M/S. BHARATHAKSHEMAM vs. THE PRINCIPAL COMMISSIONER OF INCOME TAX,

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN & THE HONOURABLE MR.JUSTICE T.R.RAVI FRIDAY, THE 13TH DAY OF NOVEMBER 2020 / 22ND KARTHIKA, 1942 I.T.A.No.36 OF 2020 AGAINST THE ORDER IN I.T.A.No.590/Coch/2019 DATED 08-01-2020 OF INCOME TAX APPELLATE TRIBUNAL, COCHIN BENCH, COCHIN [ASSESSMENT YEAR 2012-13] APPELLANT/ APPELLANT/ASSESSEE: M/S. BHARATHAKSHEMAM, BHARATHAKSHEMAM BUILDING, ST.THOMAS COLLEGE ROAD, THRISSUR-680 005, REPRESENTED BY ITS CHAIRMAN SHRI.P.M.THOMAS. BY ADVS. SRI.T.M.SREEDHARAN (SR.) SMT.NISHA JOHN SRI.V.P.NARAYANAN SMT.DIVYA RAVINDRAN SRI.R.BHASKARA KRISHNAN RESPONDENT/ RESPONDENT/REVENUE: THE PRINCIPAL COMMISSIONER OF INCOME TAX, AAYAKAR BHAWAN, M.O.ROAD, SAKTHAN THAMPURAN NAGAR, THRISSUR-680 001. BY ADV. SRI.P.K.RAVINDRANATHA MENON (SR.) BY SRI.JOSE JOSEPH, SC, FOR INCOME TAX. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 13-11-2020, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

ITA.36 of 2020 - 2 - “C.R.” K. Vinod Chandran & T.R.Ravi, JJ. ------------------------------------- I.T.A.No.36 of 2020 ------------------------------------ Dated, this the 13th day of November, 2020 JUDGMENT Vinod Chandran, J. The question of law arising in the above appeal is re-framed as follows: Whether the Tribunal was correct in having denied exemption to the income generated by the assessee, who is registered under Section 12A of the Income Tax Act, 1961 ['Act' for brevity], from the business of Chitty/Kuri which was fully utilized for the purpose of 'medical relief', which is the main object of the assessee-Trust, falling under the definition of 'charitable purpose'? 2. The facts need not be elaborated. Suffice it to notice that the assessee is constituted as a Trust with its main object, as declared in its Memorandum of Association ['MoA' for brevity], for establishing, maintaining and running a hospital for philanthropic purposes and not for the purpose of profit. One of its objects which has been declared in the MoA, as incidental or ancillary to the attainment of the main object is 'To run Chitties

ITA.36 of 2020 - 3 - (Kuries)'. The learned Counsel for the assessee specifically pointed out the ancillary object from the MoA and submitted that the assessee had been granted the exemption in the years prior and subsequent to the relevant assessment year. The entire income from the business of Chitties was applied for the main object, the philanthropic purpose and in any event, the income generated is less than Rs.25 lakhs, making the first proviso to Section 2(15) inapplicable to the assessee. The assessee's Counsel relies on Commissioner of Income Tax v. Dharmodayam Company & Ors

. [ (1977) 4 SCC 75

] and Assistant Commissioner of Income Tax v. Thanthi Trust Etc. [(2001) 2 SCC 707] to claim the exemption. 3. The learned Standing Counsel appearing for the Revenue draws a distinction between a business 'held under Trust' and that 'carried on by a Trust'. According to the Revenue, Thanthi Trust was a decision with respect to a business held under Trust; whereas in the present case it is a business carried on by a Trust. It is also pointed out that a Division Bench of the Delhi High Court in CIT v. Mehta Charitable Pranalay Trust [(2013) 357 ITR 560 (Delhi)] distinguished the decision in Thanthi Trust; the facts and law declared therein being applicable here.

ITA.36 of 2020 - 4 - 4. The first appellate authority found that the activity carried on by the assessee of conducting Chitty business, in its outcome, had mutual benefit to the subscribers and assessee. Substantial profit earned was passed on to the subscribers and there was only a minor profit shown by the assessee. Even if the said profit is applied fully to the main object of the assessee, it would not be an incidental activity for the attainment of the main objectives. The Tribunal agreed with the finding of the first appellate authority and specifically referred to the first proviso to Section 2(15) to find that the Chitty business cannot be considered as incidental to the primary object of the assessee-Trust and hence, they are dis- entitled from claiming exemption under Section 11. The reliance placed on the judgment of the Hon'ble Supreme Court in Dharmodayam Company was negated. The Tribunal was of the opinion that the said decision applies only to its facts and the same has been distinguished by the Hon'ble Supreme Court itself in Dharmaposhanam Company v. CIT [(1978) 3 SCC 414]. 5. At the outset; we cannot accept the ground taken by the first appellate authority that the assessee would be dis-entitled to claim the exemption since the

ITA.36 of 2020 - 5 - subscribers to the chitties profited from the business carried on. If the subscribers profited they would be taxed for the income in their hands and that would not result in denial of exemption, if the assessee is otherwise eligible. 6. We also have to notice that the Tribunal erred in brushing aside the dictum of the two judge Bench in Dharmodayam Company, since that decision was upheld by a Constitution Bench in Addl.CIT v. Surat Art Silk Manufacturers' Association [(1980) 2 SCC 31], which is later in time to the three judge Bench decision in Dharmaposhanam Company. Further these are decisions which considered the impact of the words 'the advancement of any other object of general public utility not involving the carrying out of any activity of profit' which does not have any relevance to the subject Trust which has as its primary object 'provision of medical relief'. In Dharmodayam Company, the Court looked at the objects to which the profits were to be applied. After first applying it to the Company's stability and creating a reserve for bad debts the balance was to be applied to 'charity, education, industry and other purpose of public interest'. On facts it was found that the Company had never undertaken any industry nor any other activity of public interest other

ITA.36 of 2020 - 6 - than conducting kuri business. The decision in Indian Chamber of Commerce v. CIT (1976) 1 SCC 324 which criticized the judgment of the Kerala High Court impugned in Dharmodayam Company, was held to have done so without looking at the facts and on the assumption that the Company had been carrying on an 'industry'. 7. In the case of Dharmaposhanam Company, intially the objects were inter alia to raise funds by conduct of kuries, accept donations and subscriptions, lend money for interest as also promote 'charity, education industries etc: and public good'. The profits left after meeting the expenses of the company were to be utilised for promoting 'education, industry, social welfare and such other purposes of common good as are resolved by the general meeting'. The objects were later amended as 'for the promotion of charity, education, medical relief and other matters of public good'. The application of profits were also amended as 'The profit left after meeting the expenses of the Company will be utilised for purposes of common good like charity, education and medical relief as are resolved by the general meeting'. It was held that the employment of the words 'industries, 'public good' and 'common good' in the Articles, evidently makes it referable to the residual

ITA.36 of 2020 - 7 - clause in Section 2(15) ie: 'the advancement of any other object of public utility', which is qualified by the restrictive words 'not involving the carrying on of any activity for profit'. It was held that 'Whether a trust is for charitable purpose falls to be determined by reference to all the objects for which the trust has been brought into existence' and there the exemption was declined. Here, in the instant case the main object is only provision of medical relief. 8. In Surat Art Silk Manufacturers' Association a Constitution Bench, again considered the effect of the words 'not involving the carrying on of any activity for profit'. It was categorically held in Para 8 that: 'This question arises on the terms of Section 2 clause (15) which gives an inclusive definition of “charitable purpose”. It provides that “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”. It is now well-settled as a result of the decision of this Court in Dharmadeepti v. CIT

(1978) 3 SCC 499

that the words “not involving the carrying on of any activity for profit” qualify or govern only the

ITA.36 of 2020 - 8 - last head of charitable purpose and not the earlier three heads'.

ITA.36 of 2020 - 9 - one held under Trust as a part of its corpus; thus creating a legal obligation to use the income generated from the business held under Trust for the public charitable purpose for which the Trust itself is created. The corollary was that a business carried on by the Trust would not have such an obligation. 10. The Hon'ble Supreme Court found that the distinction attempted would have no consequence as far as section 13(1)(bb) is concerned. Here we extract Section 13(1)(bb): "13. (1) Nothing contained in Section 11 or Section 12 shall operate so as to exclude from the total income of the previous year of the person in receipt thereof — xxx xxx xxx (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 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;” It was held so in paragraph 12: "12. A public charitable trust may hold a business as part of its corpus. It may carry on a business which it does not hold as a part of its corpus. But it seems to us that the distinction has no consequence insofar as Section 13(1)(bb) is concerned. Section 13(1)(bb) provides, so far as it

ITA.36 of 2020 - 10 - is relevant to this case, that the provisions of Section 11 shall not operate so as to include in the total income of the previous year of a public charitable trust 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. Section 13(1)(bb), therefore, will apply to a public charitable trust for the relief of the poor, education or medical relief that carries on a business, regardless of whether or not that business is held by the trust in trust, that is, as a part of its corpus. Even a business that is held by such a trust as a part of its corpus is carried on by the trust and, therefore, Section 13(1)(bb) will apply to such trust". 11. The exemption prior to 01.04.1984 in Thanthi Trust was considered on the basis of Section 13(1)(bb) and it was held that whether it be a business held under Trust or carried on by it unless the same is carried on in the course of the actual carrying out of the object of the Trust or institution, there could be no exemption claimed. We pertinently have to notice that even in Surat Art Silk Manufacturers' Association the distinction as to a business held under Trust or carried on by it was noticed in the minority judgment without any clarification as to what

ITA.36 of 2020 - 11 - would be the consequence of the distinction in the later instance. All the decisions cited, wherein business in kuries was mentioned as an object in the Memorandum of Association, were held to be business held under trust. The kuri business here too, has to be hence found to be a business held under trust. Sub-section (4) of Section 11 makes any business held under trust to be property held under trust for the purposes of this section. 12. The second controversy which arose in Thanthi Trust was the position of law between 1984 and 1992 in the context of Sub-section (4A) of Section 11 as it stood then; with which we are not concerned. For our purpose, what is relevant is sub-section (4A) of Section 11 as substituted with effect from 01.04.1992, which was the third controversy dealt with in the case of Thanthi Trust. For the said years the business of news paper held under Trust was found to be entitled to exemption on the following interpretation of sub-section (4A), in para 25: “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

ITA.36 of 2020 - 12 - attainment of the objective of the trust or, as the case may be, institution” and separate books of accounts 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 sub-section (4A) as originally enacted. In fact, it seems to us that the substituted sub-section (4A) gives a 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 utilised 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 Assessment Year 1992-93 and thereafter. It is, we should add, not in dispute that the income of its newspaper

ITA.36 of 2020 - 13 - business has been employed to achieve its objectives of education and relief to the poor and that it has maintained separate books of accounts in respect thereof.

[underlining by us for emphasis] 13. We now look at the decision of the Delhi High Court in Mehta Charitable Pranalay Trust. Therein a Trust was created settling an amount of Rs.2,200/- for the object of establishing and maintaining of schools, colleges and study circles, advancing education and research on the modern and ancient Indian thought, providing for mental, moral and spiritual development, inculcating the spirit of nationalism and patriotism, preparing and publishing text books, providing food, clothing, shelter and medicines to the needy persons, running of dispensaries, hospitals etc. As in the present case, the Trust Deed enabled carrying on of a business for and on behalf of the Trust for the sole object of applying the income and profits to the main objects of the Trust. The Trust then commenced a business for the manufacture and sale of Katha (Catechu), the funds for which came from sister concerns of the Trustees, borrowing from Banks and other agencies. The Division Bench of the High Court relied on the distinction of a business

ITA.36 of 2020 - 14 - held under a Trust and carried on by Trust as recognized in Surat Art Silk Manufacturers' Association; which as we noticed does not regulate the dictum, since it is referred in the minority decision and that too without any consequence arising therefrom. It was held that the test to find a business as a property held under Trust should have been either acquired with the help of the fund originally settled upon Trust or the same having a substantial and real connection with the commencement of the business by the Trustees. It was also held that the application of the income generated from the business is not the relevant consideration and what is relevant is whether the activity is so inextricably connected or linked with the object of the trust that it could be considered as incidental to those objectives. Examples as quoted by the first appellate authority was also referred to; which are two instances of a charitable trust established for providing medical relief running a nursing home or a trust for advancement of education running a publishing house or a news paper. 14. The declaration of the Hon'ble Supreme Court in Thanthi Trust as extracted herein above (paragraph 25) was distinguished on the following reasoning:

ITA.36 of 2020 - 15 - “25. In our opinion these observations have to be understood in the light of the facts before the Supreme Court. Thanthi Trust carried on the business of a newspaper and that business itself 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 certainly incidental to the attainment of the object of the trust, namely that of imparting education. The observations were thus made having regard to the fact that the profits of the newspaper business were utilised by the trust for achieving the object, namely education. The type of nexus or connection which existed between the imparting of education and the carrying on of the business of a newspaper does not exist in the present case. There is no such nexus between the Katha business and the objects of the assessee-trust that can constitute the carrying on of the katha business an activity incidental to the attainment of the objects, namely advancing of education, patriotism, Indian culture, running of hospitals and dispensaries, etc. It would in our opinion be disastrous to extend the sweep of the observations made by the Supreme Court (quoted above) in the case of Thanthi Trust (supra), on the facts of that case, to all cases where the trust carries on business which is not held under trust and whose income is utilised to feed the charitable objects of the trust. We are, therefore, of the respectful opinion that the observations of the

ITA.36 of 2020 - 16 - Supreme Court must be understood and appreciated in the background of the facts in that case and should not be extended indiscriminately to all cases”. 15. With all the respect at our command, we are unable to agree with the Delhi High Court insofar as the distinction drawn from Thanthi Trust. As to whether the business commenced by the Trust was from the funds settled on the Trust, we do not think it applies in the present case. The Delhi High Court was concerned with the commencement of a manufacturing business, which requires considerable capital whereas here we are concerned with a Chitty/Kuri business wherein no such initial investment is required. On the distinction drawn, we have to notice that the Hon'ble Supreme Court while considering the assessment prior to 01.04.1984 with specific reference to Section 13(1)(bb) held so in paragraph 18 to decline claim for exemption. "18. The business that the Trust carries on is that of running a newspaper. That business, though it is held by the Trust as a part of its corpus, and, therefore, in trust, does not directly accomplish, wholly or in part, the Trust’s objects of relief of the poor and education. Its income only feeds such activity. It cannot be held to be carried

ITA.36 of 2020 - 17 - on in the course of the actual accomplishment of the Trust’s objects of education and relief of the poor. It is, therefore, not possible to accept the argument on behalf of the Trust that it is entitled to the exemption under Section 11". This is the specific example pointed out by the Delhi High Court after the amendment of Sub-section (4A) of Section 11 in 1992; to distinguish the decision in Thanthi Trust which denied the exemption in the earlier years when Section 13(1)(bb) was in the statute. Thanthi Trust cited almost identical examples while denying the exemption when Section 13(1)(bb) was available in the statute. After deletion of Section 13(1)(bb) and introduction of the new sub-section (4A) under Section 11 in the year 1992, the Hon'ble Supreme Court in Thanthi Trust held that if the income from the business is utilized for achieving the objectives of the trust or institution, then it is incidental to the attainment of the objectives of the Trust. We have to follow the above dictum of the Hon'ble Supreme Court which is binding on us under Article 141 of the Constitution of India. The observation of the Delhi High Court: It would in our opinion be disastrous to extend the sweep of the observations made by the Supreme Court (quoted above) in

ITA.36 of 2020 - 18 - the case of Thanthi Trust (supra), on the facts of that case, to all cases where the trust carries on business which is not held under trust and whose income is utilised to feed the charitable objects of the trust'; according to us, does not subserve judicial discipline. 16. We also notice that the definition clause under Section 2(15) for the relevant year stood as below: “2(15) “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: Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty-five lakh rupees or less in the previous year”.

ITA.36 of 2020 - 19 - We are of the opinion that the first Proviso brought in the same effect as spoken of in Dharmaposhanam, on exemption which respect to carrying on a public utility. But 'medical relief' is not qualified with those words; as has been found in Dharmadeepti as affirmed in Surat Art Silk Manufacturers' Association. On the above reasoning we answer the question of law in the negative and in favour of the assessee and against the Revenue. The appeal would stand allowed. Parties are left to suffer their respective costs. Sd/- K.VINOD CHANDRAN JUDGE Sd/- T.R.RAVI JUDGE Vku/-

ITA.36 of 2020 - 20 - APPENDIX APPELLANT'S ANNEXURES: ANNEXURE A TRUE COPY OF THE REGISTRATION CERTIFICATE DATED 20.04.2001 ISSUED BY THE COMMISSIONER OF INCOME TAX, COCHIN. ANNEXURE B TRUE COPY OF THE ASSESSMENT ORDER DATED 14.11.2014 FOR AY 2012-13 ISSUED BY THE INCOME TAX OFFICER WARD 1(1), THRISSUR. ANNEXURE C TRUE COPY OF THE CIRCULAR NO.11/2008 DATED 19.12.2008 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES. ANNEXURE D TRUE COPY OF THE APPELLATE ORDER IN ITA NO.221/TCR/CIT(A)/14-15 DATED 18.07.2019 ISSUED BY THE CIT(A), THRISSUR. ANNEXURE E CERTIFIED COPY OF THE APPELLATE TRIBUNAL'S ORDER IN ITA NO.590/COCH/2019 DATED 08.01.2020 ISSUED BY THE ITAT, COCHIN BENCH, COCHIN. ANNEXURE F TRUE COPY OF THE ASSESSMENT ORDER DATED 19.03.1996 FOR AY 1993-94 ISSUED BY THE ASST.COMMISSIONER OF INCOME TAX, THRISSUR. ANNEXURE G TRUE COPY OF THE ASSESSMENT ORDER DATED 28/03/2015 ISSUED BY THE CONTRALISED PROCESSING CENTRE, BANGALORE, FOR THE ASSESSMENT YEAR 2013-14. ANNEXURE H TRUE COPY OF THE ASSESSMENT ORDER DATED 0/2/03/2018 ISSUED BY THE CONTRALISED PROCESSING CENTRE, BANGALORE, FOR THE ASSESSMENT YEAR 2014-15. ANNEXURE I TRUE COPY OF THE ASSESSMENT ORDER DATED 29/01/2018 ISSUED BY THE CONTRALISED PROCESSING CENTRE, BANGALORE, FOR THE ASSESSMENT YEAR 2016-17. ANNEXURE J TRUE COPY OF THE ASSESSMENT ORDER DATED 09/03/2018 ISSUED BY THE CONTRALISED PROCESSING CENTRE, BANGALORE, FOR THE ASSESSMENT YEAR 2017-18.

ITA.36 of 2020 - 21 - ANNEXURE K TRUE COPY OF THE ASSESSMENT ORDER DATED 03/05/2018 ISSUED BY THE CONTRALISED PROCESSING CENTRE, BANGALORE, FOR THE ASSESSMENT YEAR 2018-19. ANNEXURE L TRUE COPY OF THE ASSESSMENT ORDER DATED 28/01/2020 ISSUED BY THE CONTRALISED PROCESSING CENTRE, BANGALORE, FOR THE ASSESSMENT YEAR 2019-20. ANNEXURE M NOTE FILED BY THE COUNSEL FOR THE PETITIONER/APPELLANT DATED 13/08/2020. ANNEXURE N RELEVANT EXTRACT OF THE AMENDMENT TO SEC.2(15) BY FINANCE ACT, 2011. [TRUE COPY]