ASSISTANT COMMISSIONER OF INCOME TAX (EXEMPTIONS) VERSUS AHMEDABAD URBAN DEVELOPMENT AUTHORITY

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 21762 OF 2017

ASSISTANT COMMISSIONER OF

INCOME TAX (EXEMPTIONS) APPELLANT(S)

VERSUS

AHMEDABAD URBAN DEVELOPMENT

AUTHORITY RESPONDENT(S)

WITH

C.A. No. 8193/2012; C.A. No. 5057/2012; C.A. No. 5058/2014; C.A. No. 9974/2018; C.A. No.

5056/2012; C.A. No. 4196/2015; C.A. No. 4374/2015; C.A. No. 9380/2017; C.A. No.

13071/2017; C.A. No. 12058/2017; C.A. No. 16375/2017; C.A. No. 12869/2017; C.A. No.

17527/2017; C.A. No. 21845/2017; C.A. No. 5719/2018; C.A. No. 9886/2018; C.A. No.

9200/2018; C.A. No. 9860/2018; C.A. No. 10114/2018; C.A. No. 1643/2019; C.A. No.

3596/2018; C.A. No. 6762/2018; C.A. No. 3972/2018; C.A. No. 3343/2018; C.A. No. 3359/2018;

C.A. No. 3971/2018; C.A. No. 3347/2018; C.A. No. 6489/2018; C.A. No. 10598/2018; C.A. No.

7643/2018; C.A. No. 8321/2018; C.A. No. 8554/2018; C.A. No. 9172/2018; C.A. No.

10406/2018; C.A. No. 11259/2018; C.A. No. 11884/2018; C.A. No. 226/2019; C.A. No.

170/2019; C.A. No. 2047/2019; C.A. No. 2335/2019; C.A. No. 3971/2019; C.A. No. 4449/2019;

C.A. No. 4957/2019; C.A. No. 213/2020; C.A. No. 783/2020; C.A. No. 4430/2021; C.A. No.

2477/2021; C.A. No. 2478/2021; C.A. No. _____/2022 @ SLP(C) No. 23975/2012; C.A. No.

_____/2022 @ SLP(C) No. 15547/2013; C.A. No. ______/2022 @ SLP(C) No. 15040/2019; C.A.

No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 39525/2017; C.A. No. _____/2022

@ SLP(C) No. 14574/2019; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s).

16597/2020; C.A. No. _____/2022 @ SLP(C) No. 10912/2018; C.A. No. _____/2022 @ SLP(C)

No. 12304/2018; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 44856/2018;

C.A. No. _____/2022 @ SLP(C) No. 6553/2019; C.A. No. _____/2022 @ SLP (C) No.

_____/2022 @ Diary No(s). 15525/2019; C.A. No. _____/2022 @ SLP(C) No. 30597/2018; C.A.

No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 5683/2019; C.A. No. _____/2022

@ SLP (C) No. _____/2022 @ Diary No(s). 15488/2019; C.A. No. _____/2022 @ SLP (C) No.

_____/2022 @ Diary No(s). 15489/2019; C.A. No. _____/2022 @ SLP(C) No. 15055/2019; C.A.

No. _____/2022 @ SLP(C) No. 15079/2019; C.A. No. _____/2022 @ SLP(C) No. 14995/2019;

C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 21237/2019; C.A. No.

_____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 17255/2020; C.A. No. _____/2022 @

SLP (C) No. _____/2022 @ Diary No(s). 17316/2020; C.A. No. _____/2022 @ SLP(C) No.

1404/2021; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 19394/2020; C.A.

No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 19399/2020; C.A. No. _____/2022

@ SLP (C) No. _____/2022 @ Diary No(s). 19403/2020; C.A. No. _____/2022 @ SLP(C) No.

11486/2020; C.A. No. _____/2022 @ SLP(C) No. 11124/2020; C.A. No. _____/2022 @ SLP (C)

No. _____/2022 @ Diary No(s). 19449/2020; C.A. No. _____/2022 @ SLP(C) No. 12206/2020;

C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 20986/2020; C.A. No.

_____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 23310/2020; C.A. No. _____/2022 @

SLP(C) No. 3759/2021; C.A. No. _____/2022 @ SLP(C) No. 4612/2021; C.A. No. _____/2022

@ SLP(C) No. 5167/2021; C.A. No. _____/2022 @ SLP(C) No. 6253/2021; C.A. No.

_____/2022 @ SLP(C) No. 5709/2021; C.A. No. _____/2022 @ SLP(C) No. 6005/2021; C.A.

No. _____/2022 @ SLP(C) No. 7166/2021; C.A. No. _____/2022 @ SLP(C) No. 7003/2021;

C.A. No. _____/2022 @ SLP(C) No. 7011/2021; C.A. No. _____/2022 @ SLP(C) No. 6917/2021;

C.A. No. _____/2022 @ SLP(C) No. 7510/2021; C.A. No. _____/2022 @ SLP(C) No.

19044/2021; C.A. No. _____/2022 @ SLP(C) No. 7779/2018; C.A. No. _____/2022 @ SLP(C)

No. 4678/2021; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 5806/2021;

C.A. No. _____/2022 @ SLP(C) No. 4636/2021; C.A. No. _____/2022 @ SLP(C) No.

4723/2021; C.A. No. _____/2022 @ SLP (C) No. _____/2022 @ Diary No(s). 6662/2021; C.A.

No. _____/2022 @ SLP(C) No. 10490/2021; C.A. No. _____/2022 @ SLP(C) No. 6686/2021;

C.A. No. _____/2022 @ SLP(C) No. 7302/2021; C.A. No. _____/2022 @ SLP(C) No.

6580/2021; C.A. No. _____/2022 @ SLP(C) No. 7290/2021; C.A. No. _____/2022 @ SLP(C)

No. 7606/2021; C.A. No. _____/2022 @ SLP(C) No. 8364/2021; C.A. No. _____/2022 @

SLP(C) No. 10908/2021; C.A. No. _____/2022 @ SLP(C) No. 7854/2021; C.A. No. _____/2022

@ SLP(C) No. 7789/2021; C.A. No. _____/2022 @ SLP(C) No. 11072/2021; C.A. No.

_____/2022 @ SLP(C) No. 11683/2021

JUDGMENT

S. RAVINDRA BHAT, J.

Index

I. Brief history of legislative changes and this court’s interpretation..........................................................5

A. Provisions of the Income Tax Act, 1922 .....................................................................................................5

B. The new law: Income Tax Act, 1961...........................................................................................................8

C. The judgment in Surat Art Silk..................................................................................................................11

D. Relevant changes brought about to the IT Act, 1961 (Finance Act, 1983 and 1991)...............................17

E. The judgment in Thanthi Trust..................................................................................................................18

F. Deletion of certain exemptions: Section 10 (20A) and Section 10 (23)...................................................20

G. Amendments to Section 2 (15) by Finance Act, 2008 (w.e.f. 01.04.2009) ................................................21

II. Submissions of parties.................................................................................................................................22

A. Arguments on behalf of the revenue..........................................................................................................22

B. Arguments of the assessee-organizations.................................................................................................26

C. Revenue’s rebuttal arguments...................................................................................................................54

III. Analysis and reasoning ...............................................................................................................................55

A. Aids to interpretation ................................................................................................................................62

(i) History of the legislation..................................................................................................................62

(ii) Other extrinsic aids to construction of the statute............................................................................63

B. Interpretation of Section 2(15), the definition clause ...............................................................................70

Summation of interpretation of Section 2(15)...............................................................................................85

C. Sections 10, 11, 12, 12A, 12AA and 13 of the IT Act................................................................................86

Distinction between business held under Trust [Section 11(4)] and Trust carrying on business [Section

11(4A)]87

D. What kinds of income or receipts may not be characterized as derived from trade, commerce, business

or in relation to such activities, for a consideration .........................................................................................98

(i) Statutory corporations, authorities or bodies ...................................................................................98

(ii) Statutory regulatory bodies/authorities ..........................................................................................109

(iii) Trade Promotion bodies, councils, associations or organizations..................................................114

(iv) Non-statutory bodies - ERNET, NIXI and GS1 India ...................................................................116

(v) State Cricket Associations..............................................................................................................122

(vi) Private trusts...................................................................................................................................135

IV. Summation of conclusions........................................................................................................................141

A. General test under Section 2(15)............................................................................................................141

B. Authorities, corporations, or bodies established by statute....................................................................142

C. Statutory regulators................................................................................................................................143

D. Trade promotion bodies..........................................................................................................................144

E. Non-statutory bodies...............................................................................................................................144

F. Sports associations..................................................................................................................................145

G. Private Trusts..........................................................................................................................................145

H. Application of interpretation...................................................................................................................146

1. Leave granted in all matters where leave has not already been granted.

C.A. No. 21762/2017 (Assistant Commission of Income Tax, Exemptions v.

Ahmedabad Urban Development Authority) is taken as the lead matter.

2. Religious and charitable trusts have existed in one form or the other, tracing

their origins to the instinct of benevolence, which is part of human nature. Indian

philanthropy has enriched its cultural heritage, particularly in catering to the

educational, medical, socio-economic, and religious needs of the people. Here its

role has been supplementary to the efforts of the State, which has recognized the

public utility of this impulse, and granted tax exemptions. Indian income-tax laws

have favoured charities, even granted preferential treatment since 1886. The law,

while granting exemption to income from religious and charitable trusts has taken

effective measures to minimise misuse of trust funds. As a result, a

charitable trust loses tax exemption if certain provisions are not complied with,

and if its activities do not fall under Section 10 of the Act. Such trusts also have

to apply their income to the charitable objects within a specified period, maintain

proper audited accounts, and invest or utilise funds in a manner so that no benefit

is derived by the settlor, trustees, their relatives, or other persons.1

3. The scope and amplitude of the definition “charitable purpose” under the

Income Tax Act, 1961 (hereafter “Income Tax Act" or “the IT Act”) has engaged

the courts’ (including that of this court) attention on myriad occasions. The

expression “not involving the carrying on of any activity for profit” in the last

limb of the definition [Section 2(15) prior to amendment by Finance Act, 1983]

was the subject of debate in no less than five judgments of this court (including

that of a five-member bench).

4. In these batch of appeals and special leave petitions, the primary question

which falls for consideration is the correct interpretation of the proviso to Section

1 Sections 11, 12, 12-A and 13 of the Income-tax Act, 1961.

2(15)2 of the IT Act introduced by amendment w.e.f. 01.04.2009. It is necessary,

at this stage, to notice that the IT Act visualized three kinds of charitable

purposes: medical relief, education, and relief for the poor – which are described

hereafter as “per se purposes”. To this list, Parliament has, by amendments,

added other categories, such as preservation of environment (including

watersheds, forests, and wildlife) and preservation of monuments or places or

objects of artistic or historic interest, and yoga. The last – or the residual purpose

included by the definition - is “advancement of any other object of general public

utility” (hereafter referred to as “GPU category”), which is the subject of

interpretation in the present case.

5. The Director General of Income Tax for exemptions, Commissioner of

Income Tax (“CIT”) in various states, and other officials of the Income tax

department (hereafter compendiously referred to as “the revenue”) have appealed

the decisions of various High Courts, which have held that the carrying on of any

trade, commerce, or business, is not a per se bar or disqualification for a GPU

category charitable trust to claim to be such, precluding its tax-exempt status

under the IT Act.

I. Brief history of legislative changes and this court’s interpretation

A. Provisions of the Income Tax Act, 1922

6. The provisions of the erstwhile Income Tax Act, 1922 (hereafter “the old

Act”) enabled tax exemption claims by trusts for their income from business

activity, provided trusts were created thereon. The Privy Council in The Trustees

“charitable purpose” includes relief of the poor, education, medical relief, preservation of environment

(including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or

historic interest, and the advancement of any other object of general public utility:

Provided that the advancement of any other object of general public utility shall not be a charitable

purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity

of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other

consideration, irrespective of the nature of use or application, or retention, of the income from such activity:..…”

(emphasis supplied)

of Tribune Press, Lahore v. CIT, Punjab3

(hereafter “In Re: Trustees of the

Tribune”) held that the income of the Tribune Press fell within section 4(3)(i) of

the old Act, and it was implied that income from the press was derived from

property held under trust to maintain a newspaper, to keep up its liberal policy

and to devote surplus funds to improve the newspaper. The word “property”

occurring under section 4(3)(i) of that Act was also held4

to include a business

too. The old Act was amended twice with the object of eliminating and getting

rid of tax exemptions for trusts, which were otherwise eligible for it. The first

amendment of 1939 inserted5

a new clause (ia) in the then existing provision.

This provided that income derived from business carried on by or on behalf of a

charitable trust or religious institution could be limited to only such business

income as was derived by the trust or institution from business carried on either

in the course of the carrying on of a trust’s primary purpose, or carried on mainly

by the beneficiaries of the trust or institution. The Lahore High Court in

Charitable Gadodia Swadeshi Stores v. CIT6

, observed:

“Viewed in its proper perspective, therefore, clause (ia) can be taken to apply

only such business as is carried on behalf of religious or

(1939) 7 ITR 415 (hereafter “In Re: Trustees of the Tribune”).

In Commissioner of Income Tax v. P. Krishna Warriar, (1964) 8 SCR 36 : (1964) 53 ITR 176 this court, citing

and relying on In re, Trustees of the Tribune [(1939) ITR 415 PC] held that:

“This Court in J.K. Trust, Bombay v. Commissioner of Income Tax, Excess Profits Tax, Bombay [(1957) 32 ITR

535] endorsed the said view and held that “property” is a term of the widest import and that business would

undoubtedly be property unless there was something to the contrary in the enactment. If business was property,

it could be held under trust for religious and charitable purposes. As the business of running the Arya Vaidya

Sala vested under trust for religious and charitable purposes, it would fall under clause (i), if the other conditions

laid down therein were satisfied.”

5 Section 4(3) of the Indian Income-tax (Amendment) Act, 1939, reads as follows:

“(3) Any income, profits or gains falling within the following classes shall not be included in the total income of

the person receiving them:]

(i) Subject to the provisions of clause (c) of sub-section (1) of section 16, any income derived from property held

under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is

applied or accumulated for application to such religious or charitable purposes as relate to anything done

within the taxable territories, and in the case of property so held in part only for such purposes, the income

applied or finally set apart for application thereto:

(ia) Any income derived from business carried on on behalf of a religious or charitable institution when the income

is applied solely to the purposes of the institution and-

(a) the business is carried on in the course of the carrying out of a primary purpose of the institution, or

(b) the work in connection with the business is mainly carried on by beneficiaries of the institution”

(1944) 12 ITR 385

charitable institutions which were not held under trust and not to such

business as was itself held under trust or was conducted by or on behalf of

such charitable or religious institutions as were held under trust. If it was

intended to narrow down the scope of clause (1) so as to withdraw the

exemption enjoyed by a business held under trust or conducted by or on behalf

of a religious or charitable trust, the new clause should have been added as

proviso to the old clause.”

7. The Act was again amended by the Finance Act, 19537 wherein

clause (ia) was deleted from section 4(3)(i) of the old Act and instead inserted as

its proviso. Parliamentary intent, in transforming old clause (ia) into a proviso to

Section 4 (3)(i) was that whenever business was carried on behalf of a religious

or charitable institution, the conditions prescribed in clause (b) of proviso to

clause (i) had to be satisfied in addition to the general condition of exemption set

out in the substantive part of clause (i). Parliament’s attempt to exempt income

from business activity upon complying with other conditions - apart from those

laid down in clause (i) - was interpreted by this court in CIT v. P. Krishna Warriar8

(hereafter “Krishna Warriar”). The court observed that:

“The legal position may briefly be stated thus: Clause (i) of section 4(3) of

the Act takes in every property or a fractional part of it held in trust wholly

for religious or charitable purposes. It also takes in such property held only

7 Section 4 of Finance Act, 1953 added proviso to Section 4(3)(i); it reads as follows:

“Provided that such income shall be included in the total income—

[(a) if it is applied to religious or charitable purposes without the taxable territories, but in the following cases,

namely:—

(i) where the property is held under trust or other legal obligation created before the commencement of the-Indian

Income-tax (Amendment) Act, 1953 (XXV of 1953), and the income therefrom is applied to such purposes without

the taxable territories; and

(ii) where the property is held under trust or other legal obligation created after such commencement, and the

income therefrom is applied without the taxable territories to charitable purposes which tend to promote

international welfare in which India is interested,

the Central Board of Revenue may, by general or special order, direct that it shall not be included in the total

income;]

(b) in the case of income derived from business carried on on behalf of a religious or charitable institution, unless

the income is applied wholly for the purposes of the institution and either—

(i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or

(ii) the work in connection with the business is mainly carried on by beneficiaries of the institution;

for application thereto in which case it shall be deemed to be the income of the year in which it is so applied or

ceases to be so accumulated or set apart.]”

(1964) 8 SCR 36: (1964) 53 ITR 176

in part for such purposes. Business is also property within the meaning of

said clause. Clause (b) of the proviso to section 4(3)(i) applies only to

business not held in trust but carried on on behalf of religious or

charitable institutions.”

8. The old Act defined ‘charitable purpose’ under Section 4(3) - i.e., the

definition as it stood just prior to the IT Act, 1961 coming into force (thereby

replacing the old Act) - as follows:

“4 (3) Any income, profits or gains falling within the following classes shall

not be included in the total income of the person receiving them

* * *

In this sub-section “charitable purpose” includes relief of the poor,

education, medical relief and the advancement of any other object of general

public utility, but nothing contained in clause (i) or clause (ii) shall operate

to exempt from the provisions of this Act that part of the income from property

held under a trust or other legal obligation for private religious purposes

which does not enure for the benefit of the public.”

This court had occasion to interpret the meaning of the expression “advancement

of any other object of general public utility” in CIT v. Andhra Chamber of

Commerce9

. The court considered previous decisions in: In Re: Trustees of the

Tribune (supra) and All India Spinners Association of Mirzapur v. CIT10. Relying

heavily on the decision of the Privy Council in In Re: Trustees of the Tribune

(supra), this court held, in Andhra Chamber of Commerce that GPU objects

included all objects promoting welfare of general public, including taking steps

to oppose or urge legislation affecting trade, commerce, etc.

B. The new law: Income Tax Act, 1961

9. Section 2 (15) of the IT Act (which came into force on 01.04.1962 and

repealed the old IT Act) defined “charitable purpose” as follows:

“(15) ― 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.”

(1965) 1 SCR 565 (hereafter “Andhra Chamber of Commerce”)

10 (1944) 12 ITR 482 (hereafter “All India Spinners Association of Mirzapur”)

10. The then Finance Minister, Mr. Morarji Desai, explained the rationale for

the new definition on the floor of Lok Sabha:

“The definition of ‘charitable purpose’ in that clause is at present so widely

worded that it can be taken advantage of even by commercial concerns which,

while ostensibly serving a public purpose, get fully paid for the benefits

provided by them, namely, the newspaper industry which while running its

concern on commercial line can claim that by circulating newspapers it was

improving the general knowledge of the public. In order to prevent the misuse

of this definition in such cases, the Select Committee felt that the words ‘not

involving the carrying on of any activity for profit’ should be added to the

definition.”

11. The first major decision to interpret the new definition was Sole Trustee,

Lok Shikshana Trust v. Commissioner of Income Tax12 (hereafter “Lok Shikshana

Trust”). This court turned down a contention that newspaper business, carried on

with several other objects (which included setting up of educational institutions,

dissemination of knowledge to the Kannada speaking public through newspaper,

etc.) was charitable. The court noticed the changed definition:

“7.…The result thus of the change in the definition is that in order to bring a

case within the fourth category of charitable purpose, it would be necessary

to show that (1) the purpose of the trust is the advancement of any other object

of general public utility, and (2) the above purpose does not involve the

carrying on of any activity for profit. Both the above conditions must be

fulfilled before the purpose of the trust can be held to be charitable purpose.

* * *

9. It is true that there are some business activities like mutual insurance and

co-operative stores of which profit-making is not an essential ingredient, but

that is so because of a self-imposed and innate restriction on making profit in

the carrying on of that particular type of business. Ordinarily profit motive is

a normal incidence of business activity and if the activity of a trust consists

of carrying on of a business and there are no restrictions on its making profit,

the court would be well justified in assuming in the absence of some indication

to the contrary that the object of the trust involves the carrying on of an

activity for profit…….. By the use of the expression ‘profit motive’ it is not

intended that profit must in fact be earned. Nor does the expression cover a

mere desire to make some monetary gain out of a transaction or even a series

11 (LVI) Lok Sabha Debates., 32nd scs., p. 3073 (August 18, 1961).

12 (1976) 1 SCC 254 (hereafter “Lok Shikshana Trust”)

of transactions. It predicates a motive which pervades the whole series of

transactions effected by the person in the course of his activity….”

The court also rejected the submission that the “profit” referred to meant private

profit. It held that the term had to be interpreted without qualification.

12. One of the judges - Beg, J, concurred with the majority, but after noticing

that the trust deed did not contain any condition on profit-making, expressed a

slightly different view emphasizing that the actual activity needs to be considered,

rather than the absence or existence of any condition, in the trust deed.

13. The next decision of importance is Indian Chamber of Commerce v. CIT13

The appellant-chamber was a company registered under Section 25 of the Indian

Companies Act, 1913. Its memorandum and articles of association stipulated

certain broad objects, which this court agreed fell within the expression “the

advancement of any … object of general public utility” in Section 2(15) of the

Act. The objects were “promotional and protective of Indian trade interests and

other allied service operations”. A residual clause authorised the chamber “to do

all other things as may be conducive to the development of trade, commerce and

industries or incidental to attainment of the above objects or any of them”. As

per clauses (4) and (8) of the memorandum of association, the chamber’s member

could not stand to gain personally since no portion of

“income and property of the association shall be paid … directly or

indirectly, by way of dividend or bonus or otherwise howsoever by “way of

profit to the persons who at any time are ... members of the Association ....”

On dissolution of the association, the members could not claim any share in the

assets. The chamber, conceded before this court, that it “by and large, strives to

advance the general trade interests of India and Indian without seeking to make

profits for its members.” This court denied the exemption claimed, holding that:

“14… The attainment of that object shall not involve activities for profit.

What then is an activity for profit? An undertaking by a business organisation

is ordinarily assumed to be for profit unless expressly or by necessary

13 (1976) 1 SCC 324 (hereafter “Indian Chamber of Commerce”)

implication or by eloquent surrounding circumstances the making of profit

stands loudly negatived. We will illustrate to illumine. If there is a restrictive

provision in the bye-laws of the charitable organisation which insists that the

charges levied for services of public utility rendered are to be on a ‘no profit”

basis, it clearly earns the benefit of Section 2(15). For instance, a funeral

home, an S.P.C.A. or a cooperative may render services to the public but

write a condition into its constitution that it shall not charge more than is

actually needed for the rendering of the services, — maybe it may not be an

exact equivalent, such mathematical precision being impossible in the case of

variables, — maybe a little surplus is left over at the end of the year — the

broad inhibition against making profit is a good guarantee that the carrying

on of the activity is not for profit. As an antithesis, take a funeral home or an

animal welfare organisation or a super bazaar run for general public utility

by an institution which charges large sums and makes huge profits.

Indubitably they render services of general public utility. Their objects are

charitable but their activities are for profit…

**********

16. To sum up, Section 2(15) excludes from exemption the carrying on of

activities for profit even if they are linked with the objectives of general public

utility, because the statute interdicts, for purposes of tax relief, the

advancement of such objects by involvement in the carrying on of activities

for profit. We appreciate the involved language we use, but when legislative

draftsmanship declines to be simple, interpretative complexity becomes a

judicial necessity.

**********

21. The true test is to ask for answers to the following questions: (a) Is the

object of the assessee one of general public utility? (b) Does the advancement

of the object involve activities bringing in moneys? (c) If so, are such

activities undertaken (i) for profit or (ii) without profit? Even if (a) and (b)

are answered affirmatively, if (c)(i) is answered affirmatively, the claim for

exemption collapses. The solution to the problem of an activity being

one for or irrespective of profit is gathered on a footing of facts. What is the

real nature of the activity? One which is ordinarily carried on by ordinary

people for gain? Is there a built-in prescription in the constitution against

making a profit? Has there been in practice, profit from this venture?

Although, this last is a weak test. The mere fact that a service is rendered is

no answer to chargeability because all income is often derived by rendering

some service or other.”

C. The judgment in Surat Art Silk

14. The judgment by a larger, five-judge Bench, in Assistant Commissioner v.

Surat Art Silk Cloth Manufacturers’ Association14 (hereafter “Surat Art Silk”)

was the most important decision rendered on the issue. Here a Section 25 (of the

Companies Act, 1956 corresponding to Section 8 of the Companies Act, 2013)

14 (1980) 2 SCC 31 (hereafter “Surat Art Silk”)

non-profit company was established. It claimed exemption as an institution with

charitable purposes as its objectives. The objects of the company included

promoting commerce and trade in Art Silk yarn, raw silk, cotton yarn, Art Silk

cloth, silk cloth, and cotton cloth, among other objects15.Clause 5(1) of the

company’s memorandum provided that its income and property wheresoever

derived was to be applied “solely for the promotion of its objects as set forth in

the Memorandum”; Clause 5(2) directed that no portion of the income or property

could be paid or transferred, directly or indirectly, by way of dividend, bonus, or

otherwise by way of profit, to persons, who at any time are or had been members

of the assessee. The Income Tax Appellate Tribunal (hereafter “ITAT”) after

initial remand to the Appellate Commissioner, held that “the primary purpose for

which the assessee was established was to promote commerce and trade in Art

Silk and Silk Yarn and Cloth”. The ITAT made a direct reference of the issue, to

this court, since a conflict existed with regard to the correct interpretation of the

residual clause, i.e., institutions engaged in the advancement of objects of general

public utility, and whether the company was entitled to be assessed as one

carrying on activities that amounted to charitable purposes. This court first

determined that the primary or dominant object of the company was promotion

and development of trade in silk, silk cloth, yarn and other such items and that

the other objects were subsidiary to this primary object. It then held that the

requirement of absence of profit motive, was satisfied:

“7...but this requirement was also satisfied in the case of the assessee,

because the object of private profit was eliminated by the recognition of the

15 The list of objects were as follows:

“(a) To promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth

and Cotton Cloth.

(b) To carry on all and any of the business of Art Silk Yarn, Raw Silk, Cotton Yarn as well as Art Silk

Cloth, Silk Cloth and Cotton Cloth belonging to and on behalf of the members.

as well as accessories required by the members for the manufacture of Art Silk, Silk and Cotton Fabrics.

(d) To obtain export licences and export cloth manufactured by the members.

(e) To buy and sell and deal in all kinds of cloth and other goods and fabrics belonging to and on behalf

of the members.

(n) To do all other lawful things as are incidental or conducive to the attainment of the above objects.”

assessee under section 25 of the Companies Act, 1956 and clauses 5 and 10

of its Memorandum. It must, therefore, be held that the income and property

of the assessee were held under a legal obligation for the purpose of

advancement of an object of general public utility within the meaning of

section 2 clause (15).”

15. This court then held that the words of prohibition occurring at the end of

Section 2(15) were applicable to the last category of charitable institutions, i.e.,

those involved in the advancement of objects of general public utility. It further

clarified that the prohibition applied to the object and not the advancement or

attainment of the said object:

“10a. It is clear on a plain natural construction of the language used by the

legislature that the ten crucial words “not involving the carrying on of any

activity for profit” go with “object of general public utility” and not with

“advancement”. It is the object of general public utility which must not

involve the carrying on of any activity for profit and not its advancement or

attainment. What is inhibited by these last ten words is the linking of activity

for profit with the object of general public utility and not its linking with the

accomplishment or carrying out of the object. It is not necessary that the

accomplishment of the object or the means to carry out the object should not

involve an activity for profit. That is not the mandate of the newly added

words. What these words require is that the object should not involve the

carrying on of any activity for profit. The emphasis is on the object of general

public utility and not on its accomplishment or attainment. The decisions of

the Kerala and Andhra Pradesh High Courts in CIT v. Cochin Chamber of

Commerce and Industry [(1973) 87 ITR 83 : (Ker)16 and A.P. State Road

Transport Corporation v. CIT [(1975) 100 ITR 392 (AC)], in our opinion lay

down the correct interpretation of the last ten words in Section 2 clause(15).

The true meaning of these last ten words is that when the purpose of a trust

or institution is the advancement of an object of general public utility, it is

that object of general public utility and not its accomplishment or carrying

out which must not involve the carrying on of any activity for profit.”

16. The court then went on to hold what is meant by “not involving the carrying

on an activity for profit”:

“15. …The question that is necessary to be asked for this purpose is as to

when can the purpose of a trust or institution be said to involve the carrying

on of any activity for profit. The word “involve” according to the Shorter

Oxford Dictionary means “to enwrap in anything, to enfold or envelop; to

contain or imply”. The activity for profit must, therefore, be intertwined or

wrapped up with or implied in the purpose of the trust or institution or in

other words it must be an integral part of such purpose. But the question

again is what do we understand by these verbal labels or formulae; what is it

16 This decision was reversed in Indian Chamber of Commerce v. Commissioner of Income Tax (1976) 1 SCC 324

precisely that they mean? Now there are two possible ways of looking at this

problem of construction. One interpretation is that according to the definition

what is necessary is that the purpose must be of such a nature that it involves

the carrying on of any activity for profit in the sense that it cannot be achieved

without carrying on an activity for profit. On this view, if the purpose can be

achieved without the trust or institution engaging itself in an activity for

profit, it cannot be said that the purpose involves the carrying on of an activity

for profit…

****************** **************

16. The other interpretation is to see whether the purpose of the trust or

institution in fact involves the carrying on of an activity for profit or in other

words whether an activity for profit is actually carried on as an integral part

of the purpose or to use the words of Chandrachud, J, as he then was

in Dharmodayam case [(1977) 4 SCC 75] , “as a matter of advancement of

the purpose”. There must be an activity for profit and it must be involved in

carrying out the purpose of the trust or institution or to put it differently, it

must be carried on in order to advance the purpose or in the course of

carrying out the purpose of the trust or institution. It is then that the inhibition

of the exclusionary clause would be attracted. This appears to us to be a more

plausible construction which gives meaning and effect to the last concluding

words added by the legislature and we prefer to accept it. Of course, there is

one qualification which must be mentioned here and it is that if the

constitution of a trust or institution expressly provides that the purpose shall

be carried out by engaging in an activity which has a predominant profit

motive, as, for example, where the purpose is specifically stated to be

promotion of sports by holding cricket matches on commercial lines with a

view to making profit, there would be no scope for controversy, because the

purpose would, on the face of it, involve carrying on of an activity for profit

and it would be non-charitable even though no activity for profit is actually

carried on or, in the example given, no cricket matches are in fact organised.

17. The next question that arises is as to what is the meaning of the

expression “activity for profit”. Every trust or institution must have a purpose

for which it is established and every purpose must for its accomplishment

involve the carrying on of an activity. The activity must, however, be for profit

in order to attract the exclusionary clause and the question therefore is when

can an activity be said to be one for profit? The answer to the question

obviously depends on the correct connotation of the preposition “for”. This

preposition has many shades of meaning but when used with the active

participle of a verb it means “for the purpose of” and connotes the end with

reference to which something is done. It is not therefore enough that as a

matter of fact an activity results in profit but it must be carried on with the

object of earning profit. Profit-making must be the end to which the activity

must be directed or in other words, the predominant object of the activity must

be making a profit. Where an activity is not pervaded by profit motive but is

carried on primarily for serving the charitable purpose, it would not be

correct to describe it as an activity for profit. But where, on the other hand,

an activity is carried on with the predominant object of earning profit, it

would be an activity for profit, though it may be carried on in advancement

of the charitable purpose of the trust or institution. Where an activity is

carried on as a matter 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 not to earn profit. The

charitable purpose should not be submerged by the profit making motive; the

latter should not masquerade under the guise of the former….”

17. The court took note of the judgment of Pathak, J. in Dharmadeepti v. CIT17

as well as the speech of then then Finance Minister, and further observed:

“17. ….It is obvious that the exclusionary clause was added with a view to

overcoming the decision of the Privy Council in the Tribune case [AIR 1939

PC 208: In Re the Trustees of the Tribune, (1939) 7 ITR 415] where it was

held that the object of supplying the community with an organ of educated

public opinion by publication of a newspaper was an object of general public

utility and hence charitable in character, even though the activity of

publication of the newspaper was carried on commercial lines with the object

of earning profit. The publication of the newspaper was an activity engaged

in by the trust for the purpose of carrying out its charitable purpose and on

the facts it was clearly an activity which had profit making as its predominant

object, but even so it was held by the Judicial Committee that since the

purpose served was an object of general public utility, it was a charitable

purpose. It is clear from the speech of the Finance Minister that it was with a

view to setting at naught this decision that the exclusionary clause was added

in the definition of “charitable purpose”. The test which has, therefore, now

to be applied is whether the predominant object of the activity involved in

carrying out the object of general public utility is to subserve the charitable

purpose or to earn profit. Where profit making is the predominant object of

the activity, the purpose, though an object of general public utility, would

cease to be a charitable purpose. But where the predominant object of the

activity is to carry out the charitable purpose and not to earn profit, it would

not lose its character of a charitable purpose merely because some profit

arises from the activity. The exclusionary clause does not require that the

activity must be carried on in such a manner that it does not result in any

profit. It would indeed be difficult for persons in charge of a trust or

institution to so carry on the activity that the expenditure balances the income

and there is no resulting profit…..

18. The court proceeded to quote from passages in its previous judgments, in

Lok Shikshana Trust and Indian Chamber of Commerce (supra) to the effect that

if the activity of a trust consists of carrying on a business and there are no

restrictions on profit-making, the court could assume (in the absence of

something to the contrary) that the trust’s object involved carrying on of an

17 (1978) 3 SCC 499

activity for profit. The Constitution Bench disagreed with the approach in both

the previous judgments, and observed:

“19. …Now we entirely agree with the learned Judges who decided these two

cases that activity involved in carrying out the charitable purpose must not

be motivated by a profit objective but it must be undertaken for the purpose

of advancement or carrying out of the charitable purpose. But we find it

difficult to accept their thesis that whenever an activity is carried on which

yields profit, the inference must necessarily be drawn, in the absence of some

indication to the contrary, that the activity is for profit and the charitable

purpose involves the carrying on of an activity for profit. We do not think the

Court would be justified in drawing any such inference merely because the

activity results in profit. It is in our opinion not at all necessary that there

must be a provision in the constitution of the trust or institution that the

activity shall be carried on no profit no loss basis or that profit shall be

proscribed. Even if there is no such express provision, the nature of the

charitable purpose, the manner in which the activity for advancing the

charitable purpose is being carried on and the surrounding circumstances

may clearly indicate that the activity is not propelled by a dominant profit

motive. What is necessary to be considered is whether having regard to all

the facts and circumstances of the case, the dominant object of the activity is

profit making or carrying out a charitable purpose. If it is the former, the

purpose would not be a charitable purpose, but, if it is the latter, the

charitable character of the purpose would not be lost.

20. If we apply this test in the present case, it is clear that the activity of

obtaining licences for import of foreign yarn and quotas for purchase of

indigenous yarn, which was carried on by the assessee, was not an activity

for profit. The predominant object of this activity was promotion of commerce

and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth

and Cotton Cloth, which was clearly an object of general public utility and

profit was merely a bye-product which resulted incidentally in the process of

carrying out the charitable purpose. It is significant to note that the assessee

was a Company recognised by the Central Government under Section 25 of

the Companies Act, 1956 and under its Memorandum of Association, the

profit arising from any activity carried on by the assessee was liable to be

applied solely and exclusively for the promotion of trade and commerce in

various commodities which we have mentioned above and no part of such

profit could be distributed amongst the members in any form or under any

guise. The profit of the assessee could be utilised only for the purpose of

feeding this charitable purpose and the dominant and real object of the

activity of the assessee being the advancement of the charitable purpose, the

mere fact that the activity yielded profit did not alter the charitable character

of the assessee. We are of the view that the Tribunal was right in taking the

view that the purpose for which the assessee was established was a charitable

purpose within the meaning of Section 2 clause (15) and the income of the

assessee was exempt from tax under Section 11. The question referred to us

in each of these references must, therefore, be answered in favour of the

assessee and against the Revenue.”

19. There was, however, a discordant note in Surat Art Silk - A.P. Sen, J

disagreed with the majority, and delivered a dissenting opinion. Explaining how

there were no restrictive words or conditions, under the old IT Act, the learned

judge held that the approach indicated in Lok Shikshana Trust and Indian

Chamber of Commerce were correct. He felt that the previous decisions of the

court were not relevant, and that if the activities of a trust involved any activity

for profit or business, the organization ceased to be charitable, and that such

proceeds were utilized for charitable objects, were not relevant. He also noted

that “A reading of Section 2(15) and Section 11 together shows that what is

frowned upon is an activity for profit by a charity established for advancement of

an object of general public utility in the course of accomplishing its objects.” The

same judgment also stated that:

“if the object of the trust is advancement of an object of general public utility and it

carried on any activity for profit, it is excluded from the ambit of charitable purpose

defined in Section 2(15). The distinction is clearly brought out by the provision

contained in Section 13(1)(bb) inserted by Tax Laws (Amendment) Act, 1975.”

D. Relevant changes brought about to the IT Act, 1961 (Finance Act, 1983

and 1991)

20. It is pertinent to note that the judgment in Surat Art Silk was delivered on

19.11.1979. The expression “not involving the carrying on of any activity for

profit” in Section 2(15) of the IT Act, was omitted by the Finance Act, 1983,

w.e.f. 01.04.1984. Prior to this, w.e.f. 01.04.1977 the following restrictive

condition had been inserted18 as clause (bb), to Section 13(1)19:

“(bb) 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

18 Through the Taxation Laws Amendment Act, 1975.

19 Section 13 - Section 11 not to apply in certain cases.

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”

This provision had the effect of excluding or excepting the operation of Section

11 (which deemed certain receipts of charitable institutions not to be part of their

income). The restrictive condition in clause (bb) was also omitted by the Finance

Act, 1983, w.e.f. 01.04.1984.

21. Below Section 11(4)20 (as it originally stood in the IT Act, 1961), Section

11(4A)21 was inserted by the Finance Act, 1983, w.e.f. 01.04.1984. Subsequently,

Section 11(4A) was amended and substituted by the following provision w.e.f.

01.04.1992 (and continues to be in force):

“(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 or 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 account are maintained by such trust or institution in

respect of such business.”

E. The judgment in Thanthi Trust

22. This court comprehensively interpreted these provisions as they existed, in

different time periods, in Assistant Commissioner of Income Tax v. Thanthi

Trust22 where this court had to decide whether the assessee trust, created for

establishing a newspaper “as an organ of educated public opinion for the Tamil

20 Section 11(4) as originally enacted, reads as follows:

“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.”

21 Earlier, sub-section (4A) was inserted by the Finance Act, 1983, w.e.f. 01.04.1984, and read as follows:

“(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 or an institution, 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;

(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”

22 (2001) 2 SCC 707; (2001) 1 SCR 727.

reading public and to disseminate news and to ventilate opinion upon all matters

of public interest through it.” could avail of tax exemption. In 1957, the settlor

executed a supplementary deed making the trust irrevocable. On 28.07.1961

another supplementary deed was executed which directed that the trust’s surplus

income (after defraying all expenses), should be devoted to purposes such as

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. The High Court held that exemption

could be claimed by the trust. The revenue appealed. This court noticed that the

appeals covered three distinct periods- (i) 1979-80 to 1983-84, (ii) 1984-85 to

1991-92, and (ii) 1992-93 to 1996-97. This court held that for the first period

(1979-80 to 1983-84), the activity of running a newspaper, and the corpus held

for it, by the trust, did not directly result in carrying on the educational activities

mentioned in the supplementary deeds. The income was found to only feed such

activity, which was not the same as carrying on in the course of actual

accomplishment of the trust’s objects of education and relief of poor, and thus not

entitled to exemption. For the next period (1984-85 to 1991-92), noting that

Section 11(4) continued to be in existence [despite Section 11(4A) being inserted

(as originally enacted w.e.f. 01.04.1984)], dealing with the expression “property

held under trust”, and held that:

“23....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.”

23. For the third period (1992-93 to 1996-97), the court dealt with the meaning

and effect of Section 11(4A) (amended and substituted w.e.f. 01.04.1992) and

held that the assessee trust was entitled to be treated as a charity:

“25. 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 the scope of subsection (4A) as originally enacted. In fact, it seems to us that the substituted

sub-section (4A) gives 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.”

(emphasis supplied)

F. Deletion of certain exemptions: Section 10 (20A) and Section 10 (23)

24. Section 10(20A) had been inserted by the Finance Act, 1970, w.e.f.

01.04.1962; it exempted certain classes of income earned by housing boards, etc.,

and before deletion read as follows:

“(20A) any income of an authority constituted in India by or under any law

enacted either for the purpose of dealing with and satisfying the need for

housing accommodation or for the purpose of planning, development or

improvement of cities, towns and villages, or for both;”

25. Similarly, Section 10(23)23 existed and provided exemption to income

earned by sport controlling boards, and associations, subject to specific

conditions. Section 10(23) read as follows, before its deletion:

“(23) any income of an association or institution established in India which

may be notified by the Central Government in the Official Gazette having

regard to the fact that the association or institution has as its object the

control, supervision, regulation or encouragement in India of the games of

cricket, hockey, football, tennis or such other games or sports as the Central

Government may, by notification in the Official Gazette, specify in this

behalf:”

26. Section 10(20A) and 10(23) were deleted/omitted by Finance Act, 2002,

w.e.f. 01.04.2003. While both these provisions are not directly relevant for

deciding the primary question (i.e., as to what charitable purpose is, under Section

2 (15)), they still have an important bearing in the present case. This is because

in view of the circumstances that the provisions were deleted w.e.f. 01.04.2003,

housing boards, and bodies, as well as sports associations, that were earlier

claiming exemption of their income under these provisions, now sought to claim

that they were charities.

G. Amendments to Section 2 (15) by Finance Act, 2008 (w.e.f. 01.04.2009)

27. Section 2(15) - which had been amended last, in 198324, was again

amended, by Finance Act, 2008, w.e.f. 01.04.2009. Some other amendments too

were made, with effect from the same date by the Finance Act, 2009 and Finance

Act, 2010. With the said amendments, as on 01.04.2009, the provision read as

follows:

(15) “charitable purpose” includes relief of the poor, education, medical

relief, [preservation of environment (including watersheds, forests and

23 As amended by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 01.04.1989; Direct Tax Laws

(Amendment) Act, 1989, w.e.f. 01.04.1989; substituted by the Direct Tax Laws (Amendment) Act, 1989, w.e.f.

01.04.1990; and further amended by the Finance (No. 2) Act, 1991, w.r.e.f. 01.04.1990; Finance Act, 1992, w.r.e.f.

01.04.1990/w.e.f. 01.04.1992; and Finance Act, 2000, w.e.f. 1-4-2001.

24 Deletion of the expression “not involving the carrying on of any activity for profit” and the resulting Section

2(15) read as follows:

““charitable purpose” includes relief of the poor, education, medical relief, and the advancement of any other

object of general public utility.”

wildlife) and preservation of monuments or places or objects of artistic or

historic interest, and the advancement of any other object of general public

utility:

Provided that the advancement of any other object of general public

utility shall not be a charitable purpose, if it involves the carrying on of any

activity in the nature of trade, commerce or business, or any activity of

rendering any service in relation to any trade, commerce or business, for a

cess or fee or any other consideration, irrespective of the nature of use or

application, or retention, of the income from such activity:]”

[Provided further that the first proviso shall not apply if the aggregate

value of the receipts from the activities referred to therein is [ten lakh rupees]

or less in the previous year;]

In the second proviso, the reference to ten lakhs was substituted, and the figure

of rupees twenty-five lakhs, was inserted, by the Finance Act, 2011 (w.e.f.

01.04.2012). By Finance Act, 2015 (w.e.f. 01.04.2016), the first two provisos to

Section 2(15) were deleted, and instead, the following proviso was inserted:

“Provided that the advancement of any other object of general public utility

shall not be a charitable purpose, if it involves the carrying on of any activity

in the nature of trade, commerce or business, or any activity of rendering any

service in relation to any trade, commerce or business, for a cess or fee or

any other consideration, irrespective of the nature of use or application, or

retention, of the income from such activity, unless—

(i) such activity is undertaken in the course of actual carrying out of such

advancement of any other object of general public utility; and

(ii) the aggregate receipts from such activity or activities during the previous year, do

not exceed twenty per cent of the total receipts, of the trust or institution undertaking

such activity or activities, of that previous year;”

Additionally, the same amendment also inserted “yoga” (after “education”) as a

listed category of charitable activity, in the substantive provision.

II. Submissions of parties

A. Arguments on behalf of the revenue

28. The learned Additional Solicitor General, Mr. N. Venkataraman (hereafter

“ASG”) tracing the genesis of Section 2(15) contended that the old IT Act

contained no restrictive expressions forbidding trade or business activities by

charities. He argued that decisions in In Re: Trustees of the Tribune, Andhra

Chamber of Commerce and the decision in Krishna Warriar (supra) were in light

of Section 4(3) of the old Act; therefore, the contextual framework of this court’s

decisions was entirely different. Those decisions consequently did not rule out

carrying on of activities akin to business, by charitable institutions established to

advance general public utility.

29. The ASG next submitted that Parliament’s intent, in changing the law, was

to expressly forbid the tax exemption benefit if the entity was “involved” in

carrying on trade or business. The revenue relied on the two decisions in Lok

Shikshana Trust, and Indian Chamber of Commerce (supra), highlighting that the

significance of the change – brought about by Section 2(15) of the IT Act – was

noticed. Particular reliance was placed on the observations of Beg, J in Lok

Shikshana Trust and the passages in Indian Chamber of Commerce to urge that

the involvement of an entity in the carrying on of activities for profit, even if for

advancement of charitable purpose or object, disentitled it to tax exemption. The

learned ASG urged that this court had recognized – from its earlier decisions –

that the prohibition from carrying on trade or commerce activities applied only to

charities meant to advance general public utility and not the other categories such

as education, medical relief, or relief to the poor (which are per se exempt).

30. The ASG submitted that the judgments in Indian Chamber of Commerce

and Lok Shikshana Trust (supra) were conscious of the generality of the GPU

category which led Parliament to insert the restrictive words "not involving the

carrying on of any activity for profit”. It was argued that Parliament amended the

definition due to rampant abuse of the law by businesses claiming to be driven by

charitable purposes. Often, charities would be created merely to secure exemption

from tax, and would carry on large commercial activities, enjoying the profits.

This led Parliament to embed the exclusionary terms, depriving exemption if the

institution otherwise fell under the GPU category charity, but undertook activities

for profit. The ASG relied on the Finance Minister's speech in the House at the

time of the introduction of the IT Act, and submitted that it outlines the rationale

for the restrictive condition noting that units run on commercial lines could claim

that some general public utility was promoted and claim exemption. The Select

Committee of Parliament (at that time), felt that to prevent misuse of the

definition in such cases, the words “not involving the carrying on of any activity

for profit” should be added to the definition. ASG relied on Lok Shikshana Trust

(supra) which highlighted that this statement shed light on the new provision.

31. It was submitted that Indian Chamber of Commerce (supra) recognized this

legislative history, and also held that the interpretation of the provision had to be

in tune with the advancement of the object of the changed law. The court also

was conscious that there were borderline cases which posed difficulty in deciding

ex facie whether the undertaking yielding profit is a “deceptive” device or a

bonafide venture resulting “in nominal surplus although substantially intended

only to advance the charitable object”. The court also held that the restrictive

condition was a “term of art and embraces objects of general public utility”. Yet,

under the garb of charitable purposes, organisations masking profit, sprang up.

The mask was charitable, but the “heart was hunger for tax free profit”. The

revenue highlighted the following reasoning from this court’s judgment in Indian

Chamber of Commerce (supra):

“by the new definition the benefit of exclusion from total income is taken away

where in accomplishing a charitable purpose the institution engages itself in

activities for profit. The Calcutta decisions are right in linking; activities for

profit with advancement of the object. If you want immunity from taxation,

your means of fulfilling charitable purposes must be unsullied by profit

making ventures.”

32. It was then urged that before the decision in Surat Art Silk (supra) two

legislative developments took place, which reinforced the revenue’s view that

charities cannot engage in commercial activities. The first was the amendment,

carried out in 1975 to the IT Act (w.e.f. 01.04.1976), which introduced Section

10 (23C) and had the effect of excluding income received by inter alia, any fund

or institution, established for charitable purposes. The said provision, to the extent

relevant, is extracted as follows:

“10. In computing the total income of a previous year of any person, any

income falling within any of the following clauses shall not be included—

******* ********

“(23C) any income received by any person on behalf of-

(i) the Prime Minister' s National Relief Fund; or

******* ***** *****

(iv) any other fund or institution established for charitable purposes”

The other amendment was introduction of Section 13(1)(bb) (w.e.f. 01.04.1977)

which imposed conditions on the carrying on of business, by charitable

institutions.

33. It was urged that the combined operation of Section 2(15), Section

10(23C) and Section 13(1)(bb) meant that only charities which were set up for

the purpose of “relief of the poor, education or medical relief”, could claim

exemption if they carried on business “in the course of actual carrying out of a

primary purpose of the trust or institution”. The studied omission of GPU

category charities, in Section 13(1)(bb) meant that if such trust or institutions

carried on any business, even incidental to their objects, they would not be

entitled to exemption.

34. The ASG then contended that the decision in Surat Art Silk (supra) had the

unintended consequence of ignoring the significance of the addition of the

expression “advancement of any other object of general public utility not

involving the carrying on of any activity for profit”. The remedy intended by

Parliament, in adding the said terms was to prevent charities (involved in the

carrying on of any activity for profit) from claiming exemption, and to ensure that

purely charitable activity-driven trusts or institutions, could claim exemption. It

was submitted that the Constitution Bench fell into error, in holding that as long

as the ‘dominant’ objective of the charity was to promote objects of general public

utility, they were entitled to exemption.

35. The ASG further submitted that if the history of the provision, and the

further amendments were kept in mind, the question of permitting activities that

had any business or trade, for consideration, could not arise; however, by later

amendments, GPU category charities have been permitted to carry on activities

in the nature of business, for consideration, or service in relation to business and

commerce, provided that is in the course of actually achieving the charitable

object, and also that income from such activities (i.e. business, etc.) does not

exceed 20% of the total receipts.

36. It was submitted that statutory corporations, agencies, boards and

authorities may trace their origins to specific Central or State laws. However, if

their activities are akin to or “in the nature of” business, or trade, or they provide

services to businesses or trade, for consideration, fee or even cess (since they may

be enabled to do so by law) they have to fulfil the mandate and restrictions under

Section 2(15), especially proviso (ii). The ASG cited the larger bench decision in

New Delhi Municipal Council v. State of Punjab25 (hereafter “NDMC”) to urge

that state entities are not exempt from Union taxation, if they engage in trade or

business. It was furthermore submitted that the effect of proviso (i) to Section

2(15) is that there can be no question of any incidental activity; nor can the

proceeds of trade claim to be exempt merely because they are ploughed back to

feed the charitable object.

B. Arguments of the assessee-organizations

37. Mr. S.N. Soparkar, learned Senior Advocate appeared for the Ahmedabad

Urban Development Authority (hereafter “AUDA”); the Gujarat Industrial

Development Corporation (hereafter “GIDC”) and Gujarat Housing Board

(hereafter “GHB”). Counsel submitted that all three corporations were

established by or under statutes enacted by the Gujarat legislature; they were

25 (1997) 7 SCC 339 (hereafter “NDMC”)

treated as local authority under Section 10(20) of the IT Act, as it existed till 2003.

Thereafter they were treated as charitable institutions engaged in activities

involved in the advancement of public utility till the amendment of 2008. Learned

counsel highlighted that the AUDA was created purely for the development and

redevelopment - as well as for augmentation of roads and allotment of lands after

redevelopment, in the areas under its control. Relying upon the provisions of the

Act constituting AUDA26, he submitted that its mandate is to control development

activities, execution of works and dispersal of sewage, provisions of such other

facilities and generally engage in urban development in the areas it had

jurisdiction over. He highlighted Section 40 of that Act and urged that the nature

of activities, especially disposal of properties developed by AUDA were entirely

regulated. Whilst the lion’s shares of properties developed by AUDA were to be

allotted for housing and residence, and earmarked specifically for public

amenities, roads etc., a small percentage (15%) could be sold by public auction.

It was submitted that the statutory model adopted by AUDA was to enable it to

function as a self-sustaining unit. The disposal of plots through allotment and

especially by public auction were the main modes through which it could generate

revenue. The entire revenue or income so generated was to be kept in a fund under

Section 91; and its accounts were mandatorily audited by the State’s Accountant

General under Section 95.

38. It was argued that like AUDA, the GIDC too was also set up by virtue of a

statute27, i.e. GIDA, 1962 for the purposes of securing and assisting rapid and

orderly establishment and organisation of industrial areas and estates in Gujarat,

as well as establishing commercial centres for such industrial areas and estates.

Like AUDA, its accounts were audited by the Accountant General; the audited

report was to be laid before the State legislature (Section 26(4)) and the land

developed by the GIDC could be dealt with only in accordance with law, i.e., the

26 Gujarat Town Planning and Urban Development Act, 1976

27 Gujarat Industrial Development Act, 1962 (referred to as “GIDA”)

regulations framed under the GIDA, its constituting enactment, further to Section

32(2). As far as GHB is concerned, learned counsel submitted that like the other

statutory corporations it was also established by virtue of a special law28. The

functions of this Board were identical to that of AUDA and its mandate is to

regulate and develop building activities aimed for the purposes of providing

housing.

39. Learned counsel urged that none of the three boards carry on any business

activity; their functions are controlled by the parent enactments under which they

were created. Furthermore, on advancing of its affairs in such a manner that if

any surpluses are generated, they were used for furthering the objectives of law.

Thus, for instance, if surplus is generated in the activities of AUDA, GIDC, or

GHB, those would not be handed to the State Government, which previously had

control over them but rather kept in a separate fund to be utilised for further

development, expansion and development activities by each of such corporations.

These cannot be construed as carrying on any trade, business or commerce.

40. It was submitted that the decisions in In Re: Trustees of the Tribune;

Krishna Warriar and Lok Shikshana Trust (supra) were all in the context of

entities which carried on business. Moreover, in the first two decisions, the law

as it then stood did not contain any restriction prohibiting trade or commerce

activity. Learned counsel submitted that the judgment in Indian Chamber of

Commerce (supra) was specifically overruled in Surat Art Silk (supra). Therefore,

it may be treated as having no precedential value on subject. Learned counsel

highlighted the observations in Surat Art Silk (supra) and submitted that as long

as the activities involved are mainly charitable and for advancement of public

utility, its purposes are deemed to be charitable even if it carries on some business

or trade-like activities for the purpose of generating income. What is important,

it was argued, is whether the main or dominant purpose of business or activity is

28 Gujarat Housing Board Act, 1961.

motivated by profit. In such cases, the entity is debarred from claiming that it is

a charity and cannot claim the benefit of tax exemption. Therefore, what is to be

understood from the ratio in Surat Art Silk (supra) is that the main purpose or

principal objective or motivation for the activity should not be to carry on trade

or business. It should be to advance the purpose of general public utility. If such

a purpose is fulfilled, the carrying on of some activity which might result in

surplus, would not disentitle the entity from the benefit of tax exemption.

41. Learned counsel then made a brief reference to the judgment in CIT,

Bombay v. Bar Council of Maharashtra29 arguing that Surat Art Silk (supra) was

followed in this decision. He also cited Thanthi Trust (supra). Counsel

highlighted that the object of the assessee there, was charitable and required that

the business ought to be carried out for the purposes of achieving the charitable

purpose. Having regard to the nature of Section 13(1)(bb), which existed for the

relevant period, the court held that the income which the trust derived was through

a business and it only fed the charity. In this light, the court rejected the trust’s

contention with respect to the entitlement to claim tax benefit for the first part.

Counsel pointedly referred to the observations in paragraph 24 of the said

decision and submitted that the court noticed the difference in language brought

about by the substitution of Section 11(4A) (w.e.f. 01.04.1992). The new

provisions enabled the Trust to carry on business for it was incidental to the

attainment of its activities.

42. Elaborating on Thanthi Trust further, counsel highlighted that the scope of

the provision, i.e. Section 11(4A) had been ruled by this court as more beneficial

to the trust or institution, than had existed previously before its amendment.

Therefore, as long as the Trust carried on its activities mainly for charitable

purposes - any income derived from incidental trading or business activities,

29 (1981) 3 SCC 308 (hereafter “Bar Council of Maharashtra”)

would not result in it being characterised as an entity carrying on business; in

other words, it was one carrying on a charitable objective or purpose.

43. Learned counsel also relied upon Circular 11/2008 dated 19.12.2008 which

highlighted that whether the activities carried on by any charitable institutions are

in the nature of trade or whether they are essentially charitable is a question of

fact. It also spelt out that if an assessee is engaged in any activity, in the nature of

trade, commerce or business or rendering any services in relation to such trade

etc., it could not claim that its object was charitable. In such event, “the object of

general public utility will only be a means or defence to highlight the true purpose

which is trade, service or business………….”. It was emphasised therefore that

the circular and the speech of the Finance Minister during the budget clearly

pointed out organisations, trust or entities which were masquerading as charitable

but in reality carrying on business. On the other hand, genuine charitable

organisations which generated income for their sustenance could not be denied

the benefit of tax exemption under the Income Tax Act.

44. Counsel relied on the decisions in Shri Ramtanu Cooperative Housing

Society Ltd. v. State of Maharashtra30

, Gujarat Industrial Development

Corporation v. CIT31 (hereafter "GIDC case"), HSIDC v. Hari Om Enterprises32

and Commissioner of Central Excise v. Maharashtra Industrial Development

Corporation33 and urged that statutory organizations set up for housing and other

essential development, cannot be regarded as commercial or business entities.

45. Learned counsel relied upon the Constitution Bench decision of this Court

in Navnit Lal C. Jhaveri v. K.K. Sen34 (hereafter “Navnit Lal Jhaveri”), where the

court had held while interpreting the provisions of an enactment that the

30 (1970) 3 SCC 323

31 1997 (Supp 3) SCR 466; (1997) 7 SCC 17 (hereafter "GIDC case").

32 (2009) 16 SCC 208

33 2017 SCCOnline Bom 10021 (para 10-12)

34 (1965) 1 SCR 909 (hereafter “Navnit Lal Jhaveri”)

executive’s understanding – in the form of circulars in the context of taxing

statutes – were valuable guides to interpretation. The observations in Navnit Lal

Jhaveri (supra) were relied on to submit that the circulars in that case was used

to in fact soften the rigor of a newly introduced provision. Learned counsel also

relied upon the judgment of this Court in UCO Bank Calcutta v. Commissioner

of Income Tax, West Bengal35 and in Lok Shikshana Trust (supra) where the Court

had specifically rejected the contention that a speech made in Parliament cannot

be looked into to discern the intent of the lawmaker. In that case, the Court had

stressed that the real meaning of all the words used could be understood

specifically by referring to the past history of the legislation and the speech of the

mover of the amendment.

46. Learned counsel argued that the expressions “trade”, “business” or

“commerce” always mean and have been interpreted to mean activities driven by

profit. In this context, reliance was placed on this court’s decisions in State of

Punjab v. Bajaj Electricals Ltd36.; Khoday Distilleries Ltd. v. State of Karnataka37

and State of Gujarat v. M/s. Raipur Manufacturing38. It was submitted that in all

contexts, the primary meaning of the expression “trade” is “exchange of goods”

for money and connotates that such activity is necessarily or always carried on to

earn profit. It was, therefore, argued that Section 2(15) cannot be read in isolation,

but should be construed in the light of the minister’s speech while introducing the

amendment, and the Circular (i.e. Circular 11/2018). Therefore, if an organisation

is created and carries on its activities with a view to earn profit as was held in

Bajaj Electricals, Khoday Distilleries, and Raipur Manufacturing (supra), it is

precluded from claiming to be a charitable organisation. On the other hand, if the

entity is primarily set up for the charitable purpose, i.e., to carry on activities for

the advancement of general public utility, but it also carries activities that

35 1999 (4) SCC 599 (hereafter “UCO Bank Calcutta”)

36 1968 SCR (2) 636

37 (1995) 1 SCC 574

38 (1967) 1 SCR 618

generate surplus or money, they cannot be per se excluded from consideration for

tax benefit.

47. Learned Senior Counsel Mr. Kavin Gulati argued for NOIDA and relied

upon the Constitution Bench judgment of this court in Commissioner of Central

Excise, Bolpur v. Ratan Melting and Wire Industries39 to urge that a circular

cannot define an ambit of a provision. He highlighted the decision rendered by

the Delhi High Court in Greater Noida Industrial Development Authority v.

Union of India & Ors40

, where the assessee’s activities were held to be not

“commercial activity” within the meaning of clause (b) to S.10(46).41 He also

relied on other decisions – of this court, to the same effect, in Kerala State

Electricity Board v. Indian Aluminium Co. Ltd.42 and Trustees of the Port of

Madras v. Aminchand Pyarelal and Ors.43

48. Mr. Gulati relied on the GIDC case (supra) to argue that the word

“development” in S.10(20-A) of the IT Act, 1961 has to be understood in its wide

sense. It was urged that development authorities like NOIDA fall under Section

2(15) of the IT Act, 1961 if they satisfy the test in Section 11(7) of the IT Act,

1961. It was contended that Surat Art Silk (supra) was clear that engagement by

a trust with a commercial activity is not per se prohibited, as long as its object is

the attainment of an object of general public utility. Pointing to the Explanatory

Notes (to the Provisions of the Finance Act, 2015) - with respect to proviso to

Section 2(15), counsel urged that the proviso operates at the stage of registration

of trust under Section 12AA(1A) of the IT Act, 1961, when the authorities satisfy

themselves with respect to the genuineness of the activity and scope of the trust.

39 (2008) 13 SCC 1

40 2018 SccOnline Delhi 7536

41 The High Court had relied upon the ratio in Shri Ramtanu Co-operative Housing Society Limited v. State of

Maharashtra (1970) 3 SCC 323 , which ruled that the true character of the corporation in that case i.e., the

Maharashtra Development Corporation was to act as an architectural agent for the development and growth of

industrial towns and for their establishment.

42 (1976) 1 SCC 466

43 (1976) 3 SCC 167

49. It was lastly argued that the expression “trade” carries within it the idea of

profitability: counsel cited State of Gujarat v. Mahesh Dhiarjlal Thakkar44, Sodan

Singh & Ors. v New Delhi Municipal Committee & Ors45 and T.M.A Pai

Foundation and Ors. v. State of Karnataka & Ors46. Reliance was placed upon

the judgment in CIT, Madras v. M/s Madurai Mills Company Limited47 to urge

that interpretation of the definition of expression “charitable purpose” should not

be coloured by considerations stemming from legislative history, which override

the plain words of a statute.

50. Mr. K. K. Chythanya, senior counsel appeared for M/s Karnataka Industrial

Areas Development Board (“KIADB”). He urged that KIADB was formed under

Section 5 of the Karnataka Industrial Areas Development Act, 1966 (“KIAD

Act”) and it functions on “no profit-no loss” basis as is evident from the

preamble48, the aims and objectives49 of the board as well as Sections 3, 5, 6, 28,

29, 43 and 4650 of the KIAD Act. Reliance was placed on Karnataka Industrial

Areas Development Board v. Prakash Dal Mill51 which held that KIADB is

“state” under Article 12 of the Constitution, and it was urged that KIADB was an

extension of the Karnataka Government. The board exercises power of eminent

domain and it performs governmental functions. Its activities, therefore, cannot

44 (1980) 2 SCC 322

45 1989 (3) SCR 1038

46 (2002) 8 SCC 481

47 (1973) 4 SCC 194

“It is considered necessary to make provision for the orderly establishment and development of Industries in

suitable areas in the State. To achieve this object, it is proposed to specify suitable areas for Industrial

Development and establish a Board to develop such areas and make available lands therein for

establishment of Industries.”

49 Promote rapid and orderly development of industries in the state.; Assist in implementation of policies of

Government within the purview of KIAD Act; Facilitate in establishing infrastructure projects: Function on “No

Profit – No Loss” basis.

50 • Section 5 – Established and incorporated for securing the establishment of industrial areas in the State of

Karnataka and generally for promoting the rapid and orderly establishment and development of industries and for

providing industrial infrastructual facilities and amenity in industrial areas in the State of Karnataka.

• Section 6 – All the members of the Board are government officials;

• Section 46 - the members & other employees of the Respondent are deemed to be public servants.

• Section 3 & 28 - Government of Karnataka (GOK) that acquires the land from the public.

• Section 29 – GOK determines the price and pays the compensation.

• Section 43 - No duty under the Karnataka Stamp Act, 1957, or fees under the Indian Registration

Act, 1908.

51 (2011) 6 SCC 714

be regarded as trade or business. Reliance was placed upon State of Karnataka v.

All India Manufacturer’s Organisation52

51. It was submitted that in the absence of profit motive, the activity is not

trade, commerce or business - within the meaning of first proviso to Section 2(15)

of the IT Act, 1961. Reliance was placed upon Khoday Distilleries (supra), State

of Tamil Nadu v. Board of Trustees of the Port of Madras53 and several other

decisions54

. It was argued that wherever it is intended, profit element is wholly

excluded from activity - reliance was placed on provisions of the Karnataka VAT

Act, The Central Goods and Service Tax Act (“CGST Act”) and Section 2(31) of

the IT Act. In the present context, the activities of the Board do not amount to

“trade”, “commerce” or “business” and the first proviso to Section 2(15) is

attracted only if the primary/dominant objects are (a) in the nature of trade,

commerce or business; or (b) rendering any service in relation to any trade,

commerce or business. To substantiate this argument, counsel relied on Surat Art

Silk (supra), Commissioner of Income Tax v. Gujarat Maritime Board55 (hereafter

“Gujarat Maritime Board case”) and other decisions56. Hence, if the main activity

is not “business”, the connected, incidental or ancillary activities of sales carried

out in furtherance of and to accomplish their main objects would not normally,

amount to business, unless an independent intention to conduct ‘business’ in these

connected, incidental or ancillary activities is established by the revenue. The

judgments in CST v. Sai Publication Fund57 and the Board of Trustees of the Port

of Madras (supra) was relied upon. It was urged that the revenue’s contention that

statutory authorities’ claim for exemption is confined to the provision in Section

52 (2006) 4 SCC 683

53 1999 (2) SCR 195 (hereafter, “Board of Trustees of the Port of Madras”)

54 State of Karnataka v. Shreyas Papers Pvt. Ltd. AIR 2006 SC 865; Ashoka Smokeless Coal India (P) Ltd. v.

Union Of India (2007) 2 SCC 640; New Delhi Municipal Committee v. State of Punjab 1996 Supp 10 SCR 472;

and Physical Research Laboratory v. K.G Sharma 1997 (3) SCR 733.

55 2007 (12) SCR 962; (2007) 14 SCC 704 (hereafter “Gujarat Maritime Board case”).

56 Yogiraj Charity Trust v. CIT 1976 (3) SCR 947; Commissioner of Income Tax v. Andhra Pradesh Road

Transport Corporation 1986 (1) SCR 570; Queens’s Educational Society v. CIT 2015 (8) SCC 47.

572002 (2) SCR 743

10(46). He urged that in terms of Section 11(7)58 the Board has an option to claim

exemption either under Section 11 or under Section 10(46). There is no bar for

claiming exemption under either of those provisions.

52. Mr. Dhruv Agrawal, learned senior counsel appearing for the U.P Awas

Evam Vikas Parishad adopted the submissions of senior counsel Mr. Soparkar

and K.K Chythyanya. He also urged that the realization of the right to shelter and

housing is an integral part of right to life, and contended that the predominant

activity of the assessee involves the fulfilment of those objectives, especially for

the weak and poorer sections of the society. He relied on this court’s decision in

Chameli Singh v. State of U.P & Ors.59 which had stated that right to social justice

includes right to shelter, and that these statutory corporations are the means to

ensure that.

53. Mr. K. V. Viswanathan, senior counsel appearing on behalf of GS1 India

submitted that the assessee is involved in issuing bar codes which is a global

language of standardised coding and the is a universally accepted standard for

identification of products. The GS1 barcode is a global standard which is an

intellectual property of GS1 (an international non-profit organisation

headquartered at Brussels) and it has affiliates in each country with the assistance

of national governments. GS1 India the assessee, is an affiliate; it was registered

as a society in the year 1996, with the Joint Secretary-Ministry of Commerce as

its President and the administrative control vests with the Ministry of Commerce,

Government of India. It was registered as a charitable GPU category society in

58 Inserted by Finance (2) Act, 2014 and amended by Finance Act, 2020

59 (1996) 2 SCC 549. The court had cited Article 25(1) of the Universal Declaration of Human Rights and Article

11(1) of the International Covenant on Economic, Social and Cultural Rights, 1966 and relied on Sri. P.G. Gupta

v. State of Gujarat & Ors. 1995 (1) SCALE 653 - where a Bench of three Judges of this Court had considered the

mandate of the human right to shelter and read it into Article 19(1)(e) and Article 21 of the Constitution of India

to guarantee the right to residence and settlement.

1996. All the trade bodies60 as well Bureau of Indian Standards are members of

its governing council.

54. It was submitted that the revenue had granted exemptions to the assessee

society under Section 12A and Section 10(23C)(iv) while issuing various

certificates from time to time (from AY 1996-1997 to 2007-2008); therefore, it

had accepted that the assessee’s object and purpose was charitable, i.e.,

advancement of general public utility. Also, to reflect that there is no

business/trade/commerce involved and profit motive is absent the learned counsel

relied upon the decision of the assessee society to issue substantial discounts to

the extent of 50% to deserving sectors like cottage industries to enable

augmentation of market for such sectors, as well as the letter written by CEOGS1 to the President GS1 (i.e. Joint Secretary, Ministry of Commerce) to permit

reduction of fee from ₹400 too ₹70 per farm/plot, for issuing Global Location

Number (GLN) to farmers, which was approved.

55. Regarding the statutory provisions it was submitted that the words “trade,

commerce or business” in the proviso to Section 2(15) of the IT Act cannot be

read in isolation and have to be seen in context of “charitable purpose” and, even

after a series of amendments - from the Finance Act, 2008 to Finance Act, 2015

there is essentially, no change in the basis of determination of what amounts to a

trade, commerce or business and therefore the tests as laid down in Surat Art Silk

(supra) still holds the field to interpret these words.

56. Counsel urged that Parliament is assumed to have used the word ‘involves’

found in proviso to Section 2(15) as interpreted in Surat Art Silk (supra), in the

sense that an activity is involved in the advancement of an object when it is

enwrapped or enveloped in the activity of advancement, so that the resulting

60 Federation of Chambers of Indian Commerce and Industry; Confederation of Indian Industry; Associated

Chambers of Commerce and Industry of India (ASSOCHAM); The Agricultural and Processed Food Products

Export Development Authority (APEDA).

activity has a dual nature or is twin faceted. The well-known principle of

construction, that where the legislature uses in an Act, a legal term which has

received judicial interpretation, it must be assumed that the term is used in the

sense in which it has been judicially interpreted unless a contrary intention

appears, was relied upon, and the decision in P. Vajravelu Mudaliar v. Special

Deputy Collector, Madras & Ors.

61 was cited in that context.

57. Countering the contentions of the revenue that if entities making profit but

not involved in commercial activity desire exemption, they ought to apply under

Section 10(46) IT Act, it was submitted that the expression “constituted by or

under an Act” in Section 10(46) does not include all entities like the assessee,

which is a not a statutory corporation, but a “not for profit” society registered

under the Societies Act. It was argued that the distinction between “established

by and under an Act” is well settled and includes entities which are statutory

corporations as contrasted from non-statutory ones. The judgment in Dalco

Engineering Pvt. Ltd. v. Satish Prabhakar Padhye & Ors.62 was referred to, in

this context where this court ruled that

“…when the words "by and under an Act" are preceded by the words

"established", it is clear that the reference is to a corporation established,

that it is brought into existence, by an Act or under an Act. In short, the term

refers to a statutory corporation as contrasted from a non-statutory

corporation incorporated or registered under the Companies Act.”

58. Learned senior counsel lastly submitted that an activity, to be “trade,

commerce or business”, must be profit driven. Profit motive is a quintessential

element and an activity without profit motive will not result in “trade, commerce

or business” in terms of the decision in State of A.P v. H. Abdul Bakhi & Bros63

If exemption is not granted to the assessee it will face a liability of around ₹300

61 1965 (1) SCR 614

62 (2010) 4 SCC 378

63 1964 (7) SCR 664

crore (from FY-2007-08 to 2020-21), which given its financial condition will

jeopardise its existence and functioning.

59. Ms. Radhika Suri, learned counsel argued on behalf of Bhatinda

Improvement Trust and adopted the submissions of Mr. Soparkar. She urged, in

addition, that it is obligatory on part of the assessee (a statutory corporation) to

use the monies received for public utility purpose and the price fixation of

lands/plots sold by them is also regulated through statutory regulations.

Therefore, such activities qualify the test of general public utility. Ms. Suri also

relied on the decision of the Delhi High Court in Greater Noida Industrial

Development Authority (supra) to the effect that there is need to distinguish

commercial activity which constitutes disqualification under clause (b) to Section

10(46) of the Act, and charging and payment of fee, service charges,

reimbursement of costs or consideration for transfer of rights for performing and

undertaking regulatory or administrative duties for general public interest, when

these are not guided and undertaken with profit motive or intent. Further, reliance

was placed on The Commissioner of Income Tax (Exemptions), Chandigarh v.

M/s Hoshiarpur Improvement Trust, Hoshiarpur64 to explain the characteristics

of the assessee. Learned counsel further laid emphasis on provisions of the

regulations under the Punjab Improvement Trust Rules and regulations to show

the procedure adopted by the board in fixing prices.

60. Mr. Gursharan S. Virk, argued that the Gujarat Maritime Board (GMB), is

a statutory one, constituted under Section 3(2)65 of the Gujarat Maritime Board

Act, 1981 (GMB Act); it performs functions which, prior to the enactment of the

Act, were being performed directly by the State Government66. The Preamble to

the Act notes that it is constituted for administration, control and management of

64 ITA No. 78 of 2016

65 Section 3 (2):- “ The board shall be a body corporate by the name aforesaid having perpetual succession and

a common seal with power, subject to the provisions of this Act to acquire, hold and dispose of property, both

movable and immovable, and to contract, and may by the said name sue and be sued.”

66 Section 20 of the GMB Act

minor ports in the State of Gujarat, and for all matters connected therewith. The

Board’s powers under the GMB Act apply to works carried out by GMB as

conservator of ports under the provisions of the Indian Ports Act67; it is charged

with essential functions such as development and upkeep of jetties, wharves,

docks, piers, places of anchorage, light-houses, light-ships, beacons, buoys, pilot

boats, and other appliances necessary for safe maritime navigation, etc. and for

development of minor ports in general68. It is also entitled to undertake essential

maritime services such as stevedoring, landing, shipping or trans-shipping,

piloting, hauling, mooring and hooking vessels/goods, etc.

69 Hence it was urged,

that GMB’s functions are, essential and sovereign in nature, and relate to the

development, safety and protection of the waterfront.

61. It was submitted that the GMB is not engaged in any business or trade, is

not engaged in any activity which generates profit and does not (also statutorily

cannot) use money for anything except for development of minor ports in the

state of Gujarat and the features of the GMB Act. These features in context of the

controversy at hand, under the provisions of the IT Act, were considered by this

court in the Gujarat Maritime Board case (supra). The decision discussed

Sections 73, 74 & 75 of the GMB Act, which provide for management of all

monies received by the GMB; and Section 76 of the GMB Act, which permits the

setting aside of surplus money only for “expanding existing facilities or creating

new facilities at the ports” or for meeting with contingencies caused on account

of “fire, cyclones, shipwrecks or other accidents or for any other emergency.” It

was stressed that that judgment clearly indicates GMB has no profit motive. It

was therefore, urged that the provisions of the GMB Act, indicate the

overwhelming public purpose carried out by it without profit motive and that

67 Section 83 of the GMB Act

68 Section 25(2) of the GMB Act

69 Section 32 r/w Sections 37-30 of the GMB Act

utilization of funds is only for the purpose of development, management and

safety of minor ports; all these entitles GMB to exemption.

62. Mr. Rohit Jain, learned counsel, appeared on behalf of the Education and

Research Network (ERNET) and National Internet Exchange of India (NIXI). On

behalf of ERNET it was submitted that it was started as a planned project of the

Government of India under the Department of Electronics (DoE) with the support

of the United Nations Development Program (UNDP). The program was focused

on integrating information technology and internet tools with learning

environment, to enhance the quality of education. However, funding by the

UNDP ended in 1992. The DoE nevertheless continued to support the project till

1998 and thereafter the body was registered as an autonomous society under

administrative control of the Ministry of Communication and Information

Technology, Govt. of India on 27.01.1998. It was registered under Section 12A

of the IT Act, 1961 on 26.03.2004 and its activities fell within the meaning of

“charitable purpose” under Section 2(15). It duly complied with Sections 11 and

12 of the IT Act, 1961.

63. NIXI was created in 2003 by the Government of India under the Ministry

of Information Technology, for promotion and growth of internet services in

India, regulating the internet traffic and acting as internet exchange, to undertake

“.in” domain name registration thereby saving valuable foreign exchange, and

take care of national concern. It was urged that this is a Section 25 company

barred from undertaking any commercial or business activity for profit and is

bound by strict licensing conditions, including prohibition on alteration in the

memorandum of association, without prior consent of the government. The

“charitable” nature of the same has also been upheld under Section 12A of the IT

Act, 1961.

64. Learned counsel submitted that ERNET is a “not for profit” society

wherein considering its objects, it receives only subscription fees mainly from

schools, colleges, universities, scientific research institutes, etc. This subscription

fees is charged on “actual basis” and utilized towards promotion of its objectives.

The charitable character of the assessee is apparent and not in dispute since it has

been accepted by the revenue up to AY 2008-09. Also, the final factual findings

recorded by lower authorities conclusively demonstrate that the assessee is

engaged in ‘advancement of general public utility’, and qualifies as a ‘charitable

purpose’ as it does not carry any trade commerce or business, and the income

earned is not derived in the course of any commercial activity.

65. Learned counsel also submitted that the assessee carries on R&D work

which enables educational institutions with Information and Communication

Technology infrastructure for making education reach the public at large solely

for charitable purpose and further reliance was placed upon ICAI Accounting

Research Foundation v. DGIT(E)70

, Bureau of Indian Standards v. DGIT(E)71

and GS1 India v. DGIT(E)72

66. Mr. Ajay Vohra, learned senior counsel, appearing for the Apparel Export

Promotion Council (AEPC) urged that it is a non-profit organization set up with

approval of the Central Government, for promotion of exports of garments from

India (i.e., promotion of trade). It was registered under Section 12AA(1) of the

IT Act, on 18.05.1979 and is engaged in the activity of promotion of the export

of all kind of ready-made garments, knitwear, and garments made of leather, jute

and hemp. It does not per se engage in any activity for profit, and its mandate is

to ensure that Indian apparel manufacturers, are given forums and platforms, to

showcase their products. For that purpose, the AEPC charges subscriptions, and

provides services, which have general public utility. These activities are by way

of booking large spaces in fairs, and such like events, especially in overseas

locales, so that Indian manufacturers can interact with other overseas buyers, and

70 321 ITR 73 (Del)

71 358 ITR 78 (Del)

72 360 ITR 138 (Del)

are enabled to promote trade. It was submitted that there is ex-officio involvement

on behalf of the Central Government, in the AEPC’s activities, including in its

policy formulation levels.

67. Mr. Vohra relied upon the Memo Explaining Provisions in the Finance

Bill, 200873, the speech of Finance Minister in Lok Sabha on Finance Bill, 200874

CBDT Circular No. 11 dated 19/12/200875 to submit that proviso to Section 2(15)

only bars commercial/business activities undertaken for profit motive. It was

submitted that mere earning of income and/or charging any fees is not barred by

the proviso; rather, carrying of any activity in the nature of trade, commerce or

business or rendering service in relation thereto is barred. Reliance was placed

upon judgments in Dir. Of Supp. & Disp. v. Board of Revenue76 which follows

H. Abdul Bakhi & Bros (supra), Barendra Prasad Ray v. ITO77 and State of

Gujarat v. Raipur Manufacturing Co. Ltd.78 to argue that in “business” there must

be some real and systematic, or organized course of activity or conduct with the

set purpose of making profit. Counsel referred to Sai Publication Fund (supra)

where this court observed that since primary and dominant activity of the trust

was to spread message of Saibaba and hence not business, then any incidental or

ancillary activity of publishing and selling of books and literature cannot be

regarded as business. Reference was made to Customs & Excise Commissioner

v. Lord Fisher79 which held that there are six indicia to determining business

namely (a) serious undertaking earnestly pursued, (b) reasonable continuity, (c)

substantial in amount, (d) conducted regularly on business principles, (e)

predominantly concerned with making taxable supplies for consideration, (f) such

as those commonly made by persons seeking to make profit. Other judgments too

73 298 ITR (St.)

74 Quoted in ITPO v. DGIT(E) : 371 ITR 333 (Del) (hereafter “ITPO”)

75 308 ITR (St.)

76 1967 (3) SCR 778

77 1981 (3) SCR 387

78 1967 (1) SCR 618

79 (1981) 2 All ER 147

were cited; and reference was made to definitions in the Concise Oxford

Dictionary, Webster’s New Twentieth Century Dictionary, Black’s Law

Dictionary, and Sampath Iyengar’s Law of Income Tax.

68. Mr. Ajay Vohra, urged that AEPC has been claiming exemption under

Section 11 from AY 1979-80 to 1990-91. During AY 1991-92, the Assessing

Officer (“AO”) denied the exemption on the ground that it was carrying on

business. That order was eventually set aside by the ITAT which, held that it was

entitled to exemption under Section 11 of the Act. Subsequently, an amendment

was brought to Section 11(4A) and AEPC had to maintain separate books of

accounts. In AY 1992-93, the AO again denied exemption. On appeal, the issue

was decided in favour of AEPC by the ITAT. The Delhi High Court upheld the

order of the ITAT in a judgment80. AEPC received entrance fee and membership

fee which, it claimed were exempt on the principle of mutuality. This issue too

was resolved in its favour from the AY 1992-93 to AY 1997-98 by the

jurisdictional High Court. From the assessment year 1998-99 to the assessment

year 2008-09, the AO accepted the assessee’s claim that income was exempt

under Section 11 of the Act.

69. During AY 2009-10 and 2010-11, the AO denied exemption under Section

11 on the ground that the newly inserted proviso to Section 2(15) was attracted;

and thus the assessee was ineligible for exemption under Section 11. The AO held

that the assessee was rendering services in relation to trade, commerce business

for consideration and the receipt of which exceeds ₹10 lakhs. The CIT(A) allowed

the assessee’s appeal following the decision of the High Court in its case, and

there being no changes in the facts and circumstances of the case. The ITAT

upheld the findings of the first appellate authority as it observed that the assessee

did not carry any activity with an object of profit, and thus the question of

attracting the proviso did not arise.

80 Reported at 244 ITR 736

70. Ms. Prabha Swami, learned counsel submitted that the A.P State Seed

Certification Agency is a statutory society set up under Section 881 of the Seeds

Act, 1966 which is represented by the representatives of Seedsmen Association,

seed farmers, farming community and members representing Central Seed

Certification Board. While explaining the charitable characteristic of the society

the counsel pointed out that the society was duly registered and its Memorandum

of Association clearly inter-alia stated that the object for which it was established

was to see that the cultivators adopt all scientific methods for production of

quality seeds in accordance with the Seeds Act and to carry on educational

programs designed to promote the use of certified seeds. Charges are collected

from the traders or the societies engaged in the trade of seeds. The society

provides quality seeds to the farmers and hence traders are prevented from selling

inferior variety of seeds. Highlighting the activities of the authority, it was urged

that farmers are benefited by various services it offers - inspection of fields at the

time of seed production, supervision while processing seeds and issuing a

validation certificate at the time of packing, sampling, and seed testing. The

society (which is not involved in trade, commerce or business) is therefore

rendering service to the general public as they are encouraging farmers to

purchase quality seeds and help prevent loss to them, and loss of natural

resources. Mr. Sanjay Jhawar, learned counsel for Rajasthan State Seed

Corporation also adopted the submissions of Ms. Prabha Swami.

71. Mr. Sanjay Visen, learned counsel argued on behalf of M/s Raebareli

Development Authority, Raebareli, urging that the assessee is a body constituted

under the U.P Urban Planning and Development Act, 1973. As their activities

were aimed at public purpose, it applied for registration u/s 12AA of the IT Act,

1961. It was submitted that the assessee’s income was earlier exempted under

“Section 8. The State Government or the Central Government in consultation with the State Government may,

by notification in the Official Gazette, establish a certification agency for the State to carry out the functions

entrusted to the certification agency by or under this Act”.

Section 10(20A) of the IT Act, 1961 which was omitted by the Finance Act, 2002;

however, this did not restrict the assessee from getting registered under Section

12AA of IT Act, as the object of the authority is to provide shelter to homeless

people, which is charitable.

72. Mr. Harish Salve, learned senior counsel appearing on behalf of Saurashtra

Cricket Association drew attention of this court towards the ambit of Section 4(3)

of Income Tax Act, 1922 (i.e., the old Act), as compared to Section 2(15) of the

IT Act, 1961 which defines ‘charitable purpose’. He also presented the

construction of Section 11 in light of Thanthi Trust (supra). It was emphasized

that the objects of a trust are decisive and every surplus cannot be construed as

profit, as is discussed in Krishna Warriar (supra). Profits from trade or business

arising out of property held under trust for charitable purpose, if ploughed back

to the extent of 100% cannot be termed as a commercial activity. This was the

principal idea in omitting Section13(1)(bb) as it was considered as restrictive for

carrying out such activities. It was argued that, substitution of the definition of

“charitable purpose” in Section 2(15) by the Finance Act, 2008 has not changed

the law. The words “in relation to any trade, commerce or business” and “for a

cess, fee or consideration” in the proviso to Section 2(15) implies that

advancement of object of a trust may not involve activities of profit. It was urged

that the amendment appears to have undermined this court’s decision in Surat Art

Silk (supra).

73. It was argued that the crucial part of the definition of “charitable purpose”

is the word “cess” employed in the proviso. As an explanatory measure, the

activities of promotional councils were taken into consideration - for example

Surat Art Silk supported silk manufacturers. If such activity is for a cess or a fee,

the organization ceases to be charitable. Activities in the nature of trade,

commerce or business are not charitable if they are for a fee or other

consideration. Fees collected by the private organizations forms the content of

Section 2(15). However, amounts based on tariff regulations imposed by the

controlling law, or statute-based fee is neither “fee” nor “cess” under that

provision. Further, the consideration involved is vis-à-vis the activity or service.

The test is the object for which the consideration is paid, and what it entails,

wherein the words “any other consideration” is for the activities in aid or service

of business. In this regard it was submitted that, in true sense the word “business”

implies profit, however statutory organizations are excluded from its ambit. Fee

or consideration collected by such organizations should not be taken in the sense

of profiteering, as it is for the advancement of their objectives. In this sense the

word “cess” can be read down as non-statutory.

74. It was submitted that the phrase “cess, fee or any other consideration” in

the proviso to Section 2(15) covers the second part of the proviso, i.e., it is

relatable to “service in relation to” trade, commerce or business. Mr. Salve

submitted that any statutory cess, or fee, authorized or compelled by law, which

is within the domain of the state legislature, cannot be construed as taxable,

having regard to the principles indicated in the judgment of this court, in NDMC

(supra). He relied on Article 289 of the Constitution of India, and submitted that

it is only if a state engages – by itself, or through an agency, directly in trading

activity, that the immunity from Union taxation is lifted. In the present case, those

agencies set up by the State, essentially through law, to carry out welfare

activities, such as regulation and housing, cannot per se be characterized as

trading concerns.

75. Mr. Salve submitted that cricket associations are operating purely to

advance their objective of promoting the sport. They should not be considered as

pursing activities in furtherance of trade, commerce or business. The word “cess”

has to be read down in reverse (reverse ejusdem generis) and it should be read

non-statutorily while adopting purposive interpretation of the same. Reliance was

placed on Nabha Power Limited v. Punjab SPCL82 to state that a purposive

interpretation of “cess”, is to be adopted.

76. It was also argued that the sport of cricket is a form of education and if it

is not considered as a field of education, it is still an object of general public

utility. The primary regulating body i.e., the BCCI, promotes sport in the entire

country and worldwide, and the assessees herein are its second and third tier

associations. The revenue generated by BCCI flows to state and regional cricket

associations in the form of grants to maintain stadia, conduct matches, organize

training camps, and other ancillary purposes. Counsel relied on the objects

of Saurashtra Cricket Association which inter alia include, the control,

supervision, regulation, encouragement, promotion and development of the game

of cricket in the Association’s jurisdiction. Other objects include creation,

fostering friendly relationships through sports tournaments and the creation of a

healthy sportsmanship spirit, through the medium of sports in general and cricket

in particular. All other objects were similar, including “to arrange, and/or

manage among other things league and/or any other tournaments”; organize

matches, lay out grounds for playing cricket, organization of matches in aid of

public charities, etc. If these associations sell tickets and generate revenue

through other activities, those do not necessarily mean that their objects are

commercial or to promote trade. Selling tickets for a sport performance or match

is to promote cricket, and not trade. Mr. Salve also urged that the expression

“trade” has a particular meaning; he referred to State of Gujarat v. Maheshkumar

Dhirajal Thakkar83 where the court observed that

“the word trade in its narrow popular sense means ‘exchange of goods for

goods or for money with the object of making profit’. In its widest sense it

includes any business carried on with a view to earn profit84. Further, the

word takes its meaning from the context.”

82 (2018) 11 SCC 508

83 (1980) 2 SCC 322

84 Halsbury’s Laws of England, Vol. 32 para 487

77. Likewise, with regard to “business” the counsel referred to H. Abdul Bakhi

& Bros. (supra) which had discussed the term and explained that any activity

should be driven by profit motive.85 Lastly, the judgment in Secretary, Ministry

of Education & Broadcasting, Govt. of India & Ors. v. Cricket Association of

Bengal86 was cited to explain the dominant purpose of the BCCI. That judgment

highlighted what is relevant and applicable is the test of predominant character of

the activity, and not that an institution incidentally earns surplus or profit.

78. Mr. Arvind Datar, learned senior counsel appeared on behalf of the

Institute of Chartered Accountants of India (hereafter “ICAI”) as well as The

Tribune Trust.

79. Counsel submitted that ICAI is a premier professional accountancy body

of the country established under the Chartered Accountants Act, 1949 (“CA Act”)

to impart formal and quality education in accounting and thereafter to regulate

the profession of Chartered Accountancy in India. It is under the control and

supervision of the Ministry of Corporate Affairs, Government of India. Section

1587 of the CA Act defines the functions of Council of Institute which include

85 “the expression ‘business’ though extensively used is a word of indefinite import, in taxing statutes it is used in

the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with

the object of making profit. To regard an activity as business there must be a course of dealings, either actually

continued or contemplated to be continued with a profit motive, and not for sport or pleasure. But to be a dealer

a person need not follow the activity of buying, selling and supplying the same commodity. Mere buying for

personal consumption i.e. without a profit motive will not make a person a dealer within the meaning of the Act,

but a person who consumes a commodity bought by him in the course of his trade, or use in manufacturing another

commodity for sale, would be regarded as a dealer”.

86 (1995) 2 SCC 161

87 15. Functions of Council (1) The Institute shall function under the overall control, guidance and supervision

of the Council and the duty of carrying out the provisions of this Act shall be vested in the Council.

(2) In particular, and without prejudice to the generality of the foregoing powers, the duties of the Council shall

include –

(a) to approve academic courses and their contents;

(b) the examination of candidates for enrolment and the prescribing of fees therefor;

(d) the prescribing of qualifications for entry in the Register;

(e) the recognition of foreign qualifications and training for the purposes of enrolment;

(f) the granting or refusal of certificates of practice under this Act;

(g) the maintenance and publication of a Register of persons qualified to practice as chartered accountants;

(h) the levy and collection of fees from members, examinees and other persons;

(i) subject to the orders of the appropriate authorities under the Act, the removal of names from the Register and

the restoration to the Register of names which have been removed;

holding of examinations for chartered accountancy course candidates and

regulation of engagement and training of articled clerks and audit assistants.

80. It was submitted that holding of coaching and revision classes, and surplus

generated due to the fees collected from that activity is not a business or

commercial activity. Counsel urged that it is wholly incidental and ancillary to

the objects of the institute - which is to provide education and conduct

examinations of the candidates enrolled for chartered accountancy courses, so as

to bring out true professionalism. Therefore, separate books of accounts are not

required to be maintained in terms of Section 11(4A) read with the fifth and

seventh proviso to Section 10(23C) of IT Act, 1961. It was urged that ICAI was

not hit by the proviso to Section 2(15) of the IT Act (inserted w.e.f. 01.04.2009)

since its activities fall within the purview of the clause “education” specified in

the definition of the expression “charitable purpose” in S. 2(15) of the said Act,

and not the residuary clause relating to the GPU category, wherein the proviso

solely applies to the latter. In this regard the counsel referred to the Gujarat High

Court judgment in Saurashtra Education Foundation v. CIT88 which took into

account the observations made in another judgment by the same High Court in

Gujarat State Co-operative Union v. CIT89

, to hold that the ICAI was existing

solely for educational purposes and its activities clearly fall within the category

of ‘education’ in Section 2(15) of the Act. In further support of this proposition,

reliance was placed on American Hotel and Lodging Association v. CBDT90 to

(j) the regulation and maintenance of the status and standard of professional qualifications of members of the

Institute;

(k) the carrying out, by granting financial assistance to persons other than members of the Council or in any other

manner, of research in accountancy;

(l) the maintenance of a library and publication of books and periodicals relating to accountancy;

(m) to enable functioning of the Director (Discipline), the Board of Discipline, the Disciplinary Committee and

the Appellate Authority constituted under the provisions of this Act;

(n) to enable functioning of the Quality Review Board;

(o) consideration of the recommendations of the Quality Review Board made under clause (a) of Section 28B and

the details of action taken thereon in its annual report; and

(p) to ensure the functioning of the Institute in accordance with the provisions of this Act and in performance of

other statutory duties as may be entrusted to the Institute from time to time.

88 (2005) 273 ITR 139 (Guj.)

89 (1992) 195 ITR 279 (Guj.)

90 (2008) 10 SCC 509

argue that ICAI is entitled to be notified under Section 10(23C)(iv) r/w Section

2(15) of the Act, 1961.

81. Counsel submitted that profit motive is an essential element, or the driving

force, for any business or commercial activity. The activities of ICAI are not of

such nature. Counsel relied upon the judgment in NDMC (supra) which ruled that

profit motive is the core aspect of trade and business, in the context of Article 289

of the Constitution of India, which talks about exemption of property and income

of a state from Union Taxation.

82. It was argued that there is a distinction between nature of commercial

ventures and charitable institutions such as ICAI. The word ‘profit’ should never

be used with a body set up for public purposes, to regulate activities, in public

interest and the intent of the organization/establishment must be taken into

consideration. In support, Board of Trustees of the Port of Madras (supra) was

cited, where the Port trust’s activities included sale of unclaimed and

unserviceable goods in discharge of various statutory charges, items, etc. They

were part of the Port Trust’s main activities of service. The court said that they

cannot be treated as ‘business’ and that the Port Trust had no intention to carry

on business in the sale of unserviceable/unclaimed goods. Reliance was placed

on Surat Art Silk (supra), Andhra Pradesh State Road Transport Corporation

(supra), Victoria Technical Institute v CIT91, Aditnar Educational Institution v.

Addl. CIT92, Thiagarajar Charities v. ACIT93

, Director of Income Tax v. Bharat

Diamond Bourse94 and Gujarat Maritime Board case (supra). The observations

in T.M.A Pai (supra) that there can be reasonable revenue surplus, by the

educational institution for the purpose of development of education and

expansion of the institution, was also referred to.

91 (1991) 188 ITR 57 (SC)

92 (1997) 3 SCC 346

93 (1997) 4 SCC 724

94 (2003) 259 ITR 280 (SC)

83. Learned senior counsel further relied on the explanatory notes to the

provisions of the Finance Act, 2008, specifically towards amendment made to

Section 2(15) of the IT Act, aimed at streamlining the definition of “charitable

purpose” as discussed in para 595 and the ratio Visvesvarya Technological

University v. Assistant Commissioner of Income Tax96 to submit that there is no

loss to the character of a GPU charity where surplus generated is ploughed back.

Further, a judgment of the Division Bench of the Delhi High Court in J.K

Synthetics & Another v. Union of India & Ors.97 was referred to contend that it is

not open for the revenue authorities, without any cogent reason and merely at its

own caprices, to refuse to follow the conclusion reached on the earlier occasion,

and to take up a totally different stand in subsequent years - as was done in this

case while refusing to grant exemption under Section 10 (23C) of IT Act, 1961

to the ICAI.

84. Learned counsel further submitted that the present case involves two

circulars issued by the Board viz. Circular No. 1/2009 dated 27.03.2009 and

Circular No. 11/2008 dated 19.12.2008 which are clarificatory and not contrary

to any provisions of the Act, 1961 and hence the ratio of the decision in Ratan

Melting and Wire Industries (supra) does not apply. Reliance was placed on

observations made in Navnit Lal Zaveri (supra) and Ellerman Lines v.

95 "5. Streamlining the definition of “charitable purpose”

5.1 Sub-section (15) of section 2 of the Act defines “charitable purpose” to include relief of the poor, education,

medical relief, and the advancement of any other object of general public utility. This is based on the argument

that they are engaged in the “advancement of an object of general public utility” as is included in the fourth limb

of the current 12 It has been noticed that a number of entities operating on commercial lines are claiming

exemption on their income either under sub-section

(23C) of section 10 or section 11 of the Act on the ground that they are charitable institutions. This is based on

the argument that they are engaged in the “advancement of an object of general public utility” as is included in

the fourth limb of the current definition of “charitable purpose”. Such a claim, when made in respect of an activity

carried out on commercial lines, is contrary to the intention of the provision.

5.2 With a view to limiting the scope of the phrase “advancement of any other object of general public utility”,

sub-section (15) of section 2 has been amended to provide that the advancement of any other object of general

public utility shall not be

a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business,

or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any

other consideration, irrespective of the nature of use or application, or retention, of the income from

such activity.”

96 (2016) 12 SCC 258

97 1981 SCC OnLine Del 457

Commissioner of Income Tax98 to urge that these circulars are classified as

“beneficial”. They place a purposive interpretation on a statutory provision. Such

circulars enormously reduce litigation and hardship of assessees and they play a

vital role in the proper administration of taxes.

85. It was argued that the demand against ICAI is from 2004-05 and the fees

collected from students have already been spent on various infrastructure

development and other capital expenditure items. The surplus amounts remaining

were invested in government securities/FDs of nationalized banks, so the

demands raised will seriously prejudice the assessees.

86. On behalf of the Tribune Trust, Mr. Datar argued that the charitable nature

of the trust can be traced back to the In Re: Trustees of the Tribune (supra)

judgment rendered by the Privy Council, which allowed the trust’s appeal against

the judgment of Lahore High Court (that rejected exemption for the trust’s

income for AY 1932-33). The Privy Council considered the objects of the trust

and held it was not founded for private profit and prima facie the trust’s object

was of general public utility, since by supplying newspapers in the province the

trust involved the dissemination of educated public opinion. It was urged that the

impugned judgment passed by the Punjab and Haryana High Court99 in Tribune’s

case dismissing the Tribune’s appeal, erroneously relied on para 17 of Surat Art

Silk decision (supra) which wrongly quoted the Privy council judgment in the

Tribune’s case.

87. It was further argued that collecting advertisements for consideration

cannot be treated as business activity undertaken by profit because the sale price

of the newspaper is ₹2 whereas the cost of printing each newspaper is ₹12 and

the deficits can be made up only through advertisements. Placing reliance on the

extracts from the will of the late Sardar Dyal Singh Majithia it was urged that the

98 (1972) 4 SCC 474

99 ITA Nos. 62 of 2015 and 147 of 2016 (O&M)

trustees were under a duty to devote the surplus income for the improvement of

the newspaper and hence prayed for allowing the appeal.

88. Upon this court’s query with respect to advancing submissions on the

constitutional aspect in the ITPO judgment (supra), the learned senior counsel

advanced his submissions on the validity of Section 2(15) in the context of

Article 14 and Article 289. It was submitted that classification made in the ITPO

judgment i.e., institutions driven by profit motive vis-à-vis institutions driven by

motive to advance objective of GPU, was correct and is in tune with the decision

of this court in NDMC (supra). It was urged that Article 289(1) will not apply to

ITPO as its income and property cannot be regarded as income and property of a

State. It was also submitted that proviso to Section 2(15) applies only to the last

limb i.e., “advancement of object of general public utility” and not to the

preceding limb “education” and in respect of charity there is no discernible

difference between the two. Since there is no intelligible differentia and rational

nexus in this regard, this discrimination offends Article 14.

89. It was argued that the term “for a cess or fee or any other consideration”

used in Section 2(15) is clearly violative of Article 14 as it fails to make a

distinction between activities that are carried out by the State or by the

instrumentalities or agencies of the State, and those carried out by commercial

entities for which a consideration is charged. In addition, Article 289(1) exempts

states’ property and income from Union taxation. To permit levy of income tax

on cess or fee collected by a state would violate Article 289(1), hence the word

“cess” or “fee” in the proviso is liable to be declared unconstitutional and

violative not only of Article 14 but of Article 289 as well, in the context of state

undertakings. For Central institutions, it was submitted that cess or fee can never

fall within the definition of “income” under Section 2(24) read with Entry 82 of

List-I and cannot be subject to tax.

C. Revenue’s rebuttal arguments

90. In rebuttal to the submissions advanced by the assessees, the ASG relied

upon Adityapur Industrial Area Development Authority v. Union of India100 and

submitted that there is no constitutional immunity from taxation, for the state,

because by Article 289(2) even state or its instrumentalities/agencies are not

immune from taxation if they carry on trade or business. In light of Article 289(2),

there is no constitutional bar for the States (or the Union) to engage or carry on

trade or business, and Article 289 allows the Parliament to impose taxes on such

trade or business. The ratio in NDMC (supra) has to be read in light of the

provisions and the judgment rendered in Shri Ramtanu Cooperative Housing

Society (supra) should in turn be read in light of NDMC. The decisive factor

therefore is not the status of the entity, but the nature of activity carried by it. If

the nature of activity is trade or business with a profit motive, then the same can

be taxed even if it is carried by state or its instrumentalities. It was also contended

that Article 289 does not grant absolute any immunity from taxation.

91. The revenue further submitted that the validity of the amendment can be

tested especially in the case of exclusions or exemptions on limited grounds -

invalidity, arbitrariness, unreasonableness, discrimination; and the assessees have

not made out a case under any such ground. Also, by referring to In Re: Trustees

of the Tribune and All India Spinners Association of Mirzapur (supra), it was

contended that “general public utility” is only a statutory creation so as to form

part of charitable purposes and it can always be given a statutory import by

subjecting it to conditions and limitations prescribed under Section 2(15), at

different points of time. In other words, it can always be regulated or modulated

through statutory prescriptions, conditions, and limitations while granting an

exemption from taxation. The submission of the assessees, that one has to look

only at the objects to determine if it constitutes charitable purpose for Section

100 (2006) 5 SCC 100

2(15) of the Act, is to be rejected because exemptions or exclusions are not based

on mere objects of trust but on whether the purpose of the trust is “advancement

of any other object of general public utility”.

III. Analysis and reasoning

92. The history of the statute and the evolving interpretation of “charitable

purpose” reveals that in - P. Krishna Warriar (supra), this court extensively

considered the previous jurisprudence on the subject (in light of the pre-existing

Section 4(3) of the old law), as well as the amendment introduced in 1953. At

that time, income of a charitable organization, earned from business was subject

to limitations. The limitations were that (i) the business was to be carried on in

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

institution; or (ii) the work in connection with the business was to be mainly

carried on by beneficiaries of the institution. These expressions were considered

in Krishna Warriar (supra), where the court held that the term “property” (of a

trust) was of widest amplitude, which included business. The following decision,

in Andhra Chamber of Commerce (supra) where the chamber of commerce had

among its objects, one enabling it to advocate policies or legislation, or oppose

them, in addition to the object of promoting business, held that the incidental

inclusion of such objects, involving espousing a political purpose, did not

undermine its essential or main purpose, of advancing objects of general public

utility. The new provision, i.e., Section 2(15) of the IT Act, defined “charitable

purpose” restrictively: to deny tax exemption to activities for profit which were

carried on by a trust for the advancement of an object of general public utility.

The reason for this change (discussed previously) was that the advantage of tax

exemption was not intended to charitable trusts that were commercial concerns,

which while ostensibly serving a public purpose, were fully paid for the benefits

provided by them.

93. The first two decisions of some note are Lok Shikshana Trust and Indian

Chamber of Commerce (supra). The former decision, by majority, held that to

qualify as a charitable purpose, two ingredients had to be satisfied. It was held

that the change in the definition meant that to be the fourth category of charitable

purpose, it was necessary to show that

“(1) the purpose of the trust is the advancement of any other object of general

public utility, and (2) the above purpose does not involve the carrying on of

any activity for profit. Both the above conditions must be fulfilled before the

purpose of the trust can be held to be charitable purpose.”

94. In Indian Chamber of Commerce this court categorically held that even if

the activity for profit, is to further an object of general public utility, the charity

could not claim of exemption. The court went on to indicate the following test:

“21. The true test is to ask for answers to the following questions: (a) Is the