Case Law Companies Act Dharmadeepti Alwaye Kerala Vs The Commissioner of Income Tax Kerala

Case Law Companies Act

Dharmadeepti Alwaye Kerala Vs The Commissioner of

Income Tax Kerala

 

DATE OF JUDGMENT-24/07/1978

 

BENCH: PATHAK, R.S.

BENCH: PATHAK, R.S. CHANDRACHUD, Y.V. ((CJ) DESAI, D.A.

CITATION: 1978 AIR 1417  1978 SCR  (3)1038 1978 SCC  (3) 499 CITATOR INFO : R  1980 SC 387  (7,16,54)

ACT: Income Tax Act 1961-Sections 2(15) and 11(1)(a)-Main objects to  be  pursued  by the company which  has  been  granted  a licence  under s. 25 of the Companies Act were (i)  to  give charity and (ii) to promote education and (iii) to establish or  aid in the establishment of  associations  institutions, funds,  trusts with the object of promoting  charity  and/or education  and  the objects incidental or ancillary  to  the attainment  of  the  said  objects  was  “to  run   Chitties (Kuries)-Whether  the  said objects  identifiable  with  the first two heads ‘relief of the poor’ and “education” in  the definition  of ‘charitable purpose’ in Section 2(15) of  the Income  Tax Act and whether the income derived from  running Chitties (Kuries) is exempt under Section 1 1 (1) (a) of the Act.

HEADNOTE: The  appellant  Association  carries  on  the  business   of conducting ‘Kuries’ which was one of the ancillary object in furtherance  of  its  main  objects.   Clause  3(a)  of  the Memorandum of Association declares the main objects to be  : (1)  to give charity (ii) to promote education and (iii)  to establish  or  aid  in the  establishment  of  associations, institutions,  funds,  trusts with the object  of  promoting charity  and/or education.  In respect of the income  during the  calendar  year  1968 from  that  business  i.e.  during assessment  year  1969-70  the claim by  the  appellant  for exemption  under S. 11 (1 )(a) of the Income Tax  Act,  1961 was  rejected  by  the Income Tax  Officer.   The  Appellate Assistant Commissioner reversed the order in appeal and held that   ‘education’  constituted  the  main  object  of   the appellant, and therefore, the income from the Kurie business even  though  a profit making activity being in  aid  of  or incidental  to  the main object was entitled  to  exemption. The  appeal of the Revenue before the Income  Tax  Appellate Tribunal  failed  and  therefore  at  the  instance  of  the respondent,  the  question whether on the facts and  in  the circumstances  of  the  case, the assessee  is  entitled  to exemption  under s. 11 of the Income Tax Act, 1961  for  the assessment year 1969-70 ?” Was referred to the High Court of Kerala which answered it against the appellant.  The present appeal was then lodged in this Court. Allowing the appeal, the Court

HELD  : (1) The words “not involving the carrying on of  any activity  for profit” govern the words “the  advancement  of any  other  object of general public utility”  and  not  the words “relief of the poor, education and medical relief”  in section 2(15).  The heads “relief of the poor, education and medical   relief”  remained  unqualified  by   any   express statutory  restriction,  and income arising  from  a  profit making  activity linked with those heads  enjoyed  exemption without  express  limitation  until  section  13(1)(bb)  was inserted  in the Act by the Taxation Laws  (Amendment)  Act, 1975 with effect from April 1, 1977. [1042 B-D] The  specific  heads  ‘relief to  the  poor,  education  and medical  relief’  in s. 2(15) define well  known  charitable purposes.  But the residual general head “the advancement of any  other  object  of general public utility”  is  of  wide comprehension,  and Parliament when framing the  Income  Tax Act,  1961  considered it appropriate to cut down  the  wide scope of these words by qualifying them with the restrictive words  “not  involving the carrying on of any  activity  for profit”, thereby emphasising that the residual general  head was  to  be  confined  to  objects  which  were  essentially charitable in nature. [1041 E, 1042A] Morice  v.  Bishop  of  Burham,  [1805]  10  Ves  522,  532; William’s Trust v. I.R., 27 T.C. 409 referred to.

(2)  In the instant case: 1039 (a)According  to  sub-clause  (a)  of  clause  (3)  of   the Memorandum  of Association, the main objects for  which  the appellant  was formed are “to give charity” and “to  promote education”.   The third sub-clause merely confers  power  to establish  associations and other bodies with the object  of promoting  the  two  main objects.   Having  regard  to  the language used and the context in which the two main  objects are  set  forth,  it would be  reasonable  to  identify  the expression “to give charity” and “to promote education” with the first two heads “relief of the poor” and “education”  in the  definition of “charitable purpose” in section 2(15)  of the  Income Tax Act.  If the Memorandum of  Association  had referred  to  “charity”  as  the  sole  object  without  any limitations,  including those prescribed by the context,  it may  have been possible to extend it to all the  four  heads mentioned  in  section  2(15) ‘as  was  done  in  Chaturbhuj Vallabhdas  v. Commissioner of Income-tax, (14 I.T.R.  144).

But  the words are ” to give charity”; and then “to  promote education”  is also specified.  Obviously, the  former  must bear  a limited meaning and therefore, the most  appropriate seems to be “relief of the poor”.  That being so, neither of the  main objects can be classed under the residual  general head “the advancement of any other object of general  public utility.” [1041 B-D] (b)The  ‘Power  to  run the kurie business  stems  from  the provision “to run chitties (kuries)” mentioned in sub-clause (b)  of clause (3) of the Memorandum.  From the  description prefacing  the enumeration of the objects, it is plain  that the objects are really in the nature of powers incidental or ancillary to the attainment of the main objects mentioned in sub-clause  (a)  of clause (3).  The income from  the  kurie business  is intended to be applied only to  the  charitable purposes of giving to charity or the promotion of education. That  is  the basis on which the licence was  granted  under section  25  of  the Companies Act  to  the  appellant.   No question  arises  of  applying the  income  from  the  kurie business  to the other objects for which the  appellant  has been  established, that is to say, the objects set forth  in sub-clause   (c)  of  clause  (3)  of  the   Memorandum   of Association. [1042 D-E] (c)The business of conducting kuries is held under  trust. The  income  from  that  business  is  income  derived  from property  held  under trust for  charitable  purposes.   The appellant,  therefore,  is  entitled to  exemption  on  the, income from the kurie business for the assessment year 1969- 70 under section 11(1)(a) of the Income-tax Act, 1961. [1042 G]

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal No. 82 of 1975. From  the Judgment and Order dated 12-6-1974 of  the  Kerala High Court in.  Income Tax Reference No. 77/72. Y.   S.  Chitale,  V. J. Francis and Mukul  Mudgal  for  the Appellant. B.   B. Ahuja and A. Subhashini for the Respondent. The Judgment of the Court was delivered by PATHAK, J.  This appeal, by certificate under section 261 of the  Income-Tax Act, 1961, is directed against the  judgment of the High Court of Kerala disposing of a reference made to it by the Income-Tax Appellate Tribunal under section 256(1) of the Act. The appellant is an association constituted under a  licence granted  under  section  25 of the Companies  Act,  1956  on January 5, 1967.  The relevant provisions of its  Memorandum of Association are : “3.  (a) : The main objects to be        pursued  by the Company on its incorporation are (i)   To give charity. 1040 (ii)  To promote education. (iii)To establish or aid in the establishment of  associations, institutions, funds,  trusts with  the object of promoting  charity  and/or education provided that the Company shall  not support  its funds or endeavour to impose on, or  procure to be observed by, its members  or others any regulation or restriction which  if an  object  of the company, would        make  it  a trade union. (b)   The objects incidental or ancillary  to the attainment of the above main objects are : (i)To receive donations, subscriptions,  or gifts  for the furtherance ‘of the purpose  of the  Company, and to do all such other  things as  may  be  considered to  be  incidental  or conducive to the attainment of its objects  or any of them, by the Directors. (ii) (iv)To run Chitties (Kuries). (V)

(c)The other objects for which the  Company is established are : (i)To establish, promote, and carry on  any other  business which may seem to the  company profitable  or advantageous and  to  establish offices  and other places of business in        this State  or anywhere in India, as the  Directors deem necessary.” The appellant carries on the business of conducting  Kuries, and  in respect of the income during the calendar year  1968 from  that  business,  it  was  assessed  to  tax  for   the assessment  year 1969-70.  The Income-Tax Officer,  rejected the claim that the Kurie business was incidental to the main objects  of  charity  and  education  and  that  the  income proceeding  from it was exempt under section 1 1 (1) (a)  of the  Income-Tax Act.  The Appellate  Assistant  Commissioner reversed  the order of the Income-Tax Officer and held  that education constituted the main object of the appellant  and, therefore, the income from the Kurie business, even though a profit making activity, being in aid of or incidental to the main  object  was  entitled to exemption.   The  Income  Tax Appellate Tribunal, on further appeal, upheld the view taken by the Appellate Assistant Commissioner. At the instance of the  Commissioner of Income Tax, the Tribunal  referred  the following  question  to  the High Court of  Kerala  for  its opinion :-

“Whether on the facts and in the circumstances of  the  case,  the assessee  is  entitled  to exemption under section 11 of the  Income-Tax Act, 1961 for the assessment year 1969-70?” 1041 The High Court answered the question in the negative and  in favour  of the Income-Tax Department by its  judgment  dated June 12, 1974. According to sub-clause (a) of clause (3) of the  Memorandum of Association, the main objects for which the appellant was formed  are  “to give charity” and “to  promote  education”. The  third  subclause  merely  confers  power  to  establish associations  and other bodies with the object of  promoting the  two main objects.  Having regard to the  language  used and the context in which the two main objects are set forth, it  would be reasonable to identify the expression “to  give charity” and “to promote education” with the first two heads “relief  of the poor” and “education” in the  definition  of “charitable purpose” in section 2(15) of the Income Tax Act. If  the Memorandum of Association had referred to  “charity” as the sole object without any limitations, including  those prescribed  by  the context, it may have  been  possible  to extend it to all the four heads mentioned in section  2(15),

as  was  done in Chaturbhuj Vallabhdas  v.  Commissioner  of Income-Tax(1).   But  the words are “to give  charity”;  and then  “to promote education” is also specified.   Obviously, the  former must, bear a limited meaning.  To our mind,  the most  appropriate  seems to be “relief of the  poor”.   That being  so, neither of the main objects can be classed  under the  residual  general head “the advancement  of  any  other object  of  general public utility”.  Now, those  words  are followed by the words “not involving the carrying on of  any activity for profit”.  Do these restrictive words govern the residual  general bead only or also the  preceding  specific heads “relief of the poor, education, and medical relief”  ? The  specific  heads  “relief of  the  poor,  education  and medical relief” define well known charitable purposes.   But the  residual  general head “the advancement  of  any  other object of general public, utility” is of wide comprehension. This head was defined in the same terms in the definition of “charitable  purpose” in section 4(3) of the Indian  Income- Tax  Act, 1922.  The same words were used in English law  to describe one of the heads of charitable purpose in Morice v. Bishop  of  Durham(2).   Under the  English  law  they  were regarded  as  words  of  sufficiently  extensive  import  to warrant  the observation by the House of Lords in  William’s Trust v. I.R.(3) that all objects of general public  utility were not necessarily charitable, and that while some may  be so  others  may  not.  The law in  India  under  the  Indian Income-Tax Act, 1922 was not in congruency with the  English law  of charity inasmuch as by including those words in  its statutory definition the Indian law extended the  expression “charitable  purpose” to an area beyond that covered by  the English  law.

In other words, while the words  “any  other object  of general public utility” in the  Indian  enactment included  the  purposes recognised  as  charitable  purposes under the English law, they ex- (1)  14 I.T..R. 144. (2)  (1805) 10 Ves 522, 532. (3)  27 T.C. 409. 1042 tended also to objects which were not accepted as charitable tinder  the  English  law.   Apparently,  when  framing  the Income-Tax  Act, 1961, Parliament considered it  appropriate to cut down the wide scope of these words by qualifying them with the restrictive words ”  not involving the  carrying on of  any  activity for profit”.  This was done  to  emphasise that the residual general head was to be confined to objects which  were  essentially  charitable  in  nature.   It   is, therefore, clear that the words “not involving the  carrying on  of  any  activity  for profit”  govern  the  words  “the advancement  of any other object of general public  utility” and not the words “relief of the poor, education and medical relief”  in section 2(15).  The heads “relief of  the  poor, education  and medical relief” remained unqualified  by  any express  statutory  restriction, and income arising  from  a profit  making  activity  linked with  those  heads  enjoyed exemption  without express limitation until section  13  (1) (bb)   was  inserted  in  the  Act  by  the  Taxation   Laws (Amendment) Act, 1975 with effect from April 1, 1977. Now,  the  power to ran the kurie business stems  from,  the provision “to run chitties (kuries)

” mentioned in sub-clause (b)  of clause (3) of the Memorandum.  From the  description prefacing  the enumeration of the objects, it is plain  that the objects are really in the nature of powers incidental or ancillary to the attainment of the main objects mentioned in sub-clause (a) of clause (3).  Accordingly, we hold that the income  from  the kurie business is intended to  be  applied only to the charitable purposes of giving to charity or  the promotion  of  education.  That is the basis  on  which  the licence was granted under section 25 of the Companies Act to the  appellant.  No question arises of applying  the  income from  the kurie business to the other objects for which  the appellant  has been established, that is to say, the  object set forth in sub-clause (c) of clause (3) of the  Memorandum of  Association.  In the circumstances, it is not  necessary to  con-Sider  the effect of the inclusion  of  those  other objects  in  the Memorandum and whether  the  appellant  can embark on the realisation of those objects without complying with  the statutory formalities mentioned under seetion  149 of the Companies Act. It is not disputed that the business of conducting kuries is held  under trust.  We are, therefore, of opinion  that  the income  from  that business is income drived  from  property held   under   trust  for  charitable  purposes.

In   the circumstances, the appellant is @ntitled to exemption on the income from the eurie business for the assessment year 1969- 70 under section 1 1 (1) (a) of the Income-Tax Act.  We  are unable to agree with the opinion expressed by the High Court which, it seems, omitted to consider the significance of the fact that the business of conducting kuries is covered by  a power conferred expressly only for the purpose of attainment of  the  main  objects  of  giving  charity  and   promoting education. 10 43 The  appeal is allowed, the judgment dated June 12, 1974  of the High Court is set aside and the question referred by the Income-Tax   Appellate   Tribunal   is   answered   in   the affirmative,  in  favour of the appellant  and  against  the Commissioner  of Income-Tax.  The appellant is  entitled  to his costs of this appeal.

Appeal allowed. 1044

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