandum of objects and the

bye-laws.

If the object is charitable one, that would be enough. It makes

D little difference as to how the funds are utilised.

Secondly, if the bye-laws

do nol provide

for the payment of dividend, that again is descriptive on the

same line of reasoning where the proviso

says "is supported wholly or in

part

by voluntary contributions", which means it has no funds. It does not

matter how the accounts are drawn.

The learned counsel strenuously urged that the statutory setting in

which

Section 115( 4) has to be construed, must be kept in the background.

He draws our attention to Section 4 of Delhi School Education Act, 1973,

which prescribes the conditions under which a School could be recognised.

Again Section

5 provides for scheme of management. Section 17(3) makes

it obligatory on the Manager to

file with the Directory a full statement of

the fees to be levied

by the school. It further provides that no fee shall be

levied except

with the prior approval of the Director. No fee in excess of

the fee specified

by the Manager could be levied.

Section 18(3) talks of

recognition under aided school fund.

The Rules made under the Delhi School Education Act, 1973 also

have a great bearing. Rule 50 lays down elaborately the conditions for

recognition. Clause (i) of the said Rule requires that the School is run by

a Society. Clause (iv) says that the school shall not be run for profit to any

individual or group or association. Clause

(ix) stipulates that the

School

H building shall not be used for any other purpose.

]

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.] 547

Chapter XIV of the Rules deals with the School funds. Rule 172 A

requires the Trust or the Society not to collect fees.

Rules

173 stipulates the requirement for the maintenance of the

School fund. It

inter alia provides:

(i) School funds shall be kept separately.

(ii)

It cannot run for profit.

(iii) The

Society cannot draw from School funds.

Rules 177 clearly lays down the manner in which the funds realised C

by unaided recognised schools are to be utilised.

Thus, according to learned counsel,

in construing the scope of Sec-

tion

115 (4), all these provisions will have to be adverted to and then the

tests must be formulated. The next question

is whether education per se is

charity. The leading

case on this subject is Special Commissioners of D

Income Tax v. Pemsel (3 Tax Cases 53 at 96). Again, in The King v. The

Commissioners for Special Purposes

of the Income Tax (5 Tax Cases

408 at

414) it was laid down that a trust for advancing of education would be

charitable in nature. The dictum laid down in 17te Abbey, Malvern Wells,

Ltd.

v. Minister of

Town and Country Planning (1951 (2) All England Law E

Reports 154 at 161) squarely applies to the facts of this case. Therefore, it

is beyond dispute that the Society is engaged in a charitable purpose.

The learned counsel further relies on Tiie Tntstces of the 'Tribune'

(1939 (VII) Income Tax Reports 415), particularly at pages 422-423; All

flldia Spi1111ers' Association v. Commissioner of Income-Tax, Bombay (12

Income Tax Reports 1944 482) and the propositions stated at pages 488-

489 and Commissioner of Income-Tax, Bombay City v.t'Breaclt Candy Swim

ming Bath Tmst, Bombay (27 Income Tax Reports 1955 279 at pages

288-289). Therefore, according to him, the only essential factor to deter

mine whether

it is a charity or not would be to find out whether there is G

any private gain by setting up of the institution. This was the test adopted

in Addi.

C.l. T., Gujarat v. Surat Art Silk Cloth Manufacturers Association

(121 Income Tax Reports 1980 Page 1 at Pages 11 and 24).

Therefore if there is no private gain; if the Society cannot utilise the

funds as the rules under the Delhi School Act state, as long as

there is no H

548 SUPREME COURT REPORTS (1992] 2 S.C.R.

A profit it is charitable. The essential test of a charitable purpose is the

destination of profits.

If the profits continue to feed the charity, the mere

occurrence of profits would not detract from the charitable nature of the

enterprise. The proviso under Section

115( 4) prescribes three qualitative

tests for identifying charitable societies. These tests relate to the nature and

the character of the societies and not to its actual transactions in any

particular year or group of years .

. When the proviso uses the words "supported wholly or in part by

voluntary contributions", the test for as~ertaining the same would be:

(i) Does a Society rely upon voluntary contributions ultimately

to meet the deficits,

if any, which may arise in its capital or

revenue account?

(ii) Does the Society rely upon voluntary contributions to

finance its capital outlays to the extent such outlays exceed its

savings and borrowings?

The test

is essentially qualitative in nature. It is that lest which is

commended for acceptance by us. The learned counsel further states that

the advantages of applying the qualitative test

would be:

(i)

By a series of decisions it has been held that mere generation

of profits would not detract from the charitable nature of

society so long as the profits continue to

feed the charity and

are not deverted to either non-charitable or private purpose.

(ii) It would conform to the interpretation adopted by English

Courts on similar expressions used in statute which are

pari

materia .

. (iii) It would afford a definite and a reliable test for identifying

the exempt societies.

(iv) It would do away with the aritificial distinction between

societies which are efficiently run and generate a surplus and

others which run into deficits.

On the contrary if the quantitative test is applied it may lead to

H arbitratiness and anomalies. in a particular year, in order to meet its .

MUNICIPAL CORPN. v. BOOK '!RUST [MOHAN, J.] 549

-;-

expenses, the society may depend upon voluntary contributions while in the A

J' succeetling year it may not any longer depend. It is also impossible to adopt

a number of years or a particular year as yardstick to determine whether

the society satisfies the conditions enumerated in the proviso. This becomes

further apparent when

it is applied to the second and third parts of the

proviso.

Where the bye-laws of a society permit application of profits for

private purpose or payment of dividend to its members that undoubtedly

would be disqualified from claiming exemption. As laid down in

Girl's

Public

Day School

Trnst Ltd. v. Minister of Town and Country 1951 (i)

Chancery 400 the object of the proviso when it insists on support by c

voluntary contribution wholly or in part, is to disqualify mutual benefit

societies. Voluntary C' Jntributions would, therefore, mean contributions

other than those made

by bendiciaries

of the services. Reliance is placed

The Overseers of the

Poor and Chapelwarden of the Royal Precinct of the

. Savoy in the County of London v. The Art Union of London (1896 Appeal

C<ises 296 at 310) and Institution of Mechanical Engineers v. Cane (Va/ua-

tion Officer) and others (1960 3 All England Reports 715). The last submis-

sion of the learned counsel

is, the expression

"support" does not, in any

manner, connotes sustenance otherwise it would not make even partial

support to qualify for exemption. The word "support", therefore, must

mean which enriches the society itself or ~ dieves it of a burden or furthers E

__.,.

its objects or powers as laid down in Cane (Valua!ion Officer) and Another

v. Royal College of Music (1961 2 Queen's Bcul-h Division 89 at pages

120-121. Thus it is submitted that the approach of thf" High Court is

incorrect and warrants interference.

-7

Mr. B.Sen, learned counsel for the respondent iii reply to the argu·

ments of the appellant would urge that Section 115( 4) , a peculiar section

which provides for relief to those societies or bodies cacrying on charitable

support either

fully

nr in part. The proviso of the Delhi Municipal Cor-

_,;...

poration Act distinguished itself from oti.er enact.men's. The legislative

G intent is to narrow down the clauses of exemption.

The Municipal General Tax is an annu ll tax. The ctnestion of asses-

sability to such tax or exemption will, ther.~~ ... re, have to be determined each

year. Therefore, unless and until the society satisfies the assessing authority

that it fulfills the conditions for exemption in respect of that particular year,

350 SUPREME COURT REPORTS (1992) 2 S.C.R;

A it' cannot claim exemption as a rule. Therefore, the facts in each case will +

have to be ascertained in each year. Similar is the method adopted uuder

the Income Tax Act in respect of assessment of societies under Sections

11 to 13 of the said Act or even with regard to exempting donations to

charitable societies

under

Section 80G.

B One other method will be to decide with reference to the overall

position

of the society or body over a period of 4 or 5 years. This was the

method adopted in

Brighton College v. Marriott (H.M. Inspector of Taxes)

(10 Tax Cases 213). Similar wa~ the test adopted in the case of Southwell

(Surveyor of Taxes) v. The Governors of Holloway College (3 Tax Cases 386)

C while determining whether it fell within .the concept of a charitable school

within the meaning of erratic statute.

It is conceivable that society may depend upon voluntary contribu

tions for a number of years. But, in a given year it might not

be able to

generate a small surplus.

In such a

ca5e it might be entitled to exemption.

D On the contrary, where the surplus is generated in a systematic manner,

year after year, it

will lose its character as a society supported by voluntary

contributions.

The word

"supported" must mean sustenance. Where the society does

not

depend upon voluntary contributions for its sustenance it cannot have

the benefit

of the proviso. The expression

"wholly or in part" when read in

the context

of ''supported" would mean that there could be a society which

would depend upon wholly on voluntary contributions for its sustenance,

that

is, for the expenses of carrying on its activities. The word

"part" means

a society may have some income of its own. Still it could claim the benefit

of exemption if it is not sufficient for its maintenance and it has to be

supplemented by voluntary contributions. In other words, the test to be

applied

is whether the society can survive without voluntary contributions

even though it may have some income of its own. As regards the part, it

would

depend upon the facts of each case. The submission is that it must

G be a substantial part as laid down by this Court in case arising out of Land

Acquisition Act;

Smt. Somavanti and other v. The State of Punjab and others,

(1963) 2 SCR 774.

When the Section talks of Contribution it must be given its proper

meaning. Such a contribution must be voluntary. Therefore, a voluntary

H contribution is not made under compulsion, Equally, it should not be made

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.) 551

--+ under any kind of apprehension that some adverse consequences would A

;

follow if such a contribution is no made. Equally, if a contribution is not

made in return for any benefit except incidental, it would be entitled to the

benefit. In support of the submission, the learned counsel relies on

Forbes

(Surveyor of Taxes) v. Standard Life Assurance Company (3 Tax Cases 268

at 272) and Institution of Mechanical Engineers (supra).

On the basis of

these, it is submitted that any donation paid at the time of admission cannot

be treated as voluntary.

The argument, that the transfer

of funds to-the society by the school

can

be regarded as voluntary contribution received by the society, is wrong.

,- The Delhi School Education Act does not create the school into a specific c

juristic entity different from the society. The Act only makes regulations in

'j-.-

th~ matter of running the school and the service conditions of the

employees. Indeed, the Act itself imposes a condition that the school must

be run by a society or a body under Rule

50. Further, the Managing

Committee of the school shall act under the control and supervision of the

society which runs the school. Consequently, if the funds of the school were

transferred to the society, it would only amount to transfer of funds from

one account to another, both under the control of the same society.

. .t-·

Under Section ll5( 4) if the society were to run eduction as a trade

or business, even in such a. case, the benefit of exemption will be lost, as

laid down in

Brighton College case (supra).

In· cannot be urged as an axiomatic proposition that imparting educa-

tion would be a charitable purpose per se.

Pemsel's case (supra) no doubt F

continues to hold the field in England. A careful reading of the judment

will di_§close that there must be an element of public benefit or philanthropy

that was what was stressed by each of the Law Lord. Therefore, ~bile

applying t.he ratio under the Delhi Municipal Corporation Act one cannot

straightaway adopt the views expressed in England. Here, the definition is

somewhat circumspect. Hence, it must be viewed with reference to the

objects to be achieved

by a particular statute. Therefore, education per se .... cannot be regarded as a charitable object otherwise even if education was

1 carried on with a view to make profit, to call it a charity, would be

unreasonable. Hence, it is submitted that the concept of a public benefit

will have to be introduced. If that is done, "education" under Sedion 115( 4) H

552 SUPREME COURT REPORTS (1992) 2 S.C.R.

A must be interpreted a ejusdem generis. Therefore, it ought to be understood

as having some element of relief to the public at large or public benefit.

The learned counsel refers to the balance sheet and states that the

donations to the school

have been credited to the society's accounts. The

Term

"fees" appropriated by the society is reflected in the balance sheet

which clearly

shows that there have never been two separate entities as is

sought to be made out

now.

CIVIL APPEAL N0.2805 OF 1980

Mr. B. Sen, Sr. Advocate for the appellant-Corporation would submit

that respondent-Book Trust

was established on 7.5.57. The building was

constructed during the years 1961-65.

Part of the building bas been let out

1970-71. The rental income is

Rs.86,632.80 per mensum. The Children

Book Trust has:-

D (a) Delhi

Office

(b) Printing Press

(d) Library

( e) Singer Institution.

For the years

1964-65 and 1969-

70 exemption from property tax was

granted since the respondent was depending on the Government grants.

F However, in 1971 notice, making the demand for property tax, was issued

with regard to the portion which had been rented out

to the press.

Admittedly, no exemption could be claimed concerning this portion. It

only the other portions which are relevant for the purpose of the case. The

High Court in its judgment while interpreting

Section 115( 4)( a) proviso has

G held that, because of the use of words "in part" in the proviso the society

would be entitled to claim exemption provided other conditions are satis

fied if it is· able to show that it has received even a small amount of

voluntary contribution.

is this finding which is objected to by the appellant. The society

H cannot pay the tax, is the test to be adopted. In other words, to claim the

+--

).---

-i·

MUNICIPAL CORPN. v. BOOK TRUST (MOHAN, J.] 553

exemption it must be shown that the society is supported by the voluntary A

contribution. Where the activity of the society generates income to support

itself and, therefore, the society does not any longer depend on the volun-

tary contribution, certainly the exemption should be made unavailable.

From this point of

view, the finding, that even if it receives a small

contribution irrespective of the

fact whether it is able to support or not, is

not the correct

test. It is this aspect of the matter which requires to be

clarified and the

law settled by this Court.

Mr. G.B.

Pai, learned counsel for the respondent-Trust submits that

the broad purpose of Section

115 is to exempt charity. There may be two

types of voluntary contributions: C

(i) From the

Society

(ii) From third parties

The object of the Section

is to help the charitable institutions. The D

sine qua non is non-distribution of profits. Once that test is answered the

rest becomes immaterial. In support of this submission, the case

P.C.

Raja Ratnam Institution v. Municipal Corporation of Delhi and others, [1990]

Supp. SCC 97 is relied on. Lastly, it is submitted that the proviso must be

read down to find out

as to the income is realised and whether there is E

non-payment of dividends to the members. That would be in consonance

with the object of the

Section, granting exemption to those who are

engaged in chartitable purpose. Certainly,

it cannot be contended that

imparting of education

is not a charitable purpose. The leading case on

this aspect

is Pemsel's case (supra).

The learned counsel for the intervenors (the petitioners in

W.P.No.1754 of 1979) draws our attention to Section 115(4) and submits

that exemption would be available if the following tests were satisfied:-

(i) Lands or huildings or portion thereof.

(ii) Exclusive occupation and use.

(iii) Such user must be by a society or body.

(iv) For the charitable purpose.

554 SUPREME COURT REPORTS [1992) 2 S.C.R.

A (v) Charitable purpose includes education, relief of poor and medical i--

relief.

· (vi) Such a society is supported wholly or in part by voluntary

contributions.

B (vii) Applies its profit to itself for furtherance of the objects of the

society.

(viii) In promoting its objects.

(ix) It does not pay dividend or bonus to its members.

In this case, elements (iv), (v) and

lvi) are in dispute. It must be held

education

per se charity. However, it is not contended that the taxing

authority is precluded from going into the question whether the society is

imparting education

and thereby is pursuing a charitable object.

D It

· is further submitted that the voluntary support talked of under

Section inust be qualitative in nature and not quantitative. In Cane (Valua

tion Officer)

and Another (supra) is what is relied on for advancing this

proposition.

In that case, the test

that was laid down was: (1) that enriches

the

Corporation itself or (2) relieves it of a burden or (3) furthers its

. objects or powers.

British School of Egyptian Archaeology, Mu"ay and others v. Public

Trustee and others, (1954 (1) All England Reports 887) is a case which deal

with the quid pro quo nature of voluntary c-.ontribution. Therefore, it is

submitted

if the Court were to adopt the test whether voluntary contribu-

F tions provide the life line, such a test would be violative of Article 14. When

property tax exemption was granted for aided schools and such exemption

was

denied to non-aided schools it was held to be discriminatory in Baldwin

Girls'

High

Sclwo4 Bangalore v. Corporation of the City of Bangalore, AIR

1984 Karnataka 162.

Before we deal with the respective contentions we think it necessary

to provide

the background in relation to the municipality and the power

of taxation. Every municipality is a local self-government. Therefore, in

order that it may sustain itself a power of taxation has

beeh delegated to

municipal bodies. The taxes are focal taxes for local needs. Such taxes must

H obviously differ from one municipality to another. It is impossible for the

-'.,

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.) 555.

Legislature to pass statutes for the imposition of such taxes in local areas. A

In a democratic set up the munidpalities which need the proceeds of these

taxes for their own administration, it would

be but proper to leave to these

municipalities the power to impose

and collect taxes.

The local authorities do not act as Legislature when they impose a

tax but they

do so as the agent of State Legislature. The powers and the B

extent of these powers must be found in the statute which creates them

with such powers.

Local bodies being subordinate branches

of government activities are

democratic institutions managed by the representatives

of the people. They C

function for public purpose. They bear the burden of government affairs

in local areas as they

are required to carry on local self-government. The

power of taxation is a necessary adjunct to their other powers. There are

various kinds

of taxes provided under each Municipal Act, importantly,

property tax.

Now,

we come to

Section 114 of the Act. Sub-section (1) of the said

Section reads:-

"Save as otherwise provided in this Act, the property shall

be levied on lands and buildings in Delhi and shall consist of E

the following, namely:-

(a) ....................................................................................................... .

(b) ...................................................................................................... .

( d) a general tax.

(i) ......................................................................................

: ................. ·G

(ii) ...................................................................................................... .

Explanation:-Where any portion

of a land or building is liable

to a higher rate

of the general tax such portion shall be deemed

to be a separate property for the purpose

of municipal taxation. H

556

SUPREME COURT REPORTS (1992) 2 S.C.R.

The Corporation may exempt from the general tax lands and

buildings of which the rateable value does not exceed one

hundred rupees."

While dealing with the premises in respect

of which property

truces

are to be levied sub-section {4){a) of Section 115 states:

"( 4) Save as otherwise pro\ided in this Act, the general tax shall

be levied in respect of all lands and buildings in Delhi except-

(a) lands and buildings or portions of lands and buildings

exclusively occupied and used for public worship

or by a society

or body for a charitable purpose:

Provided that such society or body

is supported wholly or in

part by voluntary contributions, applies its profits,

if any, or

other income in promoting its objects and does not pay any

dividend or bonus to its members.

Explanation:

"Charitable purpose" includes relief of the poor,

education· and medical relief but docs not include a purpose

which relates exclusively

to religious teaching;

(b) ...................................................................................................... .

(Emphasis supplied)

is this scope of the sub-section that has to be determined in these

two cases.

Sub-section (5) of Section

115 provides:

"(5) Lands and buildings or portions thereof shall not be

deemed to be exclusively occupied an~ used for public worship

or for a charitable purpose within the meaning of clause (a)

of sub-section ( 4), if any trade or business is carried on in such

lands and buildings or portions thereof or if in respect of such

lands and buildings or portions thereof, any rent

is derived."

Sub-section (

6) of Section 115 provides:-

(

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.) 557

"(6) Where any portion of any land or building is exempt from A

the general tax by reason of its being exclusively occupied and

used for public worship or for a charitable purpose such por-

tion shall be deemed to be a separate property for the purpose

of municipal taxation."

Therefore, after providing for exemption under sub-sections ( 4) and

~- (5) Section 115 categorises cases, which will lose the exemption under

sub-section (4). Again, sub-section (6) clarifies that a part of a building in

the occupation of society

may not be entitled to exemption though the

other part

is clearly exempt.

By a reading of the above, it is clear that sub-section ( 4) of Section

115 provides that general tax shall be levied in respect of all lands and

--:>--

buildings except those lands and buildings or part of lands and buildings

which are exclusively occupied and used (i) for public worship or (ii)

society or body for charitable purpose.

The conditions for claiming exemption under sub-section ( 4) are:-

(i) The lands and buildings or portions of land and buildings,

in respect of which exemption is claimed shall

be exclusively

occupied

by a society or a body and used for a charitable

purpose.

(ii)

Such society or body must be supported wholly or in part

by voluntary contributions.

(iii)

It must apply its profit, if any, or other income for promot- F

ing its objects.

(iv) It must not pay any dividend or bonus to its members.

~-',

In the Explanation as to what is charitable purpose is stated in an

inclusive manner, relief of the poor, education and medical relief. In the

present case, the questions which arise for our determination are:

(i) Whether the society or body

is occupying and using the land

and building for a charitable purpose within the meaning of

sub-section ( 4)? H

558 SUPREME COURT REPORTS [1992] 2 S.C.R.

(ii) What is the meaning of the expression "supported wholly

or in

part by voluntary contribution?"

(iii)

Whether any trade or business is carried on in the premises

within the meaning of sub-section (5)?

We will first take up the case of Civil Appeal No.228 of 1990.

The appellant-Society is a society registered under the Society's

Registration Act. It

is engaged in running the school known

!15 Green Field

School. This school

is recognised private unaided school. The school is run

C in a building owned by the appellant-Society. Mr. Harish Salve, learned

counsel for the appellant draws our attention to the Delhi School Educa

tion Act,

1973 and the Rules framed thereunder, in order

to· appreciate the

statutory setting in which Section

115 ( 4), according to him, is to be

construed.

· As far as Delhi School Education Act is concerned we will refer to

Section {3). It reads as follows:

"(3) The manager of every recognised school shall, before the

commencement of each academic session, file with the Director

full statement of the fees to be levied by such .school during

the ensuing academic session, and except with the prior ap

proval of the Director, no such school shall charge, during that

academic session, any fee in excess of the fee specified by its

• f •

manager m said statement."

F Section 18 (3) talks of unaided school like the present and its school

fund, which is extracted below:

"(3) In every recognised unaided school, there shall be a fund,

be called the "Recongnised

Unaided School Fund", and there

shall

credited there to income accruing to the school by way

of-

(a) fees,

(b) any charges and payments which may

be realised by the

school for other specific purpose, and

)

>--

(

MUNICIPAL CORPN. v. BOOK TRUST (MOHA."J; J.] 559

-:f

Sub-section (4) states as under:-

"(4)(a) income derived by unaided schools by way of foes shall

be utilised only for such educational purposes as may be

prescribed; and

(b) charges and payments realised and all other contributions,

endowments a~d gifts received by the school shall be utilised

only for the specific purpose for which they were realised or

received."

_......

Rule 50 of the Rules framed under this Act stipulates the conditions

-r for recognition. The important conditions for our purpose are:-

(i) the school

is run by a society

i:egistered under the Societies

D Registration Act, 1860 (21 of 1860), or a public trust con-

stituted under any law for the tinie being in force and

managed in accordance with a scheme of management made

•,

under these rules;

(iv) the school

is not run for profit to any individual, group or

-<--

association of individuals or any other persons; and

(ix) the school buildings or other structures of the grounds are

not used during the day or night for commercial or residential

purposes (except for the purpose of residence of any employee

of the school)

or for communal, political or non-educational F

activity of any kind whatsoever.

....J Under Rule 59(2){q) it is specifically stated that the Management

Committee shall

be subject to the control and supervision of the trust

society by which such school

is run.

Now, we come to Chapter XIV which relates to school fund. Rules

172 and

173 may

be.quoted:~

~1,

"172. Trust or society not to collect fees, etc., schools to grant

. receipts for fees, etc., collected by it -(1) No fee, contribution H

560 SUPREME COURT REPORTS (1992] 2 S.C.R.

or other charge shall be collected from any student by the trust

or society running any recognised school; whether aided or not.

{2) EvepY fee, contribution or mher charge collected from any

student

by a recognised school, whether aided or not, shall be

collected by the school for every collection made by it.

173. School fund how to be maintained-(1) Every School Fund

shall be kept deposited in a nationalised bank

or a scheduled

bank any post office in the name of the school.

(2) Such part

of the School Fund. as may be approved by the

Administrator,

or any officer authorised by him in this behalf,

may be kept in the form

of Government securities.

(3) The Administrator may allow such part of the School Fund

as he may specify in the case of each school, (depending upon

the size and needs

of the school) to be kept as cash in hand.

(4) Every Recognised

Unaided School Fund shall be kept

deposited in a nationalised bank

or a scheduled bank or in a

post office in the name of the school and such part

of the said

Fund as may be specified

by the Administrator

or any officer

authorised by him in this behalf shall be kept in the form

Government securities and as cash in hand respectively:

Provided that in the case of an unaided minority school, the

proportion of

such Fund which may be kept in the form of

Government securities or as cash in hand shall be determined

by the managing committee

of such school."

Rule 177 deals with utilisation

of the fees realised by unaided recog

nised schools. In sub-rule (1) it

is stated:-

"177. Fees realised by unaided recognised schools how

to be

utilised-

(1) Income derived by an unaided recognised school by

way of

fees shall be utilised in the first instance for meeting

ihe pay,

allowances and other benefits admissible to the employees

the school:

---i

-:~

-..

-....J

~....(,

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.] 561

Provided that savings,. if any from the fees collected by such A

school may be utilised by its managing committee for meeting

capital or contingent expenditure of the school, or for one or

more of the following educational purposes, namely:-

(a) award of scholarships to students;

· ( d) establishment of any other recognised school, or

any other school or educational institution, not

being· a college, under management of the same society or trust

by which the first mentioned school is run."

In this background, we will consider whether education per se is a

charitable purpose and its application to the appeliant-society. The case

relied on strongly

is Pemsel (supra). The dictum of Lord Macnaghten al

page% is as follows:-

" 'Charity' in its legal sense comprises four principal divisions:

trusts for the relief of poverty, trusts for. the advancement of

education, trusts for the advancement of religion, and trusts for

other purposes beneficial to the community not falling under

any of the preceding heads. TJle trusts last referred to are not

the less charitable

in the eye ofthe law because incidentally E

they benefit the rich as well as the poor, as indeed every charity

that deserves the name must do, either directly or indirectly."

One thing that is clear is that each of the Law Lords emphasised the

underlying idea of charity

involving an element of philanthropy or some-

thing derived from pity of early times as being the ·fundamental of the

concept

of charity. Lord Bramwell at page 83 states:

"I think a "charitable purpose" is where assistance is given to

the bringing up, feeding, clothing, lodging, education of those

who, from poverty or comparative poverty, stand in need of

such assistance."

Again, Lord Hershell at page

88 observed:

"It is the helplessness of those who are the objects of its care

which evokes the assistance of the benevolent. I think, then,

562 SUPREME COURT REPORTS [1992) 2 S.C.R.

that the popular conception of a charitable purpose covers the

relief of any form of necessity, destitution, or helplessness which

excites the compassion or sympathy of men, and so appeals to

their benevolence for relief."

Therefore, an element

of public

beneiit or philanthropy has to be

present. The reason

why we stress on this aspect of the matter is if

education

is run on commercial lines, merely because it is a school, it does

not mean it would be entitled to the exemption under

Section 115( 4) of the

Act.

The next case to which reference can be made is The King v. The

Commissioners for Special Purposes of the Incomo Tax, 5 Tax Cases 408.

The question arose whether the University College of North Wales could

be held as established for charitable purposes, Fletcher Moulton, L.J.

relying on Pemsel's case (supra) held that a' trust for advancement of

education

was charitable.

In The Abbey, Malvern Wells, Ltd. (supra) it is observed at pages

160-161:-

"In the present case, it seems to me that one is entitled, and,

indeed, bound, to look at the constitution of the company to

see

who, in fact, is in control. I find that, by art. 3 of the

company's articles, the company

is controlled entirely by a body

called a council, a body of persons, and,

by art. 64, that body

of persons must

be the trustees of the trust deed. Therefore,

while the company, theoretically, has the power to apply its

property and assets for the purpose of making profits and

devoting the resulting profit to the distribution of dividends

among the members, I find that the persons

who regulate the

operations of the company are not free persons unrestricted

their operations, but are the trustees of the trust deed, and,

under the terms of the trust deed, they may use the property

of the company only in a particular

way and must not make

use of the assets of the company for the purpose of a profit

making concern. I find that they are strictly bound

by the trusts

of the trust deed,

and that those trusts are charitable trusts. It

seems to me, therefore, that, 'while nominally the property of

the company

is held under the provisions of the memorandum

)....

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.] 563

and articles of association, in actual fact the property of the A

company is regulated by the terms of the memorandum and

articles of association plus the provisions of the trust deed, and,

therefore, the company

is restricted in fact in the application

of its property and assets and

may apply them for the charitable

purposes which are mentioned in the trust deed."

Relying

on this passage it is contended on behalf of the appellant

that the position

is exactly the same in the instant case. The submission is

where

th!! society's building houses, the school which is imparting edu«a

tion, it being a charitable purpose, the exemption would apply. We will

consider this aspect of the matter after referring to the Indian cases. C

In The Trustees of the 'Tribune' (supra) at pages 422-423 it is ob

served:

"In the High Court stress was laid by the learned Chief Justice

and

by Addison, J., on the fact that the Tribune newspaper D

charges its readers and advertisers

at ordinary commercial rates

for the advantages which it affords. As against this the evidence

finding_s do not disclose that any profit was made by the

newspaper or press before

1918 and it is at least certain that

neither

was founded for private profit whether to the testator E

or. any other person. By the terms of the trust it is not to be

carried

for profit to any individual. It cannot in their

Lordships' opinion be regarded

as an element necessarily

present

in any purpose of general public utility, that it should

provide something for nothing or for less than it costs or for

less than the ordinary price. An elemosynary element

is not F

essential even in the strict English view of charitable uses

(Commissioners v. University College of North Wales)."

In All India Spinners' Association (su.pra) at page 483 it is observed:

" Section 4(3) of the Indian Income-tax Act gives a clear and G

succinct definition of "charitable purposes" which must be con

strued according to its actual language and meaning. Lord

Macnaghten's definition of charity and English decisions

on the

law of charities have no binding authority on its construction

and though they sometimes afford help or guidance, cannot

564

SUPREME COURT REPORTS (1992] 2 S.C.R.

relieve the Indian Courts from their responsibility of applying

the language of the Act to the particular circumstances that

emerge under conditions of Indian life. The difference in lan

guage, particularly _the inclusion in the Indian Act of the word

"public"

is of importance.

The constitution of

Section 4(3) is obviously a question of

law, but so also is the question what is the real purpose of an

Association. The Court must make its decision on the latter

point on the basis pf the factS found for it, but given the facts

the question

is one of law. Where the principal fact is the

constitution of the Association the true construction

of the

constitution for finding out its purpose

is a question of law.

The

words· "general public utility" in SectiQn 4(3) are very

wide words. They would exclude the object of private gain, such

as an undertaking for commercial profit though

all the same it

would subserve general public utility."

Commissioner of

Income-tax, Bombay City (supra) it was observed

at page

289:

"A settlor or a donor may make a charity by setting up

aii

instituti~n and also providing funds by which t~ose who take

advantage of the institution can do so without paying any

charge; or

we may have a case where the charity may not go

to those limits and one may confine his charity to merely setting

up the institution and providing that those

who wish to take

advantage of the institution must pay reasonable charges for

the same. In both cases the setting up of

the institution would

be a charitable object if the· institution serves a purpose of

general public utility. The only essential factor to determine

whether it

is a charity or not would be whether there is any

private gain by the setting up of the institution. If the gain

derived

by running the institution continues to be impressed

with the trust which

is a charitable

tru5t, then it is immaterial

whether the institution

is run as a commercial

institut!pn or not,

but

if in the running of the institution profits

are made and the

profit goes to any private individual or if the institution is

intended for ali'y private gain, then undoubtely the running of

I -

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.J 565

the institution could not be considered as being run for a. A

charitable object."

Addi.

C.l. T. v. Surat Art Silk Cloth Assocn., (Income Tax Reports

121 Page 1 at 24) it is observed:

"Where an activity is carried on as a malter of advancement of

the charitable ·purpose or for the 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 C

not to earn profit. The charitable purpose should not be sub

merged by the profit making

mo~ive; the latter should not

masquerade under the guise of the former."

view of the above rulings it would be clear that where the D

predominant object is to subserve charitable purpose and not to earn profit

it would be a charitable purpose. However, the argument of the appellant

is as per the Delhi School Education Act and the Rules framed thereunder,

if the society cannot utilise

the fund and the school cannot be run for

private gain

in the absence of any profit, it would be a charitable purpose. E

We have already seen that merely because education is imparted in

the school, that by itself, cannot be regarded as a charitable object. Today,

education

has acquired a wider meaning. If education is imparted with a

profit motive, to hold,

in such a case, as charitable purpose, will not be

correct.

We are inclined to agree with Mr.B.Sen, learned counsel for the

Delhi Municipal Corporation

in this regard. Therefore, it would necessarily

involve public benefit.

The rulings arising out of Income-tax Act may not be of great help

because

in the Income-tax Act

"charitable purpose" includes the relief of G

the poor, education, medical relief and the advancement of any other

object or general public utility. The advancement of any other object of

general public utility

is not found under the Delhi Municipal Corporation

Act. In other words, the definition

is narrower in scope. This is our answer

to question

No.1. H

566 SUPREME COURT REPORTS [1992] 2 S.C.R.

The second important aspect is society or body. is supported wholly

or in pan by voluntary contributions. Reliance is placed on The Overseers

of the Poor and Chapelwarden of the Royal Precinct of the Savoy in the

County

of London (supra). At page

310 it is observed:.

"The expression "supported by voluntary contribution" has long

been well known in connection with hospitals and other

_institu

tions; I think the essential idea conveyed by them is that the

payments are a gratuitous offering for the benefit of others, and

not the

pri~ of an advantage purchased by the contributor."

But this case is not helpful because it turned on the meaning of

"voluntary".

The test according to the appellant to determine voluntary contribu

tions

is qualitative and not quantitative. We will

examine the correctness

of this submission. The Delhi Municipal Corporation Act of

1957 in so far

D as it grants an exemption under Section 115( 4) makes a departure from the

other statutes of similar kind.

As a matter of fact, the learned counsel have

provided us with the relevant provisions of the various municipal statutes

of the other States.

Only the Delhi Municipal Corporation Act and Kerala

Act adopt this pattern of exemption. Therefore, unlike the other Acts

relating to municipalities of the various other

States, the legislative intent

appears to be to narrow down the nature of exemption.

It cannot be gainsaid that the municipal general tax

is an annual tax.

Therefore, normally speaking, the liability for taxation must be determined

with reference to each

year; In other words, the society claiming exemption

F will have to show that it fulfills the conditons for exemption each year. If

it shows, for example, that for its support it has to depend on, either wholly

or in part, voluntary contributions, in that particular year,

it may be exempt.

But where

in that year, for its support, it need not depend on voluntary

contributions at all or again if the society produces surplus income and

G excludes the dependence on voluntary contributions it may cease to be

exempt.

Of course, the word "support" will have to mean sustenance or

maintenance. Only to get over this difficulty that the qualitative test is

pressed into service. We would consider the reasonable way of giving

effect to the exemption,

will be to take each case and assess for a period

five years and find out whether the society or body depends on voluntary

H contributions.

Of course, at the end of each five year period the assessing

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.] 567

authority could review the position. In other words, what we want to stress A

is, where a society or body is making systematic profit, even though that

profit

is utilised only for charitable purposes, yet it, cannot be said that it

could claim exemption.

If, merely qualitative test is applied to societies,

even schools which are run on commercial basis making profits would go

out to the purview of taxation and could demand exemption. Thus, the test,

according to

us, must be whether the society could survive without

receiv

ing voluntary contributions, even though it may have some income by the

activities of the society. The word "part' must mean an appreciable amount

and not an insignificant one. The "part" in other words,-must be substantial

part. What

is substantial would depend upon the facts and circumstances

of each case.

The word

"contribution" used in the proviso must also be given its

due meaning. It cannot be understood as donations. If that be so, a

voluntary contribution cannot amount to a compulsive donation.

If the

donor,

in order to gain an advantage or benefit, if he apprehends that but D

for the contribution some adverse consequence would follow; makes a

donation certainly

it ceases to be voluntary.

Therefore,

we conclude that the test to be applied is not merely

qualitative but quantitative as

well.

The last aspect of the matter is utilisation of the income in promoting

its objects and

not paying any dividend or bonus to its members. The

!earned counsel for the appellant and the intervenor would urge that on

the basis

of Cane (Valuation Officer) and Another(supra) (1961(2)

Queen's Bench Divison 89) the position

in the instant case is the same. At

Page

121 the following observation is found:

"One, I think, that enriches the corporation itself or relieves it

of a burden or furthers its objects or powers."

In the light of the above discussion, we will analyse the position in

the context of the Delhi School Education Act and the Rules, since the G

school is regulated by these statutory provisions. The school no doubt is

run by a registered society as required under Rule

50. It is managed in

accordance with the scheme of management as provided under the Rules.

However, Rule

59 sub-rule 2(q) which has already been extracted clearly

lays down that the managing committee shall be subject to the control and H

568 SUPREME COURT REPORTS [1992] 2 S.C.R.

A supervision of the trust or society by which the school is run. Rule 177

which we have

quoted above requires the utilisation of the income only for

):--

the purpose mentioned in that rule. Therefore, it would be clear that the

rules do not contemplate the transfer of funds from the school to the

society.

B It cannot be denied and it is not denied that the only activity carried

on by the society is the running of the Green Field School at Safdarjung

Enclave.

We have been provided with copies of the balance . sheets of the

society.

That

~hows for years ending on 31.3.1980 to 31.3.1984 and 31.3.1986

to 31.3.1990 the society had not incurred any expenditure. The income of

C the society consists of:-

(i)

term fees received;

(ii) donations;

and

D (iii) interest from bank

What exactly are the donations, we have not been explained. The

following extracts from the Income and Expenditure Accounts furnish us

the following details:

"Year Excess of Income *Term **Donation

Ending over expenditure Fees/Contributions

received from the

School

31.3.80 49,865 3,31,189 76,230

31.3.81 79,564 3,25,725 87,274

31.3.82 1,06,698 2,78,650 1,00,244

31.3.83 1,23,032 2,43,398 1,15,301

31.3.84 2,21,561 57,109 2,17,020

31.3.86 5,35,973 3,32,662 1,87,580

31.3.87 6,73,645 .

4,81,200 1,76,778

31.3.88 13,91,743 7,16,700 5,30,547

31.3.89

10,31,228 7,59,820 2,53,230

31.3.90 9,91,487 6,30,725 5,06,255

).... ... :

*The receipts are from the School which are collected from the )..

H students thriCe an year and are called 'Term Fee'.

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.) 569

* * Sources not explained. !t appears that these are the collections A

made from the parents of the students at the time of admission."

When

we turn to the extracts from .the income and expenditure

accounts of Green Field

School, we_ find from the tabulated statement

furnished to

us for the year ending 31.3.77 to 31.3.87 contributions have B

been made every year to the society. It has already been seen that the Delhi School Education Rules nowhere contemplate transfer of funds from the

school

to the society. Certainly, such contributions cannot amount to

voluntary contributions. The transfer of funds are in disregard of the rules

and run counter to Rule

177 quoted above. We cannot, by any process of

reasoning, hold that these are voluntary contributions received by the C

society. The Delhi

School Education Act does not create the school entity

a specific juristic entity different from the society. Where under rule

59(2)(q) of the Rules

it is provided that the managing committee shall be

subject to the control and supervision of the society by

which the school is

run, it means that school is a part and parcel of the society. Where, D

therefore, the funds are transferred, even calling the contribution from the

school to the society, would be nothing more than transfer oneself.

In fact,

we do

qot find under the . Delhi School Education Act. any provision by

which the school is made a separate juristic entity.

There

is another way of looking at the matter. The school being a E

sepnrate entity, premises occupied by the school will belong to it and not

to the society. Therefore, the society cannot claim to be in exclusive

occupation and use of the land and building

in question. In fact, the

proposal

for assessment sets out these aspects clearly which are extracted

below:

"The first step would be to determine whether the activity in

which the society

is engaged is charitable or not. The charitable

purpose has not been defined

in the Act, but it definitely means

to include only such acts as relief of the poor, medical relief to

the poor and education relief.

P.C. Rajaratnam Institutions G

v. MCD (Civil Writ Petition No. 1764 of 1979) division bench

of the Delhi High Co'urt has held that to be held as charitable

institutions for the purpose of Section 115(4), the society must

give education relid. It was further held by the Hon'ble Court

that where fees are charged, exemption cannot be granted. The

570

SUPREME COURT REPORTS [1992] 2 S.C.R.

scrutiny of the Income and Expenditure account of the school

shows that the activity which

is being carried out by the society

i.e. running of school, generates positive income from year to

year. Positive income in

the years 1977 to 1987 ranged between

32;000 to Rs.3 lacs per year. I do not know on what criteria this

activity can be called as charitable activity. The institute

is being

run purely on commercial lines for the purposes of profits. Even

the society for which receipts and payments accounts have not

been filed are in receipt of income generated from this activity

in the form of building fund and donations etc. which are forced

on the students and their guardians.

The figures picked up from some of the final accounts of

the society show that contributions from the school to the

society was Rs.1,56,895 in the year ending 31.3.79, and every

year thereafter the amount of contribution from school to the

society has been increasing. Since the institute is not only

self-supporting but also

is generating positive income, I hold

that the activity carried out

by the society is not a charitable

activity. The second confusion that the institute/society should

be supported wholly or in part by voluntary contribution is also

not fulfilled. The element of

v9luntary contributions comes only

if there is an excess of expenditure over the receipts of the

society. Even otherwise the donations received

by the society

if any cannot be treated as voluntary in view of the fact that

they are all forced on the students/parents.

The very fact that

the tax payer society has claimed depreciation in the income

and expenditure accqunt of the school shows that what they are

preparing

is not the income and expenditure account, but a

Profit and Loss Account

as is done in commercial estab

lishments. Depreciation

is not an expenditure but is only a

deduction

@ certain percentage of the capital assets for arriv

ing at profits and gains of the business. In

view of the foregoing

discussions I have no hesitation to decline exemption from

payment of general tax

in respect of the property known as

Green Field School, A-2 Block, S.J.D.A. New Delhi. Accord

ingly, all property taxes are payable

by the

ta.x payer."

-r

/ -

),._.,...-

t---

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.] 571

The High Court correctly appreciated the law and held as under in A

C.W.P. No.263of1989 reported in AIR 1989 Delhi 266:

"At our instance, Mr.Bhasin brought on record the balance

sheets

of the school for the years 1981 to 1987-88 and that of

the society for the years from 1978-

79 to 1984-85. It was stated B

that balance sheets of the petitioner society for subsequent

years were not ready.

If reference is made to the income and expenditure account of

the school for the year ending 31.3.1988 it would be

s;::en that

the school has collected Rs.25,35,900.66 as fees and has given c

a contribution of Rs.17,148.60 to the petitioner society. Again,

if r~ference is made to the balance sheet for the year ending

31.3.1985

of the school, the

scpool has collected over Rs.14.5

lakhs as fees and

contributed to the petitioner society Rs.1,00,724.13. The amount is reflected in the balance sheet of D

the petitioner society as having been received from the school.

Contribution

of the school for the year ending 31.3.1984 to the

petitioner society

is Rs.1,06,459.50. As on 31.3.1983, the amount

of contribution from the

scho'ol to the petitioner society is

Rs.2,43,398.91. It is not, therefore,~that there is any contribution

being made by the society for running of the school. Rather the

school

is contributing various amounts to the

pe•itioner society.''

"Merely because the petitioner society is not distributing profit

is applying the profits earned from running of the school on

construction

of school building is not enough for it to claim F

exemption. It has to be shown that the petitioner society is

supported wholly or in part by voluntary contributions. The

learned Deputy Assessor and Collector has given weighty

reasons to come to the conclusion that there were no voluntary

contributions to the petitioners society and

also to show that

the case

of the petitioner society was not covered by

S.115( 4) G

of the Act. As has been noted above, in the present case it is

the school which is generating income for the petitioner society

and no amount whatsoever

is being spent by the petitioner

society on the school. The learned Deputy Assessor and Col

lector has further observed that the petitioner society

is being

572 SUPREME COURT REPORTS [1992) 2 S.C.R.

run purely on commercial lines for the purpose of profits and

it is in receipt of income generated from this activity in the

form of building fund and donations etc., which are forced on

the students ·and their guardians. Thus, there is no voluntary

contribution."

We are in entire agreement with these findings.

The last question is whether any trade or business is carried on within

the meaning

of sub-section (5). Section 115(6) of Act

~overs those cases

where a

part of the land or building is used for trade or

busines~ or for

C getting rental income therefrom. That part undoubedly will be subject to

tax. Suppose, there is another portion of the same lands or buildings where

trade or business is carried on and profits are made and are applied to

charitable purposes then that portion shall, for purposes· of municipal

taxation,

be deemed to be a separate property. In other words, this part of

the land.s or buildings will qualify for relief. But the other part will be

D subject to tax. This is the idea of making a

part of the lands or buildings a

separate property so that the entire building does not get the exemption.

The trade portion is subjected to tax, and the charity portion is not

subjected

to tax.

E Trade or business can be present in both

~uh-sections ( 4) and ( 5) of

section 115. But, if the profits of income of trade or business i~ devoted to

a charitable purpose and no part thereof is distributed among the members

as dividends

or bonus, then that trade or business is a means to

zin end. It

is charity.

F But, if there is a trade or business carried on in a !and or building

and its profits are not applied to a charitable purpose, sub-section ( 6) says

that

that part of the land or building where a trade or business is carried

on or from which rent is derived, will be subject lo tax.

G Applying the above propositions, it would only, at best, make the

sccidy running the school a charitable purpose, beyond that it does. not

strengthen its c,ase a~ it fails to answer the test that it is supported wholly

or in part by voluntary contributions.

We are unable to read down the proviso to utilisation of income and

H non-payment of dividends to the members as submitted by Mr. G.B.Pai.

MUNICIPAL CORPN. v. BOOK TRUST [MOHAN, J.J 573

CWIL APPEAL N0.2805·0F 1980

Mr. B. Sen, learned counsel for the appellant does not dispute before

us that the Children Book Trust qualifies in every respect for exemption.

He only objected to that part of the finding wherein the High Court had

held

as follows:

"The next contention of Mr. Arun Kumar was that the respon

dent

was not supported mainly by voluntary contributions and

was as such not entitled to the exemption. This contention of

the

appellant is answered by the provision to the said sub-sec-

tion which clearly provides that the society may be supported

'wholly

or in part by voluntary contributions'. Because of the C

use of the words 'in part' in the proviso the society whould be

. entitled to claim exemption, provided other conditions are

satisfied,

if it is able to show that it has received even a small

amount

of voluntary contribution."

But this finding cannot be correct in

view of our foregoing discussion. D

In the result, we dismiss both the appeals. However, there shall be

no orders as to costs.

N.V.K. Appeals dismissed.

Reference cases

Description

Time-Barred Debt & Security: Can a Bank's Adjustment Be a Crime? Supreme Court Decodes

In the landmark judgment of Punjab National Bank and Ors. v. Surendra Prasad Sinha, the Supreme Court of India delivered a definitive ruling on the complex interplay between Time-Barred Debt Recovery and allegations of Criminal Breach of Trust by Creditor. This pivotal case, now authoritatively documented on CaseOn, clarifies that while the legal remedy to sue for a debt may expire, the debt itself is not extinguished, granting creditors specific rights over securities in their possession.

A Deep Dive into Punjab National Bank v. Surendra Prasad Sinha: IRAC Analysis

This case analysis breaks down the Supreme Court's decision using the IRAC (Issue, Rule, Analysis, Conclusion) method to provide a clear understanding of the legal principles involved.

Issues Before the Supreme Court

The Court was tasked with addressing two fundamental legal questions:

Does Section 3 of the Limitation Act, 1963, extinguish the underlying right to a debt, or does it only bar the judicial remedy to recover it through a lawsuit?
Can a creditor (a bank), who adjusts a time-barred debt from a security (like a Fixed Deposit Receipt) provided by a guarantor, be held liable for criminal breach of trust under the Indian Penal Code, 1860?

The Governing Rule of Law

The judgment revolves around two key statutory provisions:

Section 3 of the Limitation Act, 1963: This section establishes that any suit, appeal, or application filed after the prescribed period of limitation shall be dismissed. The core principle is that it bars the remedy (the ability to use the courts to enforce a right) but does not, in most cases, extinguish the right itself. The debt still exists and is legally owed.
Section 405 of the Indian Penal Code, 1860 (Criminal Breach of Trust): For an act to be considered a criminal breach of trust, there must be an entrustment of property and a subsequent “dishonest misappropriation” or conversion of that property for one's own use, in violation of any legal contract or direction. The element of dishonest intention is paramount.

Analysis by the Court

The Supreme Court meticulously analyzed the facts against the backdrop of these legal rules, leading to a multi-faceted conclusion.

On the Nature of Time-Barred Debt: The Court unequivocally affirmed the long-standing legal principle that the Limitation Act only shutters the doors of the court for recovery; it does not wipe the debt off the books. The right to the debt remains alive. Therefore, a creditor is entitled to use other lawful methods to recover the amount, short of filing a suit. The Court stated, “The rules of limitation are not meant to destroy the rights of the parties. Section 3 of the Limitation Act only bars the remedy, but does not destroy the right which the remedy relates to.”

The Primacy of the Contract: The relationship between the bank and the respondent (guarantor) was governed by a Security Bond. This contract explicitly authorized the bank to adjust the outstanding loan amount from the proceeds of the Fixed Deposit Receipt (FDR) at maturity. The bank's action was not a rogue or dishonest act but a direct exercise of a right contractually granted to it. Acting in accordance with a contract is the very antithesis of dishonest intent.

Absence of Criminal Intent (Mens Rea): Since the bank's adjustment was a legitimate exercise of its contractual rights over the security, the essential ingredient of “dishonesty” for a criminal breach of trust was completely absent. The dispute, if any, was purely civil and contractual in nature. Attempting to initiate criminal proceedings was, therefore, a gross misuse of the legal process.

Understanding the nuances between a barred remedy and an existing right is crucial for legal practice. For legal professionals on the go, resources like CaseOn.in's 2-minute audio briefs on rulings such as this provide a quick and effective way to grasp the core principles without sifting through pages of text.

The Role of the Magistracy: The Court also issued a stern reminder to the lower judiciary, noting that the Magistrate had issued process in a mechanical manner without applying his mind to whether a prima facie criminal offense was even made out from the complaint. It emphasized that judicial process should not become a tool for harassment or to settle civil scores.

The Final Conclusion

The Supreme Court allowed the bank's appeal and quashed the criminal complaint filed by the respondent. It held that the bank was well within its rights to appropriate the maturity proceeds of the FDR towards the time-barred debt, as this was a legitimate method of recovery backed by a contract. Such an action lacks the dishonest intent necessary to constitute a criminal breach of trust.

Final Summary of the Judgment

In essence, the Supreme Court ruled that a debt becoming barred by limitation only prevents the creditor from filing a recovery suit. The debt itself is not extinguished. Consequently, if a creditor holds a security, they can legally adjust the debt from that security as per the terms of the contract. This act cannot be termed a criminal offense like embezzlement or breach of trust, as it is founded on a contractual right and lacks any dishonest intent.

Why This Judgment is an Important Read for Lawyers and Students

For Banking & Finance Lawyers: It provides a foundational understanding of a bank's right of lien and set-off over securities, even for debts that are technically time-barred, reinforcing the security of creditor positions.
For Criminal Law Practitioners: It is a classic precedent that illustrates the boundary between civil/contractual disputes and criminal offenses, preventing the misuse of criminal law to intimidate or harass.
For Civil Litigators: The judgment offers a crystal-clear reaffirmation of the core principles of the Limitation Act, distinguishing the concepts of 'right' and 'remedy'.
For Law Students: It serves as an excellent case study on the importance of *mens rea* (criminal intent) in criminal law and demonstrates how contractual terms can define the legality of an action.

Disclaimer: The information provided in this article is for informational purposes only and does not constitute legal advice. For advice on any legal issue, please consult with a qualified legal professional.

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