Commissioner of Income Tax vs South Indian Photographic and Allied Trade Association

Ramanujam, J.—The assessee who is the same in all these tax cases is the South India Photographic Co. and Allied Trades Association,

Madras (''the company''). In the assessment proceedings under the income tax Act, 1961 (''the Act'') for the assessment years 1963-64 to 1968-

69, the company claimed exemption u/s 11 of the Act on the ground that it is a non-profit making organisation devoted to the advancement of an

object of general public utility. It also claimed exemption u/s 10 of the Act. The ITO, however, did not accept the said claim and assessed its

income holding that its receipts from members and non-members should be taken to relate to the services rendered to them by the company. On

appeal, the AAC held that the exemption under sections 10(3) and 11 were not available. Ultimately the matters were taken to the Tribunal

contending that its objects are charitable and, therefore, its income should be exempt u/s 11. It was also contended alternatively that the receipts

were casual and non-recurring in nature attracting the provisions of section 10(3). It further contended that neither the provisions of section 28(iii)

nor any other provisions of the Act applied to its case so as to render its income taxable. The Tribunal, after going into the detail of the objects of

the company and after considering the nature of the receipts, held that the provisions of section 28(iii) are not attracted, that the exemption u/s 11

was available to the company to the extent to which the income was applied for the charitable purposes in India, and since the details of the

application of the income were not available, the Tribunal directed the ITO to ascertain the extent to which the amount of income has been applied

to charitable purposes for each of the assessment years and give the company proper relief. Since the Tribunal held that the company is entitled to

claim exemption u/s 11, it did not consider the claim of the company for exemption u/s 10(3). Aggrieved by the decision of the Tribunal, the

revenue has sought and obtained a reference to this Court on the following two questions in Tax Case Nos. 122 to 127 of 1978:

Whether, on the facts and in the circumstances of the case, the assessee was entitled to exemption on its income for the assessment years 1963-

64 to 1968-69 u/s 11 of the income tax Act, 1961?

Whether any portion of the income of the assessee was liable to be taxed u/s 28(iii) of the income tax Act, 1961 for the above assessment

years?

For the subsequent assessment years 1969-70 to 1972-73, the company made a similar claim for exemption, both u/s 11 as also u/s 10(3). The

ITO having rejected that claim, the matters were taken in appeal to the AAC but without success. When the matter went before the Tribunal, the

Tribunal, following its earlier decision in respect of the earlier assessment years referred to above, held that the assessee is entitled to the exemption

u/s 11, read with section 2(15), of the Act for these assessment years as well and directed the ITO to ascertain the extent to which the income has

been applied to charitable purposes for each of the years and to give the necessary relief to the company. Aggrieved by the said decision of the

Tribunal, the revenue has sought and obtained a consolidated reference to this Court in Tax Case No. 87 of 1978 on the following two questions:

Whether, on the facts and in the circumstances of the case, the assessee was entitled to exemption on its income for the assessment years 1963-

64 to 1968-69 (obviously a mistake for the assessment years 1969-70 to 1972-73) u/s 11 of the income tax Act, 1961?

Whether any portion of the income of the assessee was liable to be taxed u/s 28(iii) of the income tax Act, 1961 for the above assessments?

Section 11 provides for exemption of income from property under certain circumstances. Section 2(15) defines as to what is ''charitable purpose''.

''Charitable purpose'' has been denned in that provision to include relief of the poor, education, medical relief and the advancement of any other

object of general public utility not involving the carrying on of any activity for profit. It has been claimed by the company in this case that its objects

are clearly for the advancement of the general public utility not involving the carrying on of any activity for profit and, therefore, it should be taken

to be an organisation formed for a charitable purpose and, therefore, its income has to be exempted from tax u/s 11, read with section 2(15).

Thus, we have to see as to whether the objects of the company are for advancement of general public utility not involving the carrying on of any

activity for profit.

The objects for which the company had been established as per the memorandum of association are, inter alia : (1) To promote commerce, art,

science or any other useful objects connected with photographic and allied trades. (2) To promote and protect the interests of photographic and

allied traders in every manner possible. (3) To formulate and carry out plans designed to place the trade on a sound and remunerative basis. (4) To

make representations to authorities both governmental and non-governmental in India or abroad on behalf of the photographers and allied traders.

(5) To arrange for equitable distribution at reasonable prices of all goods imported into India and manufactured in India necessary for carrying on

the business of photographic and allied trades. (6) To collaborate with other similar associations in the interests of the science of photography and

allied trades. (7) to (9) ** ** ** (10) To promote schemes calculated to increase business. (11) To correlate and help the members to help each

other to the betterment of the business of all and to increase general life.

The following persons are eligible for the membership of the association:

(a) Any person or persons who, in the opinion of the executive committee, is fit to be classified as earning directly by the trades of photography,

graphic arts or any other trade where the use of the sensitive materials is essential.

(b) Dealers in photographic goods.

(c) Professional photographers.

(d) Press photographers.

(e) Journalist photographers.

(f) Process engravers.

(g) Person or persons who undertake offset, litho, photogravure or other printing where the use of photographic sensitive material is essential.

(h) Any other person who earns a living by use, conversion and sale of photographic sensitive materials.

Clause V of the memorandum relating to the income and profit of the company stood as under:

(1) The income and property of the company whensoever derived, shall be, applied solely for the promotion of its objects as set forth in this

memorandum.

(2) No portion of the income or property aforesaid shall be paid or transferred directly or indirectly by way of dividend, bonus or other- wise by

way of profit, to persons who at any time are, or have been members, of the company or to any one or more of them or to any persons claiming

through any one or more of them.

The company had income by way of receipts, from business, donations, rents, secretarial charges, service charges, and receipts from souvenirs.

Taking note of the objects of the company and the nature of the receipts, the Tribunal held that the company is a non-profit making body run with

the object of general public utility not involving the carrying on of any activity for profit. Before the Tribunal it was contended by the revenue that

the receipts by way of secretarial charges and by way of advertisements in souvenirs would indicate that the company carries on an activity for

profit and that is sufficient to exclude the company from the purview of the definition in section 2(15). The Tribunal, however, held that having

regard to the objects of the company which do not contemplate the distribution of profits under any circumstances as between its members, the

company cannot be said to be carrying on an activity for profit and, therefore, it should be taken to carry on an object of general public utility. The

question is, whether the view taken by the Tribunal that the objects of the company are charitable as defined in section 2(15) is correct.

In Trustees of the Tribune, In re [1939] 7 ITR 415 (PC) the judicial committee had held that a trust, the object of which was described as

''supplying the province with an organ of educated public opinion'', was entitled to exemption on the ground that it was a trust established for the

purpose of general public utility. In The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, the Supreme Court

held:

It seems clear to us that the amended provision, section 2(15) in the Act of 1961, was directed at a change of law as it was declared by the Privy

Council in the Tribune case [1939] 7 ITR 415 (PC).... (P. 254)

In that case the assessee-press carried on publication of a daily newspaper ''Samyukta Karnatak''. The object of the trust was to educate the

people of India in general and of Karnataka in particular by (a) establishing and conducting institutions calculated to educate the people by spread

of knowledge on all matters of general interest and welfare, (b) founding and running reading rooms and libraries, etc., and (c) supplying the

Kannada speaking people with an organ or organs of educated public opinion and conducting journals. The ITO brought to tax the huge profits

earned from the publication of the newspaper holding that the objects of the trust though the general public utility involved the carrying of an activity

for profit. When the matter was ultimately taken to the Supreme Court, it held that the trust was carrying on only one of its objects, namely,

supplying public with an organ or organs of educated public opinion, that both the conditions set out in section 2(15) are fulfilled in that case, that

the company is engaged in the business of printing and publication of a newspaper and journal which is one of its objects and that it is not also

carrying on any activity for profit.

The interpretation of section 2(15) again came up for consideration before the Supreme Court in Indian Chamber of Commerce Vs.

Commissioner of Income Tax , West Bengal II, Calcutta, . It was found in that case that the broad objects as spelt out from the memorandum and

articles of association were primarily promotional and protective of Indian trade interests and other allied service operations, and those were found

to fall clearly within the sweep of the expression ''the advancement of any object of general public utility'' as set down in section 2(15) and that no

portion of the income or property of the association was to be paid directly or indirectly by way of dividends or bonus or otherwise howsoever by

way of profit to the persons who at any time were members of the association. The chamber of commerce derived income from (1) by way of

arbitration fees levied by it, (2) by way of fees collected for the certificates of origin, and (3) by way of receipts for issue of certificates of

weighment and measurement. The Supreme Court in that case laid down the test as under:

The true test is to ask for answers to the following questions: (a) Is the object of the assessee one of general public utility? (b) Does the

advancement of the object involve activities bringing in monies? (c) If so, are such activities undertaken, (i) for profit, or (ii) without profit? Even if

(a) and (b) are answered affirmatively, if clause (i) is answered affirmatively, the claim for exemption collapses. The solution to the problem of an

activity being one for or irrespective of profit is gathered on a footing of facts. What is the real nature of the activity? One which is ordinarily

carried on by ordinary people for gain? Is there a built-in prescription in the constitution against making a profit? Has there been in practice, profit

from this venture?, although this last is a weak test. The mere fact that a service is rendered is no answer to chargeability because all income is

often derived by rendering some service or other? (p. 808)

This Court in Commissioner Of Income Tax, Madras Vs. Madras Stock Exchange Ltd. And Others., dealt with the claim for exemption u/s 11,

of the Andhra Chamber of Commerce, the South Indian Film Chamber of Commerce and the Madras Stock Exchange Association (P.) Ltd., and

held:

...In the The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, , the object of the trust could not be achieved

without carrying on the business of publication of newspapers. If the profit-making activity is thus the appointed means of achieving a charitable

object of general public utility, then the profit would be taxable. One cannot carry on a business and claim exemption on the income therefrom by

merely saying that it is for a charitable purpose. There is a distinction between: (a) a business being held under trust whose profits feed a charity;

and (b) the carrying on of a business in carrying out what is conceived as charitable purpose. In the former case, the income is clearly exempt. In

the latter, the income may be taxable. The distinction is somewhat fine, but it has to be kept in mind. The proposition that one must run the activity

on a ''no profit no loss basis'' is applicable to a case where in the course of carrying out a charitable purpose there is an activity. In such a case, if

the aim was not to render the service on ''no profit no loss basis'', the profit would be taxable. Similarly, the test that the profit from a business

which is taxable if carried on by a businessman, does not cease to be taxable by a charity indulging in it is also applicable primarily to a case where

the profit-making activity is embarked upon as the appointed means of achieving the purpose of the trust.... (p. 555)

In Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, dealing with the claim for exemption u/s

11 by the Surat Art Silk Mfrs. Association, the Supreme Court held that the expression ''not involving the carrying on of any activity for profit'',

qualify or govern only the last head of charitable purpose and not the earlier three heads, and that, therefore, where the purpose of a trust or

institution is relief of the poor, education or medical relief, the requirement of the definition of ''charitable purpose'' would be fully satisfied, even if

an activity for profit is carried on in the course of the actual carrying out of the primary purpose of the ''trust or institution''. The Supreme Court

further observed that the true meaning of the last ten words in section 2(15), viz., ''not involving the carrying on of any activity for profit'' is that

when the purpose of a trust or institution is the advancement of an object of general public utility, it is that object of general public utility and not its

accomplishment or carrying out which must not involve the carrying on of any activity for profit, and that the inhibition of the exclusionary clause

would be attracted if the purpose of the trust or institution in fact involves the carrying on of an activity for profit or in other words, if an activity for

profit is actually carried on as an integral part of the purpose or ''as a matter of advancement of the purpose''. The Supreme Court has laid down

the following tests to be applied in such cases: (1) Whether the predominant object of the activity involved in carrying out the object of general

public utility is to subserve the charitable purpose or to earn profit. (2) Whether the profit-making is the predominant object of the activity, then the

object of general public utility would cease to be a charitable purpose. (3) Where the predominant object of the activity is to carry out the

charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity.

In this case the decision in Indian Chamber of Commerce''s case (supra), holding that the chamber will not be entitled to the benefit of section 11,

was specifically overruled. In Commissioner of Income Tax Vs. South Indian Film Chamber of Commerce, the question arose whether the South

Indian Film Chamber of Commerce was entitled to exemption u/s 11. A Division Bench of this Court held that the objects of the Film Chamber,

inter alia, being to encourage and develop the film industry in all its branches in South India, namely, to watch, to protect and extend the rights and

privileges of its members and the film trade in general to encourage and facilitate film production, distribution and exhibition of films and to do

various things for the purpose of assisting the persons in this line of activity, it should be taken to be an object of general public utility and,

therefore, the income received by it from various sources was exempt from tax u/s 11, and that the income derived by the Film Chamber from

services rendered to its members was not liable to be charged to tax u/s 28(iii). The said decision is applicable on all fours to the facts of this case.

The objects referred to in that case are similar to the objects of the company have the difference being that the Film Chamber was interested in the

advancement of film industry while the objects of the company before us is advancement of photographic industry.

The Supreme Court in Commissioner of Income Tax, Bombay Vs. Bar Council of Maharashtra, had to consider the question whether the Bar

Council of Maharashtra can claim exemption u/s 11 in respect of its income. The Supreme Court has held that the income by way of interest from

securities held by the Bar Council is exempt from tax liability u/s 11 as the securities are held by the Bar Council on trust wholly for charitable

purposes, viz., for the advancement of an object of public utility within the meaning of section 2(15) and as such the income from securities held by

it was exempt from tax liability u/s 11.

In Addl. Commissioner of Income Tax, Delhi-I Vs. Delhi Brick Kiln owners Association, , the Delhi High Court held that where the purpose of

an institution is the advancement of an object of general public utility, it is that object of general public utility and not its accomplishment or carrying

out, which must not involve the carrying on of any activity for profit, that so long as the purpose does not involve the carrying on of any activity for

profit, the requirement of the definition in section 2(15) would stand satisfied. In that case the objects of the association were (1) to promote,

develop and protect the brick kiln trade, commerce and industries, (2) to watch and protect the interest of brick kiln owners, contractors,

customers and brick dealers, members of the association, and the interest of persons engaged in brick trade, commerce or industries, legally,

morally and socially, (3) to consider all questions connected with brick trade, commerce and industries and to initiate or support necessary action

in connection therewith, and (4) to protect brick trade, with the co-operation of the Government through legislative representation to get the

grievances and difficulties of brick kiln owners'' association redressed. These objects were held to promote the brick kiln trade, that is an object of

general public utility. The dominant intention of the association being to promote the brick kiln trade and that purpose did not involve the carrying

on of any activity for profit, the income of the association was entitled to exemption u/s 11(1)(a).

The Supreme Court in Commissioner of Income Tax, New Delhi Vs. Federation of Indian Chambers of Commerce and Industries, New

Delhi, dealt with a claim for exemption u/s 11 by the Federation of Indian Chamber of Commerce & Industry. The Supreme Court found that the

Federation, through a company with share capital, does not distribute any dividend to its members, that its entire income is being expended for the

fulfilment of its objects, that its main object as set out in the memorandum of association was to promote Indian business in matters of inland and

foreign trade, transport, industry and manufactures, finance and all other economic subjects and to encourage Indian banking, shipping and

insurance. The said Federation held the Indian Trade Fair at New Delhi in the year 1962-63 and derived receipts from rent for space allotted,

temporary stalls and storage, and sold season tickets and daily gate tickets for entry to the fair. It also realised deposits and advances from

participants for hotel accommodation. During that year also sponsored the Afro-Asian conference for economic co-operation, and for organising

the conference it received Rs. 3 lakhs from the Government of India as grant-in-aid, of which, after seeking the expenses it was left with a balance

of Rs. 2,17,346. It also received a share of profits from the sale of a book on company law and advances and fees for arbitration. On those facts,

the Supreme Court held that the Federation activities such as holding the Indian Trade Fair and sponsoring the conference of the Afro-Asian

organisation were for the advancement of the dominant object and purpose of the Federation, viz., promotion, protection and development of

trade, commerce and industry in India and, therefore, they were exempt from tax u/s 11(1)(a), read with section 2(15). The said decision of the

Supreme Court clearly applies to the facts of this case. Here the activities of the company mainly are to promote commerce, art, science or any

other useful object connected with photographic and allied trade and to promote and protect the interests of photographic and allied traders in

every manner possible and to formulate and carry out plans designed to place the trade on a sound and remunerative basis and to correlate and

help the members to help each other to the betterment of the business to increase general trade. As already stated, the memorandum of association

does not contain any provision for the division of profits or the property as amongst the members. As a matter of fact clause 5 of the memorandum

of association clearly shows that the income and the property of the company whensoever derived, shall be applied solely for the promotion of its

objects as set forth in the memorandum of association and it clearly says that no portion of the income or property shall be paid or transferred

directly or indirectly by way of dividend bonus or otherwise by way of profit to persons who at any time are, or have been members of the

company. Therefore, the dominant activity of the company is advancement of public utility and carrying on of an activity for profit is not one of its

objects.

Having regard to the principles laid down in the various decisions of the Supreme Court, referred to above, as well as the decision of this

Court, we have to hold that the company is entitled to exemption u/s 11, read with section 2(15) and that the income of the company is not liable

to be taxed u/s 28(iii) as has been held by this Court in South Indian Film Chamber of Commerce''s case (supra). The first question is, therefore,

answered in the affirmative and against the revenue and the second question is also answered in the negative and against the revenue. The revenue

will pay the costs of the assessee-company. Counsel''s fee Rs. 500.