The Hindu Business Line : Promoting welfare of general public

Any organisation that fulfils the test of advancing an object of general public utility would be entitled to be registered under Section 12-A or 12-AA and its income would be exempt under Section 11 of the Act.

H.P. Ranina

Under section 2(15) of the Income-tax Act, 1961, a charitable purpose is defined to include relief of the poor, education, medical relief and advancement of any other object of general public utility. The interpretation of the expression “advancement of any other object of general public utility” has been the subject of judicial pronouncements from time to time.

Under section 11(1), income from property held for charitable purposes is not includible and does not form part of the total income. Section 11(1) has three clauses (a), (b) and (c). In all the three clauses, the words used are “income derived from property held under trust wholly for charitable purposes”.

Under section 11(4), the expression “property held under trust” includes a business undertaking so held. In other words, income from business undertaking held for charitable purposes can fall under section 11, subject to such income fulfilling the requisite conditions of that section.

Apex court deliberations

This important question was considered by the Supreme Court in C.I.T. v. Gujarat Maritime Board (295 I.T.R. 561). The Board was constituted under the Gujarat Maritime Board Act, 1981, for the purpose of development and maintenance of minor ports in the State of Gujarat. It applied for registration under section 12-A of the Income-tax Act, 1961, as a charitable institution.

The Commissioner rejected the assessee’s application. On appeal, the Appellate Tribunal held that the object of the assessee was to develop and maintain minor ports in the State of Gujarat, which was an object of general public utility, and directed the Commissioner to register the assessee under section 12-A.

The High Court affirmed the decision of the Appellate Tribunal. Before the Apex Court, one of the objections raised on behalf of the Department was that the Gujarat Maritime Board is not entitled to the benefit of section 11 of the 1961 Act as the Board is not a trust under the Public Trusts Act and, therefore, it was not entitled to claim registration under section 12-A of the 1961 Act.

The Department’s case was that the Maritime Board was a statutory authority. It was not a trust. Its business and property were not held under trust.

Therefore, the Board was not entitled to be registered as a charitable institution. It was the case of the Department that the Board was performing statutory functions.

Development of minor ports in the State of Gujarat cannot be termed as work undertaken for charitable purposes.

The Supreme Court held that section 10(20) and section 11 of the 1961 Act operate in totally different spheres. Even if the Board has ceased to be a “local authority”, it is not precluded from claiming exemption under section 11(1) of the 1961 Act.

Therefore, section 11(1) has to be read in the light of the definition of the words “charitable purposes” as defined in section 2(15) of the Act.

Of widest connotation

The Court considered various judicial authorities that have interpreted the words “any other object of general public utility”. From the decisions, it emerges that the expression is of the widest connotation.

The word “general” in the expression means pertaining to a whole class. Therefore, advancement of any object for the benefit of the public or a section of the public, as distinct from benefit to an individual or a group of individuals, would be a charitable purpose (C.I.T. v. Ahmedabad Rana Caste Association (140 I.T.R. 1)).

The expression would, prima facie, include all objects that promote the welfare of the general public. It cannot be said that a purpose would cease to be charitable even if public welfare is intended to be served. If the primary purpose and the predominant object are to promote the welfare of the general public, the purpose would be charitable in nature.

When an object is to promote or protect the interest of a particular trade or industry, that object becomes an object of public utility, but not so, if it seeks to promote the interest of those who conduct the trade or industry (C.I.T. v. Andhra Chamber of Commerce (55 I.T.R. 722)).

When the object of an institution is charitable, any other object which might not be charitable but which is ancillary or incidental to the dominant purpose would not prevent the institution from being a valid charity (C.I.T. v. Surat Art Silk Cloth Manufacturers Association (121 I.T.R. 1)).

The present case of Gujarat Maritime Board is squarely covered by the judgment in C.I.T. v. Andhra Pradesh State Road Transport Corporation (159 I.T.R. 1) in which it has been held that since the Corporation was established for the purpose of providing efficient transport system, having no profit motive, though it earned income in the process, it was not liable to income-tax.

Applying the rationale of the judgment in the case of Andhra Pradesh State Road Transport Corporation, it was found that the Gujarat Maritime Board is established for the predominant purpose of development of minor ports within the State of Gujarat, the management and control of the Board is essentially with the State Government and there is no profit motive, as indicated by the provisions of sections 73, 74 and 75 of the 1981 Act.

Fulfilling the test

The income earned by the Board is deployed for the development of minor ports in Gujarat. In the circumstances, the judgment of the apex Court in Andhra Pradesh State Road Transport Corporation squarely applies to the facts of the present case.

It has to be mentioned that under the scheme of section 11(1) of the Act, the source of income must be held under trust or under other legal obligation.

Applying the test, it is clear that the Gujarat Maritime Board is under legal obligation to apply the income that arises directly and substantially from the business held under trust for the development of minor ports in Gujarat. Therefore, it is entitled to be registered as a charitable trust under section 12-A.

The aforesaid decision sets at rest the controversy on a vexatious issue.

This decision results in far reaching implications because any organisation that fulfils the test of advancing an object of general public utility would be entitled to be registered under section 12-A or 12-AA and its income would be exempt under section 11 of the Act.

The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in

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