Girijan Co-operative Corpn. Ltd. vs Commissioner of Income Tax

B.P. Jeevan Reddy, J.—The Tribunal, Hyderabad/has referred the following question u/s 256(1) of the income tax Act, 1961 (''the Act''): Whether, on the facts and in the circumstances of the case, and having regard to the objects for which the assessee-Corporation has been established by the Government, the assessee can be considered to be a public charitable institution within the meaning of section 2 (15) of the income tax Act, 1961, and consequently its income is liable to be excluded for assessment purposes u/s 11 of the income tax Act, 1961?

With a view to improve the conditions of the members of Scheduled tribes in the State and to put an end to exploitation of the Tribal people by plainsmen, the Government thought it fit to establish a Finance and Marketing Corporation to provide the Tribal people with credit facilities, to procure and supply them their domestic requirements and other necessities of life, and to arrange for the marketing of their agricultural produce. Accordingly, the Government issued G.O. Ms. No. 2551, Education and Endowments Department, dated 14-12-1955 sanctioning the setting up of a Corporation, known as ''Andhra Scheduled-Tribes Finance and Development Corporation, Ltd.''. The G.O. specified the authorised capital, its board of directors, and other particulars. This Corporation was later designated as ''Girijan Cooperative Corporation Ltd.'', and registered as a co-operative society under the A.P. Co-operative Societies Act. For the three previous years relevant to the assessment years 1966-67 to 1968-69, certain profit resulted from its operations. The assessee-Corporation, however, submitted that since it is a ''charitable institution'' within the meaning of section 2 (15) of the Act, its income is exempt from levy of tax u/s 11 of the Act. It was submitted that the basic object of the society is not to make any profit, but only to ameliorate the conditions of Girijans and to improve their economic lot. It was also submitted that the surplus was not the result of any activity carried on with the idea of earning profit, but was merely ancillary and incidental to the main object of purchasing and marketing the agricultural produce procured from Girijans. The ITO declined to agree with this submission, and made the assessment. An appeal preferred to the AAC was dismissed. Thereupon, a further appeal was preferred to the Tribunal. The Tribunal perused the bye-laws of the society and concluded that the assessee-Corporation has been set up to carry on business, and, that its objects clearly indicate that the main purpose of the Corporation was to carry on business like any other commercial organisation. While accepting that the activities carried on by the assessee are for the well-being of Tribals, the Tribunal opined that all the same its activities are commercial in nature. The Tribunal, no doubt, held that the business of the Corporation was held under trust, but opined that it is not held under trust for a charitable purpose. The Tribunal noticed that none of the objects of the Corporation prescribed the manner of utilisation of funds generated from its activities, nor is there any specific charitable purpose for which the funds generated from its business are to be applied. The Tribunal concluded: "It is, therefore, clear that not a single paisa is meant for the benefit of the Scheduled tribes or for any activity which is in the nature of a charitable activity meant for the Scheduled tribes. In the absence of any charitable purpose, it is difficult to apply the principle laid down by the Supreme Court in Dharmadayam''s case...." The Tribunal also found that even if, for any reason, the Corporation is treated as a charitable trust, still it would not be entitled to claim exemption with respect to its income, inasmuch as no part of its income was applied for any charitable purpose. Thereupon, the Corporation applied for, and obtained this reference. 2. According to the bye-laws of this Corporation, its operations extend to the scheduled areas of the State, and also to such non-scheduled areas where Girijans or Adivasis live in substantial numbers. Clause (e) of bye-law 2 defines the expression ''Member'' as meaning a co-operative society admitted into the Girijan Co-operative Corporation. Clause (f) defines ''Board'' as meaning the board of directors of the Corporation. Bye-law 3 sets out the objects of the Corporation. It reads:

OBJECTS:

The objects of the Corporation are:

(i) to purchase outright the produce brought by member of the Scheduled-Tribes through the agency of any primary marketing society hereinafter referred to as ''Affiliated societies'' and market it to the best advantage; and for this purpose to take up forest contracts of bamboo coupes, fuel (and the like) and for procurement of minor forest produce from the Government;

(ii) to supply the requirements of the members of the Scheduled tribes through the agency of the affiliated societies by making bulk purchases;

(iii) to take shares in the affiliated societies from its funds;

(iv) to provide working capital to the affiliated societies by advancing loans and cash credits and the like;

(v) to borrow funds for issue of loans to Girijans through the affiliated societies for purposes of agricultural operations, development of land and irrigation, sources, construction and repairs to houses, purchase of plough bullocks and agricultural implements, purchase of pump sets, oil engines, providing electrification, mechanisation of agriculture, raising plantations, development of subsidiary occupations, etc.;

(vi) to co-ordinate, supervise and control the activities of the affiliated societies;

(vii) to acquire or take on lease godowns or sale depots within its jurisdiction and elsewhere, if necessary, to facilitate the storage and sale of agricultural and other produce belonging to the Corporation and to its affiliated societies and their members;

(viii) to undertake activities such as processing and grading for the benefit of the Corporation and its affiliated societies and their members and for this purpose to own or hire the necessary plants and machinery;

(ix) to own or hire and ply lorries on hire for the transport of its godown and those of its affiliated societies and their members;

(x) to act as agent of the Government for procurement, supply and distribution of agricultural and other produce or other goods as and when required to do so;

(xi) to encourage self help, thrift and co-operation among the affiliated societies and their members;

(xii) to undertake generally such other activities as are conducive to the promotion of the economic interests and social welfare of the members of the Scheduled tribes and the attainment of the above objectives....

According to bye-law 5 the authorised share capital of the Corporation shall be Rs. 2 crores made up of 2 lakh shares of Rs. 100 each. Bye-law 6 says that any co-operative marketing society registered under the Act, working within the scheduled areas, or any Central or Taluk level co-operative society exclusively formed for the Girijans or Adivasis living in non-scheduled areas, shall be eligible for admission as members of the Corporation. No individual is eligible to become a member. It is open to the State Government to take such number of shares, and subject to such conditions, as may be prescribed by it. Bye- law 8 prescribes the maximum shareholding limit. It says, every member joining the Corporation shall take at least one share. Every member shall have to take an additional share for every Rs. 10,000 or part thereof of its borrowings from the Corporation. Bye-la w 10 restricts the transfer of shares. No transfer of share is permissible unless approved by the board. Bye-law 13 deals with the funds of the Corporation. It comprises, inter alia, share capital from members and the Government, as also subsidies and grants. Bye-law 15 deals with management. A board of directors consisting of not more than 16 members, of whom 11 shall be officers of the Government mentioned in the bye-law, shall be elected by the general body of the Corporation. Bye-law 40 deals with ''loans and cash credits''. It says, loans and cash credits may be given to the affiliated societies for purchasing agency produce and issue of loans for domestic requirements and agricultural operations to their members. Bye-law 44 deals with disposal of net profits. According to it, 40 per cent of the net profits shall be carried to reserve fund; 1 per cent of the net profits, subject to a maximum of Rs. 2,500 shall be credited to the Co-operative Education Fund; dividend and shares shall be paid to the members on 31st December of the previous year at a rate not exceeding 61/4 per cent per annum. There shall be a ''business, losses and depreciation reserve'', and a building fund. Bonus to employees is also provided for. Any profit not appropriated for the above purposes, and all undisbursable and indivisible profits shall be added to the reserve fund of the Corporation. Bye-law 45 deals with reserve fund. It belongs to the Corporation and is intended to meet unforeseen losses. No member of the Corporation shall have any claim to a share in this fund. It also prescribes the manner in which the reserve fund shall be applied on the winding up of the Corporation. One of the purposes for which the said fund shall be applied on winding up is to meet the claims relating to dividend upon the paid-up share capital of the members.

The expression ''charitable purpose'' is defined in clause (75) of section 2 in the following words:

Definitions- (1) to (14) ******

(75) ''charitable purpose'' includes 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;

Section 11(1) of the Act declares that, subject to the provisions of sections 60 to 63 of the Act, the income mentioned in clauses (a), (b) and (c) thereof shall not be included in the total income of the previous year of the person receiving the income. Clause (a) deals with ''income'' derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India; and where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of 25 per cent of the income from such property.

It is not necessary to notice clauses (b) and (c).

The assessee''s case is that the predominant purpose of the Corporation is relief of the poor, as well as advancement of the members of Scheduled tribes, which is an object of ''general public utility''. It is also submitted that its main purpose is not carrying on of any activity for profit, but it is serving the Scheduled tribes. Any profit resulting is merely incidental, and unintended. It is submitted that members of Scheduled tribes are, generally speaking, poor, and serving them is advancement of an object of general public utility. These contentions have to be examined and answered with reference to the objects of the assessee concerned herein and the nature of the activity carried on by it.

It is well settled that for satisfying the requirements of section 2(15) it is not necessary that the benefit should reach each and every poor person in the State or the country. It is sufficient if it reaches a sizable number of members of public. Further, the words ''not involving the carrying on of any activity for profit'', occurring in the said clause, qualify only the words ''the advancement of any other object of general public utility'', and not the words preceding them. The test to be applied in such cases is whether the predominant object of the activity involved in carrying out the object of general public utility is to sub serve a charitable purpose, or to earn profits. Once it is held that the predominant object is to subserve a charitable purpose, the mere fact that the activity of the assessee results in some profit is of no consequence. These questions, it is clear, have to be answered with reference to the objects of the assessee-Corporation, as set out in its bye-laws, and the nature of activity carried on by it.

It is a fact beyond dispute that Scheduled tribes in our country are the most exploited, ignorant, and poor. Their advancement is undoubtedly, an object of general public utility. If the object of the assessee- Corporation is providing relief to them or to improve their lot, it would certainly qualify as a charitable purpose within the meaning of section 2(15). What we have to see is: what is the true object of this Corporation? Is the object to earn profits or to provide relief to poor Girijans- and/or to advance their interests? Two views are projected before us:

According to the revenue, this Corporation is merely a federal society composed of societies whose membership is restricted to members of Scheduled tribes only; its object primarily is to carry on trade in forest and agricultural produce to the best advantage of its members. It is nothing but a co-operative society, designed to benefit its members alone. The mere fact that it is set up by the Government is of no consequence. It is a trading concern, whose profits are shared by its members. That the members of this society belong to Scheduled tribes is again of no consequence. It provides for declaration of dividend no doubt, subject to a ceiling. This feature clearly shows its object to be earning of profits and thereby help its members. On the other hand, the case of the assessee is that it is a mistake to treat it on par with any other or the general run of co-operative societies. It is not a case where some persons, may be poor, have come together to form a co-operative society, to carry on an activity to earn profits and thereby help themselves. This is a case where the Government; has come forward to constitute a society of Girijans to save them from exploitation, to ensure reasonable price for their produce, to supply them their necessities at reasonable prices, to provide credit to them at low interest and, thus, to raise their economic level and their consciousness. While examining the objects of the assessee as set out in its bye-laws, the Court should keep in view the overall objective for which this Corporation was constituted, as set out in G.O. Ms. No. 2551, dated 14-12-1955. They should not be read in isolation, but in the context of the stated purpose. So construed, the objects of the Corporation are nothing but the relief of poor, and the advancement of the cause of Scheduled tribes who are generally speaking, poor, ignorant, and exploited. Their advancement is, therefore, said to be an object of general public utility.

On a consideration of the material placed before us, we are inclined to agree with the submissions of the assessee and to hold that the primary or predominant object of the activity carried on by the asses see is not earning of profit, but the upliftment of the members of Scheduled tribes. This Corporation, no doubt, registered as a co-operative society, is in truth and substance an agency set up by the Government for the purposes stated in G.O. Ms. No. 2551. It has been given the form of a co-operative society only for the purposes of law and for carrying out its objects conveniently. The object is not to earn profits though profit may result incidentally from its operations. It is true that there is a provision for declaring dividends and this is the main feature emphasized by the revenue; but the dividend goes only to member-societies, which serve the Girijans in general. There is also a ceiling on dividends - it cannot exceed 6| per cent. Rest of the profits, if any, go into a reserve fund and for other beneficial purposes. Even the reserve fund is meant only to advance the cause of the Scheduled tribes as a whole. It would, therefore, be misleading to equate this Corporation with the ordinary/general type of co-operative societies, where certain persons may be poor, may be belonging to a certain profession, class, or category - come together and form into a society to carry on activity for profit. The Tribunal has, in our opinion, missed the true purpose of the Corporation and its true import.

In Commissioner of Income Tax, West Bengal III Vs. Indian Sugar Mills Association, - upon which substantial reliance is placed by the revenue - it was held by the Supreme Court that rule 64 of the rules of Indian Sugar Mills Association - an association registered as a trade union under the Trade Unions Act, 1926 - which permitted distribution of profits among the members on a resolution being passed for the purpose, introduced an element of private gain which was inconsistent with the object of general public utility, and for that reason it could not be said that the association held the income derived from its business of export of sugar wholly for charitable purposes. It was also observed that it is not permissible for the Court to rewrite the rules of the association, and that the Court has no power to treat rule 64 as repugnant to rule 4(a) - which provided that the income and property of the association shall be applied solely towards the promotion of the association, and, no portion thereof shall be paid or transferred, directly or indirectly, by way of dividend, bonus, or otherwise - and to say that it is invalid or inoperative on that account. It was also held that some of the purposes mentioned in rule 3, which sets out the main objects of the association, were not charitable in nature. In the case before us, how ever, firstly the dividend goes only to societies composed exclusively of Girijans which serve the Girijans in general, and secondly the predominant object is not to earn profits but to serve the Girijans. There is also a ceiling on dividends.

In Additional Commissioner of Income Tax, Gujarat Vs. Surat Art Silk Cloth Manufacturers Association, , the Supreme Court held that the primary object and purpose of Surat Art Silk Cloth Manufacturers'' Association - a company incorporated under the Companies Act - was a charitable purpose. The objects of the company were: "(a) to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth, and cotton cloth; (b) to carry on all or any of the business of art silk yarn, raw silk, cotton yarn, etc., belonging to and on behalf of its members; (c) to obtain import licences for import of art silk yarn, raw silk, cotton, yarn, and other raw materials as well as accessories required by its members for the manufacture of art silk, silk, and cotton fabrics; (d) to obtain export licences and export cloth manufactured by ''the members, (e) to buy and sell and deal in all kinds of cloth and other goods and fabrics belonging to and on behalf of the members;... (n) to do all other lawful things as are incidental or conducive to the attainment of the above objects............." It was a company registered u/s 25 of the Companies Act, 1956. The income and property of the assessee were to be applied solely and exclusively for promotion of the objects stated in the memorandum, and no part of such income or property could be distributed amongst its members in any form or utilized for their benefit either during its operational existence or on its winding up or dissolution. The Court held that the dominant or primary purpose of the association being promotion of commerce and trade in art silk, art silk yarn, etc., as set out in clause (a), it is an object of general public utility, not involving the carrying on of any activity for profit, within the meaning of section 2 (15). It was held that the objects mentioned in clauses (b) to (e) were merely incidental to the primary purpose mentioned in clause (a). It was also held that the assessee was entitled to exemption u/s 11(1)(a).

Similar are the facts in Commissioner of Income Tax Vs. Andhra Pradesh Bankers and Pawnbrokers Association, a decision of this Court, wherein the A.P. Bankers & Pawnbrokers'' Association was held entitled to exemption u/s 11(1)(a), read with section 2 (15).

Strong reliance is placed by Mr. Ratnakar upon the decision of the Supreme Court in Commissioner of Income Tax, A.P. Vs. Andhra Pradesh State Road Transport Corporation, In this case, the question arose whether the A.P. State Road Transport Corporation - a statutory Corporation constituted u/s 3 of the Road Transport Corporations Act, 1950 - is entitled to claim exemption of its income u/s 4(3)(i) of the Indian income tax Act, 1922, as also section 11 of the 1961 Act. The objects of the Corporation were (a) offering advantages to the public, trade and industry by development of road transport; (6) co-ordinating any form of road transport with any other form of transport; and (c) extending and improving the facilities for road transport in any area and of providing an efficient and economical system of road transport service therein. The statute obliged the Corporation to provide, or secure, or promote the provision of an efficient, adequate, economical and properly co-ordinated system of road transport services in the State. The Act also provided that in carrying on its undertaking, the Corporation shall act on business principles. Though the Act empowered the Corporation to issue shares and to pay dividends, no share capital was raised by the Corporation as a matter of fact, its entire capital being provided by the Government. Its annual profit had to be utilized for the provision of amenities to the passengers using the road transport services, welfare of the labour employed by the Corporation, and the balance, if any, to be made over to the State Government for purposes of road development. The State Government was entitled to interest at the prescribed rate on the capital contributed by it. On a consideration of the above factors, it was held that the activity of the Corporation was carried on not with the object of making profit, but for advancement of an object of general public utility. The Court held that the test in such cases is: what is the predominant object of the activity -whether it is to carry out a charitable purpose, or to earn profit? If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arises from its activity.

Reliance is also placed upon the decision of this Court in Commissioner of Income Tax, Andhra Pradesh Vs. Andhra Pradesh Police Welfare Society, where the A.P. Police Welfare Society was held to be a Society whose primary and dominant object was advancement of an object of general public utility, within the meaning of section 2 (15).

We are, therefore, of the opinion that the object for which the assessee-Corporation has been established is charitable and, therefore, it can be considered to be a public charitable institution within the meaning of section 2 (15). We also hold that its income is liable to be excluded under, and in accordance with, the provisions of section 11 of the Act. Reference answered accordingly.