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Commissioner of Income-tax Vs. Ootacamund Gymkhana Club - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 276 of 1970 (Reference No. 64 of 1970)
Judge
Reported in[1977]110ITR392(Mad)
ActsIndian Companies Act, 1913 - Sections 26; Income Tax Act, 1922 - Sections 4(3)
AppellantCommissioner of Income-tax
RespondentOotacamund Gymkhana Club
Appellant AdvocateA.N. Rangaswami and ;Nalini Chidambaram, Advs.
Respondent AdvocateT.V. Balakrishnan, Adv. for C.V. Mahalingam, ;S. Mathrubutheswaran and ;K.J. Rebello, Advs.
Cases ReferredBangalore Race Club v. Commissioner of Income
Excerpt:
.....or other useful object of public utility - section 4 (3) (i) provides income derived from property held under trust wholly for charitable purpose shall not be included in total income of assessee - on condition that income to be applied or accumulated for application to charitable purposes as related to anything done within india - in case property held in part for such purposes exemption operates in respect of income applied for charitable purposes - charitable purpose defined as including relief to poor, education, medical relief and advancement of object of general public utility - question answered in affirmative in favour of assessee. - - the club has in particular a well-known golf course in ooty. in any event, according to the learned counsel, there were some..........the assessee was not entitled to the exemption in regard to such receipts. he found also that the property income computed already required modification. he, accordingly, took proceedings under section 147. he brought to tax rs. 1,833 as 'property' income and rs. 12,965 as income from ' other sources '. the ' property ' income is from the club house. it is not clear from the statement of the case or from the orders of the authorities below whether the cluh house had any rooms, which were let out for the occupation of members or others. we were, however, told that the property income represents merely the bona fide annual value of the club house which was not let out to any one.3. it may be mentioned herein that there were certain amendments carried out to the memorandum and articles of.....
Judgment:

Sethuraman, J.

1. The assessee appears to have come into existence some time in 1857. It was registered under the provisions of Section 26 of the Indian Companies Act, 1913. Its objects were : (1) to provide a club for the accommodation of members and their friends and the encouragement and management of sports and games ' and (9) to promote social intercourse amongst the members of the club and their friends and encourage and manage sports and games '. The rest of the clauses are in the nature of ancillary clauses. Clause 11 provides that the objects of the club as setout in the earlier paragraphs would extend to all the States in the Indian Union. Clause 12 provides that the income and property of the club whensoever derived shall be applied solely towards the promotion of the objects of the club as set forth in the memorandum of association and that no portion thereof should be paid or transferred directly or indirectly by way of dividend, bonus or otherwise howsoever, by way of profit to the persons who at any time were or have been members of the club, or to any of them, or to any person claiming through any of them. The assessee could, however, pay remuneration to any officers or servants of the club or to any member thereof or other persons, in return for any services rendered to it. Under Clause 13 the local Government could impose any further conditions than those set out in Clause 12 above, which should be duly observed by the club. The club did not have a share capital, but in the event of winding up, the members undertook to contribute such sum as may be required not exceeding rupees fifty. On the winding up or dissolution of the club, any surplus assets were not to be distributed amongst the members of the club, but were to be transferred to some other institution or institutions having similar objects to be determined by the members of the club at the time of the dissolution, and in default thereof by the appropriate court. The club has in particular a well-known golf course in Ooty.

2. The assessee was not assessed to tax till the year 1960-61. For that year the assessee was originally assessed at Rs, 50 on 'property' income under the assessment order dated 29th March, 1961. Thereafter, it was noticed by the Income-tax Officer that the assessee had been in receipt of advertisement and donations from non-members. In the view of the Income-tax Officer, the assessee was not entitled to the exemption in regard to such receipts. He found also that the property income computed already required modification. He, accordingly, took proceedings under Section 147. He brought to tax Rs. 1,833 as 'property' income and Rs. 12,965 as income from ' other sources '. The ' property ' income is from the club house. It is not clear from the statement of the case or from the orders of the authorities below whether the cluh house had any rooms, which were let out for the occupation of members or others. We were, however, told that the property income represents merely the bona fide annual value of the club house which was not let out to any one.

3. It may be mentioned herein that there were certain amendments carried out to the memorandum and articles of association and that with effect from July 1, 1963, the Central Government has notified the assessee as exempt from income-tax under Section 10(23) of the Act of 1961.

4. The assessee appealed against the assessment to the Appellate Assistant Commissioner. He held that it was for the assessee to prove that the object with which the club was formed came within the definition ofcharity and that there could be no exemption in the present case because the assessee had not been established with any object of any general public utility. In the view of the Appellate Assistant Commissioner the promotion of sports, particularly golf, which was played only by a few aristocrats, did not bring it within the scope of Section 4(3)(i). On further appeal, the Appellate Tribunal, relying on the decision of the Supreme Court in Commissioner of Income-tax v. Andhra Chamber of Commerce : [1965]55ITR722(SC) , upheld the assessee's objection to the assessment. The Tribunal further held that there was a trust or in any event a legal obligation so that the people administering the club could be compelled to make use of the income for the objects of the trust.

5. At the instance of the Commissioner of Income-tax the following question has been referred :

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee-club was entitled to relief under Section 4(3)(i) of the Income-tax Act, 1922, for the assessment year 1960-61 ?'

6. The learned counsel for the revenue submitted that this is a case where the assessee has come into existence for the mere promotion of sports and games and that its objects are not charitable in character. In any event, according to the learned counsel, there were some objects, like promotion of social intercourse among the members, which were not charitable in character, so that the assessee could not be said to have been established wholly for charitable purposes.

7. On behalf of the assessee the submission was that it came into existence for the encouragement or management of sports and games and that the other clauses in the memorandum were only ancillary and incidental to the main object. Reliance was placed on the licence granted under Section 26 of the Companies Act, 1913, as showing that the assessee had been established for the charitable purposes. It was, therefore, contended that the assessment was bad in law.

8. Section 26 of the Indian Companies Act of 1913 provided that where it was proved to the satisfaction of the Government that an association capable of being formed as a limited company was formed for promoting commerce, art, science, religion, charity or any other useful object and applied or intended to apply its profits in promotion of its objects, and to prohibit the payment of any dividend to its members, the Government could, by licence, direct that the association may be registered as a company with, limited liability, without the addition of the word 'limited'. Thereupon, the association may be registered accordingly and it shall enjoy all the privileges and be subject to all the obligations of limited companies. This is not a case where a limited company has come into existence forpromoting commerce, art, science or religion. The assessee could only be brought under 'charity or any other useful object' referred to in Section 26(1). The grant of a licence under Section 26 of the Indian Companies Act of 1913 thus, prima facie, shows that the assessee has come into existence for a charitable or any other useful object. However, in view of the fact that there is a separate definition of ' charitable purpose ' in the Income-tax Act, we cannot take the issue of a licence under Section 26 as conclusive. In other words, at the time when the licence was issued, there was no need for the concerned authorities to apply their mind to the provisions of Section 4(3)(i) of the Indian Income-tax Act, 1922, under which the present exemption is claimed. We would, therefore, consider the question of the assessee's claim in the light of the provisions of Section 4(3)(i).

9. Section 4(3)(i) provides that any income derived from property held under trust or other legal obligation wholly for charitable purposes, shall not be included in the total income of the assessee. The only condition is that such income is to be applied or accumulated for application to such charitable purposes as relate to anything done within India. In the case of property held in part only for such purposes, the exemption operates in respect of the income applied or finally set apart for application thereto. The expression ' charitable purpose ' has been defined as including relief of the poor, education, medical relief and the advancement of any other object of general public utility. In the present case the claim for exemption is based on the ground that the assessee has come into existence for the advancement of ' any other object of general public utility.'

10. The learned counsel for the department contended that in the present case the claim for exemption is not admissible in view of the decision of the Calcutta High Court in Cricket Association of Bengal v. Commissioner of Income-tax : [1959]37ITR277(Cal) . The Cricket Association of Bengal was an unregistered and unincorporated body. There was no trust deed or other document vesting any property in the association for any purpose connected with its activities. The association had only framed certain rules, which envisaged the promotion of the game of cricket played in accordance with the highest standard. One of the objects of the association was to organise cricket tournaments and leagues and to carry on any other activity which may seem to it capable of being carried on in connection with its main objects. As between its members, it was a mutual association and received payments by way of subscriptions and donations. The surplus of its receipts from those sources had not been assessed. The association, however, had other receipts from the sale of tickets at the time of the cricket matches. When the association was sought to be assessed it claimed exemption under Section 4(3)(i) of the Indian Income-tax Act of 1922. This claim wasnegatived by the income-tax authorities as well as by the Tribunal. On a reference, the Calcutta High Court held that there was no property held under trust or other legal obligation for charitable purposes. On behalf of the assessee it was contended in that case that there was an organisation which came within the scope of the concept of property as held in All India Spinners' Association v. Commissioner of Income-tax [1944] 12 ITR 482 . It was held that if the members of a body merely got together certain teams for playing some games of cricket or some other game in the course of the year or every year, it was difficult to say that they maintained an organisation and that such organisation yielded the income. Even on the footing that there was an organisation and that it constituted property the question as to whether it was held under a legal obligation for a charitable purpose was examined. As there was no trust, the question had to be determined only in the light of the rules. It was held that the rules did not compel the association to apply its assets or its income to any particular purpose. Thus, the result of the decision was that there was no property held under trust and that, in any event, the income from any such property was not required to be applied for any particular purpose. The matter was further examined even on the assumption that there was property and that such property was held under legal obligation for any particular purpose. It was held that the rules of the association did not provide any service to the public in connection with the game of cricket and that, in the absence of any public benefit, which was essential, there was no charitable purpose. It is only incidentally that the Calcutta High Court came to examine the question as to whether the promotion of sport or game was a charitable purpose. After referring to certain authorities of the U.K., there are observations to the effect that there was no charitable purpose in the promotion of a mere sport or game.

11. On behalf of the assessee the submission was that this decision of the Calcutta High Court would not be good law after the decision of the Supreme Court in Commissioner of Income-tax v. Andhra Chamber of Commerce : [1965]55ITR722(SC) . It was also pointed out that reliance on British precedents in order to ascertain the existence of a charitable purpose under Section 4(3) is not proper. In All India Spinners' Association v. Commissioner of Income-tax [1944] 12 ITR 482 , Lord Wright, speaking for the Judicial Committee, observed at page 486 as follows :

' It is now recognised that the Indian Act must be construed on its actual words and is not to be governed by English decisions on the topic. The English decisions on the law of charities are not based upon definite and precise statutory provisions. They have been developed in the course of more than three centuries of the Chancery Courts. The' Act of 43 Elizabeth (1601) contained in a preamble a list of charitable objects which fell withinthe Act, and this was taken as a sort of chart or scheme which the court adopted as a groundwork for developing the law. In doing so they made liberal use of analogies so that the modern English law can only be ascertained by considering a mass of particular decisions often difficult to reconcile. It is true that Section 4(3) of the Act has largely been influenced by Lord Macnaghten's definition of charity in Commissioners for Special Purposes of Income-tax v. Pemsel [1891] AC 531, but that definition has no statutory authority and is not precisely followed in the most material particular ; the words of the section are ' for the advancement of any other object of general public utility ' whereas Lord Macnaghten's words were ' other purposes beneficial to the community '. The difference in language, particularly the inclusion in the Indian Act of the word ' public, is of importance. The Indian Act gives a clear and succinct definition which must be construed according to its actual language and meaning. English decisions have no binding authority on its construction and though they may sometimes afford help or guidance, cannot relieve the Indian courts from their responsibility of applying the language of the Act to the particular circumstances that emerge under conditions of Indian life.'

12. Similarly, Viscount Simonds in Baddeley v. Commissioners of Inland Revenue [1955] 35 TC 661, gave expression to a doubt:

'......whether this sort of rationalisation helps to explain a branch ofthe law which has developed empirically and by analogy upon analogy.'

13. Lord Upjohn in Scottish Burial Reform and Cremation Society v. Glasgow Corporation [1968] AC 138 (HL) has described the state of this branch of law relating to charities as almost incredible to anyone not familiar with this branch of the English law. Thus, it would be unsafe to seek guidance from British precedents in this branch of the law. Further, in Commissioner of Income-tax v. Andhra Chamber of Commerce : [1965]55ITR722(SC) , the Supreme Court has stated at page 734 as follows:

' 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 [1891] AC 531 and decisions of English courts, which proceed upon interpretation of language different from the Indian statute, have little value.'

14. With respect to the learned Judges of the Calcutta High Court, we would rather examine the concept of ' charitable purposes ' taking into account the Indian precedents without placing any excessive reliance on the British ones.

15. In Commissioner of Income-tax v. Andhra Chamber of Commerce : [1965]55ITR722(SC) the chamber had been registered, under Section 26 of the Indian Companies Act, 1913. It was established to promote and protecttrade, 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. Power was also taken for promotion of or opposition to legislation and to procure change of law and practice affecting trade, commerce and manufactures. The income of the chamber was to be applied solely towards the promotion of its objects as set forth in the memorandum. The Chamber of Commerce purchased a building part of which was utilised for itself and part of which was let out to tenants. The question was whether the building was property held under trust or other legal obligation, wholly for charitable purposes, so that the income therefrom was exempt under Section 4(3)(i) of the 1922 Act. It was held that advancement or promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the entire community. Though the prosperity would be shared by those who are engaged in trade, commerce and industry, it did not follow, it was held, that the purpose was any the less an object of general public utility. It was pointed out that the legislature had used language of great amplitude in defining ' charitable purpose ' and that the definition was inclusive and not exhaustive or exclusive. If the primary purpose was advancement of object of general public utility, it would remain charitable, in their Lordships' view, even if an incidental entry into the political domain for achieving that purpose for promotion of or opposition to legislation was contemplated. Such an object had to be regarded as purely ancillary or subsidiary and not the primary object with the result that the income of the chamber from its building was held to be exempt from tax under Section 4(3)(i). This case envisages the examination in any particular case of the dominant and subsidiary objects. If the dominant object is of a charitable nature, then the assessee would be eligible for exemption. If there were two distinct objects, one of which was charitable and the other not charitable and if the fund of the association could be applied for either of these purposes at the discretion of those in authority, then it cannot be held that there was any property held under trust wholly for charitable purpose. The contention of the. assessee is that just as advancement or promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the entire community, so also the promotion of games and sports tended to promote the physical well-being of members of the public, and it was submitted that it would be a charitable purpose. Whatever may be the position with reference to the organisation or exhibition of games at intervals so as to enable spectators to derive amusement therefrom as in the Calcutta case : [1959]37ITR277(Cal) , the position of an organisation intended to promote the social and physical well being of persons to enable them to participate in 'games is, in our opinion, a charitable purpose. In the present case, it is necessary to bearin mind the fact that the encouragement and management of sports and games is not restricted to the members as such. Both in Clause (1) as well as Clause (9) the participation in sports and games by the members of the public is not inhibited. Just as development of an industry leads to economic prosperity, similarly participation in games leads to the physical well being which is a sine qua non of a healthy society. Whatever may be the British precedents, examined in the light of the decision of the Supreme Court in the Andhra Chamber's case : [1965]55ITR722(SC) , it is clear to us that in the present case a charitable purpose is discernible.

16. It was argued for the revenue that one of the clauses, viz., Clause (9), provided for the promotion of social intercourse among the members of the club and that, to that extent, there was a non-charitable purpose. As we read the memorandum of association, we consider that the promotion of social intercourse among the members is not the primary object with which the assessee had come into existence. We understand the clause to mean that the promotion of social intercourse among the members is achieved by encouragement and management of sports and games. Lord Reid in Baddeley v. Commissioners of Inland Revenue [1955] 35 TC 661 (HL) had pointed out at page 707 as follows :

' On a playing field a person can learn the value of endurance, and perseverance, of assiduous practice, of unselfish association in a team, and of winning with modesty and losing with a good grace, and, to my mind, that is the kind of moral and social training which the donor's words mean in this deed and in the Acts from which they were taken.'

17. We are not here concerned with the interpretation of the deed in that particular case. We are in respectful agreement with what has been stated above as a concomitant of the participation in sports. It is this which has obviously been referred to as promotion of social intercourse. Clause (ii) of the memorandum does not confine the objects of the club to any particular sect or region, but comprehends the whole country. This shows that the objects of the assessee here cannot be understood in any restrictive sense, so that the benefit is confined only to the members. The Supreme Court's decision in the Andhra Chamber's case : [1965]55ITR722(SC) contemplates an analysis of the objects to find out what is the dominant object. The dominant object here being charitable in nature, as we have already found, the assessee would be eligible for the exemption claimed. The other objects are only ancillary and not distinct and independent.

18. The learned counsel for the revenue brought to our notice a decision of the Supreme Court in Ramchandra Shukla v. Shree Mahadeoji : [1970]2SCR809 . Some time prior to 1830 a wrestler setup and maintained an Akhara where wrestlers of both Hindu and Muslim communities could come for wrestling. The property consisted of a groveland. The incomefrom it as well as his own other resources were utilised for promoting the wrestling. He installed two idols and a picture of a Muslim in order to attract wrestlers of, both the communities. The question before the Supreme Court was whether there was a valid trust under Hindu Law. The Supreme Court, after referring to the relevant authorities under Hindu Law, came to the conclusion that there was no trust for a charitable purpose. In pronouncing on any particular object of a bounty as to whether it falls within the definition of ' charitable purpose ', the courts must in general apply the standard of customary law and common opinion amongst the community to which the parties interested belong : See In re Trustees of the Tribune [1939] 7 ITR 415 . It was, therefore, necessary for the Supreme Court to find out whether there was a charitable purpose so as to enable the property being tied down in perpetuity in the above case in the light of the Hindu notions of a charitable purpose. The present is a case where the assessee is a club incorporated under the Companies Act. The club cannot be taken to belong to any particular religion, so that the customary notions of the laws applicable to that religion could be given operative force in construing the trust. We do not, therefore, find it possible to apply this decision to the facts herein. In that case several decisions of the U. K. courts and also the decision of the Calcutta High Court in Cricket Association of Bengal v. Commissioner of Income-tax : [1959]37ITR277(Cal) were cited. It was pointed out that those decisions arose under Section 4(3)(i) of the Income-tax Act of 1922 and that they would have no relevance to a case arising under Hindu law. The Supreme Court cannot, therefore, be taken to have given its seal of approval to the decision of the Calcutta High Court in the case of Cricket Association of Bengal : [1959]37ITR277(Cal) as it did not deal with Section 4(3)(i).

19. During the course of the arguments, we were referred to the decision of the Mysore High Court in Bangalore Race Club v. Commissioner of Income-tax : [1970]77ITR435(KAR) . That was a case where a race club claimed exemption under Section 11 of the Income-tax Act of 1961 corresponding to Section 4(3)(i) of the Act of 1922. It was held that since betting on horses was one of the essential concomitants of the activity of racing, it did not confer any public benefit and that it could not be said that betting on houses was beneficial to the public. That decision has no relevance to the problem before us. In the view taken by us, we do not find it necessary to refer to the decisions of the U. K. courts, as the law on the point cannot be said to be identical in U.K. Having regard to the objects of the assessee-club, we are satisfied that it was rightly granted exemption by the Tribunal. The question referred is, therefore, answered in the affirmativeand in favour of the assessee. The assessee will be entitled to its costs, Counsel's fee Rs. 250.


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