SETHURAMAN J. - This is a common reference in respect of four assessees of whom three are chambers of commerce and the fourth is the Madras Stock Exchange. Though the question that rose for determination of the Tribunal related to the construction of section 2 (15) of the Income-tax Act, 1961, still the facts in respect of each case are somewhat different. We would first state the facts with reference to the Andhra Chamber of Commerce and consider the legal issue involved in the light of those facts. We shall thereafter take up the case of each of the other assessees to find out whether the conclusion arrived at in the case of Andhra Chamber of Commerce is applicable to them.
Andhra Chamber of Commerce is a company incorporated under the Indian Companies Act, 1913, and was permitted under section 26 of that Act to omit the word 'limited' from its name by an order of the appropriate Government. The principal objects of the assessee were :
(a) To promote and protect trade, commerce and industries of India, in the Province of Madras and in particular in the Andhra Country;
(b) To aid, stimulate and promote the development of trade, commerce and industries in India or any part thereof with capital principally preceded by Indians or under the management of Indians;
(c) To watch over and protect the general commercial interests of Indian or any part thereof and the interests of the Andhras in particular engaged in trade, commerce or manufacture in India and in particular the Andhra Desa; and
(d) To do all such other things as may be conducive to the preservation and extension of trade, commerce, industries and manufactures or incidental to the attainment of the above objects or any of them.
There are other incidental objects. By clause 4 of the memorandum of association it was provided that the income and the property of the assessee was to be applied solely towards the promotion of its objects as set forth therein and no portion thereof was to be paid or transferred, directly or indirectly, by way of dividends, bonuses or otherwise howsoever by way of profit to its members. On December 2, 1944, the assessee purchased a building and made substantial alterations, additions and improvements thereto. It then moved its offices into that building on May 14, 1947, and let out to tenants the portion not required for its own use. In the present reference we are concerned with the assessment year 1962-63, the relevant previous year being the calendar year 1961. The only source of income of the assessee related to the rent received from the aforesaid building. The net income from the property was a sum of Rs. 6,596. The assessee claimed exemption with reference to this income. At the time when the Income-tax Officer dealt with this assessment, there was a decision of this court in respect of a similar claim of the assessee for exemption under section 4(3)(i) of the Indian Income-tax Act, 1922. The said claim had been accepted by this court in Andhra Chamber of Commerce v. Commissioner of Income-tax. At the time of assessment this decision was pending in appeal before the Supreme Court. The Income-tax Officer, therefore, brought to tax the aforesaid income mentioning that, pending decision of the Supreme Court; a precautionary assessment was made and that the tax would be held in abeyance till the decision was known. On appeal the Appellate Assistant Commissioner upheld the assessees claim for exemption, as by the time he disposed of the appeal, the Supreme Court had confirmed the decision of this court. The Supreme Courts decision is reported in Commissioner of Income-tax v. Andhra Chamber of Commerce
It has to be noted here that the Supreme Courts decision was based on the language of section 4(3)(i) of the 1922 Act read with the definition of 'charitable purpose' occurring in the same provision. There was, however, an amendment of the definition in the Income-tax Act of 1961 and there were also some changes in section 11 of the 1961 Act which corresponds to section 4(3)(i) of the 1922 Act.
The department appealed against this decision of the Appellate Assistant Commissioner to the Appellate Tribunal. When the matter came before the Tribunal, the appeals relating to the three other assessee were also before it and, therefore, it considered all the appeals together in its order. Before the Tribunal the change in the definition of 'charitable purposes' was highlighted and it was argued for the revenue that the amendment withdraw the exemption that was previously available to the assessee. The Tribunal did not agree with the submission of the revenue. It was of the view that if the dominant purpose was advancement of an object of general public utility, it could not be said that such object of general public utility and the earning of income was merely incidental thereto. According to the department the expression 'not involving the carrying on of any activity for profit' occurring in section 2(15) need not be read as referring only to the assessee and if the purpose of the chamber facilitated the carrying on of any activity for profit by anyone else also, then the exemption was not available under the amended definition. The Tribunal negatived this contention also.
At the instance of the revenue, the following two questions have been referred in so far as this case is concerned :
'(1) Whether the tribunal is right in law in holding that the test laid down in the expression not involving the carrying on of any activity for profit in section 2(15) of the Income-tax Act, 1961, is to be applied with reference to the carrying on of an activity by the assessee who claims the exemption under section 11(1) of the Income-tax Act, 1961, and not with reference to any other person who is not a party to such claim for exemption under section 11(1) ?
(2) Whether, on the effects and in the circumstances of the case, the Tribunal is right in holding that the objects of the Andhra Chamber of Commerce institute charitable purposes as defined in section 2(15) of the Income-tax Act, 1961, entitling it to exemption under section 11(1) of the Income-tax Act, 1961, for the assessment year 1962-63 ?'
The learned counsel for the revenue submitted the though the assessee was exempt from tax under the provisions of the Act of 1922, this exemption was taken way under the Act of 1961, when in accomplishing its purpose, the assessee engaged itself in activities for profit. In the submission of the counsel, unless there was a written condition in the constitution of the assessee tabooing profits, the assessee could not enjoy the exemption and the mere prohibition of distribution of income by way of dividend, etc., being only a manner of application of the income, had no relevance. For the assessee, its learned counsel submitted the section 2(15) had to be read with section 11 and that if the contentions for the revenue were to be accepted, then section 11 would be rendered otiose. In the submission of the counsel, the provision for exemption would have scope for application only if there was income and, therefore, there was no need either in the constitution governing the assessee or otherwise to taboo profits. Reference was made to section 11(4) of the Act s showing that a business undertaking was treated as property held under trust, whose income was exempt from assessment to the extent contemplated therein. It was, therefore, submitted that mere earning of income could not bring the case within the scope of the closing words of section 2(15), and that this was not a case where was any activity for profit, but there was a mere earning of income from the property held under trust which came within the scope of the exemption under section 11.
The relevant provisions may now be extracted :
'11(1)...... the following income shall not be included in the total income of the previous year of the person in receipt of the income -
(a) 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;
(b) income derived from property held under trusts in part only for such purposes, the trust having been created before the commencement of this Act, to the extent to which such income is applied to such purposes in India.......
(4) For the purposes of this section property held under trust includes a business undertaking so held,......'
Section 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.
The only additions to he definition of 'charitable purpose found in section 4(3) of the Indian Income-tax Act, 1922. There is no dispute that, in the present case, the assessee fulfilled the 'charitable purpose' as defined in the Act of 1922 in view of the decision of the Supreme Court in Commissioner of Income-tax v. Andhra Chamber of Commerce. The assessee was established, it was held that decision, for the 'advancement of any other object of general public utility'. The only point to be considered is whether the words 'not involving the carrying on of any activity for profit' have the effect of the assessee forfeiting the exemption. The question has to be considered in the light of a proper construction to be placed on the words added in the definition.
There are two decisions of the Supreme Court which had occasion to consider the amended definition. The first decision is reported in Sole Trustee, Loka Shikshana Trust v. Commissioner of Income-tax. The assessee in that case was a trusts carrying on publication brought in large profit. The object of the trust was to educate the people of India in general and of Karnataka in particular by : (a) establishing and conducting institutions, calculated to educate the people by spread of knowledge on all matters of general interest; (b) founding and running reading rooms and libraries, etc.; (c) supplying the Kannada speaking people with an organ of educated public opinion and conducting journals; and (d) helping directly and indirectly societies and institutions with similar objects. The trustee was given the power of deciding what purpose was allied to or what object was covered by the trust and how it was to be served by diversion of the trust properties and the fund. The assessee enjoyed exemption from income-tax till the Act of 1961 came into force. The Income-tax Officer brought to tax the income from the publication of the newspaper, etc., holding that though the object of the assessee was of general public utility, it involved the carrying on of an activity for profit so that the exemption was not available to it. Ultimately, the matter reached the Supreme Court. Khanna and Gupta JJ. held as follows as page 243 :
'Ordinarily, profit motive is a normal incident of business activity and if the activity of a trust consists of carrying on of a business and there are no restrictions on its making profits, the court could be well justified in assuming, in the absence of some indication to the contrary, that the object of the trust involves the carrying on of an activity for profit.'
The fact that the assets of the trust in that case rose from Rs. 1,73,000 in 1947 to Rs. 22,55,000 in 1961 was emphasised as clearly showing that the company was not spending the income on any charitable purpose. Beg J., in a separate but concurring judgment, observed at pages 255 as follows :
'As a rule, if the terms of the trust permit its operation for profit, they became, prima facie, evidence of a purpose falling outside charity. They would indicate the object of profit making unless and until it is shown that the terms of the trusts compel the trustee to utilise the profits of business also for charity. This means that the tests introduced by the amendment is : Does the purpose of a trust restrict spending the income of a profitable activity exclusively or primarily upon what is charity in law If the profits must necessarily feed a charitable purpose, under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity. If that obligation is there, the income becomes entitled to exemption. That, in our opinion, is the most reliable test.'
It may be seen that beg J. has emphasised on the obligation of the trusts to spend the money or income on charity. In that particular case except augmenting the resources of the trust, the trustees had not utilised the income for any charitable purpose as was clear from the extraordinary increase in assets over a period of about fourteen years. The tax-free profit was merely ploughed back in the business. That was, if we may say so, a clear case against which the amendment was aimed. The speech of the Finance Minister has been reproduced by Beg. J. to show the evil that was sought to be remedied by the amendment. The Finance Minister had referred, in particular, to the newspaper industry claiming exemption under the earlier provision while running its concern on commercial lines and thus misusing the definition till then if force. That was a case of a newspaper.
The second decision of the Supreme Court is reported in Indian Chamber of Commerce v. Commissioner of Income-tax. That was a case of the Indian Chamber of Commerce, a company registered under section 26 of the Indian Companies Act, 1913, to promote and protect the Indian trade interests and other allied service operations, falling within the expression 'the advancement of any other object of general public utility' in section 2(15) of the Income-tax Act, 1961. The income of the Chamber was not to be paid directly or indirectly by way of profit to the members. The Chamber derived income, inter alia, from : (a) arbitration fees levied by the Chamber; (b) fees collected for issuing certificates of origin; and (c) share of profits in Messrs. Calcutta Licensed Measurers for issue of certificates of weighment and measurement. The question was whether the Chamber was exempt from income-tax under section 11 read with section 2(15) of Act. It was held that the activities of the Chamber being activities carried on for profit, in the absence of any restriction in its memorandum or articles of association against the making of profit from those activities, the income of the Chamber from those activities carried on for profit, in the absence of any restriction in its memorandum or articles of association against the making of profit from those activities, the income of the Chamber from those activities was liable to income-tax. At page 803, Krishna Iyer J., speaking for the Bench, held that 'by the new definition, the benefit of exclusion from the total income is taken away where in accomplishing a charitable purpose the institution engaged itself in activities for profit'. The Calcutta decisions were held to be right in linking activities for profit with advancement of the object. Therefore, the emphasis is on accomplishing its objects by carrying on an activity for profit. In other words, if in the advancement of its objects, the Chamber resorts to carrying on of activities for profit, then necessarily section 2(15) cannot confer cover. The advancement of charitable objects must not involve profit making activities. That is considered to be the mandate of the new amendment. At page 805 the position was summed up as follows :
'To sum up, section 2(15) excludes from exemption the carrying on of activities for profit even if they were linked with the objectives of general public utility, because the statute interdicts, for purposes of tax relief, the advancement of such objects by involvement in the carrying on of activities for profit.'
The dictionary meaning of the word 'involve' is 'to envelop, to entangle, to include, to contain, to imply'. (See the Shorter Oxford Dictionary, 3rd edition, page 1042). The word 'involve' thus contemplates the object of general public utility being sought to be achieved by carrying on an activity for profit. If we analyse properly the two decisions of the Supreme Court, it would be clear that both of them illustrate the different aspects of the provisions. In the Loka Shikshana a Trusts case the object of the trust could not be achieved without carrying on the business of publication of newspapers. If the profit making activity is thus the appointed means of achieving a charitable object of general public utility, then the profit would be taxable. One cannot carry on a business and claim exemption on the income therefrom by merely saying that it is for a charitable purpose. There is a distinction between : (a) a business being held under trust whose profits feed a charity; and (b) the carrying on of a business in carrying out what is conceived as charitable purpose. In the former case, the income is clearly exempt. In the latter, the income may be taxable. The distinction is somewhat fine, but it has to be kept in mind. The proposition the one must run the activity on a 'no profit no loss basis' is applicable to a case where in the course of carrying out a charitable purpose there is an activity. In such a case, if the aim was not to render the service on 'no profit no loss basis', the profit would be taxable. Similarly, the test that the profit from a business which is taxable if carried on by a businessman, does not cease to be taxable by a charity indulging in it is also applicable primarily to a case where the profit-making activity is embarked upon as the appointed means of achieving the purpose of the trust. For instance, the fee for arbitration or the fee for issuing certificates of origin might have been conceived as part of its objects of assisting trade and commerce by the Indian Chamber of Commerce in Indian Chamber of Commerce v. Commissioner of Income-tax. But there was no self-imposed embargo on making profits. It was, therefore, held that the activity was for making profits. If there was any such activity in the present case, then the Andhra Chamber of Commerce would not be exempt from tax. We have, therefore, to look into the facts of the present case to find out as to why the objects of the Chamber were and whether it was seeking to accomplish the said objects by indulging in an activity for profit.
The object of the Chamber was clearly to promote trade and industry. The construction of a building was for the purpose of locating its office. The Chamber fulfills many functions like arranging periodical meetings of its members in promotion of its objects, receiving officials and ministers so as to make representations in order to ensure smooth flow of trade, commerce and manufacture and helping the members in other ways conceived by it. It has necessarily to keep a house in which all these functions could be carried on. When the space available in the building was found to be surplus, it naturally made it available for rent by letting out part of it. By doing so, it was not carrying on any activity for profit as conceived by the provision. A person who lets out a property and enjoys the income therefrom, is more passive than active. It is not, therefore, reasonable to call it an activity for profit. As rightly pointed out by the learned counsel for the assessee, the whole of section 11 would be rendered useless if the construction sought to be placed for the revenue is to be accepted. If merely because there is an income either from the property or from other investments sit should be held that it is an activity for profit, then the exemption under section 11 would have no scope to operate. It would be reduced to a dead letter. Any construction which would render a provision nugatory should be avoided. Therefore, it is necessary to give scope for the exemption under section 11 keeping at the same time in mind the amendment to section 2(15). It is possible to do so in the present case by holding that the assessee by purchasing a building and letting out some surplus area was not indulging in any activity for profit. Section 11 does not taboo the earning of profit as, unless there was profit, there would be no need for the exemption provision. It is only on the postulate of profits being there, that any exemption provision would find a place in the statute. The effect of the contention of the learned counsel for the revenue is to show that when once there was a profit, the exemption was taken away. This, in our opinion, could not be the intention of Parliament which has granted the exemption on the profits earned. A reading of section 2(15) and section 11 together shows that what is frowned upon is an activity for profit by a charity established for general objects of public utility in the course of accomplishing its objects. There is no activity here. The activity spoken of by the provision is not a mere act of purchase of a building or making an investment and getting income therefrom, but something more substantial and continuous. We are, therefore, of the opinion that the Tribunal rightly granted the exemption to the present assessee even after the definition was amended under the 1961 Act. This would answer question No. 2. The answer is in the affirmative and in favour of the assessee.
As regards question No. 1, the contention that was urged before the Tribunal and taken before us is that the Chamber has been established for the purpose of promoting the profitable activities of its members, that section 2(15), especially the closing words thereof, does not say that the activity must be by the assessee as such, and so long as there was a profit either by the assessee or by its members, it would be hit by the new amendment. We have no hesitation in rejecting this contention. Section 2(15) is merely a definition provision and the definition has to be applied for the purpose of granting the exemption under section 11. The income that is exempt under section 11(1) is the income derived from the property held under trust wholly for charitable or religious purposes. The purpose here would be the purpose of the trust. The activities of the members who promoted the trust are not relevant for the purpose of considering the exemption under section 11(1)(a). The concentration of attention must be on the assessee as such and not on those who either promoted it or were benefited by or from it. Therefore, merely because the members who constituted the Chamber were businessmen, it did not follow that their activity tainted the assessee as such. We have, therefore, to answer the first question also in the affirmative and in favour of the assessee.
We now turn to the reference in the case of South Indian Film Chamber of Commerce. With reference to this assessee, the assessment years involved are 1962-63 and 1963-64. The assessment years 1964-65 to 1967-68 are covered by a different reference in Tax Case No. 87 of 1971. The assessee is a body registered under the Societies Registration Act, 1860. It was formed with the object of :
(a) encouraging and developing the film industry in South India;
(b) watching, protecting and extending the rights and privileges of its members and of the film trade in general;
(c) encouraging and facilitating film production, distribution and exhibition;
(d) acting as a clearing house for information on all matters affecting the production, distribution and exhibition of films;
(e) investigating problems peculiar to the film industry and affording its members support in protection and defence of their rights.
The other objects are of an incidental nature. Clause 4 of the memorandum provides that the income and property of the society whensoever derived should be applied solely towards promotion of the objects of the society and that no portion should be paid or transformed directly or indirectly by way of dividend, bonus or otherwise. The income derived by this assessee falls into two parts as follows :
Category of income
The property income is derived from the building owned by it. In the building there are vaults wherein films are stored. The income from 'other sources' was derived from the distribution of raw films and cinematograph films. At the instance of the Chief Inspector of Explosives the Chamber undertook the obligation of providing film vaults. Similarly, the Controller of Imports wanted the Chamber to take up the distribution of raw films, etc. Clause (k) of the memorandum of association provides that the assessee could act, if required, as an advisory body to the Government departments concerned with the use and control of films.
Before the Income-tax Officer, the assessee claimed exemption under section 11 of the Income-tax Act of 1961 for each of these years. Reliance was placed on the decision of the Madras High Court in the case of Andhra Chamber of Commerce reported in Andhra Chambers of Commerce v. Commissioner of Income-tax. The Income-tax Officer held that the income of the assessee was not exempt from tax. There is no discussion in the assessment order for these two years, but it is stated that the matter had been discussed in the orders for 1960-61 and 1962-62, which are not before us.
On appeal, the Appellate Assistant Commissioner came to the conclusion that the object for which the institution was created was to render service to film producers and the public and that if the assessee had earned any profit, it was only incidental to the primary object of its existence. He was of the view that the earning of profit would not detract from its character as an institution engaged in charitable activities. The department appealed to the Tribunal, which in its common order covering this and other assessees, held that the income was exempt from tax under section 11(1) of the Act of 1961.
At the instance of the revenue the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the South Indian Film Chamber of Commerce constitute charitable purpose as defined in section 2(15) of the Income-tax Act, 1961, entitling it to exemption under section 11(1) of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64 ?'
Question No. 1, already considered by us in the discussing the case of Andhra Chamber of Commerce, is also relevant to this case and the cases of other assessees also who are before us. It is unnecessary to discuss the said question over again here. We have already given the answer to the said question.
As far as the question extracted above is concerned, whatever we have said with reference to the Andhra Chamber of Commerce would equally apply here. The learned counsel for the revenue submitted that this is a case in which the assessee had undertaken activities for profit, which would bring it within the scope of the taxable ambit. For the assessee the submission was that it provided the film vaults and acted as distributor of raw films only at the instance of the Government and it did not indulge in any activity for profit. It was pointed out that merely because there is some surplus, it did not follow that it is taxable. In the submission of the counsel, the word 'profit' implied the existence of the business, as in the Income-tax Act the word 'profit' is used only in relation to a business, whereas with reference to the other categories the word 'income' is used. The point sought to be made by the assessee is that the assessee did not act on its own with reference to these activities and that it undertook these activities at the instance of the Government not for the purpose of earning profit, but for the purpose of complying with the Governments objectives.
The significance of the use of the word 'for' in the closing words of section 2(15) has been commented upon by the Supreme Court in Indian Chamber of Commerce v. Commissioner of Income-tax as follows :
'Further, what is an activity for profit depends on the correct connotation of the proposition. 'For' used with the active participle of a verb means for the purpose (see judgment of Westbury C., 1127). 'For' has many shades of meaning. It connotes the end with reference to which anything is done. It also bears the sense of appropriate or adapted to : suitable to purpose-vide Blacks Legal Dictionary. An activity which yields a profit or gain in the ordinary course must be presumed to have been done for profit or gain. Of course, an extreme case could be imagined where without intent or purpose an activity may yield profit. Even so, it may legitimately be said that the activity is appropriate or adapted to such profit.'
The above passage appears to us to show that if the assessee itself indulges in an activity and that if profits arise from it, it could be legitimately said that the activity was adapted to such profit. But that is not the case here. The assessee was an instrument of the Government for the purpose of ensuring certain standards in the matter of storage of films or distribution thereof. We are unable to infer on the facts the these activities were for profit so as to be hit by the last portion of the definition in section 2(15). This question is answered in the affirmative and in favour of the assessee.
The Souther India Chamber of Commerce is the next of the assessees before us. The assessment year under consideration is 1962-63. The income derived by this assessee is as follows :
Interest on securities
There was a loss of Rs. 2,805 under the head 'Business' which was accepted. The assessee claimed that the aforesaid income was exempted from assessment under section 11(1) of the Act. The Income-tax Officer had considered a similar claim for exemption under section 4(3)(i) of the 1922 Act for the year 1960-61 and for the same reasons as those given in that order, he rejected the assessees claim for this year. He further pointed out that there was some receipts on account of conducting an exhibition and that this income was taxable under 'Other sources'.
Against the assessment so made the assessee appealed to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the business might be the means for effectuating the charity but not a charitable object itself and that the absolute exemption previously enjoyed by a charitable trust where income was applied or applicable to charitable purposes no longer held good. He held also that the accumulation of the income in excess of the prescribed limit (without being spent on charity) would have to be approved by the Income-tax Officer and that there was no such approval. He, therefore, confirmed the rejection of the assessees claim for exemption. When the matter came on appeal to the Tribunal, it found that the principal objects of the assessee were to promote and protect trade, commerce and manufacture, to watch over and protect the general commercial interest of India or any part thereof, to encourage friendly feeling and unanimity among commercial field on all subjects involving their common good and to do all such other incidental things for the purpose of preservation and extension of trade, commerce and manufacture. The Tribunal proceeded on the basis that these objects were on a par with the objects in the case of Andhra Chamber of Commerce. Applying the conclusion already arrived at in dealing with the facts of the Andhra Chamber of Commerce, it was held that the assessees claim for exemption would succeed. It, however, sent the matter back to the Appellate Assistant Commissioner so as to enable him to give a fresh opportunity to the assessee to produce the necessary particulars in regard to accumulation of income and then decide the question of quantum of exemption in accordance with law after hearing both the parties.
At the instance of the revenue, the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the Souther India Chamber of Commerce constitute charitable purpose as defined in section 2(15) of the Income-tax Act, 1961, entitling it to exemption under section 11(1) of the Income-tax Act, 1961, for the assessment year 1962-63 ?'
As mentioned earlier, question No. 1 considered in the case of Andhra Chamber of Commerce is also relevant to this assessee and we have already answered the question. The income of this assessee falls into two parts viz., (1) interest derived from securities, income from property and sundry interest, and (2) income from exhibition. The assessee owns a building part of which is occupied by itself and part is let out to tenants as in the case of Andhra Chamber of Commerce. We have earlier come to the conclusion that holding of property or making of investments and deriving income therefrom cannot be construed as an activity for profit. Therefore, with reference to the first category of income whatever we have said in the case of Andhra Chamber of Commerce in answering question No. 2 would apply to this case also.
The assessee conducted an exhibition at the time of its golden jubilee. It was established in the year 1910 and on the completion of 50 years of its existence, it was responsible for organising a trade, industrial and engineering exhibition. The time of the exhibition almost synchronised with the termination of the section Five Year Plan development. The Island Ground in Madras was the venue. The exhibition was inaugurated by Pandit Jawaharlal Nehru, the then Prime Minister. It was intended as an opportunity for trade, commerce and industry in the public and private sectors to exhibit their wares and products and to publicise their achievements. It is from this exhibition that the assessee derived the income of Rs. 3,77,428. The learned counsel for the revenue submitted that this was clearly an activity for profit, so that the exemption could not be applied to it. For the assessee the submission was that this was not an activity for profit and that it was just an exhibition to mark the occasion of its completion of 50 years which synchronised with the end of the second Five Year Plan of development. The submission was that this exhibition was not organised with any motive for profit. The profit was said to be only incidental.
Having considered the rival submissions, we are of the opinion that the assessees claim deserves to be accepted. There is nothing to show that at the time when the exhibition was organised, the assessee though of it as a profit making proposition. If really it had conceived the exhibition as a profit making activity, then it would have organised similar exhibitions subsequently. The fact that in spite of such handsome surplus, it did not repeat organising any such exhibition goes to show that this was not an activity for profit. At the time when it started the exhibition, it could not have estimated the number of persons who would visit it so that it could fix the entrance fee in such a manner it derived no profit. That the assessee ultimately derived a profit was only fortuitous. The presumption spoken of at page 806 of Indian Chambers case would apply only in the absence of any other indication from the facts as to why the activity was undertaken. In the Indian Chambers case there was no other indication on the facts as to why the three activities were undertaken except to make profits. In fact, such profits derived from members for services rendered were taxable under section 28(ii)(c) of the Act. Such services to non-members would stand on an a fortiori footing. There is no such service here. The organising of the exhibition does not on the facts appear to be an activity for profit. On this point also, we are satisfied that the assessees claim for exemption has to be upheld. The result is that the question extracted above is answered in the affirmative and in favour of the assessee.
The Madras Stock Exchange is the last of the assessees in this batch, whose case is before us. On August 12, 1937, the Madras Stock Exchange Association (Private) Limited was registered under the Indian Companies Act, 1913. The Securities Contracts (Regulation) Act, 1956, was passed to prevent undesirable transactions in securities by regulating the business of dealing therein, by prohibiting options and by providing for certain other matter connected therewith. 'Securities' included shares, scrips, stocks, bonds, Government securities, etc. Section 13 of the Act provides that if the Central Government was satisfied, having regard to the nature or volume of transactions in securities in any State or area, that it was necessary so to do, it might, by notification in the Official Gazette, declare this section to apply to such State or area, and thereupon every contract in such State or area which was entered into after the date of the notification otherwise than between members of a recognised stock exchange in such State or area or through or with such member would be illegal. This provision was applied to Madras and, therefore, the assessee-stock exchange had to apply for being recognised under section 3 of the said Act. Under section 4 of that Act, the Central Government could require that the rules and bye-laws of a stock exchange applying for registration were in conformity with such conditions as might be prescribed with a view to ensure fair dealing and to protect investors. The stock exchange had also to comply with any other conditions, which the Government might impose. Accordingly, with the approval of the Government, the assessee-stock exchange was incorporated as a company in April, 1957, under the Companies Act, 1956. Its objects were, inter alia, (a) to facilitate, assist, regulate and control the trade or business in securities, (b) to support and protect the character and status of brokers, jobbers and dealers, and to further their interest as well as public interest in securities, and (c) to apply for and obtain from the Government of India recognition of the exchange as a recognised stock exchange for the purpose of regulating and controlling the business in securities within the meaning of the Securities Contracts (Regulation) Act, 1956. There are other objects like settlement of disputes by arbitration, provision of safe deposit vaults and others of an incidental nature. The assessee does not have any share capital. It is a company limited by guarantee. Every member of the exchange undertook to contribute to the assets of the exchange in the event of its being wound up while he was a member or within one year after he ceased to be a member, for payment of the debts and liabilities of the exchange contracted before the ceased to be a member, and the costs, charges and expenses of winding up and for adjustment of the rights of the contributories among themselves, such amount as might be required not exceeding one thousand rupees. Originally, in the articles of association there was no provision regarding the payment of dividends and as to how the property of the stock exchange was to be dealt with on dissolution. At the tenth annual general meeting held on June 23, 1967, long after the relevant year, article 167 of the articles was amended to provide for the way in which the income and property of the exchange and the surplus on dissolution were to be dealt with. It was provided that the income and property of the exchange was to be applied solely for the promotion of its objects set forth in the memorandum and that no portion of the income or property must be paid directly or indirectly by way of dividends to the members of the exchange.
The stock exchange derived income from the following sources :
Interest on securities
The income which was derived under the head 'Other sources' for 1962-63, and under the head 'Business' for the assessment year 1963-64, was derived from (a) preparation and sale of year book, (b) market reports and (c) listing fees. Every year the assessee prepared what is called the year book in which the detailed particulars of the companies whose shares were dealt with in the stock exchange was compiled. The market reports are what are issued every day when the market is opened giving the quotations of the shares and securities. The listing fees are derived from companies which want their shares being dealt with in the stock exchange.
For the assessment year 1962-63, the assessee did not apparently make and claim before the Income-tax Officer, as there is no discussion of any such claim in his order. The Income-tax Officer brought to tax Rs. 81,156 which is composed of the three sources of the income mentioned earlier. For the assessment year 1963-64, the assessee, relying on the decision of the Madras High Court in Andhra Chamber of Commerce v. Commissioner of Income-tax, sought the exemption under section 11 of the Act of 1961.
The Income-tax Officer was of the view that the decision of the Andhra Chamber of Commerce was not applicable to it and held that no part of the income of the assessee-company was entitled to any exemption. The Appellate Assistant Commissioner on appeal distinguished the decision in the Andhra Chamber of Commerce case, as he was of the view that the stock exchange was formed for the purpose of promoting the actual trade interest of its constituent members. He rejected the claim for exemption for both the years. The Tribunal, after referring to the amendment to article 167 under which the profits were not to be distributed among the members and, after referring to the decision of the Bombay High Court in V. V. Ruia v. S. Dalmia, came to the conclusion that the object of the assessee was advancement of general public utility and that its income was exempt. However, it was of the view that the assessee had no opportunity to place the facts on the question as to whether it had accumulated the profits beyond the margin set out in section 11. For this purpose, it sent back the matter to the Appellate Assistant Commissioner. On the above facts, the following question has been referred :
'Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the Madras Stock Exchange Limited constituted charitable purpose as defined in section 2(15) of the Income-tax Act, 1961, entitling it to exemption under section 11(1) of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64 ?'
As we have shown above, question No. 1, discussed in the case of Andhra Chamber of Commerce is also relevant here and our answer to that question would apply here also. With reference to the question given above, the learned counsel for the revenue submitted that there is no prohibition from distribution of profits in the relevant year and that, therefore, the assessee was in the same position as any other commercial concern which could make and distribute its profits. The amendment in 1967 was, in the submission of the counsel, ineffective as far as these years are concerned. For the assessee the submission was that this being a company limited by guarantee, there could be no distribution of profit at all to its members. His further submission was that the amendment in 1967 was merely clarificatory.
Section 37 of the Companies Act, 1956, relates to companies limited by guarantee. Section 37(1) to the extent material runs as follows :
'Section 37(1). - In the case of a company limited by guarantee and not having a share capital.... every provision in the memorandum or articles or in any resolution of the company purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void.'
What is prohibited is a right of participation in the divisible profits of the company otherwise than as a member. It follows that there is no prohibition against the distribution of profits among the members as such. Table C of Schedule I to the Companies Act contains the articles applicable to such companies limited by guarantee and not having a share capital. The articles in Table C do not contain any provision either enabling or preventing the distribution of dividends. However, there is no legal prohibition against the distribution of dividends in the case of a company limited by guarantee. This is also the view expressed in Palmers Company Law, Twenty-first edition, at page 24 : The relevant passage runs as follows :
'The amount of the guarantee has to be stated in the memorandum; the Act further does not provide minimum or maximum limits. The Act further does not prohibit the creation of several classes of guarantees of different amount; it would, e.g., be possible to provide that the guarantee of one class of members shall be pounds 2 and that of another shall be pounds 1. Nevertheless a provision in the memorandum or articles purporting to give a person a right to partake in the profits, otherwise as a member, is void in case of a guarantee company not having a share capital and registered after January 1, 1901 (section 21 (1)). It is, however, submitted that it is lawful for the articles to give members the right to participate in the profits in accordance with the amount of their guarantee, so that in the preceding example members who have undertaken a guarantee of pounds 2 will receive twice the dividends as those who have undertaken a guarantee of pounds 1. Section 21(1) does not, it is submitted, apply to this case because the members partake in the profits still as members; the section merely prohibits the creation of rights to profits disproportionate to the amount of the members guarantee. Similarly, it is believed that, if there are various classes of guarantees notwithstanding article 20 of the articles in Table C, the right of members to vote can by the articles be made proportionate to the amount of their guarantee.'
Therefore, the fact that the assessee is limited by guarantee does not stand in the way of distribution of its profits to its members. The amendment in article 167 is not effective for this year. Profits could have distributed to the members.
However, even if the property held under trust was held only in part for such charitable purposes, exemption is available as contemplated by section 11(1)(b). As this aspect has not been considered and decided by the Tribunal, it is necessary to leave it to the Tribunal to go into the point as to whether the assessee can be brought within the scope of section 11(1)(b). In the event of the assessee being found to be eligible for the exemption under section 11(1)(b) to the extent given therein, it would be necessary to go into the question as to whether the assessees claim for exemption is lost by the words added in section 2(15) as constrasted with the definition of 'charitable purposes' indicated in section 4(3) of the 1922 Act. We proceed to discuss this point only on the hypothesis of there being scope for exemption under section 11(1)(b). We should not be understood as having expressed any opinion on the said point in the present judgment.
As far as the property income and interest from securities are concerned, whatever we have stated in the case of Andhra Chamber of Commerce and other cases earlier would apply with equal force here. In other words, the income therefrom cannot be brought within the scope of 'activity for profit' so as to take away the exemption under section 11.
The question that now remains is whether the income derived from the publication of the year book, market reports and the income from the listing fees could be taxed. We have pointed out earlier that the Income-tax Officer taxed the said receipts as income from 'other sources' in 1962-63 and as income from 'business' in 1963-64. The question as to whether the stock exchange is carrying on a business came up for decision before a learned single judge of the Bombay High Court in V. V. Ruia v. S. Dalmia. That was a case between a broker and its constituent. The broker was member of the Bombay Stock Exchange and there were disputes between the broker and the constituent. The dispute was liable to be referred to arbitration as provided by the rules of the Bombay Stock Exchange. The broker appointed his arbitrator and called upon the constituent to appoint an arbitrator on his behalf. The stock exchange also informed the constituent about it and called upon him to appoint his arbitrator in the manner contemplated by the rules. The constituent wrote that there was no agreement for arbitration between the parties and the broker had no right to call upon him to appoint his arbitrator. Thereupon, the broker filed a petition before the Bombay High Court under the Arbitration Act for a declaration that there was a valid arbitration agreement between the parties in respect of the disputes and for consequential relief. The constituent contended before the High Court that the Bombay Stock Exchange was an illegal association as it had more than twenty members and was carrying on business for profits and that its bye-laws relating to arbitration were not in accordance with the Arbitration Act. There was certain other contentions to which it is unnecessary to allude here.
Section 11 of the Companies Act of 1956 provides that no company or association consisting of more than twenty persons could be formed for the purpose of carrying on any business, which had for its object the acquisition of gain by the company, association or partnership or by the individual members thereof, unless it was registered as a company under the Companies Act, or was formed in pursuance of some other Indian law. There was a stock exchange in Bombay under the name and style of 'The Bombay Native Share and Stock Brokers Association'. At a meeting held on April 9, 1957, it was resolved by the said association to make an application to the Central Government for its recognition under the Securities Contracts (Regulation) Act, 1956. The Central Government granted the recognition. The Bombay Stock Exchange had not, however, registered itself under the Companies Act. The contention for the constituent was that it was an illegal body not having been registered under the Companies Act. The question for consideration before the Bombay High Court was whether the Bombay Stock Exchange was carrying on any business. At page 582 the learned judge held as follows :
'Mere owning of immovable property, however, can at the higher be an investment and not a business. It would be a business in immovable property only if there is buying and selling'.
The ownership of immovable property in that particular case was held to be incidental to its main object of regulating and controlling transaction in securities. The Bombay Stock Exchange maintained a clearing house and the receipt of clearing house charges and also charges by way of rent for use of the safe deposit vault, it was contended, came within the scope of 'business receipts'. At page 584 the learned judge observed as follows :
'Business, moreover, has to motive or purpose or object of profit. But these activities of the stock exchange are only for effectually regulating and controlling transactions in shares and securities. Profit may, of course, result because the fees and charges which the stock exchange may levy cannot be so fixed that their aggregate would, every year, equal its cannot be so fixed that their aggregate would, every year, equal its anticipated expenses. Loss also may result if the fees and charges turn out to be less than the expenses in fact incurred. But what is more important is that these activities are not intended for the stock exchange making a profit or gain. The most significant factor which cannot be overemphasised is that there is no rule or by-law or regulation of the stock exchange which empowers or even envisages a distribution by the stock exchange of its profits between its members. When an association of persons carried on business, its fundamental aim would be to make profits for distribution between its members. There is, however, no such provision in the case of the Stock Exchange, Bombay...... the stock exchange does not have for its object the acquisition of gain either for itself or for its members. Now, so far as the members are concerned, the activities of the stock exchange may result in benefit to its members, such benefit to the members being by reason of earning more profit or gains for themselves because of the beneficial control exercised by the stock exchange. But whatever its members may earn in that way would not be the direct result, but would only be an indirect result, of the activity of the stock exchange of regulating and controlling the transactions in shares and securities. As a matter of fact, it would really be only a benefit but not a gain.'
It was held that no business was carried on by the stock exchange and that, therefore, the prohibition under section 11 did not apply. Agreeing with this view and applying the same reasoning, we consider that the assessee is not carrying on any business here. The compilation of the year book is only intended to give particulars to the brokers and their constituent public to know the nature and details of the shares that were dealt with in the stock exchange. It is a kind of an amenity for the benefit of the brokers and the public, so that they could decide on a rational basis the value of the shares so as to deal in them. The publication of market reports is also a beneficial activity so as to enable the public to know the price at which the shares were being dealt with in the stock exchange. There is nothing to show that these activities were undertaken with a view to making gain.
We have now to deal with the facts relating to listing fees. Companies applied for inclusion in the list of companies whose shares were dealt with in the stock exchange. At the time of such application, they have to pay a prescribed fee, which is fixed by the governing body of the stock exchange. It may be mentioned that the governing body of the stock exchange includes a member nominated by the Government. The principal object of this listing is to provide ready marketability and impart liquidity and free negotiability to the stocks and shares. This would ensure proper supervision and control on the dealings therein and protect the interest of the shareholders as well as of the general public. A company derives also some advantage by getting its shares registered in the stock exchange, as the share price is an index of its prosperity, so that when it goes into the market either for fresh issue of shares or for raising money, the public would readily subscribe if the shares or for raising money, the public would readily subscribe if the shares are quoted above par. The listing fee is fixed with reference to the capital of the company, subject to a maximum. The inclusion of a company in the list is thus in fulfillment of an object for regulating the contracts in relation to its shares. As the stock exchange is a body which has to obtain the prior approval of the Government before it could function as such and as the whole idea behind the bringing into existence of a stock exchange is to control and regulate the contracts relating to the shares and securities, the assessee, in listing the shares, carries on what can be called a statutory function. The provisions of the Securities Contracts (Regulation) Act, 1956, were not designed for the purposes of enabling the stock exchange to carry on any business as such or to allow it to make profits from the public. It was a regulatory measure to prevent speculation and any such unhealthy economic activities. It follows that the mere receipt of listing fees cannot be said to be an activity for profit. We, therefore, hold that the said receipt cannot be said to be from an activity for profit coming within the closing words of section 2(15) of the Income-tax Act, 1961.
In the result, the question as given above has to be answered in the affirmative and in favour of the assessee. As each case was separately argued, we consider it proper to award each of the assessees costs. Counsels fee Rs. 250 in the case of each assessee.
Tax Case No. 277 of 1970.
The only question referred in this reference is as follows :
'Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the object of the assessee constituted charitable purpose as defined in section 2(15) of the Income-tax Act, 1961, and that its income was exempt under section 11(1) of the same Act ?'
We have discussed the facts of this assessee in our judgment in Tax Case No. 281 of 1970. The facts are identical. For the same reasons as those given therein, the question is answered in the affirmative and in favour of the assessee. There will be no separate orders as to costs.
Tax Case No. 87 of 1971.
The questions referred in this reference are as follows :
'1. Whether the Tribunal is right in law in holding that the test laid down in the expression not involving the carrying on of an activity for profit in section 2(15) of the Income-tax Act, 1961, is to be applied with reference to the carrying on of an activity by the assessee who claims the exemption under section 11(1) of the Income-tax Act, 1961, and not with reference to any other person who is not a party to such claim for exemption under section 11(1) ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the objects of the South Indian Film Chamber of Commerce constitute charitable purpose as defined in section 2(15) of the Income-tax Act, 1961, entitling it to exemption under section 11(1) of the Income-tax Act, 1961, for the assessment years 1964-65 to 1967-68 ?
We have discussed the facts of this assessee in our judgment in Tax Case No. 281 of 1970. The facts are identical. For the same reasons as those given therein, the questions are answered in the affirmative and in favour of the assessee. There will be no separate order as to costs.