Andhra HC (Pre-Telangana)
Commissioner Of Income-Tax vs Andhra Pradesh Riding Club on 3 March, 1987
Equivalent citations: [1987]168ITR393(AP)
Author: K. Ramaswamy
Bench: K. Ramaswamy
JUDGMENT K. Ramaswamy, J.
1. The assessee is the Andhra Pradesh Riding Club registered under the Societies Registration Act. Article 2 of the articles of the club postulates its object thus :
"The object of the Club is to promote and popularise riding, mounted sports, racing and polo, and to train its members 'especially' the student members, in the art of horsemanship."
2. Article 3 provides for membership and empowers the managing committee to admit desirable persons of either sex to ordinary membership as well as bona fide students of any educational or vocational or technical institution to student membership. Article 5 authorises that the club shall maintain a school of equestrian games with well-qualified riding instructors to impart instruction in riding. Article 6 provides that the school shall conduct riding classes twice a week, and attendance at these shall be compulsory for student members, at least once a week. Article 20 gives power to the managing committee to reject any application for membership without assigning any reasons. Article 39 gives, on dissolution, power to the managing committee, thus :
"In the event of the dissolution of the club, the property of the club shall be sold and the proceeds thereof shall be made over to some charitable or educational institution as decided upon by a majority of all the members of the club entitled to vote."
3. The other articles are not necessary for the purpose of this case and hence they are omitted. Rule 4 of the Rules framed under article 25 of the constitution of the club provides for payment of entrance fees and subscriptions for ordinary members; the entrance fee is Rs. 25 and the subscription Rs. 50, and for student members or lady members, the entrance fee is Rs. 15 and the subscription, Rs. 10. Rule 7 provides regular riding fees - for ordinary members, the fee is Rs. 2 per ride and for student members or lady members, Re. 1 per ride. The other rules are not necessary and hence they are omitted.
4. The Income-tax Officer for the assessment year 1969-70 issued a notice under section 148 of the Income-tax Act, 1961 (43 of 1961) (for short "the Act"), calling upon the assessee to file the return. Pursuant to that, on April 30, 1973, the assessee filed a "nil" return. subsequently, for the assessment years 1970-71 to 1972-73, returns were filed and the assessee is that the club under section 11(1)(a) of the Act. The claim of the assessee is that the club is formed for public charitable purposes and therefore, the income derived is not assessable to tax under section 11(1) of the Act. But the Income-tax Officer found that the club came into existence in the year 1956 and that the membership is available on payment of enrollment fee and annual subscription to adults. Riding charges are levied on members and approved horses are purchased and maintained not only for riding purposes but also for participation in the Gymkhana Races annually held in Hyderabad. Members and guests ride horses at their own risk. Therefore, the assessee was carrying on regular business or an adventure in the nature of business involving risk-taking also. The members alone have the actual benefit of the club. Profit is the main consideration while the public benefit is patently incidental and ancillary to the main object of making profit. The Income-tax Officer, therefore, held that the assessee is not entitled to exemption and assessed it to tax accordingly. On appeal, the Appellate Assistant Commissioner confirmed the same. On further appeal, the Income-tax Appellate Tribunal held that the promotion of sports would be an object of general public utility. Mounted sports, riding and polo are sport activities and there can be no doubt that they would come within the purview of the objects of general public utility under section 2(15) of the Act. It was also held that there can be promotion of racing without betting. The object of the assessee-club is to promote racing. It is not for the purpose of promoting betting on racing, nor is there any object to conduct races by allowing betting. Racing can be encouraged as mere sport. The purpose of promoting racing is to train jockeys who may get gainful employment in their profession. Racing may be a hobby to some and it may be a profession to others. But it is intended to benefit the general public by imparting training in the club. The Appellate Tribunal, therefore, held that the assessee-club satisfied the requirement of the definition of charitable purpose excluding the exclusionary clause under section 2(15) of the Act. With regard to the second contention of the Revenue, that though the assessee may be held to be imparting training in sports for a charitable purpose, since it involves in itself an activity for profit, the exclusionary clause excludes the exemption accorded under section 11(1)(a) of the Act, the Appellate Tribunal held that profit-making is not the real object. The club is utilising racing for the purpose of generating funds. It is further held that there is a fundamental distinction between an object which itself involves an activity for profit and an activity carried on for the purpose of achieving the objects which are otherwise charitable. In the second category, it held, the means are adopted to feed the charity. To put it differently, it held, if an activity for profit has to be undertaken so as to fulfill the objects, then only the exclusionary clause applies. It also held that promotion of racing is not an activity for profit. Promotion of racing can be achieved by simply training the members of the club. It is not obligatory on the part of the assessee-club to conduct races and earn money on betting and gambling so as to achieve the object of promotion of racing. Conducting races and making money is one way of getting resources for the purpose of achieving the objects of the assessee-club which are undoubtedly of charitable nature. Thus considering, the Appellate Tribunal held as follows :
"The assessee-club conducts races mostly by utilising the talent of their own members and makes some money which has to be spent for the purpose of achieving the objects for which the assessee-club is established. Incidentally, there is also promotion of racing which is one of the objects of the assessee-club, but we cannot say that promotion of races involved an activity for profit merely because races are conducted."
5. Thus, it held that the assessee is a charitable institution and that it is conducting races only incidental to the main object of imparting training to its members and conducting races is a source to generate its resources for the purpose of meeting the expenditure required for maintaining the stable. Accordingly, the Appellate Tribunal held that the income earned by the assessee is exempt from taxation under section 11(1)(a) of the Act and allowed the appeal.
6. At the instance of the Revenue, the following question was referred by the Income-tax Appellate Tribunal for the opinion of this court under section 256(1) of the Act :
"Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the assessee is entitled to exemption under section 11 of the Act ?"
7. Sri Murthy, learned standing counsel, raised a three-fold contention. Firstly, it is contended that the assessee-club restricted its activities to the members thereof. It is not open for general public or a discernible section of the society to participate in the club's activities. The fourth clause of section 2(15) of the Act is inapplicable and the assessee is not entitled to seek exemption under section 11(1)(a) of the Act. Alternatively, it is contended that the club is neither a trust nor an association nor an institution constituted for charitable purpose. The benefit is intended to be conferred exclusively on the members of the club and that too at the discretion of the club. Therefore, it cannot be considered to be charitable purpose. Nextly, it is contended that the main and sole object of the assessee is to conduct races and it is a commercial activity. The object of racing and conducting races are not ancillary or incidental activities. Racing itself is one of the main objectives. When there are several objects, some charitable and others non-charitable, if the management is given absolute discretion to incur the expenditure for any one of the purposes, it is not a charitable purpose. Racing being one of the main objects, it ceases to be charitable. Therefore, the exclusionary clause gets attracted and the club is not entitled to exemption. In support thereof, he placed reliance on certain decisions which we would advert to at appropriate places.
8. At first blush, though the contentions of Sri Murthy were attractive and alluring and we were inclined to accept them, but on a deeper probe, we found it difficult to accede to any of the contentions raised by him.
9. The first contention of Sri Murthy is that since the activities of the club, viz., promotion or popularisation of riding, mounted sports, racing and polo compendiously called equestrian games and imparting training in the art of horsemanship, are exclusively confined to the members of the club, the members cannot be considered to be general public or a discernible section of the public and, therefore, the fourth clause of section 2(15) is not attracted. In support thereof, he placed reliance on Sottish Flying Club Ltd. v. IRC [1935] 20 TC 1 (C Sess); CIT v. Ootacamund Gymkhana Club and Cricket Association of Bengal v. CIT [1959] 37 ITR 277 (Cal).
10. As seen earlier, under article 2 of the articles of the club, the main object of the club is to promote and popularise equestrian games, viz., riding, mounted sports, racing and polo, and to train its members, especially the student members, in the art of horsemanship. Racing is one of its objects. Section 2(15) of the Act defines "charitable purpose" thus :
"'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."
11. Though this exclusionary clause was omitted by the Finance Act, 1983, with effect from April 1, 1984, since during the relevant assessment years the exclusionary clause was in vogue, we have to consider the effect thereof in this case. A reading of section 2(15) would disclose that the first three reliefs are not applicable to the facts in this case and, therefore, the only relevant one is the last clause, viz., "the advancement of any other object of general public utility." The question, therefore, is whether promotion or popularisation of equestrian games and imparting training in them is an advancement of any other object of general public utility. Promotion of, or encouragement in, activities which are calculated to contribute to the health and well-being would be advancement of general public health. In Baddeley v. IRC [1955] 35 TC 661, 707 (HL), Lord Reid, considering the question whether promotion of social and physical well-being of persons is a charitable purpose, held thus :
"On a playing field, a person can learn the value of endurance and perseverance, of assiduous practice, of unselfish association in a team, and of winning with modesty and losing with a good grace, and, to my mind, that is the kind of moral and social training which the donor's words mean in this deed and in the Acts from which they were taken."
12. The purpose of fostering encouraging and providing the means to obtain health and well-being includes receiving training in the art of horsemanship. Racing can be promoted as a sport without betting. The object envisaged in article 2 appears to be encourage racing as part of equestrian games or sports. To the student and women members, riding or racing inculcates endurance and a mean to achieve success or health building or to be agile. It may be a hobby to some or some may take to profession as jockeys. The club established a training school with expert trainees with nominal fee. Equestrian games indisputably contribute to physical well-being and robust health to promote or encourage activities which are calculated to usher in a healthy society. Racing is also a necessary concomitant of mounted sports, riding and polo. Therefore, imparting training to any member of the society, be it by a club or an association, which specializes in promtoting and popularising the above art of horsemanship, is intendead for the benefist of general public. The immediate question, therefore, is whether the club restricted its membership only to a specified class of the public. It is true that there is a discretion given, under article 20 of the constitution of the club, to the managing committee to reject application for membership if it finds that the person who applied for the membership is not a desirable person to be admitted and the discretion is absolute and final. But it is not an arbitrary discretion. If a person satisfies all the requirements prescribed under the constitution of the club and if he is unjustly refused admission to the membership or there is a colourable exercise of power, it is always open to him to go to a court of law and establish his right to admission subject to satisfying the bye-laws of the club. If the bye-laws are bad, it is always open to assail the legality thereof. There is no prohibition as such under the articles or the rules of the club to any member of the public to become a member of the club. Public need not mean the entire public. A section of the public would be enough but admission must be thrown open to the general public. We find no restriction. The club is also conducting annual meets in riding, mounted sports, racing and polo. It is open to all persons of general public, who have the art of horsemanship, to participate in it. There is no prohibition for them to participate in the annual meets. Therefore, considered from any perspective, we are inclined to take the view that it is open to every member of the public to become a member of the club and as of right call upon the committee of the club to admit and impart training in the art of horsemanship in the equestrian games. The trust or association or club which ensures the development of sports can, therefore, legitimately be said to carry on an object of general public utility. Therefore, we have no hesitation in concluding that the object to promote and popularise equestrian games and to impart training in the art of horsemanship is of general public utility.
13. In CIT v. Andhra Chamber of Commerce , it was held that advancement or promotion of trade, commerce and industry leads to economic prosperity and, therefore, it is an object of general public utility. Similarly, participation in games by discernible sections of the public leads to physical well-being which is a sine qua non of a healthy society and so is of general public utility.
14. In Southern India Mill Owners' Association v. CIT , Addl. CIT v. Automobile Association of Southern India and CIT v. South Indian Film Chamber of Commerce , though services were mainly confined to the members of the associations, it was held by the Madras High Court that the advantage to the members is only incidental and that a benefit is sought to be given to the general public and, therefore, the object is of general public utility. We respectfully agree. In CIT v. Breach Candy Swimming Bath Trust [1955] 27 ITR 279 (Bom), Chagla C.J., speaking for the Bench, held thus (P. 288) :
"The object of setting up swimming bath especially in modern times is obviously to advance public health; and, as we pointed out, one must not forget that access to this swimming bath is open to a section of the public. It is true that the only section of the public that could be benefited by this bath would be European public in Bombay but it is well settled that an object of public utility need not be an object in which the whole of the public is interested. It is sufficient if a well-defined section of the public benefits by the object, and the object of the trust in the case before us was to benefit clearly a defined section of the public living in Bombay."
15. Though in Scottish Flying Club Ltd. v. IRC [1935] 20 TC 1 (C Sess), relied on by Sri Murthy, it was held that the benefit of imparting training in flying was confined to the members of the club and that, therefore, the club was not a body established for the general public nor a charitable purpose, but as held by Lord Wright in All India Spinners' Association v. CIT [1944] 12 ITR 482 (PC) and followed by the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association , that the ratio in the English decisions in respect of charities cannot be imported in extenso when considering the Indian statute in the context of relevant provisions in it. So, it is difficult to place reliance on the decision in Scottish Flying Club Ltd.'s case [1935] 20 TC 1.
16. In Ootacamund Gymkhana Club's case , relied on by Sri Murthy, the Madras High Court itself held that participation in games leads to the physical well-being of the society. As an additional factor it is found that it caters to the benefit of the public at large. But that does not mean that the learned judges intended to lay down that when admission into a club which imparts training in sports is thrown open to the public, it would be confined only to a specified section of the public but not to the general public. Each case is to be considered in the light of its own facts. The ratio in Cricket Association of Bengal's case [1959] 37 ITR 277 (Cal) cannot be followed for varied reasons. The learned judges have heavily drawn sustenance from English dicta which cannot be bodily imported and applied in considering the claims under the Act. Section 10(23) itself recognises exemption of income derived from sports and thereby emasculates the effectivity of the ratio in the Cricket Association of Bengal's case [1959] 37 ITR 277 (Cal). Moreover, in that case the ultimate proceeds would go to the benefit of the individuals as it is not a registered association. In CIT v. Andhra Pradesh Police Welfare Society , a Division Bench of the Andhra Pradesh High Court was called upon to consider whether the object is of general public utility if a section of the public alone is benefited by a lottery conducted by the police association. It was held (p. 295) :
"...... To serve a charitable purpose, it is not necessary that the object should be benefit the whole of mankind or even all person living in a particular country or province. It is sufficient if the intention is to benefit a section of the public as distinguished from specified individuals."
17. Therefore, when the object is the general public utility, it need not necessarily be for the benefit of the whole of the public. In Breach Candy Swimming Bath Trust's case [1955] 27 ITR 279 (Bom), the benefits are confined to a specified section of the European public and among them there is no prohibition for admission. The ratio with equal force applies to the facts in the case. The benefit to the individual members is incidental, flowing from their membership but not exclusively confined to them. It is open every eligible member to apply for a admission and receive training. If the benefit is intended to percolate to a discernible section of the general public, the concept of general public utility is discernible therefrom and is satisfied. The criterion prescribed under the fourth clause of section 2(15) of the Act is attracted and thereby it becomes an object of general public utility.
18. The next contention of Sri Murthy is that the club is neither a trust nor an association nor an institution constituted for a charitable purpose. The benefit is confined only to the members thereof and admission is specifically restricted to a specified class of persons and that too at the absolute discretion of committee. Therefore, it cannot be considered to be a charitable purpose. We find it difficult to accept to contention. As already seen, there is not restriction to any member of the general public to become a member of the club. It is already held that promotion or encouragement of sports is of general public utility. Section 10(23) of the Act itself recognises sports as a discernible entity to exemption, which reads thus :
"In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included - ...
(23) any income of an association or institution established in India having as its object the control, supervision, regulation or encouragement in India of the games of the cricket, hockey, football, tennis or such other games or sports as the Central Government may specify in this behalf from time to time by notification in the Official Gazette."
(The proviso is not necessary for the purpose of this case, hence omitted).
19. A reading of section 10(23) itself postulates that any income derived by an association or institution established in India having as its object the control supervision, regulation or encouragement in India of the games of cricket, hockey, football, tennis or such other games or sports shall not be included in computing the total income of the association or institution. Equestrian games also are games, the promotion of which is entitled to be given encouragement. Any income earned by an association or institution established in India with the above object is to exempted. The contention of Sri Murthy is that section 10(23) has specifically has been engrafted for giving exemption to the promotion of sports like the ones specified therein. It is exclusively dealt with under section 10(23) and, by necessary implication, the exemption under section 11(1)(a) is excluded. Therefore, the assessee-club is not entitled to take aid of section 11(1)(a) of the Act. We are unable to agree with this contention too. It is true that section 10(23) of the Act gives a right to an association or institution to claim exemption by making an application in that regard to the Central Government and the Central Government is given power to grant exemption by a notification published in the Official Gazette. That does not mean that if an association or institution establishes that the games or sports under its control, supervision, regulation or encouragement are of general public utility, it cannot, as of right, seek exemption under section 11(1)(a) of the Act. Power under section 10(23) is one of discretion given to the Government. It may give exemption or refuse to accord exemption. If an assessee is otherwise entitled to exemption under law or under any other relevant provision of the Act like the one under section 11(1)(a), it is always open to the assessee to satisfy the authorities of its/his entitlement and seek exemption. Therefore, the doctrine of mutuality is incompatible with the scheme of the Act. It is to be remembered that the legislature is aware of the existence of section 10(23) and section 11(1)(a) of the Act. If the Legislature intended to exclude the application of section 11(1)(a) of the Act to sports, we would expect to find an express mention in that regard in section 11(1)(a) itself. The Legislature is always prompt to introduce explanation or exception or exclusions. There is no such specific embargo created thereunder. It we would give credence to the contention of the Revenue that section 10(23) and section 11(1)(a) are mutually exclusive, then section 11(1)(a) would be rendered otiose. By a process of construction, it is impermissible for the court to render a provision of law ineffectual. In CIT v. Bar Council of Maharashtra , a contention that section 10(23A) and section 11 are mutually exclusive and, therefore, the exemption under section 11 is inapplicable was sought to be raised. While rejecting the above contention, in view of the fact that the finding was allowed to become final, the Supreme Court held that the Legislature did not intend to rule out section 11 when exemption was claimable under the specified provision, section 10. It is now-settled that even the obiter dictum of their Lordships of the Supreme Court is binding on the High Courts under article 141 of Constitution of India. In Bar Council of U. P. v. CIT , the contention raised was that then exemption is sought to be given under section 10(23A) of the Act, section 11 of the Act is inapplicable. That contention was negatived by a Division Bench of the Allahabad High Court and it was held that the assessee being an institution established for charitable purpose is to claim benefit both under section 10(23A) and section 11 of the Act. We respectfully agree. Following the above ratio, we have no hesitation to conclude that the doctrine of mutuality is inapplicable and that the assessee is entitled to seek exemption under section 11(1)(a) of the Act.
20. The next contention of the Revenue is that even though it is held that the assessee is a charitable institution attracting the fourth clause of section 2(15) of the Act, since racing is its main object and it involves the carrying on of an activity for profit, viz., conducting races for profit, the assessee is not entitled to the benefit under section 11(1)(a) of the Act. To meet this contention, it is necessary to see what is the meaning of the last ten words in section 2(15) exclusionary clause. It is not necessary to dilate on the plethora of precedents arising under the topic. Suffice it to consider the latest Constitution Bench decision on the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Mfrs. Association. In that case, the assessee, a company incorporated under the Companies Act, 1913, after certain vital amendments in its memorandum of association was registered under section 25 of the Companies Act. Its objects as amended were : (a) to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth; and clauses (b) to (e) provide the object which are incidental to the business connected therewith. The contention raised was that since the assessee involved itself in an activity for profit, the exclusionary clause in section 2(15) of the Act is attracted and thereby section 11 of the Act is not applicable. Bhagwati J., as he then was, speaking for himself, Untwalia J. and Tulzapurkar J. with whom Pathak J., as he then was, agreed but wrote a separate judgment, considered the objects and held thus (P. 17) :
"It is clear on a plain natural construction of the language used by the Legislature that the ten crucial words' not involving the carrying on of any activity for profit' go with 'object of general public utility' and not with 'advancement. It is the object of general public utility which must not involve the carrying on of any activity for profit and not is advancement or attainment. What is inhibited by these last ten words is the linking of activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object. It is not necessary that the accomplishment of the object or the means to to carry out the object should not involve an activity for profit. That is not the mandate of the newly added words. What these words require is that the object should not involve the carrying on of any activity for profit. The emphasis is on the object of general public utility and not on its accomplishment or attainment. The decisions of the Kerala and Andhra Pradesh High Courts in CIT v. Cochin Chamber of Commerce and Industry [1973] 87 ITR 83 and Andhra Pradesh State Road Transport Corporation v. CIT , in our opinion lay down the correct interpretation of the last ten words in section 2, clause (15). The true meaning of these last ten words is that when the purpose of a trust or institution is the advancement of an object of general public utility, it is that object of general public utility and not its accomplishment or carrying out which must not involve the carrying on of any activity for profit.
It is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision where such meaning is plain and unambiguous, but they can certainly help to fix its meaning in case of doubt or ambiguity. Let us examine what would be the consequences of the construction contended on behalf of the Revenue. If the construction put forward on behalf of Revenue were to accepted, then, as already pointed out above, no trust or institution whose purpose is promotion of an object of general public utility would be able to carry on any business, even though such business is held under trust or legal obligation to apply its income wholly to the charitable purpose or is carried on by the trust or institution for the purpose of earning profit to be utilised exclusively for feeding the charitable purpose. If any such business is carried on, the purpose of the trust or institution would cease to be charitable and not only the income from such business but the entire income of the trust or institution from whatever source derived, would lose the tax exemption. The result would be that no trust or institution established for promotion of an object of general public utility would be able to engage in business for fear that it might lose tax exemption altogether and a major source of income for promoting object of general public utility would be dried up. It is difficult to believe that the Legislature could have intended to bring about a result so drastic in its consequence. if the intention of the legislature were to prohibit a trust or institution established for the promotion of an object of general public utility from carrying on any activity for profit, it would have provided in the clearest terms that no such trust or institution shall carry on any activity for profit, instead of using involved and obscure language giving rise to linguistic problems and promoting interpretative litigation. The Legislature would have used language leaving no doubt as to what was intended and not left its intention to be gathered by doubtful implication from an amendment made in the definition clause and that too in language far from clear.... (P. 22) What these last concluding words require is not that the trust or institution whose purpose is advancement of an object of general public utility should not carry on any activity for profit at all but that the purpose of the trust or institution should not involve the carrying on of any activity for profit. So long as the purpose does not involve the carrying on of any activity for profit, the requirement of the definition would be met and it is immaterial how the monies for achieving or implementing such purpose are found, whether by carrying on an activity for profit or not. We may point out that even in Sole Trustee, Loka Shikshana Trust v. CIT , a decision which, as we shall presently point out, does not commend itself to us on another point, the same interpretation has been accepted by this court.... (P. 24) The next question that arises is as to what is the meaning of the expression 'activity for profit'. Every trust or institution must have a purpose for which it is established and every purpose must for its accomplishment involve the carrying on of an activity. The activity must, however, be for profit in order to attract the exclusionary clause and the question, therefore, is when can an activity be said to be one for profit ? The answer to the question obviously depends on the correct connotation of the proposition 'for'. This proposition has many shades of meaning but when used with the active participle of a verb, it means 'for the purpose of' and connotes the end with reference to which something is done. It is not, therefore, enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit. Profit-making must be the end to which the activity must be directed or, in other words, the predominant object of the activity must be making of profit. Where an activity is not pervaded by profit motive but is carried on primarily for serving the charitable purpose, it would not be corrected to describe it as an activity for profit. But where, on the other hand, an activity is carried on with the predominant object of earning profit, it would be an activity for profit, though it may be carried on in advancement of the charitable purpose of the trust or institution. Where an activity is carried on as a matter of advancement of the charitable purpose or for the purpose of carrying out the charitable purpose, it would not be incorrect to say as a matter of plain English grammar that the charitable purpose involves the carrying on of such activity, but the predominant object of such activity must be to subserve the charitable purpose and not to earn profit. The charitable purpose should not be submerged by the profit-making motive; the latter should not masquerade under the guise of the former. The purpose of the trust, as pointed out by one of us (Pathak J.) in Dharmadeepti v. CIT , must be 'essentially charitable in nature' and it must not be a cover for carrying on an activity which has profit-making as its predominant object. This interpretation of the exclusionary clause in section 2, clause (15), derives considerable support from the speech made by the Finance Minister while introducing that provision. The Finance Minister explained the reason for introducing this exclusionary clause in the following words :
'The definition of "charitable purpose" in that clause is at present so widely worded that it can be taken advantage of even by commercial concerns which, while ostensibly serving a public purpose, get fully paid for the benefits provided by them, namely, the newspaper industry which while running its concern on commercial lines can claim that by circulating newspapers it was improving the general knowledge of the public. In order to prevent the misuse of this definition in such cases, the Select Committee felt that the words "not involving the carrying on of any activity for profit" should be added to the definition.' It is obvious that the exclusionary clause was added with a view to overcoming the decision of the Privy Council in the Tribune's case [1939] 7 ITR 415 (PC), where it was held that the object of supplying the community with an organ of educated public opinion by publication of a newspaper was an object of general public utility and hence charitable in character even though the activity of publication of the newspaper was carried on on commercial lines with the object of earning profit. The publication of a newspaper was an activity engaged in by the trust for the purpose of carrying out its charitable purpose and on the facts it was clearly an activity which had profit-making as its predominant object, but even so it was held by the Judicial Committee that since the purpose served was an object of general public utility, it was a charitable purpose. It is clear from the speech of the Finance Minister that it was with a view to setting at naught this decision that the exclusionary clause was added in the definition of 'charitable purpose'. The test which has, therefore, now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to sub-serve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity that the expenditure balance the income and there is no resulting profit. That would not only be difficult of practical realisation but would also reflect unsound principle of management. We, therefore, agree with Beg J. when he said in Sole Trustee, Loka Shikshana Trust's case that :
'If the profits must necessarily feed a 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. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity.' The learned judge also added that the restrictive 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'. We wholly endorse these observations."
21. In re Trustees of the Tribune [1939] 7 ITR 415 (PC), the purpose of the trust envisaged a commercial activity - newspaper charges rates to its readers and advertisers at ordinary commercial rates. While considering the question whether it is entitled to claim exemption under section 4(3) of the Indian Income-tax Act, 1922 (XI of 1922), the Privy council held that the newspapers and press were not established for private profits. The object of the trust was to supply the public with an organ of educated public opinion and it constitutes an object of general public utility and it was a charitable object. The fact that ordinary commercial rates are charged do not detract from the conclusion that the object was of general public utility. In Surat Art Silk Cloth's case , Pathak J., as he then was, in his separate but concurring judgment held thus (p. 33) :
"Therefore, for a purpose to fall under the fourth head of 'charitable purpose', it must constitute the advancement of an object of general public utility in which the activity of advancement must not involve a profit-making activity. The word 'involving'in the restrictive clause is not without significance. An activity is involved in the advancement of an object when it is enwrapped or enveloped in the activity of advance of an object when it is enwrapped or enveloped in the activity of advancement. In another case, it may be interwoven into the activity of advancement, so that the resulting activity has a dual nature or is twin-faceted. Since we are concerned with the definition of 'charitable purpose', and the definition defines in its entirety a 'purpose' only, it will be more appropriate to speak of the purpose of profit-making being enwrapped or enveloped in the purpose of the advancement of an object of general public utility or, in the other kind of case, the purpose of profit-making being interwoven into the purpose of the advancement of that object giving rise to a purpose possessing a dual nature or twin facets. Now, section 2(15) clearly says that to constitute a 'charitable purpose', the purpose of profit-making must be excluded. In my opinion, the requirement is satisfied where there is either a total absence of the purpose of profit-making or it is so insignificant compared to the purpose of advancement of the object of general public utility that the dominating role of the latter renders the former unworthy of account. If the profit-making purpose holds a dominating role or even constitutes an equal component with the purpose of advancement of the object of general public utility, then, clearly, the definition in section 2(15) is not satisfied. When applying section 11, it is open to the tax authority in an appropriate case to pierce the veil of what is proclaimed on the surface by the document constituting the trust or establishing the institution, and enter into an ascertainment of the true purpose of the trust or institution. The true purpose must be genuinely and essentially charitable."
22. Therefore, in the light of the above law, we have to see what is the object and purpose of the club and whether the profit derived is incidental to advance the object and purpose of the club, or its main purpose is to earn profits in carrying on racing. The restrictive clause must be, as held the Supreme Court, read along with "the advancement of any other object of general public utility". The object of the club is to impart training to its members in equestrian games to make them perfect in the art of horsemanship. Its object is not conducting races as such. It is not in the nature of carrying on any business activity. The imparting of training in the art of horsemanship especially to student members is the purpose. So, the restrictive clause must be read with the advancement of the art of horsemanship which is of general public utility and not with the object of racing as such. The charitable purpose is imparting training in equestrian games to make the trainee acquire perfection and proficiency in the art of equestrian games. Horsemanship is an essential part of the game. Without acquiring proficiency in racing, it would appear to be incomplete in having perfection in the art of horsemanship. Racing is thus an internal facet of equestrian games, such as, mounted sports, polo and riding. The object of the club thus is a definite one, viz., the charitable purpose, and in the advancement of that object incidentally, it conducts races as a means to achieve the object and the income derived therefrom is applied to defray the expenses incurred to maintain stables and the salaries of the staff required for imparting training to its members. Application of money for providing the means of a healthy recreation or sporting endurance is a good public charitable purpose. The subscription fee and riding fee are a pittance when compared to the expenditure incurred to maintain horses, etc. As held by the Supreme Court, the activity of advancement must not involve the carrying on of an activity for profit. If the activity is intended to yield profit for the continued existence of the club as such, then the club is not carrying on the business exclusively for the purpose of making profit but is carrying on the activity incidental to the main object, viz., to impart training to its members in the art of horsemanship. Take an illustration that if the club, with a view to generate its resources to meet the expenses required for maintaining the horses and for payment of salaries to the employees, seeks the assistance of philanthropic and reputed musicians and conducts a musical concert and accordingly some amount is received in conducting the musical night by sale of tickets, then the question that arises is whether the income earned is a profit. It is needless to mention that conducting musical concert is only incidental to the advancement of the main object of the club. It is true, as found by the appellate authority and the Income-tax Officer, that the horses of the assessee participate in the Gymkhana races conducted by the Hyderabad Race Club and earn income, but, as stated earlier, it is only with a view to generate the income of the club, its horses are allowed to participate in the Gymkhana races. In that regard, some income is derived. But, as already held, the sole main object is to impart training in equestrian games but not to conduct races. As found by the Tribunal, racing does not necessarily involve betting or gambling. There is no express prohibition that a charitable trust that carries on business for mobilising funds cannot be granted the benefit of section 11 of the Act. In Breach Candy Swimming Bath Trust's case [1955] 27 ITR 279(Bom), selling eatables, etc., and deriving income therefrom is only incidental to running of the swimming pool and is exempt from taxation. This ratio applies to the facts of this case too. Therefore, the contention of the Revenue that the assessee is engaged in the activity of earning profits is devoid of force and conducting races is only a fund-raising activity as a means to achieve the end of promoting equestrian games. Its primary and dominant object is only promotion of equestrian games. The assessee had applied the surplus only for the purpose of equestrian activities. It is also of necessity to note that article 39 of the club provides that on dissolution of the club, the general body has to sell the property and make over the sale proceeds to any charitable or educational institution as decided upon by a majority of the members of the club. Thereby, no member of the club has any direct or incidental personal advantage in the property of the club. The entire property has to be made over to any charitable or educational institution. No doubt, so long as he is a member of the club, he is entitled to receive the advantage of training. It is only incidental to his membership in the club. Thereby, he is not having any independent profit or share in the profit for himself.
23. Yet another contention raised by Sri Murthy, learned standing counsel for the Revenue, is that a major part of the income is being spent for the purpose of conducting races and, therefore, it is a part of the profit-earning activity. It is further argued that if some of the main objects are non-charitable and if absolute discretion is left to the management to utilise the funds for any purpose, it ceases to be charitable. Unfortunately, in the tribunal below, no such contention was raised. For the first time, taking a clue from the statement of account furnished by the assessee, Sri Murthy seeks to raise this contention. In view of the fact that no such contention was raise in the Tribunal below and no finding was recorded in that regard, we cannot hazard to come to any conclusion that a major part of the income earned by the assessee is being spent for the purpose of racing. We have already held that racing itself is not the main object but is only incidental to generate funds and the expenditure expended is also for defraying incidental expenses. So it does not cease to be charitable. In Hyderabad Race Club v. CIT [FB], the main object of the club is racing itself. So, the ratio therein does not apply to the facts of this case. Equally in Municipal Corporation of Hyderabad v. Hyderabad Race Club , the Supreme Court was concerned with a case of exemption of the property from property tax. Therein, the building was not used for charitable purpose but the income derived was used for charitable purpose. The Act exempts property tax only if the building as such is used for charitable purpose. So the ratio therein also does not apply to the facts in this case.
24. Considered from the above perspective, we have no hesitation to conclude that the assessee is not involved solely or exclusively in an activity of carrying on business and, therefore, the exclusionary clause is not attracted. We accordingly hold that the Tribunal correctly held that the assessee is entitled to exemption under section 11(1)(a) of the Act and it warrants no interference.
25. The reference is accordingly answered against the Revenue and in favour of the assessee, but in the circumstances, each party is directed to bear its own costs.