RAMAPRASADA RAO J. - At the instance of the assessee, the following question of law has been referred to us on an application filed by it under section 256(1) of the Income-tax Act :
'Whether, on the facts and in the circumstances of the case, the order the Appellate Tribunal rejecting the assessee's claim to exemption under section 4(3)(i) of the Indian Income-tax Act, 1922, for the assessment years 1959-60 to 1961-62 or under section 11 of the Income-tax Act, 1961, for assessment years 1962-63 and 1963-64 is valid in law ?'
The assessment years under consideration are 1959-60 to 1963-64. As a common question of law is said to have arisen out of the order of the Tribunal, the applications for reference were consolidated and a common statement of the cases prepared.
The section is a society registered under the Societies Registration Act (XXI of 1960). The relevant objects of the assessee-association which need to be extracted are as under :
'(a) To organise the proprietors of several cafes, restaurants, hotels, eating houses, etc., in the Madras City into a corporate body having a status to represent their grievances to the Corporation or the Government or other public authorities;
(b) To create and encourage friendly and brotherly feelings and unity among the members of the association;
(c) to remove as far as possible the various trade difficulties and to frame rules and regulations of conduct of members in their business transactions;
(d) to watch and protect the general, commercial and business interests of the members;
(e) to enquire into, adjust and settle disputes or controversies among the members of the association and to arbitrate in the settlement of disputes arising out of transactions between parties willing to abide by the decision of the association;
(f) to promote, modify or oppose legislative and other measures affecting the business of members;
(g) to arrange supply of proper articles of food for use of members at a cheap and uniform price through the marketing officer to the Government and co-operate with him and other authorities both public and private engaged in this direction and diffuse useful knowledge to members;
(h) to maintain uniformity in the methods of business as regards prices, conduct of business, etc., to prevent ruinous and unhealthy competition.'
It is common ground that the main activity and the qualifications to become a member of the association are that the members seeking admission should be engaged in the business of hotels, eating houses, cafes, tea-shops, confectionery and the business of a like nature in the City of Madras and having a licence to run the same either as proprietors or lessees or as a corporate body. That the above excerpted clauses are the only clauses which are to be scrutinised for purposes of this case is not disputed before us. Thus, the main activity of the association was to secure permits for rice, wheat, sugar and other articles of food needed by the members from the authorities empowered to issue these permits and to buy the goods which the assessee-association is authorised to buy under the said permit and to make them over to the members. In the statement furnished by the assessee, which is not quite clear, they have earned an income over expenditure in the course of their commercial activity and sustained losses also during three assessment years in question. On the basis of the statement so furnished by the assessee, the Income-tax Officer brought to tax the amounts shown by the assessee as profits and accepted their statements as regards the alleged loss sustained by them. The Income-tax Officer computed the loss for the relevant years. On appeal by the assessee two contentions were raised. Firstly, that the assessee was a mutual association and the surplus, if any, arising from its activities, was not taxable. Secondly, that the objects of the assessee-association were charitable, that is, for the benefit of the public and, therefore, the assessee's income, if any,is not assessable. The Appellate Assistant Commissioner rejected these contentions. But he excluded form the computation of profits the subscription and entrance fees received by the assessee-association from their members. Subject to the above, the order of assessment made by the Income-tax Officer was confirmed. On the further appeal before the Tribunal, the first contention referred to above was not pressed, but considerable stress was laid on the second contention that the assessee-association should be deemed to be an association indulging in charitable purposes and that their commercial activity did not involve the carrying on of any activity for profit. Reliance was placed upon section 2(15) of the Income-tax Act, 1961, and the ratio in Commissioner of Income-tax v. Andhra Chamber of Commerce : 55ITR722(SC) was heavily pressed.
In the reference before us Mr. Srinivasan placed considerable reliance on the above decision of the Supreme Court and another decision in Joint Commercial Tax Officer v. Young Men's Indian Association : 3SCR680 was also pressed upon. The counsel for the department, on the facts and opposing the contentions, would distinguish the two Supreme Court cases as above and would urge that the question has to be answered against the assessee.
Section 2(15) of the Income-tax Act of 1961, hereinafter called as 'the Act', gives an inclusive definition to the expression 'charitable purpose'. A 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 corresponding provision in the last paragraph of section 4(3) of the 1922 Act explained the charitable purpose as including relief of the poor, education, medical relief and the advancement of any other object of general public utility. In the present Act is inserted a restriction as it were, into the general definition of charitable purpose in the earlier Act by incorporating the words 'not involving the carrying on of any activity of or profit'. The primary question, therefore, is whether the commercial activity of the assessee-association involved a profit motive. The best evidence to find out whether the purpose of the activity is to earn income or profit, is the very accounts of the association. Though this aspect loomed large before the Appellate Assistant Commissioner, yet that was not pressed before the Tribunal either. Based on the statements filed by the assessee for the relatable years of assessment, it is not difficult to hold that the association was in the stream of the commercial activity which gained for them income. There are myriad ways in which income can be earned. The argument of Mr. Srinivasan is that there is no sale as such by the association to the members of the commodities secured by them, which ordinarily is the means to earn a profit or income. It is an established principle in commerce and trade that it is not the element of sale alone which would result in the profit. It is admitted that the association secures various raw materials which are necessary for the hoteliering trade, obviously in bulk, and distributes them to their members. Whilst so doing they gained a surplus. Therefore, this peculiar activity, on their own showing, has resulted in some monetary gain to the association. The Tribunal also rightly points out that the fact that the assessee has derived a surplus from its transactions of purchase and distribution is clear and that the said surplus can be taxed as such. That it could be the subject-matter is not even seriously disputed. According to the definition of 'charitable purpose' such income or surplus derived from the activity of the association is within the net of taxation and the assessee cannot claim an exclusion of such surplus or income on the ground that it is an association which has to be accepted as an institution existing for a charitable purpose within the meaning of section 2(15) of the Act.
In so far as the years in which the assessee had sustained loss, according to their own statements, it was not even suggested that such loss has been carried forward and set off in the later years. But that question does not even arise for consideration in the reference and rightly, therefore, the Tribunal did not go into the question as to whether such losses are liable to be set off in later years.
In the context of such a factual finding of the Tribunal and the reasonable impression gained on the statements of accounts filed by the assessee-association themselves, Mr. Srinivasan strenuously contended that the activity of the association would squarely come within the ratio of the two Supreme Court cases referred to above.
In order to appreciate the principle in Commissioner of Income-tax v. Andhra Chamber of Commerce : 55ITR722(SC) , it is necessary to set out the objects of the association of the Andhra Chamber of Commerce and consider it in conjunction with the objects of the association of the assessee. For purposes of convenience, the relevant clauses may be extracted one against the other.
The clauses in the memorandum of object of the Andhra Chamber
The clauses in the memorandum of of objects of the association in this case.
(a) To promote and protect trade, commerce and industry of India in the Province of Madras and in particular the Andhra Country.
(a) To organise the proprietors of several cafes, restaurants, hotels, eating houses, etc., in Madras City into a corporate body to represent grievances to the Corporation, Government, public bodies, etc.
(b) To aid, stimulate and promote the development of trade, commerce and industry in India or any part thereof with capital principally provided by Indians under the management of Indians.
(c) To watch over and protect the general commercial interests of India or any part thereof and interest of Andhras (in particular engaged in trade, commerce or industry in India and in particular Andhra Desa).
(d) To watch and protect the general, commercial and business the members. interest of the members.
(d) To do all such other things as may be conducive to the preservation and extension of trade, commerce and industry or incidental to the attainment of the above objects.
(g) To urge or oppose legislative measures affecting trade, commerce or manufacture and procure change of law and practice affecting trade, commerence and industry and removal of grievances.
(g) & (h) To promote, modify or oppose legislative and other measures affecting the business of the members. Clause (h) can be compared with the last lib of (g) in 1st column to prevent unhealthy competition.
Whilst in clause (g) intention is to promote and to protect trade in India, the object of the assessee-association is to organise the proprietors of several restaurants and hotels in Madras City to represent their grievances to the Corporation, Government, and other public bodies. There is no object in the assessee-association which is equivalent to the one in the Chamber of Commerce which is intended to promote the development of trade, commerce and industry in India as a whole. Whilst the chamber of commerce intents to protect general commercial interest of the trading community in India, the object of the assessee-association is to protect the business interests of its members. The Madras Hotels Association does not contemplate to do any act or thing conducive to the preservation and extension of trade, commerce and industry in our country. Even in the matter of the representation, the assessee-association is interested in promoting, modifying or opposing measures which would affect the business of its members. This centrifuged patronage to the members of the association cannot be said to be a charitable purpose. It is not in dispute before us that the Andhra Chamber of Commerce produces leaflets and prints journals which are very informative for the entire commercial community in our country whilst the association has no such general interest. The usual adage that charity begins at home is very conspicuous in the objects of this association. The basis on which the Supreme Court gave relief to the Andhra Chamber of Commerce was that their main and primary objects were not vague or indefinite and it was intended to advance general public utility. Incidentally, they would observe that the expression 'object of general public utility' need not be one to benefit the whole of mankind, but it is enough if it sub-serves the interests of a section of the public. If any steps are taken so as to advance such interests of trade and commerce in general which might incidentally reflect upon the interests of their own members or a section of the public, then the Supreme Court laid down the rule that it would be for the advancement of an object of general public utility. What the assessee-association does is only to consolidate its man-power and potential and use and utilise it for the benefit of the members. The argument is that by such a fair and equitable distribution of essential commodities secured from the State authorities, the association is helping to keep the price level at its reasonable height. This is a bare expectation. The association has no control over its members. Each proprietor of a hotel has his discretion to trade in the best manner he pleases. Obviously, there is no binding force as disclosed in the objects of the association whereby it is provided that every hotel proprietor is bound to keep the price line at the rate fixed by the association. There is no evidence either. On the ground that the association during the course of its activity is gaining a surplus which is equable to income in the broadest sense and also on the ground that the principle in Commissioner of Income-tax v. Andhra Chamber of Commerce : 55ITR722(SC) is not applicable to the facts of this case, we accept the finding of fact rendered by the Tribunal. The overall impression gained in this case is that the activity of the association and its zealous and assiduous interest evinced towards it by its members is only for the purpose of a private gain which is obviously inconsistent with the object of general public utility. In so far as the decision of the Supreme Court in Joint Commercial Tax Officer v. Young Men's Indian Association  26 STC 241 is concerned, the facts are entirely different and that has not been squarely referred to before us. We note that with reference to the assessment years 1962-63 onwards, the Act of 1961 would apply. We have already referred to the difference between the Acts of 1922 and 1961. The activity of the association does not come within the purview of the definition of charitable purpose either under the old Act or under the new Act.
The result of our discussion is that our answer to the referred question is against the assessee and in favour of the revenue with costs. The respondent's counsel fee is fixed at Rs. 250.