Holding

The Court held that the Federation’s activities were incidental to its dominant charitable purpose and therefore the income is exempt under section 11(1)(a) read with section 2(15).

Summary

The Federation of Indian Chambers of Commerce & Industry, a company registered under the Companies Act, claimed that its entire income for the year ended 31‑December‑1961 was exempt under section 11(1)(a) read with section 2(15) of the Income‑Tax Act, arguing that its activities – holding a trade fair and sponsoring an international conference – were undertaken solely to promote trade, commerce and industry, a charitable purpose of general public utility, and not for profit. The Income‑Tax Officer rejected this, relying on the added words “not involving the carrying on of any activity for profit” in the definition of charitable purpose, but the Appellate Assistant Commissioner and the Income‑Tax Appellate Tribunal held the income exempt, deeming the profit‑making incidental to the dominant charitable object. The Commissioner appealed, and the matter was referred to the Supreme Court under section 257. The Court, applying the majority view in the Surat Art Silk case, held that the dominant purpose test governs; since profit‑making was not the real object, the income was exempt. The reference was answered in favour of the assessee, and the Commissioner’s appeal was dismissed.

Issues considered

Whether income of the Federation for the assessment year 1962‑63 falls within the exemption under section 11(1)(a) read with section 2(15) of the Income‑Tax Act.
Whether the Income‑Tax Appellate Tribunal was correct in holding that the burden of proving taxability lies on the Revenue.
Whether the Federation’s purpose constitutes an ‘advancement of objects of general public utility’ that does not involve the carrying on of any activity for profit.

Legislation cited

Companies Act, 1956
Income Tax Act, 1961s. 11(1)(a), s. 11(4), s. 2(15), s. 256, s. 257

Subjects

charitable purposedominant purpose doctrinegeneral public utilityprofit motivesection 2(15)section 11tax exemptionreference under s.257Federation of Indian Chambers

Judgment

489

COMMISSIONER OF INCOME TAX, NEW DELHI A
v.
FEDERATION OF INDIAN CHAMBERS OF
COMMERCE & INDUSTRIES, NEW DELHI

April 15, 1981 B
[R.S. PATHAK, A.P. SEN AND E.S. VENKATARAMIAH, JJ.]

Income Tax Act 1961, S. 52(15) and IJ(J)(a)-'Charitable object'-Object of
general public utility-'Not involving the carrying on of any activity for profit'-
Meaning of-Primary or dominant purpose of trust or institution to be charitable-
'Purpose' oftrust-'Powers' conferred on trustees for carrying out the purpose- C
Distinction between.

The respondent assessee an existing company under the Companies Act,
1956 had neither any share capital nor distributed any dividend to its members
and its entire income was expended for fulfilment of its objects, which were the
premotion.. protection and development of trade, commerce and industry in
In~ D
During the assessment year 1962-63, the relevant accounting year for which
the year ended December 31, 1961 the assessee submitted a return showing its
total income as 'nil' claiming that all its income was exempt under section
ll(l)(a) read with Section 2(15) of the Income Tax Act. During the assessment
year, the assessee held the Indian Trade Fair at New Delhi and derived receipts
from rent for space allotted, temporary stalls and storage and realised deposit E
and advances from the participants for hotel accommodation. In the relevant
accounting year, the Conference of the Afro-Asian Organisation for Economic Co-
operation, was sponsored by the assessee and for organising the Conference, the
assessee received from the Government Rs. 3 lakhs as grant-in-aid and after meet·
ing the expenses, was left with a balance of Rs. 2 lakhs. It also received income
by sale of books, fee for~arbitration etc. The balance sheet for the accounting
year indicated that it had an excess of income over expenditure under the head F
'income'.

The contention of the assessee before the Income Tax Officer was that the
activities carried on by the Federation were not were not motive of earning
profits, but that they were carried on with the object of promotion, protection
and development of trade, commerce and industry in India and abroad, and
therefore the income derived by the assessee was exempt under S. l l(l)(a). G
The Income Tax Officer, held that the decision of this Court in the Andhra
Chamber of Commerce's case [1965] 1 S.C.R. 565 was no longer good law due
to the addition of the words 'not involving the carrying on any activity for profit'
in the definition of 'cliaritable purpose' in Section 2(15) of the Act which qualify
the fourth head of charity viz. 'any other object of general public utility' and, H
therefore, must be read subject to the additional statutory requirement that the
490 SUPREME COURT REPORTS [1981] 3 S.C.R.

A object of general public utility should not involve the carrying on of any activity
for profit, and accordingly raised a demand.

On appeal by the assessee, the Appellate Assistant Commissioner disagreed
with the view of the Income Tax Officer and held that the activities carried on
by the assessee were not profit-oriented and, therefore, its income was exempt.

B The Department appealed to the Appellate Tribunal, and the Appellate
Tribunal upheld the view of the Appellate Assisstant Commissioner and held that
the dominant object with which the Federation was constituted being a charitable
purpose viz., promotion, protection and development of trade, commerce and
industry, there being no motive to earn profits, it was not engaged in any activity
in the nature of business or trade, and, if, any income arose from such activity,
it was only incidental or ancillary to the dominant object for the welfare and
c common good of the country's trade, commerce and industry.

The Commissioner of Income-Tax applied to the Appellate Tribunal to
make a reference to the High Court under sub-section (I) of section 256 of the
Act, but in view of the conflict in the decisions of the High Courts on the
construction of the expression 'charitable purpose' as defined in section 2(15) of
the Act the Tribunal made a reference to this Court under Section 257.
n
On the question whether the words 'not involving the carrying on of any
activity for profit' in the definition of 'charitable purpose' contained in section
2(15) of the Act, govern the word 'advancement' and not the words 'object of
general public utility'.

HELD : [By the Court]
E
The reference must be answered against the Revenue and in favour of the
asseesee, in the view of the majority opinion in A.id!. Commissioner of Income
Tax v. Surat Art Silk Cloth Manufacturers, [1980) 1 S.C.R. 77. [492 F]

[Per A .P. Sen, J.]
F
I. The majority view in the Surat Art Silk case 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. advancement of any other
object of general public utility, so as to make the carrying on of business activity
G merely ancillary or incidental to the main object. This doctrine of dominant or
primary object holds the field till there is a change of law. [496 C-D, 497 FJ

2. The majority decision had the effect of neutralising the radical changes
brought about by Parliament in the system of taxation of income and profits of
charities, with particular reference to "object of general public utility" to prevent
H tax evasion, by diversion of business profits to charities. It is the vagueness of-the
fourth head of charity "any other object of general public utility" that impelled
C.l.T. v. FEDERATION OF INDIAN CHAMBERS 491

Parliament to insert the restrictive words "not involving the carrying on of any A
activity for profit". [496 G-497 A]

3. It was clearly inconsistent with the settled principles to hold that i( the
dominant or primary object of a trust was 'charity' under the fourth head 'any
other object of general public utility', it was permissible for such an obiect of
general public utility to augment its income by engaging in trading or commercial
activities. [497 BJ 8
4. When the Government did not accept the recommendation of the
Direct Taxes Laws Committee in Chapter 2 for the deletion of the words "not
involving the carrying on of any activity for profit"' occurring in Section 2(15) of
the Act, it was impermissible for the Court by a process of judicial construction
to achieve the same result. [496 F]

5. In the instant case, activities of the assessee in regard to holding Qf the
c
Indian Trade Fair and sponsoring of the Conference of the Afro-Asian Organisa-
tion in the relevant accounting year were for the advancement of the· dominant
object and purpose of the trust, viz. promotion, protection and development of
trade, commerce and industry in India. The income derived from such activities
was therefore exempt under S. ll(l)(a) read with S. 2(15) of the Act.
[497 G-498 A] D
6. There is a distinction between the "purpose" of a trust and the "power
conferred upon the trustees·• as incidental to the carrying out of the purpose. If
the primary or dominant purpose of a trust or institute is charitable, any other
object which is merely ancillary or incidental to the primary or dominant purpose,
would not prevent the trust or the institution being a valid charity. [498 G, 499 A]
E
[Per Venkataramiah, J.]

1. It is open to the Legislature to give encourage!llent to objects which it
considers to be laudable by means of fiscal exemptions. At the same time, it
takes care to enact fresh provisions from time to time to suppress any mischief
which may have resulted from the misuse of existing law. Parliament deliberately
stepped in by adding the words "not involving the carrying on of any activity for F
profit" in the definition of 'charitable purpo~e' in section 2(15) of the Act, when
the tax exemptions available to charitable and religious trusts came to be misused
by some for the unworthy purposes of tax avoidance. The law had been so re·
structured to prevent allergy to taxation masquerading as charity. The law was
thus designed by Parliament to prevent this misuse of tax exemption in the name
of charity. [500 F-H]
G
2. This Court has enlarged the meaning "charitable purpose" in Section
2(15) beyond what it legitimately should mean in the Surat Art Silk Cloth
Manufacturers Association's case. It has virtually wiped off the restrictive words
"not involving the carrying on or any activity for profit" occurring in S. 2(15),
thereby defeating the very object and purpose of the legislation. It is not the func·
tion of a court of law to give the words a strained and unnatural meaning. H
Judicial attitudes cannot be formed iu isolation from legislatiw r recesses,
particularly, in connection with tax avoidance provisions. [500 D, SOJA, 50()EJ
492 SUPREME COURT REPORTS . [!98!] 3 S.C.R.

3. Modern legislation has changed in pattern re-casting provisions of
A taxation with very wide language, while at the same time dealing in much more
detail with some areas of law. Judges while responding to general trend~ of law,
but also reacting;to the form of modern tax legislation, must be prepared to take
account of the context and purpo5es or the change brought about. (501 E]

Greenberg v. Inland Revenue Commissioners (1972] _A.C. 109 (HL) referred
to.
B
4. When the Government had not accepted the recommendation of the
Direct Taxes Laws Committee in Chapter 2 for the deletion of the words "not
involving the carrying on of any activity for profit", by suitable legislation, it was
impermissible by a process of judicial construction to achieve the same result.
. [501 Bl

c 5. People who are truly charitable do not think of the tax benefits while
making charities. Even the poor who do not pay income tax can be charitable
and their charities are made at great personal inconvenience. Charitable persons
are not amongst the tax payers only. [502 H-503 A]

CIVIL APPELLATE JuRJSOICTJON : Tax Reference Case No. 17 of
D 1975.
Under section 257 of the Income Tax Act, 1961 made by the
Income Tax Appellate Tribunal, Delhi Bench in Reference Applica-
tion No. 92/DEL/71-72 arising out of LT.A. No. 1339/DEL/68-69.

B.B. Ahuja and Miss A. Subhashini for the Appellant.
E A.K. Sanghi and Narayan Netter for the Respondent.

The following Judgments were delivered :

PATHAK, J. In view of the majority opinion of this Court in
Addit:'onal Commissioner f!f Income-tax, Gujarat v. Surat Art Silk
F Cloth Manufactures,(1) the reference must be answered against the
Revenue and in favour of the assessee.

SEN, J. This direct reference under s. 257 of the Income tax
Act, 1961 (hereinafter referred to as 'the Act') made by the Income
Tax Appellate Tribunal Ddhi Bench 'B' at the instance of the
G Commissioner of Income Tax, Delhi· U, New Delhi raises the much
vexed question as to whether the words "not involving the carrying
on of any activity for profit" in the definition of 'charitable purpose'
contained ins. 2 (15) of the Act, govern the word 'advancement'
and not the words 'object of general public utility .
H
(1) (1980] 121 I.T.R. l-[1980] 1 S C.R. 77.
C.I.T. v. FEDERATION OF INDIAN CHAMBERS (Sen, J) 493

The facts giving rise to the reference are as follows : The A
Federation of Indian Chambers of Commerce and Industry, New
Delhi-hereinafter referred to as 'the assessee'--is an existing com-
pany under the Companies Act, 1956. It was registered under s. 26
of that Act and permitted to omit the word 'Limited' from its name.
It has neither any share capital 1lor does it distribute any dividends
to its members. The entire income is expended for the fulfilment of B
its object. The main object of the assessee is the promotion pro-
tection and <,ievelopment of trade, commerce and industry in India.

The main objects for which the Federation has come into exis-
tence are set out in cl. 3 of the Memorandum of Association which,
insofar as material, reads : c
3.(a) To promote Indian business in matters of inland
and foreign trade, transport, industry and manufactures,
finance and all other economic subjects and to encourage
Indian banking, shipping and insurance.

While cl.3(a) defines the primary purpose of the trust, i.e. to D
promote trade and industry which undoubtedly being an object of
general public utility engaged in carrying on activities without . any
profit motive, the subsidiary objects set out in sub-els. (b) to (z2)
of cl.3 are merely incidental or ancillary thereof.

During the assessment year 1962-63, the relevant accounting E
year for which was the year ended December 31, 1961 the assessee
submitted a return showing its total income as 'nil' cla;ming that all
its income was exempt under s. ll(l)(a) read withs. 2(15) of the Act.
During the assessment year in question, the assessee held the Indian
Trade Fair at New Delhi and derived receipts totalling Rs. 75,18,548
from rent for space allotted, temporary stalls and storage. It also F
received Rs. 20,750 by sale of season tickets and Rs. 3,94,143 by daily
gate tickets. It realised deposits and advance~ from the participants
for hotel accommodation, In the relevent accounting year, the Con-
ference of the Afro-Asian Organisation for Economic Cooperation,
sponsored by the assessee, was held at New Delhi. For organising
the Conference, the assessee received Rs. 3,00,000 from the Govern- G
ment -0f India as grant-in-aid and after meeting the expenses, was left
with a balance of Rs. 2, 17,346.38, Further, the assessee received
Rs. 265.50 as the share of profits on the sale of a book on Company
Law, Rs. 5,371.82 as fee for arbitration. It. realised advances
from its members for arbitration amounting to Rs. 20,000 from out
H
of which a balance of Rs. 299.18 was left. The balance-sheet for the
494 SUPREME COURT REPORTS [1981] 3 S.C.R.

A accounting year shows that the assessee had in excess income of
R.s.2,291.71 over the expenditure under the head 'income'.

The contention of the assessee before the Income Tax officer
was that the activities carried on by the Federation were not with
the motive of earning profits, but they were carried on with the
B object of promotion, protection and development of tra<!_e, commerce
and industry in India and abroad. Its contention was that the
dominant object for which the Federation was constituted was for
promotion, protection and development of the country's trade,
commerce and industry and the activities carried on during the
assessment year in question, namely, the holding of the Indian Trade
c Fair and of sponsoring the Conference of the Afro-Asian Organisa-
tion for Economic Cooperation were incidental or ancillary to the
main 0bject, and, therefore, the income. derived therefrom was
exempt under s. 11 (!)(a) of the Act. Reliance in support of this
contention was placed on the decision of tLis Court in Commissioner ·
of Income-Tax v. Andhra Clumber of Commerce(1). In the immedi-
D ately preceding assessment years 1960-61and 1961-62, the income of
the assessee'was treated as exempt from tax under s. 4(3) (i) of the
Income Tax Act, 1922.

The Income Tax officer, however, felt that the decision of
this Court in the Andlira Chhmber of Commerce's case (supra) ·was
E no longer good law due to the addition of the words "not involving
the carrying on of any activity for profit" in the definition of
'charitable purpose' in s. 2(15) of the Act which qualify the fourth
head or' charity, vil .. "any other object of general public utility",
and, therefore, must be read subject to the additional statutory
requirement that the object of general public utility should not
F involve the carrying on of any activity for profit. He accordingly
raised a demand of Rs. 49,818 on a total income' of Rs. 84,430
on appeal, the Appellate Assistant Commissioner disagreed with the
view of the Income Tax Officer and held that the activities carried
on by the assessee were not profiit-oriented and, therefore, its income
was exempt. The Commissioner of Income-tax appealed to the Appel-
G late Tribunal without any success. The Tribunal upheld the view of
the Appellate Assistant Commis;ioner and held that the dominant
object with which the Federation was constituted being a charit~ble
purpose, viz., promotion, !protection and development of trade, com-
merce and industry, there being no motive to earn profits, it was not
H engaged;in any activity in the nature of business or trade, and, if any

(!) [1964] 55 I.T.R. 722 (S.C.)-[1965] 1 SCR 565.
c. J. T. v. FEDEARATION OF INDIAN CHAMBERS (&n, J.) 495

income arose from such activity, it was only incidental or ancillary A
to the dominant object for the welfare and common good of the
country's trade, commerce and industry.

Thereupon, the Commissioner of Income Tax applied to the
Appellate Tribunal to make a reference to the High Court under
sub-s.(i) of s.256 of the Act, but the Tribunal, in view of the conflict B
in the decisions of the High Courts on the construction of the
expression 'charitable purpose' as defined in s. 2( 15) of the Act, has
made a reference of the following questions to this Court under
s. 257 of the Act, for its opinion, namely :

1. Whether having regard to the definition of charitable
purpose as contained in Section 2( 15) read with Sections
11 ( 1) and 11 (4), charging sections and sections dealing with
computation of income, the assessee was liable to be taxed
in respect of)ncome relating to assessment year 1962-63 ?

2, Whether on the facts and in 1he circumstances of
the case, the Tribunal was right in law in, holding that the
D.
income earned by the assessee woull! not come within the
provisions of Section 2(15) read with Section 11 of the In-
come-Tax Act, 1961 and the onus that this profit was not
exempt from tax would be on the Revenue.?

3. Whether on the facts and in the circumstances of
the case, the purpose of the Federation of Indian Cham- E
bers of Commerce and Industry was advancement of objects
of general public utility not involving the carrying on of any
activity for profit ?

There had been a sharp conflict of opinion between the·
different High courts as to the construction of the ten crucial words F
"not involving the carrying on of any activity for profit" qualifying
the fourth head of charity "advancement of any other object of
general public utility". This Court resolved the conflict in the
Sole Trustee, Loka Shikshan Trust v. C./.T.(1) and the Indian
2
Chambers of Commerce v. C./. T. ( ) by holding that the words "not G
involving the carrying on of any activity for profit" govern the word
"advancement" and observed that if the advancement or attainment
of the object involves an activity for profit, tax exemption would not
be available.
H
(I) [1975] 10! I.T.R. 234
(2) [1975] IOI I.T.R. 796
496 SUPREME COURT REPORTS ( l981) 3 S.C.R.

A Unfortunately for the Revenue, the Court has, in a five-Judges
Bench, by a majority of 4 to 1, in Addi. Commissioner of Income
Tax v. Surat Art Silk Cloth Manufactures' Association (1 ) reversed
these two decisions in the Loka Shikshan Trust's case and the Indian
Chambers of Commerce's case (supra). The Court has approved of
the observations of Beg, J. in his separate but concurring judgment
B in the Loka Shikshan Trust's case that "if the profits must necessarily
feed charitable purpose under the terms of the trust, the mere fact
that the activities of the trust yield profit will not alter the charitable
character of the trust." In other words, the majority view in the
Surat Art SJk' s case (supra) was that the condition that the purpose
should not involve the carrying on of any activity for profit would
c 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.
0
One should have thought that the correct way to approach
this question of interpretation was to give the words used by Par-
liament their ordinary meaning in the English language and if,
consistently :with the ordinary meaning, there was a choice ·between
two alternative interpretations, then to prefer the construction that
-E maintains a reasonable and consistent scheme of taxation without
distorting the language. When the Government did not accept the
recommendation of the Direct Taxes Laws Committee in Chapter 2
(Interim Report, December, 1977) for the deletion of the words "not
involving the carrying on of any activity for profit" occurring in s.
2( 15) of the Act, the Court has by a process of judicial construction
F achieved the same result.

Whatever reservations one may have regarding the correctness
of this interpretation of the exclusionary clause in the definition of
charitable purpose in s. 2(15) of the Act, there can be no doubt
that the majority decision in the Surat Art Silk's case (supra) is
G binding on us. With respect, I venture to say that the majority
decision has the effect of neutralising the radical changes brought
about by Parliament in the system of taxation of income and profits
of charities, with particular reference to "objects of general public
utility" to prevent tax evasion, by diversion of business profits to
H
(I) [1980] 121 l.T.R. l.
C.I.T. v. FEDERATION OF INDIAN CHAMBERS (Sen, J.) 497

charities. It is the vagueness of the fourth head of charity "any A
other object of general public utility" that impelled Parliament to
insert the restrictive words "not involving the carrying on of any
activity for profit". In my minority opinion in the Surat Art Silk's
case (supra) I had endeavoured to give reasons why the correct-
ness of the majority decision was open to question. There is no
point in traversing the same ground over again. It was clearly 8
inconsistent with the settled principles to hold that if the dominant
or primary object of a trust was 'charity' under the fourth head
'any other object of general public utility', it was permissible for
such an object of general public utility, to augment its income . by
engaging in trading or commercial activities.
c
In retrospect it _seems that it would have been better for
Parliament to have deleted the fourth head of "any other object of
general public utility" from the ambit of the definition of 'charitable
purpose' while enacting s. 2(15) of the Act rather than inserted the
words "not involving the carrying on of any other activity for
profiit", therby creating all this legal conundrum. In England, the 0
Radcliffe Commission on Taxation gf Profits and lncome(1 ) recom-
mended in 1955 that for purposes of taxation, charity should be
restricted t0 relief of poverty, advancement of education and advance-
ment of religion and that the fourth category mentioned in the
dictum of Lord Macnaghten, namely, "trusts for other purposes
'beneficial to the community ' should be cut out entirely. E

The majorty in the Surat Art Silk's case (supra) has evolved the
doctrine of dominant or primary object and there is little that we
can do about it. Faced with this difficulty, learned counsel for the
Revenue advanced no submissions with regard to the questions
F
referred and indeed, in view of the majority decision in the Surat Art
Silk's case (supra) the answers to the questions are self-evident. The.
d.octrine of dominant or primary object must, as laid down in the
Surat Art Silk's case, holds the field till there is a change i11 the law.
Undoubtedly, the activities of the assessee in regard to holding of
the Indian Trade Fair and sponsoring of the Conference of the Afro-
r Asian Organisation . in the relevant accounting year were for the
G
advancement of the dominant object and purpose of the trust, viz.,

(I) Royal Commission on the Taxation of Profits and Income (Cmd 9474,
1955) Part I, Chap. 7. An earlier commission on income tax, the
Colwyn Commission, had similarly sough to narrow down the concept H
of 'charitable' within the context of taxation (Cmd 615, 1920, Part III,
Sec. XIV).
498 SUPREME COURT REPORTS [1981] 3 S.C.R.

A promotion, protection and development ,.of trade, commerce and
industry in India. Learned Counsel for revenue with his usual
fairness, conceded that the income derived by the assessee from
such activities was exempt under s.ll(J)(a) read with s.2(15) of the
Act.

B It was, however, urged that the objects set out in sub-els. (v),
(zl) and (z2) of cl.3 of the Memorandum of Association of the Fede-
ration were not incidental or ancillary to the ,,;nain object of the
trust. The relevant sub-clauses are set out below :

(v) To establish and support or aid the establishment
c and support of associations, institutions, funds, trusts and
convenience, calculated to benefit employees of the Federa-
tion or the dependents or connections of such persons, and
grant pension and_ allowances, and to make payments:towards
insurance, and to subscribe or guarantee money for chari-
table or benevolent objects or for any exhibition for any
D public, general, useful object.
'
(zl) To establish a Trust or Trusts and/or appoint
Trustees thereof from time to time and vest the funds,,or
the surplus income or any property of the Federatio11 in the
Trustees who shall hold and deal with the funds, 'surplus
E income or property in such manner as the committee may
decide.

(z2) To undertake and execute any Trusts the under-
taking of which may seem to the Federation desirable either
gratuitously or otherwise.
F
The contention advanced cannot be accepted, for the reason
that no such point was ever raised at any stage of. the proceedin~s,
much less before the Appellate Tribunal. Even otherwise, there
appears to be no substance in the contention. There is a distinction
G between the _"purpose" of a trust and the "powers" conferred upon
the trustees as incidental to the carrying out of purpose. For instance
cl.3(v) enables the establishment and support of associations, institu-
tions, funds," trusts and convenience calculated to benefit the emplo-
yees and their dependents, for nuking provisions for grant of
H pension and allowances etc. The framing of such employee benefit
schemes is essential and necessary for the proper functioning of the
organisation and is incidental to the carrying out of the purpose for
C.l.T. v. FEDERATION OF INDIAN CHAMBERS (Venkataramiah, J.) 499

which it is constituted, I refrain from expressing any opinion A
whether or not the employees constitute a "section of the public".
For, if the primary or dominant purpose of a trust or institution is
,, charitable, any other obj~ct which is merely ancillary or incidental
to the primary or dominant purpose, would not prevent the trust or
institution from being a valid !charity. Likewise, cls.3(zl) and (z2)
which permit the establishment of a trust or trusts, appointment of B
trustees thereof from time to time and the vesting of funds or
surplus income or any property of the assessee in the trustees, are
nothing but powers conferred on them for the proper financial
management of the affairs of the trust which are incidental or
ancillary to the main purpose of the trust. The contention must,
therefore, fail. c
In the result, the reference under s.257 of the Income Tax Act,
1961 made by the Income Tax Appellate Tribunal, Delhi-B, New
Delhi, must be answered against the Revenue and in favour of the
assessee. There shall be no order as to costs.
D
VENKATARAMIAH, J. I have had the advantage of reading the
judgment prepared by my learned brother A.P. Sen, J. and I respect-
fully agree with. his reasoning and conclusion. I share with him my
doubts about the correctness of the decision in Additional Commis-
sioner of Income tax, Gujarat v. Surat Art Silk Cloth Manufacturers'
Association.(') I would like to say a few words of my own on the
subject.
E

There can be no objection to a person spending his money on
charity. But can he be charitable at the expense of others? This is
a question which necessarily arises when we read section 11 of the
Income-tax Act, 1961. Section 11 as it stands now grants exemption
from payment of tax on any income, which would have otherwise F
been taxable, provided ( 1) the property yielding income is held under
trust or such other legal obligation which is brought into existence
by an act of party and not by an act of law, (2) the purpose of the
trust is charitable which may enure to the benefit of the public or
a section of the public and (3) the other conditions prescribed by the
Act are satisfied. It means that if there is a diversion of property or G
income earning apparatus by an act of party into a charitable trust
and the prescribed conditions are satisfied, the income derived from
it (including the portion which would have gone t<J the public exche-
quer but for the trust) may be spent by a person in charge of the
H
(!) [1980] 121 I.T.R. l-[1980] 3 S.C.R. 77.
500 SUPREME COURT REPORTS [1981] S.C.R.

A affairs of the trust on objects indicated in the trust which is a creature
of its author. In effect what does it mean? It means that the author
of the trust is able to divert by his own will to a purpose of his own
choice, though charitable, a large part of the income which would
have been, but for the trust, at the disposal of the Legislature which
alone has the power over the national exchequer. Whatever may
B have been the position in those days when the State was just a police
State performing minimum functions of Government, today when
the State is a welfare State would it be right either morally or con-
stitutionally to allow amounts which should legitimately form part
of the revenue of the State to be dealt with by non-Governmental
agencies administering trusts is a question which requires examination
c in an appropriate case. This, however, is a larger question which,
if logically pursued, may justify total deletion of the exemption accor-
ded in the case of charitable and religious trustee.

But even as the provisions now stand, I feel that while constru-
ing them, this Court has enlarged the meaning of "charitable pur-
D pose" in section 2 (15) beyond what it legitimately should mean in
the Surat Art Silk Cloth Manufacturers' Associations' case (supra).

I would like to adopt the words in the dissenting judgment of
my learned brother A.P. Sen J. in the S!i!'at Art Silk Cloth Manufa-
cturers' Association's case (supra) :
E
. "The judicial attitudes cannot be formed in isolation
from legislative processes, particularly, in connection with
tax avoidance provisions."

It is true that it is open to the Legislature to give encourage·
F ment to objects which it considers to be laudable by means of fiscal
exemptions. At the same time it takes care to enact fresh provisions
from time to time to suppress any mischief which may have resulted
from the misuse of existing law. Parliament deliberately stepped in
by adding the words "not involving the carrying on of any activity
for profit" in the definition of charitable purpose in section 2 (15) of
G the Act, when the tax exemptions available to charitable and religious
trusts came to be misused by some for the unworthy purposes of tax
avoidance. The law had been so re-structured to p'revent allergy to
taxation masquerading as charity. The law was thus designed by
Parliament to prevent this misuse of tax exemption in the name of
H charity. The majority decision in the Surat Art Silk Cloth Manu-
. facturers' Association's case (supra), if I may say so without meaning
C.I.T. 1'. FEDERATION OF INDIAN CHAMBERS (Venkatc1ramiah, J.) 501.

any disrespect, has virtually wiped off the restrictive. words "not A
involving the carrying on of any activity for profit" occurring in
section 2(15), thereby defeating the very object and purpose of the
legislation. It is not the function of a court of law to give the words
a strained and unnatural meaning.

When the Government had not accepted the recommendation B
of the Direct Taxes Laws Committee in Chapter 2 (Interim Report,
December, J 977) for the deletion of the words "not involving the
carrying on of any activity for profit", by suitable legislation, it was
impermissible for this Court by a process of judicial construction to
achieve the same result. If I may adopt the words of Lord Reid in
Greenberg v. /RC( 1) quoted in the minority decision in Surat Art c
Silk Cloth Manufacturers' Association's case (supra) displaying the
court's concern about the prevailing attitude of tax statutes :
""
"Parliament is very properly determined to prevent this
kind of tax evasion and, if the courts find it impossible to
give very wide meanings to general phrases, the only alter- D
native may be for Parliament to do as some other countries
have done, and introduce legislation of a more sweeping
character ... ''

Modern legislation has changed in pattern towards re-casting
provisions of taxation with very wide language, while at the same E
time dealing in much more detail with some areas of law. Judges,
while responding to general trends of law, but also reacting to the
form of modern tax legislation, must be prepared to take account of
the _context and purposes of the change brought about.

It is relevant to refer to one other aspect arising out of an F
observation made in the course of the majority judgment in the
Surat Art Silk Cloth Manufacture1 s' Association's case (supra)
suggesting that the area of exemption under Indian law is much
wider than what is available under English law. The relevant part
of the majority judgment reads :
G
"The definition of "charitable purp~se" in Indian Law
thus goes much further than the definition of charity to be
derived from the English cases, because it specifically in-
cludes medical relief and embraces all objects of
general public utility. In English Law it is not enough that H
(I\ (1972] A.C. l09(H.L.)
502 SUPREME COURT REPORTS (1981) 3 S.C.R.

A a purpose falls within one of the four divisions of charity
set out in Lord Macnaghten's classification. It must also
be within the spirit and intendment of the Preamble to
the Statute of Elizabeth if it is to be regarded as charitable.
There is no such limitation so far as Indian Law is concer-
ned even if a purpose is not within the spirit and intend-
B ment of the Preamble to the Statute of Elizabeth, it would
be charitable if it falls within the definition of "charitable
purpose" given in the Statute. Every object of general
public utility would, therefore, be charitable under the
Indian Law, subject only to the condition imposed by the
restrictive words "not involving the carrying on of any
c activity for profit" added in the present Act. It is on
account of this basic difference between the Indian and
English Law of charity that Lord Wright uttered a word of
caution in All India Spinners' Association v. Commissioner
of Income-tax (12 I.T.R. 482) against blind adherence to
English decisions on the subject. The definition of "chari-
D- table purpose" in the Indian Statute must be construed
according to the language used there and against the back-
ground of Indian life."

If Indian life should be a true guide for the determination of
questions arising in court, then we should go back to our ancient
E treatises to find out the true meaning of charity which may be either
dana or utsarga. In the case of dana the donor gives up his owner-
ship over a thing, makes another the owner of it and cannot there-
after use it nor has he any control over it. When a man makes an
utsarga, he no doubt gives up his ownership but gives up the thing
for the benefit of all. Opinion is, however, divided whether as a
F
member of the public he can also use a thing thus dedicated for the
public. But in any event, he would no longer have any control
over the thing dedicated. How many of the so called charitable
trusts satisfy the rigours of the Indian concept of charity? Are there
any measures by which misuse of funds belonging to charities can be
G effectively checked?

It is wrong to think that all springs of charity in India will dry
up if true effect is given to section 2 (15) of the Act in accordance
with the minority judgment in the Surat Art Silk Cloth Manufacturers'
H Association's case (supra). People who are truly charitable do not
think of the tax benefits while making charities. One must realise
C.I.T. v FEDERATION OF INDIAN CHAMBERS (Venkataramiah, J.) 503

that even the poor who do not pay income tax can be charitable and A
their charities made at great personal inconvenience are commenda-
ble indeed. One need not go in search of charitable persons amongst
the tax payers only. Still the majority view has got to be followed
now.
B

N.V.K.

r