Commissioner of Income Delhi X v. Mehta Charitable Prajnalay Trust

fo IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on: 6't' Septentber, 2012 Date of Decision: 2dt' Noventber, 2012 % + + + + + + rr|417/2003 tTAl8l2004 tTA72212007 lTA770l20l.L rTA 1050/2011 ITA 1051/2011 COMMISSIONER OF INCOME TAX .....Appellant Through: Mr. Abhishek Maratha, Sr. Standing Counsel with Ms. Anshul Sharma, Advocate. Mr. Kamal Sawhney, Sr. Standing Counsel. Versus MEHTA CHARITABLE PRAJNALAY TRUST ......Respondent Through: Mr. Ajay Vohra with Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. CORAM: MR. JUSTICE S. RAVINDRA BHAT MR. JUSTICE R.V. EASWAR R.V. EASWAR. J.: For detailed order see ITA No.30912003. a-.-l .. (R.V. EASWAR) JUDGE (s. RAVINDRA BHAT) JUDGE NOVEMBF,rR 20,2012 hs/vld IT A 4 | 7 /2003,1 8 1200 4,7 22 12007,7 7 0 l20l l, I 05 0/20 I I and I 05 I /20 I I Page I ofl Certify that the digital and physical file have been compared and the digital data is as per the physical file and no page is missing. t:l | .l,l ,'a , // ,I IN TIIE HIGTI COURT OII DELIII AT NEW DELIII Ileserved on: 6tt' September, 2012 Date of Decision: 20tt' November, 201 2 ' o/o + xTA 309/2003 + tTA 41712003 + ITA 18/2004 + ITA 7242407 + ITA 77012011 + I'fA 1050/20L1. + ITA 1051/2011 COMMISSIONER OF INCOME TAX .....Appellant Tlrough: Mr. Abhishek Maratha, Sr. Standing Counsel with Ms. Anshul Sharma, Advocate. Mr. Kamal Sawhney, Sr. Standing Counsel. Versus MEHfA CHARITABLE PRAJNALAY TRUST ......Rospondent Through: Mr. Ajay Vohra rvith Ms. Kavita Jha and Mr. Somnath Shukla, Advocates. CORAM: MTT. JUSTICE S. RAVINDRA BTIAT MR. JUS'TICE R.V. I'ASWAR R.V. I'ASWAIT. J.: '"rcr**ven appeals file<l by the Revenue under Section 260Aof the Irrcome'I'ax Act, 1961 ('Ac1', for short). The relevant assessment years are1992' \ 93 to 1994-95, 2001-02 and 2005-06 to 2007-08. In all the appeals except the appeal in I'I'A No.72212007,the following substantial clueslions of lalv have been frarned: - "(a) Welher tlrc Tribunal was correct in law in confirming the order of CIT (A) and thereby holding that the assessee is entitled to exemplion under Seclion I I of the Income Tax Act? tTn 309/2003 ,417/2003,18/2004,72212007,17012011,1050/201I /-lr ( rx'' j I qr-'. I "ii :i,, I I ; L

(b) lI/hether the Tribunal was justified in law in relying on its earlier order for A.Y. lgg2-93 and thereby holding that lhe business activiiies carried on by the assessee were incidental to the main aims and obiects of the Trust which are of charitable nalure?"

¶2In respect of ITA No.72212007 only question No.(a) has been framed.

¶3The respondent - assessee in all these appeals is the Mehta Charitable Prajanalay Trust. It was created by a trust deed drawn up on 08.09'1971 by B' D' Mehta, partner of the firm M/s. Bishan Das Girdharilal and Raj Kumar Mehta, S/o. B. D. Mehta, partner of IWs. Raj Kumar & Sons Co. These are the two founder - trustees. They settled an amount of 72,2001-upon trust. Admittedly, this is the only properly settled on the trust. The trust deed set out the objects of the trust which included the establishing and maintaining of schools, colleges and study circles, advancing education and research study on the modem and ancient Indian tliouglrt, providing for mental, moral and spiritual development, irnparting real education, laying the foundations of high class character, inculcating the spirit of nationalisrn and patriotism, arranging for interpretation of ancient Hindu literature, preparing and publishing text books, providing 'food, clothing, shelter and medicines to needy persons, running of medical dispensaries, hospitals, etc' clause 19 of the trust deed provided that the lrust may "carry on any business for ancl on behatf or in the name of the n'ust for the sole obiect of applying the income and profrs thereof for the purposes of obiects of the trltst". Another fact to be noticed here is that the founder - lrustees were partner of firms which were themselves engaged in the business of the manufacture and sale of Katha'

¶4After the formalion of the trust, a business was commenced in the narne of tlre trust for the manufactur e of Katha. The funds for this business admittedly came from sister concems of the firms in which the founder - trustees were partners and borrowings from banks and other agencies. A production unit was set up in the name "'Mahesh Udyog" at Mahesh Nagar in District Una, Himachal Pradesh in the year 1972. This unit started production on 08.02.1973. Sometime ITA 309/2003 ,41112003,1812004,722t2007,77012011,1050/2011 and 1051/2011 Page 2of 20 It\ v in the year 1978, this unit was leased to lzVs. Shankar Trading Co. (P) Ltd., a sister concem in which close relations of the trustees held substantial interest. The unit continued to be run by the aforesaid company. The trust lvas in receipt of monlhly lease rental since then; the rental was revised sometime in the years 1989 and 1991. The trust makes purchases and sale of Katha and cutch in its head office mainly through 1he two concems in which the founder trustees had substantia-interest.

¶5We are not alvare r,vhat happened prior to the assessment year 1989-90. However, for the said assessment year, the assessee seems to have claimed exemption under Section 11 in respect of its income and filed aretum of income on that basis. The exernption was denied and on appeal to the CIT (Appeals), it was lreld thal the business in Katha was carried on by the trustees or the Board of Directors and not by the beneficiaries of the trust and therefore in vierv of clause

(b) of Section l1(4A) as it existed at that time, it rvas held that the trust was not entitled to the benefit of exemption. Thus the assessment was upheld by the CIT (Appeals). It is not known lvhether there was any further appeal to the Tribunal. In respeot of the assess-eni year 1990-91, a similar view was taken by the t assessing officer in the assessmeut proceedings. On appeal the CIT (Appeals) noted that the assessee \.vas registered as a charitable trust and its activilies did not involve any commercial activity for the purpose of making profits; it r,vas held that the case fell under Section 11(44,) (b) of the Act and to this extentthe benefit of the exemption was not available. To this extent his view lvas the same as the vielv of his predecessor for the assessment year 1989-90. However, he proceeded to examine the case in the lighl of the judgment of the Madras High Court in the case of I'hanthi Tt'ust v. CBDT, (1995) 213 ITR 639 and held that the business was held under trust and therefore'the provisions of Section i1(a) applied to the exclusion of Sectionll(4A)oftheAct. Inshort,heheldthatitwasacaseofproperty(i.e.the business undertaking) being held under trust in accordance r.vilh Section 11(4) of ^the Act. He accordingly directed the assessing officer to allow the exemption. ii t?

¶6In respect of the assessment year 1992-93, rvhich is the first assessment year with which lve are concemed in the present batch of appeals, the assessee filed its income tax return on the sarne basis claiming exemption under Section 11 of the Act. In the assessment made under Section 143(3) of the Act, the assessing officer held, following his predecessor's view, that the business was carried on not by the assessee - trust, but by the Board of Directors of the company who are managing the business. FIe, therefore, held that the provisions of Section I1(4) of the Act were not applicable and the provisions of Section 11(4A) of the Act were applicable. FIe noted that in the Delhi office the trading activities comprised of purchases and sales made through sister concerns in which the founder trustees were substantially interested and the claim of the assessee that the i,vork in connection with the business of the trust is mainly carried on by the trustees was not supported by the facts. He also observ'ed that the affairs of the trust lvere closely controlled by the tr,vo founder - trustees and the beneficiaries i.e. the members of the public did not have any say. He further held that the prolits and gains of the business were not incidental to the attainment of the objects of the trust. In this view of the matter the benefit of Section I 1 of the Act was denied and the assessment was completed on a lotal income of {62,86,390/- consisting of the profits of the Katha business.

¶7In the appeal filed against the assessment, the assessee contended that it was a public charitable trust existing for the benefit of the members of the public, that it rvas registered with the CIT under Section l2A,that the business was carried on by the beneficiaries of the trust in furtherance of the objects, that the provisions of Section ll(a) of the Act and not Section 11(44) were applicable, that the business of the trust was not canied on with the motive of eaming profit but only r,vitfu a view to deriving, income for running the charitable hospitals, dispensaries, schools, etc. and that if the primary purpose of the trust was charitable and if the other activities are not driven by profit motive, exemption under Section 11 of the Act could not be denied. These submissions were sought to be supported by the judgment of the Supreme Court in the case of Addl. CIT v. Surat Art Silk Clotlt :rt, I t,' t, ; r.;,1 iili1 \ -l t ! iI t t it :tt / /r. 't'' ti Marutfacttrerr, (1980) 121 ITI{ 1. It lvas further urged that the amendment to sub-section (aA) of Section 11 rv. e. f. assessment year 1992-93 made the provisions more liberal and that having regard to the judgment of the Madras High Court in Thanthi fi'zsf (supra) the assessee should be granted exemption under Section 11. The CIT (Appeals) was not persuaded by the submissions of the assessee. After examining the trust deed, he made a distinction between the objects of the trust and the powers of the trustees and held that though the objects as per the trust deed r,r,ere uridoubtedly charitable, clauses 19 and 20 r,vhich permitted the trust to cary on any business and to borroi,v monies from banks, individuals, financial institutions and business houses are not really the objects, but were clauses stipulaling the por,vers of the truStees. Having thus made a distinction between the objecls and powers, the CIT (Appeals) proceeded to examine Section 1I(4A) vis-d-vis Section 11(a) of the Act. He held that the amended provisions of Section l1(4A) lvould apply from the assessmenl year 1992-93 onwards, and the effect of the amendment was that the benefit of exemption under Section 11 of the Act was lot available to the income arising from profits and gains of business unless the business is incidental to the attainment of the objects of the trust and separate books of accounts are maintained by the trust in reipect of the business. He held that there lvas no dispute that separate accounts were maintained in regard to the business. With regard to the main contenlion of the assessee that the Seclion i1(4A) of the Act did not have any application to the assessee's case because the business itself r,vas held under 1rust, the CIT (Appeals) was unable to agree with the assessee. According to him the facts in Thanthi ?zsl (supra) were different; there, the founder of the trust was carrying on the business of printing and publishing a ]'amil daily newspaper as its sole proprietor and the business itself was settled upon trust. In the present case, according to the CIT (Appeals), the trust was formed rvith a cash of <2,2001-contributed by the tr,vo founder trustees bul no business undertaking as such was settled upon trust. On the basis of this distinction, the CIT (Appeals) took the view that the judgment of the Madras High Court did not apply.

¶8The aforesaid view of the CIT (Appeals) was sufficient to dispose of the appealbeforehimbutforthesakeofcompletenessandindeferencetothe argumenlstakenbeforehim,heproceededtoconsiderthecaseontheassumption ftatthejudgmentoftheMadrasHighCourtappliedtotheassessee,Scase.Fle observedthatevenifthejudgmentisheldapplicabletothepresentcase,the questiontobeexaminedwouldbewhetherthebusinesscanbeconsideredtobe propertylreldunderthetrustorisonlyabusinesscarriedonbyoronbehalfofthe trustbyvirtueofthepowersconferreduponthetrusteesunderclauseslgand20of the trust deed. The other question, according to the cIT (Appeals)' that would ariseforconsiderationwaswlretherthebusinesssocarriedonisincidentaltothe atlainmentoftheobjectsofthetrustasstipulatedintheamendedSectionll(4A) of the Act. g.Sofarasthefirstquestionisconcemedi.e.lvhetherthebusinessitselfrvas heldundertrust,theClT(Appeals)heldthatwheretlretrusteesdecidetocarryon thebusinessinthenanreofthetrustbybonowingfundsordivertingmoneyfrom sisterconcerns,itcannotbeacaseofpropertybeingheldundertrustbutwouldbe onlyacaseofbusinessbeingcarriedonforandonbehalfofthetrust.Hemadea distinctionbetweenborrdwingsmadeforthepurposeoffacilitatingtherunningof businessheldundertrustandborrowingsmadeforthepurposeofcarryingona businessforandonbehalfofthetrust,rvheresuchborrowingsconstitutedtlrebasig sourceforthecommencementofthebusiness.AccordingtotheClT(Appeals),if thisdistinctionisnotmaintained,therecanbenocasewherethebusinesswould notbepropertyheldundertrustorwherethebusinesscanbesaidtobecaniedon forandonbehalfofthetrustincontrasttothebusinessitselfbeingheldunder trust.Henotedthatafterthelrustwascrealed,thesisterconcemsinwhichthe founder - trustees or their close relatives had substantial interest diverted funds in favourofthebusinessandsomeborrowingswerealsomadefromtlrebarrksand thebusinesswasstarted.withinayealamanufacturingunitof'Kathaandcutch wassetupandbecamefunctional;thebusinessstartedearningprofitsandthey wereutilisedtopayoffthedebts,InlgT8theunitwasleasedtoM/s.Shankar lTA309/2003,417t2003'18t2004,122|2007,770|20||,|050/20lland105l/20llPage6of20 I ; ++G -_-.T-tr!..-#-'i<€ffiffi@.q_ I t:1 ttr ,Y Trading Co., a sister concern r,vhich had also contributed initially for the business and in which the trustees and their close relatives had substantial interest. The lease rent inilially fixed i.vas <25,0001-per monlh which was revised to {50,000/- per month from 01.04.1987 and to {1,00,000/- per month from 3l.IZ.l99l. The transactions of the business in its head office at Delhi were. mostly with sister concems. These facts, according to the CIT (Appeals), showed that the business r,vas not settled upon trust and cannot be said 1o be a business held under trust. The source for the business came from borrowings and contributions by the sister concems and not from the trust, except to a meagre extent of T2,100/-. fhe property held under trust may no doubt include subsequent accretions to the corpus of the trust fund but it cannot include acquisilions in relation to which the trust stood in the capacity of a debtor to third parties, according to the CIT (Appeals). The business undertaking no doubt belonged to the assessee - trust and the business was also carried on by it, but for these reasons the br.rsiness cannot be held to constitute property held under trust. Having held that the business was not held under trust, the CIT (Appedls) proceeded to consider the further queslion r,vhether the carrying on of the Katha business lvas incidental to the attainment of the objects of the trust. It r,vas submitted before him on the basis of clause i9 of the lrust deed that the lvhole purpose of the business was to provide funds or generate income for being applied to the charitable activities lisled in the trust deed. The submission was rejected by the CIT (Appeals) by holding that the fact lhat the income generated by the business was applied to the charitable purposes of the trust was not relevant and what r,vas relevant was whether the business activity r,vas itself incidental to the altainment of the objects of the trust, rvithin the meaning of Section 1l(4A) of the AcL According to the CIT (Appeats) the rururing of aKathct factory can hardly be said to be incidental to the attainment of the objects of the assessee - trust, which are the advancement of education, patriotism, Indian culturq etc. The fact that the whole or some part of the income of Katha business was to be applied in terms of the trust deed to the charitable objects would by itself ITA 309/2003,41712003,18/2004,722/2007,77012011,1050/2011 and 1051/2011 PageT of 20 tI i I : C. cannot render the carrying on the business as an atlainment of the objects of the trust' activity incidental to the

¶10It would appear that the assessee had taken up another objection before the cIT (Appeals) to the effect that the leasing out of the business unit to another enlity did not amount to carrying on of a business activity. The cIT (Appeals) did not accept ihe contention, holding that where a business or commercial asset such as factory manufacturing Katha and cutch is leased to another entity for a monthly consideration termed as lease rental, the rental income would constitute business income in the hands of the lessor. According to the cIT (Appeals), leasing out of .the factory is oniy one mode of exploiting a commercial asset for gain and such gain falls to be considered as profits and gains of business'

¶11Certain other contentions regarding the computation of the business income were taken before the CIT (Appeals) as an altemative arguments and these have been dealt r,vith by him, partly in favour of the assessee and partly against it' This part ofthe case need not detain us'

¶72The assessee preferred a furl'her appeal to the Tribunal in ITA No.3633/Del/96. The Tribunal, follor'ving its decision for the assessment year 1989-90 in ITA No.3641/D ell94 by order dated 30.09.1996, heid that the Katha business carried on by the assessee was incidental to the altainment of the objects of the trust, which were for charitable purposes. As regards the position in law, after the amendment made to section 11(4A) of the Act w' e' f' 01'04'1992'the assessee placed reliance on the judgment of the Supreme court in Assistant Commissioner of Income-tctx v. Thanthi Trust, (2001) 247 lTR785 (SC) in which the effect of the amendment was considered. It was held that the Supreme Court has noted the amendment and held that it did not have any adverse effect on the claim of exemption under section 11, provide<l the income from the business carried on by the trust is utilised by the trust for the purposes achieving the objects of the trust; that would be a case of the business activity being incidental to the attainment of the objects of the trust. The Tribunal held tltat this decision squarely ITA 309/2003 ,417t2003,1812004,72212007,77012011,105012011and 1051/2011 Page8 0f 20 I .l '' t' {, ' tt"'f ,:,{ tg covered the controversy in the present case. In this view of the matter it directed the assessing officer to allow the exemption under Section 11 and thus allowed the appeal oI me assessee.

¶13It may be noted that the Tribunal did not specifically address itself to the question, which arose out of the order of the'CIT (Appeals), whether the business itself can be said to be propeay held under trust within the meaning of Section 11( ) of the Act. There is no discussion in the order of the Tribunal as to the irnpact of the various clauses of the trust deed lvhich were referred to by the CIT (Appeals) while making a distinction between the objects of the trust and the powers of the trustees.

¶74In respect of all the other assessment years namely 1993-94, 1994-95, Z00I-02 and 2005-06 Io 2007-08, the Tribunal has followed the earlier order passed by it for the assessment year 1992-93 in ITA No.3633/DeUI996. There is no independent reasoning in any of them since the facts for all the years were the same as llrey existed in the previous year relevant to the assessment year 1992-93. In some of the orders, for instance the order of the Tribunal for the assessment year 2005-06, there is additional reference to the judgment of the Supreme Court in the case ofThanilti Trust (supra). .

¶15Section 11(1) of the Ac1 grants exemption to the income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India. There is no exhaustive definition of the r,vords "property held under trust" in the Act; however, sub-section

(4) says that for the purposes of Section 11, the words "property held under trust" "includes a business undertaking so held". Sub-section (aA) as it stands amended by the Finince (No.2) Act, 1991 w. e. f. 0I.04.1992 is in the following lerms: - "(4A) Sub-section (l) or sub-section (2) or sub-section (3) or sub-section (iA) shall not apply in relation to any income of a tt'ust or an institution, being profts and gains of business, unless the business is incidental to the attainment of the obiectives of the trust ITA 309/2003 ,4t712003,1812004,722/2007,77012011,1050/201I or, as the case maY be, institution' are rnaintained bY such trust or business." and separate books ofaccount instituttion in resPect of such

16.Thequestionwhethersub-section(4A)wouldapplyeventoacaser,vherea business rvas held under trust r,vas answered in the negative in several authoritative pronouncements starting from the judgrnent of the Lahore High court in Gadodia swadeshi stores v. commissioner of Income Tax, Punjab, (1944) 12ITR 385' The general provision under Section 4(3Xi) of the 1922 Act exempted income derived lrorn property held under trust from ta,ration. However, section a(3)(ia) provided that any income derived from a business carried on on behalf of a religious or charitable trust would be entitled to exemption only if the business lvas carried on inthecourseofcarryingoutofaprimarypurposeofthetrustortlreworkin corurection r,vith the business is mainly carried on by the beneficiaries of the trust' The contention <if the revenue in that case was that since clause (ia) was a special provision dealing with the topic of exemption in respect of a business carried on lor and on behalf of a trust, any claim for exemption as regards the profits of such business can be made only under that provision, . and when the conditions laid down therein are not satisfied, it is not open to the assessee to fall back upon the general provision conlained in Section 4(3xi) and claim exemption thereunder on the ground that business is property. The Lahore High court held that the fact that the business carried on on behatf of the trust failed to satisfy the two conditions laid down in section a(3)(ia) was no reason why it should not be exempted from taxation if it fell within section 4(3xi) and the main ground of the decision is that the two categories mentioned in the two clauses having been enacted as two different clauses, it must be taken that the one did not exclude the other' This judgment of the Laliore Fligh court was approvingly referred to by the supreme court in J. K. Ii.ust v. commissioner of Incometax, (1957) 32 ITR 535. The judgrnent'of the Supreme courl; in J.K. Trttst v. cIT (supra) was followed by the Supreme Court (a Bench of equal strenglh) in Comtnissioner of Income-tax v' Krishna warriar (P.), (1964) 53 ITR 176. By that time clause (ia) of section 4(3) I'fA 309/2003 ,4t'1t2Q03,1812004,72212007,77012011,1050/2011 ancl 1051/2011 Page 10 0f 20 '--(f,j-* ,/ a7 tf' >l had been enacted as a proviso to clause (i) of Section 4(3), by an amending Act of 1953. After refening to the judgment of the Lahore High Court (supra) and rejecting the argument of the revenue that a proviso in a statule be ahvays read as limitation upon the effect of the main enactment Subbarao, J. (as he then was) observed as under. - " .. . . .. ..BLrt it is not an inflexible rule of construction that a proviso in a statute shrntld always be read as a limitation upon the ffict of the main enactment. Generally the natural presumption is that but for the proviso the enacting part of the section would have included the subiect-tnatter of the proviso; but the clear language of the substantive provisi,on as well as the proviso may establish that the proviso is not a qualifying clause of the main provision, but is in itself a substantive provision. In the words of Maxwell, "the true principle is that the sound view of the enacting clause, the saving clause and tlze proviso taken and constt'ued togetlrcr is to prevail". so construedwe find no dfficulty, as we will indicate Iaier in our itdgment, in holding that the said clause (b) of the proviso deals with a case of business which is not vested in trust for religious dr charitable purposes within the meaning of the substantive clause of section 4(3)(i)'"

¶17Thus, if a property is held under trust, and such property is a business, the case r,vould fall under Section 11(a) and not under Section i1(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust.

¶18I1 vier,v-of the above setlled legal position, lve are unable to accept the contention urged on behalf of the revenue before us that the provisions of Section 11(4A) are sr,veeping and lvould also take in a case of business held under trust.

¶19The next question which lve have to consider is r'vhether, on the facts of the present case and having regard to the terms of the trust deed and the conduct of the truslees, it can be said that the Katln business lvas itself held under trust. There is a difference between a property or business held under trust and a business carried on bv or on behalf of the trust. This distinction was recognised in Addl. I Comtnissioner of Income Tax, Guiarat v. Surat Art Silk, (1998) 121 ITI{ 1, a decision of five Judges of the Supreme Court. It r'vas observed that if a business" undertaking is held under trust for a charitable purpose, the income therefrom' would be entitled to the exemption under Section 11(1) of the Act' In the case before us the finding of the cIT (Appeals), in his order for the assessment year I.ggz-g3,is that the Katha business was not held under trust, but it ** a business commenced by the trustees with the aid and assistance of boffolvings from the sister concerns in which the setllors and the trustees or their close relatives had substantial interest, as well as from banks' It is thus with the help of the borrowed funds, or in other lvords, the funds not belonging to the assessee trust, that the Katha business was comrnenced and profits started to be eamed. The cIT (Appeals) has also found that the earnings from the business were utilised to pay off the borrowings. It was for these reasons that he held that through the business undertaking belonged to the trust and the business lvas carried on by or on behalf of the trust, but for those reasons the business cannot be said to constitute .,property held under trust". He made reference to clauses 19 and 20 of the trust deed in this behalf ancl noted that clause 19 provided that the trust may "carry on any business for or on behalf of or in the name of the trust for the sole object o{ supplying to income and profits thereof for the purposes and objects of the trust"' Clause 20 provided that the trust may obtain financial help from banks, financial instilutions, business houses and other organisations, etc. FIe r'vas inclined to vier'v these clauses only as polvers enabling the trustees to commence and carry on business to augment the resources available to the trust. It was for these reasons that the CII (Appeals) held that the Katha business was not held under trusl' Unfortunately the Tribunal, which appears to have disposed of the appeal in a rather summary lnanner did not examine this aspect and merely endorsed the claim of the assessee. This is a matter of considerable importance and lve lvould have thought that it was incumbent upon the Tribunal to have examined this fundamental aspect, for two reasons: firstly, under Section 11(4), it is only the business which is held under the trust that r,vould enjoy exemption in respect of its ITA309/2003,417t2003,1812004,722t2007,77012011,1050/2011ancl105l/20llPageL20f20 ili >9 income under Section 11(1); secondly, there is a distinction between the objects of a trust and the powers given to the trustees to effectuate the purposes of the trust. The CIT (Appeals) also held for the assessment year 1992-93 that while the objects of the trust were certainly charitable, clauses 19 and 20 arc mere powers conferred upon the trustees to carry on business, the prolits from which would feed the clraritable objects. There is no settlement of the business in Katha upon trust for 1he simple reason that the business itbelf was not in existence at the time of formalion of the trust. The property held under trust was merely a sum of (2,100/-, contributed more or less equally by the settlors at the time of creation of trusl on

08.09.1971. The business rn Katha came into existence in the yew 1972 and the production unit in Mahesh Udyog, Himachal Pradesh started production on OB.OZ.lg73. Thus the Katha business was not even in the contemplation of the setllors and, therefore, could not have been settled upon trust. ZO. A felv decisions may be noticed lvhich are of relevance to 1he point. In the case of .,/. K. 'I'rttst v. CIT (supra) one of the quesljons lvhich arose was whether the office of managing agency which \,vas an offtce of profit was in fact setlled upon trust and, therefore, could be considered to be business held under trust. The Supreme Court held that for the purposes of Section 4(3Xi) of the 1922 Act, the office of managing agency lvas property which could be held under trust. The I{evenue thereupon poinled out that on the terms of Exhibit 'A', which was the deed of trust executed by the settlors on i5.06.i945, the properties lvhich the trustees are to hold and stand possessed of were only the sum of tl,00,0004 and a:ry donations and contribution received by the truslees and all accretions thereto and investment in securities made from time to time representing the accretions, and contended that on the terms of the trust deed, the managing agency which was acquired on 10.09.1945 for a period of20 years cannot be said to be propeAy held under trust since no part of the initial amount of {1,00,000/-, which was setlled upon the trust, was utilised in the acquisition of the managing agency so as to impress it with the character of accretion. While repelling this contention, the Supreme Court held as under, (T. L. Venkataraman Iyer speaking for the Court): - ITA 309/2003 ,417t2003,18t2004,72212007,77012011,1050/2011 t i E_ ?, ry ,,.......lJltt it is to be observed that clause (s) of the trust deed expressly provides for the acquisition of the business.of mctnaging ogun"y o,i Udrnt| i7 the trust and ' .'with the help of the trust fund" ancl that preciiety is what has happened snd indeed, reading rogetherExhibits.AandB,itisitnpossibletoresist.theconclttsion thatboththe-cloctmtentsformedpartofanintegral.scheme,and that what the settlors had in view in clause 3 of Exhibit A is the very matxaging agency, which was acquired wtder. Exhibit B' There is coniderlabli attthority in England that when trustees carryonbusinesswiththeaidoftrustfund'thlpositioninlawis the same as if they actually empioyed it in the business' though' in fact, it be not actually invested lherein'" Exhibit .8, in the case of J. K.Irusf (supra) was the documenl dated 10'09'1945 (memorandum of agreement) executed by the company constituting the trustees of theJ.K.Trust,Bombayxitsmanagingagentonthetermsandconditionssetout therein. It is important to notice that the trust deed, lvhich is Exhibit 'A" provided inter aliathat the trustees may, "with the help of the trust fund", for and on behalf of and for the benefit of the trust, carry on such business including the taking up and conducting of managing agency or selling agency of any company and may start such business and utilise the profits for all or any of the objects of the trust' Large powers were conferred on the trustees in the conduct of the business which included the power to raise and borrolv money required for the purpose of trust' It rnay be seen that under the trust deed in the case of J. K. fi'zsf (supra) the trustees were authorised to carry on business "with the help of the trust fund"' It has also been noticed by the Supreme court that the sum of {1,00,000/- was given as securitybythetrusteesunderExhibit.B,forthedueperformanceoftheir obligations as managing agents. It lvas in the backgound of these facts that the Supreme Court held thal the managing agency business, which was acquired with the help of the trust fund, coul<l be considered as business held under trust and thal the fact lhat the amount of t1,00,000f which was settled upon trust was not utilised for the acquisition of the business, but was given merely as security deposit for the clue performance of the duties of the managing agents, did not matter' The court was, in the light of these facts and circumstances, inclined to hold that both I'IA 309/2003 ,4t712003,1812004,12212007,17012011,1050/2011 ancl 1051/201I Page14 0t2l) l '( 'nf ,r' "{.! ,/'- >t I a the. documents, namely Exhibits 'A' anci 'B', formed part of an integral scheme and what the settlors had in view in clause 3 of Exhibit'A' was the very managing agency lvhich was acquired under Exhibit 'B'. The test appears to us to be ilral the business, if it is to be considered as property held under trust, should have been either acquired with the help of the lund originally settled upon trust or the original fund that was settled upon trust must have a substantial and real connection wilh the later acquisition or carrying on of the business by the trustees. The facts of the present case do not measure up to the test. The fund originally sellled upon trust was a meagre amount of {2,100/- at the time of the creation of the trust on .0g.09.1971. It is undisputed that the Katha unit in Himachal Pradesh was set up in the year 1972 r,vith the aid and assistance of the borowed amounts, the boffolvings being both from the concenm in lvhich the settlors/ trustees held substantial interesl and frorn commercial banks. There is thus no nexus or integration between the amount originally settled upon trust and the later setting up and conduct of the Katha business. Moreover, the dislinction betrveen the original trust lund and the later commencement of the business with the ltelp of the borolved funds should be kept in mind in the context of ascertaining whether.the particular Katha business lvas even in the contemplation of the settlors of the trust. It is difficult to view the original setllement of {2,i00/- upon trust and the setting up of the Katha business as part of an integated scheme even apart from flre fact that the business was not acquired or canied on with the help of the original trust fund' 2I. In Thiagesar Dharnn Vanikam v. Commissioner of Incotne-tax, (1963) 50 ITR 798 a Division Bench of the Madras High Court hetd that a busiuess carried on behalf of a trust "rather indicates a business which is not held in trust, than a bttsiness of tlze trttst rtmby the lrustees". Inthat case the business was carried on by the trustees for and on behalf of the trust and it i,vas found as a facl that that business was itself held under 1rust. In Raia P. C. Lall Choudhary Vs' . Commissioner of Income Tax, Bihar & Orissa (1957) 31 ITI{ 226, the Patna High court ruled that section 4(3xD of the Indian Income Ta,r Act, 1922, r'vhich conesponds to Section I 1(1) of the 1961 Act, confers an exemption from ta:< only N (I" r?:-- .T..\; I where the property itself is held under a trust or other legal obligation; it does not apply to cases where a trust or legal obligation is not created on any property' but onlytlreincomederivedfrotnanyparticularpropertyorSourceissetapartand chargedforacharitableorreligiouspurpose.InCommissioneroflncomeThx.v. P.K. Barooah, Vice-President, Jorhat Races (1970) 77 ITR 967 ' Ihe Assam and Nagaland High court, referring to the judgment of the Patna High court (supra) held that the surplus fund of a trust, which lvas claimed to be exempt on the footing that i1 was propeny held under trust within the meaning of Section 11(1) of the Act,wasnotpropertyheldundertrustsincethepropertyfromwlichthesurplus .was generated was itself not held under trus!. observing that the expression "legal obligation,, cannot be separaled from the word "property" appearing in Section 1i (1), the Court expressed itself as under : I "The expression "legal obligation" cannot be separated from the ,,property,, itsetfwhiih in the instant case is a horse-racing concern, inasmttch oi t"t enioins that such property-must-he held under a trust or other legal'obligation and. noithe ftmd derived therefrom' We have oiruoiy showi that Jorhat Races were not the subiecr mcrtter of a rrusi and only a lrust has been created in respect of the surplus'7,ni' l'nu ,u'p[u'fund really emanates f'om a property which r, ,ot"'o ,r,uiu"tlrottir of the trust and as such in the absence of any tegal obiigation fa^stined thereto' no exemption can be illowetl under Section t I of the Act' " These cases reiterate the position that the question to be examined is whether the business itself is held under trust or is merely carried on by and on behalf of the trust. It is also significant that section 11(1) of the Act starts with the expression ..subject to theprovisions of sections 60 to 63...... '.". These sections find place in chapter v of the Act. section 60 provides for the consequences of a transfer of income where there is no transfer of assets. It says thal where a person transfers merely the income from an asset without transferring the asset itself' he lvould continue to be chargeable to income ta:<. Section 61 provides for the consequences of a revocable transfer of assets and says that the same would be the position where a person is in receipt of income by virtue of a revocable transfer of assets' Section ITA 309/2003 '4-7t2003,|8t2004,722t2007'770|2011,1050/2011 ancl 1051/201l Page 1.6 of 20 /' ' ',/ '{ ,t >2 62 provides for the consequences of a transfer of assets for specified period' It is an exception to section 61. Generally a person has to get rid of the asset itself before ceasing to be assessable in respect of the income from that asset' A mere direction that the income from the business shall be applied to the charitable objects of a trust, without there being a settlement of the business itself upon trust' does not result in any trust or legal obligation' 22'Wenowproceedtoconsiderthequestionwhetherthecarryingonofthe business inKatha was incidental to the attainment of the objects of the trust' We fail to see any connection between the carrying on of the Katha business and the attainment of the objects of the trust, which are basically for the advancement of education, inculcation of patriotism, Indian culture, running of dispensaries lrospitals, etc. The mere fact that rvhole or someiart of the income from Katha business is ear-marked for application to the charitable objects would not render the business itself being considered as incidental to the altainment of the objects' we are in agreement with the viei,v taken by the CIT (Appeals) in his order for the assessnrent year 1992-93 thal the application of the income generaled by the business is not the relevant consideration and what is relevant is lvhether the activity is so inextricably connected or linked with.the objects of the trust thal it could be considered as incidental to those objectives. Thq examples, appositely .givenbylheCIT(Appeals)inhisorder,clarifytheposition:theinstanceofa charitable trust established for providing medical relief running a nursing home in the process, or a trust for advancement of education mnning a publishing house or a nelvspaper.

¶23It was contended on behalf of the assessee that the mere letting out of the factory on lease r,v. e. f. 0r.01.1992 does not amount to carrying on of any business. We are unable to accept this contention' Initially the assessee carried on the business itself. T'he production unit was set up in1972 and started production on 08.02.1973. For a period of five years the assessee was itself carrying on business. In the year 1978 it r,vas given on lease to \4/s. Shankar Trading co' (P) ITA 309/2003 ,417t2003,18|2004,722|2007,770|2011,1050/201l and 1051/2011 PageIT of 20 -,@ffi'F +;l-::iffi;F;i# ''iffi'r'a*il-tFrlc'1 -_-r"! -s-- {tk, ': n/) i itt Ltd., a sister concem in r,vhich the close relatives of the trustees had substantial interest.TheleaserentwhichwasinitiallyT25,O0OI-pernonthwasrevisedto {50,000/- per month w. e. f. 01.04.1987 and thereafler to {1,00'000/- per month *.".r.rr.rr.i99i. ih.r"isampleauthorityforthepropositionthatleasingoutof a factory for monthly rentals is one form of carrying on a business' The judgment of theCalcuttaHighCourtinDirectorsoflncomeTax(Exemption)v.SahuJain Trust,(2011) 243 CTR(cal.) 131 dealt with a different factual situation' There the trustderived"incomefromsubletlingtenantedproperties.Thisactivitywas branded as business activity and the provisions of section l1(4A) of the Act were invoked. The calcutla High court held that there was no material on record to justify the view taken by the assessing officer that it was a business activity; it lvas justasimplesub-lettingnotamounttocarryingonofanybusiness.Thepresent casedoesnotfallunderthecalegorydealtwith,bytheCalcuttaHighCourt.We are, therefore, not inclined to accept the submission that no business rvas carried on by the trustees.

24.Referencelvasthenmadeonbehalfoftheassesseetothejudgmentofthe Supreme Court rnThanthi n'zrsf (supra) and it was' contended that if the profits of thc business carried on by the trust are utilised by the trust for the purposes of achieving the objectives of the trust, then the business should be considered to be incidental to the attainment of the objects of the trust' The exact observalions of the SuPreme Court are as under: - "As it stands, all rhat it requires for the business income of a n'ust' or institution to be exempt is thai the business should be incidental b flxe attainment of obiectives of the tust or. instittttion' A . business,io* rncome ii utilised iy me fi.Lts.t or the institution for tnu prrpos'ii of achieving the obiectives of the 'l!t'; tu any event' if there b,-;;; aunbigui[t in the language employed' the provision must be consfilted in a manner that benefts lhe assessee'" Primafacietheaboveobservalionswouldappealtosupporttheassessee'scasein the sense thal even tf the Kathabusiness is held not to constitute a business held undertrust,butonlyasabusinesscarriedonbyoronbehalfofthetrust,solongas lTA309/2003,417|2003,|8|2004'722|2007,770|20|1,1050/2011and1051/20l1Page18of20 _ : -_-i I I t I i ,. -7 the profits generaled by it are applied for the charitable objects of the trust, the condition imposed under Section 1.1(4A) of the Act should be lteld 1o be satisfied, entitling the trust to the ta,x exemption.

¶25In our opinion these observations have to be underslood in the light of the facts before the Supreme Court. Thanthi Trust carried on the business of a newspaper and that business itself was held under trust. The charitable object of the trust was the imparting of educalion which falls under Section 2(15) of the Act. The newspaper business lvas certainly incidental to the attainment of the object of the trust, namely that of imparting education. The observations were thus made having regard to the fact that the profits of the ne\,vspaper business were utilised by the trust for achieving the object, namely education. The type of nexus or connection which existed between the imparting of education and the carrying on of 1he business of a newspaper does not exist in the present case. There is no such nexus betr,veen Ihe Katha business and the objects of the assessee - trust that can constitute the carrying on of lhe Katha Business an activity incidental to the attainment of the objects, namely advancing of education, patriotism, Indian culture, running of hospitals and dispensaries, etc. It lvould in our opinion be disastrous to extend the sweep of the observations made by the Supreme Court (quoted above) in the case ofT'hanthi 77asr (supra), on the facts ofthat case, to all cases r.vhere the trust carries on business which is not held under trust and whose income is utilised to feed the charitable objects of the trust. We are, therefore, of the respectful opinion that the observations of the Supreme Court must be understood and appreciated in the background oflhe facts in that case and should not be extended indiscriminatelv to all cases.

¶26It was contended on behalf of the assessee that in case we hold that the assessee-trust is not eligible for exemption because tbe Katha business lvas itself not held under trust, it would produce an anomalous or discriminatory result inasmuch as all that is required is for the settler of the trust to declare that the Katha business itself would be held in trust. It is not for us to comment on the ITA 309/2003 ,417/2003,1812004,72212007,77012011,1050/2011 an<l 1051/2011 Page 19 ol'20 i- "'. !. contention;wecannotquestionthelegislativewisdomandifthereisreallyan anomalous or discriminatory resultant position, it is for the legislalure to take care ofit.Itisnotforustoenter..Suchacomplexarenainlvhiclrnoperlect alternativesexist,,asobservedbyJusticeStewartoftheSupremeCour|oftheUSA in Scrm Antonio Sclrcol Districr Vs' Ilodrigous (1973) 411 US 1' 2T.Forlhereasonsgivenaboveweanswerthesubstantialquestionsoflaw alltheappealsagainstthdassesseeandinfavouroftheRevenue'Theappeals the Ilevenue are accordingly allowed r'vith no order as to costs' lil",r,-.. (R.v. raswan) RAVINDRA DI"IAT) JUDGE in of I (s. r-NOVEMBEII 2o,2ol2 hs/vld I'l A 3 09/20 03'417 | 2oo3,l 8 t 200 4',7 221 ZQOT'7 1 0 | 20 | 1' I 050/20 1 I and 1051/201 1 Page 20 of20 -rffii@qff-ff r'r-lrl ; ,l