Income Tax Appellate Tribunal - Patna
Fourth Income-Tax Officer vs S.M. Shafiq Trustee Of Karimia Trust And ... on 5 March, 1993
Equivalent citations: [1993]45ITD101(PAT)
ORDER
U.S. Dhusia, (Judicial Member)
1. While the Revenue is in appeal for the assessment years 1977-78, 1978-79, 1979-80 and 1980-81, the assessee is in cross-objection for the assessment year 1977-78 only.
2. We first take up the appeals of the Revenue for disposal. As these appeals raise common contentions, these are combined together and taken up one after the other for disposal.
3. We first take up the appeal for the assessment year 1977-78. One of the issues raised in this appeal is that the assessee-Karimia Trust, Sakchi, according to the ITO, was hit by the provisions contained in Section 13(1)(bb). This provision which has now been omitted by the Finance Act, 1983, read as under:
"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 will not be excluded from the total income of the previous year of the person in receipt thereof."
4. This means that the assessee-trust will not be entitled to claim exemption for the income if it was found to be carrying on any business from which the income was derived. Admittedly, the assessee-trust had been settled with two cinemas, Jamshedpur Talkies & Karim Talkies. According to the Income-tax Officer, the provision contained in the aforesaid Clause (bb) of Section 13(1) disentitled the assessee-trust from claiming exemption from taxability in respect of the income derived from the business of the carrying on of the two cinemas named above. He supported his finding with the observations made by their Lordships of the Supreme Court in the case of Addl CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1. According to the Income-tax Officer, none of the primary objects of the trust as illustrated in the deed of trust originally executed in the year 1945 but later on modified and supplemented by rectificatory and supplementary deeds of 1953 and 1958 gave out that running of the cinema business was not one of the primary objects of the trust. Therefore, the assessee-trust claiming exemption in respect of income derived from the running of the two cinemas which was not in the course of the actual carrying out of the primary purpose of the trust was not entitled to seek exemption. The assessee protested and filed his reply containing several pleas which we shall notice shortly when we are dealing with the appeal before the Appellate Tribunal but the Income-tax Officer was not persuaded and he declined to exempt the income derived from running of the two cinemas from taxability. The Income-tax Officer followed this order for the assessment year 1977-78 and the other three years also and refused to exempt the income of those years from taxability. The assessee took this matter in appeal before the Commissioner of Income-tax (Appeals), and, inter alia, took the plea that the trust was a religious trust to which the embargo placed in the aforesaid provisions contained in Section 13(1)(bb) was not applicable. Moved by this plea, the Commissioner of Income-tax (Appeals ) vacated the finding of the Income-tax Officer whom he directed to treat the income of the assessee derived from the running of the two cinemas to be exempt. The Commissioner of Income-tax (Appeals) following his order for the assessment year 1977-78 vacated the finding of the Income-tax Officer for the remaining three years and directed the Income-tax Officer to exempt the income of the assessee-trust from tax. The Revenue has felt aggrieved and has brought the issue in appeal before the Appellate Tribunal.
5. Standing counsel for the Department, Mr. Rajgarhia contended that, after the insertion of this provision in Section 13, there was an embargo placed on the carrying on of business and, therefore, the trust can no longer claim exemption from taxability in respect of income derived from carrying on of business unless the business which the trust was carrying on was being carried out in the course of the actual carrying out of one of the primary objects of the trust. But learned counsel for the assessee, Mr. N. K. Poddar, referred to judicial pronouncements made by the Supreme Court in their several judgments particularly in CIT v. P. Krishna Warrior [1964] 53 ITR 176, CIT v. Dharmodayam Co. [1977] 109 ITR 527 and Addl CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1. In these decisions of the Supreme Court, their Lordships distinguished the case of business held under the trust and those which the trust was carrying on or acquired on its own volition. According to their Lordships, the embargo was placed only on the trusts claiming to be public charitable trusts which were found to be carrying on any business or acquiring any business on their own. Such trusts could not claim exemption from taxability in respect of the income derived from such business as they themselves were engaged in to carry on those businesses or acquired such businesses. But where the business was treated as a property, and had been settled under trust by the settlor, the income derived from such business was not affected by the aforesaid provision contained in Section 13(1)(bb). Therefore, the claim of the assessee-trust for exemption in respect of income derived from running of the two cinemas which were settled under trust for carrying out the various objects of the trust by the settlor in 1945 could not be denied. The trust has not acquired the business or initiated the carrying on of the business. The trust came into effect only because two cinema houses treated as property were settled under the trust by the author of the trust.
6. Having considered the rival submissions, we are unable to persuade ourselves that the plea of the Revenue can be accepted on the facts of the case that the claim for exemption made by the assessee in respect of income derived from running of the two cinema houses is hit by the provisions contained in Section 13(1)(bb). We are in full agreement with the submission of learned counsel that the aforesaid provision puts an embargo on the carrying on of business by a charitable trust only if the business has been started by a charitable trust or has been acquired for running it. There, it is absolutely necessary for the assessee trust or institution claiming exemption to see that such business is being carried on in the course of the actual carrying out of the primary purpose of the trust or institution. But where a business is originally settled under a trust, income derived therefrom is not hit by the aforesaid provision. Such a trust comes into effect only by reason of the business treated as property being held or settled under the trust. Their Lordships of the Supreme Court had clearly held this view in the two decisions CIT v. P. Krishna Warriar [1964] 53 ITR 176 and CIT v. Dhannodayam Co. [1977] 109 ITR 527 referred to above. Taking another view of the matter would, according to their Lordships, make the provision contained in Section 11(4) nugatory. Their Lordships themselves adhered to this view in Addl CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) and commented on the approach of the Revenue put forth by standing counsel in the following words (at page 18 of 121 ITR) :
" Moreover, another consequence of the construction canvassed on behalf of the Revenue would be that Section 11, Sub-section (4), would be rendered wholly superfluous and meaningless. Section 11, Sub-section (4), declares that for the purpose of Section 11 'property held under trust' shall include a business undertaking and, therefore, a business can also be held under trust for a charitable purpose and where it is so held, its income would be exempt from taxi provided, of course, the other requisite conditions for exemption are satisfied. It may be pointed out that Section 11, Sub-section (4), where it provides that a business may also be properly held under trust, does not bring about any change in the law, because even prior to the enactment of that provision, it was held by the Judicial Committee of the Privy Council in the Tribune case [1939] 7 ITR 415 that property in the corresponding Section 4(3)(i) of the Act of 1922 included business and this principle was affirmed by the pronouncements of this court in J. K. Trust v. CIT [1957] 32 ITR 535 and CIT v. Krishna Warriar [19641 53 ITR 176. Section 11, Sub-section (4), merely gave statutory recognition to this principle. Now, Section 13(1)(bb) introduced in the Act of 1961, with effect from 1st April, 1977, provides that in the case of a charitable trust or institution for the relief of the poor, education or medical relief which carries on any business, income derived from such business would not be exempt from tax unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution. Where, therefore, there is a charitable trust or institution falling within any of the first three categories of charitable purposes set out in Section 2, Clause (15), and it carries on business which is held by it under trust for its charitable purpose, income from such business would not be exempt by reason of Section 13(1)(bb). Section 11, Sub-section (4), would, therefore, have no application in the case of a charitable trust or institution falling within any of the first three heads of 'charitable purpose'. Similarly, on the construction contended for on behalf of the Revenue, it would have no applicability also in the case of a charitable trust or institution falling under the last head of 'charitable purpose' because, according to the contention of the Revenue, even if a business is held under trust by a charitable trust or institution for promotion of an object of general public utility, income from such business would not be exempt since the purpose would cease to be charitable. The construction contended for on behalf of the Revenue would thus have the effect of rendering Section 11, Sub-section (4), totally redundant after the enactment of Section 13(1)(bb). We do not think we can accept such a construction which renders a provision of the Act superfluous and reduces it to silence. If there is one rule of interpretation more well settled than any other, it is that if the language of a statutory provision is ambiguous and capable of two constructions, that construction must be adopted which will give meaning and effect to the other provisions of the enactment rather than that which will give none. The construction which we are placing on Section 2, Clause (15), leaves a certain area of operation to Section 11, Sub-section (4), notwithstanding the enactment of Section 13(1)(bb) and we must, therefore, in any event, prefer that construction to the one submitted on behalf of the Revenue."
7. According to the Supreme Court a certain area of operation was left for Sub-section (4) of Section 11 which was not affected by the amendment to Clause (15) of Section 2 nor by the enactment of Section 13(1)(bb).
8. After this eloquent expression by the Supreme Court on the import of the provisions contained in Clause (bb) of Section 13(1) and Clause (15) of Section 2, we cannot accept the contention of the Revenue that the aforesaid provision hits at the claim of the trust for exemption from taxability even if the business was settled under the trust by the author of the trust. We have another consideration also which supports our view and which arises from the amendment of Section 2(15) deleting the words " not involving the carrying on of any activity for profit ", from Clause (bb.) of Section 13(1) itself and the insertion of a new Sub-section (4A) in Section 11. If the said clause had such an all pervasive effect to affect all businesses run by the charitable trusts, there was no need for these changes. It is evident that the Legislature does not encourage the carrying on of any business by any trust unless the business is carried on by the beneficiaries. It was with this consideration that Sub-section (4A) was added to Section 11. These changes brought about in Sub-section 11(2) and Section 13(1)(bb) as well as in the insertion of Sub-section (4A) in Section 11 were to overcome the effect of the Supreme Court's decision in the passage extracted above. Besides, it is a well known dictum that any doubt arising from the interpretation of law has to be resolved in favour of the taxpayer and more so in the case of public charitable trust to which the doctrine of cy pres applies. However, where can a doubt still survive when that doubt had been already resolved by the Supreme Court itself in the aforesaid passage in its judgment in Surai Art Silk Cloth Manufacturers Association [1980] 121 ITR 1. Therefore, in our view, the provision in Clause (bb) is not applicable to the facts of the case for the years of appeal. The trust is not running a business of its volition. The assessee-trust is based on the running of a business which was settled by the author of the trust as a property.
9. Therefore, we have to hold that the Revenue is not correct in its approach when it held that the claim for exemption made out by the assessee-trust was hit by the provisions contained in Section 13(1)(bb), because the trust was found carrying on the business of running two cinemas which were settled under the trust by the settlor. We uphold the finding of the Commissioner of Income-tax (Appeals) although for a different reason and dismiss the appeal of the Revenue on this issue for all the years under appeal.
10. Another issue raised in this appeal is that the Commissioner of Income-tax (Appeals) erred in holding that the income of the assessee-trust was exempt under Section 11. This issue does not require any independent disposal because the case of the Revenue to refuse exemption was only based on a misreading of the provision contained in Section 13(1)(bb). As we have already held that his finding in respect of application of the provisions contained in Section 13(1)(bb) was misconceived, we uphold the finding of the Commissioner of Income-tax (Appeals) that the income of the assessee-trust under Section 11 read together with Section 13(1)(bb) was exempt and reject the contrary contention of the Revenue for the assessment year 1977-78. The same order follows for the other remaining three years in respect of the issue.
11. Another issue raised in this appeal for the assessment year 1977-78 is that the Commissioner of Income-tax (Appeals) was not justified in deleting the disallowance of Rs. 7,200 made on account of excessive remuneration to the trustee. We have considered the finding of both the authorities. According to the Income-tax Officer remuneration amounting to Rs. 19,200 granted to Mr. S. M. Shafiq, the trustee was more than 10 per cent. of the gross surplus as shown in the expenditure account. In his view, a salary at Rs. 1,000 per month was reasonable. A perusal of the order of the Commissioner of Income-tax (Appeals) shows that there had been similar disallowances in the past which have been agitated not only before the Commissioner of Income-tax (Appeals), but also before the Appellate Tribunal. Placing reliance on the order of the Tribunal in I.T.A. Nos. 427 to 429 (Patna) of 1979, the Commissioner of Income-tax (Appeals ) did not find any force in the disallowance and vacated the disallowance. In our view, on these facts, the order of the Commissioner of Income-tax (Appeals) has to be supported and the appeal of the Revenue has got to be dismissed. We order accordingly.
12. For the remaining three years, the Income-tax Officer has taken another plea that the Commissioner of Income-tax (Appeals) erred in holding that the provisions contained in Section 13(1)(c)(ii) did not apply. According to the Income-tax Officer, the assessee-trust has made over the cinema as brought out in the arrangement made with M/s. Kapurchand Pvt. Ltd. and M/s. Ruhee Enterprises to two close relatives of the trustee, namely, Mrs. Shamsun Nissa Begum and Mr. Syed Ashfaque Karim. The two persons constituted a partnership M/s. Ruhee Enterprises. Mrs. Shamsun Nissa Begum was the wife of the trustee, Mr. S, M. Shafiq, and Syed Ashfaque Karim was his son. Referring, in particular, to the provisions contained in Section 13(1)(c)(ii), he made out that both the income and the property of the trust was used and applied for the benefit of Mrs. Shamsun Nissa Begam and Syed Ashfaque Karim who combined together and formed a partnership to which the management of the two talkies was made over.
13. The trust had entered into an agreement with M/s. Kapurchand Pvt. Ltd. under which the buildings styled as Jamshedpur Talkies and Karim Talkies with all the furniture, affixture and plant and machinery were let out to M/s. Kapurchand Pvt. Ltd. at consolidated weekly hire charges of Rs. 6,000 per week, i.e., Rs. 3,000 for each talkies for the said two cinemas. M/s. Kapurchand Pvt. Ltd. in its turn entered into an agreement with M/s. Ruhee Enterprises, Jamshedpur, for management and running of the two aforesaid talkies with effect from January 6, 1978, on which date the trust had entered into an agreement with M/s. Kapurchand Pvt. Ltd. M/s. Ruhee Enterprises was to be paid Rs. 10,500 per week for meeting all the expenses with regard to running the management of the said cinemas (Rs. 5,500 for Jamshedpur Talkies and Rs. 5,000 for Karim Talkies). For looking after the management and running of the two talkies M/s. Ruhee Enterprises was to be held responsible. It was to meet out of the weekly allowance of Rs. 10,500, all the expenses incurred in running the two talkies. M/s. Kapurchand Pvt. Ltd. itself could not undertake the actual management and running of the two talkies located in Jamshedpur when it was functioning in Calcutta. On these facts, the Income-tax Officer held that both the income and corpus were used and applied by the close relatives of the trustee who were the two partners of M/s. Ruhee Enterprises. He, accordingly, held that the claim for exemption of the income of the trust was hit by the provision contained in Section 13(2)(ii). Taking this view, he computed the income of the assessee under the head "Business" and refused to exempt the same from taxability. He determined the total income at Rs. 1,68,370 for the assessment year 1977-78 and Rs. 1,28,000 for the assessment year 1978-79, Rs. 1,02,000 for the assessment year 1979-80 and Rs. 3.80,060 for the assessment year 1980-81 and he subjected these incomes to tax. Before the Commissioner of Income-tax (Appeals) to whom the issue went next in appeal, the assessee represented that it was not a case of user or application of income or corpus by the trustee for the benefit of his close relatives referred to in Section 13(3) of the Act. The assessee did not deny that M/s. Ruhee Enterprises consisted of persons to whom Section 13(3) applied. But he did not accept the finding that any part of the corpus of the trust or income of the trust was diverted to the close relatives for their benefit. The Commissioner of Income-tax (Appeals), moved by this plea, held that the provisions contained in Section 13(1)(c) read with Section 13(2)(ii) did not apply to the facts of the case. According to him. no doubt, M/s. Ruhee Enterprises was a partnership firm in which close relatives of the trustee were partners. But, at the same time, there was no user or application of the corpus or income of the trust within the meaning and ambit of the provisions contained in Sub-section (2) of Section 13. He referred to Clause (g) of Sub-section (2) in particular and said that there was no diversion of any income or property of the trust. What has been made over to M/s. Ruhee Enterprises was only the management of the two cinemas. They had not been given any lien over the income or the property or corpus of the trust. M/s. Kapurchand Pvt. Ltd. had appointed Ruhee Enterprises to manage and look after the running of the two cinemas only. They were accountable for all the receipts. Two persons were entitled to get fixed sum every week to meet the expenses while they had to give a full account of all the receipts to M/s. Kapurchand Pvt. Ltd. who was to exercise all out supervision over the functioning of M/s. Ruhee Enterprises in managing and running the two cinema houses. His finding is contained in para 30 of his order which is reproduced below :
" There is force in the aforesaid contentions of the appellant's representative. The Income-tax Officer has not placed any material on the record to establish that there was diversion of any income or property of the trust to M/s. Ruhee Enterprises. It could have at best been argued in this case that there was any income which was indirectly passed on by the trust to the interested person. Such an onus is, however, on the party making the said assertion. The Income-tax Officer has not placed any material whatsoever on the record that there was any diversion of any income directly or indirectly from the appellant to the excluded person. No doubt, M/s. Ruhee Enterprises had been handed over the management of the two cinemas by M/s. Kapurchand Pvt. Ltd. for a consideration of Rs. 10,500 per week in lieu of services to be rendered by the said firm, nevertheless, the said arrangement has not been made by the appellant, but has been made by the third party. Even if it is argued that such arrangement has been made indirectly for the benefit of the interested persons, the existence of such a benefit has to be established by the person making that assertion who in this case would be the Income-tax Officer. The Income-tax Officer has not placed any evidence or material whatsoever on the record to establish the conferring of any benefit on the interested person. In the absence of such evidence, it cannot be held that the provisions of Section 13(1)(c)(ii) has any applicability in this case."
14. Accordingly, he discharged the finding of the Income-tax Officer and held that the claim of the trust for exemption in respect of its income derived from the running of the two cinemas could not be denied.
15. Learned standing counsel for the Department contended that the provisions contained in Sub-clause (ii) of Clause (c) of Sub-section (2) of Section 13 is so wide and large that the arrangement which the assessee-trust had made out for transferring the two cinemas to M/s. Ruhee Enterprises consisting of two partners, Mrs. Shamsun Nisa Begum and Mr. Syed Ashfaque Karim, will be caught in its net. Who on the facts of the case would deny that both the income and the property of the trust had been transferred to M/s. Ruhee Enterprises for their benefit. That being so, the claim for exemption of the income from taxability cannot be allowed. On the other hand, learned counsel for the assessee controverted the charge made out by standing counsel for the Department. He reiterated that it was a business arrangement brought about to facilitate the management and running of the two talkies. The predominant motive which impelled the arrangement to be brought about was to ensure the successful running of the two cinemas for the gain of the trust. The trust entered into an agreement with M/s. Kapurchand Pvt. Ltd. to ensure the accomplishment of twin purposes : one to obtain monetary gain from the running of the two cinemas and the other to make arrangement for their management. M/s. Kapurchand Pvt. Ltd. in turn appointed M/s. Ruhee Enterprises to manage and run the cinema houses. It was a purely business arrangement which could not be looked at as diverting either income or corpus by the trust to M/s. Ruhee Enterprises for their benefit.
16. We have looked into the facts of the case and carefully considered the rival submissions made by both parties. We are of the view that the Revenue has not been able to make out a case to establish that the property or income of the trust has been made over to M/s. Ruhee Enterprises, wherein two persons closely related to the trustee are partners. We would go with the Revenue to hold that the arrangement brought about put M/s. Ruhee Enterprises in charge and in control of the management of the two talkies. A dispassionate consideration of the facts, however, does not lead us to hold that the transfer of control and management to Ruhee Enterprises was for its benefit. On the facts of the case, we are obliged to hold that it was a purely commercial or business arrangement under which M/s. Ruhee Enterprises was appointed to look after the management and running of the two cinemas. Neither the corpus nor a part of the income of the trust was made over to M/s. Ruhee Enterprises for their benefit. The dominant purpose which had moved the parties concerned was to enter into the arrangement to ensure smooth running and management of the two cinemas for the gains of the trust. Whether we look at the matter from the point of view of the gain which the trust was to obtain from this arrangement or from the point of view of the monetary gain which M/s. Ruhee Enterprises obtained, we cannot reach a finding that it was not a business arrangement but one made to benefit the firm in which two close relatives of the trustee were partners. The trust received under this arrangement Rs. 3,12,000 in the year without moving a limb or taking any risk at all. This cannot be considered a small gain for the trust. If the trust had itself managed and run the cinemas, the gain, we may hold for the sake of argument, might have been more but what amount of strain and risk the trustees would have undergone. We cannot forget that the trust was paid Rs. 6,000 per week irrespective of the fact whether the cinema was making any gain or was incurring loss without moving a limb or undergoing any strain. Same inference we reach when we look at the issue from the point of view of gain realised by M/s. Ruhee Enterprises. M/s. Ruhi Enterprises netted an income of Rs. 9,604 during the assessment year 1978-79, Rs. 23,243 for the assessment year 1979-80 and Rs. 19,359 for the assessment year 1980-81. In the following years 1981-82 and 1982-83, the firm netted as gain Rs. 34,242 and Rs. 28,484, respectively. A dispassionate consideration of these incomes cannot be considered as excessive gains made by the firm whatever criterion may be applied. M/s. Ruhee Enterprises has two partners. The share of each partner is half in the profit and loss of the firm. Considering this share in the income of the firm for their devotion and industry undertaken in managing and running the two cinemas for the entire year cannot lead one to hold that they were paid more than what consideration of business needs would justify. The Income-tax Officer has not refuted that the firm had not applied itself to managing and running the two cinemas. Therefore, remuneration which each partner gets for the gains and strain undergone by him cannot be considered excessive or coloured by any extra business considerations. Therefore, we are unable to hold that any of the clauses of Sub-section (2) of Section 13 can be depended upon to lead one to a finding that the trust had diverted a part of its income or corpus in favour of any person who was related to the trust. The few judicial pronouncements which we have gone through in this connection do not suggest that Sub-section (2) puts a complete embargo on the employment of such persons as are referred to in Sub-section (3) of Section 13 for carrying out any genuine or bona fide purpose of the trust. What is intended by the different sub-clauses of Sub-section (2) is that neither the property nor the income of the trust is diverted to any such person who is referred to in Sub-section (2) for his benefit and to the detriment of the trust. As we have brought out the two cinemas were put under the control and management of M/s. Ruhee Enterprises where the partners were closely related to the trustee was not with the motive of ensuring any gain to these persons but to ensure smooth management and running of the two cinemas held under the trust. Taking this view of the matter, we are unable to appreciate the contention of the Revenue that the claim of the assessee-trust for exemption from taxability in respect of its income derived from exploitation of the two cinemas is hit by the provisions contained in Sub-section (2) of Section 13. We, therefore, reject the contention of the Revenue and uphold the finding of the Commissioner of Income-tax (Appeals). This disposes of the appeal of the Revenue for all four years.
17. Now, we may devote our consideration to the cross objection filed by the assessee for the assessment year 1977-78. We have read through the 21 grounds of cross-objections. There are only two issues raised through these 21 grounds which we have already dealt with in disposing of the appeal filed by the Revenue. No further disposal is required. The cross-objection becomes infructuous and is, therefore, dismissed.
18. In the result, both the appeals filed by the Revenue for the assessment years 1977-78 to 1980-81 and the cross-objection filed by the assessee for the assessment year 1977-78 are dismissed.
B. Nath, (Accountant Member)
19. I have not been able to agree with the decision of my learned brother on the two issues pertaining to the interpretation and application of the provisions of Section 13(1)(bb) and also with regard to the application of the provisions of Section 13(1)(c)(ii).
20. The provisions of Section 13(1){bb) have to be considered for all the four years under consideration. The provisions of Section 13(1)(c)(ii) would be relevant only for the assessment years 1978-79 to 1980-81 and not to the assessment year 1977-78. I would first discuss the facts with regard to the applicability of the provisions of Section 13(1)(bb). This sub-section was introduced by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1977 and was omitted by the Finance Act, 1983, with effect from April 1, 1984. Thus this sub-section was in operation from the assessment years 1977-78 to 1983-84. The provisions of this sub-section are quoted as under :
"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 -
(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."
21. The relevant facts in the case under consideration are that the assessee is a charitable institution (trust) and the income of the trust, according to the provisions of the trust deed, has to be applied primarily for purposes of education, running of schools and part of the income has to be applied for relief of the poor. The provisions of Sub-section (1)(bb) of Section 13 are applicable only if the trust has carried on any business from which income is derived and the trust is a charitable one for one of the three purposes, viz., for the relief of the poor, education or medical relief. The trust under consideration has admittedly carried on business by running two cinemas and is having income therefrom. Further, this trust is also for the relief of the poor and education as mentioned above. Prima facie, in the facts of the case, the asscssee-trust falls within the mischief of Sub-section (1)(bb) of Section 13. The cinema business clearly has not been carried on ,in the course of the actual carrying out of a primary purpose of the trust which, as mentioned above, is relief of the poor and education. Thus, the other condition for the application of Sub-section (1)(bb) of Section 13 is also satisfied that the business was not carried on in the course of carrying out of a primary purpose of the trust. Cinema business, as has been mentioned by the Income-tax Officer in the assessment order, is not carried on in the course of carrying out of the primary object of the trust. Entertainment of the public in general has absolutely no connection with the establishment and running of schools and colleges for educational purposes. Thus, all the conditions for application of Sub-section (1)(bb) of Section 13 are met and the assessee-trust has obviously to be denied the benefit of exemption under Sections 11 and 12. However, the Income-tax Officer had applied the provisions of this sub-section, but the Commissioner of Income-tax (Appeals ) held that the provisions of this sub-section were not applicable as the assessee is not merely charitable but is a charitable and religious trust. He drew this conclusion from the fact that the school which is to be benefited is Central Karimia School which is for the benefit of Mohamedan boys and girls. The Commissioner of Income-tax (Appeals) has held that, as the school was for the benefit of Mohamedans only and as a portion of the trust is to be given to public madarsa, orphanages and mosques at Jamshedpur and elsewhere at the discretion of the managing committee, according to the Commissioner of Income-tax (Appeals ), the trust was not only charitable, but also religious. According to the Commissioner of Income-tax (Appeals), only a charitable trust is caught within the mischief of Sub-section (1)(bb) of Section 13 and not a religious and charitable trust. The Commissioner of Income-tax (Appeals) has not given any other reason for holding that Sub-section (1)(bb) of Section 13 is not applicable. My learned brother has not given any decision on this reason, mentioned by the Commissioner of Income-tax (Appeals) that the trust is religious and charitable and that Sub-section (1)(bb) of Section 13 is not applicable to a charitable and religious trust. I, however, would venture to examine whether the said reason given by the Commissioner of Income-tax (Appeals) is correct at all. Learned standing counsel for the Department argued at length to show and prove that the trust in question is not a religious and charitable trust, but only a charitable trust. He also argued that Sub-section (1)(bb) of Section 13 is applicable even to religious and charitable trusts and not merely to charitable trusts. The authorised representative argued on behalf of the assessee that the trust being religious and charitable as per reasons given by the Commissioner of Income-tax (Appeals), Sub-section (1)(bb) of Section 13 was not applicable.
22. I have examined the facts and the rival submissions. Their Lordships of the Supreme Court have already held in Ahmedabad Rana Caste Association v. CIT [1971] 82 ITR 704 that to serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind or even all persons living in a particular country or province. It is sufficient if the intention is to benefit a section of the public as distinguished from a specified individual. Thus, it has already been held by the Supreme Court that, if a section of the society or public is benefited, the trust is charitable and does not cease to be so. Here the trust was for the purpose of running a school meant for Mohamedan boys. This trust was not meant for any specified individual. It was meant for a section of the public and hence it was a charitable trust and solely on this account it cannot be held to be a religious trust also. I, therefore, do not agree with the decision of the Commissioner of Income-tax (Appeals). Moreover, the provisions of Sub-section (1)(bb) of Section 13 are also applicable to charitable and religious trusts as has been stated in the commentary of Income Tax Law by the eminent author, Shri N. A. Palkhivala. He has mentioned at page 295 as under :
" This section applies to trusts or institutions both charitable and religious."
23. On the above mentioned reasons, I hold that the Commissioner of Income-tax (Appeals ) was not correct in coming to the conclusion that the provisions of Sub-section (1)(bb) of Section 13 were not applicable.
24. Now, I would discuss the views of my learned brother in connection with the applicability of Sub-section (1)(bb) of Section 13. He has also held that the provisions of Section 13(1)(bb) are not applicable, but for different reasons. He has given the reasons that the two cinemas which were run by the trust were held in trust and settled under the deed of trust by the testator. It is on this account that he has come to the conclusion that the assessee would not lose the benefit of exemption even though the business was done by running the said two cinemas, viz., Jamshedpur Talkies and Karim Talkies. He has also stated that if the trustees had acquired or constructed the cinema of their own volition, the matter would have been different but as the two cinemas were transferred to the trust by the testator in the trust deeds, the profit arising from the running of these two cinemas would not lose the benefit of exemption. My learned brother has relied on the following cases of their Lordships of the Supreme Court :
(1) CIT v. P. Krishna Warriar [1964] 53 ITR 176 ;
(2) CIT v. Dharmodayam Co. [1977] 109 ITR 527 ; and (3) Addi CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1.
25. I have carefully gone through the said decision of their Lordships of the Supreme Court in the case reported at [1964] 53 ITR 176 (CIT v. P. Krishna Warriar). Their Lordships of the Supreme Court interpreted the provisions of Section 4(3)(i) of the Act of 1922. They had no occasion to consider the provisions of Section 13(1)(bb), which was introduced later by the Legislature to plug the loopholes. Thus, in my opinion, the said decision is not relevant here.
26. In the decision reported at [1977] 109 ITR 527 ( CIT v. Dharmodayam Co.), their Lordships of the Supreme Court considered the definition of charitable purposes as given in Section 2(15) of the Income-tax Act, 1961, and held that, after the changes in the definition of charitable purposes, the kuri business which was held in trust did not lose the benefit of exemption as far as the income was concerned. In this case also, the provisions of Sub-section (1)(bb) of Section 13 were not considered and were not the bone of contention. Thus, in my opinion, this decision is also not relevant.
27. In the decision of their Lordships of the Supreme Court reported at [1980] 121 ITR 1 (Addl. CIT v. Surat Art Silk Cloth Manufacturers Association ), their Lordships of the Supreme Court no doubt mainly dealt with the amendment of the definition of charitable purpose given in Section 2(15) of the Income-tax Act and held that, where the object of the trust was of " general public utility" and the predominant object of the activity was to carry out charitable purposes and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arose from the activity. The definition of charitable purpose as given in Section 2(15) of the Income-tax Act is as under :
" '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."
28. The Supreme Court, in the case reported as [1980] 121 ITR 1 (Addl. CIT v. Sitrat Art Silk Cloth Manufacturers Association) were considering only the interpretation of the definition of charitable purpose vis-a-vis the last head, viz.," any other object of general public utility". The other three heads were not under consideration before them in that case. In fact, the Supreme Court held in that case in connection with the provisions of Sub-section (1)(bb) of Section 13 as under (at page 18) :
" Now Section 13(1)(bb), introduced in the Act of 1961 with effect from 1st April, 1977, provides that in the case of a charitable trust or institution for the relief of the poor, education or medical relief which carries on any business, income derived from such business would not be exempt from tax unless the business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution. Where, therefore, there is a charitable trust or institution falling within any of the first three categories of charitable purpose set out in Section 2, Clause (15) and it carries on business which is held by it under trust for its charitable purpose, income from such business would not be exempt by reason of Section 13(l)(bb)."
29. Thus, their Lordships of the Supreme Court clearly held that, for the first three heads of charitable purpose (the present assessee before us which is for purposes of education falls within the first three heads), Clause (bb) of Sub-section (1) of Section 13 would deny the exemption of profit from business carried on by such a trust. The learned authors Chaturvedi and Pithisaria, in their book Income Tax Law (3rd Edition), at page 605, have opined as under :
"Ban on carrying on of any business - Section 13(1)(bb) :
A new Clause (bb) has been inserted in Section 13(1) by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1977. As has been discussed in 'The restrictive words qualify only the fourth limb', at page 573, ante, the ban of carrying on an activity for profit attached to the last of the four limbs of 'charitable purpose' defined in Section 2(15), viz., 'the advancement of any other object of general public utility'. The first three limbs, viz.,' relief to the poor',' education' and ' medical relief' were out of the sweep of the ban. The newly inserted Clause (bb) has also affected those first three limbs. Under the new clause, if a trust or institution for the relief of the poor, education or medical relief carries on any business, any income from such business will not enjoy exemption from tax unless such business is carried on in the course of the actual carrying out of a primary purpose of the trust or institution ( see Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1, 18, 31 (SC))."
30. Thus clearly their Lordships of the Supreme Court in the said case held that the provisions of Sub-section (1)(bb) of Section 13 would be attracted where the trust is for a charitable purpose having as its object any one of the first three heads given in the definition. There is absolutely no doubt that the cinema business was carried on not in the course of carrying out the primary purpose of the trust as mentioned above. Hence taking all these facts and the opinion of the learned authors Chaturvedi and Pithisaria into consideration, I am of the opinion that the Commissioner of Income-tax (Appeals) was not correct in holding that the benefit of tax exemption would be available to the assessee in respect of income from business as well. I also do not agree with my learned brother that the benefit of tax exemption is available to the assessee in spite of the provisions of Sub-section (1)(bb) of Section 13.
31. The second issue to be considered is as to whether the assessee would lose the benefit of exemption according to the provisions of Section 13(1)(c)(ii). The provisions of Section 13(1)(c)(ii) are quoted below :
" (c) in the case of a trust for charitable or religious purposes or a charitable or religious institution, any income therefrom -
(i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or
(ii) if any part of such income or any property of the trust or institution (whenever created or established ) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in Sub-section (3)."
32. The facts in this connection are that vis-a-vis the two cinemas which the assessee trust had entered into an agreement with effect from January 6, 1978, by which the cinemas were given on hire to M/s. Kapurchand P. Ltd. at a consolidated weekly hire charges of Rs. 6,000 per week. On the same date, Kapurchand P. Ltd. entered into an agreement with Ruhee Enterprises, Jamshedpur, for management and running of the two cinemas for which Ruhee Enterprises would be paid Rs. 10,500 per week, by M/s. Kapur Chand P. Ltd. Ruhee Enterprises is a partnership firm, which consists of two partners who are the wife and son of the trustee of the assessee-trust. The facts show that the management and running of the two talkies has, in effect, though circuitously, been given to a firm in which the wife of the trustee and his son are partners. The Income-tax Officer has held that the circuitous way in which it has been done shows that the assessee has given the management and running of the cinemas to the wife and the son of the trustee after introducing a subterfuge in the shape of Kapurchand P. Ltd. The facts clearly show that the management and running of the two cinemas has been entrusted to the wife and son of the trustee through an intermediary. Now the question arises as to whether the provisions of Section 13(1)(c)(ii) are applicable or not in this case. There is no doubt that the wife and son of the trustee are persons referred to in Sub-section (3) of Section 13. Now it has to be seen as to whether they are deriving any benefit directly or indirectly from the trust or not. The Commissioner of Income-tax (Appeals) and my learned brother have held that they are not deriving any benefit and that they are getting a share of the profits from Ruhee Enterprises for looking after the work of the two cinemas as a business proposition and exerting themselves in that connection.
33. The declared profits of Ruhee Enterprises which has income from this source only, as mentioned by my learned brother in his order, are as under :
(Rs.) Assessment year 1978-79 9,604 Assessment year 1979-80 23,243 Assessment year 1980-81 19,359 Assessment year 1981-82 34,242 Assessment year 1982-83 28,484
34. The above figures do not show, in my opinion, that the huge profit going to the firm which has only this business represents reasonable remuneration for the exertion of these two partners of Ruhee Enterprises. One partner is a lady. There is no evidence put forward at any stage to show that any one or both of these persons possessed any special qualification (technical or otherwise) which entitled them to such income or by which they could have earned profit remuneration on such a scale even elsewhere. The management and control of the two cinema houses is fully in the household of the trustee. It is not known as to what was the technical/academic qualifications of these two persons. By these facts alone, I am of the opinion that the provisions of Section 13(1)(c)(ii) apply fully and it has to be held that these two persons are deriving benefit from the trust directly or indirectly. The conditions for the application of Section 13(1)(c)(ii), in my opinion, are satisfied fully and the benefit of exemption has to be withdrawn in the case of the assessee-trust for the assessment years 1978-79, 1979-80 and 1980-81 by applying the provisions of Section 13(1)(c)(ii). Thus, I do not agree with the decision of my learned brother on this issue.
ORDER OF REFERENCE TO THIRD MEMBER
35. We, the Members of Patna Bench having differed on the following issues while deciding the above appeals, refer the following questions to the President, Income-tax Appellate Tribunal under Section 255(4) :
" 1. Whether, on the facts and in the circumstances of the case, the income of the trust derived from the running of the two cinema houses settled under the trust by the truster was not saved by the application of Sub-section (4) of Section 11 from the effect of the provisions contained in Section 13(1)(bb) of the Income-tax Act, 1961 ?
2. Whether, on the facts and in the circumstances of the case, the claim of the assessee-trust for exemption of its income from taxability was hit by the provisions contained in Section 13(1)(c)(ii) ?"
36. Registry while sending the above will send the records of the case, ORDER OF THIRD MEMBER P.J. Goradia, (Accountant Member)
37. Because of the difference of opinion between the learned two Members who heard the appeals, a reference was made under Section 255(4) of the Act on the following two questions :
"(1) Whether, on the facts and in the circumstances of the case, the income of the trust derived from the running of the two cinema houses settled under the trust by the truster was not saved by the application of Sub-section (4) of Section 11 from the effect of the provisions contained in Section 13(1)(bb) of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the claim of the assessee-trust for exemption of its income from taxability was hit by the provisions contained in Section 13(1)(c)(ii) ?"
38. The Hon'ble President has directed me to give my opinion and, accordingly, the representatives of both the sides were heard.
39. The two separate orders passed by the learned Members contained elaborate facts and reasons and, for the sake of convenience, they are not repeated here. However, it will be necessary to focus certain crucial facts to find out the exact controversy contained with regard to question No. 1. The Assessing Officer has based his assessments on his reasoned order passed for the assessment year 1977-78. He has referred to the deed of trust which was created in May, 1945, that is to say, before the commencement of the Act of 1961, and found that the primary object of the trust was to establish and run schools and colleges for the education of Muslim boys and girls and thereafter he had referred to the powers of the trustees for distribution of the income of the trust. According to him, the trust is created mainly for education, a purpose which is included in the definition of charitable purpose within the meaning of Section 2{15) of the Act. Section 2(15), as it existed at the relevant time, reads as under :
"(15) '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 ]. "
40. He further stated on page 2 of the assessment order that the trust property included two cinema houses as property of the trust. He further took into consideration the fact that there existed earlier some controversy on the point whether the words, " not involving the carrying on of any activity for profit " qualified all the four heads, i.e., relief of the poor, education, medical relief and the advancement of any other object of general public utility or the words qualified only the last head. This controversy had been set at rest by the decision of the Hon'ble Supreme Court in [1980] 121 ITR 1 in the case of Surat Art Silk Cloth Manufacturers Association wherein the Hon'ble Supreme Court held that the words " not involving the carrying on of any activity for profit " qualify or govern only the last head of charitable purpose and not the earlier three heads. He further took into consideration the newly inserted Section 13(1)(bb) of the Act inserted by the Taxation Laws (Amendment) Act, 1975, with effect from April 1, 1977, and which remained operative till March 31, 1983. Section 13(1)(bb), as it stood at the relevant time, reads as under :
"(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."
41. Considering the language of Section 13(1)(bb), the Assessing Officer was of the view that exclusion of the income derived from any business carried on by a charitable trust for the purpose of education in this case was not permissible unless the business was carried on in the course of the actual carrying out of a primary purpose of the trust. The manner in which such pursuit of business can be undertaken was likened to picking up of flowers on the way to a temple for worship and the pursuit excluded maintaining a frame for temple worship and it was not enough that the profit from any business carried on by the trust ultimately went to subserve the purpose of charity. He also considered the recommendation of the Direct Taxes Enquiry Committee to find out the intention of the Legislature behind the amendment by way of Section 13(1)(bb). He considered the following observations of the Committee (at page 52 of 121 ITR) :
" It is in this background that we addressed ourselves to the question as to whether religious or charitable trusts enjoying tax exemption should be permitted to Carry on any activity for profit. Indubitably, engagement in an activity for profit by such trusts provides scope for manipulations for tax avoidance. We, however, consider that it will not be desirable to ban an activity for profit which arises in the pursuit of a primary purpose of a trust created with the object of relief of the poor, education or medical relief. For instance, in the case of a trust for vocational training, it would be essential for the trust to carry on its vocation. We, therefore, recommend that the law should be suitably amended to provide that, where a trust for the relief of the poor, education or medical relief derives income from any activity for profit, its income would be exempt from income-tax only if the said activity for profit is carried on in the course of the actual carrying out of a primary purpose of the institution. We wish to make it abundantly clear that even where the business is settled in trust, the trust should fulfil this condition if it is to enjoy tax exemption in respect of the income from such business."
42. According to him, the trust carried on the business of running Jamshedpur Talkies and Karim Talkies and by no stretch of imagination, could it be said that the cinema business was carried on in the course of the carrying out of the primary object of the trust, since the exhibition of films only provided entertainment to the public and had no direct link with the establishment and running of schools for educational purposes. He, therefore, held that the assessee's case came within the mischief of Section 13(1)(bb) and the benefit of exemption under Section 11 could not be available to it. Accordingly, he computed the income from business for the purpose of raising a demand of tax.
43. In appeal, the assessee contended, among other things, that the trust was a religious trust, to which the prohibition contained in Section 13(1)(bb) did not apply and accepting this contention the Commissioner (Appeals ) directed the Assessing Officer to grant exemption under Section 11. Aggrieved by this order of the Commissioner (Appeals ), the Revenue preferred an appeal before the Tribunal ; whereas the assessee also preferred cross-objections, both raising legal contentions on the basis of the changed law because of the introduction of Section 13(1)(bb) of the Act.
44. In the orders passed by the two learned Members, there is no dispute with regard to the above crucial facts stated by the Assessing Officer. The learned Judicial Member held the view that Section 13(1)(bb) did not apply where the business itself was originally settled under trust and in this case, as I have pointed out earlier, even the Assessing Officer has admitted that the business as also the property of the two cinemas were held as trust property. He was further of the view that though the controversy before the Supreme Court in the case of Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 was in respect of the interpretation of Section 2(15) of the Act, yet their Lordships of the Supreme Court took into consideration the subsequent amendment made by the insertion of Section 13(1){bb) of the Act and opined that, where Section 11(4) was attracted, the provisions of Section 13(1)(bb) of the Act could not be made applicable. The learned Accountant Member, however, took the view that their Lordships of the Supreme Court were concerned only with the interpretation of Section 2(15) of the Act, especially the fourth category and, while determining the interpretation to be placed on the qualifying words, they took into consideration the language of Section 13(1)(bb) of the Act though inserted subsequently. Besides, their Lordships of the Supreme Court clearly held that the provisions of Section 13(1)(bb) would be attracted where the trust is for charitable purposes having education as one of the three heads. Besides, there was absolutely no doubt that the cinema business was carried on not in the course of carrying out the primary purpose of the trust.
45. At the time of hearing before me, learned counsel for the assessee made lengthy submissions. Briefly they are as under :
(i) Both the cinema houses were settled on trust under the original trust deed of, 1945 and subsequent modifications and amendments and, therefore, Section 11(4) was clearly applicable.
(ii) Section 13(1)(bb) prohibited activity undertaken for profit. In other words, the assessee did not undertake an activity for profit by acquiring the cinema houses subsequent to the creation of the trust. This section does not apply to charitable trusts and religious trusts and, therefore, the trusts falling in Section 11(4) were outside the scope of Section 13(1)(bb) of the Act because, otherwise, the purpose of granting exemption to charitable trusts will be frustrated.
(iii) Marginal note/heading of Section 11 was indicative of the intention of the Legislature. Even if Section 13(1)(bb) is applied, the trust falls under general public utility subserving the main purpose and, therefore, exempt.
(iv) Lastly, when two views were possible, the view in favour of the assessee should be applied.
46. Emphasising that the decision in the case of Surat An Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC) was fully applicable to the facts of the case, further reliance was placed on [19911 188 ITR 57 (SC) in the case of Victoria Technical Institute v. CIT (Addl).
47. The learned Departmental Representative, apart from relying upon the order passed by the learned Accountant Member, submitted that at what point of time the two cinema houses came into the possession of the trust is not known as there is no material in this regard. Besides, the carrying on of business itself is in conflict with the objects of the trust. Regarding the decision of the Supreme Court in the case of Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1, he relied upon the observations made by the Assessing Officer.
48. In my opinion, the view expressed by the learned Accountant Member is the correct view and, therefore, I hold that the income of the trust derived from the running of the two cinema houses settled under trust was not saved by the application of Sub-section (4) of Section 11 from the effect of the provisions contained in Section 13(1)(bb) of the Act. Firstly, I will deal with the confusion created on account of the decision in the case of Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC). It was the case of a trust established for a residuary purpose, that is to say, advancement of any other object of general public utility, where, admittedly the activity carried on for profit was an activity while fulfilling the object of general public utility. Therefore, this activity was undertaken by the trust in the course of actually carrying out the primary purpose of the trust. Because of this, the Supreme Court, while considering the language of Section 13(1)(bb), opined that the trust did not lose exemption when the source of income was held under trust. This is not the case here in the facts before me. As rightly pointed out by the learned Accountant Member, the running of the cinema houses had no connection with actually carrying out or fulfilling the primary purpose of the trust. This aspect remains uncontroverted. Therefore, in this case before me, the activity of profit is not carried on while fulfilling the primary purpose of the trust, as was the case in Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC). On the contrary, this ratio of the Supreme Court decision in the aforesaid case, though announced later on, is kept in mind by the Legislature while introducing Section 13(1)(bb) of the Act and that is why leaving aside the fourth category of the charitable purpose within the meaning of Section 2(15), only the earlier three categories were qualified or roped in. So read, the ratio laid down by the Supreme Court has to be considered by applying the test whether the activity for profit, in this case the running of the cinema houses, is in the course of actually carrying out the primary purpose of the trust. While applying this test, the learned Accountant Member has given a clear and categorical finding in this regard, as stated above, which cannot be controverted on the basis of the material on record.
49. The learned Judicial Member has made a distinction between the business which is held under trust and the business which is not so held, but which is acquired or undertaken de hors the settled trust property. To my mind, this distinction is uncalled for. It appears that this distinction was sought to be made on the basis of three decisions in [1964] 53 ITR 176 (SC) in the case of CIT v. P. Krishna Warriar [1977] 109 ITR 527 (SO in the case of CIT v. Dharmodayam Co. and [1980] 121 ITR 1 (SC) in the case of Surat Art Silk Cloth Manufacturers Association. But, on going through these three decisions, I find that nowhere was the effect of Section 13(1)(bb) in the context of purposes other than the fourth category, considered. Apart from this, as I have stated earlier, I find that the activities undertaken for profit, in those cases, were of such a nature that they could be said to be carried on in the course of actually carrying out the primary purpose of the trust. Therefore, reliance placed on these three decisions was not correct.
"The intention of the Legislature is quite clear from the recommendations of the Direct Taxes Enquiry Committee, as considered by the Assessing Officer stated above, where it is clearly mentioned that the activity for profit has to be carried on in the course of actually carrying out the primary purpose of the trust even where the business is settled in trust. On going through the commentary in various books on income-tax law, especially Sampath Iyengar's Law of Income Tax and Chaturvedi and Pithisaria's Income Tax Law, this view, as I have taken, is expressed in clear terms.
50. I shall now deal with the contentions, factual and legal, raised by learned counsel, Mr. Jain.
(i) The cinema houses are trust property, it was submitted as against the submission of the learned Departmental Representative, Mr. Mukherjee and it is not known at what point of time the two cinema houses came into the possession of the trust. From the question raised for my opinion itself, it is clear that both the learned Members had no doubt about the two cinema houses having been settled under trust and, therefore, this point does not need any more elucidation,
(ii) It was contended that Section 13(1)(bb) prohibited activity undertaken for profit and did not apply to religious trusts. This contention will enlarge the point of reference and this is not permissible at this stage. As the question is framed, I have to proceed on the basis that both the learned Members agreed that Section 13(1)(bb) clearly applied. And that is why the question is framed that way, rightly, as per the discussions in the orders passed by each of them. It was further contended that, when Section 11(4) applied to a particular trust, the provisions of Section 13(1)(bb) could not be applied, as otherwise, the purpose will get frustrated. Exactly, to find out the purpose behind the insertion of Section 13(1)(bb), the Assessing Officer took into consideration the recommendations of the Direct Taxes Enquiry Committee and reading the language of the section in the light of those recommendations, together with the report of the Select Committee which recommended substitution of the word " business " in place of the words " activity for profit", a term found to be too wide (see [1975] 99 ITR (St.) page 22, para 16), I am quite clear that the purpose of the enactment is fulfilled only when I hold, as I have held earlier, on facts found.
(iii) Placing reliance on the marginal note of Section 11, which reads as " income from property held for charitable or religious purposes ", it was submitted that charitable purpose did not include religious purpose. I have already pointed out above that this contention cannot be considered now and is, therefore, ignored. It was further submitted that, even if Section 13(1)(bb) was to be applied, then the trust should be taken as having the object of general public utility and, therefore, the profit should be taken as subserving the main purpose and, therefore, exempt. This contention again enlarges the scope of the point referred and, therefore, is not permissible. Besides, to clarify, nowhere was this contention raised because to record a finding on this contention, actual facts have to be gone through and no supporting material was also placed before me.
(iv) It was further contended that when two views are possible, the view in favour of the assessee should be taken. As I have already stated, to my mind, two views are not possible and the confusion was created only because of the incorrect understanding of the discussion in the case of Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 (SC).
(v) Reliance placed on the decision in Victoria Technical Institute [1991] 188 ITR 57 (SC) is also misplaced because that decision, if applied to the facts of this case, could go against the assessee. It was the case of a trust imparting instructions to persons in scientific or artistic principles which underlie the industrial and commercial occupations of the people (including especially handicraft manufacturers and agricultural labourers) as well as instruction in the manual and other practices involved in the application of such principles and the like. One of the means of carrying out the object was buying and selling or selling on commission articles produced by handicraftsmen or otherwise. The question was whether the income of the society was exempt under Section 11. On a reference, the High Court held that the society's object was one of general public utility and relying upon the decision in Indian Chamber of Commerce v. CIT [1975] 101 ITR 796 (SC), it was held that its advancement was linked or connected with an activity for profit and, therefore, did not qualify for exemption. This decision of the High Court was reversed by the Supreme Court by holding that there was nothing to show that the function of buying and selling articles produced by handicraftsmen was otherwise than in the carrying out of the primary purpose. Therefore, the principle laid down in this case also, if applied to the facts of the case, as discussed above, would advance the case of the Revenue and not that of the assessee. I would, therefore, agree with the view expressed by the learned Accountant Member on question No. 1.
51. With regard to question No. 2, the factual controversy and the factual data required to be considered are elaborately stated in the two orders passed by the learned Members. After hearing the representatives of both the sides, I am inclined to agree with the view expressed by the learned Judicial Member, the view expressed in favour of the assessee. It is an admitted position that Section 13(3) is not applicable to M/s. Kapurchand Pvt. Ltd. who have taken on hire two cinema houses and, therefore, the income earned by M/s. Kapurchand Pvt. Ltd. is not to be considered as income diverted to prohibited persons mentioned in Section 13(3). I also do not find any material on the basis of which it can be said that M/s. Kapurchand Pvt. Ltd. were obliged further to give on hire these two cinema houses to a firm in which relatives of the trustees were interested. M/s. Kapurchand Pvt. Ltd. had the free will either to run the cinema houses on their own or to exploit the hired property in any manner it liked. Therefore, merely because it had chosen to exploit the property through some agency in which the relatives of the trustees are interested, it cannot be said that income or property is diverted to prohibited persons. Considering the factual data in respect of the income earned by the assessee, as given on page 174 of the paper book, I find that, in the assessment year 1979-80, when the properties are rented, the income has increased from what it was earlier when the cinemas were run by the trust itself. Besides, grant of sublease by the lessees to a firm in which relatives of the trustees are interested can also be out of precaution to preserve and protect the trust property from the adverse claims that might be apprehended in the present day circumstances and which might be put by the lessees who are not in any way associated with the trustees. This aspect gains much more significance because the income of the trust has increased in spite of the relatives of the trustees having been involved. It was also submitted by the learned counsel for the assessee that no part of the amount of Rs. 6,000 received from the lessee was diverted to prohibited persons and the assessments of the lessees as also the sub-lessees are completed and the agreements are treated as genuine without there being any variation in the incomes declared. The learned Accountant Member has pointed out that one of the two partners of the sub-lessee firm was a lady and it was not known whether one or both of the partners possessed any special qualifications. This aspect is not relevant in view of the above findings. Moreover, it is not denied that they did engage themselves in attending to the business and devoted time and energy and also undertook the incidental risk that is normal in running a business of any type. It is further stated by him that the management and the control of the two cinemas is fully in the household of the trustee. This aspect alone, on the face of the facts considered by the learned Judicial Member, cannot advance the case of the Revenue. Moreover, the realities of life have also to be kept in mind because, even when the management and control is in the hands of close relatives, yet there are attendant risks which need not be elaborated.
52. I must clarify for the purpose of proper understanding that question No. 1 as is referred proceeds on the admission of both my learned brothers that not only Section 11(4) applied but also Section 13(1)(bb) applied. Hence, the scope of reference was too limited, I could not travel widely on various aspects as would have been permissible, if the question referred had been wide open, in which case perhaps the answer could have been otherwise. The Third Member has neither the power to modify the question nor the authority to enlarge the scope of the point of reference.
53. Now the matter should go to the Division Bench for passing appropriate orders in accordance with law.