The Commissioner of Income Tax vs The Bar Council

Alfred Henry Lionel Leach, C.J.—The questions referred by the Income Tax Appellate Tribunal relate to the, liability of the Bar Council of

Madras to Income Tax. The Income Tax Authorities have imposed a tax on the income of the Council for the years 1939-40 and 1940-41. In the

previous years no tax was levied, it being taken that the income of the Council was not taxable under the Act. It may be mentioned that the Bar

Councils of Calcutta, Bombay, Allahabad, Lucknow, Patna, Sind and Nagpur have not been required to pay tax on their income. The income of

the Council consists of fees paid by persons enrolled as advocates of the High Court, examination fees paid by the apprentices-at-law and interest

of investments. The enrolment fees provide the biggest source of income. The income is utilised for meeting the establishment expenses and the

payment of fees to lecturers and examiners. The Council is a statutory body whose main functions relate to the enrolment of persons as advocates

of the High Court, the rights and duties of advocates and their discipline and professional conduct. Its duties, however, include the giving of

facilities for legal education and training and the holding and conduct of examinations.

Section 3 of the Income Tax Act which is the charging section makes, inter alia, an individual or association of persons liable to pay the tax on

income. The Council has been taxed as an individual, and there can be no doubt that it is an individual or association of persons within the meaning

of the section. Therefore its income is taxable unless exemption is to be obtained under the provisions of Section 4 (3). Clause (1) of Sub-section

(3) exempts income derived from property held under trust or other legal obligation wholly for religious or charitable purposes and, in the case of

property so held in part only for such purposes, the income applied or finally set apart for application thereto. The last clause of this sub-section

defines what is meant by the words ""charitable purpose"" and the definition includes education.

When the Income Tax Officer proposed to assess the Council to Income Tax, it claimed total exemption by reason of Clause (1) of the sub-

section and the case has proceeded throughout on that basis. The Council appealed from the Income Tax Officer''s order to the Appellate

Assistant Commissioner and from the latter''s order, which confirmed the Income Tax Officer''s order, to the Income Tax Appellate Tribunal,

which agreed with the Income Tax authorities that this clause did not exempt the income of the Council.

Now, it is clear that it does exempt income derived from the investments of the Council if those investments are held by the Council for

educational purposes. This aspect of the case has not been considered. The learned Advocate-General who appears on behalf of the Council has

stated to the Court that the investments of the Council have been made, and the fund represented by them is held, for educational purposes. This

being so, this income is not taxable. On the other hand it is quite clear that the income derived from enrolment and examination fees is taxable

income. At the suggestion of the Court, the Council will make a formal statement to the Income Tax authorities with regard to the purposes for

which the investments are held. In these circumstances Mr. Sesha Aiyangar, on behalf of the Income Tax authorities, suggests that the case may be

allowed to stand over for a week in order to enable him to obtain instructions from the Commissioner of Income Tax. We agree to this course and

the case will stand out of the list until next Monday. If it is possible, as it appears likely, that an agreement may be arrived at, it will not be

necessary for this Court to answer the reference.

(This reference again coming on for hearing, the Court made the following).

ORDER

Alfred Henry Lionel Leach, C.J.

The Chief Justice.--The learned Advocate-General on behalf of the Bar Council states that the Council will utilise its income from investments

solely for legal education and for expenses, including establishment charges, in connection therewith. In future separate accounts will be maintained

for this purpose. In past years the Council have been treating the investments and income therefrom as applicable to legal education, though no

separate accounts have been maintained in respect of the investments. This makes it perfectly clear that the income of the Council received from

investments is not taxable. As we have pointed out in our Order, dated the 2nd November, 1942, the income from enrolment and examination fees

is taxable. The Commissioner of Income Tax accepts the statement of the learned Advocate-General.

In these circumstances the assessment for the years in question should be made on this basis. The questions referred will be answered in the

sense indicated in our two orders.

There will be no order as to costs.