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Andhra Chamber of Commerce Vs. Commissioner of Income-tax, Madras. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberReferred Case No. 121 of 1956
Reported in[1961]42ITR503(Mad)
AppellantAndhra Chamber of Commerce
RespondentCommissioner of Income-tax, Madras.
Cases ReferredUnited Service Club v. The Crown. But
Excerpt:
- .....of beneficiaries under the trust did not alter the nature of the trust, and that it was a public charitable trust within the scope of section 4(3)(i) of the income-tax act. the object of the assessee-association was not the advancement or protection of its individual members, but the advancement of the interests of the country as a whole. the beneficial effects of its activities in the pursuit of its declared objectives were not confined to its members; the members shared them along with the rest of the community, including of course the section thereof engaged in commerce.the learned advocate-general pointed out that the real test in deciding whether a trust is a public charitable trust for the benefit of the public should be, whether the court could control the trust. in.....
Judgment:

RAJAGOPALAN, J. - The assessee, the Andhra Chamber of Commerce, an incorporated company, obtained registration under the provisions of section 26 of the Indian Companies Act (VII of 1913). Both section 26 of that Act and article 4 of the memorandum of association required the assessee-association to expend its income solely on the promotion of its objects and prohibited it from distributing any portion of its income amongst its members by way of dividend or otherwise. Clause 7 of the memorandum provided that, even if the assessee-association was dissolved or wound up, its assets should not be distributed amongst the members of the Chamber, but should be utilised by transfer to other institutions with similar objects. The principal sources of income of the assessee-association were the subscriptions and donations it received from its members and the rental it received from the tenants who occupied the building it owned at Madras. The principal objects of the association as set out in sub-paragraphs (a), (b), (c), and (y) of clause 3 of the memorandum of association 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 provided by Indians or under the management of Indians, (c) To watch over and protect the general commercial interests of India or any part thereof and the interests of the Andhras in particular engaged in trade, commerce or manufacture in India and in particular Andhra Desa. (y) 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.

In paragraph 4 of the statement of the case submitted by the Tribunal it admitted the claim of the assessee-association, that in practice too its objects were to promote that was accepted was :

'It is the earnest desire of the committee to set up a commercial and industrial museum, arrange to send trade delegations to various countries for the promotion of Indias trade relations with those countries, institute scientific and technical research and study, expand the library and also organise commercial intelligence service on a larger scale. The committee has constantly endeavoured to raise the standard of the institution within the short period before them and they hope to do much more in the coming year also.'

That was the claim made in its annual report in 1953.

In each of the years of account 1947 to 1953, the expenditure of the assessee-association exceeded its total receipts. The net income from its buildings alone was assessed to income-tax under section 9 of the Income-tax Act in the corresponding assessment years 1948-49 and 1954-55. The details of the amounts so brought to tax were set out in paragraph 6 of the statement of the case. The Tribunal agreed with the Department, overruled the objections of the assessee and sustained the assessment.

The Tribunal referred the following questions to this court under section 66(1) of the Income-tax Act :

'(1) Whether the aforesaid income from property owned by the assessee is exempt under section 4(3)(i) for the aforesaid six years of assessment ?

(2) If the answer to the above question is in the negative, whether the activities of the assessee amount to a trade or business, the profit or loss from which is assessable under section 10 ?'

Section 4(3)(i) of the Income-tax Act exempts from tax income derived from property held under a trust or other legal obligation wholly for charitable purposes. The exemption is partial, if the property is not held wholly for such purposes but is held in part only for such purposes. The charitable purposes must relate to the taxable territories. What are charitable purposes within the meaning of section 4(3)(i) are set out in the Explanation to section 4(3), the relevant portion of which runs :

'In this sub-section charitable purpose includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility....'

None of the objects expressly enumerated in this statutory explanation to section 4(3), relief of the poor, education and medical relief, arises for consideration in this case. The real question for determination is, whether the objects of the assessee association satisfy the statutory test, 'the advancement of any other object of general public utility'. Is the avowed object of the assessee-association to promote and protect the trade, commerce and industry in the country as a whole an object of general public utility is the question to which we have to address ourselves.

It might at first sight appear to be a startling claim, that a trade association like the assessee is a charitable institution or a charitable organisation. It is not, however, the popular concept of what constitutes charity that matters. As has often been pointed out by courts, 'charitable purposes' as used in enactments is a term of art. For purposes of income-tax it has to be given the meaning the Act accords to it in the Explanation to section 4(3), which we should emphasise is an inclusive and not an exhaustive definition. The approach the court should adopt in deciding whether in a given case the statutory requirement of 'charitable Purpose' has been satisfied was indicated by the Privy Council in All-India Spinners Association v. Commissioner of Income-tax. Their Lordships reaffirmed the principles they laid down earlier in In re Trustees of the Tribune Press. At page 486 of the report in the All-India Spinners Association case, their Lordships pointed out that the statutory requirement was that the property should be held under trust or other legal obligation wholly for religious or charitable purposes and a charitable purpose included relief of the poor, education, medical relief and advancement of any other object of general public utility. Their Lordships proceeded to observe :

'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 preamble a list of charitable objects which fell within the Act, and this was taken as a sort of chart or scheme which the court adopted as a ground work 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 Macnaghtens definition of charity in Commissioners for Special Purposes of Income-tax v. Pemsel 3, 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 Macnaghtens 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.'

At page 488 their Lordships pointed out that the funds and assets of the All-India Spinners Association constituted property held by that association for its purposes and objects. After referring to the conclusion of the High Court, that the real underlying object of the association was to benefit the poor agriculturists, their Lordships proceeded :

'..... their Lordships see no sufficient reason to doubt the conclusion that the primary object of the association was the relief of the poor. That would be enough prima facie to satisfy the statute. But there is good ground for holding that the purposes of the association included the advancement of other purposes of general public utility. These last are very wide words... They were applied in the Tribune Press case, without any very precise definition to the production of the newspaper in question under the conditions fixed by the testators will. The Board stated... that the object of the paper might be described as the object of supplying the province with an organ of educated public opinion and that it should prima facie be held to be an object of general public utility. These words, their Lordships think, would exclude the object of private gain, such as an undertaking for commercial profit though all the same it would subserve general public utility. But private profit was eliminated in this case... Nor is there any ground for the court holding that the scheme is not one which may be for the public benefit. The court might in proper cases refuse to admit as charitable schemes, purposes eccentric or impracticable. But though economists might differ about the wisdom of some aspect at least of the associations purposes, the court could not hold that it was beyond the pale of legitimate charitable trusts...'

Lord Macnaghtens definition of charity in Pemsels case furnished the basis for the statutory definition of 'charitable purposes' in the charitable Endowments Act (VI of 1890), from which, however, religious trusts stood excluded. But for that difference the same concept underlay the definition is section 4(3) of the Indian Income-tax Act. The statutory variation from Lord Macnaghtens principles was explained by their Lordships of the Privy Council in the passages we have extracted above. Even apart from section 18 of the Transfer of Property Act, which runs : 'The restrictions in sections 14, 16, and 17 shall not apply in the case of a transfer of property for the benefit of the public in the advancement of religion, knowledge, commerce, health, safety, or any other object beneficial to mankind' and records legislative recognition to the view that advancement of commerce is an object beneficial to the community, there could be little difficulty in holding that advancement of trade, industry and commerce of the country is an object of general public utility. The economic prosperity of the country, or even a section thereof, built on its trade, commerce and industry, is a benefit that accrues to the country as a whole; and the fact that that prosperity is shared by those who participate in the trade, commerce and industry, does not make it any the less the concern of the country as a whole. That the economic prosperity of the country is of utility to the country as a whole should be clear. It is, in our opinion, an object of general public utility, within the scope of the statutory definition in section 4(3) of the Income-tax Act. In In re Town and Country Planning Act, 1947 : Crystal Palace Trustees v. Minister of Town and Country Planning Danckwerts, J., referred to the relevant statutory provisions of the Crystal Palace Act, 1914, and concluded at page 142 :

'... it seems to me that the intention of the Act in including in the objects the promotion of industry, commerce and art, is the benefit of the public, that is, the community, and is not the furtherance of the interests of individuals engaging in trade or industry or commerce by the trustees. It appears to me that the promotion of industry or commerce in general in such circumstance is a public purpose of charitable nature...'

When the purpose of the association is the advancement of trade, commerce and industry in the country and that is an object of general public utility, neither the object of the individual members of the association to benefit themselves, nor the fact that they did derive such individual benefit from the activities of the association of the pursuit of its objects should cloud or affect the determination of the issue, was the object of the association one of general public utility. See paragraph 517 in 4 Halsburys laws of England (Simonds Edition) page 236. Those observations were particularly based on the Institution of Civil Engineers v. Commissioners of Inlan Revenue. It is sufficient to set out extracts from the headnote. The institution was founded in 1818 and incorporated by Royal Charter in 1828 for the 'general advancement of mechanical science and more particularly for promoting the acquisition of that species of knowledge which constitutes the profession of a Civil Engineers'. By the supplemental Charter off 1922 corporated members of the institution were authorised to use the title of member or associate member, as the case might be of the Chartered Institution of Civil Engineers. The claim of the institution was that it was established for charitable purposes only. In upholding that claim the learned judges pointed out, as set out in the headnote, that 'the benefit of members was incidental to the main purpose of the institution and that the institution was established for charitable purposes only'. See also Trustees of the Charity Fund v. Commissioner of Income-tax, where the Supreme Court pointed out that the fact that some of the relations or the members of the family of the founder of the trust had a preferential claim in the selection of beneficiaries under the trust did not alter the nature of the trust, and that it was a public charitable trust within the scope of section 4(3)(i) of the Income-tax Act. The object of the assessee-association was not the advancement or protection of its individual members, but the advancement of the interests of the country as a whole. The beneficial effects of its activities in the pursuit of its declared objectives were not confined to its members; the members shared them along with the rest of the community, including of course the section thereof engaged in commerce.

The learned Advocate-General pointed out that the real test in deciding whether a trust is a public charitable trust for the benefit of the public should be, whether the court could control the trust. In National Anti-Vivisection Society v. Inland Revenue Commissioners Lord Simonds stated :

'One of the tests, and a crucial test, whether a trust is charitable, lies in the competence of the court to control and reform it. I would remind your Lordships that it is the King as Parens patriae who is the guardian of charity and that it is the right and duty of his Attorney-General to intervene and inform the court, if the trustees of a charitable trust fall short of their duty. So too it is his duty to assist the court, if need be, in the formulation of a scheme for the execution of a charitable trust.'

It should be noted that section 4(3)(i) of the Income-tax Act covers cases not only of trusts, that is, public charitable trusts, but also cases where there is a legal obligation to spend or accumulate the income for public charitable purposes. In the case of the assessee-association we have pointed out that the legal obligation is that imposed by section 26 of the Indian Companies Act, 1913, as well as by clause 4 of the memorandum of association. That is a legal obligation which the court can and will enforce when called upon to do so.

The learned Advocate-General referred to Chamber of Commerce, Hapur v. Commissioner of Income-tax. The Chamber of Commerce, Hapur, was also an association registered under section 26 of the Indian Companies Act. Its object, among others, was to promote and protect trade and commerce. One of the questions that arose for determination in that case was whether the Chamber of Commerce was a charitable institution within the meaning of the Income-tax Act. The learned Judges held that it was not a charitable association. The learned judge pointed out at page 411 :

'In the present case the persons who are actually benefited are (1) those particular individuals who are members of the association and (2) such outside merchants as may elect, when doing business at Hapur, to do it through the chamber of commerce. I feel some doubt as to whether in the circumstances an object of general public utility as contemplated by the Act is being advanced by the assessee. Further, it seems to me that before an institution can be held to be charitable there must be an element of altruism; that is to say, the beneficiaries must not be able to claim the benefit. That condition is wanting in the present case. Moreover, the contention of learned counsel for the assessee that there is no privet between the assessee and outsiders and that this is a mutual concern of the members who compose the association appears to me to be inconsistent with his claim that the assessee is a charitable institution within the meaning of clause (ii) of sub-section (3) of section 4 of the Act. The whole idea of a mutual concern is that the particular members composing it should be benefited.'

With all respect, we are unable to agree with this line of reasoning. We have pointed out earlier that the fact that members of the assessee-association also benefit is no bar to the acceptance of its claim that the object of the association as distinguished from the objects of each of the individual members of the association fulfills the statutory requirement of 'charitable purpose'. Whether on the facts found in the case of Hapur Chamber of commerce the learned judges were entitled to hold that it did not satisfy the test of having objects of general public utility does not arise for consideration in this case. But neither the test of altruism nor the fact that members of the association also benefited by it can determine the question, is the object of the assessee-association one of general public utility. We express no opinion of ours on the question, whether a mutual benefit association can never satisfy the requirement of general public utility. As we shall show later the assessee was not such a mutual concern.

The question posed by their Lordships in the Tribunes case, was set out at page 420 of the report :

'... the only question for decision is whether that property is held under trust wholly for the advancement of an object of general public utility.'

The question was answered at page 426 :

'They think that the object of the paper may fairly be described as the object of supplying the province with an organ of educated public opinion and that it would prima facie be held to be an object of general public utility.'

In the present case the question is, whether in utilising its income, from whatever source it was received, property or subscriptions, the assessee-association is under a legal obligation to apply or to accumulate it wholly for charitable purposes. Is the purpose of the association, the advancement and promotion of trade, industry and commerce, an object of general public utility We answer these questions in the affirmative.

Our answer to the first question referred to this court under section 66(1) of the Income-tax Act is in the affirmative and in favour of the assessee.

The consideration of the second question need arise only if the assessee failed on the first. Apart from that, the second question does not bring out the real controversy between the assessee and the Department. The real claim of the assessee was that it was entitled to set off its income under the head of 'property' against the total deficiency. The Tribunal was of the view that the other income of the assessee did not fall within the scope of section 10 of the Act, and that the activities of the assessee association did not amount to 'carrying on a trade, profession or vocation'. No doubt at that stage before the Tribunal the claim of the assessee was that the rest of its income had to be computed under section 10. Learned counsel for the assessee contended before us that though the other income did not fall to be assessed under section 10, still it was income, and it should be assessed under section 12 of the Act. The further submission was that under section 24 of the Act the assessee was entitled to set off every year the net income assessed under section 9 against the deficiency in a computation under section 12, to compute its net annual assessable income. We have pointed out that it was common ground that there was deficiency every year, which for exceeded the income of the assessee assessed under section 9 of the Act.

We have pointed out that the assessee-association was a company registered under section 26 of the Indian Companies Act, 1913. The members were barred by the articles of association from participating in the surplus under any circumstance. In South Indian Planting and Commercial Representation Fund v. Commissioner of Income-tax this court applied the test for mutuality laid down by Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills :

'The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial.'

This passage was quoted with approval by the Supreme Court in Commissioner of Income-tax v. Royal Western India Turf Club Ltd. The assessee-association before us does not satisfy that test.

South Indian Planting and Commercial Representation Fund v. Commissioner of Income-tax is also authority for the position that in the circumstances of this case, the subscriptions and donations the assessee-association received formats members constituted income from other sources which could be assessed under section 12 of the Act. That subscription to an incorporated club did not constitute income was what was laid down in the United Service Club v. The Crown. But that can be no longer considered good law for application to all cases of subscription to an association in view of what the Supreme Court has stated in Commissioner of Income-tax v. Royal Western India Truf Club Ltd.

The contention of the assessee would appear to be sell-founded, that had its income been assessable to tax, it was entitled to set off the net income assessed under section 9 of the Act against the deficiency that was bound to result had there been a computation of its income from other sources under section 12 of the Act.

In view, however, of our answer to the first question, that the income of the assessee association from its property came within the scope of the exemption granted by section 4(3)(i) of the Act and was not assessable, there is no need for us to record a formal answer to the second question.

The assessee will be entitled to the costs of this reference. Counsels fee Rs. 250.

Reference answered accordingly.


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