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CASE NO.:

Appeal (civil) 4406-4410 of 1996

Appeal (civil) 4759-4761 of 1998

Appeal (civil) 4395-4402 of 1996

Appeal (civil) 497-499 of 2000

Appeal (civil) 5772 of 2000

PETITIONER:

THE ASSISTANT COMMISSIONER OF INCOME TAX, MADRAS ETC. ETC.

Vs.

RESPONDENT:

THANTHI TRUST ETC. ETC.

DATE OF JUDGMENT: 31/01/2001

BENCH:

S.P. Bharucha, N. Santosh Hegde & Y.K. Sabharwal

JUDGMENT:

Bharucha, J.

L...I...T.......T.......T.......T.......T.......T.......T..J

One S.K. Adityan founded a daily newspaper called the

Dina Thanthi in 1942. On 1st March, 1954 he created a

trust called the Thanthi Trust. The property that he

settled upon trust was the business of the said newspaper as

a going concern. The objects of the Trust were to establish

the said newspaper as an organ of educated public opinion

for the Tamil reading public and to disseminate news and to

ventilate opinion upon all matters of public interest

through it. On 9th July, 1957 Adityan executed a

supplementary deed of trust that declared that the Trust was

irrevocable. On 28th July, 1961 Adityan executed another

supplementary deed of trust. Thereby he directed that the

surplus income of the Trust, after defraying all expenses,

should be devoted to the following purposes :

- establishing and running a school or college for the

teaching of journalism;

- establishing and/or running or helping to run schools,

colleges or other educational institutions for teaching arts

and science;

- establishing of scholarships for students of

journalism, arts and science;

- establishing and/or running or helping to run hostels

for students;

- establishing and/or running or helping to run

orphanages; and

- other educational purposes.

On 6th November, 1961 the Income Tax Officer proposed to

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disallow the claim of the Trust for exemption under Section

4(3)(i) of the Income Tax Act, 1922 for the Assessment Years

1955-56 to 1961-62. The Trust challenged the correctness of

the tentative decision by filing a writ petition in the High

Court of Judicature at Madras. On 25th June, 1961 the

trustees of the Trust took out an originating summons in the

High Court and therein, on 2nd March, 1962, the High Court

upheld the validity of the supplementary deed of trust and

held that the trustees of the Trust were bound to devote the

surplus income of the Trust to the purposes mentioned

therein. On 4th October, 1963 the High Court allowed the

writ petition filed by the Trust and quashed the ITOs

tentative decision (52 I.T.R. 453). The claim for

exemption made by the Trust under Section 4(3)(i) of the

1922 Act for the Assessment Years 1955-56 to 1961-62 was

thereafter allowed.

For the Assessment Years 1962-63 the claim made by the

Trust for exemption under Section 11 of the Income Tax Act,

1961 (the Act) was allowed on 28th February, 1969. The

ITO then impounded the books of accounts of the Trust

relevant to the Assessment Years 1965-66 to 1967-68 and he

demanded the production of books of account relevant to the

Assessment Years 1962-63 to 1964-65. This was the subject

matter of challenge in a writ petition filed by the Trust.

On 23rd March, 1969 the Trust was issued three notices under

Section 148 of the Act to reopen its assessments for the

Assessment Years 1965-66 to 1967-68. These notices were

challenged in a writ petition filed by the Trust. Notices

were, thereafter, issued to the Trust to reopen its

assessment for the Assessment Years 1956-57 to 1961-62 and

these were the subject matter of a writ petition filed by

the Trust. On 21st December, 1972 a Division Bench of the

High Court of Madras quashed the notices for reopening the

assessments for the Assessment Years 1956-57, 1958-59,

1960-61 and 1961-62. It upheld the notices that related to

the Assessment Years 1957-58, 1959-60, 1965-66, 1966-67 and

1967-68 (91 I.T.R. 261).

On 29th January, 1981 a Division Bench of the High Court

dismissed references under the Act in respect of the

assessment of the Trust for the Assessment Years 1968-69 and

1969-70 (137 I.T.R. 735). The High Court held :

The founder of the trust clearly evinced an intention to

create public charitable trust as seen from the preamble and

clause 3(k) of the original trust deed and the charitable

objects referred to in the schedule to the decree in C.S.

90 of 1961 have to be fulfilled from and out of the income

from the business which is directed to be held under trust

or other legal obligation. Those charitable objects fall

within the first 2 categories referred to in Section 2(15)

viz. Relief of the poor and education. It is to carry out

and fulfill those objects the business is carried on. Thus,

the primary purpose is to carry out the charitable objects

and the business is carried on as a means in the course of

the actual carrying out of that primary purpose and not as

an end in itself. While the predominant object of the trust

is the carrying out of the charitable objects referred to in

two of the three categories of charitable purposes referred

to in Section 2(15), the carrying on of the business which

is actually the property held under trust or other legal

obligation is incidental and the profit resulting from the

business can be taken to be a by-product.

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The Revenue preferred a petition for special leave to

appeal against the judgment of the High Court on the said

references. In so far as it related to the eligibility of

the Trust to claim the exemption under Section 11 of the

Act, leave was declined.

Having set out the background, we now come to the first

of the three controversies before us. It relates to Section

13(1)(bb), which was introduced into the Act with effect

from 1st April, 1977 and remained on the statute book until

omitted with effect from 1st April, 1984. The relevant

portions of Section 11 and Section 13(1)(bb) then read as

follows :

Section 11

Income from property held for charitable or religious

purpose.

(1) Subject to the provisions of sections 60 to 63, the

following income shall not be included in the total income

of the previous year of the person in receipt of the income.

(a) income derived from property held under trust wholly

for charitable or religious purposes, to the extent to

which such income is applied to such purposes in India;

Section 11(4)

For the purposes of this section property held under

trust includes a business undertaking so held,

Section 13(1)(bb)

Nothing contained in section 11 or section 12 shall

operate so as to exclude from the total income of the

previous year of the person in receipt thereof

In the case of a charitable trust or institution for the

relief of the poor, education or medical relief, which

carries on any business, any income derived from such

business, unless the business is carried on in the course of

the actual carrying out of a primary purpose of the trust or

institution.

The claim of the Trust for exemption for the Assessment

Years 1979- 80 to 1983-84 was rejected, having regard to the

provisions of Section 13(1)(bb). The rejection was

challenged in a writ petition filed by the Trust in the High

Court. The High Court upheld the contention of the Trust

(213 I.T.R. 626). This is the first decision of the High

Court that is under appeal by the Revenue.

The High Court relied upon its earlier decision in the

case of the Trust, reported in 137 I.T.R. 735, which had

become final and binding on the Revenue, namely, that the

primary purpose of the Trust was to carry out its charitable

objects and that the business is carried on only as a means

in the course of the actual carrying on purpose of the

Trust. It said that it had, therefore, no hesitation in

holding that the requirement of the last portion of Section

13(1)(bb) namely unless the business is carried on in the

course of the actual carrying out of a primary purpose of

the trust or institution is satisfied We must

also point out here that though the decision in CIT vs.

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Thanthi Trust [1982] 137 I.T.R. 735 (Mad) was rendered by

the Division Bench with regard to the assessment years

1968-69 and 1969-70 and Section 13(1)(bb) of the Act was

introduced with effect from April 1, 1977, inasmuch as the

finding rendered by the Division Bench in the said decision

is in express language of Section 13(1)(bb) of the Act, it

is not open to the Revenue to contend that the decision in

CIT vs. Thanthi Trust [1982] 137 I.T.R. 735 (Mad) will not

be applicable to the petitioners case in respect of the

assessment years in question, after the introduction of

Section 13(1)(bb) of the Act.

Section 11(4A) was introduced into the Act with effect

from 1st April, 1984. So far as it is relevant, Section 11

then read thus :

Section 11

Income from property held for charitable or religious

purpose.

(1) Subject to the provisions of sections 60 to 63 the

following income shall not be included in the total income

of the previous year of the person in receipt of the income.

(a) income derived from property held under trust wholly

for charitable or religious purposes, to the extent to

which such income is applied to such purposes in India;

.

(4) For the purposes of this section property held

under trust includes a business undertaking so held and

where a claim is made that the income of any such

undertaking shall not be included in the total income of the

persons in receipt thereof, the income tax Officer shall

have power to determine the income of such undertaking in

accordance with the provisions of this Act relating to

assessment and where any income so determined is in excess

of the income as shown in the accounts of the undertaking,

such excess shall be deemed to be applied to purposes other

than charitable or religious purposes.

(4A) Sub-Section (1) or sub-section (2) or sub-section

(3) or sub-section (3A) shall not apply in relation to any

income, being profits and gains of business, unless

(a) the business is carried on by a trust wholly for

public religious purposes and the business consists of

printing and publication of books or is of a kind notified

by the Central Government in this behalf in the Official

Gazette; or

(b) the business is carried on by an institution wholly

for charitable purposes and the work in connection with the

business is mainly carried on by the beneficiaries of the

institution;

and separate books of accounts are maintained by the

trust or institution in respect of such business.

The Trust claimed the benefit of the exemption under

Section 11 in respect of the Assessment Years 1984-85 to

1991-92. The ITO rejected the claim. The Trust filed writ

petitions challenging the rejection. The High Court upheld

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the claim of the Trust (213 I.T.R. 639). It held that

inasmuch as the business that was carried on by the Trust

was itself held under trust for public charitable purposes

and it was carried on only for the purposes of carrying out

the charitable objects of the Trust, as had been found in

the earlier judgment, the provisions of Section 11(4A) had

no application. This is the second decision of the High

Court under appeal by the Revenue.

Section 11(4A) was substituted with effect from 1st

April, 1992 and it now read thus :@@

JJJJJJJJJJJJJJJ

Section 11(4A)

Sub-Section (1) or sub-section (2) or sub-section (3) or

sub-section (3A) shall not apply in relation to any income

of a trust of an institution, being profits and gains of

business, unless the business is incidental to the

attainment of the objectives of the trust or, as the case

may be, institution and separate books of accounts are

maintained by such trust or institution in respect of such

business.

The ITO rejected the claim of the Trust for exemption

under the amended Section 11(4A). A writ petition was filed

in the High Court, and, relying upon the earlier decision,

the High Court quashed the orders of assessment for the

Assessment Years 1992-93, 1995-96 and 1996-97 (238 I.T.R.

635). This is the third decision under appeal by the

Revenue.

In so far as Section 13(1)(bb) is concerned, the learned

Solicitor General appearing for the Revenue, submitted that

a business, to be excepted from the clutches of Section

13(1)(bb), must be one carried on in the course of the

actual carrying out of a primary purpose of a public

charitable trust. In other words, it must be a business

carried on in the course of actually carrying out the work

of relief of the poor, education and medical relief. Any

business carried on for generating revenue, which revenue is

used for furthering the charitable purpose for which the

trust was established, is not an activity in the course of

the primary purpose of the trust and does not fall within

this exception.

Dr. Pal, learned counsel for the Trust, drew a

distinction between a business that was held under trust and

a business that was carried on by a trust. He submitted

that there was a difference between income derived from a

business that was a property or part of the corpus of a

public charitable trust and income derived from a business

which was carried on by such a trust but which was not held

under trust; in other words, there was a legal obligation

to use the income for the public charitable purpose of the

trust in the first case and not in the latter. This Court

had noted the distinction in Additional Commissioner of

Income-Tax, Gujarat vs. Surat Art Silk Cloth Manufacturers

Association (121 I.T.R. 1), Commissioner of Income-Tax,

Kerala and Coimbatore vs. P. Krishna Warriar (53 I.T.R.

176), Commissioner of Income-Tax, Kerala vs. Dharmodayam

Co. (109 I.T.R. 527). The provisions of Section 13(1)(bb)

applied only to a public charitable trust which carried on a

business that it did not hold in trust. They did not apply

to a public charitable trust, such as the Trust, which held

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the business in trust.

No judgment of this Court has been pointed out to us in

which the provisions of Section 13(1)(bb) have been

interpreted. Only passing references thereto are to be

found in some of the judgments aforementioned.

A public charitable trust may hold a business as part of

its corpus. It may carry on a business which it does not

hold as a part of its corpus. But it seems to us that the

distinction has no consequence insofar as Section 13(1)(bb)

is concerned. Section 13(1)(bb) provides, so far as is

relevant to this case, that the provisions of Section 11

shall not operate so as to include in the total income of

the previous year of a public charitable trust for the

relief of the poor, education or medical relief which

carries on any business, any income derived from such

business unless the business is carried on in the course of

the actual carrying out of a primary purpose of the trust.

Section 13(1)(bb), therefore, will apply to a public

charitable trust for the relief of the poor, education or

medical relief that carries on a business, regardless of

whether or not that business is held by the trust in trust,

that is, as a part of its corpus. Even a business that is

held by such a trust as a part of its corpus is carried on

by the trust and, therefore, Section 13(1)(bb) will apply to

such trust.

A judgment of this Court which comes closest to putting

a meaning to Section 13(1)(bb) is the concurring judgment of

R.S. Pathak, J. (as he then was) in Additional

Commissioner of Income-tax, Gujarat v. Surat Art Silk Cloth

Manufacturers Association (1980) 121 ITR 1. He said, When

it was found that judicial decisions had held the

restrictive clause (not involving the carrying on of any

activity for profit) in Section 2(15) to control the fourth

head (the advancement of any other object of general public

utility) only, and not also the first three heads (relief

of the poor, education and medical relief) in the

definition, Parliament attempted to secure its original

intent by enacting section 13(1)(bb). The two provisions

represent the mode of funding finance for working out the

purpose of the trust or institution, by deriving income from

the corpus of the trust property and also from an activity

carried on in the course of actual carrying out of the

purpose of the trust or institution. The learned Judge did

not, it will be seen, analyse Section 13(1)(bb), nor, in the

context of the case before him, was he required to. Upon

analysis, it appears to us that the words used in Section

13(1)(bb) are wide enough to control not only the profit

from an activity carried on in the course of the actual

carrying out of the purpose of the trust or institution but

also income from the corpus of the trust property if the

corpus of the trust includes a business. This is for the

reason that a trust or institution carries on the business

that is part of its corpus just as much as a trust or

institution carries on a business that is not a part of its

corpus, and Section 13(1)(bb) operates in respect of a

charitable trust or institution for the relief of the poor,

education or medical relief which carries on any business.

(Emphasis supplied).

The requirement of Section 13(1)(bb) is that the

exemption under Section 11 will not be available to such a

trust that carries on any business unless the business is

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carried on in the course of the actual carrying out of the

primary purpose of the trust, that is to say, unless the

business is carried on in the course of actually

accomplishing a primary purpose of the trust; the business

must, therefore, be carried on in the course of the actual

accomplishment of relief of the poor, education or medical

relief. As an example, a public charitable trust for the

relief of the poor, education and medical relief that

carries on the business of weaving cloth and stitching

clothing by employing indigent women carries on the business

in the course of actually accomplishing its primary object

of affording relief to the poor and it would qualify for the

exemption under Section 11.

The business that the Trust carries on is that of

running a newspaper. That business, though it is held by

the Trust as a part of its corpus, and, therefore, in trust,

does not directly accomplish, wholly or in part, the Trusts

objects of relief of the poor and education. Its income

only feeds such activity. It cannot be held to be carried

on in the course of the actual accomplishment of the Trusts

objects of education and relief of the poor. It is,

therefore, not possible to accept the argument on behalf of

the Trust that it is entitled to the exemption under Section

11.

The High Court, in the first judgment under appeal, held

that it was not open to the Revenue to contend that the

earlier decision (in 137 ITR 735) would not apply to the

case of the Trust for the assessment years in question after

the introduction of Section 13(1)(bb) of the Act because the

finding rendered in that decision was in the express

language of Section 13(1)(bb). We are unable to agree. The

earlier decision was not rendered in the context of Section

13(1)(bb). That provision was not on the statute book at

that time. That the provision employs language akin to that

employed in the earlier decision cannot mean that in a

proceeding directly related to that provision the Revenue is

barred by reason of the principles of res judicata from

contending that the income of the Trust is not exempt under

that provision.

This brings us to the second controversy, relevant to

the Assessment Years 1984-85 to 1991-92 during which period

of time sub-section (4A) of Section 11, as originally

enacted, was in operation. It was contended by the learned

Solicitor General that by reason of sub-section (4A) the

income derived from a business held under trust wholly for

charitable or religious purposes would not be included in

the total income of the previous year in the case only of

(a) a trust for public religious purposes, if the business

was of printing and publishing books or of a notified kind;

or (b) an institution wholly for charitable purposes, if the

work in connection with the business was mainly carried on

by the beneficiaries of the institution, provided that

separate books of accounts had been maintained in respect of

such business.

Learned counsel for the Trust laid emphasis on the fact

that in the Bill to introduce sub-section (4A) into Section

11, sub-section (4) thereof had been proposed to be deleted,

but it had been retained when the Bill was passed. A

business held under trust had, therefore, not been intended

to be excluded from the benefit of Section 11 by reason of

the enactment of sub- section (4A). This was also evident

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from the fact that sub-section (4A) did not mention in its

non obstante clause sub-section (4).

Sub-section (4) of Section 11 remains on the statute

book, and it defines property held under trust for the

purposes of that section to include a business so held. It

then states how such income is to be determined. In other

words, if such income is not to be included in the income of

the trust, its quantum is to be determined in the manner set

out in sub-section (4).

Sub-section (1)(a) of Section 11 says that income

derived from property held under trust only for charitable

or religious purposes, to the extent it is used in the

manner indicated therein, shall not be included in the total

income of the previous year of the trust. Sub-section (4)

defines the words property held under trust for the

purposes of Section 11 to include a business held under

trust. Sub-section (4A) restricts the benefit under Section

11 so that it is not available for income derived from

business unless (a) the business is carried on by a trust

only for public religious purposes and it is of printing and

publishing books or any other notified kind or (b) it is

carried on by an institution wholly for charitable purposes

and the work in connection with the business is mainly

carried on by the beneficiaries of the institution,

provided, in both cases, that separate books of account are

maintained by the trust or the institution in respect of

such business. Trusts and institutions are separately dealt

with in the Act (Section 11 itself and Sections 12, 12A and

13, for example). The expressions refer to entities

differently constituted. It is thus clear that the

newspaper business that is carried on by the Trust does not

fall within sub-section (4A). The Trust is not only for

public religious purposes so it does not fall within clause

(a). It is a trust not an institution, so it does not fall

within clause (b). It must, therefore, be held that for the

assessment years in question the Trust was not entitled to

the exemption contained in Section 11 in respect of the

income of its newspaper.

We now address the third controversy, which relates to

sub-section (4A) of Section 11 as substituted with effect

from 1st April, 1992. The learned Solicitor General

submitted that while the substituted sub-section (4A) gave

trusts and institutions a wider latitude than the earlier

sub-section (4A), it had still to be construed to mean that

a trust or institution would not get the benefit of Section

11 unless the business it carried on was carried on in the

course of the actual carrying out of a primary purpose of

the trust or institution. Dr. Pal, on the other hand,

submitted that the substituted sub- section (4A) was couched

in wide language and a trust was entitled to the benefit of

Section 11 if it utilized the income of its business for the

purposes of achieving its objects.

The substituted sub-section(4A) states that the income

derived from a business held under trust wholly for

charitable or religious purposes shall not be included in

the total income of the previous year of the trust or

institution if the business is incidental to the attainment

of the objective of the trust or, as the case may be,

institution and separate books of account are maintained in

respect of such business. Clearly, the scope of sub-section

(4A) is more beneficial to a trust or institution than was

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the scope of sub- section (4A) as originally enacted. In

fact, it seems to us that the substituted sub-section (4A)

gives a trust or institution a greater benefit than was

given by Section 13(1)(bb). If the object of Parliament was

to give trusts and institutions no more benefit than that

given by Section 13(1)(bb), the language of Section

13(1)(bb) would have been employed in the substituted

sub-section (4A). As it stands, all that it requires for

the business income of a trust or institution to be exempt

is that the business should be incidental to the attainment

of the objectives of the trust or institution. A business

whose income is utilized by the trust or the institution for

the purposes of achieving the objectives of the trust or the

institution is, surely, a business which is incidental to

the attainment of the objectives of the trust. In any

event, if there be any ambiguity in the language employed,

the provision must be construed in a manner that benefits

the assessee. The Trust, therefore, is entitled to the

benefit of Section 11 for the Assessment Year 1992-93 and

thereafter. It is, we should add, not in dispute that the

income of its newspaper business has been employed to

achieve its objectives of education and relief to the poor

and that it has maintained separate books of account in

respect thereof.

Accordingly, Civil Appeals 4406-4410 of 1996, 4395-4402

of 1996, 4759-4761 of 1998 and 5772 of 2000 are allowed in

as much as they relate to the Assessment Years 1979-80 to

1991-92 and the two judgments of the Madras High Court

relating thereto (reported in 213 I.T.R. 626 and 213 I.T.R.

639) are set aside. Civil Appeals 497-499 of 2000 are

dismissed. There shall be no order as to costs.