Madras Kirana Merchants Association vs Commissioner of Income Tax

Ismail, J.—The Income Tax Appellate Tribunal, Madras Bench, u/s 256(1) of the Income Tax Act, 1961, has referred the following

question for the opinion of this court :

Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the income of the applicant is not exempt u/s 11 of

the Income Tax Act?

In view of the course which we propose to adopt, it is not necessary to refer in great detail to the provisions contained in the memorandum of

association of the assessee. It is enough to mention that the assessee is M/s. Madras Kirana Merchants Association, and it was incorporated in

1940 u/s 25 of the Companies Act, with the liberty to omit the word ""Limited"". For the assessment years 1965-66 and 1966-67, the assessee filed

returns showing incomes of Rs. 1,598 and Rs. 2,040 respectively from a property. Interest incomes of Rs. 667 and Rs. 686 were also shown for

the two years respectively. The total receipts thus amounted to Rs. 2,265 and Rs. 2,726 in these two years. Deducting loss from business at Rs.

859 and Rs. 19, respectively, the net assessable incomes were shown at Rs. 1,406 and Rs. 2,707 in the returns. In the course of the assessment

proceedings, it was contended for the assessee that the income is not taxable at all as the assessee was not a profit making body and that the

objects of the Association were charitable in nature. The Income Tax Officer rejected this contention holding that the activities of the assessee did

not comply with the requirements of Section 11 of the Income Tax Act, 1961. The assessee preferred appeals to the Appellate Assistant

Commissioner of Income Tax and contended before him that the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs.

Andhra Chamber of Commerce, supported its claim for exemption. The Appellate Assistant Commissioner by his order dated February 21, 1968,

held that since the purpose for which the assessee came into existence is to advance the interests of kirana merchants and to work for their

betterment, the decision of the Supreme Court in Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce, applied and as such

the assessee''s income would be exempt from tax. Against the decision of the Appellate Assistant Commissioner, the department preferred

appeals.

For the assessment year 1967-68, the assessee likewise filed a return showing an income of Rs. 2,659; it was contended that for that year also

the income was exempt. The claim was rejected by the Income Tax Officer. But the Appellate Assistant Commissioner, following his earlier

decision, held that the income was exempt. Against this decision also, the department preferred an appeal. Therefore, there were three appeals

before the Tribunal relevant to the assessment years 1965-66, 1966-67 and 1967-68. The Tribunal held that the number of members of the

assessee in this case was very small, that, in addition, the judgment of the Supreme Court in Commissioner of Income Tax, Madras Vs. Andhra

Chamber of Commerce, was rendered with reference to the provisions contained in the Indian Income Tax Act, 1922, that the amendment

effected to the relevant provisions in the Income Tax Act, 1961, made all the difference, and that the decision in Commissioner of Income Tax,

Madras Vs. Andhra Chamber of Commerce, did not support the claim for exemption for the years under consideration. It is the correctness of this

conclusion of the Tribunal that is challenged in this court by the assessee in the form of a reference extracted already.

There are three decisions of the Supreme Court and also a decision of this court to be considered. The first decision of the Supreme court, as

we pointed out already, is the decision in Commissioner of Income Tax, Madras Vs. Andhra Chamber of Commerce, . That judgment was

rendered with reference to the provisions contained in Section 4(3)(i) of the Indian Income Tax Act, 1922, as to what constituted ""charitable

purpose"" ; the other two decisions were rendered with reference to the term ""charitable purpose"" as defined in Section 2(15) of the Income Tax

Act, 1961. The first of the two decisions is The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, and the other

decision is Indian Chamber of Commerce Vs. Commissioner of Income Tax , West Bengal II, Calcutta, . These decisions dealt with the scope of

the expression ""charitable purpose"" as contained in Section 2(15) of the Income Tax Act, 1961.

The expression ""charitable purpose"" was denned in Section 4(3) of the Indian Income Tax Act, 1922, as under :

In this sub-section ''charitable purpose'' includes relief of the poor, education, medical relief and the advancement of any other object of general

public utility.

The definition of ""charitable purpose"" as given in Section 2(15) of the Income Tax Act, 1961, reads :

''""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.

The difference between the two provisions is the addition of the words ""not involving the carrying on of any activity for profit"" at the end of the

definition as given in the Indian Income Tax Act, 1922.

In The Sole Trustee, Lok Shikshana Trust Vs. The Commissioner of Income Tax, Mysore, the question came to be considered whether these

ten words at the end of the definition in Section 2(15) of the Income Tax Act, 1961, qualified every one of the objects which preceded the object,

viz., the ""object of general public utility"", or was confined only to the ""object of general public utility"". Khanna J., who delivered the judgment of

himself as well as Gupta J., did not think it necessary to decide that question in that case, because on the facts of that case the object was only the

object of general public utility"", and not one of relief of the poor or advancement of education or medical relief, and consequently they proceeded

to decide on the basis that the said ten words qualified only the last object, viz., the object of general public utility, and on such consideration came

to the conclusion that the object in that case involved the carrying on of activity for profit, and, therefore, did not come within the scope of the

expression ""charitable purpose"". Beg J., who delivered a separate judgment, proceeded on the basis that the ten words extracted already qualified

only the last object, viz., the ""object of general public utility "".

In Indian Chamber of Commerce Vs. Commissioner of Income Tax , West Bengal II, Calcutta, also, the Supreme Court proceeded on the

basis that the ten words extracted already qualified only the last object, viz., the ""object of general public utility"", and only on that basis laid down

the general principles of law applicable to such a case.

The decision of this court referred to is the judgment dated April 15, 1976, in Commissioner Of Income Tax, Madras Vs. Madras Stock

Exchange Ltd. And Others., which applied the law laid down by the Supreme Court in the decisions referred to already.

In the present case also, the objects of the assessee will not come within the scope of the advancement of education, or medical relief or relief

of the poor, but only within the scope of the ""object of general public utility"". Consequently, if the assessee is to satisfy the test of ""charitable

purpose"" as defined in Section 2(15) of the Income Tax Act, 1961, as clarified by the Supreme Court in the two decisions referred to above, it

could not involve in any activity for profit, The Tribunal, in this case, has not rendered any finding on this part of the case. All that the Tribunal

stated in its order is :

In view of this definition of charitable purpose given by Section 2(15) of the Act of 1961, which is applicable in these appeals, it is clear that the

assessee is not entitled to the exemption claimed as the receipts accounted for in the profit and loss account, other than entrance fees and

subscriptions, arose from activities carried on for profit.

The Tribunal itself does not say what were those activities which were carried on for profit on the basis of which it came to the conclusion that

the assessee did not satisfy the definition of ''''charitable purpose"" as contained in Section 2(15) of the Income Tax Act, 1961. In view of this,

normally speaking, this court should send back the reference without answering the question referred to this court, so that the Tribunal can pass

fresh orders after considering this aspect of the matter and recording a finding with reference thereto. However, Mr. Jayaraman, the learned

counsel for the department, contends that in view of the judgment of the Supreme Court in Indian Chamber of Commerce Vs. Commissioner of

Income Tax , West Bengal II, Calcutta, , it is not necessary to give an opportunity to the Tribunal to deal with this matter, because the assessee has

to fail on the sole ground that the memorandum of association of the assessee does not contain a clause that the activities of the association shall be

carried on on the basis of no profit or no loss. We are unable to accept this argument, since, in our opinion, the Supreme Court has not laid down

that the presence of any such clause in the memorandum of association is an indispensable requirement to satisfy the test of charitable purpose. At

page 809, the following passage occurs, on which Mr. Jayaraman relied (page 809):

The objects of the chamber include settlement of disputes among traders by arbitration. This is undoubtedly a service of general public utility--

preventing protracted commercial litigation. If the fee charged for doing so is more or less commensurate with the expense the chamber has to

incur, a minor surplus will not attract tax. But no such restriction is written into the rules governing the chamber. It may charge a heavy sum and

spend much less for hiring experts to decide the dispute. There is no magna carta binding the Indian or Cochin or Bengal Chamber of Commerce

(with which the Supreme Court was dealing) not to sell arbitral justice.

Relying upon this passage, Mr. Jayaraman contended that there being no such restriction written into the memorandum of association and the

rules of the assessee in the present case, the assessee must fail on that ground itself, and there is no need for the Tribunal to record any other

finding. In view of yet another passage occurring in the very same judgment, we are unable to accept this contention of the learned counsel for the

department.

At page 808, the Supreme Court observed :

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 moneys ? (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.........

We may wind up with a brief rounding off and indication on the approach. A pragmatic condition, written or unwritten, proved by a

proscription of profits or by long years of invariable practice or spelt from strong surrounding circumstances indicative of anti-profit motivation--

such a condition will qualify for ''charitable purpose'' and legitimately get round the fiscal hook. Short of it, the tax tackle holds you fast.

(Underlining* is ours). Thus, the sentence underlined in the above extract will clearly negative the indispensability of a written condition and all that

the judgment requires is a condition which may be written or unwritten, and if it is unwritten, to be gathered from long years of invariable practice

or spelt from strong surrounding circumstances. Therefore, we are of the opinion that it is not correct to contend that the Supreme Court has laid

down as an indispensable requirement that such a condition must be written in the constitution of a body like the assessee itself. It is in view of this

feature alone, we think it proper that we should return the reference unanswered, leaving the Tribunal to record its finding on this important

question as to whether the assessee is involving in activities for profit or not. There will be no order as to costs.