[1980] 3 Taxman 1 (ART)

[1980] 03 TAXMAN 1 (ART)

K. CHATURVEDI
Charitable purpose-Its scope
The question of the scope of charitable purpose has given rise to many ding-dong legal
battles. The latest Supreme Court judgment (delivered on November 19, 1979) in the case of
Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association [1979] 2 Taxman 501
makes the dominant motive behind an activity determine the character of that activity.
However, the tests suggested remain difficult to apply, particularly in borderline cases. So
endless battles will continue to be waged on whether the object of an activity is more
charitable or more profit-making. Citing the English as well as Indian case law, the author
focuses our attention on dilemmas still unresolved and asserts the need to keep the tax law
on the subject of charity charitable so that the springs of charity which are a great
sustaining force in the present society do not dry up – Editor.

Charity and religion - East vs. west property or its income devoted to certain charitable
1. In India, from times immemorial, charity has uses; and had since been repealed.
been a good part of religion ; and the two—charity Lord Macnaghten's legal concept of charitable
and religion—had all along been understood in a purpose
similar sense, one involving the other. 2. In Pemse’s case [1891] AC 531, Lord
In England, religion and charity were not so Macnaghten classified charitable purposes to fall
mingled. The preamble to the English Statute of under four broad heads, namely, (a) for the relief of
1601, 43 Eliz. 1, c.4, enumerated the gamut of poverty, (b) for the advancement of education, (c)
charitable purposes as "the relief of aged, impotent for the advancement of religion, and (d) for other
and poor people; the maintenance of sick and purposes beneficial to the community not falling
maimed soldiers and mariners; the maintenance of under any of the preceding heads. These
schools of learning and free schools and scholars in observations candidly laid down the legal concept
universities; the repair of bridges, ports, havens, of charitable purposes for the purpose of recognition
causeways, churches, sea banks and highways; the in income-tax cases.
education and preferment of orphans; the relief, Charitable purpose defined in the Indian
stock or maintenance of houses of correction, the Income-tax Act, 1922
marriages of poor maids; aid and help of young
tradesmen, handicraftsmen and persons decayed; 3. Section 4(3) of the Indian Income-tax Act, 1922,
the relief or redemption of prisoners or captives; the provided exemption to income derived from
aid or ease of any poor inhabitants..." That Act was property held under trust or other legal obligation
passed for the reformation of abuses in the for religious or charitable purposes which enures for
application of the benefit of the

public. The concluding protion of section 4(3) also
denned, for the purposes of that sub-section,
"charitable purpose" to include "( a) relief of the
poor, (b) education, (c) medical relief, and (d) the
advancement of any other object of general public
utility". It may be readily seen that this Indian
definition closely follows the lines of the English
concept laid down in Pemsel's case. Cases where the
object was purely personal and not enuring to the
benefit of the general public, or a cross-section
thereof were left out of the definition so as to be
Whatever might have been the intention of
Parliament in improving, by addition of certain
qualifying words at the end of the Bill, the proposed
definition clause, these attempts opened the floodgate
to eternal litigation, which may not have been
foreseen by Parliament.
5.1 Added words apply only to the fourth limb- The
first question litigated upon was, whether the newly
added restrictive words "not involving the carrying
on of any activity for profit" govern all the four
limbs of the definition clause, viz., relief of the poor,
education, medical relief, and the advancement of
disregarded for the exemption granted under that
section.
Section 4(3) had thus laid down an exemption in
regard to incomes from property held under
charitable or religious trust or other legal obligation,
if it enured to the benefit of the public.
Relevance of Pemsel's case to the Indian context
4. The Supreme Court in CIT v. Andhra Chamber of
Commerce [1965] 55 ITR 722 , observed that
since the Indian law has evolved its own definition
of "charitable purpose" which departs in its material
clause from that in Pemsel’s case, the decision of
English Courts on the point has little value under
the Indian law, a view long before taken by the
Privy Council in All India Spinners' Association v.
CIT [1944] 12 ITR 482 .
Definition of charitable purpose under the
Income-tax Act, 1961
5. Since the expression "charitable purpose"
occurred in more than one place, the framers of the
Income-tax Act, 1961, thought it fit to detach its
definition from the provisions about exemption,
etc., and to frame an independent definition, which
they did in section 2(15) of that Act. The Bill (No.
27 of 1961) suggested to adopt the 1922 Act
definition which was as follows: "'charitable
purpose' includes relief of the poor, education,
medical relief and the advancement of any other
object of general public utility". Parliament,
however, on the recommendation of the Seclect
Committee, added the words "not involving the
carrying on of any activity for profit" at the end, so
that the definition read: "'charitable purpose'
includes relief of the poor, education, medical relief,
and the advancement of any other object of general
public utility not involving the carrying on of any
activity for profit".
scholastic instruction which a person has received.
The word 'education' has not been used in that wide
and extended sense, according to which every
acquisition of further knowledge constitutes
education . . . What education connotes in that clause
is the process of training and developing the
knowledge, skill, mind and character of students by
normal schooling".
5.3 Object of general public utility-The expression
"object of general public utility" in section 2( 15)
includes only those objects which promote the
welfare of general public and not the personal and
individual interests of some persons. Still, an object
to be of public utility need not be an object in which
the whole of the public is interested. It is sufficient
if a well-defined section of the public benefits by
the object. Lord Green M.R. in Powell v. Compton
[1945] 1 Ch. 123 (CA), sets out an example: "Thus,
if there is a gift to relieve the poor inhabitants of a
parish, the class to benefit is readily ascertainable.
But they do not enjoy the benefit, when they receive
it, by virtue of their character as individuals but by
virtue of their membership of the specified class. In
such a case, the common quality which unites the
potential beneficiaries into a class is essentially an
impersonal one. It is definable by reference to what
any other object of general public utility, or merely
the residual fifth limb to which they were
immediately attached. The Kerala High Court in
CIT v. P. Krishna Worrier [1972] 84 ITR 119 and
the Mysore High Court in CIT v. Sole Trustee, Loka
Shikshana Trust [1970] 77 ITR 61 held that the
restrictive words apply only to the last limb and not
to the first three limbs of the definition. The
Supreme Court affirmed Sole Trustee, Loka
Shikshana Trust v. CIT 101 ITR 234. In
Dharmadeepti v. CIT [1978] 114 ITR 454, the
Supreme Court categorically laid down that "the
words 'not involving the carrying on 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)". Thus, the first three limbs of
the definition remained unqualified by any express
statutory restriction, and income arising from a
profit-making activity linked with any of those three
heads enjoyed exemption until section 13(1)( bb)
was inserted with effect from April 1, 1977. In
affirming Loka Shikshana Trust's case (supra), the
Supreme Court had reiterated the same result
holding that "in order to bring a case within the
fourth category of charitable purpose, it would be
necessary to show that: (i) the purpose of the trust is
advancement of any other object of general public
utility, and (ii) the above purpose does not involve
the carrying on of any activity for profit".
5.2 Education means schooling, etc.-A circum
scribed sense - The Supreme Court laid down in
Loka Shikshana Trust's case (supra) that "the sense
in which the word 'education' has been used in
section 2(15) is the systematic instruction, schooling
or training to the young in preparation for the work
of life. It also connotes the whole course of
some common quality of a puiblc or impersonal
nature ; where there is no common quality of uniting
the potential beneficiaries into a class, it may not be
regarded as valid".
Trust involved in long legal battles
6. There are, however, two broad categories of such
trusts which have carried on long legal battles: (a)
trusts or institutions for the promotion of industry,
commerce and art, etc., e.g., chambers of
commerce, etc.; and (b) trusts or institutions
disseminating public news and views in order to
educate "the public".
6.1 Institutions to promote trade, industry, etc. - The
promotion of trade, commerce or industries in India
is an object of general public utility and falls within
the inclusive definition of "charitable purpose" in
section 2(15) of the 1961 Act—Andhra Chamber's
case, (supra) . It is not the furtherance of the
individuals engaged in a particular trade or industry.
"But, under cover of charitable purposes, a crop of
comouflaged organisations sprung up", observes
Krishna Iyer, J. in Indian Chamber of Commerce v.
CIT [1975] 101 ITR 796 (SC.) "The mask was
charitable, but the heart was hunger for tax-free
profit". When Parliament found this dubious growth
each has in common with the others, and that is
something into which their status as individuals
does not enter".
"The test thus propounded", observes Lord
MacDermott in Oppenheim v. Tobacco
Securities Trust Co. Ltd. [1951] AC 297,
"focuses upon the common quality which unites
those within the class concerned and asks
whether that quality is essentially impersonal or
essentially personal. If the former, the class will
rank as a section of the public and the trust will
have element common to and necessary for all
legal charities; but, if the latter, the trust will be
private and not charitable". "A group of persons
may be numerous", says Lord Simonds in that
very case, "but, if the nexus between them is
their personal relationships to a single
propositus or to several propositi, they are
neither the community nor a section of
community for charitable purposes".
As laid down by the Supreme Court in Andhra
Chambers' case (supra) "Section of the community
sought to be benefitted must undoubtedly be
sufficiently defined and identifiable by
would be taxable. Why would the Chamber be
granted exemption for making income by methods
which in the hands of other people would have been
exigible to tax"?
It is not uncommon for the trade chambers to settle,
by arbitration, commercial disputes among their
members or traders. This is undoubtedly a service of
general public utility, preventing protracted
commercial litigation. If the fee charged for doing
so is more or less commensurate with the expense
the chamber has to incur, minor surplus will not
attract tax. But not so where the activity is made a
profit earning, venture, where the umbrella of
charitable purpose would be removed due to the
new addition in section 2(15)— Indian Chamber's
case (supra) .
6.2 Institutions disseminating public news and views
in order to educate "the public" -Another common
claim comes from trusts, etc., established for
carrying on news or views papers. In re. Trustees of
the Tribune [1939] 7 ITR 41 was an old case where
the trust, created under a will, was to maintain a
printing press and run a newspaper, with the
condition that the surplus income of the press and
newspaper should be employed in the maintenance
of a college. The Privy Council held that the object
of trust to supply the province with an organ of
educated public opinion was an object of general
public utility covered under the definition of
charitable purpose in the 1922 Act, and its income
was exempt from tax under section 4(3) of the 1922
Act.
Recently, in Loka Shikshana Trust's case (supra)
one of the objects of the trust was to supply the
Kannada speaking public with an organ of educated
public opinion and conducting journals, etc. The
Supreme Court held that this object did not fall
of charitable chamleons, the definition in section
2(15) was altered to suppress the mischief by
qualifying the broad object of "general public
utility" with the additive "not involving the carrying
on of any activity for profit"
"By the new definition", observed Krishna Iyer,
J. (seepages 803-4), "the benefit of exclusion
from total income is taken away where in
accomplishing a charitable purpose the
institution engages itself in activities for profit …
If you want immunities from taxation, your
means for fulfilling charitable purposes must be
unsullied by profit making ventures. The
advancement of general public utility must not
involve the carrying on of any activity for profit.
If it does, you forfeit". In the course of this
judgment, his Lordship disapproved the Kerala
High Court decisions in CIT v. Indian Chamber
of Commerce [1971] 80 ITR 645 and CIT v.
Cochin Chamber of Commerce & Industry
[1973] 87 ITR 83 . Illustrating the facts of that
case, His Lordship finally observed that if the
chamber "runs certain special types of services
for the benefit of manufacturers and charges
remuneration from them, it is undoubtedly an
activity which, if carried on by private agencies,
Does the advancement of the object involve bringing
in monies? (c) If so, are such activities undertaken (i)
for profit, or (ii) without profit? Even if (a) and (b)
are answered affirmatively, if clause (i) is answered
affirmatively, the claim for exemption collapses...A
pragmatic condition, written or unwritten, proved by
a proscription of profits or by long years of invariable
practice or spelt from strong surrounding
circumstances indicative of anti-profit motivation—
such a condition will qualify for "charitable purpose"
and legitimately get round the fiscal hook. Short of it,
the tax tackle holds you fast".
What if the ultimate profit is used up for charity
?
8. It was held by Beg, J. in his dissenting judgment
in Loka Shikshana Trust's case (supra) that charity
does not necessarily exclude carrying on an activity
which yields profit, provided that "such profit also
has to be used up for what is recognised as charity".
Where a business itself is held under trust for
charitable purposes
9. In CIT. v. Dharmodayam Co. [1977] 109 ITR
527, the Supreme Court was concerned with a
business which itself was held under trust for
charitable purposes. There the Court noted the
distinction between "an activity carried on for profit
as a matter of advancement of an object of general
public utility" and "a business itself held under a
trust for charitable purposes". It held that where the
business activity with a profit-motive was
undertaken by the trust in order to advance any
object of general public utility, the umbrella of
exemption will not come up for protection from tax.
On the other hand, where the business itself was
held under trust for charitable purposes, and its
entire income is necessarily to go for the fulfilment
of only charitable purposes, the exemption from tax
 within the limb of "education", but fell within the will continue to protect its income. The principle
limb "any other object of general public utility", was, again, reiterated in Dharmadee-pti's case
and, since it had a profit element in carrying it out, (supra).
it lost the benefit of exemption from tax under the The latest Supreme Court case
definition in section 2(75) of the 1961 Act.
10. The latest Supreme Court decision in Addl. CIT
Some specific tests for exemption or taxability v. Surat Art Silk Cloth Manu facturers' Association
laid down by the Supreme Court
[1979] 2 Taxman 501 their Lordships considered
7. The tests for exemption or taxability, as laid the observations in Loka Shikshana Trust's case
down by Krishna Iyer, J. in Indian Chamber's case (supra) and Indian Chamber's case (supra) and
(supra) are "to ask for answers to the following observed that the broad dicta to the effect that
questions: (a) Is the object of the assessee one of where-
general public utility? (b)
ever an activity is carried on by an otherwise Tightening up of section 2(15) by section 13(1)(bb)
charitable trust or institution which yields profits, the with effect from 1-4-1977
inference must necessarily be drawn in the absence of 11. The insertion of section 13(1)(bb) in the 1961
some indication to the contrary that the activity is for Act, effective from April 1, 1977, has brought a
profit forfeiting the exemption from tax could not be great basic change in the case law deciding that the
accepted. It is not at all necessary that there must be a inhibition of profit-motive does not effect the first
provision in the constitution of the trust or institution three limbs of the definition under section 2(15) .
that activity should be carried on no-profit no-loss Section 13(1)( bb) provides that in the case of a
basis. It is sufficient if, in the circumstances of a charitable trust or institution for the relief of the
particular case, it may be inferred that the activity is poor, education or medical relief, if it carries on any
not impelled by a dominant profit-motive. If the business, it shall not enjoy exemption from tax
dominant object of the activity is carrying on a unless the business is carried on in the course of the
charitable purpose—and not profit-making— the actual carrying out of a primary purpose of the trust
exemption is not lost. or institution.
Still, the tests suggested remain difficult to apply in
what is stated to be borderline cases. In Surat Art Law about charity and charitable purpose
Silk's case, Pathak, J. although concurring with the should be lenient so that the source does not dry
majority decision, observed in a separate judgment, up
that the activity of the association in obtaining 12. It needs little emphasis to state that even in
licences for import of foreign yarn and quotas for modern times private charity does afford important
purchase of indigenous yarn—which was carried on succour to the hard-pressed masses at least in the
by the association for commission calculated on the Indian sub-continent. Formerly, the law was very
basis of a percentage of their value, with the much generous in granting exemption from tax to
condition that no part of the association's income incomes meant to be applied to charity. And, we
shall be paid directly or indirectly to its members, find each important city, town or village with its
did not militate against provision for grant of own public temples, public wells and tanks,
exemption from tax. In this connection, his dharmasalas and goshalas. Big towns have their
Lordship also expressed disagreement with certain colleges and hospitals sprung out of private charity.
observation made in the Supreme Court majority Palatial buildings were erected for public purposes
decision in Loka Shikshana Trust's case (supra) and not only by Rajas and Sahukars, but even by
Indian Chamber's case (supra). ordinary people. But if one takes a record of recent
—say, the last 30 year-period, we sadly note that
This case also held that the decisions of the Kerala
private charity is hopelessly shrinking. And one of
and Andhra Pradesh High Courts in CIT v. Cochin
the major causes of this shrink is the tightening of
Chamber of Commerce (supra) and A.P. State Road
tax concessions and creation, in the relevant law, of
Transport Corporation v. CIT [1977] 110 ITR too many hurdles and restrictions thereabout. It is
392 were correctly decided. It may be noted that in common experience that while the Government
Indian Chamber's case (supra), it was held that expenditure of billions fails to give individual relief
these two cases were not correctly decided. The to the common man, it is the private charity of
latest decision of the Supreme Court has individuals which shelters ordinary individuals in
considerably lessened the rigour of decision in times of need. The earlier this distinction is
Andhra Chamber's case (supra). appreciated by the law-makers, the better for the
masses. ¨¨

Current Topic Vol.3 – Sec.IIITAXMANJanuary, 1980