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Additional Commissioner of Income-tax, Madras Vs. Madras Oil and Seeds Exchange. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTaxation Cases Nos. 188 of 1974 and 176 to 178 of 1975 (References Nos. 64 of 1974 and 159 to 161 of
Reported in[1978]114ITR165(Mad)
AppellantAdditional Commissioner of Income-tax, Madras
RespondentMadras Oil and Seeds Exchange.
Cases ReferredIndian Chamber of Commerce v. Commissioner of Income
Excerpt:
- .....of the tribunal in the said i.t.a. s nos. 834 to 838 of 1965-66 dated june 16, 1967, that the assessee income is exempt under section 4(3)(i) of the indian income-tax act, 1922 as also the corresponding provision in the act of 1961 and allowed the appeals holding that the income was exempt from tax under section 11 of the act.the revenue took the matter in appeal to the tribunal. following the decision in commissioner of income-tax v. andhra chamber of commerce : [1965]55itr722(sc) the tribunal held that the object in these cases would fall under the head 'advancement of the other objects of general public utility'. the tribunal further found that 'involving the carrying on any activity for profit' would mean that the very object of the assessee should be the carrying on of any.....
Judgment:

VARADARAJAN J. - The identical question referred by the Income-tax Appellate Tribunal, Madras 'A' Bench, for the opinion of this court in these cases relating to the same assessee is this :

'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 of 1961, and that consequently its income was exempt under the provisions of section 11(1) of the said Act ?'

T.C. NO. 188 OF 1974 relates to the assessment years 1967-68 to 1970-71 and T.C. Nos. 176 to 178 of 1975 relate to the assessment years 1971-72 to 1973-74.

In response to the notices issued to the assessee under section 148 of the Income-tax Act, 1961, hereinafter referred to as the Act, the assessee filed returns admitting a total income of Rs. 5,706 in the assessment year 1967-68 and nil income in the assessment year 1968-69. The assessee filed a nil return for the assessment year 1969-70. For those three years and for the assessment years 1971-72 to 1973-74 the assessee contended that it was not a trading concern and that it was a charitable trust within the meaning of section 2(15) of the Act and it referred the Income-tax Officer to the Tribunals judgment in I.T. As Nos. 834 to 838 of 1965-66 holding that the assessee-company is exempt from the income-tax. But the Income-tax Officer negatived the claim for exemption on the ground that the assessee is a trading association recognised under the Forward Contracts (Regulation) Act, 1952, and also an incorporated body, that the articles of association and bye-laws indicate that the company is no longer solely managed by the members of the representatives, but there is a director nominated by the Government and the surplus is not distributed to contributors but is owned by the company itself according to clause 21 of the articles of association and, therefore, there is no principle mutuality and no exemption could be claimed. This was stand taken by the Income-tax Officer so far as the assessment years 1967-68 to 1970-71 are concerned. As regard the assessment years 1971-72 to 1973-74, the Income-tax Officer declined to concede the assessees claim on the ground that the Tribunals order made in favour of the assessee and against the revenue in regard to the assessment years 1967-68 to 1970-71 was pending before this court in the reference.

On appeal by the assessee, the Appellate Assistant Commissioner followed the order of the Tribunal in the said I.T.A. s Nos. 834 to 838 of 1965-66 dated June 16, 1967, that the assessee income is exempt under section 4(3)(i) of the Indian Income-tax Act, 1922 as also the corresponding provision in the act of 1961 and allowed the appeals holding that the income was exempt from tax under section 11 of the Act.

The revenue took the matter in appeal to the Tribunal. Following the decision in Commissioner of Income-tax v. Andhra Chamber of Commerce : [1965]55ITR722(SC) the Tribunal held that the object in these cases would fall under the head 'Advancement of the other objects of general public utility'. The Tribunal further found that 'involving the carrying on any activity for profit' would mean that the very object of the assessee should be the carrying on of any activity for profit, but it was not the case of the assessee in this case, that the object of the assessee is to promote and protect the trade in vegetable oil seeds, that the collection of lagas, entrance fees etc., is only incidental and not the main object of the association, and that the object of the assessee was, therefore, charitable purpose as defined under section 2(15) of the Act. The Tribunal consisting of then vice-president, now a judge of this court, found that the decisions of the Mysore and Calcutta High Courts in Commissioner of Income-tax v. Sole Trustee, Loka Shikshana Trust : [1970]77ITR61(KAR) and Commissioner of Income-tax v. Indian Chamber of Commerce : [1971]81ITR147(Cal) , respectively, support the stand taken by the department against the assessees contention but he preferred to follow the decisions of the Kerala High Court in Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645 and Commissioner of Income-tax v. Cochin Chamber of Commerce and Industry : [1973]87ITR83(Ker) and stated that the aforesaid decision of the Mysore and Calcutta High Courts cannot be applied to these cases and he dismissed the appeals relating to the assessment years 1967-68 to 1970-71. Another Tribunal, presided over by a different vice-president, dismissed the revenues appeal relating to the assessment years 1971-72 to 1973-74 following the earlier decision of the tribunal relating to the assessment years 1967-68 to 1970-71.

According to clause (1) of paragraph III of the memorandum of association of the appellant-association, the object is to promote and protect the trade in vegetable oil seeds and vegetable oils and oil cakes of all kinds and the trade, commerce and industry of vegetable oil manufacturers and allied products. Clause (3) says that the object of the association is to control and regulate and to make rule and bye-laws for the control and regulation of the business of sale and purchase of vegetable oils and vegetable oil seeds and oil cakes of all kinds, to open and close markets, fix brokerage for the periodical settlement of contracts and differences, pass on delivery orders, hold surveys of goods, etc. Clause (45) authorises the association to enter into partnership or any arrangement for sharing profits, union of interests, co-operation with any person, firm, company, association or body carrying on or interested in or about to carry on or be interested in any business which the association is authorised to carry on or any business or transaction capable of being conducted so as to directly or indirectly benefit the association. clause (48) authorises the association to purchase or otherwise acquire and undertake all or any part of the business, property and liabilities of any person or company or association carrying on any business which this association is authorised to carry on. Having regard to these clauses the Tribunal has held that the object of the assessee association would fall under the head 'Advancement of any other object of general public utility'.

It is seen from page 56 of the typed set in T.C. No. 188 of 1974 and page 4 of the typed set relating to T.C. Nos. 176 to 178 of 1975 that the assessee gets income under three heads, namely, (1) profits form business (2) subscription and fees, and (3) interest on fixed deposits. The assessee derived income by way of subscriptions in all the assessment years and by way of interest on fixed deposits in all the assessment years except 1968-69, and suffered loss under the head 'profit or loss from business' in all the assessment years except 1968-69, in which year there was neither loss nor profit.

According to section 2(15) of the Act, 'Charitable purpose' includes 'relief of the poor', 'education', 'medical relief' and 'advancement of any other object of general public utility not involving the carrying on of any activity for profit'. Section 11(1)(a) of the Act exempts 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. In sole Trustee, Loka Shikshana Trust v. Commissioner of Income-tax : [1975]101ITR234(SC) it is observed (page 242) :

'The position as it existed under the Act of 1922 was that once the purpose of the trust was relief of the poor, education, medical relief or the advancement of any other object of general public utility, the trust was considered to be for a charitable purpose. As a result of the addition of the words not involving the carrying on of any activity for profit at the end of the definition in section 2(15) of the Act, even if the purpose of the trust is advancement of any other object of general public utility, it would not be considered to be charitable purpose unless it is shown that the above purpose does not involve the carrying on of any activity for profit. The result thus of the change in the definition is that in order to bring a case within the fourth category of charitable purpose, it would be necessary to show that : (1) the purpose of the trust is advancement of any other object of general public utility, and (2) the above purpose does not involve the carrying on of any activity for profit. Both the above conditions must be fulfilled before the purpose of the trust can be held to be charitable purpose.'

The Supreme Court has observed in Indian Chamber of Commerce v. Commissioner of Income-tax : [1975]101ITR796(SC) :

'Section 2(15) excludes from exemption the carrying on of activities for profit even if they are linked with the objectives of general public utility, because the stature interdicts, for the purposes of tax relied, the advancement of such objects by involvement in the carrying on of activities for profit.'

It could not be disputed that the object of the assessee which is advancement of any other object of general public utility, according to section 2(15) of the Act would not be charitable purpose if it appears that the above purpose involves the carrying on of any activity for profit. The fact that in the assessment years 1968-69 no profit was realised and that in all the other assessment years, namely, 1967-68 and 1969-70 to 1973-74, the assessee suffered loss from the business would not affect the position, for, what we have to determine is whether the object of the assessee involves the carrying on of any activity for profit. The Tribunal has found that the object of the assessee involves the carrying on of activity for profit. But relying upon the earlier decision of the Kerala High Court in Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645 and Commissioner of Income-tax v. Cochin Chamber of Commerce and Industry [1976] 87 ITR 83 referred to above, it held that the object was charitable purpose within the meaning of section 2(15) of the act on the ground that the main object of the assessee is to promote and protect the trade in vegetable oil seeds and that the collection of lagas, entrance fees, etc., is only incidental and not the main object of the association. The assessee is carrying on business and is likely to get profits from the business, though in the assessment years with which we are concerned it has not realised any profit but has suffered loss in all the assessment years except 1968-69. There is, therefore, involvement in an activity for profit in achieving the object of the assessee, namely, promoting and protecting the trade in vegetable oil seeds, vegetable oils, etc., as mention above. A full Bench of the Kerala High Court in Commissioner of Income-tax v. Dharmadeepti : [1975]100ITR375(Ker) differed from the view taken earlier in the said tow decisions in the Commissioner of Income-tax v. Indian Chamber of Commerce [1971] 80 ITR 645 and Commissioner of Income-tax v. Cochin Chamber of Commerce and Industry [1973] 80 ITR 83 relied upon by the Tribunal in these cases. The Full bench has observed in the decision thus - sec : [1975]100ITR375(Ker) :

'In view of the altered definition of the term charitable purpose, the question whether an object of a company is a main object or is only an incidental object loses much of its significance. We say so because we conceive that even in cases where a business is conducted not in carrying our the objects of the company but only in aid of achieving the objects of the company if that business is so linked or connected with the objects of the company, and, if the objects are such that it will fall only under object of general public utility, the charitable purpose will cease to be a charitable purpose as defined in the Act. And if the incidental object or even the purpose of the company is business, as conducting kuries is, the income or at least a specified part of it must be exclusively applicable to charitable purposes in order that income or the specified part thereof could be exempted from tax. A complete discretion in the directors to apply the funds to charitable and non-charitable purpose (which in this case would include business) would make the trust a non-charitable trust'.

In that case, the main objects of the assessee-company were inter alia, (1) to give charity, (2) to promote education, and (3) to establish associations, etc., with the object of promoting charity or education, etc. The objects incidental or ancillary to the attainment of the main objects were to run kuries or chitties and the other objects were to establish, promote and carry on any other business. The learned judges disallowed the claim of the assessee for exemption under section 11 of the Act. Following that decision we hold that the object of general public utility would not be a charitable purpose within the meaning of section 2(15) of the Act, even if the business carried on by the assessee is not the main object of the assessee and is only an incidental object, for, even if the object is incidental, it would show that the incidental object is so linked or connected with the main object of the assessee that the main object of general public utility will cease to be 'charitable purpose' within the meaning of section 2(15) of the Act. In these circumstances, we are of the opinion that the Tribunal erred in law in holding that the object of the assessee constitutes charitable purpose as defined under section 2(15) of the Act and that the assessee was exempt from tax under the provisions of section 11(1) of the Act. we accordingly answer the question referred to us in the negative and in favour of the revenue and against the assessee. The assessee shall pay the costs of the revenue. Advocates fee Rs. 500 one set.


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