Additional Commissioner of Income Tax, Madras-I and Another vs Madras Jewellers and Diamond Merchants Association

Sethuraman, J.—These two references arise out of an order of the Income Tax Appellate Tribunal for the assessment years 1967-68 and

1968-69 and 1970-71 to 1973-74. T. C. No. 359 of 1974 deals with the first two years and T. C. No. 282 of 1975 deals with the other three

years. In both these references the question is common one, though slightly differently worded.

In T. C. No. 359 of 1974 of the question referred runs as follows :

Whether, on the facts and in the circumstances of the case, it has been rightly held that the assessee was entitled to exemption u/s 11 of the

Income Tax Act, 1961 ?

In T. C. No. 282 of 1975 the question referred runs as follows :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the assessee was entitled to exemption

u/s 11 of the Income Tax Act, 1961 ?

The assessee was incorporated under the Indian Companies Act, 1913, and was exempted for, adding the suffix ""Limited"" under s. 26 of the

said Act. The association was started for protecting, safeguarding, guiding and furthering the interest and welfare of merchants dealing in diamonds,

bullion, manufactured gold and silverware and jewellery, and to create and encourage friendly feeling and unity amongst the merchants engaged in

the abovementioned trades in Madras. There are other objects, which are more in the nature of powers and which are incidental to the objects

mentioned above. For the assessment years 1967-68 and 1968-69, the assessee, in response to a notice under s. 148 of the Act, submitted a

return showing the income assessable as ""nil"". The assessee claimed exemption in respect of its income as, according to it, it was an association for

promotion of commerce. The claim for exemption was not accepted by the ITO as, according to him, the objects were only to promote the

interest of the members and to benefit them. In his view, there was no advancement of any object of general public utility served by the association.

He brought to tax a sum of Rs. 340 for the assessment year 1967-68 and Rs. 3,810 for 1968-69. The assessee appealed to the AAC. The

assessee objected before the AAC to s. 147(b) being invoked and also to the rejection of the claim for exemption under s. 11. The AAC was of

the view that the ITO had merely changed his opinion and brought to tax the amount in dispute, even though he had exempted them earlier, that this

was bad in law, and that even on merits the assessee''s activities were of general public utility and that the income, therefore, was exempt under s.

The revenue appealed to the Tribunal. The Tribunal accepted the department''s contention that the reopening had been validly done particularly

in the context of information which emanated from the internal auditor''s report. It further held that the assessee''s claim for exemption under s. 11

was well founded. In the opinion of the Tribunal, the dominant object of the assessee was intended to benefit the cross-section of the public, as

well as the merchants engaged in the jewellery and diamond trade and that if any charges were received for services, it was only incidental and not

with a view to make any profit. The result was that the assessee''s claim for exemption succeeded. The assessee did not file any reference

application against the finding of the Tribunal relating to the applicability of s. 147(b). The only question that arises for consideration is whether the

assessee was entitled to exemption under s. 11 of the I. T. Act, 1961 ?

The receipts of the assessee are from survey charges, weighment charges and charges for arbitration. in the course of the order, the Tribunal has

pointed out as follows :

...... we are of the view that the dominant object of the assessee-association, as seen from the object clause, is that it is to protect, safeguard,

guide and further the interest and welfare of merchants dealing in diamonds, bullion, manufactured gold and silverware and jewellery and also to

create and encourage friendly feeling and unity amongst the merchants engaged in the aforesaid trades in Madras and further to remove as far as it

might be within the powers of the association the difficulties of business represented by the above trades and to frame such rules of conduct as

would facilitate smooth transaction of business.

After pointing out the several objects that have been extracted, the Tribunal added :

All these would show that these are wider aspects intended to benefit ultimately the cross section of the public as well as the merchants engaged in

the jewellery and diamond trade. On illustration regarding such services is the provision for common weighing facility to all public whoever intended

to purchase or sell jewellery or other connected articles. Such services is really handy and beneficial to the public, because it serves as a safeguard

against malpractices alleged in the weighment of such precious items like gold, jewellery, etc., if the weighment is done elsewhere. Further m if any

charges are charged, it is only incidental and not to make any profit.

We have already examined the claim for exemption of the automobile Association of Southern India under s. 11 in T. C. No. 352 of 1974

Additional Commissioner of Income Tax, Madras-I Vs. Automobile Association of Southern India, in the light of the judgment of the Supreme

Court in Tax Reference No. 1A of 1973 and 10 to 14 of 1975 dated November 19, 1979, in the case of Additional Commissioner of Income

Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, . The principles laid down in the said judgment have all been set out in our

judgment pronounced today (See Additional Commissioner of Income Tax, Madras-I Vs. Automobile Association of Southern India, . We do not

think it necessary to go over the same ground in the present case also. The finding of the Tribunal that the assessee is not conducting any activity

for profit is clear from the passage reproduced above. When the assessee is not pursuing any activity for profit, any surplus received cannot be

said to be assessable to tax by reason of the word ""excluded"" in s. 2(15). The case of the assessee falls within the scope of the decision in

Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce, , as the activities of an association of this kind would reach the cross

section of the public. In fact, as pointed out by the Tribunal, the facility for authoritative weighment of bullion had jewellery for a nominal charge of

Re. 1 is a great benefit to the general public. The promotion of standards of behaviour of the bullion merchants towards the general public also

subserves the public good. Thus, the activities of the assessee fall within the scope of the main part of the definition of s. 2(15). It is not a case

where the assessee can be brought within the scope of the words ""not involving the carrying on of any activity for profit"". There is no profit motive

and whatever profit has been derived is only incidental. In the light of these findings of the Tribunal, which are not in dispute, the claim for

exemption by the assessee has to succeed. THe question referred in both the references are answered in the affirmative and in favour of the

assessee. There will be no order as to costs.