My trade association's objects are charitable, but the activity it runs to achieve them throws up a surplus. Does that surplus destroy its exemption?
No, provided profit-making is not the real object. A five-judge bench of the Supreme Court held that the words "not involving the carrying on of any activity for profit" in section 2(15) qualify the object, not the way the object is accomplished. The test is whether the predominant object of the activity is to subserve the charitable purpose or to earn profit. Profit that arises incidentally, and which under the constitution of the body can only feed the charitable purpose, does not take the case out of section 2(15). The association's income was held exempt under section 11.
Decided by the Supreme Court (Supreme Court of India; P.N. Bhagwati, N.L. Untwalia, V.D. Tulzapurkar, R.S. Pathak and A.P. Sen JJ; majority judgment delivered by Bhagwati J, with a separate concurring judgment by Pathak J) on 1979-11-19, reported as 1980 AIR 387; 1980 SCR (2) 77; 1980 (2) SCC 31; (1980) 121 ITR 1; 1980 TAX. L. R. 230. It bears on section 2(15), section 11 of the Income Tax Act 1961, in Charitable Trusts & Exemption and Capital Gains Exemptions matters.
This is the leading construction of the pre-1984 exclusionary clause in section 2(15), and it displaced a line of reasoning that would have made it impossible for a general-public-utility trust to run any activity at all. It rejects the inference, drawn in Sole Trustee Lok Shikshana Trust and Indian Chamber of Commerce, that an activity yielding profit must be assumed to be an activity for profit unless the trust deed forbids profit. It supplies the dominant-object test that is still the working tool whenever the department says a body's fee-earning activity is commercial, and it fixes the two-condition structure for the fourth head of charitable purpose.
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The assessee was a company recognised by the Central Government under section 25 of the Companies Act, 1956. It carried on activities to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth, and among other things obtained licences for the import of foreign yarn and quotas for the purchase of indigenous yarn, taking a commission fixed as a percentage of the value of the licences and quotas. Under its memorandum of association its income and property had to be applied solely to the promotion of its objects, and no part of the profit could be distributed to members in any form. It claimed exemption under section 11(1). The Income-tax Officer refused it, holding the objects were not charitable within section 2(15). The Appellate Assistant Commissioner and the Tribunal upheld the claim. Because the High Courts had taken conflicting views on the exclusionary clause, the Tribunal referred the question directly to the Supreme Court under section 257.
The references were answered in favour of the assessee, with costs in two sets. The majority held that the purpose for which the assessee was established was a charitable purpose within section 2(15) and its income was exempt under section 11. The words "not involving the carrying on of any activity for profit" govern only the last head of charitable purpose, the advancement of any other object of general public utility, and require that the object, not its accomplishment, must not involve an activity for profit. The test 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. Applying that, obtaining import licences and yarn quotas was not an activity for profit: profit was a by-product, and could under the memorandum only feed the charitable purpose.
The majority worked from the word "for". Used with the active participle of a verb it means "for the purpose of", so it is not enough that an activity in fact yields profit; it must be carried on with the object of earning profit, and profit-making must be the end to which the activity is directed. The Court then tested the Revenue's reading against its consequences: if the means of accomplishing the object could not involve profit, no general-public-utility trust could carry on any activity at all, and income from other sources would be lost as well, which the legislature cannot have intended. The Finance Minister's speech confirmed that the clause was added to undo the Privy Council's decision in the Tribune case, where the newspaper was itself run with profit-making as its predominant object. The Court endorsed Beg J's formulation in Lok Sikshana Trust that if profits must necessarily feed a charitable purpose, the mere fact that the activities yield profit does not alter the charitable character; the condition is satisfied if profit-making is not the real object. It rejected the further observations in Lok Sikshana Trust and Indian Chamber of Commerce that an activity yielding profit must be presumed to be an activity for profit absent an express no-profit clause. No such clause is necessary; the nature of the purpose, the manner in which the activity is carried on and the surrounding circumstances may show the absence of a dominant profit motive. On the earlier limb, a merely ancillary or incidental non-charitable object does not destroy a dominant charitable purpose.
The emphasis is on the object of general public utility and not on its accomplishment or attainment.
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Handle my notice → Ask a CA on WhatsAppNo, provided profit-making is not the real object. A five-judge bench of the Supreme Court held that the words "not involving the carrying on of any activity for profit" in section 2(15) qualify the object, not the way the object is accomplished. The test is whether the predominant object of the activity is to subserve the charitable purpose or to earn profit. Profit that arises incidentally, and which under the constitution of the body can only feed the charitable purpose, does not take the case out of section 2(15). The association's income was held exempt under section 11. This was decided by the Supreme Court (Supreme Court of India; P.N. Bhagwati, N.L. Untwalia, V.D. Tulzapurkar, R.S. Pathak and A.P. Sen JJ; majority judgment delivered by Bhagwati J, with a separate concurring judgment by Pathak J) and bears on section 2(15), section 11 of the Income Tax Act 1961. It is reported as 1980 AIR 387; 1980 SCR (2) 77; 1980 (2) SCC 31; (1980) 121 ITR 1; 1980 TAX. L. R. 230. This is the leading construction of the pre-1984 exclusionary clause in section 2(15), and it displaced a line of reasoning that would have made it impossible for a general-public-utility trust to run any activity at all. It rejects the inference, drawn in Sole Trustee Lok Shikshana Trust and Indian Chamber of Commerce, that an activity yielding profit must be assumed to be an activity for profit unless the trust deed forbids profit. It supplies the dominant-object test that is still the working tool whenever the department says a body's fee-earning activity is commercial, and it fixes the two-condition structure for the fourth head of charitable purpose. If it applies to you, the first step is this: Show what the dominant object of the activity is, with evidence on pricing, margin and how the surplus is applied, rather than arguing about the size of the surplus alone.
The assessee was a company recognised by the Central Government under section 25 of the Companies Act, 1956. It carried on activities to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth, and among other things obtained licences for the import of foreign yarn and quotas for the purchase of indigenous yarn, taking a commission fixed as a percentage of the value of the licences and quotas. Under its memorandum of association its income and property had to be applied solely to the promotion of its objects, and no part of the profit could be distributed to members in any form. It claimed exemption under section 11(1). The Income-tax Officer refused it, holding the objects were not charitable within section 2(15). The Appellate Assistant Commissioner and the Tribunal upheld the claim. Because the High Courts had taken conflicting views on the exclusionary clause, the Tribunal referred the question directly to the Supreme Court under section 257. The matter was decided on 1979-11-19 by the Supreme Court (Supreme Court of India; P.N. Bhagwati, N.L. Untwalia, V.D. Tulzapurkar, R.S. Pathak and A.P. Sen JJ; majority judgment delivered by Bhagwati J, with a separate concurring judgment by Pathak J). On those facts the Supreme Court held as follows. The references were answered in favour of the assessee, with costs in two sets. The majority held that the purpose for which the assessee was established was a charitable purpose within section 2(15) and its income was exempt under section 11. The words "not involving the carrying on of any activity for profit" govern only the last head of charitable purpose, the advancement of any other object of general public utility, and require that the object, not its accomplishment, must not involve an activity for profit. The test 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. Applying that, obtaining import licences and yarn quotas was not an activity for profit: profit was a by-product, and could under the memorandum only feed the charitable purpose.
The majority worked from the word "for". Used with the active participle of a verb it means "for the purpose of", so it is not enough that an activity in fact yields profit; it must be carried on with the object of earning profit, and profit-making must be the end to which the activity is directed. The Court then tested the Revenue's reading against its consequences: if the means of accomplishing the object could not involve profit, no general-public-utility trust could carry on any activity at all, and income from other sources would be lost as well, which the legislature cannot have intended. The Finance Minister's speech confirmed that the clause was added to undo the Privy Council's decision in the Tribune case, where the newspaper was itself run with profit-making as its predominant object. The Court endorsed Beg J's formulation in Lok Sikshana Trust that if profits must necessarily feed a charitable purpose, the mere fact that the activities yield profit does not alter the charitable character; the condition is satisfied if profit-making is not the real object. It rejected the further observations in Lok Sikshana Trust and Indian Chamber of Commerce that an activity yielding profit must be presumed to be an activity for profit absent an express no-profit clause. No such clause is necessary; the nature of the purpose, the manner in which the activity is carried on and the surrounding circumstances may show the absence of a dominant profit motive. On the earlier limb, a merely ancillary or incidental non-charitable object does not destroy a dominant charitable purpose. In the words reproduced by the source cited on this page: "The emphasis is on the object of general public utility and not on its accomplishment or attainment."
It was decided by the Supreme Court on 1979-11-19 and is reported as 1980 AIR 387; 1980 SCR (2) 77; 1980 (2) SCC 31; (1980) 121 ITR 1; 1980 TAX. L. R. 230. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 2(15), section 11, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The references were answered in favour of the assessee, with costs in two sets. The majority held that the purpose for which the assessee was established was a charitable purpose within section 2(15) and its income was exempt under section 11. The words "not involving the carrying on of any activity for profit" govern only the last head of charitable purpose, the advancement of any other object of general public utility, and require that the object, not its accomplishment, must not involve an activity for profit. The test 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. Applying that, obtaining import licences and yarn quotas was not an activity for profit: profit was a by-product, and could under the memorandum only feed the charitable purpose. It arises in Charitable Trusts & Exemption and Capital Gains Exemptions matters, on section 2(15), section 11 of the Income Tax Act 1961, and was decided by Supreme Court of India; P.N. Bhagwati, N.L. Untwalia, V.D. Tulzapurkar, R.S. Pathak and A.P. Sen JJ; majority judgment delivered by Bhagwati J, with a separate concurring judgment by Pathak J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Point to any constitutional bar in the memorandum or trust deed on distributing profit to members; the Court treated that as telling. Separate the primary object from objects that are only powers or ancillary to it, and argue the primary object is the charitable one. Remember the section has been amended since 1979; check the wording in force for your assessment year before relying on this construction.
Validity check could not be completed. Not checked against later law, and section 2(15) has been amended more than once since 1979 — the judgment itself notes that section 13(1)(bb) came in with effect from 1 April 1977. I had no source beyond the harvested judgment, so I cannot state the present position or how far this construction survives the later wording. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Two holes in the harvested text. It carries a note that 65,033 characters in the middle are not reproduced, which swallows the majority's own recital of the facts and much of the argument, and it then stops with a marker at 110,000 characters part-way through Pathak J's separate judgment. The facts above are therefore taken from the parts of the majority judgment that survive, mainly its application paragraph, together with the reporter's statement of the case. The bench was of five judges; the report describes the majority as Bhagwati, Untwalia and Tulzapurkar JJ and Pathak J as concurring, but nothing I could see records what A.P. Sen J held. The batch line dated the case to 1980; the judgment is dated 19 November 1979 and that date is used here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The references were answered in favour of the assessee, with costs in two sets. The majority held that the purpose for which the assessee was established was a charitable purpose within section 2(15) and its income was exempt under section 11. The words "not involving the carrying on of any activity for profit" govern only the last head of charitable purpose, the advancement of any other object of general public utility, and require that the object, not its accomplishment, must not involve an activity for profit. The test 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. Applying that, obtaining import licences and yarn quotas was not an activity for profit: profit was a by-product, and could under the memorandum only feed the charitable purpose.
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