Income Tax Appellate Tribunal - Delhi
Apparel Export Promotion Council vs Assistant Director Of Income-Tax on 8 April, 1996
Equivalent citations: [1996]57ITD609(DELHI)
ORDER
Vimal Gandhi, JM
1. This appeal by the assessee for the assessment year 1990-91 is directed against order of CIT(A) rejecting the case of the assessee for exemption under section 11 of the Income-tax Act and directing the Assessing Officer to bring to tax the following receipts :
1. Rs. 8,56,000 representing Entrance Fees received from the assessee from its constituents after rejecting the claim that said receipt was of capital nature.
2. Rs. 2,93,47,205 on account of EMD forfeiture and penalty collected by the assessee on behalf of Central Government
3. Rs. 9,250 representing Entrance Fees not brought to tax by the Assessing Officer.
Besides, the other income brought to tax by the Assessing Officer was approved by the CIT(A).
2. The assessee, the Apparel Export Promotion Council, ("Council" in short), is a registered company under section 25 of the Companies Act, 1956 set up for promoting export of garments from India with approval of the Central Government. The Council is registered under section 12A(a) of Income-tax Act with the Commissioner of Income-tax as a non-profit Charitable Institution. It was allowed exemption under section 11 of the Income-tax Act till the assessment year 1991-92. The Council was set up with following main objects :-
(1) To promote, advance, increase, develop export of all types of readymade garments, excluding, woollen knitwear and garments of leather, jute and hemp.
(2) To undertake all export promotion measures, particularly, to undertake market research, quota distribution and allocation, to find out the tariff and other restrictive practices of importing countries, to find out the product range and export prices of garments of other countries, to develop new designs and patterns of garments, to undertake marketing in individual foreign markets, to send trade delegations and missions to foreign countries as well as to survey export potential of readymade garments from the country.
(3) To appoint representative, agents or correspondents in foreign markets for the purpose of continuously and regularly reporting the markets prices, market preferences and latest fashions and designs prevalent in the foreign countries.
(4) To conduct propaganda and publicity regularly and continuously so as to bring to the notice of the importers and the public in foreign countries the advantages of trade and commerce with India and to create a liking for the various types of garments markets for the purpose of continuously and regularly reporting to manufacturers, traders and exporters of garments.
(5) To assist members, especially, in the Small Scale Sector by giving assistance in the matter of understanding and implementation of the drawback, rules and procedures, import licence facilities provided and how to apply for the facilities.
(6) To establish design centres, to evolve improved design and patterns and garments suitable for export, to improve the qualities and standards of the fabrics and garments by importing technical knowhow, to encourage export production of quality garments and to undertake necessary research in fashions, designs and techniques and to encourage manufacture of garments for exports.
(7) To undertake training of a workers and technical personnel, to improve the skill of workers engaged in garment manufacturing in India and to assist in the technological base of the garment industry.
(8) To obtain from members of the Council and to prepare for the Council as a whole, action plans for promotion of exports, development of export markets, generation of production for exports, setting of export targets generally and in relation to specific countries and commodities on an annual basis and for such medium and longer terms as may be considered desirable and to ensure/undertake execution of such plans.
The other incidental and ancillary objects to attain the main objects numbering twenty-seven are also listed in the memorandum. With respect to income and property of the Council, it is provided as under :-
(1) The Income and Property of the Council whensoever derived shall be applied solely for the promotion of its objects as set forth in this Memorandum.
(2) No portion of the Income or Property aforesaid shall be paid or transferred, directly, or indirectly by way of dividend, bonus, or otherwise, by way of profit, to persons who at any time are, or have been Members of the Council or to any one or more of them or to any persons claiming through any one or more of them.
(3) Except with the previous approval of the Central Government, no remuneration or other benefit in money or money's worth shall be given by the Council to any of its Members (whether officers of servants of the Council or not) except, payment of out-of-pocket expenses, reasonable and proper interest on money lent or reasonable and proper rent on premises let to the Council.
(4) Except with the previous approval of the Central Government, no Member shall be appointed to any office under the Council which is remunerated by salary, fees or in any other manner, not excepted, by sub-clause (3) above.
(5) Nothing in this clause shall prevent the payment by the council in good faith of reasonable remuneration to any of its officers or servants (not being Members) or to any other person (not being Member) in return for any services actually rendered to the Council.
3. The Memorandum and Article of Association of Council also provide for enrolment and registration of members and payment of membership subscription and entrance fees. Article 47 of the Memorandum read with article 45 provides for election and composition of Executive Committees for managing the affairs of the Council. The members of the Committee shall from time to time elect the Chairman, three Vice-chairmen and other office bearers. There is also provision for Member of Government Nominees on Committee. The powers and functions of the Executive Committee are enumerated in articles 57, 58 and other articles of the memorandum.
4. In the assessment year under consideration, the Council filed return showing "nil" income on December 31, 1991 along with audited accounts and audit report. The Assessing Officer found that the Council had more than 2300 Members and its activities included holding of -
(a) Fashion shows, seminars, workshops.
(b) Creation of demand for Indian garments in international market by overseas publicity.
(c) Sending applications abroad for participation in foreign fairs and exhibitions.
(d) Conducting market study, survey and export potential, etc.
(e) Development of technical skill of Indian labour.
The Assessing Officer on scrutiny of balance-sheet found that the Council had received Entrance Fees of Rs. 8,57,000 from its Members. He rejected the claim that this receipt was of capital nature and, therefore, not taxable. The Assessing Officer further found that the Council had collected Rs. 2,93,47,205 on account of EMD forfeiture. The claim that this amount was collected on behest of the Central Government and belonged to it, was rejected. The amount was held to be taxable income of the assessee. Another item of Rs. 3,64,383 representing expenses of previous year was held to be taxable in the hands of the assessee. The Assessing Officer thus added a sum of Rs. 3,05,68,888 to Rs. 6,29,162 shown as profit in the profit & loss account and took assessee's taxable income at Rs. 3,67,97,750. As activities of the Council were commercial in nature and it was charging its members for every service rendered, the Council was held to be not entitled to benefit of section 11. The entire income was held to be business income assessable in view of section 11(4A) of Income-tax Act. Thus assessment was made on total income of Rs. 3,67,97,750.
5. The assessee impugned the assessment in appeal before CIT(A). In respect of addition of Rs. 8,57,000 on account of entrance/admission fees, the assessee contended that it was a capital receipt. Reliance in this connection was placed on the decision of ITAT dated 27-9-1985 in ITA No. 2765/Del/84 in the case of the assessee for the assessment year 1980-81. The learned Members had held similar receipt to be of capital nature.
The learned CIT(A) considered above order in the light of letter of Council dated September 21, 1994 and concluded that as per Council's admission, benefit accruing to its Members was of temporary nature. The membership was to cease if annual subscription was not paid. Having regard to above admission, he held that admission fees was not of capital nature. He further noted that the Assessing Officer had not added sum of Rs. 9,250 in respect of admission fees due from 37 members. The said admission fees, according to the learned CIT(A) was assessable under mercantile system of accounting regularly followed by the assessee. The CIT(A) accordingly issued show-cause notice to the assessee as to why said sum of Rs. 9,250 should not be added in the income of the assessee under section 251(2) of the Income-tax Act. After considering objections of the assessee, above amount was added. While treating Entrance/Admission fees as taxable receipt, the learned CIT(A) looked into memorandum and article of association of the Council and found that every member has to pay admission fees and annual subscription as prescribed by the Executive Committee of the Council from time to time. In case of failure to pay subscription the membership would cease. The CIT(A) also referred to Annual Report of the Council for A. Y. 1990-91 and noted that in the period under consideration 3465 Members were enrolled as against 4206 during the year 1989-90. In reaching the conclusion that the amount in question was a taxable receipt, learned CIT(A) relied upon decision of CIT v. Bar Council [1943] 11 ITR 1 (Mad.). Thus assessment was enhanced by Rs. 9,250.
6. While challenging assessment of forfeited amount of Rs. 2,93,47,205 the assessee relied upon decision of ITAT in its own case for the assessment year 1980-81 wherein it was held that forfeited amount was not the property of the Council but of the Central Government. The learned CIT(A) noted amount collected by the Council on account of forfeiture for the years 1988-89, 1989-90 and 1990-91. He further referred to letters from the Ministry of Textile, Government of India, pointing out that the forfeited amount collected by the Council was not deposited in P. D. account as directed by the Government. From the material before him, the learned CIT(A) concluded that the Council was flouting Government directions with impunity. The Council was earning interest on the forfeited amount without disclosing the same to the income-tax authorities. He also referred to the shifting stand of the Council relating to deposit of forfeited amount. In his view, the bulk of forfeited amount was kept and utilised by the Council for its own purposes. The learned CIT(A) rejected the contention that forfeited amount was under the control of the Government. In the above background, he agreed with approach of Assessing Officer on taxability of forfeited amount.
7. In relation to assessee's claim of exemption under section 11 of the Income-tax Act, the CIT(A) noted that Council was holding fashion shows, seminars and other activities noted by the Assessing Officer. He was of the view that the Assessing Officer was right in holding that such activities of the appellant were commercial in nature and that the Council was charging for every service provided to its members. The Council distributes quota for export of garments as per guidelines given by the Central Government. For performance of contract, it received earnest money which is forfeited in case the fixed quota is not exported. Huge amount is collected towards advances from members. Bulk of earnest money deposited was being forfeited. Every service rendered by the Council was for a fixed fees. The learned CIT(A) referred to Annual Report for assessment year 1990-91 according to which members were getting personal favour for granting quotas in the eyes of the Government. In fact, the Council existed for the benefit of foreign jaunts and few influential members. The Council has been acting as a low up to itself. The learned CIT(A) called the Council a trade association. In his view on account of decision in the case of Addl. CIT v. Ahmedabad Mill Owners Association [1977] 106 ITR 725 (Guj.), the Council was not a charitable trust as it was existing for the benefit of fluctuating body of private individual. The CIT(A) further relied upon decision in the case of Calcutta Stock Exchange Association Ltd. v. CIT [1956] 29 ITR 687 (Cal.) and held that the fees was charged for specific services and, therefore, receipt was liable to be taxed. Reference was also made to decision of Hon'ble Supreme Court in the case of CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 to conclude that the council was formed by exporters and manufacturers to advance their own interest.
8. The CIT(A) further observed that the Council was like a mutual association and was earning taxable profit through its activities from its own members. In this connection, learned CIT(A) once again referred to service charges and forfeiture of bank guarantee and other funds. He held that any surplus with the assessee was liable to be charged under section 28(iii) as it was amount received for specific services rendered to the members. The CIT(A) concluded that assessee was not a charitable institution but was engaged in business. The decision in the case of Addl. CIT v. Surat Art Silk Cloth Mfgs. Association [1980] 121 ITR 1 (SC), had no application in this case. It was accordingly held that the Assessing Officer was right in refusing to grant exemption to the assessee under section 11 of the Income-tax Act. The learned CIT(A) also refused to grant deduction of Rs. 28,89,918 claimed as application of income. In a similar fashion, the CIT(A) disallowed deduction of 25% for accumulation of income under section 11(1)(a) of the Income-tax Act. Both the above deductions were denied as the assessee was not a charitable institution attracting application of section 11 of the Income-tax Act.
9. The CIT(A) also issued enhancement notice to add Rs. 44,27,987 as interest on EMD forfeited amount kept by the assessee in the bank. The assessee objected to above addition but CIT(A) held that the forfeited amount being revenue receipt of the assessee, interest on such amount was liable to be assessed. The assessment was accordingly enhanced by sum of Rs. 44,27,481. The assessee has not challenged above enhancement in appeal before the Appellate Tribunal. On other points, the assessee has come up in appeal.
10. We have heard both the parties at great length. After several oral hearings, both the parties were granted time to file written submissions. The written submissions have also been placed on record. The submissions of the appellant are summarised below.
The council as a non-profit association has been established as per policy of the Central Government to project India's image abroad of quality goods and to help and encourage export from India. The Council was formed on 22-2-1978 by seven subscriber members when exports from India were only Rs. 250 crores. Total membership during the year under consideration rose to 18,311 with members coming from all parts of India with total export increasing to Rs. 4,639 crores which presently stands at Rs. 15,000 crores. The Executive Committee which controls day-to-day activities of the Council is elected democratically by its members with Chief Executive (Director General) nominated by the Government.
The Council is not a trading association as it does not carry any trading activity whatsoever but is working for promotion and protection of export relating to readymade garments. No profit, surplus or any remuneration or benefit is payable or distributable to the members. With reference to specific additions the appellant submitted as under :
(1) Charging of entrance fees of Rs. 8,57,000.
The Entrance Fees charged by the Council from its members is claimed to be not taxable on the following grounds :
(a) The Council is a mutual trade association and entrance fees is not charged for any specific service performed for members. The privilege enjoyed by the members is not a tenable endeavouring benefit.
(b) The Council is not actually carrying on any business and, therefore, entrance fees received is not taxable. Reliance in this connection has been placed on decision of Hon'ble Delhi High Court in the case of CIT v. Delhi Race Club (1940) Ltd. [1970] 75 ITR 111.
(c) The revenue has not shown that receipt is of taxable nature.
(d) The entrance fees is receipt of capital nature.
(2) Treating earnest money deposit forfeited amounting to Rs. 2,93,47,206 as revenue receipt.
In this connection, it is pointed out that the Government of India, Ministry of Textile vide notification dated 31st August, 1990 has appointed the Council as Agency for implementation of quota policy for export of readymade garments to USA, Canada and some other countries. The allotment policy is notified from time to time. The terms and conditions for floutment of quota, deposit of earnest money or guarantees and their forfeiture are laid down in the policy. As per Notification dated 29-8-1989 issued by the Ministry of Textiles, the forfeited earnest money is to be deposited in Public Deposit Account. It was explained that the demand from exporters far exceeds the quota made available by that country for readymade garments and, therefore, the allotment of quota is regulated under the allotment policy. So that the quota allotment is fully utilised and maximum foreign exchange is earned by the country, the provisions for forfeiture of earnest money are made to avoid lapses and non-performance.
The aforesaid amount is collected by the Council as agency of the Government and has been deposited with Public Deposit Account with Central Bank of India. The assessee has furnished details of collection and deposit in above account. As against total collection of Rs. 2,93,47,205 collected from defaulting exporters, the assessee has deposited Rs. 4,40,00,000 in the Public Deposit Account in the period under consideration. In the alternative, the assessee claimed that no addition should be made in the hands of the assessee as amount deposited by the assessee far exceeds the amount collected on account of EMD forfeiture.
The assessee had stated that observation of CIT(A) are factually incorrect. An affidavit from Shri R. P. Gupta, Director (Finance) has been filed. In the said affidavit, it has been affirmed that EMD forfeited has been deposited with the Central Bank of India in Public Deposit Account of Central Government. No amount has been deposited in any personal account. It is further affirmed that there is no admission in annual report for 1990-91 that members were receiving personal favours for grant of quotas. Allegations made by the CIT(A) are denied and it is stated that annual report has been misinterpreted by learned CIT(A).
Admission fee received from members is not liable to be taxed as income as per section 2(24)(v) and section 28(iii) of Income-tax Act as forfeited amount was not received from members for any specific service. Recovery of penalty from defaulting members in contravention of quota policy of the Government of India cannot be held to income in the commercial sense. Every amount received cannot be held to be taxable income.
(3) DENIAL OF EXEMPTION UNDER SECTION 11 OF INCOME-TAX ACT.
The assessee has emphasised that it is registered under section 12A of Income-tax Act as a non-profit charitable institution and was allowed exemption since inception from assessment years 1979-80 to 1990-91.
The departure made by the Revenue and denial of exemption under section 11 by applying provisions of section 11(4A) read with section 28(iii) is totally untenable. The Council was charging from members entrance fees and subscription as also counsel charges to recover cost of administration. None of the charges were for any specific service rendered or to make profit.
It has been explained that counsel charges were collected to meet cost of administration and computerisation relating to quota endorsement. It is a nominal fees charged at a rate not exceeding ten paise per piece to cover cost of administration of quota entrusted by the Government of India. It is not a consideration for granting tenable specific benefit. A Member is entitled to quota as per the Government policy. The Member is not making payment to the Council to get quota rights. The Council was neither selling quota nor routing the exports through it to earn any income from the members. Thus there is no taint of commerciality in council charges or in its activities. As services are rendered to its members, provisions of section 28(iii) read with 2(24)(v) were not attracted. The assessee strongly relied upon decision of Hon'ble Supreme Court in the case of Surat Art Silk & Cloth Mfgs. (supra). It was emphasised that primary objects of Council were confined to promotion and protection of export of readymade garments without carrying any trading activity for profit. The powers vested with the Council are only incidental for achieving main and primary objects.
The assessee further stated that even if it was held that the assessee was carrying business, the provisions of section 11(4A) were not applicable in view of Circular of CBDT No. 372 dated 8-12-1983 as according to the said Circular, income from business is entitled to exemption where business is itself held in trust and the activities are carried out for charitable objects. It is further stated that even if section 11(4A) is made applicable to some part of Council's activity, there would be no taxable income as business income of assessee is "nil". The interest income is not hit by provisions of section 11(4A).
(4) ENHANCEMENT OF INCOME BY CIT RS. 9,250.
It is explained that 37 Members who were given registration number after their membership was suspended for non-payment of annual subscription, never paid entrance fees again. As the amount was never paid, the same could not be treated as income on accrual basis. Even otherwise, the amount is claimed as of capital receipt. The other ground raised in the Memo. of appeal was stated to be consequential.
11. Shri Rajindra appearing for the Revenue vehemently opposed above submissions advanced on behalf of the assessee. He placed strong reliance on observation of CIT(A) in the impugned order. With regard to chargeability of entrance fees, it was submitted that before the CIT(A) the assessee had relied upon decision of ITAT for assessment year 1981-82 but its own letter dated 13-10-1994 showed that members were not getting any endeavouring benefit from membership. The assessee thus contradicted itself. With reference to Assessment Year 1980-81 it was submitted that in that year the CIT(A), as would be evident from para 9 of his order, confused entrance fees with subscription. While before the Hon'ble Supreme Court in the case of Surat Art Silk & Cloth Mfgs. Association (supra), the Department had conceded that the subscription was not taxable, the CIT(A) in the order for assessment year 1980-81 held subscription to be taxable as having nexus with services rendered by the Council. He, however, held Entrance Fees to be exempt, Shri Rajindra submitted that admission fees was quite a recurring affair as large number of members (3,465 in this period) were enrolled every year. On each enrolment, admission fee of Rs. 250 was being charged. This charge was for a specific service. Reliance in this connection was placed on case of Bar Council (supra); Bar Council v. CIT [1949] 17 ITR 452 (Pat.); Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC).
12. With regard to taxability of forfeiture of earnest money it was stated that the earnest money was being forfeited right from inception and opening balance in this account was Rs. 6.20 crores. The assessee had earned interest on this amount which was shown as income in the return. The interest of Rs. 44,27,987 on this account has been added by the CIT(A) through enhancement and not challenged by the assessee by raising any ground in appeal before the ITAT. When interest is admitted to be income, the Council cannot argue that forfeited amount belonged to some body else. In this connection, Shri Rajindra has referred to correspondence between the Council and the Textiles Ministry over the years to show that forfeited amount belonged to the Council but it was to be utilised for export promotion as approved by the Government. It was emphasised that the forfeited money remained with the Council for more than ten years and only through order dated 29-8-1989 a Public Deposit Account was opened but the Council still took many years to deposit the money in Public Deposit Account. Para 3 of order of Ministry dated 29-8-1989 showed that forfeited money is to be used "for export promotion activities in the field of readymade garments". The garment export entitlement policy for 1988 - 1990 nowhere shows that forfeited amount is government money. It only regulates administration of allocation of export quota. It is further submitted that the Public Deposit Account is distinguishable from consolidate fund of India. Money in Public Deposit Account remains earmarked for utilisation by the depositor while deposits in consolidated funds loses its identity and is blended with Government funds. Forfeited money continued to belong to the Council and is to be utilised for its benefits. The Government is only a guardian supervising proper utilisation of these funds. There are complaints of wasteful expenditure by the Council as is evident from para 10 of report of Executive Committee. The alternative submission of the assessee was stated to be untenable as deposit in Public Deposit Account cannot be presumed to be an expenditure. In rebuttal Shri S. P. Puri again addressed lengthy arguments both orally and in writing.
13. We have given careful though to rival submissions of parties and examined relevant material available on record. The first and foremost important question that arises for consideration is whether the assessee is entitled to exemption under section 11 of the Income-tax Act as a public charitable institution. The Council as a non-profit company is registered under section 25 of the Companies Act with approval of the Central Government for the promotion of export of readymade garments from India. It is also registered under section 12A of the Income-tax Act with the Commissioner of Income-tax, New Delhi as a non-profitable charitable institution. The Council was allowed exemption from its inception since 1979-80 to 1990-91 and there has been neither any change in its activities nor in its objects.
While denying exemption to the assessee in the year under consideration, the learned tax authorities have held that activities of the appellant are of commercial nature as it is holding fashion shows, seminars, workshops, etc., for a fee. It is charging fee from its members for every service it was performing for them. The Council was collecting huge amounts towards advances and by forfeiture of earnest money. With reference to annual report for the assessment year 1990-91, the learned CIT(A) concluded that personal favours were shown in granting quota. The Council was held to be a trade association existing for benefit of fluctuating body of private individuals. Its activities were commercial and as it was charging for every specific service provided to its members, provisions of section 28(iii) were applicable in this case. The revenue authorities also held that in view of section 11(4A) the assessee was not entitled to exemption under section 11 as it was an institution working for profit.
14. We have already noted primary and main objects of the Council. It is clear from the objects that promotion of exports from India and administration of quota polices on behalf of the Government are the main activities of the Council. In order to promote its main objects of export from India and to make Indian garments known globally, the Council is organising fairs and shows. The promotional activities were claimed to have contributed to the growth of garments export since 1978. In the fair and exhibitions organised by the Council, Indian garments are given the publicity and these events are attended to by foreign buyers and representatives of importing companies. It is further claimed that export from India of readymade garments were Rs. 250 crores in 1978 when the Council was formed. It jumped to Rs. 4,639 crores in 1989-90 and presently stands at Rs. 15,000 crores. This claim has not been refuted by the revenue at any state of proceedings.
15. One of the important controversies before the Tribunal relates to taxability of forfeited earnest money. The Council distributes quota as per policy of Government of India, Ministry of Textiles vide notification dated 31-8-1990 published in Part I Section I of the Gazette of India Extra-ordinary to serve as Guidelines for export under OGL-3 in respect by garments, etc., has appointed the Council as the Agency for implementation of quota policy for export of readymade garments to USA, Canada, EEC member States, Austria, Finland, Sweden and Norway. This Allotment Policy is notified from time to time. The policy lays down the terms and conditions of allotment of quota under various categories and also the earnest money deposit or guarantees to be obtained from the exporters subject to which export quota of garments is allotted and in case of infringement of conditions of allotment, the extent of forfeiture of earnest money or invoking of bank guarantee is provided (para 16 page 19 of Annexure - VIII). Reference is invited to notification order issued by Ministry of Textiles, Government of India dated 29-8-1989 constituting a committee to administer the Earnest Money forfeited deposited in Public Deposit Account. Since the demand from exporters for allotment of quota for each item of export (Fast moving items) exceeds the quota made available by that Country for the particular readymade garment items, the allotment of quota is regulated under the Allotment Policy of the Government of India so that the quota allotted is fully utilised by exporters with maximum foreign exchange earnings by the Country. If the exporter exports less than 100% but more than 75% of allotted quota, proportionate security deposit is liable to be forfeited and if it is less than 75%, the entire earnest money is forfeited. The forfeiture has been stipulated by Government because by non-performance of export the quota lapses and Country loses foreign exchange earnings. The forfeited amount is collected by the Council as agency of the Government, which has been deposited at the instance of Central Government (Refer pages 139 to 145 of the paper Book) with Public Deposit Account of Ministry of Textiles in Udyod Bhawan, Central Bank of India. Para 16(v) of notification on pg. 19 of Annexure - VIII reads as under :
"All forfeited EMD/BGO shall to deposited into a Public Deposit account of Government to be operated in such manner as Govt. notified from time to time."
As detailed on page 127 of Paper Book which has been quoted by CIT (Appeals) and on page 9 of Paper Book - impugned, CIT order, a net sum of Rs. 2,93,47,205 was collected from the defaulting exporters during the year and a sum of Rs. 4,40,00,000 was deposited with Government of India in the Public Deposit Account as per copies of Challans duly submitted.
16. It is clear from above that purpose of distribution of quota is to advance export of garments from India. The forfeited amount is collected as per the export policy and under the directions of Central Government, the assessee has no dominion or ownership over funds so forfeited. The forfeiture is done at the behest of the Government and the funds so forfeited are to be used in accordance with Government directions. The correspondence exchanged between the Council and the Government leaves no amount of doubt that forfeited funds belongs to the Government and not to the Council. The arguments of Shri Rajindra have no factual foundation. The assessee deposited more than Rs. 4 crores of forfeited amount in the Public Deposit Account in the year under account as per directions of the Government. It further deposited similar amounts from time to time in the same account. There might have been some delay on the part of the Council in depositing the forfeited amount but on that account, nature and character of money received cannot be altered. It is difficult to hold that Ministry of Commerce without authority of law would direct the Council to deposit the forfeited amount in the Public Deposit account. Unless ownership of forfeited amount vested in the Government, such like directions could not be issued by the Central Government. On the basis of correspondence it is reasonable to hold that the forfeited amount belonged to the Central Government. Shri Rajindra laid considerable emphasis on the fact that interest earned on forfeited amount was admitted by the assessee to be its income by not challenging order of CIT(A) on this point. The interest was earned by the Council as there was time lag between recovery of amount as earnest money and final order of forfeiture. The Council further delayed deposit of forfeited amount in Public Deposit account and thereby earned interest. Thus interest was realised by use/misuse of forfeited amount by the Council. In the above circumstances, interest may or may not be Council's income. We are not concerned with that question as the same is not an issue before us. But on account of assessment of interest, the forfeited amount cannot be treated as property of the assessee. On material on record, we have to hold that it belonged to and was collected as per the policy of the Central Government. It is not the income of the assessee although as noted earlier, collection of forfeited amount is one of the activities carried on by the assessee relating to distribution of quota.
17. The learned revenue authorities in holding that assessee was not a charitable institution failed to consider the distinction between pre-dominant object of an institution and the power to carry it. The authorities also failed to observe distinction between main and incidental object necessary to be carried to achieve the main or dominant object. In the case of Surat Art Silk & Cloth Mfg. Association (supra), their Lordships observed as under :-
"(vii) The test which has now to be applied is whether the predominant object of the activity involved in carrying out the object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable purpose. But where the predominant object of the activity is to carry out the charitable purpose and not to earn profit, it would not lose its character of a charitable purpose merely because some profit arises from the activity. The exclusionary clause does not require that the activity must be carried on in such a manner that it does not result in any profit. "If the profits must necessarily feed a charitable purpose under the terms of the trust, the mere fact that the activities of the trust yield profit will not alter the charitable character of the trust. The test now is, more clearly than in the past, the genuineness of the purpose tested by the obligation created to spend the money exclusively or essentially on charity". The restrictive condition that the purpose should not involve the carrying on of any activity for profit would be satisfied if profit-making is not the real object.
(viii) It is not at all necessary that there must be a provision in the constitution of the trust or institution that the activity shall be carried on no-profit no-loss basis or that profit shall be prescribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancing the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not propelled by a dominant profit motive."
Again in CIT v. Andhra Chamber of Commerce [1965] ITR 722 (SC) their Lordships observed that advancement or promotion of trade, commerce and industry leading to economic prosperity ensured for the benefit of entire community. That prosperity would be shared also by those who engaged in trading, commerce and industry but on that account the purpose was not rendered any less an object of general public utility.
In the case of CIT v. Bar Council of Maharashtra [1981] 130 ITR 28 (SC), above principles were reiterated in the following words :-
"And applying these tests, trading bodies like Andhra Chamber of Commerce and Surat Silk Cloth Manufacturers Association have been held to be institutions constituted with a view to advance an object of general public utility because their primary or dominant purpose was to promote and protect industry, trade and commerce either generally or in certain commodities, even though some benefit through some of their activities did accrue to their members which was regarded as incidental and this court held that the income derived from diverse sources by these institutions (rental income from property in the case of Andhra Chamber of Commerce and income from annual subscriptions collected from its members and commission of a certain percentage of the value of licences for import of foreign yarn and quotas for purchase of indigenous yarn obtained by the assessee from its members in the case of Surat Art Silk Cloth Manufacturers Association) was exempt from tax liability under section 11 of the Act."
In the case of CIT v. Andhra Pradesh State Road Transport Corpn. [1986] 159 ITR 1 (SC), the question of exemption of income of Andhra Pradesh State Road Transport Corporation under section 11 of the Income-tax Act was involved. The said Road Transport Corporation was established under section 3 of the Road Transport Corporation Act, 1950. The objects for which Corporation was established are set out in section 3 of the Act and are reproduced by their Lordships at page 8 of the Report. The main object being to offer advantage to public trade and industry by development of road transport. The other objects, duties and powers are incorporated in sections 18 and 19 of the Act. The principle on which the Corporation was expected to carry on its undertaking is stated in section 22 of the Act is reproduced below :
"22. General principle of Corporation's finance - It shall be the general principle of a Corporation that in carrying on its undertaking, it shall act on business principles."
On the basis of above provision, it was submitted that activities of the Corporation were carried on for profit as under sub-section (22), the Corporation was enjoined to act on business principles. It was further submitted that Corporation could issue shares even to members of the public and that the dividend would be paid to the shareholders and, therefore, the profit would be made from the activity of the Corporation by its owners namely the shareholders. Their Lordships rejected this contention with following observations :-
"The submission founded upon section 22 is based upon a misunderstanding of what that section provides. A road transport corporation cannot be expected or be required to run at a loss. It is not established for the purpose of subsiding the public in matters of transportation of passengers and goods. The objects for establishing a road transport corporation are those set out in section 3 of the RTC Act which we have already reproduced above. Section 18 shows that it is the duty of a road transport corporation to provide, secure and promote the provision of an efficient, adequate, economical and properly co-ordinated system of road transport in the State. No activity can be carried on efficiently, properly, adequately or economically unless it is carried on, on business principles. If an activity is carried on, on business principles, it would usually result in profit, but, as pointed out by this court in Surat Act Silk Cloth manufacturers Association's case (1980) 120 ITR 1 (SC), it is not possible to carry on a charitable activity in such a way that the expenditure balances the income and there is no resultant profit, for, to achieve this, would not only be difficult to practical realisation but would reflect unsound principles of management. What section 22, therefore, does when it states that it shall be the general principle of a road transport corporation that in carrying on its undertakings it shall act on business principles is to emphasise the objects set out in section 3 for which a road transport corporation is established and to prescribe the manner in which the general duty of the corporation set out in section 18 is to be performed. It is now firmly established by the decision of this court in Surat Art Silk Cloth Manufacturers Association's case (1980) 121 ITR 1 (SC) and Bar Council of Maharashtra's case (1981) 130 ITR 28 (SC), that the test is "what is the predominant object of the activity - whether it is to carry out a charitable purpose or to earn profit? "If 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 the activity."
In the present case, the revenue authorities denied exemption to the assessee holding that Council was charging fees for every activity carried for the members and that it was indulging in holding fashion shows, seminars, etc. No material has been placed by the revenue to establish that activities were carried on by Council for earning profit and not for achieving its dominant object of advancement of exports of garments. A reference to the relevant balance-sheet of the company reveals that if interest earned on forfeited amount is ignored, the assessee had deficit income. This demonstratively proves that the assessee hardly recovered expenditure incurred by its and made no profit from any activity carried on by it. Para 144 of export and import policy specifically provides that such councils are non-profit organisations registered under the Companies Act or the Societies Registration Act, as the case may be. They are supported by financial assistance from the Central Government. There is no material to show that Council violated the rules governing its activities. The assessee has filed affidavit of Director (Finance) challenging facts stated by the CIT(A) in the impugned order and claiming that observations are based on mis-reading of report for assessment year 1990-91. Without material and in view of the position reflected in the profit and loss account, we are unable to hold that council is making huge profit from its activities. It is clear that in treating council as a trading activity, the learned revenue authorities did not keep in mind the distinction that exists between dominant object of institution and its activities to achieve that object. They also did not appreciate that fashion shows, seminars, etc., are required to be carried on educate people on export and economically it has to be carried on, on business lines by charging fee from the participants to meet administrative and other expenses of the Council. It does not mean that any activity in which loss is not suffered is being carried on for profit. Activity carried on business principles does not mean that the assessee was carrying on business. It is clear from material on record that all activities of the assessee are directed towards achieving its main object of promoting export on readymade garments from India. It did not carry any activity for earning profit and, therefore, it has to be held that the assessee did not carry on "business" as the term is understood in common parlance. The assessee, therefore, is a public charitable institute. For the purpose of granting exemption, the dominant or main object is to be seen. Even if it is found that at some point of time the persons at the helm of affairs did not observe rules and acted in a manner not authorised by rules that would not make any difference to the claim of the assessee. A breach of a duty by public or private holder of an office cannot change the character of office or institution. Thus even if it is proved that certain favours were done by Executive Committee in allotment of quota that would not make the assessee a non-charitable institution. For all the above reasons, we hold that assessee is a charitable institution to which provisions of section 11 are applicable. The provisions of section 28(iii) or of section 11(4A) are not applicable to this case as the assessee did not carry on any business. The case law cited on behalf of the revenue is not applicable as factual foundations to apply those decisions do not exist in this case.
18. The assessee has also challenged taxability of entrance fees. All the same, it has admitted that subscription paid by the members is taxable. In our considered opinion, both the receipts are of same character and there is contradiction in the approach of the assessee. The revenue contended that subscription or entry fee was paid for specific services. This is challenged by the assessee. No details of services rendered by the assessee to its members have been placed on record. From perusal of export policy we find that as per para 124, registration number and membership certificates are to be given in the application for licences to export and other benefits referred to in the said para. In view of above para, it has to be held that privilege is granted to the member on payment of fees and subscription. if subscription is not paid, the name of member is scored of the role. The assessee claimed that entry fee is a capital receipt. This contention was accepted by the ITAT in assessment year 1980-81. However, we are at a loss to understand how entry fee is a capital receipt. What endeavouring benefit it would provide to the council as an institution? Although we do not agree with the submission advanced on behalf of the assessee, the question of taxability of entry fee has to be re-determined in the light of our finding that the assessee is a public charitable institution not carrying any business activity for profit. The Assessing Officer has to re-determine this and other issues raised before us in the light of our above findings. Accordingly, we set aside the impugned orders of CIT(A) and direct the Assessing Officer to re-compute assessee's income as a public charitable institution. The matter is remitted back to the Assessing Officer.
19. In the result, assessee's appeal is allowed in terms stated above.