Commissioner of Income Tax vs Ootacamund Gymkhana Club

Sethuraman, J.—The assessee appears to have come into existence some time in 1857. It was registered under the provisions of Section 26

of the Indian Companies Act, 1913. Its objects were : (1) to provide a club for the accommodation of members and their friends and the

encouragement and management of sports and games "" and (9) to promote social intercourse amongst the members of the club and their friends

and encourage and manage sports and games "". The rest of the clauses are in the nature of ancillary clauses. Clause 11 provides that the objects of

the club as set out in the earlier paragraphs would extend to all the States in the Indian Union. Clause 12 provides that the income and property of

the club whensoever derived shall be applied solely towards the promotion of the objects of the club as set forth in the memorandum of association

and that no portion thereof should be paid or transferred directly or indirectly by way of dividend, bonus or otherwise howsoever, by way of profit

to the persons who at any time were or have been members of the club, or to any of them, or to any person claiming through any of them. The

assessee could, however, pay remuneration to any officers or servants of the club or to any member thereof or other persons, in return for any

services rendered to it. Under Clause 13 the local Government could impose any further conditions than those set out in Clause 12 above, which

should be duly observed by the club. The club did not have a share capital, but in the event of winding up, the members undertook to contribute

such sum as may be required not exceeding rupees fifty. On the winding up or dissolution of the club, any surplus assets were not to be distributed

amongst the members of the club, but were to be transferred to some other institution or institutions having similar objects to be determined by the

members of the club at the time of the dissolution, and in default thereof by the appropriate court. The club has in particular a well-known golf

course in Ooty.

The assessee was not assessed to tax till the year 1960-61. For that year the assessee was originally assessed at Rs, 50 on ""property"" income

under the assessment order dated 29th March, 1961. Thereafter, it was noticed by the Income Tax Officer that the assessee had been in receipt of

advertisement and donations from non-members. In the view of the Income Tax Officer, the assessee was not entitled to the exemption in regard

to such receipts. He found also that the property income computed already required modification. He, accordingly, took proceedings u/s 147. He

brought to tax Rs. 1,833 as ""property"" income and Rs. 12,965 as income from "" other sources "". The "" property "" income is from the club house. It

is not clear from the statement of the case or from the orders of the authorities below whether the cluh house had any rooms, which were let out for

the occupation of members or others. We were, however, told that the property income represents merely the bona fide annual value of the club

house which was not let out to any one.

It may be mentioned herein that there were certain amendments carried out to the memorandum and articles of association and that with effect

from July 1, 1963, the Central Government has notified the assessee as exempt from Income Tax u/s 10(23) of the Act of 1961.

The assessee appealed against the assessment to the Appellate Assistant Commissioner. He held that it was for the assessee to prove that the

object with which the club was formed came within the definition of charity and that there could be no exemption in the present case because the

assessee had not been established with any object of any general public utility. In the view of the Appellate Assistant Commissioner the promotion

of sports, particularly golf, which was played only by a few aristocrats, did not bring it within the scope of Section 4(3)(i). On further appeal, the

Appellate Tribunal, relying on the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce, ,

upheld the assessee''s objection to the assessment. The Tribunal further held that there was a trust or in any event a legal obligation so that the

people administering the club could be compelled to make use of the income for the objects of the trust.

At the instance of the Commissioner of Income Tax the following question has been referred :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee-club was entitled

to relief u/s 4(3)(i) of the Income Tax Act, 1922, for the assessment year 1960-61 ?

The learned counsel for the revenue submitted that this is a case where the assessee has come into existence for the mere promotion of sports

and games and that its objects are not charitable in character. In any event, according to the learned counsel, there were some objects, like

promotion of social intercourse among the members, which were not charitable in character, so that the assessee could not be said to have been

established wholly for charitable purposes.

On behalf of the assessee the submission was that it came into existence for the encouragement or management of sports and games and that the

other clauses in the memorandum were only ancillary and incidental to the main object. Reliance was placed on the licence granted u/s 26 of the

Companies Act, 1913, as showing that the assessee had been established for the charitable purposes. It was, therefore, contended that the

assessment was bad in law.

Section 26 of the Indian Companies Act of 1913 provided that where it was proved to the satisfaction of the Government that an association

capable of being formed as a limited company was formed for promoting commerce, art, science, religion, charity or any other useful object and

applied or intended to apply its profits in promotion of its objects, and to prohibit the payment of any dividend to its members, the Government

could, by licence, direct that the association may be registered as a company with, limited liability, without the addition of the word ""limited"".

Thereupon, the association may be registered accordingly and it shall enjoy all the privileges and be subject to all the obligations of limited

companies. This is not a case where a limited company has come into existence for promoting commerce, art, science or religion. The assessee

could only be brought under ""charity or any other useful object"" referred to in Section 26(1). The grant of a licence u/s 26 of the Indian Companies

Act of 1913 thus, prima facie, shows that the assessee has come into existence for a charitable or any other useful object. However, in view of the

fact that there is a separate definition of "" charitable purpose "" in the Income Tax Act, we cannot take the issue of a licence u/s 26 as conclusive. In

other words, at the time when the licence was issued, there was no need for the concerned authorities to apply their mind to the provisions of

Section 4(3)(i) of the Indian Income Tax Act, 1922, under which the present exemption is claimed. We would, therefore, consider the question of

the assessee''s claim in the light of the provisions of Section 4(3)(i).

Section 4(3)(i) provides that any income derived from property held under trust or other legal obligation wholly for charitable purposes, shall not

be included in the total income of the assessee. The only condition is that such income is to be applied or accumulated for application to such

charitable purposes as relate to anything done within India. In the case of property held in part only for such purposes, the exemption operates in

respect of the income applied or finally set apart for application thereto. The expression "" charitable purpose "" has been defined as including relief

of the poor, education, medical relief and the advancement of any other object of general public utility. In the present case the claim for exemption

is based on the ground that the assessee has come into existence for the advancement of "" any other object of general public utility.

The learned counsel for the department contended that in the present case the claim for exemption is not admissible in view of the decision of

the Calcutta High Court in Cricket Association of Bengal Vs. Commissioner of Income Tax, . The Cricket Association of Bengal was an

unregistered and unincorporated body. There was no trust deed or other document vesting any property in the association for any purpose

connected with its activities. The association had only framed certain rules, which envisaged the promotion of the game of cricket played in

accordance with the highest standard. One of the objects of the association was to organise cricket tournaments and leagues and to carry on any

other activity which may seem to it capable of being carried on in connection with its main objects. As between its members, it was a mutual

association and received payments by way of subscriptions and donations. The surplus of its receipts from those sources had not been assessed.

The association, however, had other receipts from the sale of tickets at the time of the cricket matches. When the association was sought to be

assessed it claimed exemption u/s 4(3)(i) of the Indian Income Tax Act of 1922. This claim was negatived by the Income Tax authorities as well as

by the Tribunal. On a reference, the Calcutta High Court held that there was no property held under trust or other legal obligation for charitable

purposes. On behalf of the assessee it was contended in that case that there was an organisation which came within the scope of the concept of

property as held in All India Spinners'' Association v. Commissioner of Income Tax [1944] 12 ITR 482 . It was held that if the members of a body

merely got together certain teams for playing some games of cricket or some other game in the course of the year or every year, it was difficult to

say that they maintained an organisation and that such organisation yielded the income. Even on the footing that there was an organisation and that

it constituted property the question as to whether it was held under a legal obligation for a charitable purpose was examined. As there was no trust,

the question had to be determined only in the light of the rules. It was held that the rules did not compel the association to apply its assets or its

income to any particular purpose. Thus, the result of the decision was that there was no property held under trust and that, in any event, the income

from any such property was not required to be applied for any particular purpose. The matter was further examined even on the assumption that

there was property and that such property was held under legal obligation for any particular purpose. It was held that the rules of the association

did not provide any service to the public in connection with the game of cricket and that, in the absence of any public benefit, which was essential,

there was no charitable purpose. It is only incidentally that the Calcutta High Court came to examine the question as to whether the promotion of

sport or game was a charitable purpose. After referring to certain authorities of the U.K., there are observations to the effect that there was no

charitable purpose in the promotion of a mere sport or game.

On behalf of the assessee the submission was that this decision of the Calcutta High Court would not be good law after the decision of the

Supreme Court in Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce, . It was also pointed out that reliance on British

precedents in order to ascertain the existence of a charitable purpose u/s 4(3) is not proper. In All India Spinners'' Association v. Commissioner of

Income Tax [1944] 12 ITR 482 , Lord Wright, speaking for the Judicial Committee, observed at page 486 as follows :

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 a 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 groundwork 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 Macnaghten''s definition of charity in Commissioners for

Special Purposes of Income Tax v. Pemsel [1891] AC 531, 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 Macnaghten''s

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.

Similarly, Viscount Simonds in Baddeley v. Commissioners of Inland Revenue [1955] 35 TC 661, gave expression to a doubt:

......whether this sort of rationalisation helps to explain a branch of the law which has developed empirically and by analogy upon analogy.

Lord Upjohn in Scottish Burial Reform and Cremation Society v. Glasgow Corporation [1968] AC 138 (HL) has described the state of this

branch of law relating to charities as almost incredible to anyone not familiar with this branch of the English law. Thus, it would be unsafe to seek

guidance from British precedents in this branch of the law. Further, in Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce,

, the Supreme Court has stated at page 734 as follows:

The Indian legislature has evolved a definition of the expression ''charitable purpose'' which departs in its material clause from the definition

judicially supplied in Pemsel''s case [1891] AC 531 and decisions of English courts, which proceed upon interpretation of language different from

the Indian statute, have little value.

With respect to the learned Judges of the Calcutta High Court, we would rather examine the concept of "" charitable purposes "" taking into

account the Indian precedents without placing any excessive reliance on the British ones.

In Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce, the chamber had been registered, u/s 26 of the Indian

Companies Act, 1913. It was established to promote and protect trade, commerce and industries, to aid, stimulate and promote the development

of trade, commerce and industries, and to watch over and protect the general commercial interests of India or any part thereof. Power was also

taken for promotion of or opposition to legislation and to procure change of law and practice affecting trade, commerce and manufactures. The

income of the chamber was to be applied solely towards the promotion of its objects as set forth in the memorandum. The Chamber of Commerce

purchased a building part of which was utilised for itself and part of which was let out to tenants. The question was whether the building was

property held under trust or other legal obligation, wholly for charitable purposes, so that the income therefrom was exempt u/s 4(3)(i) of the 1922

Act. It was held that advancement or promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the

entire community. Though the prosperity would be shared by those who are engaged in trade, commerce and industry, it did not follow, it was

held, that the purpose was any the less an object of general public utility. It was pointed out that the legislature had used language of great

amplitude in defining "" charitable purpose "" and that the definition was inclusive and not exhaustive or exclusive. If the primary purpose was

advancement of object of general public utility, it would remain charitable, in their Lordships'' view, even if an incidental entry into the political

domain for achieving that purpose for promotion of or opposition to legislation was contemplated. Such an object had to be regarded as purely

ancillary or subsidiary and not the primary object with the result that the income of the chamber from its building was held to be exempt from tax

u/s 4(3)(i). This case envisages the examination in any particular case of the dominant and subsidiary objects. If the dominant object is of a

charitable nature, then the assessee would be eligible for exemption. If there were two distinct objects, one of which was charitable and the other

not charitable and if the fund of the association could be applied for either of these purposes at the discretion of those in authority, then it cannot be

held that there was any property held under trust wholly for charitable purpose. The contention of the. assessee is that just as advancement or

promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the entire community, so also the promotion of

games and sports tended to promote the physical well-being of members of the public, and it was submitted that it would be a charitable purpose.

Whatever may be the position with reference to the organisation or exhibition of games at intervals so as to enable spectators to derive amusement

therefrom as in the Cricket Association of Bengal Vs. Commissioner of Income Tax, , the position of an organisation intended to promote the

social and physical well being of persons to enable them to participate in ''games is, in our opinion, a charitable purpose. In the present case, it is

necessary to bear in mind the fact that the encouragement and management of sports and games is not restricted to the members as such. Both in

Clause (1) as well as Clause (9) the participation in sports and games by the members of the public is not inhibited. Just as development of an

industry leads to economic prosperity, similarly participation in games leads to the physical well being which is a sine qua non of a healthy society.

Whatever may be the British precedents, examined in the light of the decision of the Supreme Court in the Commissioner of Income Tax, Madras

Vs. Andhra Chamber of Commerce, , it is clear to us that in the present case a charitable purpose is discernible.

It was argued for the revenue that one of the clauses, viz., Clause (9), provided for the promotion of social intercourse among the members of

the club and that, to that extent, there was a non-charitable purpose. As we read the memorandum of association, we consider that the promotion

of social intercourse among the members is not the primary object with which the assessee had come into existence. We understand the clause to

mean that the promotion of social intercourse among the members is achieved by encouragement and management of sports and games. Lord Reid

in Baddeley v. Commissioners of Inland Revenue [1955] 35 TC 661 (HL) had pointed out at page 707 as follows :

On a playing field a person can learn the value of endurance, and perseverance, of assiduous practice, of unselfish association in a team, and of

winning with modesty and losing with a good grace, and, to my mind, that is the kind of moral and social training which the donor''s words mean in

this deed and in the Acts from which they were taken.

We are not here concerned with the interpretation of the deed in that particular case. We are in respectful agreement with what has been stated

above as a concomitant of the participation in sports. It is this which has obviously been referred to as promotion of social intercourse. Clause (ii)

of the memorandum does not confine the objects of the club to any particular sect or region, but comprehends the whole country. This shows that

the objects of the assessee here cannot be understood in any restrictive sense, so that the benefit is confined only to the members. The Supreme

Court''s decision in the Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce, contemplates an analysis of the objects to find

out what is the dominant object. The dominant object here being charitable in nature, as we have already found, the assessee would be eligible for

the exemption claimed. The other objects are only ancillary and not distinct and independent.

The learned counsel for the revenue brought to our notice a decision of the Supreme Court in Pt. Ram Chandra Shukla Vs. Mahadeoji

Mahabirji and Hazrat All Kanpur and Others, . Some time prior to 1830 a wrestler setup and maintained an Akhara where wrestlers of both

Hindu and Muslim communities could come for wrestling. The property consisted of a groveland. The income from it as well as his own other

resources were utilised for promoting the wrestling. He installed two idols and a picture of a Muslim in order to attract wrestlers of, both the

communities. The question before the Supreme Court was whether there was a valid trust under Hindu Law. The Supreme Court, after referring to

the relevant authorities under Hindu Law, came to the conclusion that there was no trust for a charitable purpose. In pronouncing on any particular

object of a bounty as to whether it falls within the definition of "" charitable purpose "", the courts must in general apply the standard of customary

law and common opinion amongst the community to which the parties interested belong : See In re Trustees of the Tribune [1939] 7 ITR 415 . It

was, therefore, necessary for the Supreme Court to find out whether there was a charitable purpose so as to enable the property being tied down

in perpetuity in the above case in the light of the Hindu notions of a charitable purpose. The present is a case where the assessee is a club

incorporated under the Companies Act. The club cannot be taken to belong to any particular religion, so that the customary notions of the laws

applicable to that religion could be given operative force in construing the trust. We do not, therefore, find it possible to apply this decision to the

facts herein. In that case several decisions of the U. K. courts and also the decision of the Calcutta High Court in Cricket Association of Bengal

Vs. Commissioner of Income Tax, were cited. It was pointed out that those decisions arose u/s 4(3)(i) of the Income Tax Act of 1922 and that

they would have no relevance to a case arising under Hindu law. The Supreme Court cannot, therefore, be taken to have given its seal of approval

to the decision of the Calcutta High Court in the case of Cricket Association of Bengal Vs. Commissioner of Income Tax, as it did not deal with

Section 4(3)(i).

During the course of the arguments, we were referred to the decision of the Mysore High Court in Bangalore Race Club Vs. Commissioner of

Income Tax, Mysore, . That was a case where a race club claimed exemption u/s 11 of the Income Tax Act of 1961 corresponding to Section

4(3)(i) of the Act of 1922. It was held that since betting on horses was one of the essential concomitants of the activity of racing, it did not confer

any public benefit and that it could not be said that betting on houses was beneficial to the public. That decision has no relevance to the problem

before us. In the view taken by us, we do not find it necessary to refer to the decisions of the U. K. courts, as the law on the point cannot be said

to be identical in U.K. Having regard to the objects of the assessee-club, we are satisfied that it was rightly granted exemption by the Tribunal. The

question referred is, therefore, answered in the affirmative and in favour of the assessee. The assessee will be entitled to its costs, Counsel''s fee

Rs. 250.