COMMISSIONER OF INCQ1E-TAX ANDHRA PRADESH, HYDERABAD. v. ANDHRA PRADESH STATE ROAD TRANSPORT CORPORATION, HYDERABAD.

The Judgment of the Court was delivered by

MADON, J. The above three Appeals have been filed by certificate granted by the Andhra Pradesh High Court under ~ section 261 of the Income~tax Act, 1961, against the judgment D of that High Court in an income-tax reference. The Respondent, the Andhra Pradesh State Road Transport Corporation, is a Road Transport Corporation established with effect from January 11, 1958, by the State of Andhra Pradesh by a notification issued under section 3 of the Road Transport Corporations. Act, 1950 (Act No. 64 of 1950) (hereinafter referred to in short as "the E RTC Act"). Prior to the establishment of the Respondent Corpo- ration road transport in the State of Andhra Pradesh was a department of the Government, being run by the Government of . Hyderabad prior to the formation of the State of Andhra and -. ~ th~reafter by the Government of Andhra Pradesh. During the whole of this period the income made from road transport was F exempt from income tax. After the Respondent Corporation was formed, the Inco~~E-tax Department took the view that the income of the Respondent Corporation was liable to income-tax and assessed the Respondent Corporation to income-tax for the assessment years· 1958-59 and 1959-60. The Respondent Corpora- tion thereupon filed a writ petition in the Andhra Pradesh G High Court contending that the property owned by it and the .aJ income earned by it were the property and income of a State - exempted from Union taxation under Article 289(1) of the Cons- titution. This contention was rejected and the writ petitions were dismissed by ~he High Court. Appeals filed by the Respon- H

.574 SUPREME COURT REPORTS [1986] 1 S.C.R • A dent Corporation in this Court were also dismissed. The judg-"'-_ ment of this Court is reported as Aodhra Pradesh State Road · Transport Corporation v. Income-tax Officer, B-1 B-ward, Hyderabad and Aor., [1964] 52 I.T.R. 524, 535-36; s.c. [1964] 7 S.C.R. 17, 29-30. After referring to the various provisions of the RTC Act, ·this Court held B

"Far from making any provision which would make the income of the corporation the income of the State, ~ ~ . all the relevant provisions emphatically bring out the separate _personality of the corporation and proceed on the basis that the trading activity is c run by the corporation and the profit and loss that would be made as a result of the trading activity would be the profit and loss of the corporation. • •• When we are deciding the question as to whether the income derived by the corporation is the income of th( State, the provision made by section 30 for ..,., D making over to the State Govt~rnment the balance._ that may remain as indicated therein, is of no assistance. The income is undoubtedly the income of the Corporation. All that section 30 requires is that a part of that income may be entrusted to the State Government for a specific purpose of road E development. It is not suggested or shown that when such income is made over to the State, it becomes a part of the general revenue of the State. It is incoroo which is impressed with an obligation and which can be utilised by the State Government onl~ for the specific purpose for which it is entrusted; ~ F to it."

Having failed in its contention that its income was exempt from income-tax under Article 289(1) of the Constitu- tion, the Respondent Corporation filed retu~s in respect of the assessroont years 1960-61, 1961-62, and 1962-1)3, showing its income as "Nil". In respect of the assessment years 1960-61 and 1961-62, which are the subject of Civil Appeals...-.' Nos. 216 and 217 (NT) of 1973 before us, it claimed exemptio~ from income-tax under section 4(3) (i) of the Indian Income- .... tax Act, 1922 (hereinafter referred to as "the 1922 Act"). In respect of the assessment year 1962- 63, which is the subject of Civil Appeal No. 218 (NT) of 1973 before us, it claimed

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A ~exemption under section 11 of the Income-tax Act, 1961 (hereinafter referred to as ''the 1961" Act"). The Respondent Corporation's claim for exemption was rejected by the Income- tax Officer, Company Circle, Hyderabad. The appeals filed by the Respondent Corporation were allowed by the Appellate Assistant Commissioner of Income-tax, D-Range, Hyderabad, but B the appeals filed by the Department before the Income-tax Appellate Tribunal, Hyderabad Bench, were allowed and at the -~nstance of the Respondent Corporation the Tribunal by a common order made in all the three appeals before it stated a case and referred the following question of law to the Hi:gh .C ourt:

''Whether, on the facts and in the circumstances of c the case, the assessee's.income for the assessment years 1960-61 and 1961-62 was exempt from income- tax under section 4(3)(i) of the lnco~-tax Act, 1922, and for the assessment years 1962-63, under section 11 of the Income-tax Act, 1961." D The High Court answered the above question in favpur of the Respondent Corporation and against the Department and on an application made by the Appellant, the Commissioner of Income- Tax, Andhra Pradesh, Hyderabad, granted under section 261 of the 1901 Act a certificate of fitness for appeal to this E Court.

Section 4(3)(i) of the 1922 Act, omitting what is not ~elevant for our purpose, provided as follows : , ' "(3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them :

(i) Subject to the provisions of clause (c) of sub-section (1) of section 16, any income derived from property held under trust or other legal obligation who~ly for religious or charitable p\lrposes, in so far as .. such income is applied or accumulated for application. to such religious or charitable purposes as relate to anything done Within the taxable territories, and in the case of property so held in part only for such purposes, H

576 SUPREME COURT REPORTS [1986] 1 s.c.R~

A the income applied or finally set apart· fof~ application thereto .~

Provided that such income shall be included in the total income--

B X X X X

(b) in the case of income derived from busines4'- carried on on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes of the institution a~d either- c (i) the business is carried on in the course of the actual carrying out of a primary purpose of tl1c institution, or

(H) the work in connection with the business i!J.. 0 mainly carri~d on by beneficiaries of the institu~ tions;

X X X X

In this sub-section 'charitable purpose' includ~·s relief E of the poor, education, medical relief, and the advancement of any other object of general public utility, but nothing contained in clause (i) or clause (ii) shall operate to exempt from the provi~ions of this Act that part of the ~ncome from , property held under a trust or other legal obU.gation fqr private religious purposes which does not enure for the ben~~·• F fit of the public".

The material provisions of section ll(l)(a) of the 1961 Act are as follows :

"11. Income from property held for charitable or G religious purposes.- t-: (1) Subject to the provisions of sections 60 to 63, the following income shall not be included in th·~ total income of the previous year of the person in receipt of the income- H (a) income derived from property held under trust

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wholly for charitable or religious purposes, to the A extent to which such income is applied to such purposes in India • • • • "

Clause (15) of the section 2 of the 1961 Act defines the expression charitable p~rpose. This definition is as follows : B "(15) 'charitable purpose' includes relief of the poor, education, medical relief, and the advance- ment of any other object of general public utility not involving the carrying on of any activity for profit 11 •

The difference between the 1922 Act and the 1961 Act with c respect of the definition of the .expression 'charitable purpose" was thus stated by this ~Court in Additional Coumissioner of lncoue-Tax, Gujarat v. Surat Art Silk Cloth ~~ufacturers Association, [1980] 121 I.T.R. l, 25-26, s.c. :. ' .-l,

"It is obvious that the exclusionary dause was added with a view to overcoming the decision of the Privy Council in. the Tribune's case, (1939) 7 I. T.R. 415 (PC), whet;.e it was held that the object of supplying the community with an organ of educa- ted public opinion by publication of a newspaper was an object of general public utility and hence charitable in character even though the activity of publication of , the newspaper was carried on on commercial lines wich the object of earning profit. The publication of the newspaper was an activity ( engaged in by the trust for the purpose of carrying out its charitable purpose and on the facts it was clearly an activity which had profit-making as its predominant object, but even so it was held by the Judicial Committee that since the: purpose served t was an object of general public utility, it was a charitable purpose. It is ~lear from the speech of the Finance Minister that it was with a view to setting at naught this decision that the ex- clusionary clause was added in the de Einition of 'charitable purpose'. The test which has, thecefore, now to be applied is whether the predo- minant object of the activity involved in carrying H,

578 SUPREME COURT REPORTS [ 1986 ] 1 S. C•R.

A out the object of general public utility is to~· subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a chari- table purpose. But where the predominant object of the activity is to carry out the chgritable purpose B and not to earn profit, it would not lose its character of a charitable purpose merely becaus~­ some profit arises from the activity. The exclu- sionary clause does not require that the activity liJJSt be carried on in such a manner that it does not result in any profit. It would indeed be di~fi­ c cult for persons in charge of a trust or institu- tion to so carry on the activity that the expendi- ture balances the income and there is no resulting profit. That would not only be difficult of practi- cal realisation but would also reflect unsoundr principles of management." •- D The position as stated above in the above case was reiterated by this Court in Comadssiooer of Income-tax, Bombay v. Bar Council of Mabarashtra, [ 1981] 130 I. T. R. 28, 33-34, S.C. In that case this Court said : E "It may be noticed that whereas any object of general public Ut·ility was included in the definition of 'charitable purpose' in the 1922 Act, the present definition has inserted the restrictiv~ words 'not involving the carrying on of any activity for profit' which qualify or govern the I F last head of charitable purpose. In CIT v. Andhra · Chamber of Commerce, [1965] 55 I.T.R. 722, a case decided by this Court under the 1922 Act, where the • restrictive words were absent, this court laid down that if the primary or dominant purpose of a trust or institutiGm was charitable, any other object G which by itself might not be charitable but whid~_,.--­ was merely ancillary or incidental to the primary or dominant purpose would not prevent the trust or institution from being a valid charity. After the addition of the restrictive words in~he definition in the 1961 Act, this court in Addl. CIT v. Surat

C.I.T. v. STATE [MADON, J} 579

A art Silk Cloth Manufacturers Association [1980] 121 I.T.R. 1 affirmed that the aforesaid test of primary or dominant purpose of a trust or institution still holds good, that the restrictive words qualify 1 object 1 and not the advancement or accomplishment thereof and that the true meaning of. B the restrictive words was that when the purpose of a trust or institution was the advancement of an object of general public utility it was that object of general public utility and not its accomplish- ment or carrying out which tDJSt not involve the. carrying on of any activity for profit. And, apply- ing these tests, trading bodies like Andhra Chamber c of Commerce and Surat Art Silk Cloth Manufacturers Association have been held to be institutions cons- tituted with a view to advance an object of general public utility because their primary or dominant purpose was to promote and protect industry, trade '"-I'· and commerce either generally or in certain commo- D dities, even though some benefit through some of their activities did accrue to their members Which was regarded as incidental and this Court held that the income derived from diverse sources by these institutions (rental income from property in the case of Andhra Chamber of Commerce and income from annual subscriptions collected from its members and commission of a certain percentage of the value of licences for import of foreign yam and quotas for purchase of indigenous yarn obtained by the asses- see from its members in the case of Surat Art Silk Cloth Manufactuc-ers Association) was exempt from tax liability under s. 11 of the Act."

It was contended on behalf of the Appellant that the Respondent Corporation was not entitled to any exemption as claimed by it because its activities were carried on profit as shown by sections 22, 23 and 28 of the RTC Act. In fairness to G /"~,.learned Counsel for the Appellant it must be stated that in ·view of the Judgment of the Judicial Committee of the Privy Council in In re 'Die Trustees of 'Die 'Tribune', [1939] 7 I. T.R. 415 P.C. in which it was held that where an activity carried on with the object of general public utility did no~ cease to be charitable in character even though it was carried H

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A on on commercial lines with the object of earning profit, the ~ concentration of the attack was on the exemption claimed in respect of the assessment year 1962-63 which was covered by ~··

the 1961 Act. The above contention entails an examination of the relevant provisions of the RTC Act. The objects for which a Road Transport Corporation is established by a State Govern- B ment are set out in section 3. These objects are :

(a) the advantages offered to the public, ttade and j- industry by the development of road transport;

(b) the desirability of co-ordinating any form or c road transport with any other form of transport; and

(c) the desirability of extending and improving the facilities for road transport in any area and of pro,.iding an efficient and economical system of ~ D road transport service therein. ,_

These were, therefore, the objects for which the Respondent Corporation was established. Section 18 reiterates the above objects. It provides as follows :

E "18. General duty of Corporation.-

It shall be the general duty of a Corporation so to exercise its powers as progressively to provide or .\'P secure or promote the provision of an efficient, ' adequate, economical and properly co-ordinated • F system of road transport services in the State or part of the State for which it is established and in any extended area:

X X X X

G Section l9 enumerates the powers of a Road Transport Corporation. They include the power to operate road transport 1---f services in the State and in any extended area and to provide for any ancillary service. Section 22 provides as follows : I "22. General principle of Corporation's finance.- H

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- It shall be the general principle of a Corporation that in carrying on its undertaking it shall act on busine~s principles." A

Under sub-section· ( 1) of section 23, the capital of a Road Transport Gorporation is to be provided by the Central B Government and the State Government in such proportion as may be agreed to by both the Governments. Under sub-section (2) of ~ section 23, where the capital of a Road Transport Corporation II" is not provided by the Central Government or the State Government, such Corporation may raise such capital by the issue of shares as may be authorized in that behalf by the State Government. Under sub-section (3) of section 23, the shares are to be subscribed by the Central Government the State Government and other parties including persons whose undertakings have been acquired by the Corporation and under sub-section (6) a Corporation may at any time, with the ~ previous approval of the State Government, redeem the shares ~ issued to the other parties in such manner as may be prescribed. Under section 24, if after the issue of such shares, the Corporation requires additional capital, it may, with the previous.approval of the State Government, raise such additional capital by the issue of new shares and the provisions of section 23 apply to such issue. Under section 25, the shares of a Road Transport Corporation are to be guaranteed by the State Government both as to the payment of the principal and the annual dividend at such minimum rate as may be fixed by the State Government by notification published t in the Official Gazette at the time of issuing the shares. ~ , Section 26 authorizes a Road Transport Co.rporation, with the previous approval of .the State Government, to borrow money in the open market for purposes of raising its working capital or for meeting any expenditure of a capital nature. Section 27 provides that every Road Transport Corporation is to have its own fund and all receipts of the Corporation are to be carried thereto and all payments by the Corporation are to be made therefrom, and that except as otherwise directed by the State G , ..~Government, all moneys belonging .to that fund are to be ' deposited in the Reserve Bank of India or with the agents of the Reserve Bank of India or invested in such securities as may be approved by the State Government. Under section 28 where the capital of a Road Transport Corporation is provided by the Central Government and the State Government, the Corpo- H

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A ration is to pay interest on such capital and where the Corpo--~ ration has raised its capital by issue of shares it is to pay dividend on such shares at such rate as may, from time to time, be fixed by the Corporation, subject to any general limitations which may be imposed by the State Government in consultation with the Central Government, and such interest B and dividend are to be deemed to be a part of the expenditure of the Corporation. Section 30 provides as ·follows

c ''30. Disposal of net profits.-

After making provision for payment of interest and dividend under section 28 and for depreciation, reserve and other funds under section 29, a Corpo- • ration may utilise such percentage of its net annual prof its as may be sped.f ied in this behalf by the State Government for the provision of ame- nities to the passengers using the road transport ,_ D services, welfare of labour employed by the Corpo- ~ ration and for such other purposes as may be pres- cribed with the previous approval of the Central Government, (and out of the balance such amount as may, with the previous approval of the State Government and the Central Government, be specified E in this behalf by the Corporation, may be utilised for financing the expansion programmes of the Cor- poration and the remainder, if any, shall be made over to the State Government for the purpose of road development.)"

F The bracketed portion in section 30 was substituted for the · words "and the balance shall be made. over to the State Government for the purpose of road development" by the Road Transport Corporation (Amendment) Act, 1959 (Act No. 28 of 1959).

G It was not disputed that the object of the activity carried on by the Respondent Corporation was one of general public utility. What was submitted was that such activity was carried on for profit as shown by section 22 under which the Respondent Corporation was enjoined to act on business principles. It was further submitted that the Respondent H Corporation could issue shares even to the members of the

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A • public and that dividend would be paid to the shareholders and, therefore, profit would be made from the activity of the Respondent Corporation by its owners, namely, the share- holders. We are unable to accept these submissions.

The submission founded upon section 22 is based upon a B misunderstanding of what that section provides. A road Transport Corporation cannot be expected or be required run at a loss. It is· not established for the purpose of subsfdizing the public in matters of transportation of passengers and goods. The objects for establishing a Road Transport Corpora- tion are those set out in section 3 of the RTC Act which we have already reproduce~above. Section 18 shows that it is the duty of a Road Transport Corporation to provide, secure and c promote the provision of an efficient, adequate, economical and properly co-ordinated system of road transport services in the State. No activity can be carried on efficiently, properly, adequately or economically unless it is carried on on business principles. If an activity is carried on on business principles, it would usually result in profit, but as pointed out by this Court in the Surat Art Silk Cloth Haou- fac•urers Assoei$tion Case, it is not possible so to carry on a charitable activity that the expenditure balances the income and there is no resultant profit, for to achieve this would not only be difficult of practical realization but would reflect unsound principles of management. What section 22, therefore, does when it states that it shall be the general principle of a Road Transport Corporation that in carrying on t its undertakings it shall act on business principles is to j emphasize. the objects set out in section 3 for which a Road Transport Corporation is established and to prescribe the manner in which the general duty of the Corporation set out in section 18 is to be performed. It is now firmly established by decisions of this Court in the Surat Art Cloth Manufacturers Association Case and the Bar Council of Mabarashtra Case that the test is '~t is the pre-dominant object of the activity - whether it is to carry out a charitable purpose or to earn profit?'' If the pre-dominant object 1.s to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from the activity.

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A There is no factual foundation for the submission based upon section 23(2) and other sections of the RTC Act which empower a Road Transport Corporation to issue shares including issuing shares to members of the public and to pay dividend thereon. It is an admitted position, as pointed out by the High Court .in its judgment under Appeal, that no share ' capital B has been raised under section 23(2) and the entire capital has been provided by the Government under section 23( 1) and the Government is only paid interest thereon under section 28(1) just as interest would be paid on any money due as a debt. That the activity of the Respondent Corporation is not carried c on with the object of making profit is made abundantly clear by the provisions of section 30 under .which prior to the amendment of that section by the Amendment Act of 1959, the balance of income left, after utilization of the net profits for the purposes set out in section 30, was to be made over to D the State Government for the purpose of road development and after the Amendment Act of 1959 is to be utilized for financing the expansion programmes of the Respondent Corporation and the remainder, if any, is to be made over to the State Government for the purpose of road development. As pointed out by this Court in Aodhra Pradesh Road Traos{Jbrt Corporation v. lncoE-tax Officer, B-1 &-Ward, Byderabad aod Anr. the amount handed over to the State Government does not become a part of the general revenue of the State but .is impressed witn an obligation that it should be utilized only for the purpose for which it is entrusted, namely, road . development. It is not, and cannot be, disputed that road F development is an object of general public utility.

For the reasons given above, we hold that the Respondent Corporation was entitled to the exemption claimed by it both under the 1922 Act and the 1961 Act.

G In the result, these Appeals fail and are dismissed with costs.

A.P.J. Appeals dismissed.