Saji Koduvath, Advocate, Kottayam

Introduction

An association of persons can engage in any lawful activity including business. When a ‘charitable’ institution is engaged in a business activity, its legitimacy is tested on four important counts.

• First:    Is the business activity clearly predicated as an ‘object’ in its trust deed or bye laws; or, at least, is such business activity one ‘fairly incidental or reasonably ancillary’[1] to its declared object?[2]
• Second: Is the business activity, by itself,a ‘charitable’ one; or, at least, is such activity one ‘fairly incidental or reasonably ancillary’[3] to its declared ‘charitable’ object?[4]
• Third:   Is the intent or purpose of such business activity predominantly to carry out the charitable objective; and not to earn profit?[5]
• Fourth: Has the profit been utilised for the charitable activity?[6]

The negative answer to the first enquiry results in rendering the activity of the trust or other institution, ‘ultra vires’ its objects; and therefore, illegal and void. The negative answer to the second, third or fourth enquiry will not render the business activity, totally illegal; but, it will result in losing the protection or benefit,[7] as a ‘charitable institution’, that had already been extended to the establishment.[8]

Business Activity Not Supported By ‘Object-Clause’ Will Be ‘Ultra-Vires’

The activities of a company or an association differ from that of a natural person who is free to act on his whims and fancies.[9] An ultra vires contract executed by a company is analogous to, and stands on the same footing as, a contract entered into by an infant.[10]  Such an  ultra vires contract  executed by a company  will be a nullity.  It will be  just like a consent-decree passed on the basis of a compromise signed by a  minor.[11] The acts of the companies and associations are limited by their Memorandum or bye laws. Any activity of a company or an association – especially a significant profit oriented business activity[12] – not supported by the ‘object  clause’ of its memorandum or bye laws, will be ‘ultra  vires’ the company or association itself;[13] and therefore,  void and unenforceable.  An agreement arrived at between the shareholders and directors of a company with respect to the management of the affairs of the company, without being incorporated in the Articles of Association is not enforceable against the company.[14] Any action referable to the articles and contrary thereto would be ultra vires.[15]

These principles are recapped in Ashbury Railway Carriage and Iron Co. Ltd. Vs. Riche.[16]They have been followed by our Apex Court in A. Lakshmana-swami Mudaliar Vs. Life Insurance Corporation of India,[17] In Re Steel Equipment and Construction Co. (P) Ltd.[18]etc.It is held in A. Lakshmana-swami Mudaliar Vs. Life Insurance Corporation of India[19] as under: 

• “A company is competent to carry out its objects specified in the  memorandum of association and cannot travel beyond the objects.”

It was also pointed out in this decision that acts done beyond the objects mentioned in the memorandum would be ultra vires. 

The bye laws of a society and its terms constitute a binding contract, not just between the members and the society but also between the members inter se. In Sinclair Vs. Brougham[20] it had been held that a building-society cannot involve  in  a banking-business.[21]  In re Birkbeck Permanent Benefit Building Society,[22]it was pointed out that a building-society cannot validly engage in ‘the business of banking as an independent and substantial business; not merely ancillary to, or in aid of, the building-society business’;  and, it was held that such a business was ‘ultra vires’ its powers.[23]

These principles fully apply to trusts also.[24]The trustees are bound to administer the affairs of the trust to attain the objects[25] envisioned by the founder and in accordance with his directions laid down in the trust-deed; and the acts of trustees, ultra vires such objects or directions are void.  If a trustee fails to administer the trust in accordance with the terms of its trust deed, it would amount to breach of trust.[26]

The fundamental principles of an association  are not open to alter even by the majority of its members, unless such a power is specifically reserved. This principle laid down in Milligan Vs.  Mitchel,[27]Attorney General Vs. Anderson[28]and Free Church of England Vs. Overtoun[29] is referred to in Prasanna Venkitesa Rao Vs. Srinivasa Rao.[30]

Tudor on Charities[31] explained this principle as under:

• “When a charity has been founded and trusts have been declared, the founder has no power to revoke, vary or add to the trusts. This is so irrespective of whether the trusts have been declared by an individual, or by a body of subscribers, or by the trustees. “[32]

Business Activities, Fairly Incidental to the Objects are Not Ultra Vires

Acts beyond the powers conferred by law, or acts  that are violative of the objects envisaged in the memorandum of a company (or in the bye laws of an association, or in the foundational documents of a trust), are termed ‘ultra vires’ acts.  But, if the acts done by an administrator of such company,  association or trust  are fairly incidental or reasonably ancillary to its main objectives, they cannot be held to be ultra vires,[33]  unless such acts  are expressly prohibited. While explaining the doctrine of ultra vires,it is specified in the Palmer’s Company Law that a company is expected to have the following powers:

• “(i) Power to do whatever (such things) is necessary to do with a view to the attainment of the objects specified in the memorandum.
• (ii)   Power to do whatever else (all such other things), which may fairly be regarded as incidental to, and consequential upon, its objects.
• (iii) Power to do such other things as are authorised to be done by the companies act or by any other statute.”

The transactions, which do not fall under any of the three categories mentioned above, alone are regarded as ‘ultra vires’ acts.[34]

Any legitimate step taken to augment the working capital of the company is undoubtedly incidental to the business of the company; and the same will be  conducive to the attainment of the objects mentioned in the Memorandum.[35]But, as pointed out by our Apex Court in A. Lakshmanaswami Mudaliar Vs. Life Insurance Corporation of India,[36] such activity must at least be incidental or ancillary to its declared objects and must have a ‘reasonably proximate-connection with the objects’.[37]In such a case, though a particular activity may yield profit, it would not alter its ‘charitable’ character.

In CIT Vs. Sadhu Singh Hamdard Trust[38]  it is observed as under:

“Wherever, the terms of the trust permit its operation ‘for profit’ they become, prima facie, evidence of a purpose falling outside the ambit of ‘charity’. Ordinarily, profit motive is a normal incident of business activity and if the activity of a trust results in yielding profit, it could be concluded that the object of the trust involves the carrying on of an activity for profit. Wherever predominant object of the trust is charitable purpose and ancillary business activity results in profit, the profit earned is required to be utilized for the purposes of charity and if it is shown that the ‘profits of the business’ as per term of the trust are utilized for the purposes of the trust, the factum of activities yielding profit would not alter the charitable character of the trust.”[39]

Ultra Vires Acts Cannot Be Ratified

The Articles of Association of a Company are contract between members and are binding not only on the members but also on the company.[40] It is not permissible for the directors to act contrary to the powers conferred by the Articles. Any such action would be ultra vires the Articles, as also Section 10 of the Companies Act, 2013.[41]

Consequently, any action contrary to or in defeasance of these participatory rights or objects mentioned in the memorandum is ultra vires and void;[42] and for its inherent illegalities, the issue of ratification of such acts would not arise at all.[43]

If the trust had been validly created, any deviation by the founder of the trust or by the trustees from the declared purposes would amount to ‘breach of trust’though it would not put an end to the trust itself.[44]

Business by Charitable Trust ItselfMust be a ‘Charitable’  One

A charitable trust or institution can engage in a business activity,lawfully retaining its charitable nature,[45] if

• (i)the business activity itself  is a charitable  one  (or a public-utility service)[46],  or it is ‘fairly incidental or reasonably ancillary’ to the‘charitable’ objectives;[47]
• (ii) such activity forms an ‘object’  of such institution or trust under the bye laws or trust deed; and
• (iii) the sole or predominant purpose of the same is to carry out the charitable object and not to earn profit. That is, business activity done by a  trust or institution with the predominant objective of charity  will not lose its identity as a charitable institution, merely because some profit or benefit is gained from such business.[48]

Nevertheless, when the business activity carried on by an institution is one that is generally considered as a profit oriented one, and not a common public-utility service,[49] the burden will be heavy on the administrators of such institution to show that the  business activity is ‘fairly incidental or reasonably ancillary’ to its main charitable objectives.

If Predominant Object, Profit-making: It will Destroy  Charitable-Character

Ordinarily, business is a profit motive activity[50]  and stands antithesis to benevolent undertakings and charitable activities.[51]

Reiterating the earlier view in CIT Vs. Andhra Chambers of Commerce,[52] the Constitution Bench of the Supreme Court, pointed out in Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association,[53] that the business activities with the sole or predominant object of making profit will disentitle such trust or institution to claim benefits as a ‘charitable’ trust or institution.[54]It will not make any difference even if the business  carried on is  in advancement of a charitable purpose or it is  an object of general public utility.

The purpose of a charitable trust must be ‘essentially charitable in nature’[55]and the extent of profit must have been so designed that it is confined to what is actually required to carry-on or fulfil its‘charitable’objectives;[56]and it must not be a cover for carrying on a predominant profit making activity.[57]

Resulting  ‘Some Profit’ Will Not Lose Charitable-Character

Where an institution carries on business activity primarily for supporting the charitable purpose,and not with predominant object of making profit,such institution would not deprive[58] of the benefits lawfully entitled to by a charitable organisation.

The Supreme Court observed in Addl. CITVs. Surat Art Silk Cloth Manufacturers Association[59] as under:

• “But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit[60]arises from the activity.”[61]

It is observed in this decision that though publication of a newspaper is an object of general public utility and hence charitable in character, if the activity of publication of the newspaper is carried on, on commercial lines with the object of earning profit, it would no longer be a charitable activity. It is also pointed out that the activity need  not be in such a manner that it does not result in any profit. It would indeed be difficult for persons in charge of a trust or institution to so carry on the activity in a manner that the expenditure balances the income and there is no resulting profit. That would not only be difficult of practical realisation, but would also reflect unsound principle of management.

Permission to Apply Income for Non-Charitable Purpose – No More Charitable

If the objects for the trust or institution included both charitable and non-charitable purposes, and the trustees or the managers were permitted to apply the income of the trust or institution,in their discretion,to those objects, the trust or institution would not be liable to be regarded as charitable; and no part of its income would be exempted from tax.[62]

Tax Exemption

Ordinarily,a business is doing for ‘profit’;[63]and profit making activities stand in contrast to benevolent undertakings.Where the predominant object[64] of a trust or an institution is to earn‘profit’ from business,[65] it cannot claim the status as a ‘charitable’ institution.[66]But, if a lawful ancillary business activity of a trust or an institution results in profit and the profit earned is utilized[67] for the purposes of charity, the mere fact that the said activities yielded profit would not alter or destroy its charitable character.[68]

Acts ultra vires the byel aws of  an institution being void, the  institution that is engaged in the business activity must have been  fully supported by the ‘object clause’ of its constitution or the bye laws, to retain the charitable nature;or the business activity must have been ‘fairly incidental or reasonably ancillary’ to its objectives. For getting exemption from payment of tax, the business activity of a charitable institution must not be one that is ultra vires its constitution.In other words, for availing tax exemption the business itself must be a ‘property’ held by the trust. And, the business must also be a charitable activity, and the income generated by the same must have been applied to the charitable purposes.^[69]

The Income Tax Act, Sec. 11 (4A)[70] specifically provides that a trust or an institution is entitled tax exemption only when ‘the business is incidental to the attainment of the objectives’ of such trust or institution, and ‘separate books of account are maintained by such trust or institution in respect of such business.’[71]

The following decisions elucidate the principles.

In re: Bennett(Ch: 1892):[72] The articles of association of the company provided that no dividend or bonus should be payable except out of profits. No profits were made by the company; but the directors paid interest to the shareholders out of the capital of the company. The Court of Appeal, affirming the judgment of the court of the first instance, held that the payment of interest out of the capital was ultra vires. Lindley L.J. observed:

“As soon as the conclusion is arrived at that the company’s money has been applied by the directors for purposes which the company cannot sanction, it follows that the directors are liable to replace the money, however honestly they may have acted. “

A  LakshmanaswamiMudaliar Vs. LIC (SC: 1963):[73] In this leading case the Supreme Court emphasided that ‘a company is competent to carry out its objects specified in the  memorandum of association and cannot travel beyond the objects’, and that the power  to carry out ‘incidental or conducive’ acts to the attainment of the object[74] of a company did not allow it to travel beyond its  ‘object’ or to do an act ‘which has not a reasonably proximate connection with the object and which would only bring an indirect or remote benefit to the company’. It was also pointed out that acts done beyond the objects mentioned in the memorandum would be ultra vires. 

It was laid down that the objects of the Life Insurance Corporation, inter alia, included only the investment of funds and assets upon securities; and the memorandum of association having not included the giving of donation of Corporation fund for the benefit of a charitable trust, that act would be ultra vires as there was no discernible connection between the donation and the objects of the Corporation. 

The Supreme Court held:

• “The trust has numerous objects one of which is undoubtedly to promote art, science, industrial, technical or business knowledge including knowledge in banking, insurance, commerce and industry. There is no obligation upon the trustees to utilise the fund or any part thereof for promoting education in insurance and even if the trustees utilised the fund for that purpose, it was problematic whether any such persons trained in insurance business and practice were likely to take up employment with the Company. Thus the ultimate benefit which may result to the Company from the availability of personnel trained in insurance, if the trust utilises the fund for promoting education, insurance, practice and business, is too indirect, to be regarded as incidental or naturally conducive to the objects of the Company. We are, therefore, of the view that the resolution donating the funds of the Company was not within the objects mentioned in the Memorandum of Association and on that account it was ultra vires.”

Bell Houses Ltd. Vs. City Wall Properties Ltd. (QB: 1966)[75]: In the Memorandum of the Company considered in this case there was a clause which provided that the company could do all such  other things as were incidental or conducive to the laid down objects or any of them. It was held that the trade or business which the directors had done was ultra vires, though they bona fide believed that it could be advantageously carried on by the plaintiff company in connection with or as ancillary to its main business.[76]

DM Co-op. Bank Vs. Dulichand(SC: 1969):[77]The Supreme Court observed that the nature of business of a society can be ascertained from the objects of the society.

Indian Chamber of Commerce  Vs. CIT Kerala Ernakulam (SC: 1976): The matters as to Sales Tax exemption came for consideration in  Indian Chamber of Commerce  Vs. CIT Kerala Ernakulam & Commissioner of Income Tax West Bengal II Vs. Calcutta Cochin Chamber of Commerce and Industry Cochin.[78] Justice Krishna Iyer has said in this decision as under:

• “The true test is to ask for answers to the following questions:
  • (a) Is the object of the assessee one of general public utility?
  • (b) Does the advancement of the object involve activities bringing in moneys?
  • (c) If so, are such activities undertaken, (i) for profit, or (ii) without profit?
• Even if (a) and (b) are answered affirmatively, if Clause (i) is answered affirmatively, the claim for exemption collapses. The solution to the problem of an activity being one for or irrespective of profit is gathered on a footing of facts.
• What is the real nature of the activity?
• One which is ordinarily carried on by ordinary people for gain?
• Is there a built-in-prescription in the constitution against making a profit?
• Has there been in practice, profit from this venture?, although this last is a weak test.
• The mere fact that a service is rendered is no answer to chargeability because all income is often derived by rendering some service or other.”

Justice Krishna Iyer explained:

• “We will illustrate to illumine. If there is a restrictive provision in the bye-laws of the charitable organisation which insists that the charges levied for services of public utility rendered are to be on a ‘no profit’ basis, it clearly earns the benefit of Section 2(15). For instance, a funeral home, an SPCA or a co-operative may render services to the public but write a condition into its constitution that it shall not charge more than is actually needed for the rendering of the services,–may be it may not be an exact equivalent, such mathematical precision being impossible in the case of variables– may be a little surplus is left over at the end of the year–the broad inhibition against making profit is a good guarantee that the carrying on of the activity is not for profit. As an antithesis, take a funeral home or an animal welfare organisation or a super-bazar run for general public utility by an institution which charges large sums and makes huge profits. Indubitably they render services of general public utility. Their objects are charitable but their activities are for profit. Take the case of a blood bank which collects blood on payment and supplies blood for a higher price thereby making profit. Undoubtedly, the blood bank may be said to be a general public utility but if it advances its public utility by sale of blood as an activity for (making) profit, it is difficult to call its purpose charitable. It is just blood business.”

In Queens Educational Society Vs. CIT, [79] our Apex Court after citing the afore-quoted passage of Justice Krishna Iyer it is observed:

• “Now we entirely agree with the learned Judges who decided these two cases that activity involved in carrying out the charitable purpose must not be motivated by a profit objective but it must be undertaken for the purpose of advancement or carrying out of the charitable purpose. But we find it difficult to accept their thesis that whenever an activity is carried on which yields profit, the inference must necessarily be drawn, in the absence of some indication to the contrary, that the activity is for profit and the charitable purpose involves the carrying on of an activity for profit. We do not think the Court would be justified in drawing any such inference merely because the activity results in profit. It is in our opinion not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no profit no loss basis or that profit shall be proscribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or carrying out a charitable purpose. If it is the former, the purpose would not be a charitable purpose, but, if it is the latter, the charitable character or the purpose would not be lost.”

Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association[SC: 1980][80]:The assesse in this case was an association established to promote commerce and trade in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth and Cotton Cloth. Its objects, as evidenced from the memorandum of association, included, inter alia, carrying on business in Art Silk Yarn, Raw Silk, Cotton Yarn, Art Silk Cloth, Silk Cloth, and Cotton Cloth belonging to and on behalf of its members as well as buying and selling and dealing in all kinds of cloth and yarn belonging to and on behalf of its members. The Constitutional Bench of the Supreme Court held that, if there are several objects of the institution, some of which are charitable and some non-charitable, and the trustees or the managers in their discretion may apply the income of the institution of those objects, the trust or institution would not be liable to be regarded as charitable and no part of its income would be exempted from tax. Where the main or primary objects are distributive, each and every one of the object must be charitable in order that the trust be held as a valid charity. But, if the primary or dominant purpose of the institution is charitable and another which, by itself, may not be charitable, but is merely ancillary or incidental to the primary or dominant object, it would not prevent the institution from validly being recognised as a charity. It is pointed out that the test to be applied is, whether the object which is said to be non-charitable is the main or primary object of the trust or institution or it is ancillary or incidental to the dominant object which is charitable. Reiterating its earlier view in CIT Vs. Andhra Chamber of Commerce,[81] the Supreme Court said that if the primary purpose is advancement of objects for general public utility, the institution would remain charitable, even if an incidental non-charitable object for achieving that purpose was contemplated.

All important subsequent decisions in this subject have noticed and followed this judgment.

Gajadhar Prasad Choudhary Vs. State of Bihar (Pat: 1984):[82] The main business of the Samiti, a co-operative institution, mentioned in this case was distribution of seeds to the agriculturists. The members of the Samiti were agriculturists. The Samiti, for the purposes of distribution of seeds, adopted cultivation of land for growing desirable seeds treating it to be efficient, economical and safe way to serve the purpose of its object. The act was found to be having a reasonable and proximate connection with the object; and it was held that the cultivation was not an ultra  vires act.

Thanthi Trust Vs. Central Board of Direct Taxes (Mad: 1995):[83] The charitable object of the Thanthi Trust was imparting of education. The trust carried on the business of a newspaper. It was held that the newspaper business was certainly incidental to the attainment of the object of the trust, namely that of imparting education.

Commissioner of Sales Tax Vs. Sai Publication Fund (SC: 2002):[84] In this case our Apex Court considered the issue whether the Trust,Sai Publication Fund, which had been set up by some devotees of Saibaba of Shirdi for spreading his message, can be held to be a “dealer”. It was observed that whether a particular person was a ‘dealer’ and whether he was carriying on ‘business,’ were matters to be decided on facts and in the circumstances of each case. The main and dominant activity or object of the Trust was to spread message of Saibaba. It was not a ‘business’.  Publication for the purpose of spreading message was incidental to this main activity.  Hence, it was held that such activity also did not amount to ‘business’ and entitled for Sales Tax exemption. 

CIT Vs. Mehta Charitable PrajnalayTrust (Dlh: 2012):[85]The Delhi High Court, in Commissioner of Income Tax Vs. Mehta Charitable Prajnalay Trust explored the scope of matters that had connection with ‘the attainment of the objects of the trust’. It was observed that the carrying on of the Katha business had no connection with the attainment of the objects of the trust, which were basically for the advancement of education, inculcation of patriotism, Indian culture, running of dispensaries hospitals, etc; and it was held that the mere fact that whole or some part of the income from Katha business was ear-marked for application to the charitable objects would not render the business itself being considered as incidental to the attainment of the objects. Relying on the Supreme Court decision in Addl. Commissioner of Income Tax, Gujarat Vs. Surat Art Silk[86]  it was pointed out that there was difference between business held under trust as ‘trust property’ (where the business itself is trust property[87]) and a business carried on by or on behalf of the trust.

Director of Income Tax Vs. Sabarmati Ashram Gaushala Trust (2014):[88] Sabarmati Ashram Gaushala Trust, the assesee in this Tax matter was created with object to breed the cattle and to improve the quality of the cows and oxen. The income was generated by the trust from the activity of milk production and sale thereof. The trust was thus marketing products which were incidental to its main activity of improving breeding of milch cows, and therefore, it was held as noncommercial activity. It is submitted that therefore, in the aforesaid facts, the Division Bench has held that “merely because while carrying out activities for the purpose of achieving objects of trust, certain incidental surpluses were generated, would not render activity in nature of trade, commerce or business”.

Mool Chand Khairati Vs. Director of IT (Dlh: 2015):[89] It is observed in this case that a plain reading of the objects-clause of the trust deed indicated that it included “devising means for imparting education and improving Ayurvedic system of medicine and preaching the same”. It was also expressly clarified that the Assessee was not prohibited to take help from the English, Unani or any other system of medicine for its object. It is observed that it was clear that the object did not prohibit running of an Allopathic hospital or drawing from any the other system of medicine for improving the Ayurvedic system of medicine inasmuch as any activity reasonably incidental to the object would not be ultra vires the objects.

Queens Educational Society Vs. CIT (SC: 2015):[90] In this case the Supreme Court, quoting the a passage from an earlier decision, Aditanar Educational Institution Vs. Additional CIT (1997),[91] it is emphasised that we should bear in mind the corpus, the objects and the powers of the concerned entity. The said passage reads as under:

• “The High Court has made an observation that any income which has a direct relation or incidental to the running of the institution as such would qualify for exemption. We may state that the language of Section 10(22) of the (IT) Act is plain and clear and the availability of the exemption should be evaluated each year to find out whether the institution existed during the relevant year solely for educational purposes and not for the purposes of profit. After meeting the expenditure, if any surplus results incidentally from the activity lawfully carried on by the educational institution, it will not cease to be one existing solely for educational purposes since the object is not one to make profit. The decisive or acid test is whether on an overall view of the matter, the object is to make profit. In evaluating or appraising the above, one should also bear in mind the distinction/difference between the corpus, the objects and the powers of the concerned entity.”

Director of Income Tax Vs. Shri Vile Parle Kelavani Mandal (2016):[92]Where an educational trust generated income by letting out various halls and properties of the institution only on Saturdays and Sundays and on public holidays when they were not required for educational activities, it was observed in Director of Income Tax (Exemptions) Vs. Shri Vile Parle Kelavani Mandalthat this cannot be said to be a business which is not incidental to attain the objects of the trust.

This decision was followed in  Director of Income Tax Vs. M/S Lala Lajpatrai Memorial Trust^[93] where the educational trust let out certain surplus parts of its building for running another educational institution and derived income. It was held in that it could not be said to be a business which was not incidental to attain the objects of the trust.  It was pointed out that this was merely an incidental educational activity and the income derived from it was used for the educational institute.

Trust Misusing status under Sec. 12AA is not entitled to retain Exemption

In Commissioner of Income Tax (Exemptions), Kolkata v. Batanagar Education and Research Trust, 2021-9 SCC 439, our Apex Court considered the answers given by the Managing Trustee of the Trust to the questions put by the Tax Authorities, and observed that they show the extent of misuse of the status enjoyed by the Trust. The Court held as under:

• “These answers also show that donations were received by way of cheques out of which substantial money was ploughed back or returned to the donors in cash. The facts thus clearly show that those were bogus donations and that the registration conferred upon it under Sections 12AA and 80G of the Act was completely being misused by the Trust. An entity which is misusing the status conferred upon it by Section 12AA of the Act is not entitled to retain and enjoy said status. The authorities were therefore, right and justified in cancelling the registration under Sections 12AA and 80G of the Act.”

Trustees&  Administrators Who Commit Ultra Vires Acts Have To Answer

The directors and administrators of the companies and associations, so also its general bodies, are expected to engage in and execute their activities honouring the objectives in the memoranda or bye laws of the institutions.   The trustees are obliged to administer the trust property as directed by the author of the trust. The directors, administrators or trustees who commit breach,or who take the institution or trust to such acts, are liable to answer the ultra vires acts it if they are challenged.[94]

The Supreme Court has held in Lakshmanaswami Mudaliar Vs. LIC[95]that the directors of a Company who were responsible for passing the ultra vires resolution were personally liable[96] to make good the amount belonging to the Company which was unlawfully disbursed in pursuance of the resolution.

It was observedin Karnataka Films Ltd. Vs. Official Liquidator, Chitrakala Movietone Ltd.[97]that the directors were liable for losses occasioned through acts done by them in matters which were ‘ultra vires’ the company, and this liability was not dependent upon any question of honesty or intention.

In Kathiawar Trading Co. Vs. Virchand Dipchand[98] it was held that the directors were liable to replace the moneys of the company which had been misapplied by them to a purpose which was ultra vires.

The Madras High Court referred various English decisions in this subject in Brahmayya and Co Vs. VS Ramaswami Aiyar.[99]It included the following.

Joint Stock Discount Co. vs. Brown, 1869-8 EqCas 381: In this decision the directors were held liable for unauthorised investments which were ultra vires of their powers. The fact that a director was not present at all the meetings in which the unauthorised investments were sanctioned was held to be no defence.

In re, Sharpe; Bennett Masonic and General Life Assurance Co. Vs. Sharpe, 1892-1 Ch D 154:It was held in this case that the payment of interest from out of the capital when there were no profits was ultra vires.

Ramskill Vs. Edwards, 1885-31 Ch D 100: In this case the directors of a company advanced moneys of the company upon an unauthorised security. It was held that the directors were liable for breach of trust.

In re, Oxford Benefit Building and Investment Society, (1886) 35 Ch D 502: In this decision it was that it was settled by authorities that directors were quasi trustees of the capital of the company, that directors who improperly paid  dividends out of capital were liable to repay such dividends personally upon the company being wound up and that such an act was a breach of trust and the remedy was not barred by the statute of limitation.

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[1]      Manufacturing or conducting sale of drugs by a medical institution, Conducting a nursing-school by a hospital etc.

[2]      Lakshmanaswami Mudaliar Vs. LIC: AIR 1963 SC 1185, Bholanath Kundu Vs. Official Liquidator: 1987-61 CC 10; Jaiveer Singh Virk Vs. Sir Sobha Singh: 2020-3 LAWS(DLH) 120.

[3]      Printing and publishing books or newspapers by an educational institution, Sale of articles made by inmates of an asylum etc.

[4]      Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association: AIR 1980 SC 387; Queens Educational Society Vs. CIT:AIR  2015 SC 3253.

[5]      AP State Road Transport Corporation Vs. Income Tax Officer: AIR 1964 SC 1486; CIT Vs. Andhra Chambers of Commerce AIR 1965SC 1281 Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association: AIR 1980 SC 387; CIT Vs. Bar Council of Maharashtra:  AIR 1981 SC 1462; Queens Educational Society Vs. CIT: AIR  2015 SC 3253.

[6]      Queens Educational Society Vs. CIT:AIR  2015 SC 3253; CIT Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 2013-92 DTR 185; The Tribune Trust Vs. CIT: 2017-291 CTR 352: 2017-390-ITR 547; Swadeshi Stores Vs. CIT, Punjab: 1944- 12-ITR 385 (Lahore) approved in:  JK Trust Vs. CIT: 1957-32-ITR 535 and  CIT Vs. Krishna Warriar: 1964-53-ITR 176.

[7]      Like tax exemptions, right to receive donation etc.

[8]      Commissioner of Income-Tax Vs. Thanthi Trust: 2001- 247-ITR 785 (SC); Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Assn: AIR 1980 SC 387

[9]      Jaiveer Singh Virk Vs. Sir Sobha Singh: LAWS(DLH) 2020-3 120; ManiuddinBepari Vs. The Chairman Municipal Commrs, Dacca: 40 CWN 17, Scotte (P) Ltd. Vs. Corporation of Calcutta: 79 CWN 883, Sasanka Sekhar Panda Vs. State of West Bengal: 90 CWN 924.

[10]    Jaiveer Singh Virk Vs. Sir Sobha Singh: LAWS(DLH) 2020-3 120.

[11] Om Prakash Mohta Vs. Steel Equipment and Construction:   1968-38 CC 82; Jaiveer Singh Virk Vs. Sir Sobha Singh: LAWS(DLH) 2020 3 120,

[12] Gajadhar Prasad Choudhary Vs. State of Bihar: AIR 1984 Pat 105; Lakshmanaswami Mudaliar Vs. LIC: AIR 1963 SC 1185; Indian Steel And Wire Products Ltd Vs. CIT: 1968-38 CC 660, 1968-69ITR 379;

[13]    Jaiveer Singh Virk Vs. Sir Sobha Singh: LAWS(DLH) 2020-3 120; BholanathKunduVs. Official Liquidator: 1987-61 CC 10. Maniuddin Bepari Vs. The Chairman Municipal Commrs, Dacca: 40 CWN 17, Scotte (P) Ltd. Vs. Corporation of Calcutta: 79 CWN 883, SasankaSekhar Panda Vs. State of West Bengal: 90 CWN 924.

[14] V.B. Rangaraj Vs. V.B. Gopalakrishnan: (1992) 1 SCC 160; Vodafone International Holdings Vs. Union of India: (2012) 6 SCC 613; World Phone India Vs. WPI Group Inc.: (2013) SCC OnLine Del 1098.

[15] Claude Lila Parulekar  Vs. Sakal Papers: AIR 2005 SC 4074: 2005-11 SCC 73; Quoted in: Tin Plate Dealers Association Vs. Satish Chandra Sanwalka: AIR 2016 SC 4705

[16] (1875) LR 7 HL 653 (DC)

[17] AIR 1963 SC 1185

[18] 1966 SCC OnLine Cal 44

[19] AIR 1963 SC 1185

[20]1914 AC 398

[21] ModiVanaspati Manufacturing Co. Vs. Katihar Jute Mills: AIR1969 Cal 496

[22] (1912) 2 Ch 183. Folloed in: Lakshmanaswami MudaliarVs. LIC: AIR 1963 SC 1185

[23]Mahaluxmi Bank Ltd Vs. Registrar of Companies WB: AIR  1961 Cal 666

[24]    Mool Chand Khairati Ram Trust Vs. Director of Income Tax: 2015-280 CTR 121: 2015-222 DLT 102: 2015-377 ITR 650: TAXMAN 2015-234 222

[25]   Commr of IT Vs. RajmitraBhailal: 1964-54 ITR 241

[26]    RP Kapur Vs. Kaushalya Educational Trust:1982-21 DLT 46; ILR  1982-1Del 801

[27]    40 ER 852

[28]    (1888) 57 LJ Ch 543

[29]    (1904) AC 515:

[30]    AIR 1931 Mad. 12. See also: Inderpal Singh Vs. Avtar Singh: 2007-4 Raj LW 3547;          Allahabad High School Society Vs. State of UP: 2010-5 ADJ 734, 2010-82 All LR 83;         P. Jayader Vs. Thiruneelakanta Nadar Chinnaneela Nadar: ILR  1966-2 Mad 92.

[31]   6th Edn.  At p. 131,

[32]    Agasthyar Trust Vs. Commr IT Madras ; 1998 AIR (SCW)3945 ;1998-5 SCC 588

[33]    CIT Vs. Thanthi Trust: 2001- 247-ITR 785 (SC)

[34]    Radhabari Tea Company Vs. Mridul Kumar Bhattacharjee: 2010-153 CC 579

[35]    Turner Morrison and Co Vs. Hungerford Investment: AIR  1972 SC 1311.

[36]    AIR 1963 SC 1185

[37]    See also: Gajadhar Prasad Choudhary Vs. State of Bihar: AIR 1984 Pat 105.

[38]    CIT Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 20 13-92 DTR 185

[39]    Quoted in: The Tribune Trust Vs. CIT: 2017-291 CTR 352: 2017-390 ITR 547.

[40]    Naresh Chandra Sanyal Vs. Calcutta Stock Exchange Assn: 1971-1 SCC 50

[41]    Section: 10, Companies Act, 2013 reads as under: 10. Effect of memorandum and articles: (1) Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on its and his part to observe all the provisions of the memorandum and of the articles.

(2) All monies payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

[42]    Claude Lila Parulekar Vs. Sakal Papers:  AIR 2005 SC 4074: 2005-11 SCC 73.

[43]    Ashbury Railway Carriage and Iron Co. Ltd. Vs. Riche:  (1875) LR 7 HL 653 (DC), Re. Birkbeck Permanent Benefit Building Society, (1912) 2 Ch 183; Folloed in: Lakshmanaswami Mudaliar Vs. LIC: AIR 1963 SC 1185. Gajadhar Prasad Choudhary Vs. State of Bihar: AIR 1984 Pat 105, Asma Alsam Vs. State of UP: 2015- 4 ADJ 607: 2015 -4 AWC 3615: 2015-111-All LR 341; Nirbhay Kapoor Vs. Kamero Technosys: 2019-8 ADJ 11: 2019-135 AllLR 606,

[44]    Thanthi Trust Vs. ITO: 91-ITR 261 (Mad); Quoted with approval in Agasthyar Trust Vs. CIT, Madras: 1998 AIR (SCW)3945 ;1998-5 SCC 588.

[45]    Dharmodayam Co. v. CIT : 1962-45-ITR 478 (Ker), Referred to in: Commissioner of Income-Tax Vs. Dharmodayam Co. 1997-141 CTR 524, 1997-225 ITR 686, 1998-99 TAXMAN 465.

[46]    Eg: a hospital, educational activities etc.

[47]    Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association: AIR 1980 SC 387; Queens Educational Society Vs. CIT:AIR  2015 SC 3253.

[48]    AP State Road Transport Corporation Vs. Income Tax Officer: AIR 1964 SC 1486; CIT Vs. Andhra Chambers of Commerce AIR 1965 SC 1281, Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association: AIR 1980 SC 387; CIT Vs. Bar Council of Maharashtra:  AIR 1981 SC 1462; Queens Educational Society Vs. CIT: AIR  2015 SC 3253.

[49] Like blood-bank, diagnostic-service, business in essential articles etc.

[50]    Chandrakant Manilal Shah Vs. CIT: AIR  1992  SC 66; CIT Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 2013-92 DTR 185, Serum Institute of India Ltd. Vs.  UOI: 2012-48 VST 99; Tarsem Kumar Garg Vs. D D A: ILR  2006-1Del  481, C J International Hotels Vs. New Delhi Municipal Council: 2003-105 DLT 545, [51] Ahmedabad Urban Development Authority Vs. Asst CIT: 2017-396- ITR 323

[52]    AIR 1965SC 1281

[53]    AIR 1980 SC 387

[54] Also see: Bengal National Chamber of Commerce Vs. CIT: 1978-111- ITR 514

[55] Dharmadeepti v. CIT

[56]    AP State Road Transport Corporation Vs. Income Tax Officer: AIR 1964 SC 1486; CIT Vs. Andhra Chambers of Commerce AIR 1965SC 1281, Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Association: AIR 1980 SC 387; CIT Vs. Bar Council of Maharashtra:  AIR 1981 SC 1462; Queens Educational Society Vs. CIT: AIR  2015 SC 3253.

[57] Addl. CIT  Vs. Surat Art Silk Cloth Manufacturers Association AIR 1980 SC 387.

[58] Director of Income Tax Vs. Bharat diamond Bourse: 2003-259-ITR 280

[59] AIR 1980 SC 387:1980-121-ITR 1

[60] AP State Road Transport Corporation Vs. Income Tax Officer: AIR 1964 SC 1486; CIT Vs. Andhra Chambers of Commerce AIR 1965 SC 1281, CIT Vs. Bar Council of Maharashtra:  AIR 1981 SC 1462. [61] Referred to in: CIT Vs. AP  State Road Transport Corporation: AIR  1986 SC 1054; Thiagarajar Charities Madurai Vs. Additional CIT: AIR  1997 SC 2541, Queens Educational Society Vs. CIT: AIR  2015 SC 3253.

[62] AIR 1980 SC 387

[63]    Chandrakant Manilal Shah Vs. CIT: AIR  1992  SC 66; CIT Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 2013-92 DTR 185, Serum Institute of India Ltd. Vs.  UOI: 2012-48 VST 99; Tarsem Kumar Garg Vs. D D A: ILR  2006-1Del  481, C J International Hotels Vs. New Delhi Municipal Council: 2003-105 DLT 545

[64]    The Tribune Trust Vs. CIT, Chandigarh: 2017-291CTR 352

[65] CIT Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 2013-92 DTR 185; The Tribune Trust Vs. CIT: 2017-291 CTR 352: 2017-390 ITR 547

[66]    Addl. CIT Vs. Surat Art Silk Cloth Manufacturers Assn: AIR 1980 SC 387

[67] CIT Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 2013-92 DTR 185;

The Tribune Trust Vs. CIT: 2017-291 CTR 352: 2017-390-ITR 547

[68] Queens Educational Society Vs. CIT:AIR  2015 SC 3253.

[69] Queens Educational Society Vs. CIT:AIR  2015 SC 3253; CIT Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 2013-92 DTR 185; The Tribune Trust Vs. CIT: 2017-291 CTR 352: 2017-390-ITR 547; Swadeshi Stores Vs. CIT, Punjab: 1944- 12 ITR 385 (Lahore) approved in:  JK Trust Vs. CIT: 1957-32 ITR 535 and  CIT Vs. Krishna Warriar: 1964-53 ITR 176.

[70]With effect from April 1, 1992.

[71] CIT Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 2013-92 DTR 185

[72] [1892] 1 Ch 154, Referred to in Bholanath Kundu Vs. Official Liquidator: 1987-61 CC 10.

[73]   AIR 1963 SC 1185

[74]   Mool Chand Khairati Vs. Director of IT: 2015-280 CTR 121; 2015-222 DLT 102

[75]   (1966) 2 QB 656

[76]   Referred to in: Gajadhar Prasad Choudhary Vs. State of Bihar: AIR 1984 Pat 105, Kumarapuram Gopal Krishnan  Vs. Burdwan Cutwa Railway Co: 1978-1 Cal LJ 6504

[77]   AIR 1969 SC 1320

[78] AIR  1976 SC 348: 1975-101 ITR 796

[79] (2015) 8 SCC 47,

[80]    AIR 1980 SC 387

[81]   AIR 1965 SC 1281:  1965-55-ITR 722

[82]   AIR 1984 Pat 105

[83]   Thanthi Trust Vs. Central Board of Direct Taxes: 1995-213-ITR 639 (Mad)

[84] AIR  2002 SC 1582

[85] 2013-255 CTR 232: 2013-81 DTR 104: ILR 2012-22 Dlh 4992: ITR 2013-357 560.

[86] 1998-121 ITR 1, See also: Raja PC Lall Choudhary Vs. CIT, Bihar: 1957-31 ITR 226 (Pat); and CIT Vs. Mehta Charitable Prajnalay Trust: ILR 2012-22 Dlh 4992: 2013-357 ITR 560.

[87] CIT  Vs. Sadhu Singh Hamdard Trust: 2013-263 CTR 61: 2013-92 DTR 185

[88]2014-362 ITR 539

[89]   2015-280 CTR 121; 2015-222 DLT 102

[90] AIR  2015 SC 3253

[91]1997-224 ITR 310

[92]2016-286 CTR 219: 2015-378ITR 593

[93]2016-383 ITR 345: 2016-240 TAXMAN 557.

[94]    Thenappa Chettiar Vs.Karuppan Chettiar: AIR 1968 SC 915 , Eninsular Locomotive Co Ltd Vs. Hlangham Reed: AIR  1937 Pat 293; Lakshmanaswami Mudaliar Vs. LIC: AIR 1963 SC 1185, In re: Bennett: 1892-1 Ch 154:  Referred to in Bholanath Kundu Vs. Official Liquidator : 1987-61 CC 10.

[95]AIR 1963 SC 1185.

[96]Edavan Kavingal Kelappan Vs. Moolakal Kunhi Raman: AIR  1957 Mad 164, Babubhai Chandulal Vs. Official Liquidator Atlas 1996-86 CC 580; 1994 -1 MadLW 445; Brahmayya and Co Vs. V S Ramaswami Aiyar: AIR 1966 Mad 247; In re: Bennett: [1892] 1 Ch 154, Referred to in Bholanath Kundu Vs. Official Liquidator: 1987-61 CC 10.

[97]1951- 21 CC 138 (Mad).

[98] ILR 18 Bom 119

[99] AIR 1966 Mad 247

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