Madras High Court
Southern India Mill Owners' ... vs Commissioner Of Income-Tax on 16 April, 1975
Equivalent citations: [1977]110ITR871(MAD)
Author: V. Ramaswami
Bench: V. Ramaswami
JUDGMENT Sethuraman, J.
1. This is a reference under the Indian Income-tax Act, 1922, in which the point raised relates to the claim of the assessee for exemption under Section 4(3)(i) of that Act. The assessee, originally a company known as " South Indian Mill Owners' Association ", was registered under 'the Indian Companies Act, 1913. The present assessee is an association of persons registered under the Societies Registration Act on 14th December, 1959, and it took over all the assets and liabilities of the previous Association registered under the Indian Companies Act. The objects for which the assessee-Association came" into existence are as follows :
" (1) To create and encourage friendly feeling and unanimity amongst the textile mill owners on all subjects connected with their common good.
(2) To secure good relations between members of the Association and between themselves and their employees.
(3) To advance, encourage and promote commercial and other technical education and also to establish and maintain such institutions for instructing and training persons connected with manufacture, trade and commerce of its members, (4) To promote and protect the interest of textile industries and other trades, commerce and manufactures of South India in general and of the cotton trade in particular.
(5) To provide an exchange or mart with library and reading rooms and other accommodation for the comfort of the members who are engaged in questions connected with trade, commerce and manufactures and promote the diffusion of knowledge among its members.
(6) To collect, supply, distribute and circulate literature, statistics, tables and such other data and to circulate and supply such information as useful for the trade, commerce and manufactures of its members and their employees.
(7) To take all steps which may be necessary for promoting, protecting, supporting, encouraging or opposing legislative and other measures affecting the interests of its members.
(8) To make representations to Municipal, State, Central or other authorities on any matters connected with trade, commerce and manufactures of its members and their interests.
(9) To act as arbitrators or umpires in the settlement of disputes arising out of the transactions in all products of the textile mills and also raw materials for the manufacture of the textile goods between parties willing or agreeing to submit to arbitration in accordance with the Arbitration Act and Rules of the Association.
(10) To undertake special enquiries and initiate or support any action for securing the redress of legitimate grievances connected with manufacture, trade or commerce of its members.
(11) To take any action which may be conducive to the extension of manufacture, trade and commerce of its members or incidental to the attainment of this object.
(12) To take such steps by personal or written appeals, non-political public meetings or otherwise as may from time to time be deemed expedient for the purposes of procuring contributions to the funds of the Association in the shape of donations, annual subscriptions or otherwise.
(13) To print and publish any newspapers, periodicals or leaflets that the Association may think desirable for the promotion of its objects and dissemination of knowledge and information.
(14) To apply for and acquire such concessions and Acts of legislature in any country, State in India or foreign country as may be advantageous for carrying out the objects of the Association.
(15) From time to time to subscribe to local or other charities and to grant donations for any public purpose, and to provide or establish or aid in the establishment of superannuation or such other funds for employees and servants of the Association, or otherwise to assist any such servants, their widows and children.
(16) To establish and support and to aid in the establishment and support of any other association formed for all or any of the objects of this Association and also to subscribe to become member or affiliate, amal gamate and co-operate with any other associations, institutions, societies or companies incorporated or not whose objects are altogether or in part similar to those of the Association, to procure from or communicate to any such association such information as may be likely to promote the objects of this Association.
(17) To purchase or otherwise acquire and undertake all or any part of the property, assets, liabilities and engagements of any one or more of the Associations, institutions, societies or companies with which this Association is authorised to amalgamate.
(18) To transfer all or any part of the property, assets, liabilities and engagements of this Association to any one or more of the Associations, institutions, societies or companies with which this Association is authorised to amalgamate.
(19) And generally to do all such other lawful things as are incidental or conducive or may be necessary in the interests of the Association or of the above objects of the Association directly or indirectly." The members of the Association are drawn from all the four States of South India, viz., Andhra Pradesh, Karnataka, Kerala and.Tamil Nadu. Any individual, firm or company owning one or more mills in these States is eligible to become a member of the Association. The word " Mills " means textiles and natural and/or artificial fibre manufacturing or processing mills and shall include cotton, silk, woollen or other natural or artificial fibre processing or manufacturing mills. There is a form of application prescribed by the Association and the committee could accept or reject such application without assigning any reasons. Rule 44 of the Rules and Regulations describes the business of the annual general body meeting as :
(1) To receive the committee's report, balance-sheet, etc. (2) To elect the office-bearers.
(3) To appoint an auditor and fix his remuneration, and (4) To transact any other business which may be brought forward by the committee or by any member.
2. There is no provision for distribution of dividend and on the dissolution of the Association the property of the Association is not to be distributed among the members, but is to be given to some other institution having similar objects.
3. We are concerned in this reference with the assessment for 1961-62, the relevant previous year ending on 31st December, 1960. The assessee filed a return admitting an interest income of Rs. 1,165 under the head " other sources ". This sum was arrived at after deducting from the gross income of Rs. 3,455 a sum of Rs. 2,288 as expenses. The Income-tax Officer found that it had other income, viz., Rs. 200, credited to the profit and loss account and Rs. 12 realised from the investment of the sinking funds. A sum of Rs. 3,25,306 had been received as interest on deposits! The origin of the fund, which gave rise to the interest, was as follows :
The textile mills which got import licences for cotton had to deposit a certain amount specified by the Textile Commissioner with the Association. The mills which exported yarn or cloth sustained losses in the export trade due to the competitive world market. The amount received as levy from the cotton importing mills was liable to be distributed among the exporters of yarn and cloth in accordance with the directions of the Textile Commissioner. During the period when the levy amount was with assessee awaiting the instructions for disposal from the Textile Commissioner, the fund was kept in deposit with banks and earned interest. It is this interest which came to Rs. 3,25,306 in the relevant year. The assessee claimed exemption on the ground that the income was exempt from taxation under Section 4(3)(i) of the Indian Income-tax Act of 1922 and relied for this purpose on the decision of the Supreme Court in Commissioner of Income-tax v. Andhra Chamber of Commerce . The Income-tax Officer rejected this submission and brought to tax the said sum after deducting Rs. 8,434 incurred as expenses.
4. The assessee appealed to the Appellate Assistant Commissioner and relieved its claim under Section 4(3)(i) of the .Act on the strength of the decision ill Commissioner of Income-tax v. Andhra Chamber of Commerce . The Appellate Assistant Commissioner upheld the assessment and in addition enhanced it by bringing to tax a sum of Rs. 75,471 received as subscription and entrance fees and also withdrawing the allowance of Rs. 8,434 as expenses on the ground that it had been deducted twice.
5. The assessee then appealed to the Appellate Tribunal. The point in issue was whether the property of the assessee was held for charitable purposes. The Tribunal examined this claim in the light of the objects clause. It considered certain objects as primary and certain others as incidental, the primary objects being those set out in Clauses (4), (6), (8) and (11) of the objects clause already extracted, the rest of the clauses being treated as incidental. Before the Tribunal the assessee placed certain materials to show that the assessee's activities led to economic prosperity enuring for the benefit of the entire community. It was pointed out for the assessee that there was no direct personal gain to the members in those activities thereby showing that the dominant purpose of the Association was the advancement of objects of general public utility. After referring to the absence of any material to show that there was any personal gain to the members and observing that the materials placed by the assessee provided an aid to the understanding as to how the dominant objects of the assessee-Association were worked, the Tribunal held that the objects of the Association were beneficial to the public and that the assessee was eligible for exemption. The Tribunal deleted the sum of Rs. 75,471 enhanced in the assessment, but sustained the withdrawal of the allowance of Rs. 8,434 as made by the Appellate Assistant Commissioner. At the instance of the Commissioner of Income-tax, the following two questions have been referred to this court :
"(1) Whether, on the facts and in the circumstances of the case, the purpose of the Association is one of advancement of an object of general public utility and, therefore, a charitable purpose as contemplated in Section 4(3)(i) of the Indian Income-tax Act, 1922 ?
(2) If the answer to question No. (1) is in the negative, (a) whether the interest receipt of Rs. 3,25,306 is the income of the assessee ? and (b) if it is, whether such interest income is of a casual and non-recurring nature and, therefore, exempt from tax under Section 4(3)(vii) of the Indian Income-tax Act, 1922 ? "
6. It may be seen that the second question would arise for consideration only in the event of the answer to the first question being in the negative. We have thus to consider the first question primarily and only in the event of the answer being in the negative, go into the second.
7. With reference to the first question the learned counsel for the department submitted that the assessee-Association has been constituted only for the benefit of the members and not for any general public benefit. He reiterated the objection taken before the Tribunal against considering certain objects as primary and certain others as secondary. In his submission, so long as there were objects, which were concerned only with the members, the assessee-Association could not claim to be" founded for charitable purpose. He emphasised also the point that the Tribunal had wrongly looked into certain materials as showing how the objects of the assessee were worked and how they disclosed a public charitable purpose. He tried to show that the decision of the Supreme Court in Commissioner of Income-tax v. Andhra Chamber of Commerce had no application to the facts herein.
8. We have very carefully considered the submissions ; but we are unable to agree with the counsel. The Tribunal's decision is based on the decision of the Supreme Court in Commissioner of Income-tax v. Andhra Chamber of Commerce . The primary objects of the Andhra Chamber of Commerce, which was a company incorporated under Section 26 of the Indian Companies Act of 1913 was to promote and protect trade, commerce and industries, to aid, stimulate and promote the development of trade, commerce and industries, and to watch over and protect the general commercial interests of India or any part thereof. The chamber was particularly concerned with the promotion and protection of trading in the Andhra country. There were other objects, which were found to be incidental to the principal objects. The chamber derived income from letting out a property it had acquired and claimed exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922. The case canvassed before the Supreme Court was whether the purposes for which the assessee stood incorporated were objects of general public utility, within the meaning of the expression " charitable purpose " in Section 4(3) of that Act. The Supreme Court pointed out that advancement or promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the entire community. If that prosperity was shared also by those who engaged in trade, commerce and industry, it did not mean that the purpose was not rendered any the less an object of general public utility. It was pointed out that promotion and protection of trade, commerce and industry could not be equated with promotion and protection of activities and interest merely of persons engaged in trade, commerce and industry. The Supreme Court affirmed the judgment of the Madras High Court granting the exemption under Section 4(3)(i) of the Act.
9. The objection of the learned counsel for the department that there can be no bifurcation of the objects between primary and incidental is untenable . in view of the decision of the Supreme Court. That decision shows that we have to find out what are the main or principal objects of the Association and if there are any objects which are incidental to the main objects and which are beneficial to the members' as contrasted with the general public, then such incidental objects would not detract from the public utility emerging from the main objects. In the present case we find that in Clause (3) there is reference to advancement, encouragement and promotion of commercial and other technical education. This is not an object which is confined to the members. Similarly, Clause (4) contemplates promotion and protection of the interest's of textile industries and other trades, commerce and manufactures of South India in general and of cotton trade in particular. This is an object of general public utility. Clause (6) contemplates collection and supply of literature useful for the trade, commerce and manufactures of its members and their employees. In our opinion, that is also a general object as what is emphasised is the need for such information being useful for the trade, commerce and manufactures dealt with by this Association. Similarly, Clause (8) relates to representations to authorities on matters connected with the trade, commerce and manufactures of the members. The idea appears to be not to sponsor any individual representations, but to bring to the notice of the authorities the conditions relating to the trade or manufactures represented by this Association. Clause (9) provides for settlement of disputes generally and not merely relating to the members. The settlement of a dispute in a healthy manner is such as to subserve public good. Similarly, Clause (11) contemplates action being taken so as to be conducive to the extension of manufacture, trade and commerce of the members. Here also we do not understand the clause as being designed to sponsor individual cases, but to promote the manufactures, trade and commerce of textiles. Clauses (13) and (14) envisage printing and publishing newspapers, periodicals, etc., for the promotion of the objects of this Association and dissemination of knowledge and information, and applying for and acquiring such concessions in any country, as may be advantageous for carrying out the objects of the Association. These two clauses are not intended only for the members. Having these objects in view, we are satisfied that the Tribunal rightly upheld the assessee's claim for exemption on the ground that it came within the last part of the definition of " charitable purpose " in Section 4(3) of the Act. If there are any benefits which accrued to the members because of these objects, those benefits, are incidental. Having gone through the memorandum, we are satisfied that the primary and dominant purpose of the Association is only to promote and protect the textile industry. The textile industry occupies a pre-eminent place in the economy of South India and anything intended to promote and protect the-economic activity of such an industry is bound to have its effect on the economy of the country and in particular of this part of the country. We are, therefore, unable to accept the submission that the Association has been constituted only for the benefit of the members and not for any general public benefit.
10. In paragraph 9 of its order the Tribunal has referred to the way in which the assessee-Association has functioned and has tried to further the interests of the trade as such and not of any particular member or members. The objection of the learned counsel for the department was that the objects of the Association have to be ascertained only from the memorandum or the constitution and not from any external source. He relied for the purpose on the decision of the Privy Council in All India Spinners' Association v. Commissioner of Income-tax [1944] 12 ITR 482 (PC). In that case the question related to the claim for exemption of the All India Spinners' Association, which was a body brought into existence for the development of hand-spinning and hand-weaving. There was an attempt on the part of that assessee to rely on the practice to use the surplus income for the purpose of the Association. It was also sought to be shown by the assessee that the business was carried on in pursuance of the primary purpose in addition mainly by the beneficiaries of the Association. The Privy Council pointed out at page 487 that the practice, however, was not enough and that the purpose was to be ascertained from the constitution. We agree that external aid is not to be availed of for ascertaining the purpose or the object for which the assessee-Association has come into existence. The Tribunal has sought to use these external data only to show how the assessee has actually functioned. In other words, we do not understand the order of the Tribunal, as relying on the practice for the purpose of ascertaining the intention of the objects of the Association. However, those materials themselves have not been included in the annexures. We say no more about those materials. We have already, independently of those materials, come to the conclusion that the objects of the assessee-Association satisfy the test of general public utility.
11. During the course of the arguments our attention was drawn to the decision of the Supreme Court in Commissioner of Income-tax v. Indian Sugar Mills Association , wherein also a similar claim for exemption was agitated. In that case Rule 64 permitted' distribution of profits among the members on a resolution being passed for this purpose. This was construed as introducing an element of private gain, which was inconsistent with the object of general public utility. There is no such rule in the present case, so that the assessee's claim cannot fail because of any element of private gain.
12. For all these reasons, we answer the first question in the affirmative and in favour of the assessee. The second question does not arise for consideration in view of this answer. The assessee will have its costs. Counsel's fee Rs. 250.