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17. The court took note of the judgment of Pathak, J. in Dharmadeepti v. CIT17 as well as the speech of then then Finance Minister, and further observed:

“17. ….It is obvious that the exclusionary clause was added with a view to overcoming the decision of the Privy Council in the Tribune case [AIR 1939 PC 208: In Re the Trustees of the Tribune, (1939) 7 ITR 415] 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 commercial lines with the object of earning profit. The publication of the 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 subserve 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 balances the income and there is no resulting profit…..

III. Analysis and reasoning

92. The history of the statute and the evolving interpretation of “charitable purpose” reveals that in - P. Krishna Warriar (supra), this court extensively considered the previous jurisprudence on the subject (in light of the pre-existing Section 4(3) of the old law), as well as the amendment introduced in 1953. At that time, income of a charitable organization, earned from business was subject to limitations. The limitations were that (i) the business was to be carried on in the course of the actual carrying out of a primary purpose of the trust or institution; or (ii) the work in connection with the business was to be mainly carried on by beneficiaries of the institution. These expressions were considered in Krishna Warriar (supra), where the court held that the term “property” (of a trust) was of widest amplitude, which included business. The following decision, in Andhra Chamber of Commerce (supra) where the chamber of commerce had among its objects, one enabling it to advocate policies or legislation, or oppose them, in addition to the object of promoting business, held that the incidental inclusion of such objects, involving espousing a political purpose, did not undermine its essential or main purpose, of advancing objects of general public utility. The new provision, i.e., Section 2(15) of the IT Act, defined “charitable purpose” restrictively: to deny tax exemption to activities for profit which were carried on by a trust for the advancement of an object of general public utility. The reason for this change (discussed previously) was that the advantage of tax exemption was not intended to charitable trusts that were commercial concerns, which while ostensibly serving a public purpose, were fully paid for the benefits provided by them.

100. The view that prevailed, after the decision in Surat Art Silk (supra), therefore, was that so long as the “dominant” object of a trust was charitable, and it did not essentially involve in business or commercial activity, the generation of profits, or surpluses by it, through activities, incidental to that main or dominant activity, did not undermine its charitable purpose, as long as the surpluses or profits, were used for the advancement of an object of general public utility.

101. An interesting detail, is that the old Act did not define “charitable purpose” restrictively, in the manner that the IT Act did, when enacted, in 1961. This lent a fair degree of interpretive flexibility, to the courts, to decide whether a commercial or business element, could be interwoven with a charitable object. The amendment of 1953 ensured that income “applied or accumulated for application to such .. charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application…”102 could not be included as taxable income of any charitable organization. This provision is a precursor for Section 11 under the IT Act. In other words, the structure of the old Act did not prohibit the carrying on of business; it spelt out a condition that any income derived from business “carried on in the course of the actual carrying out of a primary purpose of the institution” if applied for charitable purposes, was exempt.

105. It is therefore clear that after 1 April, 1984, the statute did not contain any restriction as to the nature of activity that could be carried on by GPU category charity. Furthermore, the condition in Section 13(1)(bb) - which applied to other kinds of trusts, i.e., that their incomes could be exempt under Section 11 to the extent they arose out of business, if the business was “in the course of the actual carrying out of a primary purpose of the trust”- was deleted. On the other hand, the wording of Section 11(4A) did seem to indicate that business activity was permissible if the objects of the trust were wholly charitable, and such business were to be carried on by its beneficiaries. This legal position continued, till the amendments in question were carried out, in relation to Section 2(15) in 2008.