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Commissioner of Income-tax, Kerala Vs. India Pepper and Spice Trade Association. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberIncome-tax Reference Nos. 1 to 3 of 1975
Reported in[1978]111ITR206(Ker)
AppellantCommissioner of Income-tax, Kerala
RespondentIndia Pepper and Spice Trade Association.
Cases ReferredIndian Chamber of Commerce v. Commissioner of Income
Excerpt:
.....paid to the association by the seller as well as by the purchaser on all contracts. cochin chamber of commerce and industry [1973]87itr83(ker) .what has been stated in these two decisions can briefly be summarised in this manner :the words occurring in section 2(15) of the act 'not involving the carrying on of any activity for profit' only qualified 'any other object of general public utility' and not 'relief of the poor, education and medical relief'.it was further held, and that is the more important aspect as far as these references are concerned, in commissioner of income-tax v. even the extent of the alleged income is not clearly known......thus, the kerala high court has pointed out in the case of commissioner of income-tax v. indian chamber of commerce [1971] 80 itr 645 that, in order to be disentitled from exemption, the object must involve the carrying on of any activity for profit. the object must imply the carrying on of such activity. it is not sufficient if there is some activity carried on which results in profit. there must be an activity in the form of business because the activity must be for profit and that activity for profit must be involved in the objects of general public utility. even when an activity is in furtherance of the objects of a trust and even if such activity results in profits, the definition will not be attracted unless the objects involve such activity. the same ruling will apply to the.....
Judgment:

GOVINDAN NAIR C.J. - These references relate to the assessment of M/s. India Pepper & Spice Trade Association for the assessment years 1969-70, 1970-71 and 1971-72. The appeals before the Tribunal relating to the assessment for the above years were disposed of by a common order and it was found by the Tribunal that the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961, for short 'the Act', in regard to certain disputed items of income. The view of the Tribunal was contended by the department to be erroneous in law and applications were made before the Tribunal for a reference to this court and the Tribunal has stated a case and referred the following questions :

'1. Whether, on the facts and in the circumstances of the case the Appellate Tribunal was justified in law in holding that the income of the assessee is exempt under section 11 of the Income-tax Act, 1961

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in holding that the provisions of section 28(iii) are not applicable to the facts of the case ?'

The order of the Tribunal is annexure 'D' and paragraphs 6, 7 and 8 have dealt with the particular aspects which arose for consideration regarding the exemption claimed under section 11 of the Act. We shall extract those paragraphs :

'6. Now it is necessary to see whether these objects satisfy the definition given in the Income-tax Act in section 2(15). Where an object is a matter of general public utility, the object should not involve the carrying on of an activity for profit. We are of opinion that none of the objects involve per se any activity for profit. Certain activities carried on in furtherance of the objects of the association had resulted in an excess of income over expenditure but that does not mean that the object itself involves the carrying on of an activity for profit. Thus, the Kerala High Court has pointed out in the case of Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645 that, in order to be disentitled from exemption, the object must involve the carrying on of any activity for profit. The object must imply the carrying on of such activity. It is not sufficient if there is some activity carried on which results in profit. There must be an activity in the form of business because the activity must be for profit and that activity for profit must be involved in the objects of general public utility. Even when an activity is in furtherance of the objects of a trust and even if such activity results in profits, the definition will not be attracted unless the objects involve such activity. The same ruling will apply to the assessee here. We, therefore, have to hold that the Appellate Assistant Commissioner was correct in his conclusion that the assessee is entitled to be considered as a charitable institution.

7. We will now consider the items which have led to the excess of income over expenditure. The first to be considered is the subscription which is payable by the members. The second item to be considered is laga which is collected under bye-law 207. As per this bye-law, a contribution at the rate of 50 paise per unit of 25 quintals of pepper shall be paid to the Association by the seller as well as by the purchaser on all contracts. Now, this laga is being levied to enable the Association to carry on its activities. This is not in the objects and it does not involve an activity for profit. The next item which has resulted in some income is interest from banks. This interest has arisen out of the time and call deposit in banks. Now, the rules of the Association require that the members deposit with them certain amount of the contract which they have entered for purchase or sale of pepper. These amounts, instead of being allowed to be idle, are deposited with the bank for short durations. It has resulted in interest. This is merely incidental to holding the funds.

8. The next item is rent from building owned by the Association. Another item is contributions from the brokers for licensing them. Some amounts are also received on sale of forms. These do not involve any activity for profits and on facts we do not find anything to disentitle the Association from exemption.'

It is clear from what is stated in paragraph 6 of the order of the Tribunal that the Tribunal was very largely influenced by the decision of this court in Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645. The view expressed by this court in the above decision has been reiterated by this court in Commissioner of Income-tax v. Cochin Chamber of Commerce and Industry : [1973]87ITR83(Ker) . What has been stated in these two decisions can briefly be summarised in this manner : The words occurring in section 2(15) of the Act 'not involving the carrying on of any activity for profit' only qualified 'any other object of general public utility' and not 'relief of the poor, education and medical relief'. It was further held, and that is the more important aspect as far as these references are concerned, in Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645 that :

'In order to take an object of general public utility outside the scope of the definition in section 2(15) of the Income-tax Act, 1961, on the ground that it involves the carrying on of an activity for profit, that object must involve the carrying on of any activity for profit. `Involve' means comprise or imply and the object must, therefore, imply the carrying on of any activity for profit. It is not sufficient, if there is some activity carried on which results in profit. There must be an activity in the form of business because the activity must be for profit and that activity for profit must be involved in the objects of general public utility.'

This interpretation of section 2(15) has not been adhered to by this court in a later Full Bench decision in Dharmaposhana Company v. Commissioner of Income-tax : [1975]100ITR351(Ker) . The view taken therein was that the word 'involve' in the context must be understood as meaning 'connect' or 'link'. It was, therefore, ruled that if the word is so understood :

'The last part of section 2(15) would mean that when the advancement of an object of general public utility is linked or connected with an activity for profits, that object would cease to be a `charitable purpose'. This is how the latter part of the section must be interpreted.'

There was, however, no specific overruling of the earlier Division Bench rulings by the Full Bench. This decision of the Full Bench was rendered on the 12th of June, 1974, and a few months later, dealing with an appeal from the decision of the Calcutta High Court in Commissioner of Income-tax v. Indian Chamber of Commerce : [1971]81ITR147(Cal) , the Supreme Court in the decision in Indian Chamber of Commerce v. Commissioner of Income-tax : [1975]101ITR796(SC) , Mr. Justice V. R. Krishna lyer, speaking for the court, emphatically overruled the dicta of this court in Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645 and in Commissioner of Income-tax v. Cochin Chamber of Commerce and Industry : [1973]87ITR83(Ker) . The matter has now been settled beyond controversy as far as this court is concerned and it is clear that if the advancement of an object of general public utility is connected or linked with an activity for profit, then, the particular charity must be outside the definition of section 2(15) and the profits arising out of that charity will not, therefore, be exempt from tax. The Supreme Court has dealt with various aspects in detail in the judgment of the Supreme Court in Indian Chamber of Commerce v. Commissioner of Income-tax : [1975]101ITR796(SC) and there is discussion in the judgment as to when it can be said that there is an activity for profit. The approach to be made in such circumstances has also been indicated in the judgment.

We have already pointed out that the Tribunal has been influenced to a very large extent by the observations of this court in Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645 if not entirely guided by that decision, which is evident from what is stated in paragraph 6 of the order of the Tribunal. It appears to us that the finding at the end of paragraph 8 that 'These do not involve any activity for profit and on the facts we do not find anything to disentitle the association from exemption' is a direct corollary to the observations in paragraph 6 of the order. Whether, in the circumstances of the case, there was any activity at all and if there was any activity, there was any activity for profit are matters which are to be considered by the Tribunal and a finding entered in the light of the observations of the Supreme Court in Indian Chamber of Chamber of Commerce v. Commissioner of Income-tax : [1975]101ITR796(SC) , because without such a finding being entered, it is not possible for this court to answer the first question referred to this court. What is stated in paragraph 7 gives an indication of the items comprising the so-called income which was sought to be exempted by the assessee. One of these relates to interest on amounts left with association by its members which is credited in the accounts of the association and another relates to rent, apparently of buildings owned by the association and covered by the trust. It is contended by the assessee's counsel that these items of receipts cannot be said to be profits arising from an activity for profit. The other items referred to in paragraphs 7 and 8 are contributions by brokers for licensing them and amounts received on sale of forms. In regard to these also it is contended by counsel that these are very small items and the association was not carrying on any activity for profit in receiving contributions for issuing licences and in selling forms and counsel relied on certain observations of the Supreme Court in Indian Chamber of Commerce v. Commissioner of Income-tax : [1975]101ITR796(SC) in support of the contention that these sums do not constitute profits arising from an activity for profit. We have not got even the necessary materials before us. Even the extent of the alleged income is not clearly known. These are aspects that have to be considered by the Tribunal and a finding entered. There has been no such finding entered.

In the light of the above, we have to follow the procedure adopted by the Supreme Court in Commissioner of Income-tax v. Greaves Cotton and Co. Ltd. : [1968]68ITR200(SC) and in Commissioner of Income-tax v. Indian Molasses Co. P. Ltd. : [1970]78ITR474(SC) . It will be open to the Appellate Tribunal to take back the appeal on its file and pass fresh orders in the light of what is stated above and in the light of the pronouncement of the Supreme Court in Indian Chamber of Commerce v. Commissioner of Income-tax : [1975]101ITR796(SC) . We have to further mention that it was conceded before us that if the income would fall under section 11 of the Act, no further question about that income falling under section 28(iii) of the Act would arise. Question No. 2 referred to us cannot be answered in the abstract. It can be answered in favour of the assessee if it is found that the assessee is entitled to exemption under section 11 by stating that notwithstanding section 28(iii) the income is exempted. If, on the other hand, the income is not exempted under section 11, no question of exemption arises and it will fall under section 28(iii).

We direct the Appellate Tribunal to deal with the appeals in the manner indicated above.

A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.


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