S. RANGANATHAN J. - These four references have been made by the Income-tax Appellate Tribunal at the request of the Delhi Stock Exchange Association Ltd. (hereinafter referred to as 'the assessed'). They relate to the assessment years 1966-67 to 1969-70. The previous years relevant for these assessment years were the financial years which ended on March 31, 1966, March 31, 1967, March 31, 1968, respectively.
The questions which have been referred for decision of this court are : ITR 111 to 113/72 :
'Whether, on the facts and in the circumstances of the case, the income of M/s. Delhi Stock Exchange Association Ltd., for the accounting periods relevant to the assessment years 1966-67, 1967-68 and 1968-69 can be said to be income derived from property held under trust for charitable purposes ?'
'Whether, on the facts and in the circumstances of the case, the income of the Delhi Stock Exchange Association Ltd., for the assessment year 1969-70 can be said to be income derived from property held under trust for charitable purposes ?'
The assessed is a company limited by shares and was incorporated some time in 1947. This company was formed with a view to acquire and to take over, as going concerns, the activities, functions and business of the Delhi Stock and Shares Exchange Ltd., and the Delhi Stock and Share Brokers Association Ltd. The objects for which the company was established are sets out in para. 3 of its memorandum of association. It is object was generally that of conducting a stock exchange and thus to promote and regulate the business in stocks, shares, debentures and other securities, to frame rules and bye-laws for regulating the conditions subject to which business on the stock exchange could be transacted and the like. It is necessary to refer only to cl. 16 of para. 3 of the memorandum which ran :
'To establish and support or aid in the establishment and support of any funds, trusts and conveniences calculated to benefit shareholders or employees or ex-employees of the company (or members of the exchange) or the dependents or connections of any such persons and to grant pensions and allowances and to make payments towards insurance and to subscribe or guarantee money for charitable or benevolent objects or any public, general or useful objects.'
The assessed-company derived income by way of membership fees, rent from property and interest on securities and was assessed thereon for the assessment year 1966-67. However, for the three subsequent years the assessed claimed exemption under s. 11 of the I.T. Act, 1961, on the ground that its income was derived from property held under trust or legal obligation for religious or charitable purposes. The ITO rejected the claim of the assessed for exemption.
The assessed, thereafter, appealed to the AAC who, following the decision of the Supreme Court in the case of CIT v. Andhra Chamber of Commerce : 55ITR722(SC) and the decision of the Andhra Pradesh High Court in Hyderabad Stock Exchange Ltd. v. CIT : 66ITR195(AP) , accepted the claim. Applying terms of s. 11, the AAC directed the exemption of the entire income of the assessed for the assessment years 1966-67 and 1968-69 while, for the assessment year 1967-68, he came to the conclusion that only a part of the income was entitled to the exemption under the above section. For the assessment year 1969-70, however, the AAC dismissed the assesseds appeal for the reasons that will be presently stated.
For the assessment years 1966-67 to 1968-69, the department preferred an appeal to the Tribunal. It was argued for the department that the running of a stock exchange was different from the running of a Chamber of Commerce and that the ratio of the decision of the Supreme Court in the case of Andhra Chamber of Commerce : 55ITR722(SC) would not be applicable to the present case. It was pointed out that the assessed had, in earlier years, based its claim for exemption only on the ground of mutuality but that the said claim stood rejected by the decision of the Supreme Court in Delhi Stock Exchange Association Ltd. v. CIT : 41ITR495(SC) . It was argued that a business undertaking clearly implied an activity for profit and that the running of a stock exchange which involved an activity for profit could not be said to be an object of general public utility. Above all, it was pointed out on behalf of the department that the memorandum and articles of association of the assesee contained no prohibition against the declaration of dividends to its shareholders and that, in fact also, brief cases worth Rs. 4,269 were distributed to several members in the accounting period relevant to the assessment year 1967-68.
The Tribunal held that the running of a stock exchange was an object of general public utility and that its objects did not cease to be charitable because some surplus was realised by the stock exchange by reason of its receipts from its members or because it derived income from property. The Tribunal, however, came to the conclusion that the income of the assesee could not be said to have been derived from property held under trust wholly for religious or charitable purpose. The reason given by the Tribunal for coming to this conclusion was as follow :
'On a perusal of the memorandum and articles of association, we do not find any prohibition against distribution of dividends to the shareholders. The Appellate Assistant Commissioner of Income-tax was clearly wrong in his assumption that n dividend could be distributed by the assessed and that the surplus, if any, realised by the assessed could be used only for the purposes set out in the memorandum of association, Like any other company, thereforee, the assessed could distribute the surplus among its shareholders and it was, thereforee, not possible to say that the income of the assessed was derived from property held under trust only for charitable purpose. It may be pointed out that while the Supreme Court decided the assesseds claim on the basis of the principle of mutuality in : 41ITR495(SC) (Delhi Stock Exchange Association Ltd. v. CIT), the Supreme Court, inter alia, considered the memorandum and articles of association and it found that the income, if any, which accrued from the activities of the assessed was distributable among the shareholders like any joint stock company. Moreover, clause 16 of the memorandum of association empowered the assessed to establish and support funds, trusts and conveniences calculated to benefit shareholders or employees or ex-employees or their dependents. The surplus of the assessed, thereforee, cannot be said to be income derived from the property held under trust for charitable purposes. The aim and object of the trust had to be determined by reference to the manner in which the surplus derived from the activity could be disposed of and the absence of any prohibition for dividend to the shareholders and specific provision for creating funds for benefit of shareholders, employees and their relations clearly showed that the surplus of the activity carried on by the assessed was definitely for the benefit of the shareholders, employees and their relations clearly showed that the surplus of the activity carried on by the assessed was definitely for the benefit of the shareholders, employees and their relations and could not by any manner or means be treated as held for charitable purpose.... The properties were held and the activities were carried on but there was clear absence of a trust or a legal obligation to apply the income from the property or the activity for charitable purpose. The mere fact that no dividends were declared or that the assessed did carry on the object of general public utility did not in any manner establish the trust for using the income for the charitable purpose. The income could be use for distribution as dividends or for creating funds for the benefit of shareholders, employees and their dependents.'
For the assessment year 1969-70, the AAC dismissed the assesseds appeal, following the decision of the Tribunal for the earlier three assessment years. The assessed preferred an appeal to the Tribunal. Before the Tribunal a reference was made by the counsel for the assessed to some correspondence between the assessed and the Ministry of Finance of the Govt. of India. He also relied on a letter dated August 28, 1963, addressed by one Shri S. S. Sharma to the President of the assessed-exchange. This letter was to the effect that the Government was averse to presents of the value of Rs. 200 being given to the members of the assessed, that such presents amounted to distribution of dividends in specie and that, thereforee, the matter had rightly been referred by the assessed to its legal advisers and auditors for further advice. It was sought to be contended that, as the Government had the right to impose conditions for the recognition of a stock exchange under s. 4 of the Securities (Contracts) Regulation Act, 1956, so as to bring the rules and bye-laws of the stock exchange in conformity with the said Act, this letter should be construed as a direction to the assessed not to distribute any dividends or presents to the members.
The Tribunal, however, held that there was no reason to differ from the earlier conclusion of the Tribunal for the assessment years 1966-67 and 1968-69. It was unable to construe the letter dated August 28, 1963, as containing any direction to the assessed. On the other hand, it was seen that as late as march 1, 1973, the assessed had received another letter from the Government repeating the suggestion that the assessed should avoid distribution in the form of presents. It was only at the extraordinary general meeting held in December, 1973, that it was decided to amend the articles of association of the company. Clause (xiv) of art. 103 was amended to prohibit the distribution of profits as interest or dividends in cash or to members so long as the Central Govt. prohibited such distribution. In these circumstances, the Tribunal found that the decision should be the same as in the earlier three assessment years and so rejected the assesseds appeal.
It is in these circumstances that these reference have come up before us for our opinion on the questions set out earlier as to the eligibility of the assessed to exemption under s. 11 of the I.T. Act.
Section 11 of the I.T. Act, 1961, to the extent relevant for our present purposes and as it stood at the relevant time, conferred exemption in respect of the following class of income :
'Income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and, where any such income is accumulated for application to such purposes in India, to the extent to which the income so accumulated is not in excess of 25% of the income from the property or Rs. 10,000, whichever is higher.'
The assessed will be eligible for this exemption only if the income derived by it can be said to be derived from property held under trust wholly for religious or charitable purpose, bearing in mind that the expression 'trust' will include also any legal obligation - vide Expln. 1 to s. 13(b). It is also well settled that the word 'property' used in this section is a word of very wide import and also includes a business undertaking - See also s. 11(4). The question, thereforee, is whether it can be said that the assessed was under any legal obligation to utilise or apply the income only for religious or charitable purposes. We will assume, for the purposes of this case, that all the objects of he assessed-company were charitable as held by the Tribunal. Even so, unfortunately, though the company has been formed to carry on certain activities and to fulfilll certain purposes which can be described as charitable purposes, the claim for exemption has to fail for the reason pointed out by the Tribunal that there is no trust or legal obligation compelling the assessed to utilise its income only for such purposes. The assessed is a company limited by shares and like any other such company is at liberty to distribute its entire profits or income by way of dividends. Learned counsel tried to make a point that the articles of association of the company did not contain any reference to dividends. But this does not help the assessed. On matters of which the articles of association of the assessed-company are silent, the provisions of Table A of the Companies Act would apply, there being nothing in the companys articles to exclude or modify them in this respect (See s. 28 of the Companies Act, 1956). Moreover, as pointed out by the Tribunal, it has been held by the Supreme Court in the assesseds case itself that there was nothing to prohibit the assessed-company from distributing its profits by way of dividends to the shareholders and this was the round on which its claim based on which its claim based on mutuality was rejected. Till December, 1973, when art. 103(xiv) was amended, it read as follows :
'To set aside out of the profits of the assessed such sums as they think proper as a reserve fund to meet contingencies or for repairing, improving and maintaining any of the property of the association and for such other purposes as the board shall in their absolute discretion think conducive to the interests of the association and to invest the several sums so set aside upon which investments as they way think fit and from time to time deal with and vary such investments and dispose of all or part thereof for other benefit of the association or the members or any particular class or classes of the shareholders and to divide the reserve fund into such special funds as they think fit with full power to employ the assets constituting the reserve fund in the business of the association and without being bound to keep the same separate from the other assets.'
Clause (xvii) of art. 103 enabled the company :
'To set aside such portion of the profits of the association to form a fund to provide for such pensions, gratuities, scholarships, aids or compensations or create any provident or benefit fund in such manner as the board may think fit but in conformity with law.'
Reference has already been made to cl. 16 of para. 3 of the memorandum of the company. These provisions are very widely wored and, considering these also in the light of the important fact that the company is at complete liberty to distribute its profits by way of dividends, we have no doubt in our minds that the company was at complete liberty to deal with its profits in any manner it liked. It was not under any compulsion in law to hold the profits or to utilise them wholly or even in part only for religious or charitable purposes. It would have been perfectly legitimate for the company to have distributed its entire profits among its members and to have set apart of utilised no part of it for charitable purposes. The mere fact that the company did not in fact distribute any dividends will not be of any help to the assessed as the requirement for the purposes of the exemption is, not the factual position, but whether in law the company is under any obligation to devote its profits only to religious or charitable purposes. That test unfortunately fails in the present case.
In the above context, it may be pointed out that the Hyderabad Stock Exchange Association (See : 66ITR195(AP) ) was a company registered as a charitable company under the Companies Act and hence prohibited from distributing dividends. The Madras Stock Exchange (See : 105ITR546(Mad) ) was a company limited by guarantee. The observations of the court at page 565-6 indicate that where there is no prohibition against distribution of dividends, the exemption under s. 11 would not be available and the court proceeded to discuss the question regarding the assessability of income from some of the activities only on the 'hypothesis of there being scope for exemption under s. 11(1)(b)'. We are, thereforee, of the view that the present assessed being at complete liberty to distribute its profits by way of dividend and in other way referred to above to the members and others it cannot qualify for exemption under s. 11.
We also agree with the Tribunal that the letter of the Ministry of Finance relied upon before the Tribunal by the counsel for the assesee does not help to improves the assesseds case. That letter is merely advisory in nature. Even there, it is not an advice to the effect that the company was in law under a disability in regard to distributing dividends. The letter only points out that, having regard to the nature of the assessed and its activities, it should avoid making such distributions. That letter contained nothing more than a mere suggestion for implementation. that it had no compulsive or legal overtones is clearly seen from the fact that even after the receipt of the letter, in the financial year 1966-67, the company distributed suit-cases to its shareholders. These might have been of nominal value but, having regard to the fact that the profits of the company were also nominal, the distribution was in the nature of a distribution of dividends in specie. It also appears that, perhaps, despite the letter, the assessed continued this practice, for, we find that in 1973 the Government of India had again to request the assessed not to indulge in this practice. Moreover, counsel for the assessed has not been able to make out that under the Securities (Contracts) Regulation Act, 1956, the Govt. of India could have imposed on the assessed any condition of this type. On the contrary, if the Government had been able to impose the restriction by way of a condition, it would have perhaps done so under threat of withdrawal of recognition granted to the assessed under the said Act, and would not have been merely writing recommendatory or persuasive letters pleading with the assessed to discontinue the practice.
We are, thereforee, of opinion that the Tribunal was clearly right in coming to the conclusion that the assessed was not eligible for the exemption. The questions referred are answered in the negative and against the assessed. The Commissioner will be entitled to one set of costs. Counsels fee, Rs. 300.