Our trade association promotes commerce in our industry, but the work it does throws up a surplus every year. Does the surplus stop it being charitable?
No, not by itself. A five-judge Bench of the Supreme Court held that the test is whether the predominant object of the activity carried on in advancing an object of general public utility is to subserve the charitable purpose or to earn profit. Profit-making must be the end to which the activity is directed; it is not enough that the activity in fact results in profit. Where the dominant object is the charitable purpose, the character of the purpose is not lost merely because some profit arises. The exclusionary clause does not require the activity to be run so that it yields no surplus.
Decided by the Supreme Court (Supreme Court of India, five judges - P.N. Bhagwati, N.L. Untwalia, V.D. Tulzapurkar, R.S. Pathak and A.P. Sen JJ; judgment by Bhagwati J, with a separate concurring judgment by Pathak J) on 1979-11-19, reported as (1980) 121 ITR 1; 1980 AIR 387; 1980 SCR (2) 77; 1980 (2) SCC 31; 1980 SCC (Tax) 170; (1979) 2 Taxman 501; (1980) Tax LR 230. It bears on section 2(15), section 11, section 13(1)(bb) of the Income Tax Act 1961, in Charitable Trusts & Exemption and Capital Gains Exemptions matters.
This is the decision that replaced a presumption with a test. Earlier decisions had said that where a trust carries on business with no restriction on making profit, the court is justified in assuming, absent indication to the contrary, that the object involves an activity for profit. The Court accepted the first half of that reasoning - the activity must not be motivated by a profit objective - and rejected the second: profit alone justifies no inference. Nor need the constitution of the trust say that the activity is on a no profit no loss basis; the nature of the purpose, the manner in which the activity is carried on and the surrounding circumstances may show there is no dominant profit motive. The particular words the Court was construing have gone from the statute, but the predominant object language, and the reasoning about when a surplus turns an activity into a business, are still the vocabulary in which the current proviso to section 2(15) is argued.
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The assessee was a company recognised by the Central Government under section 25 of the Companies Act 1956. Its object was the promotion of commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth, and the activity in question was obtaining licences for the import of foreign yarn and quotas for the purchase of indigenous yarn. Under its memorandum of association any profit arising from its activities had to be applied solely and exclusively for the promotion of trade and commerce in those commodities, and no part of it could be distributed among the members in any form or under any guise. The Tribunal held that the purpose for which the assessee was established was a charitable purpose within section 2(15) and its income exempt under section 11. The matter reached the Supreme Court on references from the Gujarat High Court, in Reference Case No 1A of 1973 and Reference Cases Nos 10 to 14 of 1975, and was heard by a Bench of five judges because of the importance of the question and the state of the earlier authorities.
The question referred in each reference was answered in favour of the assessee and against the Revenue, with costs in two sets. On these facts the activity of obtaining import licences and yarn quotas was not an activity for profit. Its predominant object was the promotion of commerce and trade in the named commodities, which is an object of general public utility, and profit was merely a by-product arising incidentally in the course of carrying out the charitable purpose; the profit could be used only to feed that purpose. On the law, 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. Where profit-making is the predominant object, the purpose ceases to be charitable even though it is an object of general public utility; where the predominant object is the charitable purpose, the purpose does not lose its character merely because some profit arises. The Court endorsed Beg J in Sole Trustee, Lok Shikshana Trust, that if the profits must necessarily feed a charitable purpose under the terms of the trust the mere fact that the activities yield profit does not alter its charitable character, and that the restrictive condition is satisfied if profit-making is not the real object. It agreed with the observations in Lok Shikshana Trust and Indian Chamber of Commerce that the activity must not be motivated by a profit objective, but declined to accept the further proposition that wherever an activity yields profit the inference must be drawn, absent indication to the contrary, that it is an activity for profit.
The Court construed the exclusionary words as a matter of language first. A purpose of general public utility must for its accomplishment involve the carrying on of an activity, but the activity must be for profit before the exclusion bites, and the preposition for, used with the active participle of a verb, means for the purpose of and connotes the end with reference to which something is done. It is therefore not enough that an activity in fact results in profit; it must be carried on with the object of earning profit, so that profit-making is the end to which it is directed. Where the activity is not pervaded by a profit motive but is carried on primarily to serve the charitable purpose, it is not an activity for profit - though the charitable purpose must not be submerged by a profit-making motive, and the latter must not masquerade under the guise of the former; the purpose must, as Pathak J had put it in Dharmodipti, be essentially charitable in nature. The Court supported that reading from the Finance Minister's speech, which explained that the definition had been so widely worded that commercial concerns could take advantage of it - the example given being the newspaper industry claiming that circulating newspapers improved the general knowledge of the public - and that the Select Committee had proposed the added words to prevent that misuse. So the clause was aimed at the Privy Council's decision in the Tribune case, where publication of a newspaper on commercial lines with the object of earning profit was held not to detract from the object being one of general public utility. The Court then rejected the practical objection to any stricter test: it would be difficult, and unsound management, to run an activity so that expenditure exactly balances income and no surplus results. It illustrated the working of the test with a foundation established to propagate a body of thought that publishes a journal priced to leave a small margin - the charitable character is not polluted - against the same journal priced wholly on commercial lines leaving a large margin, and against Krishna Iyer J's example of a blood bank that collects blood on payment and sells it at a higher price on commercial lines. Ordinarily the dominant object will be apparent; border-line cases will present real difficulty. Pathak J, concurring, approached the definition structurally: the Act protects the exemption at two points, the definition of charitable purpose and the controls on the application of accumulated income, and considerations belonging to the second should not be imported into the construction of the first. He also read the fourth head grammatically - the object is not the purpose, the advancement of the object is the purpose - so that the restrictive clause, itself descriptive of an activity, must be read with the advancement of the object.
It is not therefore enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit.
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Handle my notice → Ask a CA on WhatsAppNo, not by itself. A five-judge Bench of the Supreme Court held that the test is whether the predominant object of the activity carried on in advancing an object of general public utility is to subserve the charitable purpose or to earn profit. Profit-making must be the end to which the activity is directed; it is not enough that the activity in fact results in profit. Where the dominant object is the charitable purpose, the character of the purpose is not lost merely because some profit arises. The exclusionary clause does not require the activity to be run so that it yields no surplus. This was decided by the Supreme Court (Supreme Court of India, five judges - P.N. Bhagwati, N.L. Untwalia, V.D. Tulzapurkar, R.S. Pathak and A.P. Sen JJ; judgment by Bhagwati J, with a separate concurring judgment by Pathak J) and bears on section 2(15), section 11, section 13(1)(bb) of the Income Tax Act 1961. It is reported as (1980) 121 ITR 1; 1980 AIR 387; 1980 SCR (2) 77; 1980 (2) SCC 31; 1980 SCC (Tax) 170; (1979) 2 Taxman 501; (1980) Tax LR 230. This is the decision that replaced a presumption with a test. Earlier decisions had said that where a trust carries on business with no restriction on making profit, the court is justified in assuming, absent indication to the contrary, that the object involves an activity for profit. The Court accepted the first half of that reasoning - the activity must not be motivated by a profit objective - and rejected the second: profit alone justifies no inference. Nor need the constitution of the trust say that the activity is on a no profit no loss basis; the nature of the purpose, the manner in which the activity is carried on and the surrounding circumstances may show there is no dominant profit motive. The particular words the Court was construing have gone from the statute, but the predominant object language, and the reasoning about when a surplus turns an activity into a business, are still the vocabulary in which the current proviso to section 2(15) is argued. If it applies to you, the first step is this: Frame the question as one of dominant object, and prove it from the constitution, the manner of operation and the surrounding circumstances rather than from the size of the surplus alone.
The assessee was a company recognised by the Central Government under section 25 of the Companies Act 1956. Its object was the promotion of commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth, and the activity in question was obtaining licences for the import of foreign yarn and quotas for the purchase of indigenous yarn. Under its memorandum of association any profit arising from its activities had to be applied solely and exclusively for the promotion of trade and commerce in those commodities, and no part of it could be distributed among the members in any form or under any guise. The Tribunal held that the purpose for which the assessee was established was a charitable purpose within section 2(15) and its income exempt under section 11. The matter reached the Supreme Court on references from the Gujarat High Court, in Reference Case No 1A of 1973 and Reference Cases Nos 10 to 14 of 1975, and was heard by a Bench of five judges because of the importance of the question and the state of the earlier authorities. The matter was decided on 1979-11-19 by the Supreme Court (Supreme Court of India, five judges - P.N. Bhagwati, N.L. Untwalia, V.D. Tulzapurkar, R.S. Pathak and A.P. Sen JJ; judgment by Bhagwati J, with a separate concurring judgment by Pathak J). On those facts the Supreme Court held as follows. The question referred in each reference was answered in favour of the assessee and against the Revenue, with costs in two sets. On these facts the activity of obtaining import licences and yarn quotas was not an activity for profit. Its predominant object was the promotion of commerce and trade in the named commodities, which is an object of general public utility, and profit was merely a by-product arising incidentally in the course of carrying out the charitable purpose; the profit could be used only to feed that purpose. On the law, 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. Where profit-making is the predominant object, the purpose ceases to be charitable even though it is an object of general public utility; where the predominant object is the charitable purpose, the purpose does not lose its character merely because some profit arises. The Court endorsed Beg J in Sole Trustee, Lok Shikshana Trust, that if the profits must necessarily feed a charitable purpose under the terms of the trust the mere fact that the activities yield profit does not alter its charitable character, and that the restrictive condition is satisfied if profit-making is not the real object. It agreed with the observations in Lok Shikshana Trust and Indian Chamber of Commerce that the activity must not be motivated by a profit objective, but declined to accept the further proposition that wherever an activity yields profit the inference must be drawn, absent indication to the contrary, that it is an activity for profit.
The Court construed the exclusionary words as a matter of language first. A purpose of general public utility must for its accomplishment involve the carrying on of an activity, but the activity must be for profit before the exclusion bites, and the preposition for, used with the active participle of a verb, means for the purpose of and connotes the end with reference to which something is done. It is therefore not enough that an activity in fact results in profit; it must be carried on with the object of earning profit, so that profit-making is the end to which it is directed. Where the activity is not pervaded by a profit motive but is carried on primarily to serve the charitable purpose, it is not an activity for profit - though the charitable purpose must not be submerged by a profit-making motive, and the latter must not masquerade under the guise of the former; the purpose must, as Pathak J had put it in Dharmodipti, be essentially charitable in nature. The Court supported that reading from the Finance Minister's speech, which explained that the definition had been so widely worded that commercial concerns could take advantage of it - the example given being the newspaper industry claiming that circulating newspapers improved the general knowledge of the public - and that the Select Committee had proposed the added words to prevent that misuse. So the clause was aimed at the Privy Council's decision in the Tribune case, where publication of a newspaper on commercial lines with the object of earning profit was held not to detract from the object being one of general public utility. The Court then rejected the practical objection to any stricter test: it would be difficult, and unsound management, to run an activity so that expenditure exactly balances income and no surplus results. It illustrated the working of the test with a foundation established to propagate a body of thought that publishes a journal priced to leave a small margin - the charitable character is not polluted - against the same journal priced wholly on commercial lines leaving a large margin, and against Krishna Iyer J's example of a blood bank that collects blood on payment and sells it at a higher price on commercial lines. Ordinarily the dominant object will be apparent; border-line cases will present real difficulty. Pathak J, concurring, approached the definition structurally: the Act protects the exemption at two points, the definition of charitable purpose and the controls on the application of accumulated income, and considerations belonging to the second should not be imported into the construction of the first. He also read the fourth head grammatically - the object is not the purpose, the advancement of the object is the purpose - so that the restrictive clause, itself descriptive of an activity, must be read with the advancement of the object. In the words reproduced by the source cited on this page: "It is not therefore enough that as a matter of fact an activity results in profit but it must be carried on with the object of earning profit."
It was decided by the Supreme Court on 1979-11-19 and is reported as (1980) 121 ITR 1; 1980 AIR 387; 1980 SCR (2) 77; 1980 (2) SCC 31; 1980 SCC (Tax) 170; (1979) 2 Taxman 501; (1980) Tax LR 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, section 13(1)(bb), 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 question referred in each reference was answered in favour of the assessee and against the Revenue, with costs in two sets. On these facts the activity of obtaining import licences and yarn quotas was not an activity for profit. Its predominant object was the promotion of commerce and trade in the named commodities, which is an object of general public utility, and profit was merely a by-product arising incidentally in the course of carrying out the charitable purpose; the profit could be used only to feed that purpose. On the law, 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. Where profit-making is the predominant object, the purpose ceases to be charitable even though it is an object of general public utility; where the predominant object is the charitable purpose, the purpose does not lose its character merely because some profit arises. The Court endorsed Beg J in Sole Trustee, Lok Shikshana Trust, that if the profits must necessarily feed a charitable purpose under the terms of the trust the mere fact that the activities yield profit does not alter its charitable character, and that the restrictive condition is satisfied if profit-making is not the real object. It agreed with the observations in Lok Shikshana Trust and Indian Chamber of Commerce that the activity must not be motivated by a profit objective, but declined to accept the further proposition that wherever an activity yields profit the inference must be drawn, absent indication to the contrary, that it is an activity for profit. It arises in Charitable Trusts & Exemption and Capital Gains Exemptions matters, on section 2(15), section 11, section 13(1)(bb) of the Income Tax Act 1961, and was decided by Supreme Court of India, five judges - P.N. Bhagwati, N.L. Untwalia, V.D. Tulzapurkar, R.S. Pathak and A.P. Sen JJ; judgment 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 the binding application of the surplus - here the memorandum required profits to be applied solely to the objects with nothing distributable to members, and the Court treated that as significant. Watch the degree of profit. The Court accepted that the extent of profit-making may itself lead to the inference that the real object is profit, and its own examples turn on commercial pricing. Read the current section 2(15) with its proviso before relying on the outcome; the words this case construes were later dropped and a different restriction now governs objects of general public utility.
Superseded by amendment. The words this judgment construes - not involving the carrying on of any activity for profit - are no longer in section 2(15). Those words were omitted from section 2(15) by the Finance Act, 1983 with effect from 1 April 1984, that is from assessment year 1984-85. A proviso restricting the fourth head was added afterwards and has been in force from 1 April 2009: the advancement of any other object of general public utility is not a charitable purpose if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. The limit attached to that proviso is not, in the law as it now stands, a monetary one: the proviso does not apply where the activity is undertaken in the course of actually carrying out the advancement and the aggregate receipts from it during the previous year do not exceed twenty per cent of total receipts. A money cap did once exist - one was added by the Finance (No. 2) Act, 2009 with retrospective effect from 1 April 2009, and it stood at twenty-five lakh rupees in the department's 2014 text - but it is no longer the test. The predominant object reasoning survives as the language in which those later provisions are argued, but the statutory question is now a different one, and a reader must work from the current text. The predominant object reasoning survives as the language in which those later provisions are argued, but the statutory question is now a different one, and a reader must work from the current text. I read only part of the judgment and checked no later authority here. 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.
Until build 87 this library carried a second entry on the same judgment, at /caselaw/case/surat-art-silk-predominant-object-test-for-charitable-purpose/, which asked: 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? It was the shorter of the two write-ups and has been merged into this one. That address now redirects here, and every citation, section and subject it carried that this entry did not has been folded in. This judgment is badly served by the harvested page. About 65,000 characters from the middle are not reproduced, and the page is then cut off at 110,000 characters in the middle of Pathak J's concurring judgment. What is missing includes the Court's own statement of the facts and of the questions referred, its review of the earlier decisions - Sole Trustee Lok Shikshana Trust, Indian Chamber of Commerce, Andhra Chamber of Commerce and others - and the greater part of the concurrence. The facts stated here are only those the majority itself recites when applying its test, and the record does not say what the sources of the assessee's income were beyond the licence and quota activity. The majority's decisive reasoning and its operative answer are present and are what this record rests on. The harvested page also carries an editorial headnote, which is not used. Because the reproduced text stops short, I cannot say whether any member of the five-judge Bench dissented or wrote separately besides Pathak J. 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 question referred in each reference was answered in favour of the assessee and against the Revenue, with costs in two sets. On these facts the activity of obtaining import licences and yarn quotas was not an activity for profit. Its predominant object was the promotion of commerce and trade in the named commodities, which is an object of general public utility, and profit was merely a by-product arising incidentally in the course of carrying out the charitable purpose; the profit could be used only to feed that purpose. On the law, 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. Where profit-making is the predominant object, the purpose ceases to be charitable even though it is an object of general public utility; where the predominant object is the charitable purpose, the purpose does not lose its character merely because some profit arises. The Court endorsed Beg J in Sole Trustee, Lok Shikshana Trust, that if the profits must necessarily feed a charitable purpose under the terms of the trust the mere fact that the activities yield profit does not alter its charitable character, and that the restrictive condition is satisfied if profit-making is not the real object. It agreed with the observations in Lok Shikshana Trust and Indian Chamber of Commerce that the activity must not be motivated by a profit objective, but declined to accept the further proposition that wherever an activity yields profit the inference must be drawn, absent indication to the contrary, that it is an activity for profit.
TaxSphere, “Addl CIT v Surat Art Silk Cloth Manufacturers Association”, https://taxnotice.vittsphere.com/caselaw/case/surat-art-silk-predominant-object-test-for-charitable-purpose/ (validity last checked 2026-08-29)
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Our trust runs a business and puts the profit into its objects. Does s.11(4A) still deny the exemption?
We charge fees for our public utility work. Does that cost us charitable status under s.2(15)?
Our trust benefits one caste. Can that be a charitable purpose at all?
My trade association only helps its own trade and its members get a benefit from it — can it still be charitable?
