ADDITIONAL COMMISSIONER OF INCOME-TAX GUJARAT, AHMEDABAD vs. SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATION, SURAT

TAX REFERENCE CASE No. 10/1975Supreme Court[1980] 2 S.C.R. 7719 November 1979Bench: 5 JudgesAuthor: P.N. BHAGWATI, N.L. UNTWALIA, V.D. TULZAPURKAR, R.S. PATHAK, A.P. SEN64 pages
AI SummaryDismissed

What did the Supreme Court hold?

The Supreme Court, in a majority decision (Bhagwati, Untwalia, and Tulzapurkar, JJ.), held as follows: 1. The contention that the assessee's objects were not charitable because its members were specific individuals and not a section of the public could not be raised in the reference, as the Tribunal is limited to referring questions where High Courts have conflicting decisions, and the Supreme Court cannot go beyond the referred question. (92 A-B) 2. If the primary purpose of a trust is charitable, ancillary objects that are not charitable in themselves will not prevent it from being a valid charity. The test is whether the non-charitable object is primary or ancillary to the dominant charitable purpose. In this case, the dominant purpose of promoting commerce and trade was charitable, and other objects were incidental to achieving this. The benefit to members was incidental to the main purpose. (92 D-F, 93 E-G) 3. The condition "not involving the carrying on of any activity for profit" qualifies only the last head of charitable purpose, "advancement of any other object of general public utility," and not the first three heads (relief of the poor, education, medical relief). This condition is satisfied if the object of general public utility itself does not involve profit-making, not necessarily the accomplishment of the object. The assessee's object of general public utility did not involve profit-making, and any profit-making activity was ancillary. The elimination of private profit was evident from its incorporation under the Companies Act and its Memorandum of Association. (94 C-D, 94 G-H) The operative direction was to dismiss the appeal, affirming the exemption for the assessee. The majority found the assessee's dominant purpose to be charitable and its profit-making activities to be ancillary and not disqualifying under Section 2(15).

What were the facts?

The assessee, Surat Art Silk Manufacturers Association, is an incorporated company engaged in promoting commerce and trade in art silk yarn and cloth. Its objects included obtaining import and export licenses for its members and other incidental activities. The association's income and property were to be used solely for its objects, with no profit distribution to members. Upon dissolution, surplus assets were to be transferred to a similar organization. The assessee received income from member subscriptions (conceded as exempt) and commissions on import/export licenses. It also earned rent from a building it constructed. The Income-Tax Officer rejected the assessee's claim for exemption under Section 11(1) of the Income-Tax Act, 1961, stating its objects were not charitable under Section 2(15). The Appellate Assistant Commissioner and the Appellate Tribunal disagreed, holding the assessee's activities fulfilled charitable purposes without profit-making. Due to conflicting High Court decisions on the interpretation of "not involving the carrying on of any activity for profit" in Section 2(15), the Tribunal referred the matter to the Supreme Court.

What were the issues?

1. Whether the assessee's objects fall within the category of "advancement of any other object of general public utility" and are charitable under Section 2(15) of the Income-Tax Act, 1961, considering its members are specific individuals and not a section of the public. (Question of law) 2. Whether the primary or dominant purpose of the assessee is charitable, and if so, whether ancillary objects that may not be charitable individually would disqualify it from being a valid charity. (Question of mixed law and fact) 3. Whether the condition "not involving the carrying on of any activity for profit" in Section 2(15) applies to all charitable purposes or only to "any other object of general public utility". (Question of law) Assessee's Contentions: The assessee argued that its dominant purpose was the promotion of commerce and trade, which is a charitable object. The activities involving obtaining licenses and commissions were ancillary to this primary purpose and did not involve private profit. The prohibition of profit distribution to members and the provision for asset transfer upon dissolution further supported its charitable nature. The assessee relied on cases like Commissioner of Income-tax, Madras v. Andhra Chamber of Commerce and Institution of Civil Engineers v. Commissioner of Inland Revenue. Revenue's Contentions: The revenue contended that if the means to achieve an object of general public utility involve carrying on an activity for profit, then the purpose, even if falling under "any other object of general public utility," would not be charitable, and income from such business would not be exempt from tax. The revenue argued that the assessee's activities, particularly earning commission on licenses, constituted carrying on a business for profit, which disqualified it from exemption under Section 2(15) as amended.

Which sections of the Income-tax Act were involved?

Section 2(15),Section 11(1),Section 13(1)(bb),Section 257

AI-generated summary — verify with the full judgment below

, • ' I • ., ADDITIONAL COMMISSIONER OF INCOME-TAX GUJARAT, AHMEDABAD v. 77 SURAT ART SILK CLOTH MANUFACTURERS ASSOCIATION, SURAT November 19, 1979 [P. N. BHAGWATI, N. L. UNTWALIA, 'V. D. TULZAPURKAR R. S. PATHAK AND A. P. SEN, JJ.] Income-tax Act 1961-Sections 2 (15), 11 and 13(1)' (bb)-Scope of- .. Advancement of any other objectr of general public utility not involving the -carrying on oj any activity for profit" nzeaning.

The assessee which was an incorporated company, carried on various activities for promotion of commerce and trade in art silk yarn, art silk cloth and silk cloth.

Its other objects were to obtain licences for import of raw material needed by its members, to obtain licences for export of cloth manu- factured by its members and to do all other lawful things as are incidental or conducive to the attainment of the objects. Its income and property were to be applied solely for the promotion of its objects and no portion of the income or property was to be paid or transferred directly or indirectly by way of dividend, bonus or profits to its meinbers.

In the event of its winding up or <lissolution, surplus of assets over liabilities, if a

The order continues below.

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