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Case Number

Income-tax Referred Case No. 77 of 1972

Advocates

For the Appellant: C. T. Peter T. C. Karunakaran V. M. Kurian A. I. Mohammed Basheer E. M. Shahul Hameed

Judges

P. Govindan Nair, C.J
M.U Isaac
George Vadakkel, JJ.

Acts

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Smart Summary

High Court Judgment Summary (Delivered by Govindan Nair, C.J.)

Factual and Procedural Background

This reference was made at the instance of the department by the Income-tax Appellate Tribunal, Cochin Bench, for the assessment year 1969-70. The question referred was whether the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961 for that assessment year.

The company's memorandum of association contained several relevant clauses. Clause 3(a) set out the main objects, including giving charity, promoting education and establishing or aiding associations, institutions, funds and trusts for promoting charity and/or education. Clause 3(b)(iv) described running "chitties (kuries)" as an incidental/ancillary object. Clause 3(c) included other objects allowing the company to establish, promote and carry on any other business which may seem profitable or advantageous. Additional provisions (identified in the opinion as clauses 4(iii) and 4(iv)) stated that the income and property of the company shall be applied solely for the promotion of its objects and that no portion of income or property shall be paid or transferred to members by way of dividend, bonus or profit.

The assessee's position was that no business under clause 3(c) had been actually carried on and no income derived from such business; that conducting chitties was described only as an incidental object; and that the income from chitties (kuries) therefore constituted property held under trust for a charitable purpose and was exempt under section 11 of the Income-tax Act. The Court noted that a batch of similar referred cases (Income-tax Referred Cases Nos. 51 to 56 and 79 of 1972) with practically the same facts had been decided by the Court just prior to this judgment.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 11 of the Income-tax Act, 1961 for the assessment year 1969-70.
Whether income derived from the business of conducting chitties (kuries), described in the memorandum as an incidental object, can be treated as property held under trust for charitable purposes and thereby be exempt under section 11, especially where the memorandum also contains wide "other objects" permitting business generally.

Arguments of the Parties

Assessee's Arguments

The memorandum's clause 3(c) (other objects) as required by section 13 of the Companies Act, 1956, did not reflect any actual business carried on by the assessee, and no income arose from those "other objects".
Conducting chitties was described only as an incidental object (clause 3(b)), and the main objects in clause 3(a) are charitable (giving charity, promoting education, establishing charitable associations/institutions/funds/trusts).
Accordingly, the income from the chitty business is property held under trust for charitable purposes and should be exempt under section 11 of the Income-tax Act.
Counsel relied on the Supreme Court decision in Oriental Investment Co. Ltd. v. Commissioner of Income Tax, Bombay to the effect that the mere fact that dealing in investments is within a company's objects does not necessarily make the company a dealer — i.e., mere power does not automatically mean the company is actually carrying on that business.

The opinion does not contain a detailed account of the department's separate legal arguments; the reference was made at the instance of the department and the ultimate answer was given in the department's favour.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Oxford Group v. Inland Revenue Commissioners [1949] 31 TC 221, 252 CA	Observation that a trust permitting expenditure of income on subsidiary activities (not purely religious/charitable) may not be a valid charitable trust; wide powers to spend on non-charitable activities undermine charitable character.	Used to support the proposition that if directors have discretion to apply income to non-charitable activities (including business), the trust ceases to be charitable and income cannot be exempted under section 11.
Keren Kayemeth Le Jisroel Ltd. v. Inland Revenue Commissioners [1932] 17 TC 27, 40–41 HL	Principle (Lawrence L.J.) that to obtain exemption, the memorandum must be confined to charitable purposes so that application to non-charitable purposes would be ultra vires; extensive secondary powers that are in substance objects of the company defeat charitable status.	Applied to show that wide "other objects" which permit carrying on business and leave the question of conduciveness to the company’s own opinion render the memorandum not confined to charitable purposes and negate exemption.
East India Industries (Madras) Private Ltd. v. Commissioner of Income-tax (Supreme Court)	Approved the principle from the English authorities that wide objects and powers to engage in business can prevent a company's property from being regarded as held for charitable purposes.	The Court referred to this Supreme Court approval in applying the same principle to the present facts concerning kuries/chitty business and the memorandum's wide objects.
Oriental Investment Co. Ltd. v. Commissioner Of Income Tax, Bombay (Supreme Court)	Held that the mere existence within a company's objects of the power to deal in investments/shares does not automatically characterise it as a dealer; mere power is not proof of carrying on that business.	The Court acknowledged the principle but held it inapplicable here because it was admitted that the company was actually carrying on kuries and conducting kuries is business; therefore mere-power reasoning did not assist the assessee.
Wilson Box (Foreign Rights) Ltd. (in liquidation) v. Brice (H.M. Inspector of Taxes)	Principle similar to Oriental Investment concerning the distinction between having power to carry on a business and actually being a dealer.	The Court noted this authority but found it not helpful on the facts because the company in the present case was actually conducting kuries (a business).
Income-tax Referred Cases Nos. 51–56 and 79 of 1972 (batch decided by this Court)	Applied the same principles to substantially similar facts (company conducting kuries and questions of charitable exemption).	The Court treated the present case as factually and legally similar and applied the same reasoning and conclusion as in those recently pronounced cases.

Court's Reasoning and Analysis

The Court began by examining the memorandum of association and the categorisation of objects: main objects (clause 3(a)), incidental/ancillary objects (clause 3(b), which included conducting kuries), and other objects (clause 3(c) permitting carrying on any other business deemed profitable).

The Court accepted that the assessee could rely on the principle that merely including a power to carry on business in the memorandum does not necessarily mean the company is actually carrying on that business (as in Oriental Investment). However, the Court emphasised that it was admitted the company was carrying on kuries and that conducting kuries is in fact a business.

The Court explained that, in light of changes to the definition of "charitable purpose", the formal distinction between a "main" object and an "incidental" object has diminished importance. The decisive consideration is whether the business is so linked or connected with the company's objects that, given the nature of those objects (including objects of general public utility), the purported charitable purpose still falls within the statutory definition of "charitable purpose".

The Court reasoned that where an incidental object (or any purpose of the company) is business, then for income from that business to be exempt, that income (or a specified part of it) must be exclusively applied to charitable purposes. If the memorandum and corporate powers give the directors a complete discretion to apply funds to charitable and non-charitable purposes (including business), that discretion undermines the charitable nature of the trust and precludes exemption. The Court relied on English authorities (Oxford Group and Keren Kayemeth) and the Supreme Court's approval (East India Industries) to support this legal proposition.

The Court concluded that because there was no restriction requiring that any part of the income from the business be applied exclusively to charitable purposes, and because an implied discretion existed in the directors to apply income/property to other objects (including business), the principle established in the Court's recently decided referred cases applied and exemption under section 11 could not be allowed.

The Court considered but rejected the assessee's reliance on Oriental Investment and Wilson Box because those authorities addressed whether the mere inclusion of a power in the memorandum meant the company was necessarily engaged in that business; in the present case the company was in fact conducting kuries and that activity was business.

Holding and Implications

Holding: The Court answered the referred question in the negative — that is, in favour of the department and against the assessee. The parties were directed to bear their respective costs, and a copy of the judgment under the seal of the High Court and signature of the Registrar was to be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

Implications: The direct effect is that the assessee is not entitled to exemption under section 11 for the assessment year 1969-70 with respect to income from the chitty (kuri) business, given the memorandum's wide objects and the absence of a restriction requiring exclusive application of that income to charitable purposes. The opinion applies and follows existing principles from English authorities and a Supreme Court approval; the judgment does not purport to establish a novel legal principle beyond applying those precedents and the Court's recently pronounced batch of referred cases.

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Commissioner Of Income-Tax, Kerala v. Dharmadeepti

The Judgment of the Court was delivered by

Govindan Nair, C.J:— This reference is at the instance of the department and the question referred to us for the year 1969-70 by the Income-tax Appellate Tribunal, Cochin Bench, reads as follows;

“Whether, on the facts and in the circumstances of the case, the assessee is entitled to exemption under section 11 of the Income-tax Act, 1961, for the assessment year 1969-70”

2. The relevant objects of the company are detailed in clauses 3(a), 3(b)(iv), 3(c), 4(iii) and 4(iv) and they read as follows:

“3. (a) The main objects to be pursued by the company on its incorporation are:

(i) to give charity.

(ii) to promote education.

(iii) to establish or aid in the establishment of associations, institutions, funds, trusts with the object of promoting charity and/or education provided that the company shall not support with its funds or endeavour to impose on, or procure to be observed by, its members or others any regulation or restriction which, if an object of the company, would make it a trade union.

(b) The objects incidental or ancillary to the attainment of the above main objects are:…….

(iv) to run chitties (kuries)……..

(i) to establish, promote and carry on any other business which may seem to the company profitable or advantageous and to establish offices and other places of business in this State or anywhere in India, as the directors deem necessary.

4. The objects of the company extend to all the States and Union.

(iii) the income and property of the company whencesoever derived shall be applied solely for the promotion of its objects as set forth in this memorandum.

(iv) no portion of the income or property aforesaid shall be paid or transferred, directly or indirectly by wav of dividend, bonus or otherwise by way of profit to persons who at any time are or have been members of the company or to any person claiming through any one or more of them.”

3. The assessee contended that no business activities as envisaged by clause 3(c) describing “other objects” in the memorandum as required by section 13 of the Companies Act, 1956, had been actually carried on by the assessee and no income whatever had been derived from any such business and the business of conducting the chitties has been described in the memorandum only as “incidental objects” and, as it is evident from the memorandum that the main objects of the company are those described in clause 3(a), the income from the conduct of business of chitties, which is the property held under trust, is property held under trust for a charitable purpose and must, therefore, be exempt from tax under section 11 of the Income-tax Act, 1961, for short, “the Act”. This is the very same question that we dealt with in a batch of cases, Income-tax Referred Cases Nos. 51 to 56 and 79 of 1972, *wherein the facts were practically the same and in which we pronounced judgment just now. We would, however, like to add a word more in this case in addition to what we said in our judgment in those cases. In view of the altered definition of the term “charitable purpose”, the question whether an object of a company is a main object or is only an incidental object loses much of its significance. We say so because we conceive that even in cases where a business is conducted not in carrying out the objects of the company but only in aid of achieving the objects of the company if that business is so linked or connected with the objects of the company and, if the objects are such that it will fall only under “objects of general public utility”, the charitable purpose will cease to be a charitable purpose as defined in the Act. And if the incidental object or even the purpose of the company is business, as conducting kuries is, the income or at least a specified part of it must be exclusively applicable to charitable purposes in order that income or the specified part thereof could be exempted from tax. A complete discretion in the directors to apply the funds to charitable and non-charitable purpose (which in this case would include business) would make the trust a non-charitable trust. So in Oxford. Group v. Inland Revenue Commissioners [1949] 31 TC 221, 252 CA. it was observed that although a religious body might, without losing its religious character, engage in a number of subsidiary activities which were not purely religious, a trust which was so worded as to permit the expenditure of income by such a body in such subsidiary activities was not a good charitable trust. It was further held that the objects set forth in clause 3(c), paragraphs (9) and (10), of the memorandum of association were not merely ancillary to the main objects expressed in sub-clauses (A) and (B), but themselves conferred powers on the company which were so wide that they could not be regarded as charitable. The principle has been clearly expressed if we may say so with respect by Lawrence L.J in Keren Kayemeth Le Jisroel Ltd. v. Inland Revenue Commissioners [1932] 17 TC 27, 40, 41 HL. as follows:

“The instrument with which this case is concerned consists of the memorandum of association of the company and it is essential to bear in mind that in order to obtain exemption from income-tax under the section it is not enough that the purposes described in the memorandum should include charitable purposes, the memorandum must be confined to those purposes so that any application by the company of its funds to non-charitable purposes would be ultra vires…………

The extensive powers conferred on the company by sub-clauses (2) to (22) (to some of which I have referred in order to indicate their character) although purporting to be secondary to the object mentioned in subclause (1), are nevertheless objects for which the company is established.

The company can exercise any or all of these powers whenever in its opinion such an exercise would be conducive to the attainment of the socalled primary object which, from a practical point of view, means that it can exercise them whenever it is minded to do so, and whether such exercise is in fact conducive to the attainment of that object or not, as neither the court nor any one else can control the company's opinion, or otherwise interfere with the manner in which it chooses to carry out its objects.

It would be difficult in any case to determine whether any particular enterprise undertaken by the company under its wide powers was or was not in fact conducive to the attainment of the primary object, but when the question of whether it is or is not so conducive is left to the decision of the company itself, I cannot avoid the conclusion that the objects mentioned in sub-clauses (2) to (22) can be carried out by the company just as freely as the object mentioned in sub-clause (1) and that there is no substantial difference in degree between them.”

4. These decisions were referred to with approval by the Supreme Court in East India Industries (Madras) Private Ltd. v. Commissioner of Income-tax . Here the property that was contended to be held under trust was the business of the kuri and the income therefrom was to be applied for the objects of the company which are stated in clause 3(a). The business of conducting the kuries is itself mentioned as an incidental object of the company in clause 3(b). Under clause 3(a) the charitable purposes are mentioned as “to give charity, to promote education and to establish or aid in the establishment of associations, institutions, funds, trust with the object of promoting charity and/or education……….” We have no doubt whatever that these charitable purposes include and comprehend advancement of objects of general public utility and particularly the carrying on of business. And since there is no restriction that any part of the income from the business must be applied to charitable purposes alone and there is an implied discretion in the directors to apply the income or property of the company to all or any of the purposes which will include business, the principle stated above and which we enunciated in our judgment that we just now pronounced in Income-tax Referred Cases Nos. 51 to 56 and 79 of 1972 must apply.

5. Mr. C.T Peter, counsel for the assessee, invited our attention to the decision of the Supreme Court in Oriental Investment Co. Ltd. v. Commissioner Of Income Tax, Bombay , wherein it was held that “the mere fact that a company has within its objects the dealing in investment in shares, does not give to the company the characteristics of a dealer in shares”. This decision only considered the question when a company can be said to be a dealer. The mere power to deal in shares does not mean that the company was actually dealing in shares and was a dealer in shares. So the assessee is well founded in his contention that by the mere power taken under other objects to carry, on business will not be sufficient to say that the company was carrying on business. But it is admitted that the company was carrying on kuries and it is not contended that conducting kuries is not business. The decision in Oriental Investment Co. Ltd. v. Commissioner Of Income Tax, Bombay can, therefore, have no application. It is the principle of that decision that is laid down in Wilson Box (Foreign Rights) Ltd. (in liquidation) v. Brice (H.M Inspector of Taxes), another case relied on by counsel for the assessee, and that decision too is not helpful.

6. We, therefore, answer the question referred to us in the negative, that is, in favour of the department and against the assessee. We direct the parties to bear their respective costs.

7. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.

Commissioner Of Income-Tax, Kerala v. Dharmadeepti

High Court Judgment Summary (Delivered by Govindan Nair, C.J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Assessee's Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

Commissioner Of Income-Tax, Kerala v. Dharmadeepti

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