1. The common question referred to us by the ITA Tribunal, Bangalore Bench, in these two cases under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act') is :
'Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in coming to the conclusion that the income of the assessee-company, viz., Bangalore Stock Exchange Ltd., is exempt under s. 11 of the I.T. Act, 1961 ?'
2. The assessee is Bangalore Stock Exchange Ltd. and the assessment years in question of 1970-71 and 1971-72. The assessee is a company registered under the Companies Act, 1956, and was accorded recognition under the Securities Contracts (Regulation) Act, 1956, with the effect from February 16, 1963. Its objects can be gathered from its memorandum of association. The principal objects are :
(i) facilitating the transaction of business on the stock exchange and establishing for that purpose a clearing house for the transaction of the members;
(ii) erection and maintenance of a suitable building in Bangalore for transacting there the business of the association and for other purposes as may be determined upon;
(iii) dealing in any manner with the property of the association;
(iv) to associate with other bodies having objects similar to those of the association;
(v) establishing and supporting institutions, Trusts, etc., calculated to benefit the present and past members and employees and the dependants of such persons; and
(vi) carrying on business as financiers, promotors, etc.
3. During the assessment years under consideration, the assessee claimed that its incomes during the relevant periods were not taxable under the Act by virtue of s. 11 thereof. Its case was that its objects were of general public utility not involving the carrying on of any activity for profit and the income realised by it had been applied for charitable purposes. The income of the assessee during the relevant period consisted of - (1) admission fees and membership fees, and (2) listing fees paid by companies who wanted the rates of their shares to be quoted in the circulars issued by the assessee and wished to have periodical information about the stock market. The net income derived by the assessee from these two sources was Rs. 8,410 in 1970-71 and Rs. 2,470 in 1971-72. The ITO declined to exempt the incomes of the assesses under s. 11 relying upon the decision of the Calcutta High Court in the case of CIT v. Indian Chamber of Commerce : 81ITR147(Cal) . The relevant part of his assessment order for the year 1970-71 reads :
'The only point then to consider is whether its business involves the carrying on of activity for profit. As already mentioned the bulk of its receipts comes from listing fees. The assessee charges listing fees to the companies at the rate of Rs. 300 per annum where the paid up share capital is below Rs. 10,00,000 and at the rate of Rs. 600 per annum where the paid up share capital is above Rs. 10,00,000. When a new company is listed for the first year an initial listing fee of Rs. 1,000 is levied in addition. The facilities given to the companies who list their shares with the Stock Exchange are :
(i) a ready market for transacting the business in the shares of the listed company;
(ii) render advice regarding capital structure, underwriting by members of the stock exchange, act as brokers, etc.
4. Listed companies will get once in a week the transactions on the stock exchange. No additional payment is to be made for this facility. Others who want to get the same should pay for it. The listing fee is the main source from which the assessee meets its expenses and leaves the margin. I am, therefore, convinced that the assessee is engaged in a business which cannot be said to be a business no involving the carrying on of any activity for profit. The claim of the assessee for exemption is, therefore, rejected.
2. The assessee has raised the second argument that the membership fees should be exempted. The members paid a monthly subscription of Rs. 10 each. They get the use of the premises is to be made for this facility. Thus, the assessee renders services to its members. In similar cases, the Mysore High Court had occasion to consider the assessability of membership fees. In Bangalore Turf Club Ltd., (sic), the High Court had come to the conclusion that membership fee of the members is assesseable. As the case of the assessee is similar in nature, I hold that the exemption claimed for membership fee cannot succeed.'
5. The AAC, however, allowed the appeals filed by the assessee holding that the object of the assessee did not involve the carrying on of any activity for profit. The appeals filed by the department before the Tribunal were dismissed. At the instance of the department, the above question has been referred to this court.
6. At the outset it should be mentioned that the principal objects of the assessee which are extracted above are of general public utility in view of the decision of the Supreme Court in CIT v. Andhra Chamber : 55ITR722(SC) . After examining the objects of the Andhra Chamber of Commerce, whose objects were more or less similar to the objects of the assessee, the Supreme Court observed (page 728) :
'In the promotion of trade, commerce and industries of India the Public is vitally interested and if by the activities of the assessee that object is achieved, it would be within the meaning of s. (3)(i) of the Act an advancement of an object of general public utility. In enacting the last paragraph of s. 4(3) the legislature has used language of great amplitute. 'Charitable purpose' includes not only relief of the poor, education and medical relief alone, but advancement of others objects of general public utility as well. The clause is intended to serve as a special definition of the expression 'charitable purpose' for the Act : it is again inclusive and not exhaustive or exclusive. Even if the object or purpose may not be regarded as charitable in its popular signification as not tending to give would still be included in the expression 'charitable purpose' if it advances an object of general public utility. The expression 'object of general public utility', however, is not restricted to objects beneficial to the whole of mankind. An object beneficial to a section of the public is an object of general public utility. To serve a charitable purpose, it is not necessary that the object should be to benefit the whole of mankind or even all persons living in a particular country or province. It is sufficient if the intention is to benefit a section of the public as distinguished from specified individuals.'
7. Proceeding further, the Supreme Court observed (page 736) :
'The primary purpose of the assessee is, as we have already observed, to promote and protect trade, commerce and industries, to aid, stimulate and promote the development of trade, commerce and industries and to watch over and protect the general commercial interests of India or any part thereof. It is only for the purpose of securing these primary aims that it was one of the objects mentioned in the memorandum of association that the assessee may take steps to urge or oppose legislative or other measures affecting trade, commerce or manufactures. Such an object must be regarded as purely ancillary or subsidiary and not the primary object.'
8. Having held that the objects of the Andhra Chamber of Commerce were of general public utility, the Supreme Court held that they came within the definition of 'charitable purpose' found at the end of s. 4 of the Indian I.T. Act, 1922, as according to that definition 'charitable purpose' included relief of the poor, education, medical relief and advancement of any other object of general public utility. But in the Act the definition of charitable purpose was modified by qualifying the object of general public utility by the addition of the words 'not involving the carrying on of any activity for profit'. s. (15) of the Act which defines 'charitable purpose' reads :
'2. (15) 'Charitable purpose' includes relief of the poor, education, medical relief and the advancement of any other object of general public utility not involving the carrying on of any activity for profit.'
9. The case in Indian Chamber of Commerce v, CIT : 101ITR796(SC) was decided after the Act came into force, in the light of s. 2(15). In that case, the Supreme Court held that although the objects of the Indian Chamber of Commerce were of general public utility, the income derived by it from its activities in the form of (i) arbitration fees, (ii) fees for issuing certificates of origin, and (iii) fees for weighment and measurement for the benefit of traders was the result of activities carried on for profit and hence such income was not exempt under s. 11 of the Act.
10. Even though one of the objects specified in the memorandum of association of the assessee was 'carrying on business as financiers and promoters, etc.', no activity falling under that class was carried on by it during relevant period. The contention of the department is that the said object, namely, carrying on business as financiers and promoters, etc., or similar objects mentioned in the memorandum of association would involve the assessee in carrying on an activity for profit, whether or not the assessee has, in fact, carried on any activity pursuant to such objects during the relevant period. We do not think that the submission made on behalf of the department is correct in view of the following observations made by the Supreme Court in CIT v. Dharmodayam Co. : 109ITR527(SC) :
'Nothing really turns on the respondent's articles of association or on the circumstances that art. 39 was amended in 1963 after the High Court gave its judgment on December 30, 1961. Art. 39, as it then stood, has been set out at page 480, para. 9, of the High Court's judgment, in Dharmodayam Co.'s case : 45ITR478(Ker) . The present art. 39 reads
'The profit of this company shall not be divided among the members. From the annual net profits from the working of the company, such proportion as the general meeting may deem fit may be set apart towards a reserve fund for the stability of the company and towards a reserve for bad debts and the balance of the profit may in accordance with the objects in the memorandum be spent on charity, education, industry and other purposes of public interest.'
It is disputed that the respondent-company, which was registered on January 21, 1959, under the Cochin Companies Act, has never engaged itself in any industry or in any other activity of public interest. It is notorious that the memoranda and articles of association of companies usually cover a variety of activities, only a few of which are in fact undertaken or intended to be undertaken. That obviates the necessity for applying for amendment of the articles from time to time and helps to rule out a possible challenge on the ground that the company has acted beyond its powers in undertaking a particular form of activity. The only activity in which the respondent is engaged over the years is the conduct of kuries. On this aspect of the matter, the High Court rightly observes (CIT v. Dharmodayam Co. : 94ITR113(Ker)
'There is no case that Dharmodayam Company ever started any industry : there is also no ground for saying that the object of the company was to start an industry for the purpose of making profit'.'
11. After considering the decision in Sole Trustee, Loka Shikshana TRust v. CIT : 101ITR234(SC) and the decision in Indian Chamber of Commerce v. CIT : 101ITR796(SC) , the Supreme Court proceeded to observe (page 536) :
'The facts of the instant case were not before the court in the case of Indian Chamber of Commerce : 101ITR796(SC) and it is evident from the passage extracted above that the test applied by the kerala High Court was held to be wrongs on the assumption that the case fell under the last clause of s. 2(15) of the Act of 1961, which was the only part of s. 2(15) relevant for deciding the cases of Indian Chamber of Commerce : 101ITR796(SC) . Considering further that the word 'industry' has been initialized in the passage extracted above, it is plain that the court assumed that the assessee was engaged in running an industry. We have endeavoured to point out that, on the facts of the case, it is impossible to hold that the last clause of s. 2(15) has any application and that, in the light of the activities of the respondent spread over the past several years, no importance can be attached to clause 39 of its articles of association which enables it 'to do the needful for the promotion of...... industry'. With great deference, therefore, we are unable to read the decision in the case of Indian Chamber of Commerce : 101ITR796(SC) as overruling the judgment which is under appeal before us...... we are, therefore, of the opinion, strictly limiting ourselves to the facts of the case and for the reasons mentioned above, that the income derived by the assessee from the kuries is exempt from taxation under s. 11(1)(a) of the ACt of 1961.'
12. At this stage it should be stated that the income derived by the assessee has to be utilised for the objects referred to in the memorandum. Art. 92 of the articles of association of the assessee clearly lays down that the income should not be utilised for any private benefit and that in the event of the winding up of the utilised for any private benefit and that in the event of the winding up of the assessee its surplus assets should be transferred to some other company having similar objects but not distributed amongst its members.
13. The sources of income of the assessee during the relevant years were - (1) admission fees and membership fees, and (2) listing fees. There is apparently no element of profit in the admission fees and membership fees as the members would get back any part of it except in the form of service which is of charitable nature. Similarly, listing fees received from companies who wish the prices of their shares to be quoted in the circulars of the assessee do not possess any element of profit. Some amount is collected as listing fees to meet the expenditure involved in publishing the information regarding the market prices of shares which is essential for the carrying on of the assessee's activities as a stock exchange, one of which being collection and circulation of information relating to stocks, shares and like securities. It may be that during the relevant years there is some marginal surplus of receipt over expenditure. But that by itself does not make the activity a profit-making one. By and large the activity is carried on a 'no profit' basis. In the case of Indian Chamber of Commerce : 101ITR796(SC) the Supreme Court repelled the contention of the revenue by observing (page 804) :
'The opposite position in its extreme form is equally untenable. While Shri Sharma is right that merely because service is rendered to traders escapement from tax liability does not follow, every type of service-oriented activity, where some charge is levied from the beneficiary and at the end of the year some surplus is left behind, does not lose the benefit of s. 2(15). For, then, one cannot conceive of any object of general public utility some fee will have to be levied if the chamber is not to turn bankrupt and merely because a fee is levied one cannot castings the activity as one for profit. Therefore, it is a false dilemma to talk of activity for profit as against activity rendered free. The true demarcating line lies in between.'
14. Later on, in the course of the same decision, the Supreme Court observed (page 808) :
'We may wind up with a brief rounding off and indication on the approach. A primitive condition, written or unwritten, proved by a proscription of profits or by long years of invariable practice or spelt from a strong surrounding circumstances indicative of anti-profit motivation-such a condition will qualify for 'charitable purpose' and legitimately get round the fiscal hook. Short of it, the tax tackle holds you fast. A word about the burden of proof is necessary here. Income, ordinarily chargeable, can be free from exigibility only if the assessee discharges the onus of bringing himself within s. 2(15). In so doing, he has to attract and repel attract the condition that his objects are of 'general public utility' and repel the charge that he is advancing these objects by involvement in activities for profit. Once this broad dual basis is made out, the revenue will not go into meticulous mathematics and charge every chance excess or random surplus. If the activity is prone to yielding income and in fact results in profits, the revenue will examine the reality or pretence of the condition, that the activity is not for profit. Here, one may well say : 'Suit the action to the word, the word to the action'.'
15. We may, however add, as observed by the Supreme Court in the case of Dharmodayam Co. : 109ITR527(SC) that if and when the affairs of the assessee take the shape of a profit making concern, the department will have ample powers and opportunity to deny the exemption to the assessee. The mere possibility of the happening of such an event should not deter us from now holding that the income of the assessee is not liable to tax on the basis of the existing facts. As long as the activities in which the assessee is engaged are not activities for profit and the income derived by it from them are being applied for charitable purposes, the assessee is entitled to claim the exemption under s. 11 notwithstanding the fact that its memorandum makes reference to some objects which may not be of charitable nature. Even when the assessee carries on any business which is not of charitable nature, only the income derived from that source will not get the protection of s. 11.
16. In conclusion we hold that the primary objects of the assessee are of charitable nature and the income derived from the levy of membership fees and listing fees is not from any source involving any activity for profit. The income so derived is applied for charitable purposes. The assessee was, therefore, entitled to claim relief under s. 11 read with s. 2(15) of the Act during the assessment years in question.
17. Accordingly, we answer the question in the affirmative in both the cases.