Bombay High Court
Deccan Gymkhana vs Commissioner Of Income-Tax on 29 August, 2002
Equivalent citations: [2003]262ITR459(BOM)
Author: S. H. Kapadia
Bench: S.H. Kapadia, J.P. Devadhar
JUDGMENT S. H. Kapadia, J.
1. The Income-tax Appellate Tribunal has referred to this court, the following questions arising out of its order dated February 10, 1988.
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee-club was not a charitable institution within the meaning of Section 2(15) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the income of the assessee was entitled to exemption either under Section 11 of the Income-tax Act, 1961 read with Section 2(15) of the Income-tax Act, or under the principle of mutuality ?"
Facts :
3. Both the above two references raise a common question of law and, therefore, they were heard together and they are disposed of by this common judgment. Income-tax Reference No. 76 of 1995 relates to the accounting year 1972-73 (assessment year 1973-74), whereas Income-tax Reference No. 79 of 1991 relates to the assessment years 1973-74, 1974-75, 1976-77 up to 1979-80.
4. The basic issue which arises for determination in the above two references is : whether the assessee-trust and the activities carried on by it come under the definition of "charitable purpose" under Section 2(15) of the Act and, therefore, whether the assessee-Deccan Gymkhana Trust was entitled to exemption under Section 11 of the Income-tax Act.
5. The assessee is a society registered under the Societies Registration Act, 1860. It was registered on October 5, 1906. It is a public trust. The objects of the society are described in Clause 3 of Part I of the constitution. The main object was to develop and promote gymnastic games (sports) and sportsmanship. The assessee was assessed for the assessment year 1973-74 by the Income-tax Officer on October 20, 1975, granting exemption under Section 11 of the Act. However, the Commissioner of Income-tax initiated proceedings under Section 263 of the Act and came to the conclusion that Deccan Gymkhana Trust was not a public charitable institution and was not entitled to exemption under Section 11 of the Act. Against the order under Section 263, the assessee went in appeal to the Tribunal. By its order dated October 20, 1978, the Tribunal agreed with the Commissioner of Income-tax and dismissed the appeal. The Tribunal disallowed the application of the assessee under Section 256(1). However, the High Court, vide order under Section 256(2) of the Act directed the Tribunal to refer the two questions, above quoted, to the High Court and accordingly, by the statement of case dated March 18, 1983, the above two questions were referred to this court by the Tribunal. To complete the chronology of events, it may be mentioned that for the subsequent assessment years 1974-75, 1976-77 up to 1979-80, the Income-tax Officer disallowed the assessee's claim for exemption. However, in appeal, the first appellate authority came to the conclusion that the assessee was entitled to exemption under Section 11. Being aggrieved, the Department went in appeal to the Tribunal. In the Tribunal, there was a difference of opinion between the learned Judicial Member and the Accountant Member. The learned Judicial Member held that the assessee was not a charitable trust, whereas the learned Accountant Member held that the assessee was a public trust and its objects were of a charitable nature. On such difference, the matter was referred by the President under Section 255(4) to the Third Member, who opined that the assessee did not fulfil the requirements of Section 2(15) and, therefore, disallowed the claim for exemption under Section 11. Following the opinion of the majority, the assessee lost the matter. Ultimately, the matter has come to this court by way of reference to answer the above two questions.
6. The entire controversy in this case has taken place in view of Clause 3 of the constitution of Deccan Gymkhana. Clause 3 has Sub-clauses A to I. Sub-clauses A to I of Clause 3 are quoted hereinbelow.
"3.A. To foster and develop (promote) gymnastic (sports) games and sportsmanship ;
3.B. To make arrangements, as far as possible, for all kinds of Indian and foreign games and systems of sports ;
3.C. To make efforts in the direction that India should participate in international sports competitions ;
3. D. To give systematic shape to Indian games and to foster and popularize them ;
3.E. To publish useful literature on gymnastics, games and sportsmanship and to circulate the same ;
3.F. To acquire and hold immovable property ;
3.G. To plan a colony for the members of the society and to make other arrangements ancillary to it;
3. H. To raise funds and loan, to invest amounts and advance loans, etc.;
3. I. To do all other things helpful in the achievement of the above objects."
7. The moot point which arises is in view of Sub-clauses F and G quoted above. According to the Department, Sub-clauses A to F show that the object of the society was to promote sports, games and sportsmanship, but with the introduction of Sub-clauses F, G, and H, the assessee cannot claim exemption under Section 11 as a charitable trust. On the other hand, according to the assessee, Sub-clauses A to E constituted the dominant object, whereas Sub-clauses F, G and H constituted incidental objects. That, in the alternative, it was contended that in any event, Sub-clauses F, G and H were never intended to be implemented ; that these sub-clauses were never, in fact, implemented. That, Sub-clauses F, G and H were introduced in the light of the situation which prevailed in Pune in 1906. That, after 1923, no colony has been set up by the assessee. That, in 1993, in fact, Sub-clause G has been deleted and the Department conferred registration under Section 12A of the Act for the assessment year 1995-96.
8. Before considering the legal submissions, the following historical facts are required to be quoted. In 1906, the city of Pune was a cultural and sports centre. Around that period, the city of Pune produced eminent freedom fighters like Chiplunkar, Agarkar and Lokmanya Tilak, who believed that the youth should take part in the freedom movement and for that purpose, the youth required strong physique. They believed that a sports environment was required to be created and with that object in mind, these leaders, fired by idealism, brought into existence an educational society known as Deccan Education Society. This society started its school known as New English School in Pune and, later on, this society set up a college which is Ferguson College. Ferguson College was in the old city of Pune earlier. At that time, in 1906, on the western side of the Mutha river, the area had no inhabitation. Lokmanya Tilak was not only interested in education, but he equally emphasized physical education, gymnastics, sports, games and sportsmanship. Lokmanya Tilak and the band of enthusiastic young men started an institute on October 5, 1906, which was registered as "Deccan Gymkhana, Pune." This institute celebrated its diamond jubilee in October, 1966. The first general secretary of the institute was N. C. Kelkar. However, Deccan Gymkhana was beyond the city limits. It was on the other side of the river, as stated above. On the western side of the river, there was hardly any inhabitation. The area was quite isolated. To have a Gymkhana in an isolated area having no residential population, would have been a failure. With a view to overcome these difficulties, the persons running the Gymkhana at that time considered a suggestion to have a colony so that sports lovers could reside around the Gymkhana and it was with that object that a housing society was formed and lands were allocated to the members who constructed their own houses on the allocated lands. At that time, the Gymkhana was beyond the municipal limits. At that time, the Gymkhana was under a panchayat. It is in the light of this historical background that one has to read Sub-clauses F, G and H. Reasons :
9. At the outset, we wish to clarify that we are basing this judgment only to the facts and circumstances of this case. That, we are reading the aforestated Sub-clauses F, G and H in the light of the historical facts enumerated above.
10. Mr. Inamdar, learned counsel for the assessee, submitted that there was a difference between objects of the trust and the powers of the trustees. He contended that Sub-clauses A to E indicate the objects of the public trust--Deccan Gymkhana, whereas Sub-clauses F, G and H only indicate the power of the trustees to acquire and hold immovable properties ; to plan a colony for the members of the society and to raise funds. He contended that the powers of the trustees should not be mixed with the dominant object of the trust as indicated by Clauses 3-A to 3-F. He contended that the Gymkhana was not formed in order to deal in immovable properties. He contended that in the light of the above historical facts, the youth was required to be brought to an area which was a desolate area in 1906, for sports and cultural activities. He contended that in 1906 there were logistical problems. He pointed out from the decision of the Tribunal in the aforestated historical facts to show that in 1906, in this area, there was no electricity. It is in this light that in the objects it was decided to state that a colony would be planned for the members of the society and in the light of those facts, it can never be stated that Sub-clauses F, G and H constituted the objects of the trust. He, therefore, submitted that these sub-clauses indicated the powers of the trustees only. In the alternative, he submitted that one has to apply the test of the dominant object. He submitted that the dominant object of Deccan Gymkhana was never to construct houses for the members. That, at the highest, Sub-clauses F, G and H refer to incidental objects. He contended that the colony came up only in 1923. That, thereafter, no colony has been put up and in 1993, Sub-clause G has been deleted. He further pointed out that the Tribunal erred in coming to the conclusion that no restriction existed on the trust to apply the income only for sports. Mr. Inamdar contended that the majority view of the Tribunal proceeds on the basis that as long as Sub-clause G existed, nothing prevented the trust from planning one more colony and, in the circumstances, the majority view of the Tribunal was that the trust was not entitled to exemption. Mr. Inamdar, therefore, contended that keeping in mind the historical facts enumerated above read with the fact that after 1923 till today, no colony has been set up and that in 1993, Sub-clause G stood deleted, the apprehension in the mind of the Tribunal that the trust would set up one more colony was ill-founded. He further pointed out that the Tribunal has failed to notice a Clause under the trust deed dated January 4, 1945, which states as follows :
"When the permanent reserve fund has been built to the extent of Rs. 75,000, the trustees shall hand over surplus to the Gymkhana for being utilised in the cause of sports."
11. He, therefore, contended that it was not open to the trust to apply the surplus income for any business and that the trust was duty-bound to apply the income only for the cause of sport and, therefore, the Department was wrong in saying that under the trust deed, there was no restriction to apply the income only to sports. Large number of decisions were cited by Mr. Inamdar and Mr. Desai on behalf of the respective parties.
12. As stated above, we are confining our judgment to the facts of this case. Section 2(15), as it stood at the relevant time, defines the words "charitable purpose" to include 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. In the case of Thiagarajar Charities v. Add. CIT , it has been held that the correct test to be applied was whether the predominant object of the activity was to subserve the charitable purpose or to earn profit. Where profit making was the predominant object of the activity, the purpose would cease to be a charitable purpose. But, where the predominant object of the activity was to carry out the charitable purpose and not to earn profit, it would not lose the character of a charitable purpose merely because some profit arises from the activity. In that judgment, it has been further laid down that there is a difference between the objects of the trust and the power of the trustees. In that matter, the Supreme Court had to construe two clauses in the constitution of the trust. In that matter, under Clause 1(g) the words were as follows (page 1021) :
"To engage in ... and assist and promote rural reconstruction work, cottage industry and all other matters incidental thereto . . . ."
13. The other clause in the trust deed was Clause 7(e) which reads as follows (page 1021) :
"7(e) To invest in any business undertaking of whatever nature . . . ."
14. It was held by the Supreme Court that the above Clause 1(g) was an object clause, whereas Clause 7(e), referred to above, indicated the power of the trustees to invest in business. That, the predominant object was in Clause 1(g). In the circumstances, it was held by the Supreme Court, applying the above test, that Clause 1(g) came within the ambit of the words "relief of the poor, education and medical relief" under Section 2(15) of the Income-tax Act, and not to earn profit and, in the circumstances, the fourth limb of Section 2(15) stood excluded. According to us, the judgment of the Supreme Court squarely applies to the facts of our case.
15. Basically, one has to read the objects under the constitution in the light of the facts of the case. In this case also, as stated hereinabove, we have to keep in mind, the historical perspective behind the establishment of the institution and if one keeps the historical background in mind, then it is clear that Sub- Clauses A to E constituted the object whereas Sub-clauses F, G and H gave power to the trustee to plan a colony for the members so that those members could take part in the promotion of sports, gymnastics and sportsmanship. The colony was set up only in 1923. Once the locality developed, the assessee has not put up any further colonies. In 1993, Sub-clause G has been deleted. Therefore, keeping in mind the peculiar historical facts of this case, we are of the view that the majority view of the Tribunal was erroneous; that they erred in construing Clause 3G as an object of the trust. We hold that there was no profit motive involved in this case vide the said clause and, therefore, the assessee had fulfilled the requirement of Section 2(15) of the Income-tax Act and, consequently, they were entitled to exemption under Section 11 for the assessment years 1973-74, 1974-75, 1976-77 up to 1979-80.
16. Accordingly, we answer the above two questions as follows :
ORDERS Question No.1 :
Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the asses-see-club was not a charitable institution within the meaning of section 2(15) of the Income-tax Act, 1961 ?
In the negative, i.e., in favour of the assessee and against the Department.
Question No.2 :
Whether, on the facts and in the circumstances of the case, the income of the assessee, was entitled to exemption either under section 11 of the Income-tax Act, 1961, read with section 2(15) of the Income-tax Act, or under the principle of mutuality ?
On the facts and in the circumstances of the case, income of the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961, read with section 2(15) of the Income-tax Act.
17. Accordingly, both the above references are disposed of with no order as to costs.