Per Shri B. C. Mitra, Accountant Member - The assessee, Indian Jute Mils Association, having its registered office at 6, Netaji Subhas Road, Calcutta, has been stated to be an association established to protect, forward and defend the trade of the members of the association. The said association has been registered under the Indian Trade Unions Act - XVI, 1926.
2. The WTO initiated wealth-tax proceedings by the issue of notices under section 17 of the Wealth-tax Act, 1957 (the Act) for the assessment year 1968-69, 1970-71 and 1971-72 and in response thereto, the assessee being an AOP was not an entity which could be charged to tax in terms of section 3 of the Act. In was claimed that the assets of the association being held under a legal obligation for public charities as enumerated in the rules and regulations of the association, the same could not be brought to tax in view of section 5(1) (i) of the Act. The WTO negatived both the contentions of the assessee by observing that the world individual includes a group of persons forming a unit or an AOP and for this proposition, reliance was placed on the two Supreme Court decisions in the cases of CIT v. Sodra Devi : 32ITR615(SC) and Banarsi Dass v. WTO : 56ITR224(SC) . The WTO further held that the assessee was not entitled to the immunity available under section 5(1) (i) inasmuch as the assessee had been carrying on activities of profit and also on the ground that as per rule 2 of Chapter XIV, the surplus funds of the association representing accumulated subscription and interest were liable to be distributed amongst the members of the association in the event of the dissolution of the association. The wealth-tax assessments were, accordingly, completed in the status of an AOP on net wealth of Rs. 11,63,661 for the assessment year 1968-69 and on net wealth of Rs. 13,01,944 and Rs. 14,44,855, respectively, for the assessment years 1970-71 and 1971-72. The AAC upheld the assessments vide his consolidate order dated 5-12-1981.
3. The present appeals filed by the assessee are against the said order of the AAC, in which the common contentions raised are as follows :
(i) that the AAC erred in holding that the assessee was was chargeable to wealth-tax thereby, ignoring the provisions of section 3;
(ii) that the AAC failed to notice that the assets of the assessee were exempt from wealth-tax under section 5(1) (i); and
(iii) that the AAC erred in not directing the WTO to allow deduction in respect of liabilities claimed before the WTO.
4. At the time of hearing before us, the learned counsel for the assessee submitted a paper book containing the rules and regulations of the association along with a list containing the names of 58 jute mills, who were members of the assessee-association in 1970. It has been stated that the association has all through been treated for the purpose of income-tax as an AOP and the same consists of members who have been admitted to the membership of the association according to the rules framed by the assessee. It has been argued that under the Act, the assessable entities are individual, HUF and company while under the Income-tax Act, every person is an assessable entity including an AOP or a BOI whether incorporated or not, It has been stated that an AOP or a BOI, whether incorporated or not. It has been stated that an AOP or BOI, whether incorporated or not is not specifically made an assessable entity but a company has been made an assessable entity under the Act. In terms of section 4(1) (b) of the Act, it has been stated that the proportionate share of the members of the AOP may be brought to tax but the determination of the share of the AOP has to be done in the prescribed manner as provided under rule 2 of the Wealth-tax Rules (the Rules). It has been pointed out that a reading of section 4(1) (b) read with rule 2 will indicate that it is the partner or a member of an AOP as an individual who is alone treated as a taxable unit. It has been argued that the Supreme Court in the cases relied on by the revenue, did not construe the meaning of the word individual in the context of the provision of the Act. According to the learned counsel, the two Supreme court decision, viz., in the case of Sodra Devi and Banarsi Dass (supra) have been duly considered by the Gujarat and Bombay High Courts in the cases of Orient Club v. WTO : 123ITR395(Guj) and Orient Club v. CWT : 136ITR697(Bom) and it has been held that the club as an AOP is not an individual for the purpose of the Act and, hence, is not an assessable entity. The learned counsel also placed before us a copy of a appropriated decision of the Calcutta High Court dated 30-5-1983 in Civil Rule No. 1585W of 1977 in the case of Royal Calcutta Turf Club v. CIT : 144ITR709(Cal) wherein their Lordships by following the Gujarat and the Bombay High Court decisions in the case of Orient Club (supra), held that a members club being an AOP could not be an individual entity and, consequently, is not chargeable to wealth-tax.
Alternatively, it has been argued that even if it is held that the assets of the association are chargeable to wealth-tax, the entire wealth of the assessee is exempt in terms of section 5(1) (i). In this context, the learned counsel brought to our notice the various objects of the association enumerated in paragraph 3 of Chapter I of the rules and regulations framed by the Indian Jute Mills Association. It has been stated that the different objects enumerated in various sub-clauses should be read together and in this connection he made particular reference to one of the main objects of the association, viz. rule 3(i) providing the manner in which the inter se relationship between the members as also the employees of the member jute mils are to be regulated with a view to promote, protect and defend the activities of the members of the association. Our attention has been drawn to the objects mentioned in sub-clauses 5,7 and 8, namely, that one of the functions of the association is to encourage and finance measures for improving the cultivation of jute as also to develop existing markets and in opening out new markets of Indian jute goods abroad. It has been stated that jute being one of the major foreign exchange sources of the Government revenue, the entire activity of the assessee has been geared to the growth and development of the jute industry as a whole so as to encourage larger exports with a view to earn scarce foreign exchange for the country. In that view, according to the learned counsel, the primary object of the assessee being for a public purpose of a charitable nature, the assessee is entitled to the exemption provided in section 5(1) (i). In this connection, reliance has been placed on the Supreme Court decision in the case of CIT v. Andhra Chamber of Commerce : 55ITR722(SC) .
5. In regard to the second objection of the revenue, namely that the assessees claim for exemption under section 5(1) (i) is to be denied in view of the fact that the assessee is carrying on activity with a motive to earn profit and that there is a specific mention in the rules that in the event of dissolution, the surplus funds of the assessee were liable to be distributed amongst the members of the association, the learned counsel stated that so long the assets are held under a legal obligation for a charitable purpose the assessee is entitled to the exemption admissible under section 5(1) (i). It has been pointed out that as per provisions contained in paragraph 3, Chapter IV of rules and regulation of the association, the entire receipts of the association are to be applied towards the implementation of the objects of association. It has been argued that for the purpose of granting exemption under section 5(1) (i) it is not necessary for the WTO to be satisfied whether the requirement of section 11 of the Income-tax Act, 1961 (the 1961 Act) have been fulfilled by the assessee or not. In fact, accordingly to the learned counsel, the assessees claim for exemption in terms of section 11 has been disputed by the revenue and the matter is pending before the Tribunal. It has been pointed out that even in the case of a trust, where some of the objects were not of a public charitable nature, it has been held by the Bombay High Court in the case of Trustees of K. B. H. M. Bhiwandiwalla Trust v. CWT : 106ITR709(Bom) that the objects of the trust being predominantly for charitable nature, the assessee-trust was entitled to the deduction under section 5(1) (i).
6. The departmental representative while supporting the orders of the authorities below drew our attention to the Full Bench decision of the Kerala High Court in the case of Kerala Financial Corpn. v. WTO : 82ITR477(Ker) , wherein it has been held that the term individual in section 3 is not restricted to human beings as it includes a corporation similar to the Kerala Financial Corporation constituted under a Central, Provincial of State Act. In regard to the point whether the assessee is entitled to exemption under section 5(1) (i), the departmental representative retitled the points raised by the WTO, viz, that the assessee carried on activities for profit and it was stipulated in the rules of the association that in the event of its dissolution, the surplus funds were liable to be distributed amongst the members, who were none other than the well-known jute mills of the country. It has been further stated that the said rules of the association regarding distribution of funds at the time of dissolution runs counter to the provisions embodied in paragraph 3 of Chapter IV of the rules, wherein it has been stipulated that the entire funds of the association are to be applied in carrying out the objectives of the association.
7. We have considered the submissions of the parties concerned made at great length. The first contention of the assessee, namely, that the association is not chargeable to wealth-tax in terms of section 3, in our opinion, is not tenable inasmuch as the ratio decided in the Gujarat and the Bombay High Court decisions, relied on by the learned counsel, is not applicable to the facts and circumstances of the present case. In both the cases, the status of the assessee viz, Orient Club, was of a non-proprietary members club consisting of individual members, who contributed to the funds of the club out of which the expenses of conducting the activities of the members of the club were paid. An unincorporated members club is a society of persons and such a society is not a partnership because the members are not associated with a view to share profit. The contribution to the funds of the society is generally made by means of entrance fees or subscriptions or both. Such a club is not recognised as having any legal existence apart from the members of which it is composed. Members are entitled to enjoy the rise of the club premises and other privileges of the society in accordance with the rules so long as they duly pay the subscriptions and continue to be members. In an unincorporated members club there are usually trustees appointed in pursuance of the provisions in the rules in whom the property and assets of the club are vested in trust for the members for the time being and who are given power to invest the funds of the club some times at their own discretion and sometimes according to the directions of the committee. Accordingly, it has been observed by the Bombay High Court in the case of Orient Club (supra) at page 708 that so far as the property of the club is concerned, though in common parlance it is said to be owned by the club, the club not being a juristic entity and not having any corporate status, is really incapable of owning the property. Even though members for the time being own the property, their right, merely consists of the enjoyment of the property because the right of ownership is not transmissible and it can only materialise at the time when the club as a body will stand dissolved. If the membership of a club could be obtained only voluntarily and on becoming a member, and the rules of the club became part of the conduct of members inter se in the case of an unincorporated club, then it is obvious that the club becomes an AOP In the instant case the assessee-association consisted of 58 members and the status of each member was that of a corporate body. Such an association, in our opinion, cannot be equated with that of an unincorporated members club as in that even the assessee could not have a separate existence other than its members. The fact that the members of the assessee-association are all juristic persons implies that the assessee has a distinct personality capable of regulating the inter se relationship between the different corporate bodies, who are its members. However, under section 13 of the Trade Unions Act, 1926, the association is a body corporate with powers to acquire and hold both movable and immovable properties. Accordingly, the ratio of the Full Bench decision of the Kerala High Court in the case of Kerala Financial Corpn. (supra) would be applicable in the present case as in that case it has been held that the term individual in section 3 includes a corporation similar to the Kerala Financial Corporation. In deciding the issue, the High Court followed the decision of Andhra Pradesh State Road Transport Corpn. v. ITO : 47ITR101(AP) and held that the said Road Transport Corporation constituted under the Road Transport Corporation Act is an individual within the meaning of section 3 of the Indian Income-tax Act, 1922, and as such is taxable. The said decision of the Andhra Pradesh High Court has been affirmed by the Supreme Court. It is also pertinent to note that the Calcutta High Court in the case of Royal Calcutta Turf Club (supra) remarked that the corporate identity of a members club or an unincorporated members club must not be confused with the corporate status. Accordingly, we are of the opinion that the assessee being an association consisting of members having independent corporate status was a distinct personality and, consequently, is liable to be assessed as an individual in accordance with the provisions of section 3.
8. In regard to the second ground, namely, whether the assessee is entitled to the exemption in terms of section 5(1) (i), it is necessary to examine the objects of the association as embodied in paragraph 3 of Chapter I of the rules and regulations of the association, which are as follows :
'(3) The object of the association is to regulate relations between members and members and between members and their employees and additionally the objects of the association shall include the following :-
(i) To protect, forward and defend the trade of the members of the association.
(ii) To regulate the conduct of the trade.
(iii) To arbitrate on matters of dispute.
(iv) To collect, classify, interpret and circulate statistics.
(v) To encourage and finance measures for improving cultivation of jute and allied fibers in India.
(vi) To encourage and finance technical developments in plant and machinery necessary for the manufacture of jute products.
(vii) To encourage and finance the scientific exploration of new uses to which jute can be applied and the discovery of by-products and to the promote the commercial exploitation of the results of such research.
(viii) To foster existing markets and open out new markets in India and abroad through publicity and public relations work, the establishing and maintaining of branch offices of the association overseas, the organising of trade delegates and study teams, the undertaking of market surveys and other suitable promotional media.
(ix) To seek and/or obtain from any Government or any public authority or any company, body corporate, firm or person, bounties, subsidies, grants or donations for the purposes of the association of such conditions and in such manner as the association shall think fit.
(x) Ton encourage the use of standard forms of contract in the trade and to assist in securing general recognition of, and adherence to establish trade customs and practices.
(xi) To work for the proper definition of standards of quality of jute and jute products and to encourage the maintenance of these standards.
(xii) To provide training facilities in jute technology for the benefit of the members.
(xiii) To promote sound relations between the members and their employees through the observance of common labour policies based on the requirement of the law and general considerations of labour welfare.
(xiv) The establishment of a fund or of funds.
(xv) The giving of legal assistance in connection with all or any of the above objects within the limits allowed by law.
(xvi) The assistance of or amalgamation with, in India or overseas, other associations or societies or federations of associations for societies having for their objects or one of their objects the promotion of the interests of the jute trade.
(xvii) To do all such other lawful things as a reincidental or conducive to the attainment of the above objects or any of them.'
The other two sub-rules which have been referred to by the parties are also extracted below for better understanding of the facts of the case.
Sub-rule 3 of Chapter IV regarding funds of the association
'3. Subject to rule 7 of Chapter II and to rule 8 hereof all moneys on account of subscriptions or other contributions obligatory upon members shall be credited to be general fund. No expenditure from such fund shall be made in contravention of section 15 of the Indian Trade Unions Act, 1926, and subject to this restriction all moneys received on account of contributions, subscriptions or otherwise may be applied towards carrying out the objects of the association.'
Sub-rule 2 of Chapter XIV regarding dissolution of Association.
'2. In the event of dissolution, the funds representing accumulated subscriptions and interest together with any other accumulations under lay other accounts maintained under these rules as at the time of the dissolution and after all the debts and outstanding of the association have been satisfied, shall be distributed amongst the members of the association as for as possible upon the basis of the scale upon which such members are contributing to the association at the time of its dissolution.'
The objections of the revenue are two-fold, namely (i) that the assessee had been carrying on activities of profit; and (ii) that in the event of dissolution of the association, the surplus funds were liable to be distributed amongst the members of the association. In regard to the first objection, it has been pointed out by the learned counsel that in accordance with sub-rule 3 of Chapter IV, the entire funds of the association are to be applied in implementing the objects of the association. According to the departmental representative, the said sub-rule runs contrary to the provisions contained in sub-rule 2 of Chapter XIV, wherein the manner of distribution of funds in the event of dissolution of the association has been prescribed.
9. Section 5(1) (i) exempts any property held under trust or other legal obligation for any public purpose of a charitable or religious nature in India. The corresponding provision in the 1922 Act, as it stood in 1956-57, i.e., at or about the time when the 1957 Act was enacted by the Parliament, namely, the provisions of section 4(3) (i) of the 1922 Act read as follows :
'(3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them :
(i) Subject to the provisions of clause (c) of sub-section (1) of section 16, any income derived from property held under trust of other legal obligation wholly for religious or charitable purposes, insofar as such income is applied or accumulated for application to such religious of charitable purposes as relate to anything done within the taxable territories, and in the case of property so held in part only for such purposes, the income applied or finally set apart for application thereto :'
There is a proviso but it is not relevant for our present purposes.
It will be seen that there is a marked difference in the language between section 4(3) (i) of the 1922 Act and section 5(1) (i) of the 1957 Act. The provision under the 1922 Act at the relevant time was where the income derived from property was wholly held on trust for religious or charitable purposes, the whole of the income qualified for exemption and in case a property held in part only for such purposes, the income applied or finally set apart for application thereto was allowed exemption. Now, in the case of the 1957 Act, where a property is held on trust for objects which are partly charitable and partly non-charitable, there cannot be any apportionment as is to be fund under the 1922 Act. It was, accordingly, held by the Bombay High Court in the case of Trustees of K. B. H. M. Bhiwandiwalla Trust (Supra) at page 717 that the commission of the word wholly in the above section of the 1957 Act and the omission of a similar provision as is to be found in the later part of the sub-section in the 1922 Act was deliberate and intentional and the Legislature advisedly avoided or omitted the said word. The High Court in the said case by following the Supreme Court ruling in the case of Trustees of Gordhandas Govindram Family Charity Trust v. CIT : 88ITR47(SC) held that it is unnecessary under the 1957 Act that for the purpose of claiming exemption under section 5(1) (i), the property must be held under trust wholly for a public purpose so a charitable or religious nature in India. It is also relevant to point out in this connection that the 1957 Act does not contain the definition of charitable purpose as in section 2(15) of the 1961 Act, i.e., 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. With the insertion of section 21A in the 1957 Act with effect from 1-4-1973, the exemption under section 5(1) (i) is now linked up with what happens to the assessees claim for exemption of trust income in terms of section 11 to 13 of the 1961 Act. In our opinion, the first objection of the revenue, namely, that the assessee is engaged in a business actively for earning of profits, to our mind is not tenable as the assessment years involved in the present appeals are all prior to the assessment year 1973-74, i.e., before the insertion of section 21A of the 1957 Act in the statute book.
Now coming to the second objection of the revenue, viz., that the objects of the assessee are not directed towards any charitable purpose, since the surplus funds of the assessee in the event of its dissolution were to be distributed amongst the jute mills, there is not discussion in the WTOs order about the actual activities of the Indian Jute Mills Association. We have been told that the said association is a representative body of the jute industry and its activities embrace, inter alia, liaison with Central and State Governments, provision of various services to its members, market research, advancement of trade, export promotion, public relations and research and product development. It is not known what the learned counsel means by provision of various services to its members and what were the activities of the assessee toward encouragement of research for improved production of jute. The WTO, it seems, did not examine the various objects of the association as enumerated in paragraph 3, Chapter I of the rules with a view to ascertain, whether the primary or dominant objective of the association was to promote the advancement of jute industry, so as to enable the country to earn valuable foreign exchange as has been argued by the assessees learned counsel before us. Since the matter requires investigation of facts, we would set aside the AACs order and restore the assessments on the WTOs file with a direction to pass fresh orders after making necessary enquiries with reference to the assessees books of accounts (i) whether the entire receipts of the association have been applied towards implementation of the objects as stipulated in paragraph 3 of Chapter IV of the rules; (ii) what were the actual activities of the association during the assessment years under appeal and which of the objects mentioned in chapter 3 were actually carried out; and (iii) the manner in which the funds have been utilised and the percentage of expenditure in relation to the total expenditure of the association for emplementing the main and dominant objectives of the the assessee. Before, however, making fresh assessments, the WTO should allow necessary opportunity to the assessee of being heard.
10. In the third ground, the assessees objection relates to the disallowance of its claim for deduction of liabilities as claimed by the assessee before the WTO. The WTO has not given any reasoning in rejecting the assessees claim and the AAC also, we find has not discussed about the admissibility of the assessees claim for deduction of liabilities. Since we have restored the assessments on the WTOs file, we would direct the WTO to consider the assessees claim for deduction of liabilities for each of the assessment years under appeal while making fresh assessments in the assessees case.
11. In the result, for statistical purposes, the assessees appeals for the assessment year 1968-69, 1970-71 and 1971-72 are allowed in part.