Dharmaposhanam Company vs Commissioner of Income Tax, Kerala

Govindan Nair, J.—The Income Tax Appellate Tribunal, Madras Bench, had drawn up the following statement of fact :

By these applications u/s 66(1), the assessee requires the Tribunal to draw up a statement of the case and to refer certain questions of law which are said to arise out of the Tribunals order in I.T. As. Nos. 11849 to 11853 of 1959-60, dated 29th October, 1962/7th Karthika, 1884, to the High Court of Kerala at Ernakulam. Inasmuch as, in our opinion, a question of law does arise and as the facts are common, a consolidated statement of the case is hereby drawn up.

The assessee is a company registered u/s 32 of the Cochin Companies Act, corresponding to section 26 of the Indian Companies Act. A licence dated 8th January, 1931, was issued to the company by the secretary to the Dewan of Cochin and this was as under:

Under section 26(1) of the Indian Companies Act, VII of 1913, made applicable to Cochin by his Highness the Maharajas proclamation dated 19-3-1097, Government are pleased to direct that the association named Dharmaposhanam Company, Irinjalakuda, which has as its object the promotion of charity, education and industry be registered with limited liability without the addition of the word limited to its name.

The memorandum and articles of association of the company are in Malayalam. The following is a rough translation of the relevant objects of the company and certain articles of association:

(1) To raise funds by conducting kuries with the company as foreman receiving donations and subscriptions and by such other means as the company deems fit;

(2) To do the needful for the promotion of charity, education and industry;

(3) To construct buildings or acquire properties on own account or for rent for the abovementioned purposes;

(4) To encourage others to carry on similar institutions with objects identical to that of the company;

(5) To carry on activities for the fulfillment of the abovementioned purposes;

(6) To advance loans on the security of gold ornaments, immovable properties or any other security approved by the directors or on the personal security of one or more persons approved by the directors and to raise loans for the purpose of the company and carry out other transactions (as amended on 21-11-1117, corresponding to July, 1942).

Under clause 38 of the articles of association, the business of the company was to be carried on by the directors. Clause 40 is as under:

The board of directors will have power to elect trustees for each year, not less than three and not exceeding five in number, from among themselves and to authorise them to exercise the whole or part of the powers of the directors as they deem fit.

Clause 42 is as under:

The movable and immovable properties of the company shall be in the names of the trustees and all monetary and property transactions and all the suits pertaining to the company shall be carried on in the names of the trustees.

Clause 58 deals with the profit and is as under:

The profit of the company shall not be divided among the members. The profit left after meeting the expenses of the company will be utilised for promoting education, social welfare and such other purposes of common good as are resolved by the general meeting.

Clause 59 is as under:

From the annual profit, 20 per cent should be set apart towards the reserve fund every year.

A certified copy of the memorandum and articles of association (in English) is annexed as annexure "A" and forms part of the case. The original in Malayalam is undertaken to be produced, if necessary, at the time of the hearing.

The assessee carried on business in kuries, and also derived income from shares, securities, interest on mortgage and loans. Separate accounts had been maintained for the kuri business. During the relevant previous year, the assessees income from these sources were as under:

Year ended

31-12-53

Year ended 31-12-54

Year ended 31-12-55

Year ended 31-12-56

Year ended 31-12-57

Rs.

Rs.

Rs.

Rs.

Rs.

Interest

2,474

3,307

5,421

1,681

880

Kuri

1,773

500

1,357

3,220

2,457

The income shown under "interest" includes interest on mortgage loans, pro-note loans, etc.

The directors, of whom three are named as trustees, recommended from year to year to the general body of shareholders the appropriation of the net profits to various funds, like reserve fund, bad debts reserve fund, scholarship fund and charity fund. The transfer to scholarship and charity funds were as under:

Year ended 31-12-53

Year ended 31-12-54

Year ended 31-12-55

Year ended 31-12-56

Year ended 31-12-57

Rs.

Rs.

Rs.

Rs.

Rs.

Scholarship fund

200

129

492

400

nil

Charity fund

744

794

689

744

600

The expenses debited to scholarship and charity funds in the above years were as under:

Rs.

Rs.

Rs.

Rs.

Rs.

Scholarship

198

181

192

277

274

Charity

Nil

427

537

1014

874

The Income Tax Officer brought to tax the incomes during these years. He gave exemption in respect of interest received by the assessee on account of interest on National Savings Certificates. It was submitted before him that the income of the company was exempt from Income Tax as the income, according to it, was applied wholly for religious or charitable purposes. The Income Tax Officer rejected the contention of the assessee. His reasons therefore are given in the assessment order for 1956-57. These reasons may be summarised as under:

(1) The income of the assessee-company was not being wholly applied for religious or charitable purposes for every year; 20 per cent of the profits was being set apart as reserve fund and the bulk of the balance was being invested in buildings, shares and securities, etc.,

(2) That only a very negligible part of the profit was utilised for religious or charitable purposes.

He considered that the main activity of the company was conduct of kuries and observed that it had not been proved that the business of conducting kuries was in the course of actual carrying out a primary purpose of the institution and that the work in connection with the business of the company was also not being carried on on behalf of the beneficiaries of the institution. The orders of the Income Tax Officer are annexures "B" to "B-4" and form part of the case.

There were appeals to the Appellate Assistant Commissioner. It was contended before him that the assessee-company was a company incorporated for charitable purposes; that all its income was derived from property held under trust or other legal obligation wholly for religious or charitable purposes and, therefore, no part of the income was liable to Income Tax u/s 4(3)(i). It was further submitted that the interest incomes from mortgage, pro-notes, etc., were also income from property held under trust or other legal obligation wholly for religious or charitable purposes and that income from kuri was also from property held under trust or other legal obligation wholly for religious or charitable purposes and, therefore, these were also exempt from taxation.

The Appellate Assistant Commissioner has considered all these contentions in his appellate order for 1956-57. He was of the view that the main part of section 4(3)(i) was a general provision applicable to all categories of properties of which proviso (b) was a general provision dealing with a special category of property, viz., business. He then proceeded to consider whether the conditions of clause (b) of the proviso were satisfied. He held that the assessee did not satisfy these conditions and the assessee also did not seriously dispute this. In the end, he held that the income derived by the assessee did not qualify for exemption u/s 4(3)(i).

In regard to the part of the profits from interest on mortgages, pro-notes, etc., which was claimed to be not business income flowing from normal business activities of the assessee-company, he held that the interest received from these also formed part of the assessees business, which, according to him, under the objects of the memorandum was that of money-lending business. The clause referred to is clause 6 mentioned in paragraph 3 of this statement.

Apart from the above reasons, he considered that, for the following reasons also, the assessee was not entitled to the exemption:

As stated above under article 58, the profits of the company cannot be divided among the members and 20 per cent thereof is required to be set apart towards reserve. It is quite clear from this article that the appellant-company is under an obligation to utilise only 80 per cent of its annual income from business for public and charitable purposes and that with regard to the balance it is under no such obligation. This in itself is sufficient to disqualify the appellant-company from claiming in respect of its business income, quite apart from the fact that the conditions laid down in clause (b) of the proviso to section 4(3)(i) are not satisfied.

In the result, he rejected the claim of the assessee for all the years under reference. Copies of the orders of the Appellate Assistant Commissioner are annexures "C" and "C-1" and form part of the case.

There were appeals to the Tribunal. The grounds of appeal before it were as under:

(1) The learned Appellate Assistant Commissioner should have held that the appellant-company is a company incorporated for charitable purposes and that all its income is derived from property held under trust or other legal obligation wholly for religious or charitable purposes and that no part of its income is liable to be assessed as income.

(2) The learned Appellate Assistant Commissioner should have held that appellant-companies income from dividends and interest on securities, mortgages, pro-notes, etc., is income from property held under trust or other legal obligation wholly for religious or charitable purposes and that the whole of the said income is being applied or accumulated for application to such religious or charitable purposes within the taxable territories.

(3) The learned Appellate Assistant Commissioner should have held that the income from kuries is income from property held under trust or other legal obligation wholly for religious or charitable purposes and that the whole of the said income is being applied or accumulated to such purposes within the taxable territories.

(4) The learned Appellate Assistant Commissioner has erred in holding that income derived from items other than kuries is income from business activities of the appellant-company.

(5) The learned Appellate Assistant Commissioner has gone wrong in holding that by setting apart 20 per cent of the profits to the reserve fund, the entire income is not applied wholly for religious or charitable purposes. He should have found that the reserve fund is maintained in accordance with the provisions of the Companies Act and the reserve so maintained is accumulated for the application of religious and charitable purposes.

The Tribunal confirmed the order of the Appellate Assistant Commissioner. Its reasons are as under:

(1) It is clear that the business of the company is carried on by the directors qua directors of a company. The trustees are appointed by the directors or in effect constitute a sub-committee of the directors. It follows therefrom that the trustees do not carry on the business.

(2) In the absence of a trust deed, section 4(3)(i) does not come to the aid of the business.

(3) Having regard to the income spent on scholarships and charity (Rs. 200, Rs. 129, Rs. 492, Rs. 400 for scholarships and Rs. 744, Rs. 794, Rs. 689, Rs. 743 and Rs. 600 for charity), it cannot be said that the object of the company was a charitable purpose. It is therefore unnecessary to consider whether clause (a) or (b) of the proviso applies.

A copy of the Tribunals order is annexure "D" and forms part of the case.

Parties agree to the facts stated above and have referred the following question of la :

Whether, on the facts and in the circumstances of the case, the income of the assessee for the abovementioned previous years was exempt under the provisions of section 4(3)(i) of the Income Tax Act.

The assessee is a company registered u/s 32 of the Cochin Companies Act which corresponds to section 25 of the Indian Companies Act. It is contended by counsel appearing on behalf of the assessee that by virtue of the memorandum and articles of association which is annexure "A" it is clear that section 4(3)(i) of the Indian Income Tax Act, 1922, which is the relevant section, is attracted and that the income in question was derived from property held under trust or at least under other legal obligations and such income is to be used wholly for religious or charitable purposes.

Our attention has been invited to the decision of the Privy Council in D. K. K. Kaisha v. S. K. S. N. Co. as also to the decisions in Andhra Chamber of Commerce v. Commissioner of Income Tax, Dharmodayam Co. v. Commissioner of Income Tax and Commissioner of Income Tax v. Bengal Home Industries Association. The terms of the constitution which were considered by the Judicial Committee of the Privy Council as well as the memorandum and articles of association of the companies dealt with in the three decisions referred to above are similar to the memorandum and articles of association of the assessee-company (annexure "A"). The profit of the company is not to be divided. It is to be utilised for the purpose of social education and for the purposes of industry. This will fall within the meaning of charitable purposes as defined in the Indian Income Tax Act, 1922. We think, therefore, this is a case where section 4(3)(i) of the Indian Income Tax Act, 1922, is attracted. If that section is attracted, proviso (b) to the section cannot apply. It has been so held by the Supreme Court in a decision in Commissioner of Income Tax v. P. Krishna Warriar.

The reasons which prompted the Income Tax Appellate Tribunal to hold that the benefit of section 4(3)(i) will not be available to the assessee are summarised in the statement of the case in paragraph 14 under three heads (1), (2) and (3) reading as follow :

(1) It is clear that the business of the company is carried on by the directors qua directors of a company. The trustees are appointed by the directors or in effect constitute a sub-committee of the directors. It follows therefrom that the trustees do not carry on the business.

(2) In the absence of a trust deed, section 4(3)(i) does not come to the aid of the business.

(3) Having regard to the income spent on scholarships and charity (Rs. 200, Rs. 129, Rs. 492, Rs. 400 for scholarships and Rs. 744, Rs. 794, Rs. 689, Rs. 743 and Rs. 600 for charity), it cannot be said that the object of the company was a charitable purpose. It is therefore unnecessary to consider whether clause (a) or (b) of the proviso applied.

The first of these grounds can have no relevancy. The property is held at least under a legal obligation and the company is obliged to apply the income for the purposes specified in the memorandum and articles of association. Whether the business is managed by trustees appointed by the directors or whether they are carried on by the directors qua directors is not a material consideration for deciding the applicability of section 4(3)(i). Nor can it be said that a trust deed is essential in order that the provisions of section 4(3)(i) may be relied on by the assessee. The further point made that only a small portion of the income has been spent for scholarship and charity also is not a criterion for deciding whether the assets of the company are held under any legal obligation to apply the income therefrom for the purposes mentioned in section 4(3)(i). It is not anybody''s case that any part of the income has been utilised for any purposes other than those specified in the memorandum and articles of association.

In the light of the above, we answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the department. We direct the parties to bear their costs.

Question answered in the affirmative.