1. Under Section 254(3) of the Income Tax Act, 1961, Honble President had constituted a Special Bench, in this case, to consider the following questions: (1) Whether the object of the assessee trust is an object of general public utility under Section 2(15) of the Income Tax Act, 1961 (2) Whether, the provisions of Section 11(4A) introduced with effect from 1-4-1984 are applicable to assessees case (3) Whether, the provisions of Sub-section (4A) of Section 11, as substituted by Finance (No. 2) Act, 1991 with effect from 1-4-1992 are clarificatory in nature and are hence applicable to the assessment years involved in these appeals (4) If the answer to the first question, is in affirmative, does the earning of substantial profit by the assessee affect its status as a trust existing for an object of general public utility and consequently the claim for exemption under Section 11, and if so, to what extent, in the light of the judgment of Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association .
2. The Special Bench so constituted, vide order dated 22-10-2003, adjudicated question Nos. (2) and (3) against the assessee and observed that in view of this decision, question Nos. (1) and (4) have now become academic for the years under consideration. A rectification petition was filed by the assessee pointing out that the ground Nos.
(1) and (4) need to be dealt with on merits and cannot be dismissed as merely academic, inter alia, for the reason that this aspect of the matter was never argued or discussed before the Special Bench. To that extent, and vide order dated 15-2-2006, order dated 22-10-2003 was recalled for the limited purposes of disposing of question Nos. (1) and (4) on merits. In the meantime, all the Members constituting the original Special Bench have been transferred out of Mumbai Benches, and, accordingly, the Members constituting this Special Bench were nominated to hear the recalled matter and dispose of question Nos. (1) and (4) on merits.
3. It is in the backdrop set out above that we come to be in seisin of the matter to deal with the following two questions: -Whether the object of the assessee trust is an object of general public utility under Section 2(15) of the Income Tax Act, 1961 -If the answer to the first question is in affirmative, does the earning of substantial profit by the assessee affect its status as a trust existing for an object of general public utility and consequently the claim for exemption under Section 11, and if so, to what extent, in the light of the judgment of Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association .
4. So far as these two questions are concerned, the material developments are like this. The assessee is a trust established in June, 1942. Right from the assessment year 1943-44, it is engaged in the activity of publication of newspapers and periodicals. The question whether this activity can be said to be of general public utility, and, accordingly, covered by exemption under Section 4(3)(i) of the Income Tax Act, 1922, travelled upto the Tribunal in the assessment year 1943-44 itself. The Tribunal, vide order dated 2-1-1946, held that the trust existed for charitable purposes. That finding was, it is important to bear in mind, in the context of the provisions of Section 4(3)(i) of 1922 Act in which the limitation of not involving the carrying on of any activity of profit did not exist, as later found place in the corresponding section of 1961 Act, i.e., Section 2(15). It was because of this paradigm shift in Income Tax Act, 1961, that the exemption was denied to the assessee for the assessment years 1962-63 onwards. The Tribunal, dealing with the assessment years 1962-63 to 1971-72, declined to accept the assessees contention that the object of the trust did not involve carrying on of any activity for profit.
Similar stand was taken for the later assessment years as well.
However, Section 2(15) was amended with effect from 1-4-1984 inasmuch as the words not involving the carrying on of any activity of profit are deleted from Section 2(15). As a connected amendment, a disqualification clause was inserted by way of Section 11(4A) which also came into force with effect from 1-4-1984. According to this disqualification clause, the provisions of Section 11(1), (2), (3) and (4), which deal with the exemption of incomes of the charitable institution, are not to apply to any income, being profits and gains of business, unless such business is incidental to the attainment of main objects and unless the separate books of accounts are maintained in respect of such business activity. In the assessment year 1984-85, in the light of the amendment in Section 2(15) and the corresponding amendment in the scheme of the Act by insertion of Section 11(4A), the issue as to whether the assessee trust can be said to be eligible for exemption under Section 11 was referred to the Special Bench. While the Special Bench held that the assessee was engaged in the carrying on the activity for profit, and therefore, profits and gains from business and profession earned by the assessee will attract the disability clause set out in Section 11(4A), the assessees plea that so far as income under the heads other than Profits and gains from business and profession is concerned, the same will be exempt under Section 11, remains undisposed of.
5. Shri V.H. Patil, learned Counsel submits that right from the assessment year 1943-44, the assessee was treated as involved in pursuing an object of general public utility and it was only because of the words not involving the carrying on of any activity of profit appearing in the 1961 Act, that the assessee lost its exemption of income with effect from 1-4-1961. It was because of these words that the assessee was held to be not covered by the scope of a trust for charitable purposes under Section 2(15). Undoubtedly, submits the learned Counsel, limitation on exemption as set out in Section 11(4A) is broadly to the same effect. However, since the said limitation applies only to the income under the head Profits and gains from business and profession, so far as income under the other heads of income is concerned, such incomes continue to be governed by exemption under Section 11 (of the) Act. Learned counsel also points out that the assessee trust has substantial income under the heads other than profits and gains from business and profession. It is thus contended that, so far as income other than income under the head Profits and gains from business and profession is concerned, the same is to be hold as eligible for exemption under Section 11 of the Act. Shri K.C.P.Patnaik, learned departmental Representative, relies upon the stand of the assessing officer and submits that there is no change in the legal position because of amendment in Section 2(15) w.e,f. 1-4-1984, because the expression not involving the carrying on of any activity of profit in substance stands shifted from Section 2(15) to Section 11. While Section 2(15) defines a charitable institution, Section 11 deals with exemption of income in the hands of a charitable institution. Once Section 11(4A) provides that the exemption under Section 11 cannot be extended unless the business is such that it is incidental to the attainment of main object, it amounts to the same thing as that the assessee is not entitled to exemption in respect of an income from activity of profit. Both of these sections are required to be read in conjunction, and. read in conjunction, there is no change in the legal provisions at all.
6. We have considered the rival submissions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
7. We see merits in Shri Patils plea. As far as the scope of the expression charitable purposes is concerned, as a result of the amendments brought in Section 2(15) by the 1984 amendments and by removing the words not involving the carrying on of any activity of profit appearing in the said sub-section, the provisions of Section 4(3)(i) of the 1922 Act and the provisions of Section 2(15) are now exactly the same. In other words pre 1-4-1961 is restored by the amendment. No doubt, this change in the definition of charitable purposes is coupled with the disability clause set out in Section 11(4A) which was introduced at the same time as the time when the words not involving the carrying on of any activity of profit were removed from Section 2(15) but then, as learned Counsel rightly points out, this disability is only to the extent business profits are concerned.
8. We consider it appropriate to reproduce Section 11(4A) for the ready reference. This is as follows: : Sub-section (1), Sub-section (2), 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 main objective of the trust, or as the case may be, of the institution, and separate books of accounts are maintained by such trust or institution in respect of such business.
The disability clause set out in Section 11(4A) clearly and unambiguously refers to the income which can be taxed as business income. Therefore, so far as income under other heads is concerned, the same will be eligible for exemption under Section 11. The net effect of the amendments in Section 2(15) and insertion of Section 11(4A), with effect from 1-4-1984, thus is that even when a trust or institution is held to be carrying out an activity for profit, and unless the business is incidental to the attainment of main objects and unless the separate books of accounts are maintained in respect of such business activity, the exemption of income under Section 11 will not be available in respect of profits from such an activity.
This disability clause, however, does not affect the incomes which may be taxable under a head of income other than the profits and gains from business or profession.
9. In the case before us, it is an undisputed position that the activities of the assessee are pursuing an object of general public utility. It is not the revenues case that the activities of the assessee cease to be in the nature of general public utility. The assessee was declined exemption only on the ground that it cannot be said that the assessee was not involved in the carrying on of any activity of profit. Post 1-4-1984, however, that aspect of the matter ceased to be relevant so far as the scope of charitable purposes under Section 2(15) is concerned. The pre 1961 position thus stands restored.
In those years, and following the Tribunals decision for the assessment year 1943-44, the assessee was held to be pursuing an object of public utility. Revenue admits and accepts this position, as reflected from the stand taken by the revenue authorities all along. The post-amendment Section 2(15) being pari materia with Section 4(3)(i) of the 1922 Act and the material facts being identical, the assessee thus continues to be eligible for exemption under Section 11. As for the disability under Section 11(4A), the same being confined to exemption of business income, the assessee will nevertheless be entitled to exemption in respect of other incomes, such as income from house property, capital gains and income from other sources.
: Whether the object of the assessee trust is an object of general public utility under Section 2(15) of the Income Tax Act, 1961 : Yes. In the light of the amendments in section with effect from 1-4-1984, the assessee trust is eligible for being treated as pursing an object of general public utility under Section 2(15) of the Act.
: If the answer to the first question is in affirmative, does the earning of substantial profit by the assessee affect its status as a trust existing for an object of general public utility and consequently the claim for exemption under Section 11, and if so, to what extent, in the light of the judgment of Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association .
: While earning of substantial profit does not affect its status as a trust existing for an object of general utility, so far as business income is concerned, earning of substantial profits attracts the disqualification under Section 11(4A) of the Act, from exemption under Section 11. As for the exemption of income of the assessee trust under heads of income other than profits and gains from business or profession is concerned, the earning of substantial profit does not affect the said exemption.
11. The matter shall now go before the Division Bench for disposal of appeals in accordance with the law, and in the light of our above observations.