1. The question of law that has been referred for our decision in this case is :
'Whether, on the facts and in the circumstances of the case, the assessee's income is exempt under section 4 (3) (i) of the Income-tax Act ?'
2. The circumstances under which the question arises are briefly as follows : The assessee is the Cotton Textiles Export Promotion Council, which was registered as a company on the 4th October, 1954. The Government of India exempted the company from adding the word 'Limited' after it by virtue of a notification No. 29 (160)-CL/54 dated September 24, 1954, promulgated under their powers under section 26 of the Indian Companies Act.
3. The reason for the exemption is found in the objects and purposes for which the Council was established. Its principal general object, as stated in its memorandum of association, so to be promote, support, protect, maintain and increase the export of cloth and yarn, but inter alia, it was a body which undertook many other activities with the idea, as its name implies, of promoting the export of cotton textiles from this country. With that end in view, among its several objects were the objects of undertaking market studies, sending out trade missions, collecting statistics and other information regarding the manufacture or trade in cloth and yarn in various countries, propagating information useful to that trade, laying down standards of quality and packing in respect of cloth and yarn, and so on. Under the licence granted to the council under section 26 it was provided that the conditions and provisions contained in its memorandum of association shall, in all respects, govern the Council. As regards its income its income and property, it was provided in clause (2) of the licence that 'the income and property...... whensoever derived shall be applied solely towards the promotion of the objects of the association as set forth in its memorandum of association and that no portion thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus or otherwise by way of profit...', the remuneration to any of its officers or servants being excepted. It was also provided in the licence that the licence granted and the registration of the association shall cease on violation of any of the conditions thereof.
4. So far as its finances were concerned, the Council received its funds from two sources, namely, from the grants made by the Central Government and from subscriptions of its members. Its first members, as was expected, were to representatives of the Textile Export Association and the textile trade.
5. It is an important circumstance, which is not in dispute between the parties, that the grants which were made by the Central Government were given in quarterly installments and were based on the requirement in accordance with the Treasury Rules and that, at the end of the year, whatever was the unutilised balance in the hands of the Council was refunded to the Government.
6. The three years with which we are concerned are the assessment years 1956-57, 1957-58, and 1959-60. In these years the Income-tax Officer sought to bring to tax the unutilised balance in the hands of the assessee after deducting the expenditure incurred by the Council as income from 'other sources' under section 12. He held that there was no mutuality in the composition of the Council and it could not, therefore, be held that there was no mutuality in the composition of the Council and it could not, therefore, be held to be a mutual association, because the declaration and payment of dividend was prohibited and there was no standard available for judging mutuality. The Government grant and the other income from subscriptions, however, should be considered as income, as it came regularly from a definite source and as the income was not exempt under section 4 (3) (i) or (ii), as it was not a charitable organization.
7. The Appellate Assistant Commissioner upheld these assessment. The assessee had, inter alia, contended before the Appellate Assistant Commissioner that the grants were given in quarterly installments and based only upon the actual requirements of the Council during the quarter and under the provisions of the Treasury Rules, and as the unutilised cash balance remaining with the assessee at the end of the year had to be refunded to the Government, there was no income as such left with the assessee which was taxable. But the Appellate Assistant Commissioner held that the assessee being a company the grant which was being received was in the nature of a revenue receipt in its hands and that justified treating the surplus in the hands of the Council as the income of the assessee from 'other sources'.
8. When the matter went before the Tribunal, the Tribunal reversed the decision of the tax authorities on the short ground that the Council was not an association for profit and the income of the assessee was thus entitled to exemption under section 4 (3) (i) of the Act. The Tribunal held : 'Examining even the several objects of the company, there is no doubt in our minds that they are of general public utility and relate to things done within the taxable territories. This is an association not for profit. All that the Government does is to recoup the actual deficit and whatever is unexpended at the end of the year has to be paid over to the Government in accordance with the Treasury Rules. Promoting trade, commerce and industry is certainly an object of general public utility within the meaning of section 4 (3) (i) of the Act and the assessee was under a legal obligation both under the Companies Act as well as its memorandum of association and the licence issued by the Government to spend or accumulate its income for a public charitable purpose or objects of general public utility, which obligation the court could and would enforce when called upon to do so. Therefore, we hod that the assessee is entitled to the exemption under section 4 (3) (i) of the Income-tax Act'. Having so held, the Tribunal felt that it was unnecessary for it to consider and deal with the other contentions raised before it. It is upon these finding that the question referred arises before us.
9. Now we may, to begin with, way that before us one of the questions, which has been raised as an alternative submission in addition to the submissions upon which the assessee succeeded before the Tribunal, has been that the amounts received by the Council from the grants and the subscription would not partake the nature of the income, profits and gains at all and is not liable to tax for that reason. We have already shown that that question was raised and dealt with by the Appellate Assistant Commissioner. It was a matter of some controversy whether it was raised before the Appellate Tribunal. Mr. Mehta on behalf of the assessee submitted that it has been raised and pointed to ground No. 4 in the memorandum of appeal and Mr. Joshi on behalf of the Commissioner pointed out that there was no discussion on the question at all before the Tribunal to which Mr. Mehta replied by saying that the Tribunal has expressly stated that it was not considering the other questions which had arisen before it because of the view that it took, that the income was exempt under section 4 (3) (i) of the Act. We would have considered this question ourselves but after hearing counsel for both the sides we are satisfied that, assuming that the receipts of the grants and the subscriptions by the assessee were income, it would be exempt under the provisions of section 4 (3) (i) of the Act and that the conclusion which the Tribunal came to was a correct conclusion. Therefore, we need not consider the question whether the receipts were income in the first instance and whether they were liable to tax at all. We will assume that the amounts received by the assessee are income in the hands of the assessee.
10. The exemption granted by the Act under section 4 (3) (i) is in the following terms :
(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 wholly for religious or charitable purposes, 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, the income applied or finally set apart for application thereto.'
There is an explanatory clause at the end of the section in expression 'charitable purpose' several matters. The clause runs as follows :
'In this sub-section 'charitable purpose' includes relief 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 provisions of this Act that part of the income from property held under a trust or other legal obligation for private religious purposes which does not enure for the benefit of the public.'
11. The first question that arises for consideration having regard to the provisions of the sub-section is whether the income of the Council is 'income derived from property held under trust... wholly for religious or charitable purposes'. We have already referred to the objects for which the company was established and it has been found that its principal object was the promotion of trade, commerce and industry and all its other objects mentioned in clause (a) to (m) of article 3 (1) of its memorandum of association were clauses which subserve the primary object which was to promote, from this country. If that be so, it seems to us that the object would without any doubt be an object of general public utility and intended to benefit the public as a whole in the country. The question moreover, it seems to us, is now placed beyond controversy by the decision of the Supreme Court in Commissioner of Income-tax v. Andhra Chamber of Commerce. Under almost identical provisions, the Andhra Chamber of Commerce was constituted and when a similar attempt to tax that Chamber was made, one of the questions which arose was whether the objects and purposes of the Andhra Chamber of Commerce showed that it was for general public utility. The Supreme Court pointed out that the expression 'object of general public utility' was not restricted to objects beneficial to the whole of mankind and object would be to benefit the whole of mankind or even all person living in a particular country or province. It was also held in that case that the advancement or promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the entire community and would amount to an object of general public utility as here. The view, therefore, taken by the Madras High Court in its judgment Andhra Chamber of Commerce v. Commissioner of Income-tax, Madras was confirmed by the Supreme Court. Some reference was made in the arguments before the Supreme Court to the definition of charity in the decision of the Privy Council in Pemsel v. Commissioners for Special Purposes of the Income-tax. But so far as that definition was concerned, the Supreme Court ruled it out. They said (at page 734) :
'The Indian legislature has evolved a definition of the expression 'charitable purpose' which departs in its material clause from the definition judicially supplied in Pemsel's case and decisions of English courts, which proceed upon the interpretation of language different from the Indian statute, have little value'.
12. The supreme Court also pointed out that the legislature had used language of great amplitude in defining 'charitable purpose' in the Indian Income-tax Act and the definition was inclusive and not exhaustive or exclusive. We hold, therefore, that the Tribunal was right in holding that the property held by the assessee-company was for an object or general public utility, and was wholly for charitable purposes.
13. The further question that has been raised upon the words used in sub-section (3) of section 4 'any income derived from property held under trust'. It is contended on behalf of the Commissioner that it is not the requirement of the sub-section that the income of the assessee should be held under trust but that the income should be derived from 'property which is held under trust', and that in the present case all that the company receives in the shape of property is the income which it receives from the grants made by the Central Government and a comparatively small amount from the subscriptions from its members. There is no 'property' as such held in trust.
14. A glance at the assessment orders for the assessment years in question shows that the grant received from the Government constituted the bulk of the income of the assessee and that the subscription formed an infinitesimal part of income. There is no other income or property giving rise to income. In any case, what is contended is that its income is not derived from property held under trust but it is either derived directly from the Government or from its own members and it can, therefore, under no circumstances attract the application of sub-section (3) (i) of section 4.
15. The provision of section 4 (3) (i) confer an exemption of income from property only 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 in respect of any property, but only the income derived from any particular property or source is itself held in trust as where it is set apart or charged for a charitable purpose. That is clear upon the term of the section itself and upon the authorities. (See Raja P. C. Lall Chaudhary v. Commissioner of Income-tax and Mahomed Kassim Rowther v. Commissioner of Income-tax.) To this contention the reply on behalf of the assessee has been that the business which the company carries on is itself its property and therefore, if that business be for a charitable purpose as defined in the Act whatever income or receipts it derives from that business, would be the income derived from property held under trust or other legal obligation. The contention is that in the present case the property which is held under trust and from which the income is derived is the business of the company itself and, therefore, it is not correct to contend that this company only receives an income directly from the Government or its members by way of subscriptions.
16. This point has also been urged in answer to the other contention raised in the case that, whatever may be said of the income received from Government by way of grant, the subscription which this company receives from its members was not income for a charitable purposes. In this respect, reference was made on behalf of the department to two decision in Commissioner of Income-tax v. Bar Council, Madras and Bar Council, Patna High Court v. Commissioner of Income-tax. Both these cases were cases concerning the income of the Bar Councils of Madras and Patna, respectively, and in both of them the same view was taken that the income received by the Bar Council by way of fees paid by the advocates for enrolling themselves to practice in the High Court or registration fee for apprentices of law is not income derives from property held under trust or other legal obligation and is not, therefore exempt from tax under section 4 (3) (i) of the Income-tax Act. Even accepting the principles laid down in these authorities, we may point out that the position here is different. In this case there has been advanced the contention that the property held under trust in the present case from which the income of this company is being derived or received is in the shape of grants and subscriptions from members which cannot possible have been received by the company except from its business. Therefore, the entire income of this company must be held to be income derived from its business which is its property. If this contention is correct, then it is further submitted that there can be also no doubt upon the terms of its memorandum of association and its purposes and objects that this company was holding the business in trust for charitable purposes.
17. The question directly arose for consideration in a case from this court in J. K. Trust, Bombay v. Commissioner of Income-tax in appeal against the decision of this court in J. K. Trust, Bombay v. Commissioner of Income-tax. In that case three brothers, whom we shall refer to as the Singhania brothers, were carrying on business under the name of 'Juggilal Kamlapat'. On 15th June, 1945, they executed a deed of trust whereby they settled a sum of Rs. 1 lakh on various charities specified in the trust deed and called it the J. K. Trust, Bombay. They appointed themselves and two other persons as its trustees. The trust deed, inter alia, provided that '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 the managing agency or selling agency of any company in such name or the managing agency or selling agency of any company in such name or names as they in their absolute discretion may think fit and proper and may close and re-start such business and utilise the profits for all or any of the objects aforesaid'. Extensive powers were given to the trustees for conducting the business including powers to raise or borrow money. The three brother, who had declared the trust, acquired a controlling interest in a company called Raymond Woollen Mills and soon after the managing agents of the company, Messrs. E. D. Sassoon & Co, Ltd., resigned and the company appointed the J. K. Trust as the managing agents of the company, which the trust accepted pursuant to the power given under the trust deed to take up and conduct the managing agencies. Thus, the trustees of the J. K. Trust took up the managing agency of Messrs. Raymand Woollen Mills for a period of twenty years and they were to get remuneration of 10% of the net annual profits of the company subject to a minimum of Rs. 50,000 and other benefits. The question was whether these amounts of commission earned by the trustees as managing agents for managing the Raymond Woollen Mills were earned by them as managing agents for services rendered or was income from property held under trust, which was exempt under the provision of section 4 (3) (i) of the Income-tam Act.
18. The Supreme Court pointed out (see J. K. Trust, Bombay v. Commissioner of Income-tax at page 541) that the managing agency was a business and the business itself was the property of the trust. It was argued before the Supreme Court that the only property of the trust was the sum of Rs. 1 lakh given to them by the Singhania brothers and that had never been utilised. The Supreme Court did not accept this contention and pointed out that the J. K. Trust had given a guarantee of Rs. 1 lakh with the aid of that amount and they held that, when trustees carry on business with the aid of trust funds, the position in law is the same as if they actually employed it in the business, though, in fact, it be not actually invested therein. They held that the word 'property' in section 4 (3) (i) of the Act is of sufficient amplitude to comprehend 'business'. In that connection the Supreme Court cited with approval the decision of the Privy Council in All India Spinners' Association v. Commissioner of Income-tax, where an unregistered association collected subscription and donations and commenced business. The Privy Council held that 'the property consisted of the organisation and the undertaking as well as in the fluctuating stocks of yarn and cloth' and that the exemption in section 4 (3) (i) applied.
19. There was also a dispute in the J. K. Trust case as to whether the exemption in respect of the income of the trustees was to be determined under section 4 (3) (i) or section 4(3)(i)(a). The High Court did not decide this dispute because it had held that the business could not be property. Upon the view which the Supreme Court Took, they remanded the matter for further consideration of the latter question. In coming to their conclusions the Supreme Court held that the word 'property' is a term of the widest import and subject to any limitation or qualification which the context might require, it signifies every possible interest which a person can acquire, hold and enjoy. 'Business' they held would undoubtedly be property in the connotation in which it is used in section 4 (3) (i). In the light of this pronouncement of the Supreme Court it clear that 'business' itself can be property within the meaning of section 4 (3) (i) and upon that principle the business of the assessee in the present case would be 'property' held by the assessee.
20. Mr. Joshi sought to distinguish this decision by urging that in that case it was found that the managing agency which the trust had acquired was itself the trust property, whereas in the present case, the business as such of the company has never been declared to be a trust, whether one considers the memorandum of association of the assessee or the term of the licence granted by the Government of India. He, therefore, urged that the principle of the decision in J. K. Trust, Bombay v. Commissioner of Income-tax would not apply to the present case. We are unable to see on what principle such a distinction is being made. Even in the J. K. Trust case the only property which was, upon the terms of the trust deed, in that case set apart originally reached in that case, since the managing agency was acquire with the aid of the trust property, it would partake of the nature of the trust property. The property held under trust was in that case Rs. 1 lakh in respect of which the trust was declare and by term of that very trust deed they company. In the present case, as in the All India Spinners' Association case, the Council got donation from the Government and subscriptions from its members and commenced its business. That business further gave rise to income. There can, therefore, be no distinction drawn between the business and the income. The latter was derived from the former. It cannot be accepted, therefore, that there is any distinction between the facts of that case and the present case. We have already shown that the entire business in this case or the organisation of the assessee was commenced with the object of promoting the export trade of the country. That object, we have already held, would fall within the words 'charitable purposes' as defined in the Act. The income which the company received from the two admitted sources, namely, grants from Government and subscription from its members, was income which it could not have received but for its business or organisation and it would be, therefore, income derived from such business or organisation which we have shown can be held to be the property of the company.
21. Another small point may disposed of. The point is based upon the income derived from the property held under trust.' In the decision of the Division Bench of this court in the J. K. Trust case, at page 151, Chief Justice Chagla, referring to the expression 'derived', placed upon it the interpretation given to the word by the Privy Council in Commissioner of Income-tax v. Kamakshya Narayan Singh as meaning 'effective source from which the income arises'. The Division Bench there held : 'It is not sufficient that the property is indirectly responsible for the income. The income must directly and substantially arise from the property held under trust...' We have already referred to the facts of the case and even assuming that the word 'derived' means 'directly and substantially arises', we cannot see how, upon the circumstances here, the entire income of the assessee cannot be said to be directly and substantially arising from the property held under trust. We have already held that the property held under trust was the business or organisation itself and whether we consider either of the two sources of income of theirs company, namely, the grant or the subscription from its members, both arose directly and substantially from that business or organisation. If the organisation has not existed, the grants would not have been paid to the company nor would the subscriptions have been received by the company. Therefore, even upon the construction put upon the word 'derived' the income would be derived from the business or organisation which we held was the property held under trust in this case.
22. Under the circumstances, therefore, we think that view taken by the Tribunal was the correct view and the income of the assessee would be exempt under the provisions of section 4 (3) (i) of the Act. We answer the question referred in the affirmative. The Commissioner shall pay the costs of the assessee.
23. Question answered in the affirmative.