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

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


Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले


1
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
2
@ 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.
3
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
4
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.
5
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
2
“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)
6
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
3
(1939) 7 ITR 415 (hereafter “In Re: Trustees of the Tribune”).
4
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”
6
(1944) 12 ITR 385
7
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;
(c) if it is applied to purposes other than religious or charitable purposes or ceases to be accumulated or set apart
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.]”
8
(1964) 8 SCR 36: (1964) 53 ITR 176
8
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.”
9
(1965) 1 SCR 565 (hereafter “Andhra Chamber of Commerce”)
10 (1944) 12 ITR 482 (hereafter “All India Spinners Association of Mirzapur”)
9
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
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”)
10
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”)
11
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”)
12
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.
(c) To obtain import licences for import of Art Silk Yarn, Raw Silk, Cotton Yarn and other raw materials
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.”
13
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
14
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
15
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
16
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
17
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.
18
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.
19
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.”
20
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;”
21
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.”
22
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
23
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
24
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:
25
“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.
26
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”)
27
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”)
28
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.
29
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”)
30
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”)
31
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
32
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
33
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
48
“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
34
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
35
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.
36
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).
37
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
38
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
39
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
40
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
41
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)
42
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
43
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
44
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
81
“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”.
45
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
46
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
47
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
48
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;
(c) the regulation of the engagement and training of articled and audit assistants;
(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;
49
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
50
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)
51
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
52
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)
53
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.
54
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
55
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.
56
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
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?....”
95. The decision in Surat Art Silk, needs careful scrutiny, not only because it
is by a larger Bench, but also because it has been the bulwark of the assessee’s
contentions- and has been the premise upon which almost all High Courts have
interpreted Section 2 (15) after its amendment, in 2008. As noticed earlier, the
old Act (in Section 4(3)) did not contain any terms, restricting or prohibiting
charities from engaging in commercial activities or those which yielded profit.
No doubt, the idea of income from business carried on “behalf of a religious or
charitable institution” being exempt, provided “the business is carried on in the
course of the actual carrying out of a primary purpose of the institution” was
introduced by amendment, in 1953. This was interpreted in Andhra Chamber of
Commerce and Krishna Warriar (supra). However, Parliament clearly intended a
57
departure, when it introduced the new Section 2 (15) under the IT Act. The earlier
decisions in Indian Chamber of Commerce, and Lok Shikshana Trust (supra)
noticed this change. Surat Art (supra) was yet another a departure. While it
considered the previous decisions of the court, it consciously departed from them,
and even overruled the interpretation in Indian Chamber of Commerce (supra).
The larger Bench in Surat Art Silk agreed with the previous decisions to the effect
that the motivation for the activity in question (i.e., for it to be charitable) should
not be deriving of profits. However, the larger Bench enunciated the principle of
‘predominant object’ and held that what was of importance was “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” and that such
an entity would not lose its charitable character merely because some profit arose
from the said activity.
96. Thus, was born the ‘predominant object’ test, of an organization, to
determine whether it was essentially charitable, or ‘for profit’. If the predominant
object was not for profit, but advancement of general public utility, that some
profits were earned, would not debar it from claiming to be an organization with
a charitable purpose. However, if the predominant object was such that profit
making was “enwrapped” or “intertwined” with it, the organization or trust could
not be called charitable. Crucially, the court emphasized that the manner of
carrying on of the activity in question, was determinative:
“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.”
97. Interestingly, the test proposed by the majority judgment in Surat Art Silk
is similar to the one advocated in Indian Chamber of Commerce (which it
overruled). The difference in approach is that Surat Art Silk advocated the
“predominant object” test to see whether the object is for advancement of general
public utility, bereft of profit motive, whereas in Indian Chamber of Commerce
58
(supra), the court did not deal with or visualize consideration of a “predominant
object”. The second difference between the two decisions, is that Surat Art Silk
stated that there is no need for an express provision in the constitution of a given
trust, eschewing profit motive, whereas in Indian Chamber of Commerce, the
necessity of such a condition was highlighted.
98. The judgments of this court, after Surat Art Silk (supra), noticed the
enunciation of, and the need to apply the test of “dominant” object. In
Commissioner of Income Tax v. Federation of Indian Chambers of Commerce
and Industries101 it was, thus held:
“In other words, the majority view in the Surat Art Silk's case (supra) was that
the condition that the purpose should not involve the carrying on of any activity
for profit would be satisfied if profit-making is not the real object. The theory
of dominant or primary object of the trust has, therefore, been treated to be
the determining factor, even in regard to the fourth head of charity, viz., the
advancement of any other object of general public utility, so as to make the
carrying on of business activity merely ancillary or incidental to the main
object.”
99. In Bar Council of Maharashtra (supra) this court considered whether a bar
council, constituted under the Advocates Act, 1961, performed activities that
were charitable in nature; it was held that the statute obliged several activities
whose dominant object was advancement of public utility, without profit motive.
This court held that the provisions of the Act
“enjoined upon avowedly with the objective of protecting the litigating public
from unscrupulous professionals by taking them to task for any misconduct
on their part; it is also one of the obligatory functions of a State Bar Council
to promote and support measures for law reform as also to conduct law
seminars and organise talks on legal topics by eminent jurists, obviously with
a view to educate the general public, the function prescribed by Clause (eee)
is obviously charitable in nature, the same being to organise legal aid to the
poor. Amongst these various obligatory functions one under Clause (d) is to
safeguard the rights, privileges and interests of the advocates on its roll and
it is difficult to regard it as a primary or dominant function or purpose for
which the body is constituted. Even this function apart from securing speedy
discharge of obligations by the litigants to the lawyers ensures maintenance
of high professional standards and independence of the Bar which are
101 1981 (3) SCR 489
59
necessary in the performance of their duties to the society. In other words, the
dominant purpose of a State Bar Council as reflected by the various
obligatory functions is to ensure quality service of competent lawyers to the
litigating public, to spread legal literacy, promote law reforms and provide
legal assistance to the poor while the benefit accruing to the lawyer-members
is incidental…”
100. The view that prevailed, after the decision in Surat Art Silk (supra),
therefore, was that so long as the “dominant” object of a trust was charitable, and
it did not essentially involve in business or commercial activity, the generation of
profits, or surpluses by it, through activities, incidental to that main or dominant
activity, did not undermine its charitable purpose, as long as the surpluses or
profits, were used for the advancement of an object of general public utility.
101. An interesting detail, is that the old Act did not define “charitable purpose”
restrictively, in the manner that the IT Act did, when enacted, in 1961. This lent
a fair degree of interpretive flexibility, to the courts, to decide whether a
commercial or business element, could be interwoven with a charitable object.
The amendment of 1953 ensured that income “applied or accumulated for
application to such .. 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…”
102 could not
be included as taxable income of any charitable organization. This provision is a
precursor for Section 11 under the IT Act. In other words, the structure of the old
Act did not prohibit the carrying on of business; it spelt out a condition that any
income derived from business “carried on in the course of the actual carrying
out of a primary purpose of the institution” if applied for charitable purposes,
was exempt.
102. The second aspect is that Surat Art Silk (supra), was rendered in the context
of Section 2(15) of the IT Act, as it stood originally. However, by the Taxation
Laws Amendment Act, 1975 (w.e.f. 01.04.1977), Section 13(1)(bb) was inserted.
102 Section 4(3)(i) of the old IT Act.
60
That provision excluded the operation of Sections 11 and 12 (under which income
of charities were entitled to be exempted) in the case of income derived from
business by charities engaged in medical relief, education and relief to the poor,
unless the business fulfilled a condition:
“(bb) in the cases of a charitable trust or institution for the relief of the
poor, education or medical relief, which carries on any business, any
income derived from such business, unless the business is carried on in the
course of the actual carrying out of a primary purpose of the trust or
institution;"
103. The interpretation in Surat Art Silk (supra), obviously could not have been
affected, in the light of a subsequent amendment; however, what is of significance
is that with effect from 01.04.1977, the condition of actual carrying on a primary
purpose of the trust while conducting business was visualised only in the case of
trusts involved in relief of the poor, education or medical relief. The majority
judgment in Surat Art Silk (supra) recognized this:
“8. […] Where therefore, there is a charitable trust or institution falling
within any of the first three categories of charitable purpose set out in Section
2 Clause (15) and it carries on business which is held by it under trust for its
charitable purpose, income from such business would not be exempt by
reason of Section 13(1)(bb). Section 11 Sub-section (4) would, therefore, have
no application in case of a charitable trust or institution falling within any of
the first three heads of 'charitable purpose'.”
Yet, the court enunciated and applied the ‘predominant object’ test.103 The
conscious omission of the last object, i.e., the GPU category, in the newly inserted
13(1)(bb), therefore, meant that when those trusts, while carrying out the object
of advancement of general public utility, had to conduct of business, the income
was to be taxed (because the main provision, under Section 13(1) excluded the
operation of Sections 11 and 12).
104. The next significant change, which occurred was with the Finance Act,
1983 (w.e.f. 01.04.1984). This amendment:
103 See para 19 of Surat Art Silk (extracted above at paragraph 18 of this judgment).
61
(a) omitted the restrictive words under Section 2(15) i.e. “not involving
the carrying on of any activity for profit”
(b) omitted Section 13(1)(bb)
(c) Section 11(4A) was inserted104, by which - in relation to charities set up
with the object of general public utilities, “business” could be “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 account are maintained by the trust or institution in
respect of such business”.
105. It is therefore clear that after 1 April, 1984, the statute did not contain any
restriction as to the nature of activity that could be carried on by GPU category
charity. Furthermore, the condition in Section 13(1)(bb) - which applied to other
kinds of trusts, i.e., that their incomes could be exempt under Section 11 to the
extent they arose out of business, if the business was “in the course of the actual
carrying out of a primary purpose of the trust”- was deleted. On the other hand,
the wording of Section 11(4A) did seem to indicate that business activity was
permissible if the objects of the trust were wholly charitable, and such business
were to be carried on by its beneficiaries. This legal position continued, till the
amendments in question were carried out, in relation to Section 2(15) in 2008.
106. Section 2 begins with the expression “unless the context otherwise
requires”- as a preface to every expression which is sought to be defined, under
the IT Act. The 1922 Act did not contain any words of restriction, in the definition
104 "(4A) Sub-section (1) or sub-section (2) or sub-section (3) or sub-section (3A) shall not apply in relation to
any income, being profits and gains of business, unless –
(a) the business is carried on by a trust wholly for public religious purposes and the business consists of
printing and publication of books or publication of books or is of a kind notified by the Central Government in
this behalf in the Official Gazette; or
(b) the business is carried on by an institution wholly for charitable purposes and the work in connection with
the business is mainly carried on by the beneficiaries of the institution, and separate books of account are
maintained by the trust or institution in respect of such business. …"
62
clause. The IT Act, however, defined charitable purpose - at the outset,
restrictively, and then, substantively enacted provisions that give effect to
Parliamentary intent. Section 10 (23C)(iv) exempts any “income” of “any other
fund or institution established for charitable purposes which may be approved by
the prescribed authority, having regard to the objects of the fund or institution
and its importance throughout India or throughout any State or States” from
taxation.
A. Aids to interpretation
(i) History of the legislation
107. The amendments (i.e. Finance Act 2008, Finance Act 2009, Finance Act
2012 and Finance Act 2015) do not throw light – by way of statement of objects
and reasons or notes on clauses. The court, therefore would have to resort to the
surrounding circumstances that led to the amendment.
108. The words of a statute are to be construed in their terms, according to the
circumstances in which they occur. At the same time, there is some authority for
the proposition that statutes – particularly amending provisions, may be
considered in the light of the previous history of the legislation. Justice Cardozo
in Duparquet Co. v. Evans105 said that in questions relating to construction,
"history is a teacher that is not to be ignored”. In a similar vein, Chief Judge
Learned Hand said that “statutes always have some purpose or object to
accomplish, whose sympathetic and imaginative discovery is the surest guide to
their meaning”
106
.
109. Some decisions of this Court have highlighted this aspect. In Bhuwalka
Steel Indus. Ltd. & Ors. v. Bombay Iron and Steel Labour Bd. & Ors.
107 this court
observed that
105 297 U.S. 216 (1936)
106 Cabell v. Markham (1945) 148 F 2d 737
107 2009 (16) SCR 618
63
“The legislative intent of the enactment may be gathered from several sources
which are, from the statute itself, from the preamble to the statute, from the
Statement of Objects and Reasons, from the legislative debates, reports of
committees and commissions which preceded the legislation and finally from
all legitimate and admissible sources from where they may be allowed.
Reference may be had to legislative history and latest legislation also. But,
the primary rule of construction would be to ascertain the plain language
used in the enactment which advances the purpose and object of the
legislation...”
110. In Chief Justice of Andhra Pradesh & Ors. v. L.V.A. Dixitulu & Ors.
108
again, the court held that resort to the history of the legislation is legitimate, for
interpreting a provision:
“..in order to ascertain the true meaning of the terms and phrases employed,
it is legitimate for the Court to go beyond the arid literal confines of the
provision and to call in aid other well-recognised rules of construction, such
as its legislative history, the basic scheme and framework of the statute as a
whole, each portion throwing light on the rest, the purpose of the legislation,
the object sought to be achieved, and the consequences that may flow from
the adoption of one in preference to the other possible interpretation.”
111. Other decisions109 have also commented on the use of history of the
legislation as a tool for its construction. It is, therefore, clear that courts can look
at the previous history of the statute, and the changes it underwent to discern what
is intended by the lawmakers when an amendment is introduced, or a new law
enacted. In light of these factors, it would therefore, also be useful for the court
to consider the background which led to the amendment – firstly in 2008 and
thereafter in 2012 and 2015, seeking to restrict the nature of activities that a GPU
category charity can legitimately undertake.
(ii) Other extrinsic aids to construction of the statute
(a)Speeches in Parliament
112. Speeches made in the legislature or Parliament, can be looked into for
throwing light on the rationale for an amendment. There is some authority for
108 1979 (1) SCR 26
109 Lohia Machines Ltd. and Ors. v. Union of India & Ors 1985 (2) SCR 686; Commissioner of Customs (Import),
Mumbai v. Dilip Kumar & Company & Ors 2018 (9) SCC 1
64
that proposition.110 Some light can be discerned from the statement of the finance
minister on the floor of Parliament, who answered to the criticism levelled against
the change brought about by the amendment in 2008. The finance minister
commented on the criticism levelled against the amendment to Section 2(15) in
the following words:
"I once again assure the House that genuine charitable organisations will
not in any way be affected. The CBDT will, following the usual practice,
issue an explanatory circular containing guidelines for determining
whether an entity is carrying on 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. Whether the purpose is a charitable
purpose will depend on the totality of the facts of the case. Ordinarily,
Chambers of Commerce and similar organisations rendering services to
their members would not be affected by the amendment and their activities
would continue to be regarded as "advancement of any other object of
general public utility".”
(b)Departmental circulars
113. Learned counsel for the assessees relied upon Circular No. 1/2009 dated
27.03.2009 and Circular No. 11/2008 dated 19.12.2008 issued by the Central
Board of Direct Taxes. The relevant part of Circular No. 11/2008 reads as
follows:
“3. The newly inserted proviso to section 2(15) will apply only to entities
whose purpose is ‘advancement of any other object of general public utility’
i.e. the fourth limb of the definition of ‘charitable purpose’ contained in
section 2(15). Hence, such entities will not be eligible for exemption under
section 11 or under section 10(23C) of the Act if they carry on commercial
110 State of West Bengal v. Union of India 1964 (1) SCR 371:
“A statute, as passed by Parliament, is the expression of the collective intention of the legislature as a whole, and
any statement made by an individual, albeit a Minister, of the intention and objects of the Act cannot be used to
cut down the generality of the words used in the statute.”
At the same time, later decisions have relaxed the rigor of this rule. In K.P. Varghese v. Income-tax Officer, 1982
(1) SCR 629, this court, referring to the budget speech of the Minister stated:
“Now it is true that the speeches made by the Members of the Legislature on the floor of the House when a Bill
for enacting a statutory provision is being debated are inadmissible for the purpose of interpreting the statutory
provision but the speech made by the Mover of the Bill explaining the reason for the introduction of the Bill can
certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and
the object and purpose for which the legislation is enacted.”
Other decisions following the same approach are Ramesh Yeshwant Prabhoo v. Prabhakar Kashinath Kunte 1995
(Supp 6) SCR 371; Novartis AG v. Union of India (2013) 6 SCC 1; Surana Steels (P) Ltd. v. Commissioner of
Income Tax 1999 (2) SCR 589 and Kalpana Mehta & Ors. v. Union of India (UOI) and Ors 2017 (7) SCC 295.
65
activities. Whether such an entity is carrying on an activity in the nature of
trade, commerce or business is a question of fact which will be decided based
on the nature, scope, extent and frequency of the activity.
3.1. There are industry and trade associations who claim exemption from tax
u/s 11 on the ground that their objects are for charitable purpose as these are
covered under ‘any other object of general public utility’. Under the principle
of mutuality, if trading takes place between persons who are associated
together and contribute to a common fund for the financing of some venture
or object and in this respect have no dealings
or relations with any outside body, then any surplus returned to the persons
forming such association is not chargeable to tax. In such cases, there must
be complete identity between the contributors and the participants.
Therefore, where industry or trade associations claim both to be charitable
institutions as well as mutual organizations and their activities are restricted
to contributions from and participation of only their members, these would
not fall under the purview of the proviso to section 2(15) owing to the
principle of mutuality. However, if such organizations have dealings with
non-members, their claim to be charitable organizations would now be
governed by the additional conditions stipulated in the proviso to section 2
(15).”
114. Circular No. 1/2009 dated 27.03.2009 contains explanatory notes to
provisions of the Finance Act, 2008. It inter alia reads as follows:
“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. 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. Scope of this
amendment has further been explained by the CBDT vide its circular
no.11/2008 dated 19th Dec 2008.”
66
115. Senior counsel appearing for the assessees relied on Section 119 of the IT
Act as well as decisions of this court, reported as Navnit Lal Jhaveri (supra) and
UCO Bank Calcutta (supra) and argued that departmental circulars are binding
upon tax administrators, and should be legitimately considered as aids of
construction. This was in support of their reliance on the circulars in the present
case (No.11/2008 and No. 1/2009).
116. This court in Navnit Lal Jhaveri (supra) considered Sections 2(6A)(e) and
12(1B) of the IT Act which were introduced by the Finance Act, 15, 1955 (w.e.f.
01.04.1955). As a result of these amendments, the combined effect of the two
provisions was that three kinds of payments made to shareholders companies to
which those applied, were treated as taxable dividend to the extent of the
accumulated profits held by the company. The provision was challenged. It was
noticed that while introducing the amendment, the Finance Minister assured that
outstanding loans and advances – otherwise liable to taxation as dividends in AY
1955-56, would not be subjected to tax if it were shown that they had been
genuinely refunded to the respective companies before 30.06.1955. The
government felt that unless such a step was taken, the operation of Section 12(1B)
would lead to extreme hardship, as it would cover the aggregate of all outstanding
loans of past years and could have led to unreasonably high liability on
shareholders to whom the loans might have been advanced. A circular [No.
20(XXI-6) /55] was issued by the Central Board of Revenue on 10.05.1955. The
court, in that context, observed that:
“It is clear that a circular of the kind which was issued by the Board would
be binding on all officers and persons employed in the execution of the Act
under s. 5(8) of the Act. This circular pointed out to all the officers that it
was likely that some of the companies might have advanced loans to their
shareholders as a result of genuine transactions of loans, and the idea was
not to the effect such transactions and not to bring them within the mischief
of the new provision.
The officers were, therefore, asked to intimate to all the companies that if the
loans were repaid before the 30th June, 1955, in a genuine manner, they would
not be taken into account in determining the tax liability of the shareholders
to whom they may have been advanced. In other words, past transactions
which would normally have attracted the stringent provisions of s. 12(1B) as
67
it was introduced in 1955, were substantially granted exemption from the
operation of the said provisions by making it clear to all the companies and
their shareholders that if the past loans were genuinely refunded to the
companies, they would not be taken into account under s. 12(1B). Section
12(1B) would, therefore, normally apply to loans granted by the companies,
to their respective shareholders with full notice of the provisions prescribed
by it.”
117. This court ultimately upheld the amendments. As is evident, the judgment
noticed that the circular sought to soften the rigors of the otherwise harsh
consequence of immediate application of the amendment. There was nothing in
the circular to make it applicable for all times to come. It was more in the nature
of the government issuing a temporary suspension of operation of the substantive
provision, introduced by the amendment.
118. In UCO Bank, Calcutta (supra), this court had to deal with circulars issued
under Section 145 regarding the method of accounting to be followed, in the
context of bank loans to be written off, when an assessee was following the
mercantile system (of accounting). The court inter alia, held that under Section
119 (2) of the IT Act, the Central Board of Direct Taxes is empowered, for proper
and efficient management of assessment and collection of revenue to issue
general or special orders in respect of any class of incomes or class of cases
setting forth directions or instructions, not being prejudicial to assessees, as the
guidelines, principles or procedures to be followed in the work relating to
assessment. The court held that the
“9. […] The Board thus has power, inter alia, to tone down the rigour of the
law and ensure a fair enforcement of its provisions, by issuing circulars in
exercise of its statutory powers under Section 119 of the Income-tax Act
which are binding on the authorities in the administration of the Act. Under
Section 119(2)(a), however, the circulars as contemplated therein cannot be
adverse to the assessee. Thus, the authority which wields the power for its
own advantage under the Act is given the right to forego the advantage when
required to wield it in a manner it considers just by relaxing the rigour of
the law or in other permissible manners as laid down in Section 119. The
power is given for the purpose of just, proper and efficient management of
the work of assessment and in public interest.”
68
119. The view expressed in Navnit Lal Jhaveri (supra), and later elaborated in
UCO Bank (supra) appears to have found resonance in other decisions111 of this
court. A recent instance where this court took aid of explanatory circulars is in
CIT v. Vatika Township112 when after holding that the amendment in question
applied prospectively, the court also supported that holding by citing the
revenue’s understanding about such prospective application, in a circular. What
is of note in that judgment, is that the question of whether circulars or explanatory
notes issued by the executive are binding aids of construction was not discussed;
more importantly, the court first interpreted the statute, in its own terms, and then
cited the circular.
120. That circulars are per se not binding upon courts, in regard to interpretation
of a statutory provision and, at best are guides or aid to interpretation for
departmental authorities, who are bound to take them into account, was pithily
stated in Keshavji Ravji & Co. and Ors. v. Commissioner of Income Tax113 where
the court observed as follows:
“This contention and the proposition on which it rests, namely, that all
circulars issued by the Board have a binding legal quality incurs, quite
obviously, the criticism of being too broadly stated. The Board cannot
preempt a judicial interpretation of the scope and ambit of a provision of the
'Act' by issuing circulars on the subject. This is too obvious a proposition to
require any argument for it. A circular cannot even impose on the tax payer
a burden higher than what the Act itself on a true interpretation envisages.
The task of interpretation of the laws is the exclusive domain of the courts.
However, this is what Sri Ramachandran really has in mind - circulars
beneficial to the assessees and which tone down the rigour of the law issued
in exercise of the statutory power under Section 119 of the Act or under
corresponding provisions of the predecessor Act are binding on the
authorities in the administration of the Act. The Tribunal, much less the High
Court, is an authority under the Act. The circulars do not bind them. But the
benefits of such circulars to the assessees have been held to be permissible
even though the circulars might have departed from the strict tenor of the
statutory provision and mitigated the rigour of the law. But that is not the
same thing as saying that such circulars would either have a binding effect in
the interpretation of the provision itself or that the Tribunal and the High
Court are supposed to interpret the law in the light of the circular. There is,
111 Ellerman Lines Ltd. v. Commissioner of Income tax 1972 (2) SCR 168; K.P. Verghese v. Commissioner of
Income Tax 1982 (1) SCR 629; Union of India v. Azadi Bachao Andolan 2003 (Supp 4) SCR 222
112 (2015) 1 SCC 1
113 1992 (2) SCC 231
69
however, support of certain judicial observations for the view that such
circulars constitute external aids to construction.”
121. This view was accepted in Commissioner of Customs v. Indian Oil
Corporation114
, which articulated the position with some degree of clarity.
Commenting on Navnit Lal Jhaveri (supra) and other decisions, it was observed
that:
“30. No proposition was laid down in that case that even if the circular was
clearly contrary to the provisions of the Act it should prevail, On the other
hand, the learned Judges were inclined to view the circular as granting the
benefit of exemption from the operation of the impugned provisions subject
to fulfilment of certain conditions. Navnit Lal's case was referred to and
construed in two cases decided by Benches of two learned Judges. The first
one was the case of Ellerman Lines Ltd. v. Commissioner of Income Tax,
West Bengal [1971]82ITR913(SC) and the other is K.P. Varghese v. I.T.
Officer, Ernakulam [1981]131ITR597(SC) . In both these cases it was
assumed that Navnit Lal's case was an authority for the proposition that even
if the directions given in the circular clearly deviate from the provisions of
the Act, yet, the Revenue is bound by it. These three decisions were
repeatedly referred to and relied on in the subsequent decisions in which the
issue arose as regards the binding nature of the circulars either under the
Income Tax Act or under the Central Excise Act. In between, there was the
three Judge Bench decision in Sirpur Paper Mills Ltd. v. Commissioner of
Wealth Tax [1970]77ITR6(SC) in which Section 13 of the Wealth Tax Act
corresponding to Section 5(8) of the Income Tax Act, 1922 fell for
consideration. This Court took the view that the instructions issued by the
Board may control the exercise of the power of the departmental officials in
matters administrative but not quasi-judicial. There is yet another decision
of a three Judge Bench which seems to make a dent on the weight of the
proposition that the circulars of the Board, even if they are plainly contrary
to the provisions of the Act, should be given effect to and binding on the
authorities concerned in the administration of the Act. That is the case of
Keshavji Ravji & Co. v. I.T. Commissioner [1990] 183 ITR 1(SC)”
122. In view of a conflict between decisions, on the binding nature of circulars
issued by the Board (in the context of decisions of authorities dealing with
indirect taxation issues) this court, by a five-judge decision, in Ratan Melting and
Wire Industries (supra) held that
“6. Circulars and instructions issued by the Board are no doubt binding in
law on the authorities under the respective statutes, but when the Supreme
Court or the High Court declares the law on the question arising for
consideration, it would not be appropriate for the Court to direct that the
114 2004 (2) SCR 511
70
circular should be given effect to and not the view expressed in a decision of
this Court or the High Court. So far as the clarifications/circulars issued by
the Central Government and of the State Government are concerned they
represent merely their understanding of the statutory provisions. They are
not binding upon the court. It is for the Court to declare what the particular
provision of statute says and it is not for the Executive. Looked at from
another angle, a circular which is contrary to the statutory provisions has
really no existence in law.”
123. In the opinion of this court, the views expressed in Keshavji Ravji, Indian
Oil Corporation and Ratan Melting and Wire Industries (though the last decision
does not cite Navnit Lal Jhaveri), reflect the correct position, i.e., that circulars
are binding upon departmental authorities, if they advance a proposition within
the framework of the statutory provision. However, if they are contrary to the
plain words of a statute, they are not binding. Furthermore, they cannot bind the
courts, which have to independently interpret the statute, in their own terms. At
best, in such a task, they may be considered as departmental understanding on the
subject and have limited persuasive value. At the highest, they are binding on tax
administrators and authorities, if they accord with and are not at odds with the
statute; at the worst, if they cut down the plain meaning of a statute, or fly on the
face of their express terms, they are to be ignored.
B. Interpretation of Section 2(15), the definition clause
124. Section 2 of the Income Tax Act opens with the phrase “unless the context
otherwise requires”. It has been held in S.K. Gupta & Anr. v. K.P. Jain & Anr.115
that where the definition of a term is preceded by this phrase, normally, the
definition given in the section “should be applied and given effect to but this
normal rule can be deviated if there is something in the context to show that the
definition should not be applied”. This rule was also adopted in Indira Nehru
Gandhi v. Shri Raj Narain and Anr.116 by Khanna, J and in Kalya Singh v. Genda
115 (1979) 3 SCC 54.
116 (1975) Supp. SCC 1
71
Lal and Ors117. Previously, in Vanguard Fire and Insurance Company Ltd. v. M/s.
Fraser and Ross and Anr.118, it was held that the term “unless the context
otherwise requires” implies that the word or term so defined should be applied –
subject to the context. It was held that in view of such a qualification, the Court
has not only to look at the words but also to look at the context, collocation, and
the object of such words in respect of such matters and factor the meaning to be
conveyed by the use of the words under the circumstances. Almost the same
reasoning has been echoed in N.K. Jain and Ors. v. C.K. Shah and Ors119
.
125. The importance of terms expressly defined in a statute is that they are
internal and binding aids to interpretation. The prefacing – to any definition – of
the phrase “unless the context otherwise requires” merely signifies that in case
there is anything expressly to the contrary, in any specific provision(s) in the body
of the Act, a different meaning can be attributed. However, to discern the purport
of a provision, the term, as defined has to prevail, whenever the expression is used
in the statute. This rule is subject to the exception that when a contrary intention
is plain, in particular instances, that meaning is to be given. Therefore, in the light
of the previous discussion, this court would interpret the true meaning of
“charitable purpose” after its amendment in 2008, taking into consideration the
subsequent changes.
126. As observed at the beginning of this judgment, GPU charities have been
recognized as distinct from the ‘per se categories’ of charity (education, medical
relief, relief to the poor; and later - preservation of water sheds, monuments,
environment, and yoga). The judgment of this court in Dharmadeepti (supra) has
clarified that the per se categories – are not subjected to the restrictive condition
of eschewing activities of profit. This enunciation of the principle has been
endorsed in all later decisions – starting with Surat Art Silk (supra). Therefore,
117 (1975) 3 SCR 783
118 (1960) 3 SCR 837
119 (1991) 1 SCR 938
72
the restriction imposed by Parliament against charities – prohibiting them from
carrying on activities of profit do not apply to the first six categories. Although
the occasion did not so arise in Surat Art Silk (supra) (since this Court was dealing
with AYs prior to 1975), the provision in Section 13(1)(bb) which prevailed then
with effect from 01.04.1977 made the position clearer in that it permitted these
per se category charities, in the course of their actual carrying on of their
activities, to earn profits. Of course, this provision was deleted from 01.04.1984.
Alongside, the restriction imposed on GPUs from engaging in activities for profit,
was also deleted.
127. As noticed in Thanthi Trust (supra), Section 11(4A) was originally
introduced with effect from 01.04.1984 and substituted w.e.f. 01.04.1991. At that
stage, the statute as it stood, did not restrict GPU category charities from carrying
on activities of profit or from carrying on business. This court nevertheless was
bound by the decision in Surat Art Silk (supra) which had ruled that:
(i) A GPU category charity with a constitution granting discretion to the
trustees to engage in charitable and non-charitable activities, could not
claim the exemption;
(ii) The main or dominant purpose of the GPU category charity had to be
essentially charitable. If it was so, and it incidentally entailed carrying
on activities that led to profit, it was entitled to exemption.
128. This court’s understanding of the law as expressed in Thanthi Trust was
therefore, coloured by the statute as it existed, and the formulation in Surat Art
Silk (supra). As a result, Thanthi Trust, interpreted Section 11(4A) in this
background and held that the assessee in that case incidentally was engaged in
activities for profit. The court was also of the opinion that Section 11(4A) was
wider than the revenue urged it to be, in that activities by way of business could
not be carried on incidentally by a Trust, which otherwise was a GPU category
trust.
73
129. As noticed earlier, between Surat Art Silk (supra) and the decisions
rendered thereafter (i.e., Bar Council of Maharashtra, Federation of Indian
Chamber of Commerce and Industries and Thanthi Trust) there were two changes
in law in 1983 w.e.f. 01.04.1984 – on the one hand deleting the restrictive words
prohibiting GPU categories from carrying on profit, and deleting Section
13(1)(bb), and introducing Section 11(4A), on the other. There was otherwise no
meaningful statutory change. The position therefore, continued as it was for about
25 years.
130. After its introduction, by amendment in 2008, Section 2(15) read as
follows:
(15) “charitable purpose” includes relief of the poor, education, medical
relief, 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;”
131. The term “in the nature of” occurring in Section 2(15) has frequently been
interpreted by this court. In G. Venkataswami Naidu v. Commissioner of Income
Tax120 the isolated transaction of sale of land was held not to be activity in the
nature of trade or business. In State of Tamil Nadu v. Burmah Shell Oil Storage
Distribution Company of India Ltd.
121 the test indicated was whether the
“frequency, volume, continuity and regularity of transactions carried on with a
profit-motive”. In State of Tamil Nadu v. Shakti Estates122
, the assessee’s
activities in leasing forest lands, clearing them, and creation of wooden sleepers,
which were sold, as well as charcoal, which was sold, in a series of “sustained,
systematic and organised activities” was held to be in the nature of business. In
120 1959 (Supp 1) SCR 646
121 1973 (2) SCR 636
122 1989 (1) SCR 408
74
Director of Civil Supplies v. Member Board of Revenue123
 this court outlined,
what would be activity in the nature of business:
“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;
there must be some real and systematic or organised course of activity or
conduct with a set purpose of making profit. To infer from a course of
transactions that it is intended thereby to carry on business ordinarily there
must exist the characteristics of volume, frequency, continuity and system
indicating an intention to continue the activity of carrying on the transactions
for a profit. But no single test or group of tests is decisive of the intention to
carry on the business. “
132. The term “in relation to” was interpreted in Renusagar Power Co. Ltd.
v. General Electric Co.124 in an arbitration clause - as follows:
“25... (2) Expressions such as “arising out of or “in respect of or “in
connection with” or “in relation to” or “in consequence of or “concerning”
or “relating to” the contract are of the widest amplitude and content..”
In Mansukhlal Dhanraj Jain v. Eknath Vithal Ogale125 this court underlined
the amplitude to the term “relating to”:
“16. It is, therefore obvious that the phrase “relating to recovery of
possession” as found in Section 41(1) of the Small Cause Courts Act is
comprehensive in nature and takes in its sweep all types of suits and
proceedings which are concerned with the recovery of possession of suit
property from the licensee and, therefore, suits for permanent injunction
restraining the Defendant from effecting forcible recovery of such possession
from the licensee-Plaintiff would squarely be covered by the wide sweep of
the said phrase.”
In Doypack System (P) Ltd. v. Union of India126
, this court ruled that the
expression “in relation to” is broad and is akin to the “concerning with” and
“pertaining to”; and is also expansive. The court observed:
“50. The expression “in relation to” (so also “pertaining to”), is a very broad
expression which presupposes another subject matter. These are words of
comprehensiveness which might have both direct significance as well as
indirect significance depending on the context [internal citation omitted].
123 1967 (3) SCR 778
124 1985 (1) SCR 432
125 1995 (1) SCR 996
126 1988 (2) SCC 299
75
Assuming that the investments in shares and in lands do not form part of the
undertaking but are different subject matters, even then these would be
brought within the purview of the vesting by reason of the above expressions.
In this connection reference may be made to 76 Corpus Juris Secundum at
pages 620 and 621 where it is stated that the term “relate” is also defined as
meaning to bring into association or connection with. It has been clearly
mentioned that “relating to” has been held to be equivalent to or synonymous
with as to “concerning with” and “pertaining to”. The expression “pertaining
to” is an expression of expansion and not of contraction.”
133. The position, therefore, with respect to what kind activities GPU charities
could legitimately undertake, was in a state of flux till 2015. However, the
amendments cumulatively point to prohibitions that were constant:
(1)the prohibition applicable to such charities involved in carrying on
activities “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”
(2) “irrespective of the nature of use or application, or retention, of the
income from such activity” (i.e. activity in the nature of trade, commerce
or business for a cess, fee or other consideration).
134. By retrospective amendment, in Section 2(15), after the proviso, a second
proviso was inserted with effect from 01.04.2009 .-
"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;";
With the introduction of the second proviso, the resulting situation was that the
first proviso (of exclusion of income through an activity as referred to) was
inapplicable if the aggregate value of the receipts of such activity did not exceed
₹10,00,000, and later by Finance Act, 2012 – this was enhanced to ₹25,00,000.
135. The next important change took place through the Finance Act, 2015,
which, w.e.f. 01.04.2016 substituted the two provisos to Section 2(15) with the
following proviso:
76
“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;”
136. The limited relief, given by the second proviso, to GPU charities (for the
period 2009-2015) was that in case such GPU category charities did carry on
activities undertaken in the course of actual carrying out of their GPU objects
that were in the nature of trade, commerce or business, or rendered any service in
relation to trade, business, etc., and collected fee, cess, or other consideration,
such income could still be exempt, if it did not exceed ₹10,00,000 (and later,
₹25,00,000). By the amendment of 2015, the second proviso was deleted and two
conditions were introduced, with respect to permissibility of carrying on trade,
commerce, etc:
(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 percent of the total receipts, of the
trust or institution undertaking such activity or activities, of that
previous year.
137. Having thus far discussed a nature of the changes to the term “charitable
purpose” and how judicial thinking has shaped it, this court would now explore
the all important question of the scope of the term of “any other object generally
public utility” not being charitable purpose “if it involves the carrying on of any
activity in the nature of trade, commerce or business or any activity of rendering
77
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.”
138. Parliamentary endeavour, was to alter the regime applicable to taxation of
GPU category charities, under the IT Act. The absolute bar imposed on GPU
charities from carrying on activities in the nature of trade, commerce or business,
or of rendering any service in relation to any trade, commerce or business, for a
cess or fee or any other consideration, evidences this intent. The original Section
2(15) did not allude to trade, commerce or business, or any service in relation to
such activities. It only enjoined the GPU charities from involving themselves
from carrying on of any activity for profit127 (which was interpreted in Surat Art
Silk). This substantial change brought about by the amendments of 2008 -2012
and 2015 is the prohibition from engaging in any kind of activity in the nature of
business, commerce, or trade or any rendering any service in relation thereto, and
earning income by the way of cess, fee or consideration. In the opinion of this
court, the express deletion of the reference to ‘activity for profit’ on the one hand,
and the enactment of an expanded list of what cannot be done by GPU charities
if they are to retain their characteristic as charities, is an emphatic manner in
which Parliament wished to express itself.
139. Counsel on both sides went to great lengths and cited several judgments
for the proposition that “trade or business” are terms which imply profit-making.
They relied on Khoday Distilleries (supra); M/s. Raipur Manufacturing (supra);
Board of Trustees of the Port of Madras (supra), and Physical Research
Laboratory v. K. G. Sharma128
. It was contended by the revenue, that the
reference to terms “business, trade or commerce” and “service in relation to”
such activities are meant to imply that profit motive should be completely absent.
127 “…the advancement of any other object of general public utility not involving the carrying on of any activity
for profit"
128 (1997) 4 SCC 257.
78
At the same time - on behalf of the assessees, it was contented that if the
proscribed activities i.e., business, commerce or trade or service in relation to
such activities - is not the main or dominant object of the GPU charity, any
incidental involvement in such activities is permissible. Counsel on behalf of
many assessees urged that some of them are statutory corporations charged with
developing housing industrial infrastructure sector, regulation of professions
(such as chartered accountants, etc.). It was underlined that such corporations are
agencies of the state, recognized as “State” under Article 12 of the Constitution,
and carry out the essential purposes for which they were set up, which otherwise
state departments would have been expected to carry out. It was then emphasized
that the activities of such corporations cannot be characterized as motivated by
profit- rather their essential purposes are to achieve objects of general public
utility.
140. In Town Investments v. Department of Environment129
, it was remarked
that “business” is an ‘etymological chameleon’. In NDMC (supra) - while dealing
with the question of immunity of states and state corporations, municipal
corporations and local authorities from union taxation, this court (in a nine-judge
bench composition) interpreted Article 289 of the Constitution130 and discussed
the nature of the activities that could be carried on by state or state agencies:
“Section 155(1) which by its own force levied taxes upon the trading and
business operations carried on by the Provincial Governments did not either
define the said expressions or specify which trading or business operations
are subject to taxation. On this account, the proviso was not and could not
be said to have been, ineffective or unenforceable. It was effective till 26-1-
129 1977 1 ALLER 813
130 289. Exemption of property and income of a State from Union taxation.—(1) The property and income of a
State shall be exempt from Union taxation.
(2) Nothing in clause (1) shall prevent the Union from imposing, or authorising the imposition of, any tax to
such extent, if any, as Parliament may by law provide in respect of a trade or business of any kind carried on by,
or on behalf of, the Government of a State, or any operations connected therewith, or any property used or
occupied for the purposes of such trade or business, or any income accruing or arising in connection therewith.
(3) Nothing in clause (2) shall apply to any trade or business, or to any class of trade or business, which
Parliament may by law declare to be incidental to the ordinary functions of government.
79
1950. Clause (2) of Article 289 also similarly does not define or specify —
nor does it require that the law made thereunder should so define or specify.
It cannot be said that unless the law made under and with reference to clause
(2) specifies the particular trading or business operations to be taxed, it
would not be a law within the meaning of clause (2). Coming back to the
language of clause (2), a question is raised, why does the proviso speak of
taxation in respect of trade or business when the main limb of sub-section
(1) speaks only of taxes in respect of lands or buildings and income? Is the
ambit of proviso wider than the main limb? Is it an independent provision of
a substantive nature notwithstanding the label given to it as a proviso? Or is
it only an exception? It is asked. We are, however, of the considered opinion
that it is more important to give effect to the language of and the intention
underlying the proviso than to find a label for it. It is clarificatory in nature
without a doubt; it appears to be more indeed. It is concerned mainly with
the “income” (of Provincial Governments) referred to in the main limb of
sub-section (1). It speaks of tax on the “lands or buildings” in that context
alone, as we shall explain in the next paragraph. The idea underlying the
proviso is to make it clear that the exemption of income of Provincial
Government operates only where the income is earned or received by it as a
Government; it will not avail where the income is earned or received by the
Provincial Government on account of or from any trade or business carried
on by it — that is a trade or a business carried on with profit motive. In the
light of the language of the proviso to Section 155 and clause (2) of Article
289, it is not possible to say that every activity carried on by the Government
is governmental activity. A distinction has to be made between governmental
activity and trade and business carried on by the Government, at least for
the purposes of this clause. It is for this reason, we say, that unless an activity
in the nature of trade and business is carried on with a profit motive, it would
not be a trade or business contemplated by clause (2). For example, mere
sale of government properties, immovable or moveable, or granting of leases
and licences in respect of its properties does not amount to carrying on trade
or business. Only where a trade or business is carried on with a profit motive
— or any property is used or occupied for the purpose of carrying on such
trade or business — that the proviso [or for that matter clause (2) of Article
289] would be attracted. Where there is no profit motive involved in any
activity carried on by the State Government, it cannot be said to be carrying
on a trade or business within the meaning of the proviso/clause (2), merely
because some profit results from the activity [ For example, almost every
State Government maintains one or more guest houses in Delhi for
accommodating their officials and others connected with the affairs of the
State. But, when some rooms/accommodation are not occupied by such
persons and remain vacant, outsiders are accommodated therein, though at
higher rates. This activity cannot obviously be called carrying on trade or
business nor can it be said that the building is used or occupied for the
purpose of any trade or business carried on by the State Government.] . We
may pause here a while and explain why we are attaching such restricted
meaning to the words “trade or business” in the proviso to Section 155 and
in clause (2) of Article 289. Both the words import substantially the same
idea though, ordinarily speaking, the expression “business” appears to be
wider in its content. The expression, however, has no definite meaning; its
80
meaning varies with the context and several other factors. … Having regard
to the context in which the words “trade or business” occur — whether in
the proviso to Section 155 of the Government of India Act, 1935 or in clause
(2) of Article 289 of our Constitution — they must be given, and we have
given, a restricted meaning, the context being levy of tax by one unit of
Federation upon the income of the other unit, the manifold activities carried
on by Governments under our constitutional scheme, the necessity to
maintain a balance between the Centre and the States and so on.”
(emphasis supplied)
141. From NDMC (supra), it is clear that not every state activity resembling
commerce can be considered per se exempt from union taxation, in the context
of Article 289. The court also emphasized that mere sale or lease of government
property does not imply trade or business. The crucial or determinative element
in the venture, so to say, is whether performance of a function is actuated by profit
motive.
142. What then is the true meaning of the expressions “fee, cess or
consideration”? The careful analysis of the amended proviso to Section 2(15),
reveal that the prohibition applies in a four-fold manner-
(a) The bar to engaging in trade, commerce or business,
(b)The bar to providing any service in relation to trade, commerce or
business,
(c) wherein “for a fee, cess or any other consideration” is the
controlling phrase for both (a) and (b) (which are collectively
referred to as “prohibited activities” for brevity)
(d)irrespective of the application of the income derived from such
‘prohibited activities’.
143. The impermissibility of any trade, or commercial activity or service, and
income, from them, was intended to be conveyed through the prohibition, in the
first part of the definition of GPU charities. The necessary implication which
arises is that income (received as fee, cess, or any other consideration) derived
from such ‘prohibited activities’ is necessarily motivated by profit. The ordinary
meaning of fee or consideration would be synonymous with something of value,
81
usually in monetary terms. However, the use of the expression “cess” facially
lends a different colour to all the three expressions.
144. “Fee, cess and any other consideration” has to receive a purposive
interpretation, in the present context. If fee or cess or such consideration is
collected for the purpose of an activity, by a state department or entity, which is
set up by statute, its mandate to collect such amounts cannot be treated as
consideration towards trade or business. Therefore, regulatory activity,
necessitating fee or cess collection in terms of enacted law, or collection of
amounts in furtherance of activities such as education, regulation of profession,
etc., are per se not business or commercial in nature. Likewise, statutory boards
and authorities, who are under mandate to develop housing, industrial and other
estates, including development of residential housing at reasonable or subsidized
costs, which might entail charging higher amounts from some section of the
beneficiaries, to cross-subsidize the main activity, cannot be characterized as
engaging in business. The character of being ‘state’, and such corporations or
bodies set up under specific laws (whether by states or the centre) would,
therefore, not mean that the amounts are ‘fee’ or ‘cess’ to provide some
commercial or business service. In each case, at the same time, the mere
nomenclature of the consideration being a “fee” or “cess”, is not conclusive. If
the fee or cess, or other consideration is to provide an essential service, in larger
public interest, such as water cess or sewage cess or fee, such consideration,
received by a statutory body, would not be considered “trade, commerce or
business” or service in relation to those. Non-statutory bodies, on the other hand,
which may mimic regulatory or development bodies - such as those which
promote trade, for a section of business or industry, or are aimed at providing
facilities or amenities to improve efficiencies, or platforms to a segment of
business, for fee, whether charged by subscription, or specific fee, etc, may not
be charitable; when they claim exemption, their cases would require further
scrutiny.
82
145. This Court has in some decisions considered the term "cess". In Shinde
Brothers Etc. v. Deputy Commissioner, Raichur and Ors.
131
, Justice M.
Hidyatullah, (though his was a dissenting judgment, yet no contrary opinion was
expressed by majority in regard to “cess”) said that:
“... The word "cess" is used in Ireland and is still in use in India although the
word rate has replaced it in England. It means a tax and is generally used
when the levy is for some special administrative expense which the name
(health cess, education cess, road cess etc.) indicates. When levied as an
increment to an existing tax, the name matters not for the validity of the cess
must be judged of in the same way as the validity of the tax to which it is an
increment. By Schedule A(1) read with Section 3 of the Act, it is collected as
an additional levy with a tax, which, as described in Schedule A, is
undoubtedly one within the powers of the State Legislature and has been so
even prior to the Constitution....”
146. The seven-judge bench judgment of this court in India Cement Ltd. & Ors.
v. State of Tamil Nadu and Ors.
132
, approved the definition propounded by
Hidayatulla, J. In Vijayalashmi Rice Mill and Ors. v. Commercial Tax Officers,
Palakol & Ors133 this court observed that
“13. Hence ordinarily a cess is also a tax, but is a special kind of tax.
Generally tax raises revenue which can be used generally for any purpose by
the State. For instance, the income tax or excise tax or sales tax are taxes
which generate revenue which can be utilised by the Union or the State
Governments for any purpose e.g. for payment of salary to the members of the
armed forces or civil servants, police, etc. or for development programmes,
etc. However, cess is a tax which generates revenue which is utilised for a
specific purpose. For instance, health cess raises revenue which is utilised for
health purposes e.g. building hospitals, giving medicines to the poor, etc.
Similarly, education cess raises revenue which is used for building schools or
other educational purposes.”
147. The expression "cess", therefore, implies a tax or impost levied for some
special purpose, which may be levied as an increment to an existing tax. The term
“fee”, to some extent, has a similar meaning. In The Commissioner of Income
Tax, Lucknow v. U.P. Forest Corporation134 this court, after considering other
131 1967 (1) SCR 548
132 1989 (Supp 1) SCR 692
133 (2006) 6 SCC 763
134 1998 (2) SCR 22
83
previous decisions, held that exaction, through process of law, of amounts may
be called “fee” but broadly are taxes:
“compulsory exaction's of money imposed for public purpose and requiring
no consideration to sustain it, but in a broad generic sense as to also include
fees levied essentially for services rendered. It is now well recognised that
there is no generic difference between a tax and a fee; both are compulsory
exaction of money by public authority.”
148. At the same time, there is also authority135 for the proposition that charges
(which may be termed as “fee” in given statutes) collected by local or municipal
authorities, for supply of water, for sewerage, etc., are not “taxes”- they form
consideration for the specific services, by the concerned local authority.
149. The term “consideration” however is broader. The plain meaning is a
monetary payment, for something obtained, in the form of goods, or services.
In Commissioner of Central Excise, Mumbai v. Fiat India (P) Ltd. & Ors136 this
court explained the meaning of that term:
“Consideration means something which is of value in the eyes of law,
moving from the Plaintiff, either of benefit to the Plaintiff or of detriment to
the Defendant. In other words, it may consist either in some right, interest,
profit or benefit accruing to the one party, or some forbearance, detriment,
loss or responsibility, given, suffered or undertaken by the other, as
observed in the case of Currie v. Misa (1875) LR 10 Ex. 153.
54. Webster's Third New International Dictionary (unabridged) defines,
consideration thus:
‘Something that is legally regarded as the equivalent or return given or
suffered by one for the act or promise of another.’
55. In volume 17 of Corpus Juris Secundum (p.420-421 and 425) the
import of 'consideration' has been described thus:
‘Various definitions of the meaning of consideration are to be found in the
text-books and judicial opinions. A sufficient one, as stated in Corpus Juris
and which has been quoted and cited with approval is "a benefit to the
party promising or a loss or detriment to the party to whom the promise
is made.....
135 See Union of India & Ors. v. State of U.P. & Ors. 2007(12) SCR 792; Union of India v. Purna Municipal
Corporation 1991 (Supp 1) SCR 183; Municipal Corporation, Amritsar v. Senior Superintendent of Post
Offices, Amritsar Division & Anr. 2004 (1) SCR 913.
136 2012(12) SCR 975
84
At common law every contract not under seal requires a consideration to
support it, that is, as shown in the definition above, some benefit to the
promisor, or some detriment to the promisee.’
56. In Salmond on Jurisprudence, the word 'consideration' has been
explained in the following words.
A consideration in its widest sense is the reason, motive or inducement, by
which a man is moved to bind himself by an agreement. It is for nothing
that he consents to impose an obligation upon himself, or to abandon or
transfer a right. It is in consideration of such and such a fact that he agrees
to bear new burdens or to forego the benefits which the law already allows
him.
57. The gist of the term 'consideration' and its legal significance has been
clearly summed up in Section 2(d) of the Indian Contract Act which
defines 'consideration' thus:
‘When, at the desire of the promisor, the promisee or any other person has
done or abstained from doing, or does or abstains from doing, or promises
to do or to abstain from doing, something, such act or abstinence or
promise is called a consideration to the promise.’
58. From a conspectus of decisions and dictionary meaning, the
inescapable conclusion that follows is that 'consideration' means a
reasonable equivalent or other valuable benefit passed on by the promisor
to the promisee or by the transferor to the transferee. Similarly, when the
word 'consideration' is qualified by the word 'sole', it makes consideration
stronger so as to make it sufficient and valuable having regard to the facts,
circumstances and necessities of the case.”
150. Therefore, what Parliament intended – through the amendments in question
was to proscribe, involvement or engagement of GPU charities, from any form
(“in the nature of”) of activities that were trade, business or commerce, or engage
or involve in providing services in relation to trade, business or commerce- for a
fee, cess or other consideration. The inclusion of the term “in the nature of” was
by design, to clarify beyond doubt, that not only business, trade or commerce, but
all activities in the nature of, or resembling them, were proscribed. Likewise,
service in relation to such activities, i.e., services relating, or pertaining to, such
proscribed activities, too were forbidden.
151. The reference to fee or cess, is in the opinion of the court, only to
emphasize that even a statutory consideration, for a service to business, trade or
commerce, would take the activity outside the definition of a GPU charity. The
85
sense in which the expressions “cess, fee or other consideration” are used, is that
if any amount, is received for trading, or business or commercial activity, or any
services to such activity, then, notwithstanding their nomenclature (as fee or cess,
i.e. that they are fixed under a law) the GPU charity cannot claim tax exempt
status. To bring home this even more pointedly- and underline a break from the
past, the application of such amounts (received in the course of trade, commerce,
or business, or towards services in relation thereto) would be irrelevant, as
evidenced by the term “irrespective”, in the fourth limb of reading Section 2(15).
Summation of interpretation of Section 2(15)
152. Section 2(15) - in the wake of its several amendments between 2008 and
2015 - can be juxtaposed with the interpretation of the unamended Section 2(15)
by this Court. In Surat Art Silk (supra), the principle enunciated was that so long
as the predominant object of GPU category charity is charitable, its engagement
in a non-charitable object resulting in profits that are incidental, is permissible.
The court also declared that profits and gains from such activities which were
non-charitable had to be deployed or “fed” back to achieve the dominant
charitable object.
153. The paradigm change achieved by Section 2(15) after its amendment in
2008 and as it stands today, is that firstly a GPU charity cannot engage in any
activity in the nature of trade, commerce, business or any service in relation to
such activities for any consideration (including a statutory fee etc.). This is
emphasized in the negative language employed by the main part of Section 2(15).
Therefore, the idea of a predominant object among several other objects, is
discarded. The prohibition is relieved to a limited extent, by the proviso which
carves out the condition by which otherwise prohibited activities can be engaged
in by GPU charities. The conditions are:
86
(a) That such activities in the nature of trade, commerce, business or
service (in relation to trade, commerce or business for consideration)
should be in the course of “actual carrying on” of the GPU object, and
(b)The quantum of receipts from such activities should be exceed 20% of
the total receipts.
(c) Both parts of the proviso: (i) and (ii) (to Section 2 (15)) have to be read
conjunctively-given the conscious use of “or” connecting the two of
them. This means that if a charitable trust carries on any activity in the
nature of business, trade or commerce, in the actual course of fulfilling
its objectives, the income from such business, should not exceed the
limit defined in sub-clause (ii) to the proviso.
C. Sections 10, 11, 12, 12A, 12AA and 13 of the IT Act
154. The effect of Sections 11, 12, 12A 12AA and 13 have been the subject of
certain decisions137 of this court. These decisions have noticed that Section 11
deals with income from trusts for charitable and religious purposes and sets out
which shall be subject to tax. Section 11(1) relates to application of income
towards the objects of the trust and exempts income of trusts with objects wholly
charitable or religious, or parts of income which relate to such objects. Section
11(1-A) provides for exemption of capital gains derived by trusts. Section 11(1-
B), speaks of failure to apply income as per option under Explanation (2) to
Section 11(1). Section 11(2) relates to setting apart or accumulation of income.
Section 11(3) deals with consequences of misapplication of income or improper
investment, while Section 11(3-A) relates to modification of purposes specified
in Form 10 under Section 11(2). Sections 11(4) and 11(4-A) relate to business
income of charitable trusts. Lastly, Section 11(5) provides for the prescribed
137 Commissioner of Income Tax v. Dawoodi Bohara Jamat, (2014) 16 SCC 222; S.RM.M.CT.M. Tiruppani
Trust v. Commissioner of Income Tax, (1998) 2 SCC 584
87
modes of investment in regard to the said trusts. Section 12 enacts that income of
trusts created wholly for charitable or religious purpose from voluntary
contributions would be deemed as income from the property held under such trust
for the purposes of Sections 11 and 13 of the Act. Section 12-A prescribes the
conditions for applicability of Sections 11 and 12 of the Act. It enacts two
essential conditions which are to be satisfied by a charitable or religious trust for
claiming exemption under those sections: firstly, that the person in receipt of the
income has made an application for registration of the trust on or after 01.06.2007
in the prescribed form and manner to the Commissioner and such a trust is
registered under Section 12-AA and secondly, where the total income of the trust
exceeds the maximum amount which is not chargeable to income tax in any
previous year, the accounts of the trust must be audited by a chartered accountant
and the person in receipt of the income should furnish such audit report in the
prescribed form along with the return of income. The procedure for grant (or
refusal) of registration is prescribed by Section 12AA. Section 13 enlists the
circumstances under which tax exemption is unavailable to religious or charitable
trusts otherwise falling under Sections 11 or 12. Section 13 therefore, has to be
read with the provisions of Sections 11 and 12 for deciding eligibility of a trust’s
claim for exemption.
Distinction between business held under Trust [Section 11(4)] and Trust
carrying on business [Section 11(4A)]
155. Section 11(4) applies to cases where the business undertaking itself is the
property held by a trust. Thus, where the property held in trust, or where property
settled by the donor or trust creator in favour of the trustees itself is a business
undertaking, then the income from such an undertaking is covered by Section
11(4). Section 11(4A) operates differently. It is applicable to cases where the trust
carries on a business. Section 11(4A) states that when a trust carries on a
business, unless the business is incidental or ancillary to the attainments of the
88
objectives of the trust, it would be disentitled to an exemption under Section
11(1). It imposes a further condition that separate books of accounts need to be
maintained in such cases.
156. Section 11(1) confers an exemption from tax only where the property itself
is held under a trust or other legal obligation. It does not apply to cases where a
trust or legal obligation is not created on any property, but only the income
derived from any particular property or source is set apart and charged for a
charitable or religious purpose. Similarly, when a business itself has been set
aside for the objects of the trust, then such business is held under trust and will
fall under sub-section (4). However, where the profits of a business of a trust are
applied for charitable purposes, then such business and trust will be governed by
sub-section (4A).
157. Section 11(1) of the Act exempts income derived from property held under
trust wholly for charitable or religious purposes, to the extent to which such
income is applied to such purposes in India. The Act does not comprehensively
define "property held under trust". Section 11(4) however, provides that for the
purposes of Section 11, the words "property held under trust" "includes a
business undertaking so held". Section 11(4A) as amended by the Finance (No.
2) Act, 1991 w.e.f. 01.04.1992 reads as under:-
"(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."
158. The question whether Section 11(4A) applies where a business is held
under trust was answered in the negative in earlier High Court judgments. The
general provision under Section 4(3)(i) of the old Act exempted income derived
from property held under trust from taxation. Section 4(3)(ia) however, enacted
that any income derived from a business carried on behalf of a religious or
89
charitable trust would be entitled to exemption only if the business was carried
on in the course of carrying out of a primary purpose of the trust or the work in
connection with the business is mainly carried on by the beneficiaries of the trust.
The revenue contended there that since clause (ia) was a special provision dealing
with exemption in respect of a business carried on for and on behalf of a trust,
any claim for exemption as regards the profits of such business can be made only
under that provision, and if conditions laid down therein are not satisfied, the
assessee cannot rely upon the general provision contained in Section 4(3)(i) to
claim exemption thereunder on the ground that business is property. In Gadodia
Swadeshi Stores v. Commissioner of Income Tax, Punjab138
, the Lahore High
Court held that the fact that the business carried on behalf of the trust failed to
satisfy the two conditions in Section 4(3)(ia) was no reason for it be denied
exemption if it fell within Section 4(3)(i). The court held that that the two
categories mentioned in the two clauses did not exclude each other.
159. This judgment of the Lahore High Court was approved- by reference by
this court in J.K. Trust v. CIT139 which was followed in Krishna Warriar (supra).
By then the content of Section 4(3)(ia) had been enacted as a proviso to clause (i)
of Section 4(3), by amending Act of 1953. After referring to the judgment of the
Lahore High Court (supra) and rejecting the argument of the revenue that a
proviso in a statute be always read as limitation upon the effect of the main
enactment Subbarao, J. in Krishna Warriar (supra) observed as under:
“........But it is not an inflexible rule of construction that a proviso in a statute
should always be read as a limitation upon the effect of the main enactment.
Generally the natural presumption is that but for the proviso the enacting part
of the section would have included the subject-matter of the proviso; but the
clear language of the substantive provision as well as the proviso may
establish that the proviso is not a qualifying clause of the main provision, but
is in itself a substantive provision. In the words of Maxwell, "the true principle
is that the sound view of the enacting clause, the saving clause and the proviso
taken and construed together is to prevail". So construed we find no difficulty,
138 See Gadodia Swadeshi Stores v. Commissioner of Income Tax, Punjab, (1944) 12 ITR 385
139 1958 (1) SCR 65
90
as we will indicate later in our judgment, in holding that the said clause (b)
of the proviso deals with a case of business which is not vested in trust for
religious or charitable purposes within the meaning of the substantive clause
of section 4(3)(i).”
160. Therefore, to summarise on the legal position on this - if a property is held
under trust, and such property is a business, the case would fall under Section
11(4) and not under Section 11(4A) of the Act. Section 11(4A) of the Act, would
apply only to a case where the business is not held under trust. There is a
difference between a property or business held under trust and a business carried
on by or on behalf of the trust. This distinction was recognized in Surat Art Silk
(supra), which observed that if a business undertaking is held under trust for a
charitable purpose, the income from it would be entitled to exemption under
Section 11(1) of the Act.
161. The interface between Sections 11(1) and (4) is of some importance.
Firstly, under Section 11(4), it is only the business which is held under the trust
that would enjoy exemption in respect of its income under Section 11(1).
Secondly, there is a distinction between the objects of a trust and the powers given
to the trustees to effectuate the purposes of the trust. In this regard, the
observations of this court, in J.K. Trust (supra) assume relevance. There, one of
the questions which arose was whether the office of managing agency, which was
an office of profit, was in fact settled upon trust and, therefore, could be
considered to be business held under trust. The court held that for the purposes of
Section 4(3)(i) of the 1922 Act, the office of managing agency was property
which could be held under trust. The revenue pointed out that on the terms of the
trust deed previously executed by the settlors (on 15.06.1945), the properties
which the trustees are to hold and stand possessed of, were only the sum of
₹1,00,000/-, any donations and contribution received by the trustees and all
accretions thereto, and investment in securities made from time to time
representing the accretions. It was contended that on the terms of the trust deed,
the managing agency which was acquired on 10.09.1945 for a period of 20 years,
91
cannot be said to be property held under trust since no part of the initial amount
of ₹1,00,000/-, which was settled upon the trust, was utilised in the acquisition
of the managing agency, so as to impress it with the character of accretion. While
repelling this contention, this court held that:
“.......But it is to be observed that clause (3) of the trust deed expressly
provides for the acquisition of the business of managing agency on behalf of
the trust and "with the help of the trust fund" and that precisely is what has
happened and indeed, reading together Exhibits A and B, it is impossible to
resist the conclusion that both the documents formed part of an integral
scheme, and that what the settlors had in view in clause 3 of Exhibit A is the
very managing agency, which was acquired under Exhibit B. There is
considerable authority in England that when trustees carry on business with
the aid of trust fund, the position in law is the same as if they actually
employed it in the business, though, in fact, it be not actually invested
therein.”
162. It seems that the test applied in J.K. Trust (supra) that for a business, to be
considered as property held under trust, it should have been either acquired with
the help of the fund originally settled upon trust or the original fund settled upon
trust must have a proximate connection with the later acquisition or carrying on
of the business by the trustees. This distinction between a business held and
carried on by a trust, or a trust business run by the trustees, was noticed, in
Thiagesar Dharma Vanikam v. CIT140 by the Madras High Court and in Raja P.C.
Lall Choudhary v. CIT, Bihar & Orissa141 by the Patna High Court which held
similarly in relation to Section 4(3)(i) of the Act of 1922 (which corresponds to
Section 11(1) of the 1961 Act).
163. What has to be examined, therefore, is whether the business itself is held
under trust or is carried on by and on behalf of the trust. Importantly Section
11(1) of the Act starts with the expression "subject to the provisions of Sections
60 to 63........". Those provisions are in Chapter V of the Act. Section 60 provides
for the consequences of a transfer of income where there is no transfer of assets.
140 (1963) 50 ITR 798 Madras.
141 (1957) 31 ITR 226 Patna.
92
It says that where a person transfers merely the income from an asset without
transferring the asset itself, he would continue to be chargeable to income tax.
Section 61 provides for the consequences of a revocable transfer of assets and
says that the same would be the position where a person is in receipt of income
by virtue of a revocable transfer of assets. Section 62 provides for the
consequences of a transfer of assets for a specified period, and serves as an
exception to Section 61. An assessee has to be divested of the asset before ceasing
to be assessable in respect of the income from it. A mere direction that the income
from the business shall be applied to the charitable objects of a trust, without there
being a settlement of the business itself upon trust, does not result in any trust or
legal obligation.
164. It is now, necessary to consider Thanthi Trust (supra) and its context. This
court, while interpreting Section 11(4A) (as amended w.e.f. 01.04.1992) stated
that the provision requires the “business income of a trust or institution to be
exempt is that the business should be incidental to the attainment of objectives of
the trust or institution”.
165. The above observations have to be understood in the light of the facts
before the court. Thanthi Trust carried on newspaper business which was held
under trust. The charitable object of the trust was the imparting of education -
which falls under Section 2(15) of the Act. The newspaper business was
incidental to the attainment of the object of the trust, namely that of imparting
education. This aspect is important, because the aim of the trust was a per se
charitable object, not a GPU object. The observations were therefore made,
having regard to the fact that the profits of the newspaper business were utilized
by the trust for achieving the object of education. In the light of such facts, the
carrying on of newspaper business, could be incidental to the object of educationa per se category. The Thanthi Trust (supra) ratio therefore, cannot be extended
93
to cases where the trust carries on business which is not held under trust and
whose income is utilized to feed the charitable objects of the trust.
166. What then is the interpretation of the expression “incidental” profits, from
“business” being “incidental to the attainment of the objectives” of the GPU
charity (which occurs in Section 11(4A))? As stated earlier, the interpretation of
that expression in Thanthi Trust (supra) was in the context of a per se charity, i.e.,
where the trust’s object was education. However, the restrictive or negative terms
enjoining GPU charities from carrying on profitable activity had been deleted in
1983 (w.e.f. 01.04.1984). In Surat Art Silk (supra), the court had articulated the
determinative test for defining whether a Trust was a GPU charity if its
predominant object was to carry out a charitable purpose and that if that was the
case, the fact that it earned profit would not per se deprive it of tax exemption.
This decision was interpreted in the context of Section 11(4A) by this court in
Thanthi Trust, to hold that business can be incidental to attainment of the trust’s
objects.
167. Thus, the journey which began with Surat Art Silk was interpreted in
Thanthi Trust to mean that the carrying on of business by GPU charity was
permissible as long as it inured to the benefit of the trust. The change brought
about by the amendments in questions, however, place the focus on an entirely
different perspective: that if at all any activity in the nature of trade, commerce
or business, or a service in the nature of the same, for any form of consideration
is permissible, that activity should be intrinsically linked to, or a part of the GPU
category charity’s object. Thus, the test of the charity being driven by a
predominant object is no longer good law. Likewise, the ambiguity with respect
to the kind of activities generating profit which could feed the main object and
incidental profit-making also is not good law. What instead, the definition under
Section 2(15) through its proviso directs and thereby marks a departure from the
previous law, is – firstly that if a GPU charity is to engage in any activity in the
94
nature of trade, commerce or business, for consideration it should only be a part
of this actual function to attain the GPU objective and, secondly – and the equally
important consideration is the imposition of a quantitative standard - i.e., income
(fees, cess or other consideration) derived from activity in the nature of trade,
business or commerce or service in relation to these three activities, should not
exceed the quantitative limit of ₹10,00,000 (w.e.f. 01.04.2009), ₹25,00,000
(w.e.f. 01.04.2012), and 20% (w.e.f. 01.04.2016) of the total receipts. Lastly, the
“ploughing” back of business income to “feed” charity is an irrelevant factor –
again emphasizing the prohibition from engaging in trade, commerce or business.
168. If one understands the definition in the light of the above enunciation, the
sequitur is that the reference to “income being profits and gains of business” with
a further reference to its being incidental to the objects of the Trust, cannot and
does not mean proceeds of activities incidental to the main object, incidental
objects or income derived from incidental activities. The proper way of reading
reference to the term “incidental” in Section 11(4A) is to interpret it in the light
of the sub-clause (i) of proviso to Section 2(15), i.e., that the activity in the nature
of business, trade, commerce or service in relation to such activities should be
conducted actually in the course of achieving the GPU object, and the income,
profit or surplus or gains can then, be logically incidental. The amendment of
2016, inserting sub clause (i) to proviso to Section 2(15) was therefore
clarificatory. Thus interpreted, there is no conflict between the definition of
charitable purpose and the machinery part of Section 11(4A). Further, the
obligation under Section 11(4A) to maintain separate books of account in respect
of such receipts is to ensure that the quantitative limit imposed by sub-clause (ii)
to Section 2(15) can be computed and ascertained in an objective manner.
95
169. The conclusion recorded above is also supported by the language of
seventh proviso142 to Section 10(23C). Whereas Section 2(15) is the definition
clause, Section 10 lists out what is not income. Section 10(23C) – by sub-clauses
(iv) and (v) exempt incomes of charitable organisations. Such organisations and
institutions are not limited to GPU category charities but rather extend to other
types of charities (i.e. the per se kind as well). The controlling part of Section
10(23C) along with the relevant clauses (iv) and (v) seek to exclude income
received by the concerned charities. However, the provisos hedge such exemption
with conditions. The seventh proviso - much like Section 11(4A) and the
definition - carve out an exception, to the exemptions such that income derived
by charities from business, are not exempt. The seventh proviso virtually echoes
Section 11(4A) in that business income derived by a charity (in the present case,
the GPU charities) which arises from an activity incidental to the attainment of
its objective is not per se excluded.
170. Classically, the idea of charity was tied up with eleemosynary143. However,
“charitable purpose” – and charity as defined in the Act have a wider meaning
where it is the object of the institution which is in focus. Thus, the idea of
providing services or goods at no consideration, cost or nominal consideration is
not confined to the provision of services or goods without charging anything or
charging a token or nominal amount. This is spelt out in Indian Chamber of
Commerce (supra) where this Court held that certain GPUs can render services
to the public with the condition that they would not charge “more than is actually
needed for the rendering of the services, - may be it may not be an exact
equivalent, such mathematical precision being impossible in the case of
142
“Provided also that nothing contained in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause
(via) shall apply in relation to any income of the fund or trust or institution or any university or other educational
institution or any hospital or other medical institution, being profits and gains of business, unless the business is
incidental to the attainment of its objectives and separate books of account are maintained by it in respect of such
business:”
143 Providing relief from distress to humans based on Christian values - refer to Director of Income Tax v. Bharat
Diamond Bourse (2002) 10 SCC 392, and Bangalore Water Supply and Sewage Undertaking v. A Rajappa (1978)
2 SCC 213.
96
variables, - may be 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”.
171. Therefore, pure charity in the sense that the performance of an activity
without any consideration is not envisioned under the Act. If one keeps this in
mind, what Section 2(15) emphasizes is that so long as a GPU’s charity’s object
involves activities which also generates profits (incidental, or in other words,
while actually carrying out the objectives of GPU, if some profit is generated), it
can be granted exemption provided the quantitative limit (of not exceeding 20%)
under second proviso to Section 2(15) for receipts from such profits, is adhered
to.
172. Yet another manner of looking at the definition together with Sections
10(23) and 11 is that for achieving a general public utility object, if the charity
involves itself in activities, that entail charging amounts only at cost or marginal
mark up over cost, and also derive some profit, the prohibition against carrying
on business or service relating to business is not attracted - if the quantum of such
profits do not exceed 20% of its overall receipts.
173. It may be useful to conclude this section on interpretation with some
illustrations. The example of Gandhi Peace Foundation disseminating Mahatma
Gandhi’s philosophy (in Surat Art Silk) through museums and exhibitions and
publishing his works, for nominal cost, ipso facto is not business. Likewise,
providing access to low-cost hostels to weaker segments of society, where the fee
or charges recovered cover the costs (including administrative expenditure) plus
nominal mark up; or renting marriage halls for low amounts, again with a fee
meant to cover costs; or blood bank services, again with fee to cover costs, are
not activities in the nature of business. Yet, when the entity concerned charges
substantial amounts- over and above the cost it incurs for doing the same work,
or work which is part of its object (i.e., publishing an expensive coffee table book
97
on Gandhi, or in the case of the marriage hall, charging significant amounts from
those who can afford to pay, by providing extra services, far above the cost-plus
nominal markup) such activities are in the nature of trade, commerce, business or
service in relation to them. In such case, the receipts from such latter kind of
activities where higher amounts are charged, should not exceed the limit indicated
by proviso (ii) to Section 2(15).
174. The insertion of Section 13(8)144
, the seventeenth proviso to Section
10(23C) and third proviso to Section 143(3) (all of which were inserted by
Finance Act, 2012, but w.r.e.f. 01.04.2009), further reinforces the interpretation
of this Court, of “charitable purpose”. These provisions, form the machinery to
control the conditions under which income is exempt. The effect of the
seventeenth proviso to Section 10(23C) is to impose the same condition i.e., that
that the trade, commerce or business activity or service relating to trade, business
or commerce, should be part of the GPU’s activities, to achieve its object of
advancing general public utility. The other condition– which is drawn in as part
of the exemption condition, is that if such trading or commercial activity takes
place the receipts should be confined to a prescribed percentage of the overall
receipts. Section 13(8) too reinforces the same condition.
175. In the opinion of this court, the change intended by Parliament through the
amendment of Section 2(15) was sought to be emphasised and clarified by the
amendment of Section 10(23C) and the insertion of Section 13(8). This was
Parliaments’ emphatic way of saying that generally no commercial or business or
trading activity ought to be engaged by GPU charities but that in the course of
their functioning of carrying out activities of general public utility, they can in a
limited manner do so, provided the receipts are within the limit spelt out in Clause
(ii) of the proviso to Section 2(15).
144 “(8) Nothing contained in section 11 or section 12 shall operate so as to exclude any income from the total
income of the previous year of the person in receipt thereof if the provisions of the first proviso to clause (15) of
section 2 become applicable in the case of such person in the said previous year.”
98
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
(i) Statutory corporations, authorities or bodies
176. It would be essential now to deal with certain kinds of receipts which GPU
charities, typically statutory housing boards, regulatory authorities and
corporations may be entitled to, if mandated to collect or receive. During the
course of hearing, learned counsels highlighted that statutory boards, and
corporations have to recover the cost of providing essential goods and services in
public interest, and also fund large scale development and maintain public
property. These would entail recovering charges or fees, interest and also
receiving interest for holding deposits. It was further pointed out that in some
cases, income in the form of rents – having regard to the nature of the schemes
which the concerned board, trust or corporation may be mandated or permitted to
carry on, has to be received. For instance, in some situations, for certain kinds of
properties, the boards may be permitted only to lease out their assets and receive
rents.
177. The answers to these, in the opinion of this court, are that the definition
ipso facto does not spell out whether certain kinds of income can be excluded.
However, the reference to specific provisions enabling or mandating collection
of certain rates, tariffs or costs would have to be examined. Generically, going by
statutory models in enactments (under which corporations boards or trust or
authority by whatsoever name, are set up), the mere fact that these bodies have to
charge amounts towards supplying goods or articles, or rendering services i.e.,
for fees for providing typical essential services like providing water, distribution
of food grains, distribution of medicines, maintenance of roads, parks etc., ought
not to be characterized as “commercial receipts”. The rationale for such
exclusion would be that if such rates, fees, tariffs, etc., determined by statutes and
99
collected for essential services, are included in the overall income as receipts as
part of trade, commerce or business, the quantitative limit of 20% imposed by
second proviso to Section 2(15) would be attracted thereby negating the essential
general public utility object and thus driving up the costs to be borne by the
ultimate user or consumer which is the general public. By way of illustration, if
a corporation supplies essential food grains at cost, or a marginal mark up, another
supplies essential medicines, and a third, water, the characterization of these, as
activities in the nature of business, would be self-defeating, because the overall
receipts in some given cases may exceed the quantitative limit resulting in
taxation and the consequent higher consideration charged from the user or
consumer.
(a)Interpretation of Section 10(46) and Section 2(15)
178. Section (20A) was inserted by Finance Act, 1970 with effect from
01.04.1962. It had excluded certain classes of income, of corporations145. This
court had occasion to deal with the provision while it was in force in the GIDC
case (supra) . The court had then emphasized that the expression “development”
in Section 10(20A) should be understood widely; thus, all development
programmes “relating to any industry” fell within the purview of “development”.
The court also highlighted that nothing in the IT Act laid down how a corporation
could be termed as a development corporation nor was there anything mandating
that fee chargeable by such corporations was confined to non-industrial activities.
179. The decision in Gujarat Maritime Board case (supra) was rendered in the
context of Section 10(20). That provision exempts income accruing to local
authorities, from taxation. By Finance Act, 2002, an Explanation was added to
145 Incomes not included in total income.
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 includedxxxxxx xxxxxx xxxxxx
(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.
100
Section 10(20) which defined “local authority” retrospectively. The Board ceased
to enjoy exemption which it had hitherto, in the absence of the retrospective
definition. It, therefore sought exemption, as a GPU category charity claiming
that it was controlled by objects of general public utility having regard to the
provisions of its parent Act, i.e., the Gujarat Maritime Board Act. This court
refuted the argument of the revenue that if a corporation did not fall within the
definition of “local authority” it could not claim to be a GPU charity. It was held
that Section 10(20) and Section 11 of the 1961 Act operate in totally different
spheres. Even if the Board is not considered as a local authority, it is not precluded
from claiming exemption under Section 11(1) of the 1961 Act. Therefore, the
court read Section 11(1) in light of the definition of the words “charitable
purposes” as defined under Section 2(15). This court also relied upon the ruling
in CIT v. APSRTC (supra) where the APSRTC – constituted under the Road
Transport Corporation Act, 1950 – having regard to the objectives of the Act, was
held to be a GPU charity, thus entitling it to exemption in terms of the IT Act.
180. In the light of these decisions, it is evident that the revenue’s narrow
construction by which tax exemption is denied on the ground that if an entity is
not covered by Section 10(20A) – or the newly applicable Section 10(46), it
cannot claim benefit as a GPU charity under Section 11, is unsound. These two
provisions confer different though overlapping benefits. If an entity does not fulfil
the requirement of one provision because it does not answer the description of a
body under that provision, that ipso facto is not a bar for it to claim benefit of
another provision.
181. Section 10(46) re-incarnated so to say Section 10(20A), which had been
deleted w.e.f. 01.04.2003. This provision, i.e., Section 10(46) was inserted with
effect from 01.04.2009 retrospectively by the Finance Act, 2011146. The
146 Incomes not included in total income.
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-
101
conditions for applicability of Section 10(46), i.e., that specified income or a class
of specified income of ports, trusts or commissions, etc., established or
constituted by or under Central or State enactments with the object of regulating
or administering any activity in the general public, is on similar lines as in the
case of GPU charities. Like in the case of GPU charities, there is a prohibition by
Section 10(46)(b) against such corporations, etc. engaging in commercial
activity. This restriction has been introduced for the first time [as that prohibition
was absent in the now repealed Section 10 (20A)].
182. The term “commercial” is closely similar to, if not identical, with the
phrase “in the nature of trade, commerce or business.” The other condition in
Section 10(46) is that the specified income to be exempted, is to be notified by
the Central Government in the Official Gazette. Facially the allusion to
commercial activity, appears to be in the nature of a complete bar to activities
which are akin to commerce or business, yielding profit. However, what needs to
be kept in mind is that the object of Section 10 is to remove from the taxable net,
an entire class of receipts of income. Given this object of Section 10, the
interpretation of “commercial” activity has to be on the same lines as in the case
of income derived by GPU charities, in the course of their actual functioning, by
involving in activities in the nature of trade, commerce or business. Thus, if
statutory corporations within Section 10(46) derive their income by charging a
nominal mark-up over the cost of service rendered or goods supplied, meant to
recover the costs of the activities they engage in primarily or to achieve the object
for which they were set up, such as development of housing, road infrastructure,
xxxxxx xxxxxx xxxxxx
(46) any specified income arising to a body or authority or Board or Trust or Commission (by whatever name
called) or a class, thereof which-
(a) has been established or constituted by or under a Central, State or Provincial Act, or constituted by the Central
Government or a State Government, with the object of regulating or administering any activity for the benefit of
the general public;
(b) is not engaged in any commercial activity; and
(c) is notified by the Central Government in the Official Gazette for the purposes of this clause.
102
water supply, sewage treatment, supply of food grains, medicines, etc., with or
without regulatory powers, the mere fact that some surplus or gain is derived
would not disentitle them from the benefit of Section 10(46).
183. In this context, it would be useful to consider the judgment of the Delhi
and Allahabad High Courts in Greater Noida Industrial Development Authority
v. Union of India147 (hereafter “GNIDA”) and CIT v. Yamuna Expressway
Industrial Development Authority148. In GNIDA (supra), the High Court drew a
distinction between bodies set up by the government with commercial purpose
and objects – which are motivated by profit, and other government bodies. The
court held, correctly so – that other government bodies are not entitled to
exemption as they are motivated by profit. Then, dealing with the term
“commercial activity” under Section 10(46), it was held that the decisive test is
whether the activities for which consideration in the form of fee, service charge
etc., is collected, is “intrinsically associated, connected and had minimum nexus
with the object of regulating and administering the activity for the benefit of the
public”.
184. It was also held that if the activity is not carried on commercial lines, i.e.,
with the profit motive in mind, but the body is assigned an administrative role,
having regard to the objects of the controlling statute or law, exemption cannot
be denied under Section 10(46). As juxtaposed, activities for profit or activities
which clearly were motivated by profit – carried on by government or statutory
bodies, cannot avail of exemption. The judgment in Yamuna Industrial
Development Authority (supra) is along the similar lines.
185. As far as boards and corporations which are tasked with development of
industrial areas, by statute, the judgments of this court, in Shri Ramtanu
Cooperative Housing Society (supra) and Gujarat Industrial Development
147 (2018) 406 ITR 418 (hereafter “GNIDA”)
148 (2017) 395 ITR 18
103
Corporation (supra) have declared that these bodies are involved in
‘development’ and are not essentially engaged in trading. In Shri Ramtanu
Cooperative Housing Society (supra) this court, by a five judge bench, held that
the Maharashtra Industrial Development Corporation is not a trading concern,
and observed as follows:
“These features of transfer of land, or borrowing of moneys or receipt of rents
and profits will by themselves neither be the indicia nor the decisive attributes
of the trading character of the Corporation. Ordinarily, a Corporation is
established by shareholders with their capital. The shareholders have their
Directors for the regulation and management of the Corporation Such a
Corporation set up by the shareholders carries on business and is intended
for making profits. When profits are earned by such a Corporation they are
distributed to shareholders by way of dividends or kept in reserve funds. In
the present case, these attributes of a trading Corporation are absent. The
Corporation is established by the Act for carrying out the purposes of the Act.
The purposes of the Act are development of industries in the State. The
Corporation consists of nominees of the State Government, State Electricity
Board and the Housing Board. The functions and powers of the Corporation
indicate that the Corporation is acting as a wing of the State Government in
establishing industrial estates and developing industrial areas, acquiring
property for those purposes, constructing buildings, allotting buildings,
factory sheds to industrialists or industrial undertakings. It is obvious that the
Corporation will receive moneys for disposal of land, buildings and other
properties and also that the Corporation would receive rents and profits in
appropriate cases. Receipts of these moneys arise not out of any business or
trade but out of sole purpose of establishment, growth and development of
industries.
17. The Corporation has to provide amenities and facilities in industrial
estates and industrial areas. Amenities of road, electricity, sewerage and
other facilities in industrial estates and industrial areas are within the
programme of work of the Corporation. The found of the Corporation consists
of moneys received from the State Government, all fees, costs and charges
received by the Corporation, all moneys received by the Corporation from
the disposal of lands, buildings and other properties and all moneys received
by the Corporation by way of rents and profits or in any other manner. The
Corporation shall have the authority to spend such sums out of the general
funds of the Corporation or from reserve and other funds. The Corporation
is to make provision for reserve and other specially denominated funds as the
State Government may direct. The Corporation accepts deposits from
persons, authorities or institutions to whom allotment or sale of land,
buildings, or sheds is made or is likely to be made in furtherance of the object
of the Act. A budget is prepared showing the estimated receipts and
expenditure. The accounts of the Corporation are audited by an auditor
appointed by the State Government. These provisions in regard to the finance
of the Corporation indicate the real role of the Corporation viz. the agency
of the Government in carrying out the purpose and object of the Act which is
104
the development of industries. If in the ultimate analysis there is excess of
income over expenditure that will not establish the trading character of the
Corporation. There are various departments of the Government which may
have excess of income over expenditure.
************** ******** *********
20. The underlying concept of a trading Corporation is buying and selling.
There is no aspect of buying or selling by the Corporation in the present case.
The Corporation carries out the purposes of the Act, namely, development of
industries in this State. The construction of buildings, the establishment of
industries by letting buildings on hire or sale, the acquisition and transfer of
land in relation to establishment of industrial estate or development of
industrial areas and of setting up of industries cannot be said to be dealing
in land or buildings for the obvious reason that the State is carrying out the
objects of the Act with the Corporation as an agent in setting up industries in
the State. The Act aims at building an industrial town and the Corporation
carries out the objects of the Act. The hard core of a trading Corporation is
its commercial character. Commerce connotes transactions of purchase and
sale of commodities, dealing in goods. The forms of business transactions
may be varied but the real character is buying and selling. The true character
of the Corporation in the present case is to act as an architectural agent of
the development and growth of industrial towns by establishing and
developing industrial estates and industrial areas. We are of opinion that the
Corporation is not a trading one.”
186. In Shri Ramtanu Cooperative Housing Society (supra) no doubt, this court
did not have to decide whether the Maharashtra Industrial Development
Corporation was entitled to tax exemption. However, it examined the provisions
of the Act, and the ratio, that such industrial development corporations are not
engaged in trading, is binding. Like in that case, here too, the concerned state
Acts (Gujarat Industrial Development Act, 1962 and the Karnataka Industrial
Areas Development Act, 1966) tasked the boards with planning and development
of industrial areas. Their personnel are appointed under the enactments and are
deemed to be public servants. The state government is empowered to acquire
land, in exercise of eminent domain power, for their purposes; their audits are by
the Accountant General of the concerned state, or auditors appointed by the state.
They are authorized by law, to levy rates and charges, for the services they
provide, on pre-determined basis. In the light of these provisions, clearly, these
boards and authorities perform objects of general public utility; and they are not
driven by profit motive.
105
187. There is a two-fold distinction between the now-deleted Section 10(20A)
and the newly added Section 10(46) (w.e.f. 01.06.2011). Firstly, that the erstwhile
Section 10(20A) applied to a limited class of undertaking i.e., the bodies, or
corporations, constituted by or under any law-confined to the planning and
development of housing infrastructure. However, the newly added Section
10(46) is wider in comparison and the activities of any body or authority or board
constituted by or under any central or State Act with “the object of regulating or
administering any activity for the benefit of the general public”, has broader
import. In a sense, the newly added Section 10(46), resembles a GPU category
charity classified under Section 2(15). The second distinction is that Section
10(20A) did not bar any board, or corporations, etc. from indulging in commercial
activities. However, sub-clause (b) of Section 10(46) imposes such a bar, and the
concerned body cannot claim tax exemption if it engages in commercial activity.
188. The manner in which GPU charities has been dealt with under the
definition clause, i.e., Section 2(15), indicates that even though trading or
commercial activity or service in relation to trade, commerce or business appears
to be barred – nevertheless the ban is lifted somewhat by the proviso which
enables such activities to be carried out if they are intrinsically part of the activity
of achieving the object of general public utility. Furthermore, in the case of GPU
charities there is a quantified limit of the overall receipts, which is permissible
from such commercial activity. In the case of local authorities and corporations
covered by Section 10(46) no such activities are seemingly permitted.
189. As was observed in the earlier part of this judgment – while considering
whether for the period 01.0.2003 - 31.05.2011, statutory boards, corporations, etc.
could have lawfully claimed to be GPU charities, this court has observed that the
nature of such corporations is not to generate profit but to make available goods
and other services for the benefit of public weal. If such corporations (falling
within the description of Section 10(46)) applied to the Central Government for
106
exemption, the treatment of their receipts, should be no different than how such
receipts can and should have been treated for the purposes of determining whether
they are GPU charities, during the period when Section 10(46) was not in
existence. Furthermore, this court is of the opinion that having regard to the
observations in Gujarat Maritime Board case (supra), the denial of exemption
under one category cannot debar such corporations from claiming income exempt
status under another category.
(b)Summary in relation to statutory authorities/corporations
190. In light of the above discussion, this court is of the opinion that:
(i) The fact that bodies which carry on statutory functions whose income
was eligible to be considered for exemption under Section 10(20A)
ceased to enjoy that benefit after deletion of that provision w.e.f.
01.04.2003, does not ipso facto preclude their claim for consideration
for benefit as GPU category charities, under Section 11 read with
Section 2(15) of the Act.
(ii) Statutory Corporations, Boards, Authorities, Commissions, etc. (by
whatsoever names called) in the housing development, town planning,
industrial development sectors are involved in the advancement of
objects of general public utility, therefore are entitled to be considered
as charities in the GPU categories.
(iii) Such statutory corporations, boards, trusts authorities, etc. may be
involved in promoting public objects and also in the course of their
pursuing their objects, involved or engaged in activities in the nature of
trade, commerce or business.
(iv) The determinative tests to consider when determining whether such
statutory bodies, boards, authorities, corporations, autonomous or selfgoverning government sponsored bodies, are GPU category charities:
107
(a) Does the state or central law, or the memorandum of association,
constitution, etc. advance any GPU object, such as development of
housing, town planning, development of industrial areas, or
regulation of any activity in the general public interest, supply of
essential goods or services - such as water supply, sewage service,
distributing medicines, of food grains (PDS entities), etc.;
(b) While carrying on of such activities to achieve such objects (which
are to be discerned from the objects and policy of the enactment; or
in terms of the controlling instrument, such as memorandum of
association etc.), the purpose for which such public GPU charity, is
set-up - whether for furthering the development or a charitable
object or for carrying on trade, business or commerce or service in
relation to such trade, etc.;
(c) Rendition of service or providing any article or goods, by such
boards, authority, corporation, etc., on cost or nominal mark-up
basis would ipso facto not be activities in the nature of business,
trade or commerce or service in relation to such business, trade or
commerce;
(d)where the controlling instrument, particularly a statute imposes
certain responsibilities or duties upon the concerned body, such as
fixation of rates on pre-determined statutory basis, or based on
formulae regulated by law, or rules having the force of law, setting
apart amenities for the purposes of development, charging fixed
rates towards supply of water, providing sewage services, providing
food-grains, medicines, and/or retaining monies in deposits or
government securities and drawing interest therefrom or charging
lease rent, ground rent, etc., per se, recovery of such charges, fee,
interest, etc. cannot be characterized as “fee, cess or other
consideration” for engaging in activities in the nature of trade,
108
commerce, or business, or for providing service in relation in
relation thereto;
(e) Does the statute or controlling instrument set out the policy or
scheme, for how the goods and services are to be distributed; in what
proportion the surpluses, or profits, can be permissively garnered;
are there are limits within which plots, rates or costs are to be worked
out; whether the function in which the body is engaged in, is
normally something a government or state is expected to engage in,
having regard to provisions of the Constitution and the enacted laws,
and the observations of this court in NDMC; whether in case surplus
or gains accrue, the corporation, body or authority is permitted to
distribute it, and if so, only to the government or state; the extent to
which the state or its instrumentalities have control over the
corporation or its bodies, and whether it is subject to directions by
the concerned government, etc.;
(f) As long as the concerned statutory body, corporation, authority, etc.
while actually furthering a GPU object, carries out activities that
entail some trade, commerce or business, which generates profit
(i.e., amounts that are significantly higher than the cost), and the
quantum of such receipts are within the prescribed limit (20% as
mandated by the second proviso to Section 2(15)) – the concerned
statutory or government organisations can be characterized as GPU
charities. It goes without saying that the other conditions imposed
by the seventh proviso to Section 10(23C) and by Section 11 have
to necessarily be fulfilled.
(v) As a consequence, it is necessary in each case, having regard to the first
proviso and seventeenth proviso (the latter introduced in 2012, w.r.e.f
01.04.2009) to Section 10(23C), that the authority considering granting
exemption, takes into account the objects of the enactment or
109
instrument concerned, its underlying policy, and the nature of the
functions, and activities, of the entity claiming to be a GPU charity. If
in the course of its functioning it collects fees, or any consideration that
merely cover its expenditure (including administrative and other costs
plus a small proportion for provision) - such amounts are not
consideration towards trade, commerce or business, or service in
relation thereto. However, amounts which are significantly higher than
recovery of costs, have to be treated as receipts from trade, commerce
or business. It is for those amounts, that the quantitative limit in proviso
(ii) to Section 2(15) applies, and for which separate books of account
will have to be maintained under other provisions of the IT Act.
(ii)Statutory regulatory bodies/authorities
191. During the hearings, rival contentions were made in regard to the facial
nature of the public utility character of regulatory bodies. A sample special case
was that of the Institute of Chartered Accountants of India (ICAI). In respect of
some years, the revenue has preferred appeals and in respect of some others, the
Institute has preferred appeals. Reliance was placed upon the provisions of the
ICAI Act and detailed submissions were made to emphasise that it plays a pivotal
role in regulating the entire universe of vocation of Chartered Accountants – i.e.,
selecting candidates that can undergo the educational course, setting the syllabus
for the Chartered Accountancy examination; holding classes, training sessions
and imparting education; conducting exams, etc. It was highlighted that the
membership of the institute, i.e., those who are enrolled as Chartered Accounts
has grown significantly. Whereas in the end of financial year 2005, the
membership was 1.23 lakhs, it had increased to 1,86,440 on 31.03.2012.
Likewise, there was an exponential growth in the students appearing in the
examination - in 2005, it was 2,96,294, and on 31.03.2012, it had increased to
10,70,839. Apparently, the Institute conducts distance education courses and also
110
conducts classroom instruction facilities. These are integrated with the course
curriculum. Additionally, it was urged that no commercial motive was involved;
coaching and revisional classes conducted are very nominally priced - ranging
from ₹1500 to ₹2500 for one group, and from ₹4000 to ₹6000 for both groups,
depending on cities where the classes are held.
192. During the submissions on behalf of the Institute, the financials for
different years were provided. It was revealed that the total outflow towards
salaries for 2003-04 was ₹55.27 lakhs and depreciation for the same was ₹51.64
lakhs. The total expenditure for that year was ₹1.0691 lakhs. As against that, the
Revenue earned from generation of fees for the corresponding year which was
₹1.78 crores and the corresponding expenditure was ₹96.93 lakhs. The
corresponding figures for FY 2011-12 for salaries was ₹2.94 crores. The
depreciation was Rs.4.05 crores. The total expenditure thus was ₹ 6.9 crores. As
against this, the amount received towards fees was ₹6.36 crores and expenditure
incurred towards coaching, including salaries, provisions of course material, etc.
was ₹4.34 crores. The surplus (without including administrative expenditure) for
that year was ₹2.01 crores. The Institute apparently cannot distribute the surplus
or utilise it for any activity other than what is set out under the controlling statute
and its rules.
193. The Revenue highlighted that conducting courses leading to a professional
qualification and charging feesfor it is in the nature of a ‘service’, and all services
in relation to trade, commerce or business squarely falls within the mischief of
Section 2(15), which has to preclude the institute’s claim for exemption as a GPU
charity.
194. The Institute is a creature of the Institute of Chartered Accountants Act,
1949. By Section 4 of this Act, every person who qualifies in the examination
conducted by the Institute has to seek registration as a Chartered Accountant.
Only when members obtain certificates issued by the Council of the Institute
111
under Section 6 can they be known as a ‘Chartered Accountant’ and be entitled
to practice that profession (Sections 6 and 7). The Council of the Institute is
constituted under Section 9 which defines such constitution and the manner for
holding elections, etc. The functions of the Council by Section 15(2A) include
approving the academic courses and their contents, examining the candidates,
regulation and articleship assistance, prescribing qualification for entry of
persons in the register, collection of fees from members; the regulation and
maintenance and status of the professional qualifications of the members of the
Institute, etc. By Section 15A, universities are enabled to impart education on
subjects covered by the academic courses of the Institute. However, by Section
15A(2) while awarding degrees or diplomas, their designation should not
resemble or be identical to what is awarded by the Institute. The finances are
regulated by Section 18. The Council is enjoined to maintain the register under
Section 19 and has disciplinary powers by virtue of Section 21A, 21B and 21C
of the Act.
195. These provisions of the Act clarify beyond a doubt that the Institute
performs statutory functions in the larger public interest of regulating the
standards of education, leading up to the profession of Chartered Accountancy
and also prescribing standards of professional etiquette, behaviour, and discipline
of its members. No other entity or body has the authority in law to perform the
functions that the Institute does. Although the Act regulating Chartered
Accountancy came into force prior to the Constitution of India, the subject (of
regulating professions, etc.) appears to be relatable to the exercise of legislative
power under Entry 25 and 26 of the Concurrent List149. Furthermore, they also
149 In List III of the Seventh Schedule to the Constitution of India,
“25. Education, including technical education, medical education and universities, subject to the provisions of
entries 63, 64, 65 and 66 of List I; vocational and technical training of labour.
26. Legal, medical and other professions”.
112
appear to conform to Entry 65 of the Union List150 (which has been adverted to
in Entry 25 of the Concurrent List). As things stand, the Institute is the only body
which prescribes the contents of professional education and entirely regulates the
profession of Chartered Accountancy. There is no other body authorised to
perform any other duties which it performs. It, therefore, clearly falls in the
description of a charity advancing general public utility. Having regard to the
previous discussion on the nature of charities and what constitutes activities in
the ‘nature of trade, business or commerce’, the functions of the Institute ipso
facto does not fall within the description of such ‘prohibited activities’. The fees
charged by the Institute and the manner of its utilisation are entirely controlled
by law. Furthermore, the material on record shows that the amounts received by
it are not towards providing any commercial service or business but are essential
for the providing of service to the society and the general public.
196. Similarly, there are several other regulatory bodies that discharge functions
which are otherwise within the domain of the State. A singular characteristic of
ICAI and other statutory bodies which can be said to regulate specific functions
and professions (including the profession of Cost and Work Accountants, and
Company Secretary, etc.) is the powers conferred upon them by the statutes to
prescribe standards and enforce them through disciplinary sanctions. Therefore,
it is held that bodies which regulate professions and are created by or under
statutes which are enjoined to prescribe compulsory courses to be undergone
before the individuals concerned is entitled to claim entry into the profession or
vocation, and also continuously monitor the conduct of its members do not ipso
facto carry on activities in the nature of trade, commerce or business, or services
in relation thereto.
150 In List I of the Seventh Schedule to the Constitution of India,
“65. Union agencies and institutions for—
(a) professional, vocational or technical training, including the training of police officers; or
(b) the promotion of special studies or research; or
(c) scientific or technical assistance in the investigation or detection
of crime.”
113
197. At the same time, this court would sound a note of caution. It is important,
at times, while considering the nature of activities (which may be part of a
statutory mandate) that regulatory bodies may perform, whether the kind of
consideration charged is vastly or significantly higher than the costs it incurs. For
instance, there can be in given situations, regulatory fees which may have to be
paid annually, or the body may require candidates, or professionals to purchase
and fill forms, for entry into the profession, or towards examinations. If the level
of such fees or collection towards forms, brochures, or exams are significantly
higher than the cost, such income would attract the mischief of proviso to Section
2(15), and would have to be within the limits prescribed by sub-clause (ii) of the
proviso to Section 2(15).
198. The next set of ‘statutory regulatory authorities’ among the present batch
are those related to authorities set up under the Seeds Act, 1966 (i.e, the Andhra
Pradesh State Seeds Certification Authority and the Rajasthan State Seeds and
Organic Production certification Agency). These two entities are set up as
societies under Section 8 of the Seeds Act, and comprise of farmers, farmers cooperatives’ representatives, seed certification authorities, etc. The task of these
agencies and authorities is certification of seeds, to decide whether to certify
supply of seeds of “any notified kind or variety”, by applicants who may wish to
offer them for trade. These agencies/authorities scrutinize the samples to ensure
they conform to the requisite standard notified under Section 6. These decisions
are subject to appeal under Section 11.
199. The functioning of the seed certification agency, is a crucial one, in those
only seeds conforming to prescribed standards, are permitted to be traded and
used, by farmers. Such standards are - in the context of the fact that agriculture is
one of the mainstays of the economy, and furthermore, pivotal for food security
- essential as they ensure efficacy of seeds and guarantee to the farmers that they
can be relied upon. The essential nature of the regulatory function performed by
114
these certification agencies is obvious. The nature of their activities is not by way
of trade, commerce or business, nor service in relation to trade commerce,
business, for some form of consideration.
(iii) Trade Promotion bodies, councils, associations or organizations
200. Surat Art Silk (supra) and other decisions, had ruled that as long as the
objects of trade promotion bodies were for general public utility - wherein ‘trade
promotion’ in itself, was held to be a GPU - the fact that incidentally these bodies
carried on some commercial activity, leading to profit, did not preclude them from
claiming to be driven by charitable purpose. As observed earlier, the enunciation
of those principles were in the context of the unamended Section 2(15).
201. The question that arises is whether the change in definition impacts the
claims of trade promotion bodies, federations of commerce, or such
organizations, that they are GPU charities . The judgment in Surat Art Silk (supra)
proceeded on the assumption that trade promotion was the pre-dominant object
of the GPU charity before the court, and that other objects – including procuring
licences, trade etc. were incidental. The assessee in Surat Silk had clear trading
objects:
“(b) To carry on all and any of the business of Art Silk Yarn, Raw Silk,
Cotton Yarn as well as Art Silk f loth, Silk Cloth and Cotton Cloth
belonging to and on behalf of 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.”
This court, nevertheless, held that since the predominant object of the assessee
was trade promotion, while furthering it, the fact that some trading occurred,
leading to income, did not preclude the assessee from claiming tax exemption.
202. In the opinion of this court, the change in definition in Section 2(15) and
the negative phraseology - excluding from consideration, trusts or institutions
which provide services in relation to trade, commerce or business, for fee or other
115
consideration - has made a difference. Organizing meetings, disseminating
information through publications, holding awareness camps and events, would be
broadly covered by trade promotion. However, when a trade promotion body
provides individualized or specialized services - such as conducting paid
workshops, training courses, skill development courses certified by it, and hires
venues which are then let out to industrial, trading or business organizations, to
promote and advertise their respective businesses, the claim for GPU status needs
to be scrutinised more closely. Such activities are in the nature of services “in
relation to” trade, commerce or business. These activities, and the facility of
consultation, or skill development courses, are meant to improve business
activities, and make them more efficient. The receipts from such activities clearly
are ‘fee or other consideration’ for providing service “in relation to” trade,
commerce or business.
203. The revenue has appealed to this court, in respect of two assessment years,
in the case of Apparel Export Promotion Council (AEPC). The objects of AEPC,
which was set up in 1978 – include promotion of ready-made garment export. To
achieve that end, its objects include providing training to instil skills in the
workforce, to improve skillsin the industry; guide in sourcing machinery; to serve
as a body advising, providing information on market or technical intelligence;
assisting the concerned industry in obtaining import licenses; showcase the best
capabilities of Indian garment exports through the prestigious “India International
Garment Fair” organised twice a year by AEPC, etc. These fairs host over 350
participants who exhibit their garment designs and patterns. Other functions are
to provide information, and to provide market research. AEPC also assists in
developing new design patterns and garments and to perform promotional
activities in individual foreign markets. Further, AEPC sends missions and trade
delegations abroad, who participate in international fairs; and conducts surveys
to gather information on potential export of ready-made garments.
116
204. As part of its functioning, it also books bulk space, which is then rented
out to individual Indian exporters, who showcase their products and services, and
ultimately secure export orders. Towards these services, i.e., booking and
providing space, AEPC charges rentals. Now, these rents are not towards fixed
assets owned by it. They are in fact charges, or fees, towards services in relation
to business; likewise, the skill development and diploma courses conducted by it,
for which fees are charged, are to improve business functioning of garment
exporters. Furthermore, market surveys and market intelligence, especially
country specific activities, aimed at catering to specified exporters, or specified
class of exporters, is also service in relation to trade, commerce or business.
205. In the circumstances, it cannot be said that AEPC’s functioning does not
involve any element of trade, commerce or business, or service in relation thereto.
Though in some instances, the recipient may be an individual business house or
exporter, there is no doubt that these activities, performed by a trade body
continue to be trade promotion. Therefore, they are in the “actual course of
carrying on” the GPU activity. In such a case, for each year, the question would
be whether the quantum from these receipts, and other such receipts are within
the limit prescribed by the sub-clause (ii) to proviso to Section 2(15). If they are
within the limits, AEPC would be – for that year, entitled to claim benefit as a
GPU charity.
(iv) Non-statutory bodies - ERNET, NIXI and GS1 India
206. ERNET is a not-for profit society, set up under the aegis of the Union
Government. At one time, government functionaries, including the late President,
APJ Abdul Kalam, were members, on account of their ex officio capacity. The
objects of this assessee are to
“ 3.1.1 To advance the cause of computer communication in the country in
all its aspects and dimensions with a view to provide rapid nationwide
117
development of the sector and technological and economic growth of the
county.
3.1.2 To develop, design, setup and operate nationwide state of the art
computer communication infrastructure with international connectivity
directed towards research and development, advancement of high quality
education, create and host content, express creative and academic potential
via intranet and intranet peer to peer connectivity among educational and
research institutions in the country and the world and make available the
communication infrastructure to users in academic, research and
development institutions, Govt organizations in line with national
priorities.”
207. ERNET’s networks are a mix of terrestrial and satellite-based wide-area
network. It provides services through its 15 Points of Presence (PoPs) located
across the country. All those are equipped to provide access to Intranet, Internet
and Digital Library through trial leased circuits and radio links to the user
institutions. The PoP at STPI Bengaluru provides Intranet and Internet access
through Satellite. ERNET provides, services, namely, Network Access Services,
Network Applications Services, Hosting Services, Operations Support Services
und Domain Registration Services under srnet.in, ac.in, edu.in & res.in domains.
Funded through government grants, its projects support educational networks and
development of internet infrastructure in numerous other segments of society.
208. Having regard to the nature of ERNET’s activities, it cannot be said that
they are in the nature of trade, commerce or business, or service, towards trade,
commerce or business. It has to receive fees, to reimburse its costs. The materials
on record nowhere suggest that its receipts (in the nature of membership fee,
connectivity charges, data transfer differential charges, and registration charges)
are of such nature as to be called as fees or consideration towards business, trade
or commerce, or service in relation to it. The functions ERNET performs are vital
to the development of online educational and research platforms. For these
reasons, it is held that the impugned judgment, which upheld the ITAT’s order,
does not call for interference.
118
209. The Revenue has appealed the decision of Delhi High Court in which the
National Internet Exchange of India (NIXI) was held to be a GPU category
charity. The materials on record show that NIXI was established in 2003 under
the aegis of the Ministry of Information Technology of the Union Government
for the promotion and growth of internet services in India, to regulate the internet
traffic, act as an internet exchange, and undertake “.in” domain name registration.
Concededly, NIXI, is a not for profit, and is barred from undertaking any
commercial or business activity. Its object is to promote the interests of internet
service providers and internet consumers in India, improve quality of internet
service, save foreign exchange, and carry on domain name operations. It is bound
by licensing conditions – which include the prohibition from altering its
memorandum, without the prior consent of the Union Government. According
to the submissions made on NIXI’s behalf, it charges annual membership fee of
₹1000/- and registration of second and third level domain names at ₹500/- and
₹250/-. The finding of the ITAT and the High Court are that NIXI’s objects and
functioning are by way of general public utility and thus it is a GPU category
charity.
210. Having regard to the findings on record and the materials placed by the
parties, it is evident that NIXI carries on the essential – crucial purpose of
promoting internet services and more importantly, regulating domain name
registration which is extremely essential for internet users in India. A country’s
need to have a domestic internet exchange, rather than depend on an international
one, cannot be overemphasized. The Union Government’s object of setting up of
internet exchange is part of its essential function as a government to regulate
certain segment of the communication networks. In the absence of a single entity
authorized to register “.in” domain names, there is bound to be chaos or
confusion.
119
211. In view of the foregoing discussion, this Court is of the opinion that the
revenue’s contention that NIXI does not merely carry-on public purpose of
regulatory activity but is involved in trade, commerce, or business or in providing
service in relation thereto, cannot be accepted.
212. The next assessee under consideration – is GS1 India. GS1 codes were
developed and created by GS1 International, Belgium (an international not-forprofit under Belgium tax law). This coding system has been in use worldwide and
is even mandatory for some services/goods, or adopted for significant advantages
being a singular identification system, recognized and accepted all over the world.
The code promotes universal standard in Electronic Data Inter-exchanged (EDI)
and other services. This system of coding has been accorded priority by the
Government of India as it is a compulsory requirement on products exported from
India. Government of India had set up non-profit organizations EAN India, now
known as GS1 India (the assessee).
213. Counsel on behalf of GS1 India, submitted that GS1 is affiliated and
conferred exclusive rights relating to GS1 coding in India. The GS1 code on a
product, provides a unique identification to it with wide ranging benefits and
advantages which facilitate tracking, tracing of the product, product recalls,
counterfeit detection, user safety due to accuracy, wastage control through
accurate monitoring and stock levels for commodities, security and safety of
supply chains, detection of illegal trade, etc. The unique identification or coding
system developed and operated by GS1 International or GS1 India is recognized
and accepted globally. Additionally, the unique identification code can be
enabled with RFID chip and other electronic technology. Being one of its kinds
globally, only a GS1 registered organization can set up and promote the said
system/standard within a country. These can be used for several fields including
public distribution system, agriculture, health products, etc. and has been
successfully used for product package labels. The utility and benefits of a
120
universal coding system assessable by anyone across the globe, for the
consumers, government, manufacturers, traders, exporters, etc. are enormous and
significant. Initial registration fee of ₹ 20,000/- is charged by GS1, plus annual
fee of ₹4,000/- (enhanced to ₹ 5,000/- from financial year 2006-07 onwards) from
third parties, who become subscribing members, and are entitled to use the GS1
coding system.
214. It was submitted on behalf of GS1 that it was set up as society in 1996 and
sponsored by the Union Government. The Union Government representatives
and the representatives of the trade bodies are its members. The activities of GS1
are extremely important and have to be characterized as involving general public
utility. It was submitted that having regard to the fact that GS1 provides services
to all organizations regardless of whether they carry on business, trade or other
commercial activity, a narrow interpretation confining the expression “service in
relation to” should not be adopted. It was urged, that there is no dispute about the
fact that GS1 was directed to be granted registration under the IT Act, and that
GS1 Belgium, the parent organization, so to say, which owns the technology, has
been granted the status of not for profit charity. GS1 urges that it is not dealing
or treating the prized rights as a right be exploited commercially to earn or
generate profits. It is not directly or indirectly subjecting their activity to market
mechanism/dynamics (i.e., demand and supply), rather it is motivated and
prompted to serve the beneficiaries. Therefore, this is not a case of commercial
exploitation of intellectual property rights to earn profits (as contended by the
Revenue), but rather a case where a token fee has been fixed and payable by the
user of the global identification system. Clause 44 of GSI’s Memorandum of
Association of the petitioner stipulates that it is a "Not-for-Profit" society and the
funds/receipts are to only be used for promotion of objects of the society for
which it is established, including sustenance and expansion.
121
215. The revenue contended that although GS1 India has a monopoly, the mere
fact that it is stated to be a Not for Profit Society with some governmental
involvement in its management would not detract from its essential nature; which
is to sub-serve the interest of the business community. It was elaborated in this
context that GS1 by providing bar codes and the coding system secured by
license, not only exploits the intellectual property rights but is in fact engaged in
services in relation to trade, commerce or business. Counsel pointed to the fact
that the revenues of GS1 has steadily increased over the years. It was pointed out
that according to the balance sheet the aggregate registration fees receipt for the
year ending 31.03.2007 was ₹1,80,80,760/- whereas for the year ending
31.03.2008 which had increased to ₹4,85,47,170/-. Likewise, membership fees
had increased from ₹44,40,000/- as on 31.03.2007 to ₹93,42,500/-. Furthermore,
renewal fees for the year ending 2007 was ₹1,68,57,200/- whereas for the next
year i.e., as on 31.03.2008 it was ₹1,90,50,650/-. The Revenue submitted that
even where income and interest were to be excluded, the increase on a yearly
basis was exponential. Likewise, it was pointed out that registration fees as on
31.03.2011 was ₹4,24,69,850/- whereas as on 31.03.2012 it was ₹6,07,58,100/-;
subscription fee as on 31.03.2011 was ₹1,02,06,720/-; for the next year i.e., on
31.03.2012 it was ₹1,01,69,850/-. Likewise, the subscription renewal fees as on
31.03.2011 was ₹4,18,62,804/- and the same head as on 31.03.2012 was
₹4,46,71,134/-.
216. The Revenue emphasises the fact that GS1 is a monopolist organization,
has exclusive licenses in relation to bar coding technology which it admittedly
uses for fee or other consideration. It is highlighted that these services are
provided mostly to business, trade purpose, manufacturing, etc. On the other
hand, GS1 urges that it performs the important public function which enables not
merely manufactures but others involved in supplies of various articles by
packaging, etc., to regulate and ensure their identity.
122
217. In the opinion of this Court, GS1’s functions no doubt is of general public
utility. However, equally the services it performs are to aid businesses
manufactures, tradesmen and commercial establishments. Bar coding packaged
articles and goods assists their consigners to identify them; helps manufactures,
and marketing organizations (especially in the context of contemporary times,
online platforms which serve as market places). The objective of GS1 is
therefore, to provide service in relation to business, trade or commerce - for a fee
or other consideration. It is also true, that the coding system it possesses and the
facilities it provides, is capable of and perhaps is being used, by other sectors, in
the welfare or public interest fields. However, in the absence of any figures,
showing the contribution of GS1’s revenues from those segments, and whether it
charges lower amounts, from such organizations, no inference can be drawn in
that regard. The materials on record show that the coding services are used for
commercial or business purposes. Having regard to these circumstances, the
Court is of the opinion that the impugned judgment and order calls for
interference.
(v) State Cricket Associations
218. The revenue has preferred appeals against the decision of the Gujarat High
Court in respect of orders made in the cases of the Gujarat Cricket Association,
the Saurashtra Cricket Association, Baroda and Rajkot Cricket Associations and
the decision of the Rajasthan High Court, in respect of the Rajasthan Cricket
Association. The main facts, relevant for deciding the questions involved are set
out in the order of the ITAT151 against which the Gujarat High Court rendered the
impugned judgment152
. Since the legal issues are common in relation to all these
151 ITA Nos: 1257/Ahd/13, 3303/Ahd/16, 3304/Ahd/16, 408/Ahd/17 Assessment years: 2009-10, 2010-11,
2011-12 and 2012-13.
152 SLP (D) No. 16597/2020 against a common judgment dated 27.9.2019, which relate to the Gujarat Cricket
Association, Saurashtra, Baroda and Rajkot Cricket Association Cricket Association.
123
matters, the facts relating to the Gujarat Cricket Association (GCA) may be
considered for convenience.
219. The objects of GCA (and other associations) are to control, supervise,
regulate, promote or encourage, and develop the game of cricket in the area under
its jurisdiction. The association can also undertake any other and all activities
which may be beneficial to it. GCA’s objects include activities aimed at creating,
fostering and maintaining friendly and cordial relationship through sports
tournaments and competitions, to create a healthy spirit through the medium of
sports in general, and cricket in particular. The other objects include: to instil the
spirit of sportsmanship in school and college students, members of other
institutions, and other citizens; instil the ideals of cricket and educate them in the
same; to select teams to represent the association in any competitive forum; to
arrange, supervise, hold, encourage and finance visits of teams; to arrange or
manage league and/or any other tournaments; to promote persons, meetings,
competitions and matches in relation to sports; and to offer, give/distribute or
contribute towards prizes, medals and awards; to lay out grounds for playing the
game; and to provide pavilion, stadia, other conveniences and amenities in
connection therewith. The GCA also includes within its objects, providing
coaching to deserving persons in the various departments of the game of cricket;
engaging professional cricketers, coaches, umpires, groundsmen, and other
employees, and to pay remuneration or honorarium to them; and to start, sponsor
and/or to subscribe to any fund for the benefit of such persons or their families.
The GCA can collect funds for the purpose of the Association and utilise it in
such manner as its Managing Committee considers desirable for the fulfilment of
its objects.
220. The assessing authorities denied GCA’s claim and that of the other
associations, that they were charities. Before the ITAT, it was contended, on
behalf of the revenue, inter alia, that looking at the nature of the relationship of
124
these state cricket associations with the Board of Cricket Control of India (BCCI),
the amounts received by these associations from BCCI were in the nature of
consideration or fees, for granting media rights, and collecting their share, among
other things. This amounted to a business or commercial activity. It would, in this
context, be useful to quote the observations set out in the ITAT’s order (which
were part of the commissioner’s order). The Commissioner had taken note of
assessment proceedings in relation to BCCI, and set out its submissions:
“9.7.2 The AO of BCCI, based on the communication of DIT(E), Mumbai, has
not granted benefit of section 11 & 12 of the Act to BCCI. The stand taken by
BCCI during its assessment proceedings is mentioned below. The BCCI vide
its submission dated 03/12/2012 to the AO has explained its relationship with
State Cricket Association as follows:-
"1. BCCI is society registered under the Tamil Nadu Societies Registration
Act. It was formed in the year 1929 with the object of promotion and
development of cricket in India and is a member of the International Cricket
Council (ICC) the regulatory body for world cricket. As a member of ICC,
BCCI represents India in bilateral tours between member countries and in
ICC tournaments such as the World Cup.
2. BCCI has 30 members out of whom 25 are state cricket associations, 2 are
private clubs and 3 are Central Government Institutions. BCCI does not own
or manage the infrastructure and facilities that are required for cricket. It
encourages and oversees the various state associations to promote the game,
build the required infrastructure organize tournaments, leagues, coaching
camps etc. in their respective states. Whenever a foreign team visits India, the
international matches such as Test and ODI are allotted by BCCI to the State
Cricket Associations by a rotation policy. The matches are conducted and
managed by the respective state associations and over time, arrangements
have evolved about the respective responsibilities, rights, shares of revenue
etc. These have evolved in order to promote co-operation and unity among
the member associations and by applying the principles of equity and
fairness, for which the sport of cricket is renowned."
9.7.3 The BCCI in its submission dated 21/1/2013 earned subsidy paid to
SCAs and TV Subvention as stated as follows:-
"13.2
PAYMENTS TO STATE ASSOCIATIONS
During the year, BCCI has paid amounts to the state associations under the
head "TV, Subventions to Associations". This represents payment of 70% of
the revenue from sale of media rights to the state associations".
Whenever a foreign team visits India, the international matches such as Test
and ODI are allotted by BCCI to the state cricket associations by a rotation
policy. The matches are conducted and managed by the respective state
associations. It is not possible for BCCI to conduct all these matches with its
own limited personnel. It is dependent on the state associations, their office
125
bearers, their employees and their network and resources at the local centre
to conduct the matches.
The association manage the entire match right from provision of security to
players, spectators in coordination with respective state police personnel,
taking other security measures like fire prevention etc. The association incurs
a good chunk of expenditure in conducting an International
Test/ODI/T20/IPL/CL T20 Matches.
In order to have fair and equitable sharing of the revenues, arrangements
have evolved over time, about the respective responsibilities, rights, shares of
revenue etc. of BCCI and the state associations. The state association is
entitled to the ticket revenue and ground sponsorship revenues. Expenses on
account of security for players and spectators, temporary stands, operation
of floodlights, Score Boards, management of crowd. Insurance for the match,
electricity charges, catering etc are met by the state associations. On the other
had expenditure on transportation of players and other match officials,
boarding and lodging, expenses on food for players and officials, tour fee,
match fee, etc are met by BCCI and revenues from sponsorship belong to
BCCI. In respect of revenues from sale of media rights, an arrangement has
evolved over time. Until 1991-92 the income from media rights was meager.
With the growth in income from media rights, it became necessary to optimize
the arrangement for sale of media rights. For a Test series or ODI series
conducted in multiple centers and organised by BCCI and multiple state
associations, it was found that if each state association were to negotiate the
sale of rights to events in its centre, its negotiating strength would be low. It
was, therefore, agreed that BCCI would negotiate the sale of media rights for
the entire country to optimize the income under this head. It was further
decided that out of the receipts from the sale of media rights 70% of the gross
revenue less production cost would belong to the state associations. Every
year, BCCI has paid out exactly 70% of its receipts from media rights (lessproduction cost) to the state associations. This amount has been utilized by
the respective associations to build infrastructure and promote cricket,
making the game more popular, nurturing and encouraging cricket talent,
and leading to higher revenues from media rights.
************* ****************
Even in the event that exemption under section 11 is denied, the payments to
state associations must be allowed as a deduction, as expenditure laid out or
expended wholly and exclusively for the purpose of earning such income, it
must be appreciated that in order to earn revenues, BCCI was and continues
to be highly dependent on the state associations. BCCI does not have the
infrastructure and the resources to conduct the matches by itself and is
dependent on the state associations to conduct the matches. The income from
media rights is dependent on the efforts of the state associations in conducting
the matches from which the media rights accrue. The division of revenues and
expenditure is a matter of arrangement between the parties. Certain incomes
such as sale of ticket revenues belong to the state associations, who meet the
expenditure on the matches such as security for players and spectators
temporary stands, operation of floodlights, Score Boards, management of
crowd, insurance for the match, electricity charges, catering etc. Whereas
with regard to the income from sale of media rights, the arrangement between
126
BCCI and the State Associations has been that 70% of the revenue would
belong to the State Associations. As shown, this has been the arrangement
between the parties for the twenty years. The State Associations are entitled
by virtue of established practice to 70% of the media right fee. It is in
expectation of this revenue that the various state associations take an active
part and cooperate in the conduct of the matches. This payment is therefore
made only with a view to earn the income from media rights.”
221. The ITAT accepted the assessee’s contentions, and held that the
associations were GPU charities:
“35. Let us take a pause here and examine as to what are the activities of the
assessee cricket associations so as to be brought within the ambit of trade,
commerce or business. We have seen objects of the association, which are
reproduced earlier in our order, and it is not even the case of the revenue
that these objects have anything to do with any trade, commerce or business;
these objects are simply to promote cricket. The trigger for invoking proviso
to Section 2(15), as Shri Soparkar rightly contends, has to an activity of the
assessee which is in the nature of trade, commerce or business. However,
the case of the revenue authorities hinges on the allegation that the way and
manner in which cricket matches are being organized, particularly the IPL
matches, the activity of organizing cricket matches is nothing but brute
commerce. Undoubtedly, it would appear that right from the time Kerry
Packer started his World Series Cricket in 1977, there has been no looking
back in commercialization of cricket and the impact of this
commercialization has not left Indian cricket intact. The Indian Premier
League and the rules of the game being governed by the dictates of
commercial considerations may seem to be one such example of
commercialization of Indian cricket. The difficulty for the case of the revenue
before us, however, is that these matches are not being organized by the local
cricket associations. We are told that the matches are being organized by the
Board of Cricket Control of India, but then, if we are to accept this claim
and invoke the proviso to Section 2(15) for this reason, it will amount to a
situation in which proviso to Section 2(15) is being invoked on account of
activities of an entity other than the assessees- something which law does not
permit. We are not really concerned, at this stage, whether the allegations
about commercialization of cricket by the BCCI are correct or not, because
that aspect of the matter would be relevant only for the purpose of proviso
to Section 2(15) being invoked in the hands of the BCCI. We do not wish to
deal with that aspect of the matter or to make any observations which would
prejudge the case of the BCCI. Suffice to say that the very foundation of
revenue's case is devoid of legally sustainable basis for the short reason that
the commercialization of cricket by the BCCI, even if that be so, cannot be
reason enough to invoke the proviso to Section 2(15). We are alive o learned
Commissioner (DR)'s suggestion that the cricket associations cannot be seen
on standalone basis as the BCCI is nothing but an apex body of these cricket
associations at a collective level and whatever BCCI does is at the behest of
or with the connivance of the local cricket associations, and that it is not the
case that anyone can become a Member of the BCCI because only a
127
recognized cricket association can become a Member of the BCCI. We are
also alive to learned Commissioner's argument that what is being sought to
be protected by the charitable status of these associations is the share of
these cricket associations from the commercial profits earned by the BCCI
by organizing the cricket matches. The problem, however, is that the
activities of the apex body, as we have explained earlier, cannot be reason
enough to trigger proviso to Section 2(15) in these cases. Whether these
cricket associations collectively constitute BCCI or not, in the event of BCCI
being involved in commercial activities, the taxability of such commercial
profits will arise in the hands of the BCCI and not the end beneficiaries. Even
in such a case the point of taxability of these profits is the BCCI and not the
cricket associations, because, even going by learned Commissioner's
arguments, these receipts in the hands of the cricket associations is nothing
but appropriation of profits. What can be taxed is accrual of profits and not
appropriation of profits. In any event, distinction between the cricket
associations and the BCCI cannot be ignored for the purposes of tax
treatment. There is no dispute that the matches were organized by the BCCI,
and the assessee cannot thus be faulted for the commercial considerations
said to be inherent in planning the matches. As we make these observations,
and as we do not have the benefit of hearing the perspective of the BCCI, we
make it clear that these observations will have no bearing on any
adjudication in the hands of the BCCI. Suffice to say that so far as the cricket
associations are concerned, the allegations of the revenue authorities have
no bearing on the denial of the status of 'charitable activities' in the hands
of the cricket associations before us- particularly as learned Commissioner
has not been able to point out a single object of the assessee cricket
associations which is in the nature of trade, commerce or business, and, as
it is not even in dispute that the objects being pursued by the assessee cricket
associations are "objects of general public utility" under section 2(15). All
the objects of the assessee cricket associations, as reproduced earlier in this
order, unambiguously seek to promote the cricket, and this object, as has
been all along accepted by the CBDT itself, an object of general public
utility.”
222. In granting relief, the ITAT was persuaded by the decision of the Madras
High Court, in Tamil Nadu Cricket Association v. Director of Income Tax
(Exemptions) & Ors.153
, and held
“54. The assessee is a member of the Board of Control for Cricket in India
(BCCI), which in turn is a member of ICC (International Cricket Council).
BCCI allots test matches with visiting foreign team and one day international
matches to various member cricket associations which organise the matches
in their stadia. The franchisees conduct matches in the stadia belonging to
the State cricket association. The State association is entitled to all in-stadia
sponsorship advertisement and beverage revenue and it incurs expenses for
the conduct of the matches. BCCI earns revenue by way of sponsorship and
153 [2014] 360 ITR 633 (Mad)
128
media rights as well as franchisee revenue for IPL and it distributes 70 per
cent, of the revenue to the member cricket association. Thus, the assessee is
also the recipient of the revenue. Thus, for invoking section 12AA read with
section 2(15) of the Act, the Revenue has to show that the activities are not
fitting with the objects of the association and that the dominant activities are
in the nature of trade, commerce and business. We do not think that by the
volume of receipt one can draw the inference that the activity is commercial.
The Income-tax Appellate Tribunal's view that it is an entertainment and,
hence, offended section 2(15) of the Act does not appear to be correct and
the same is based on its own impression on free ticket, payment of
entertainment tax and presence of cheer group and given the irrelevant
consideration. These considerations are not germane in considering the
question as to whether the activities are genuine or carried on in accordance
with the objects of the association. We can only say that the Income-tax
Appellate Tribunal rested its decision on consideration which are not
relevant for considering the test specified under section 12AA(3) to impose
commercial character to the activity of the association. In the circumstances,
we agree with the assessee that the Revenue has not made out any ground to
cancel the registration under section 12AA(3) of the Act.
55. As regards the observation of the Income-tax Appellate Tribunal that IPL
matches and Celebrity cricket matches are also being held by the association
and hence, it is an entertainment industry, we need not go into these aspects
for the order of the Director of Income-tax (Exemptions) casts no doubt on
the genuineness of the objects of the trust. Hence, it is for the Assessing
Officer to take note of all facts, while considering the same under section 11
of the Income-tax Act, 1961. We disapprove the approach of the Tribunal in
this regard. In the above said circumstances, we set aside the order of the
Income-tax Appellate Tribunal.”
223. The ITAT agreed with the assessees that TV subsidy amounts received by
the associations were “corpus donations” in furtherance of the BCCI’s resolution
dated 05.09.2001. It accordingly held that these amounts were in the capital field,
irrespective of whether they were fully utilized by the state association, or
whether some part of it, was given to district associations. Thus, for AY 2009-
2010, the sum of ₹3,52,86,521 paid by BCCI to GCA was subsidy, falling in the
capital field.
224. It was urged on behalf of the Revenue that the cricket associations are not
carrying on any charitable activity; reliance was placed on the facts to say that
substantial amounts were received by the state associations, towards their share
of sale of media rights (as constituents or members of BCCI), which are
commercial receipts. Although the sale of those rights was by the BCCI, the lion’s
129
share of those amounts was that of the respective state associations. Furthermore,
the state associations owned the stadia, and actually conducted the matches, in
respect of which stadium advertisements and sponsorship amounts were received:
these, too, were in the nature of business or commercial activities. The assessees
on the other hand, submitted that they are distinct from the BCCI. It was sought
to be urged that the activity of sports and sport promotion is basically education,
and hence, per se exempt. Realizing the value of inculcating sportsmanship and
fostering the culture of sport, Parliament had introduced Section 10(23), to
exempt income received by sports bodies. However, that was deleted w.e.f.
01.04.2003. It was argued that this does not preclude sports bodies, like cricket
associations from claiming to be charities. It was urged that even if the court were
not to consider the cricket associations to be education-related charities, they
cannot be denied the status of GPU charities, having regard to the sports
promotional nature of their objects. It was submitted that these bodies are
primarily responsible for fostering the sport, talent spotting, nurturing it, and
providing opportunities to those who have the aptitude and passion for the game
of cricket. All these are objects of general public utility. It was submitted that the
amounts which BCCI collects may or may not be in the course of commerce;
however, what is given to the associations is subsidy, which cannot be termed as
consideration for carrying on any commercial activity.
225. At the outset, the contention that sports promotion is ‘education’ and
hence, per se exempt, has to be dealt with. In Lok Shikshana Trust (supra) this
court has comprehensively addressed the scope of the term, and conclude that it
would entail “scholastic” education:
“5. The sense in which the word “education” has been used in Section 2(15)
is the systematic instruction, schooling or training given to the young in
preparation for the work of life. It also connotes the whole course of
scholastic instruction which a person has received. The word “education”
has not been used in that wide and extended sense, according to which every
acquisition of further knowledge constitutes education. According to this wide
and extended sense, travelling is education, because as a result of travelling
130
you acquire fresh knowledge. Likewise, if you read newspapers and
magazines, see pictures, visit art galleries, museums and zoos, you thereby
add to your knowledge. Again, when you grow up and have dealings with
other people, some of whom are not straight, you learn by experience and
thus add to your knowledge of the ways of the world. If you are not careful,
your wallet is liable to be stolen or you are liable to be cheated by some
unscrupulous person. The thief who removes your wallet and the swindler
who cheats you teach you a lesson and in the process make you wiser though
poorer. If you visit a night club, you get acquainted with and add to your
knowledge about some of the not much revealed realities and mysteries of life.
All this in a way is education in the great school of life. But that is not the
sense in which the word “education” is used in clause (15) of Section 2. What
education connotes in that clause is the process of training and developing
the knowledge, skill, mind and character of students by formal schooling.”
Therefore, there is no doubt that the claim of the present sport associations will
not fall within ‘education’ and will have to be examined under the fourth limb of
Section 2(15) – i.e., GPU category, if it is to make a case for tax exemption.
226. BCCI is the body which regulates cricket and represents the country.
Within the country it organizes and conducts the Ranji Trophy, the Irani Trophy,
the Duleep Singh Trophy, the Deodar Trophy and the NKP Salve Challenge
Trophy. These are domestic events, yet only those who are members of the Board
and/or recognized by it can take part in these events. The members of the Board
(entitled to vote in its election) are the state cricket associations.154
 The BCCI is
the country-level cricket regulator both off and on the fields, and its functions
include selection of players and umpires. The International Cricket Council (of
which BCCI, as the representative body of the country, is a member) possesses
and exercises all the powers to regulate international competitive cricket. It also
exercises disciplinary power – in case of violation of the rules, a country member
or the player may be derecognized. The ICC exercises a monopoly over the sports
at the international level whereas BCCI does so at the country level. BCCI
recognizes bodies which are entitled to participate in the nominated tournaments.
Players and umpires also are to be registered with it.
154 Rule 3 (a) (ii) (B) of the latest BCCI Memorandum of Association and the Rules and Regulations
131
227. The game of competitive cricket, at the organizational level is structured
in such a manner that BCCI has umbilical ties with the state associations. Not
only are the latter, the members who constitute BCCI and elect its governing
bodies, they also own vital infrastructure necessary to play cricket: such as stadia,
and all related facilities. BCCI does not own those facilities or infrastructure and
depends on them. Furthermore, the state associations are the channels through
which players are mostly selected, and get opportunities to participate in state,
national and international level cricket.
228. As things stand, therefore, the state associations and BCCI are linked
closely. The management of the game of cricket is structured in such a way that
this link is apparent at every match or fixture of significance. In the course of
conducting matches (which are scheduled by the BCCI as the national coordinating body), apart from amounts received towards sale of entry tickets, the
state associations also receive advertisement money, sponsorship fee, etc. from
the BCCI. Aside from these, media rights - i.e., broadcasting rights to each
national or international event conducted at various locales owned by the state
associations, and digital rights (all of which are exclusive, in nature) - are
auctioned by BCCI. As noticed above, the BCCI, by its own admission,
negotiates the terms on which media rights are sold, on behalf of the state
associations:
“For a Test series or ODI series conducted in multiple centers and
organised by BCCI and multiple state associations, it was found that if each
state association were to negotiate the sale of rights to events in its centre,
its negotiating strength would be low. It was, therefore, agreed that BCCI
would negotiate the sale of media rights for the entire country to optimize
the income under this head. It was further decided that out of the receipts
from the sale of media rights 70% of the gross revenue less production cost
would belong to the state associations. Every year, BCCI has paid out
exactly 70% of its receipts from media rights (less- production cost) to the
state associations. This amount has been utilized by the respective
associations to build infrastructure and promote cricket, making the game
more popular, nurturing and encouraging cricket talent, and leading to
higher revenues from media rights.”
132
229. These media, or broadcasting rights, are in the nature of intellectual
property rights: under Section 37 to 40 of the Copyrights Act, 1957. These rightsespecially television and digital rights enable the licensee or the successful bidder
to exploit the telecast or broadcast commercially, by carrying advertisements of
various products and services, in the media. Given that (i) BCCI does not own
the stadia, and uses the entire physical infrastructure of the state associations (ii)
expressly negotiates on their behalf for the sale of such rights (which appear to
be purely commercial contracts), the associations’ assertions that they only
received subsidy from BCCI, needed closer examination.
230. The income and expenditure account for the year ending on 31.03.2009
shows that the total income of the GCA was ₹4,03,98,736.81. Of these
sponsorship money was ₹20,00,000/-; bank interest was ₹2,21,88,527.05 and as
against the head ‘India v. South Africa test match’, the sum of ₹1,51,97,741/- has
been shown. Of the total of ₹2,21,02,441.45 shown as income, ₹32,24,591.25 is
shown as expenditure, only a fraction appears to have been expended towards
promotion of cricket. This is apparent from the following:
S. No. Details of expenditure Amounts
1. Ground equipment of District Cricket Association ₹ 29,34,394/-
2. Prize money to all teams ₹ 27,86,796/-
3. Ground expenditure ₹ 20,06,228/-
4. Cricket academy expenses ₹ 9,51,067/-
5. Coach Fee ₹ 10,06,040/-
6. Senior and Junior tournament subsidy to District
Cricket Association
₹ 7,00,000/-
Total ₹ 1,03,84,525/-
231. The details of the subsidy amounts received from BCCI for every match
has been shown. This aggregates to over ₹41 lakhs. Furthermore, the details
received towards the India-South Africa test fixture paid between 03.04.2008-
133
04.04.2008 has been shown. GCA received ₹1,57,00,000/- towards sale of space;
ticket sales yielded ₹27,57,700 and towards the head screen income, a sum of ₹3
lakhs was received. After deducting the expenditure, the excess income received
for the year was ₹1,51,97,741/-.
232. In the case of Saurashtra Cricket Association, for the year ended on
31.03.2012, various heads of income have been disclosed. These include entry
fees which is ₹5200 onwards. Interest of income received from Fixed Deposits
was to the tune of ₹8,85,67,418/-; total amount of subsidy received from BCCI is
₹17,56,72,490/-. Of these, the overwhelming share is towards the IPL money
collected by the BCCI – wherein Saurashtra Cricket Association’s share worked
out to a total of ₹17,16,32,490/-.
233. Apart from this, the BCCI also reimbursed to Saurashtra Cricket
Association the sum of ₹73,73,911/-. The income and expenditure account shows
a head titled “subvention income from BCCI” to the extent of ₹8,14,53,834/-.
After deducting the heads of expenditure, excess of income over expenditure for
the AY was ₹69,96,537/-. The Cricket Association showed in the expenditure
column that the sum of ₹24,00,00,000/- was transferred to the Cricket
infrastructure fund. For the previous year, a sum of ₹21,21,00,000/- was
transferred to the stadium fund.
234. It is quite evident that the activities of the cricket associations are run on
business lines. The associations own physical and other infrastructure, maintain
them, have arrangements for permanent manpower and have well-organised
supply chains to cater to the several matches they host. Many such matches are
not at national level and are under-16 or under-18 matches at the regional level.
However, these activities are not to be seen in isolation but are to be regarded as
part of the overall scheme, and ecosystem in which the game of cricket is
organized in India. Talent is spotted, at local levels and dependent on the promise
shown, given appropriate exposure.
134
235. On a close scrutiny of the expenses borne, having regard to the nature of
receipts, the expenditure incurred by Cricket Associations does not disclose that
any significant proportion is expended towards sustained or organized coaching
camps or academies. Therefore, in the opinion of this court, the ITAT fell into
error in not considering the nature of receipts flowing from the BCCI into the
corpus of GCA and SCA – as well as other associations that are before this courtto determine their true character. The ITAT appears to have been swayed by the
submission that the amount given by the BCCI were towards capital subsidy.
236. To determine whether a given receipt is to be characterized as falling in the
revenue or capital stream, the objective for which it is given as well as the manner
in which it is utilized has to be scrutinized. This aspect has been highlighted in
Sahney Steel & Press Works Ltd v. Commissioner of Income Tax155 in the
following terms:
“It is not the source from which the amount is paid to the assessee which is
determinative of the question whether the subsidy payments are of revenue or
capital nature. The first proposition stated by Viscount Simon in Ostime
case [28 TC 261 : (1946) 1 All ER 668] is that if payments in the nature of
subsidy from public funds are made to the assessee to assist him in carrying
on his trade or business, they are trade receipts.”
This has later been followed in Commissioner of Income Tax v. Ponni
Sugars156
.
237. Recent trends have shown that media rights, especially broadcasting and
digital media rights have yielded colossal revenues to the BCCI. The model
adopted in the last 10 years or so has been to auction media rights in respect of
events over a 3 or 5-year period. As discussed previously, these media rights are
not per se owned by BCCI, which is but an association of persons or agglomerate
of all the State Cricket Association. The stadia which form the venue for these
cricket matches (in relation to which media rights are transferred or licensed) are
155 1997 (Supp 4) SCR 189
156 2008 (9) SCC 337
135
owned by the State Cricket Associations. According to the BCCI itself, the State
Associations can well bargain and enter into arrangements for the sale of such
media rights. However, to obtain better terms, and gain bargaining leverage a
centralized form of sale of such rights has been agreed and adopted by which the
BCCI auctions these rights on behalf of the State Associations. All State
Associations put together are entitled to 70% of the revenue – i.e., the proceeds
of sale of the media rights. This may or may not be in proportion to the events
hosted by each or some of the cricket associations. Yet, this forms part of the
arrangement by which the consideration flowing from such commercial rights has
been agreed to be shared amongst all members of the BCCI. These rights are
apparently commercial.
238. In the light of these, the Court is of the opinion that the ITAT – as well as
the High Court fell into error in accepting at face value the submission that the
amounts made over by BCCI to the cricket associations were in the nature of
infrastructure subsidy. In each case, and for every year, the tax authorities are
under an obligation to carefully examine and see the pattern of receipts and
expenditure. Whilst doing so, the nature of rights conveyed by the BCCI to the
successful bidders, in other words, the content of broadcast rights as well as the
arrangement with respect to state associations (either in the form of master
documents, resolutions or individual agreements with state associations) have to
be examined. It goes without saying that there need not be an exact correlation or
a proportionate division between the receipt and the actual expenditure. This is in
line with the principle that what is an adequate consideration for something which
is agreed upon by parties is a matter best left to them. These observations are not
however, to be treated as final; the parties’ contentions in this regard are to be
considered on their merit.
(vi) Private trusts
(a)Tribune Trust
136
239. The Tribune Trust was constituted pursuant to a will executed by late
Sardar Dial Singh Majithia. In clause (xxi) of his Will – after nominating three
trustees, the testator directed that they ought to maintain a press and a newspaper;
in clause (xx) the testator directed that his property in the Tribune Press and
newspaper would vest permanently in a Committee of Trustees who would
thereafter maintain them and “keep up the liberal policy of the newspaper and
activity and the excess income after current expenses in improving the said
newspaper and place it on a footing of permanency”.
240. Under the old Act, a question arose as to whether the activity of running a
newspaper was one of general public utility; the revenue disallowed the
exemption for AY 1932-33. This was affirmed by the Lahore High Court. The
Privy Council by its decision in In Re: Trustees of Tribune (supra) allowed the
trust’s appeal and held that the trust was neither constituted for private profit
either to the testator nor to any other private person, and that the object of the
paper could be described as one “supplying the province with an organ of
educated public opinion”. The Privy Council, therefore, reasoned that the Trust
was established as a GPU charity.
241. Apparently, the trust was continuously treated as a GPU category charity
and exempted under Section 10(23C)(iv) from 1984-85 onwards. For AY 2009-
10, after considering the revised return of the trust, the Revenue was of the
opinion that it was not entitled to claim exemption under Section 10(23C). The
Punjab and Haryana High Court which dealt with the Trust’s present appeal was
of the opinion that in Surat Art Silk (supra), this court had considered the
judgment of the Privy Council. In that judgment, this Court had made some
observations that even though the activity of the publication of newspaper was
carried on commercial lines with the object of earning profit, it was an activity
engaged by the Trust for the purposes of carrying out its charitable objects. The
High Court upheld the revenue’s contention and based upon its analysis of
137
Section 2(15) concluded that the Trust’s income derived from its activities were
based on profit motive. In doing so, it was noticed that 85% of the trust’s revenue
was from advertisements and interest. The total revenue was ₹161 crores out of
which ₹124.87 crores was received from advertisements and ₹11.38 crores from
interest on FDRs; ₹17.49 crores was from sale of newspapers and ₹3.74 crores
from subscriptions of the dailies.
242. It was argued on behalf of the trust that it was never intended and in fact,
not run on profitable basis. No part of its income was ever disbursed to any private
individual through profit sharing or otherwise, nor distributed for any purpose
other than the activities of the Trust. It was submitted that the High Court’s
surmise that the accumulation of large profits and its assumption that the Trust
could utilize them for non-charitable purposes in future, was unfounded. In this
regard, it was submitted that till 2008-09 all assessments were completed, since
the Revenue was satisfied that more than 85% had been ploughed back to feed
the main charitable activity.
243. It is noticed from the impugned judgment that the High Court concedes to
the fact that the trust’s activities were held by the Privy Council to constitute
financing of objects of ‘general public utility’; further that merely because
thousands of newspapers were being published made no difference. It still
continues to be a GPU charity.
244. The question then is whether the nature of receipts and income garnered by
the Trust, in the course of actually carrying out its activity of publishing
newspaper, can be characterized as “in the nature of trade, commerce or
business” or “service in relation to trade, commerce or business”, for any
consideration. During the course of submissions, it was urged that advertisement
revenue should not be treated as business or commercial receipts since that
virtually is the lifeblood which sustains the activity of publication of newspapers.
It was highlighted that the object of maintaining the activity of publishing and
138
distribution of newspaper remains the advancement of general public utility, as it
has the effect of both notifying and educating the general public about the current
affairs and developments. The inclusion of advertisements also serves as
information to the general public, especially in areas of employment, availability
of resources, etc. Therefore, publication of advertisement is intrinsically
connected with the activity of printing and publishing of newspapers.
245. The publication of advertisements for consideration, in the opinion of the
court, by the newspaper, cannot but be termed as an activity in the nature of
carrying on business, trade or commerce for a fee or consideration. That the
newspaper published by the trust (“the Tribune”) in this case is funded mainly
through advertisement is no basis for holding that publishing such advertisements
by the Trust does not constitute business. The object of the trust to involve or
engage in publication of newspapers. Publishing advertisements is obviously to
garner receipts which are in the nature of profit. Now, by virtue of the amended
definition of Section 2(15), GPU charities can engage themselves in business or
commercial activity or profit, only if the receipts from such activities do not
exceed the quantitative limit of the overall receipts earned in a given year. While
the assessee’s contention that publication of advertisement is intrinsically linked
with newspaper activity (thereby fulfilling sub-clause (i) of the proviso to Section
2(15), i.e. an activity in the course of actual carrying on of the activity towards
advancement of the object) is acceptable, nevertheless, the condition imposed by
sub-clause (ii) of the proviso to Section 2(15) has to also be fulfilled. In the
present case, that percentage had been exceeded, as evident from the record.
246. In the light of the foregoing discussion, this court is of the opinion that the
impugned judgment and order of the Punjab and Haryana High Court cannot be
sustained, to the extent it holds that the Tribune trust is not a GPU charity.
However, having regard to the factual analysis, the judgment needs no
interference.
139
(b)Shri Balaji Samaj Vikas Samiti
247. The revenue appeals a decision of the Allahabad High Court157 affirming
the order of the ITAT which had directed the CIT to grant registration under
Section 12AA of the Income Tax Act.
248. The assessee is a registered society which was formed with the object of
establishing and running a health club, Arogya Kendra; its object included
organization of emergency relief centres, etc. Other objects, included promotion
of moral values, eradication of child labour, dowry, etc. The assessee had entered
into arrangements with the state agencies to supply mid-day meals to students of
primary schools in different villages through contracts entered into with the Basic
Shiksha Adhikari, District Meerut. It is a matter of record that the materials for
preparation of mid-day meal was supplied by the government. The assessee
society claimed that it only obtains nominal charges for preparation of mid-day
meals. The assessee’s claim for registration was rejected on the ground that it was
involved in commercial activity. Upon appeal, the ITAT agreed with the assessee
that supply of mid-day meals did not constitute business or commerce and that it
promoted the objects of general public utility.
249. The revenue in its appeal contends that the assessee’s only activity for the
relevant year was supply of mid-day meals to primary schools. This was not
relatable to any object of the society. The assessee’s contention is that the state
ordinarily would have carried on the activity of supply of mid-day meals. Yet,
nevertheless it outsourced its activity to an outside agency like the assessee which
performed it for nominal charges.
250. This court is of the opinion that there is no clarity with respect to whether
the activity of supplying mid-day meals falls within the objects clause of the
assessee society. The order of the ITAT as well as the High Court disclosed that
157 Dated 09.02.2018 in ITA 49/2014.
140
the assessee’s objects involved maintenance of health clubs, Arogya Kendra,
promotion of moral values and provision of emergency relief. These do not
however include the activity which it actually performed, i.e., entering into
contracts for supply of mid-day meals and the activity of cooking and supply of
mid-day meals. In the absence of fuller material, it would not be possible for the
court to assess the activity with which the assessee was engaged, and determine
whether it could be said to legitimately fall within the description of GPU.
251. The first consideration would be whether the activity concerned was or is
in any manner covered by the objects clause. Secondly, the revenue authorities
should also consider the express terms of the contract or contracts entered into by
the assessee with the State or its agencies. If on the basis of such contracts, the
accounts disclose that the amounts paid are nominal mark-up over and above the
cost incurred towards supplying the services, the activity may fall within the
description of one advancing the general public utility. If on the other hand, there
is a significant mark-up over the actual cost of service, the next step would be
ascertain whether the quantitative limit in the proviso to Section 2(15) is adhered
to. It is only in the event of the trust actually carrying on an activity in the course
of achieving one of its objects, and earning income which should not exceed the
quantitative limit prescribed at the relevant time, that it can be said to be driven
by charitable purpose.
252. This court, in the normal circumstances, having regard to the above
discussion, would have remitted the matter for consideration. However, it is
apparent from the records that the tax effect is less than Rs.10 lakhs. It is apparent
that the receipt from the activities in the present case did not exceed the
quantitative limit of Rs.10 lakhs prescribed at the relevant time. In the
circumstances, the impugned order of the High Court does not call for
interference.
141
IV. Summation of conclusions
253. In view of the foregoing discussion and analysis, the following conclusions
are recorded regarding the interpretation of the changed definition of “charitable
purpose” (w.e.f. 01.04.2009), as well as the later amendments, and other related
provisions of the IT Act.
A. General test under Section 2(15)
A.1. It is clarified that an assessee advancing general public utility cannot
engage itself in any trade, commerce or business, or provide service in relation
thereto for any consideration (“cess, or fee, or any other consideration”);
A.2. However, in the course of achieving the object of general public utility, the
concerned trust, society, or other such organization, can carry on trade, commerce
or business or provide services in relation thereto for consideration, provided that
(i) the activities of trade, commerce or business are connected (“actual carrying
out…” inserted w.e.f. 01.04.2016) to the achievement of its objects of GPU; and
(ii) the receipt from such business or commercial activity or service in relation
thereto, does not exceed the quantified limit, as amended over the years (Rs. 10
lakhs w.e.f. 01.04.2009; then Rs. 25 lakhs w.e.f. 01.04.2012; and now 20% of
total receipts of the previous year, w.e.f. 01.04.2016);
A.3. Generally, the charging of any amount towards consideration for such an
activity (advancing general public utility), which is on cost-basis or nominally
above cost, cannot be considered to be “trade, commerce, or business” or any
services in relation thereto. It is only when the charges are markedly or
significantly above the cost incurred by the assessee in question, that they would
fall within the mischief of “cess, or fee, or any other consideration” towards
“trade, commerce or business”. In this regard, the Court has clarified through
illustrations what kind of services or goods provided on cost or nominal basis
142
would normally be excluded from the mischief of trade, commerce, or business,
in the body of the judgment.
A.4. Section 11(4A) must be interpreted harmoniously with Section 2(15), with
which there is no conflict. Carrying out activity in the nature of trade, commerce
or business, or service in relation to such activities, should be conducted in the
course of achieving the GPU object, and the income, profit or surplus or gains
must, therefore, be incidental. The requirement in Section 11(4A) of maintaining
separate books of account is also in line with the necessity of demonstrating that
the quantitative limit prescribed in the proviso to Section 2(15), has not been
breached. Similarly, the insertion of Section 13(8), seventeenth proviso to Section
10(23C) and third proviso to Section 143(3) (all w.r.e.f. 01.04.2009), reaffirm this
interpretation and bring uniformity across the statutory provisions.
B. Authorities, corporations, or bodies established by statute
B.1. The amounts or any money whatsoever charged by a statutory corporation,
board or any other body set up by the state government or central governments,
for achieving what are essentially ‘public functions/services’ (such as housing,
industrial development, supply of water, sewage management, supply of food
grain, development and town planning, etc.) may resemble trade, commercial, or
business activities. However, since their objects are essential for advancement of
public purposes/functions (and are accordingly restrained by way of statutory
provisions), such receipts are prima facie to be excluded from the mischief of
business or commercial receipts. This is in line with the larger bench judgments
of this court in Ramtanu Cooperative Housing Society and NDMC (supra).
B.2. However, at the same time, in every case, the assessing authorities would
have to apply their minds and scrutinize the records, to determine if, and to what
extent, the consideration or amounts charged are significantly higher than the cost
and a nominal mark-up. If such is the case, then the receipts would indicate that
the activities are in fact in the nature of “trade, commerce or business” and as a
143
result, would have to comply with the quantified limit (as amended from time to
time) in the proviso to Section 2(15) of the IT Act.
B.3. In clause (b) of Section 10(46) of the IT Act, “commercial” has the same
meaning as “trade, commerce, business” in Section 2(15) of the IT Act.
Therefore, sums charged by such notified body, authority, Board, Trust or
Commission (by whatever name called) will require similar consideration – i.e.,
whether it is at cost with a nominal mark-up or significantly higher, to determine
if it falls within the mischief of “commercial activity”. However, in the case of
such notified bodies, there is no quantified limit in Section 10(46). Therefore, the
Central Government would have to decide on a case-by-case basis whether and
to what extent, exemption can be awarded to bodies that are notified under
Section 10(46).
B.4. For the period 01.04.2003 to 01.04.2011, a statutory corporation could
claim the benefit of Section 2(15) having regard to the judgment of this Court in
the Gujarat Maritime Board case (supra). Likewise, the denial of benefit under
Section 10(46) after 01.04.2011 does not preclude a statutory corporation, board,
or whatever such body may be called, from claiming that it is set up for a
charitable purpose and seeking exemption under Section 10(23C) or other
provisions of the Act.
C. Statutory regulators
C.1. The income and receipts of statutory regulatory bodies which are for
instance, tasked with exclusive duties of prescribing curriculum, disciplining
professionals and prescribing standards of professional conduct, are prima facie
not business or commercial receipts. However, this is subject to the caveat that if
the assessing authorities discern that certain kinds of activities carried out by such
regulatory body involved charging of fees that are significantly higher than the
cost incurred (with a nominal mark-up) or providing other facilities or services
such as admission forms, coaching classes, registration processing fees, etc., at
144
markedly higher prices, those would constitute commercial or business receipts.
In that event, the overall quantitative limit prescribed in the proviso to Section
2(15) (as amended from time to time) has to be complied with, if the regulatory
body is to be considered as one with ‘charitable purpose’ eligible for exemption
under the IT Act.
C.2. Like statutory authorities which regulate professions, statutory bodies
which certify products (such as seeds) based on standards for qualification, etc.
will also be treated similarly.
D. Trade promotion bodies
Bodies involved in trade promotion (such as AEPC), or set up with the objects of
purely advocating for, coordinating and assisting trading organisations, can be
said to be involved in advancement of objects of general public utility. However,
if such organisations provide additional services such as courses meant to skill
personnel, providing private rental spaces in fairs or trade shows, consulting
services, etc. then income or receipts from such activities, would be business or
commercial in nature. In that event, the claim for tax exemption would have to
be again subjected to the rigors of the proviso to Section 2(15) of the IT Act.
E. Non-statutory bodies
E.1. In the present batch of cases, non-statutory bodies performing public
functions, such as ERNET and NIXI are engaged in important public purposes.
The materials on record show that fees or consideration charged by them for the
purposes provided are nominal. In the circumstances, it is held that the said two
assessees are driven by charitable purposes. However, the claims of such nonstatutory organisations performing public functions, will have to be ascertained
on a yearly basis, and the tax authorities must discern from the records, whether
the fees charged are nominally above the cost, or have been increased to much
higher levels.
145
E.2. It is held that though GS1 India is in fact, involved in advancement of
general public utility, its services are for the benefit of trade and business, from
which they receive significantly high receipts. In the circumstances, its claim for
exemption cannot succeed having regard to amended Section 2(15). However,
the Court does not rule out any future claim made and being independently
assessed, if GS1 is able to satisfy that what it provides to its customers is charged
on cost-basis with at the most, a nominal markup.
F. Sports associations
So far as the state cricket associations are concerned (Saurashtra, Gujarat,
Rajasthan, Baroda, and Rajkot), this Court is of the opinion that the matter
requires further scrutiny, in light of the discussion in paragraphs 228-238 of the
judgment. Accordingly, a direction is issued that the AO shall adjudicate the
matter afresh after issuing notice to the concerned assessees and examining the
relevant material indicated in the previous paragraphs of this judgment.
Furthermore, if any consequential order needs to be issued, the same shall be done
and resulting actions, including assessment orders shall be passed in accordance
with the law under relevant provisions of the IT Act.
G. Private Trusts
So far as the appeal by assessee-Tribune Trust is concerned, it has been held that
despite advancing general public utility, the Trust cannot benefit from exemption
offered to entities covered by Section 2(15) as the records reveal that income
received from advertisements, constituted business or commercial receipts.
Consequently, the limit prescribed in the proviso to Section 2(15) has to be
adhered to for the Trust’s claim of being as a charity eligible for exemption, to
succeed. Therefore, despite differing reasoning, this court has held that the
impugned judgment of the High Court does not call for interference.
146
H. Application of interpretation
H. At the cost of repetition, it may be noted that the conclusions arrived at by
way of this judgment, neither precludes any of the assessees (whether statutory,
or non-statutory) advancing objects of general public utility, from claiming
exemption, nor the taxing authorities from denying exemption, in the future, if
the receipts of the relevant year exceed the quantitative limit. The assessing
authorities must on a yearly basis, scrutinize the record to discern whether the
nature of the assessee’s activities amount to “trade, commerce or business” based
on its receipts and income (i.e., whether the amounts charged are on cost-basis,
or significantly higher). If it is found that they are in the nature of “trade,
commerce or business”, then it must be examined whether the quantified limit (as
amended from time to time) in proviso to Section 2(15), has been breached, thus
disentitling them to exemption.
254. In accordance with the foregoing discussion, and summary of conclusions,
the numerous appeals are disposed of as follows:
(i) The revenue’s appeals against the Improvement Trust, Moga158, the
Hoshiarpur Improvement Trust159, Bathinda Improvement Trust160, Fazilka
Improvement Trust161, Sangrur Improvement Trust162; Patiala
Improvement Trust163, Jalandhar Improvement Trust164, Kapurthala
Improvement Trust165, Pathankot Improvement Trust166
, Improvement
Trust, Hansi167
, and the Special Leave Petitions filed against the Gujarat
158 CA Nos. 9974/2018 and 10371/2017
159 CA Nos. 12058/2017 and 9886/2018
160 CA Nos. 16375/2017, 2047/2019 and Diary No. 5683/2019
161 CA No. 10598/2018
162 CA No. 17527/2017
163 CA Nos. 9860/2018, 8321/2018, 2335/2019, 4449/2019 and 4957/2019
164 CA Nos. 12869/2017 and 10406/2018
165 CA No. 11259/2018
166 D. No. 44856/2018
167 CA No. 9200/2018
147
Maritime Board168 and Karnataka Water Supply and Drainage Board169 are
rejected.
(ii) The revenue’s appeals against Ahmedabad Urban Development
Authority170, the Gujarat Housing Board171, the Gandhinagar Urban
Development Authority172, Rajkot Urban Development Authority173, Surat
Urban Development Authority174, Jamnagar Area Development
Authority175, and the Gujarat Industrial Development Corporation176 are
rejected. Likewise, the revenue’s appeals against Agra Development
Trust177; UP Awas Evam Vikas Parishad178; Raebareli Development
Authority179, Rajasthan Housing Board180; Mangalore Urban Development
Authority181; Mathura Vrindavan Development Authority182; Meerut
Development Authority183; Belgaum Development Authority184;
Moradabad Urban Development Authority185, Yamuna Expressway
Industrial Development Authority186; Greater Noida Industrial
Development Authority187; New Okhla Industrial Development
168 SLP (C) Nos. 3759/2021, 4612/2021, 5167/2021, 4678/2021, 4636/2021, 4723/2021, 7854/2021 and
11683/2021
169 SLP (C) Nos. 8364/2021.
170 CA Nos. 21762/2017, 5719/2018, 6762/2018, 3343/2018, 3359/2018, 1643/2019, 3971/2019, SLP (C)
6686/2021, and SLP (C) No. 6580/2021
171 CA No. 6553/2019 and 783/2020
172 SLP (C) No. 5709/2021, 6005/2021 and 10490/2021
173 SLP (C) No. 7003/2021; 7166/2021; 6917/2021; 7510/2021; 7290/2021 and 7606/2021
174 SLP (C) No. 10908/2021; 7789/2021 and 11072/2021
175 SLP (C) No. 7302/2021 and 7011/2021
176 D. Nos. 39525/2017, 15525/2019, 21237-2019; 15488/2019; 15489/2019 and 21237/2019; CA Nos. 3971-
3972/2018, 170/2019; SLP (C) No. 15055/2019
177 C.A No. 10114/2018
178 SLP(C) No. 12304/2018
179 C.A. No. 6489/2018
180 SLP (C) No. 10912/2018
181 C.A No. 9172/2018
182 C.A No. 11884/2018
183 C.A No. 226/2019
184 C.A. No. 213/2020
185 SLP (C) No. 7779/2018
186 SLP (C) No. 14574/2019
187 C.A No. 3596/2018
148
Authority188 and Karnataka Industrial Areas Development Board189 are
rejected.
(iii) The revenue’s appeals190 against ICAI are dismissed and for the same
reasons, the appeals191 filed by the ICAI are hereby allowed.
(iv) The revenue’s appeal - C.A. No. 21845/2017, against Rajasthan State Seed
and Organic Production Certification Agency is rejected, whereas SLP (C)
No. 15547/2013 filed by Andhra Pradesh State Seed Certification Agency
is allowed for the same reasons.
(v) The revenue’s appeal against APEC succeeds in part. The impugned
judgment of the High Court is set aside; the matter is remitted for the
concerned years, to the Assessing Officer. SLP (C) No. 14995/2019 is
allowed, in the above terms.
(vi) In relation to the non-statutory bodies - the revenue’s appeal against
ERNET fails, and SLP (C) No. 15040/2019 is hereby dismissed; and
similarly the impugned judgment in relation to NIXI is confirmed –
SLP(C) No. 15079/2019 is therefore dismissed. However, the revenue’s
appeals against GS1 – C.A. No. 5058/2014 and C.A. No. 4374/2015, are
hereby allowed and the impugned judgments are set aside, for the reasons
elaborated in the body of the judgment.
(vii) The revenue’s appeals against the cricket associations before this court
succeed in part, and the impugned judgments of the Gujarat High Court
and Rajasthan High Court are hereby set aside. The matter is remitted to
the concerned authorities for determination of the question afresh in the
light of the above discussion and observations. D. No. 16597/2020, C.A
No. 7643/2018, C.A No. 8554/2018, D. No. 17255-2020, SLP (C) No.
188 CA No. 3347/2018
189 CA Nos. 4430/2021, 2477/2021, 2478/2021
190 CA Nos. 8193/2012, 5057/2012 and 4196/2015
191 SLP (C) No. 23975/2012; and CA No. 5056/2012
149
1404/2021, D. No. 19394-2020, D. No. 19399-2020, D. No. 19403-2020,
SLP (C) No. 11486/2020, SLP (C) No. 11124/2020, D. No. 19449-2020,
SLP (C) No. 12206/2020, D. No. 20986-2020, D. No.23310-2020, SLP (C)
No. 6253/2021, SLP(C) No. 19044/2021, D. No. 5806/2021, D. No.
6662/2021 are hereby allowed.
(viii) In relation to the private trusts, the appeal filed by the assesseee, Tribune
Trust - CA 9380/2017 is dismissed. The revenue’s appeal – SLP (C) No.
30597/2018, against Shri Balaji Samaj Vikas Samiti is dismissed, on
account of low tax effect.
255. This batch of matters is disposed of, in the above terms. Pending
applications, if any, are dismissed.
………..............................................................CJI.
 [UDAY UMESH LALIT]
 .…...………..........................................................J.
 [S. RAVINDRA BHAT]
..............................................................................J.
 [PAMIDIGHANTAM SRI NARASIMHA]
New Delhi,
October 19, 2022

Comments

Popular posts from this blog

100 Questions on Indian Constitution for UPSC 2020 Pre Exam

संविधान की प्रमुख विशेषताओं का उल्लेख | Characteristics of the Constitution of India

भारतीय संविधान से संबंधित 100 महत्वपूर्ण प्रश्न उतर