Income Tax Appellate Tribunal - Pune
National Engg. Co-Ordination ... vs Assistant Commissioner Of Income-Tax on 30 July, 1992
Equivalent citations: [1992]43ITD612(PUNE)
ORDER
T.A. Bukte, Judicial Member
1. The appellant has filed all these appeals against the orders of the CIT and CIT (Appeals). ITA Nos. 655 & 656/PN/89 are filed against the consolidated order of the CIT, Pune dated 31-3-1989 for the assessment years 1984-85 and 1985-86. The CIT, Pune scrutinised the assessments made by the Assessing Officer for the said assessment years and found that the assessments were erroneous and prejudicial to the interest of revenue on the ground that no exemption should have been granted to the appellant under Section 11 of the Income-tax Act, 1961. ITA Nos. 132 to 136/PN/92 are filed against the consolidated order of the CIT (Appeals), Pune dated 26-12-1991 on several common grounds relating to only one issue, ie., whether the assessee is a charitable trust carrying on business to derive income from such business and whether such income derived from the business is exempt under Section 11 of the Act. The Assessing Officer in compliance with the CITs order dated 31-3-1989 passed under Section 263 of the Act made fresh assessments for the assessment years 1984-85 and 1985-86. Thus the appellant has preferred appeals against the order of the CIT (Appeals) for these assessment years. The CIT (Appeals) disposed of all the appeals for the assessment years 1984-85 and 1985-86 and subsequent assessment years by passing a consolidated order. As both the sets of appeals were heard together, therefore, they are disposed of by this consolidated order for the sake of convenience.
2. In view of the facts brought on record, relevant evidence relied upon by both the parties, the legal position and the case law, mainly the following points have arisen for our consideration:
(a) Whether the assessee is a charitable trust ?
(b) Whether the activity carried on by the assessee amounts to a business activity ?
(c) Whether the chick levy voluntarily contributed by the poultry farmers and hatcheries or collected by the assessee is income from business activity ?
(d) Whether such an income is exempt or taxable ?
(e) Whether the provisions of Section 13(1)(d) of the Act are applicable ?
To arrive to the correct findings on these points, it is necessary to scrutinise the facts from the relevant evidence brought on record and particularly in the light of the case law cited and relied upon by both the parties. It is also necessary to find out the facts of creation of the assessee-trust in question. It is also necessary to point out the facts relating to original creation of the assessee trust in question with its broad objects and general utility of the services to the egg industry. An action of collecting chick levy for discharge of the duty cast upon the appellant would amount to rendering facilities to the poultry farmers and hatcheries for rendering services against the payments is also a relevant question to be considered. Therefore, in the broad sense we are required to go through the provisions of Sections 11, 11(4A). 12 and 13(1)(d) of the Act. We are required to consider whether the provisions of Section 11 (4A) or 11(4A)(b) are applicable to the activities of the appellant.
3. The lower authorities have held that the appellant is carrying on business. Therefore, they have withdrawn the exemption enjoyed by the assessee trust under Section 11 of the Act. There is no doubt that the appellant is carrying on concerted and systematic activity in extending several facilities necessary to carry on the egg industry smoothly. To carry on such activities for extending facilities to the poultry farmers and hatcheries, the appellant has to collect chick levy from them. The Assessing Officer, the CIT and the CIT (Appeals), all of them, have held that carrying on such concerted and systematic activity amounts to business and therefore., receipts by way of collections from chick levy constitute business receipts.
4. The appellant's case is that the activities carried on by it cannot be considered as business activity. According to it, it does not derive income by way of profits and gains from the business. The appellant claims to have satisfied all the conditions as laid down under Section 11 of the Income-tax Act, 1961 to claim the exemption. According to the appellant, the voluntary contributions are received by way of chick levy from both the members and non-members. It is not compulsory for the non-members to contribute towards chick levy. It is also not compulsory even for the members to contribute towards chick levy, but they have to contribute towards membership fees. Extending facilities in all respects to the poultry farmers and hatcheries to improve and protect the egg industry, whether amounts to rendering services and contribution of chick levy as service charges is also a further question. The lower authorities have held that the assessee trust is rendering specific services against payments of specific charges and therefore, its income is liable to be taxed under Section 28(iii) of the Act. It was further submitted that the activities of the assessee trust were not that of poultry farmers at large and the same does not amount to rendering of specific services against specific charges. The voluntary contributions are not in proportion to the alleged services rendered but in proportion to the chicks purchased by poultry farmers. The voluntary contributions collected from the poultry farmers is 6 paise per chick and from the hatcheries 4 paise per chick totalling 10 paise per chick.
5. In the assessment years 1986-87, 1987-88 and 1988-89 another issue has been raised by the department, ie., the assessee trust is, in any event, ineligible to avail of and it is dis-entitled to exemption on the ground that it had made investments or deposits otherwise than in the permitted manner and thereby attracted the mischief of Section 11 (5) read with Section 13(1)(d) of the Income-tax Act, 1961. On this ground, income for these years, 1986-87 to 1988-89, is sought to be charged to tax at the maximum marginal rate under Section 164(2).
We may at this stage point out that though the CIT's order under Section 263 was confined to Section 11 (4A) only and did not at all raise the issue of Section 13(1)(d), the Assistant Commissioner while giving effect to the said Section 263 order also sought to invokve Section 13(1)(d) read with Section 11(5). However, in the course of arguments before us the learned departmental representative stated very fairly and in our opinion correctly that the department was raising the issue of Section 13(1)(d) and maximum marginal rate only with regard to the assessment years 1986-87 to 1988-89.
6. The main receipt of the assessee trust is an amount which has been described as 'chick levy' as described above. The hatcheries hand over these contributions made by the poultry farmers along with their own contributions which again is at a certain rate per chick to the assessee trust. The assessee trust uses the amounts for financing the activities which are meant for the benefit of the poultry industry as a whole. The basic contention of the assessee trust is that the said amount of chick levy received by it are voluntary contributions and are, therefore, exempt from tax under Section 12 read with Section 11 of the Income-tax Act. In the assessment years with which we are concerned, ie., 1984-85 to 1988-89, there have been large excesses or surpluses of the said receipts of the assessee trust over the amounts applied by it to the objects. The department's case, on the other hand, broadly is that the activities of the assessee trust constitute business and that the said amount of chick levy received constitute profits of the said business and that by virtue of provisions of Section 11(4A) the assessee trust looses the benefit of that: exemption.
7. Before we consider in details the rival contentions and arguments of the appellant and the department, certain basic and undisputed facts relating to the status of the appellant and the nature of the activities carried on by it may be stated as follows: The appellant is a charitable society which was established on 31-5-1982 and was registered under the Societies Registration Act, 1860 on the same date. It may be noted that only a non-profit organisation which is engaged in carrying on activity of a charitable nature can be registered as a Society under the Societies Registration Act, 1860. The provisions of the said Act prohibit distribution of assets to the members of a society and lay down that even in the event of dissolution of the society, the assets of the society shall be handed over to another society or charitable organisation with similar objects. The appellant was also registered as a public charitable trust under the Bombay Public Trust Act on2-8-1982. It is also registered under Section 12A of the Income-tax Act. The Memorandum of Association & Rules & Regulations are placed on record. The main objects of the appellant, as per Clause 3 of the Memorandum are as under:
Objectives; The objectives for which the appellant is formed are:
(i) To promote the welfare of poultry farmers in relation to the poultry industry.
(ii) To ensure that, the poultry farmers are given a fair and reasonable price for their products, ie., eggs, poultry meat, and to undertake any activity and/or to incur any expenditure in order to achieve this objective.
(iii) To bring about a greater sense of awareness in the poultry farmers about the recent developments, trends and innovations pertaining to the industry.
(iv) To bridge the communication gap that exists among poultry farmers which has led to exploitation of the poultry farmers in rural areas.
(v) To form a strong and united body that will identify the general difficulties and problems faced by the poultry farmers and attempt to solve these problems in the most satisfactory manner.
(vi) To organise a strong and pervasive advertising campaign that will enlighten the consumer on the high nutritional value of egg and poultry meat, thereby promoting the consumption of eggs and poultry meat, which will lead to further expansion and growth of poultry industry.
(vii) To coordinate and work in liaison with other organisations, Central and State Governments, Public and Private Institutions whose objectives are similar and/or complementary to those of the NECC, towards the attainment of the objectives.
(viii) To issue and to accept gifts, donations, and subscriptions of cash and/or securities and of any property either movable or immovable in furtherance of the said objectives of NECC.
(ix) To do or get done, any and all such other lawful things as are conducive or incidental to the attainment of the above objects.
It is important to note that it has been accepted by the department that the objects of the assessee trust are objects of general public utility and therefore, of a charitable nature within the meaning of Section 2(15) of the Income-tax Act. This position has been clearly admitted by the Chief Auditor of the Department itself in the written submissions filed by its Chief Auditor before the CIT (Appeals). The relevant portion of the said report reads as under:
It is submitted by me your Honour that I do accept that the activities carried on by the assessee are charitable in nature.
Further Clauses 3.16 an 3.17 of Memorandum of Association of the assessee prohibit the assessee from carrying on any activity for profit and also from making payment or distribution of any part of the income or property of the assessee trust by way of dividend, bonus or otherwise. These two Clauses are reproduced hereinbelow:
3.16: To utilise the income and property of the NECC towards the promotion of the objectives set forth in this Memorandum of Association. No portion of the income and property of NECC shall be paid or transferred, directly or indirectly, by way of dividends, bonus or otherwise, however, by way of profits to any person or persons, who at any time have been members of the council or to any one claiming through them, provided that nothing herein contained shall prevent the payment in good faith of honoraria, perquisites, facilities of any nature whatsoever to any member, office bearer or any one else, as the Central Committee thinks fit for any service rendered to the society.
3.17: The NECC shall not be operated for profit in the functioning to achieve the aforesaid objects. Provided that any activity carried out by NECC for the promotion of the above stated objectives shall not be construed to be an activity for profit.
The membership pattern is as per Rule 3 of the Regulations. The Members are Founder life members, Honorary Members, Associate Members and Ordinary Members. All public organisations, Government institutions etc. connected with poultry industry and industrial and business houses engaged in poultry and/or related activities can be Associate Members. Poultry farmers with a bird strength of 250 layers and above and egg traders who handle a minimum of 10,000 eggs per day are eligible to become ordinary members on payment of a fee as prescribed, ie,, payment of Rs. 50 and there is no other fee.
8. The day-to-day working, administration and management of the activities of the assessee trust are divided between the Executive Committee, Zonal Committee, Local .Committee and General Body in each important poultry pocket. There is a Local Committee of 5 members elected by the ordinary members belonging to the area covered by the said Local Committee. The Local Committee executes the directives and resolutions of the Executive Committee and the Zonal Committee. They function under the concerned Zonal Committee. For each important poultry producing and consuming centre, there is a Zonal Committee consisting of 5 members elected by the electoral college consisting of the Chairman and Vice-chairman of the Local Committees situated in the Zone. The Zonal Committee execute the directives and resolutions of the Executive Committee in the concerned Zone. The overall management is in the hands of the Executive Committees which has 7 members elected by the founder members, 7 members elected by the electoral college, consisting of the Chairman and Vice-chairmen of all Zonal Committees, 3 Members co-opted by these clauses, ie., 17 members in all. The Zonal Offices of the assessee are at 21 different places all over India. All others are poultry farmers. Out of 17 members constituting Executive Committee, 4 are from Venkateswara Hatcheries Ltd. group of companies. The remaining 13 members of Executive Committee are all from Indian poultry farmers located all over the country. The Chairman Shri B.V. Rao is from Venkateswara Hatcheries Ltd. group of companies. As per Clause 9(6) of the Rules & Regulations, on dissolution of the appellant Institution, the residual property after discharge of liabilities is to be disposed of by the Executive Committee in the manner prescribed by the Societies Registration Act. Under these provisions, the assets cannot be distributed to the members, but they are to be transferred to any other society having similar objects.
9. The factors which led to the establishment of the assessee society as also the nature of its activities were stated at some length. These are also not disputed by the department. Before 1982, trading in eggs was in the hands of a few wholesalers in major towns, Bombay, Hyderabad or Delhi. These wholesalers were powerful because there was no unity among the poultry farmers who were scattered all over the rural parts of the country. These poultry farmers had no information about the market conditions and they had no bargaining power. The eggs having very little life-long in general conditions were therefore required to be sold at whatever price was prevailing. In national calamities, drought, earthquake etc. the poultry farmers will be fully exposed and face financial ruination. In times of overproduction of eggs, the price dictated by the wholesaler would be totally unremunerative, the expenditure being more than the prices received. Even the Government agencies like, MAFCO, MAPDEC, TAPC & NAKED or individual co-operative societies of poultry farmers were unable to change this situation. Their role was confined to functioning as buying/ selling agencies following the existing pattern for pricing. They could not bring about any change in the pricing system itself. Between 1975 to 1980, the cost of all inputs went up by 250 per cent or so. But in the main egg producing centre the cost of production was about 38 paise per egg, while selling price remained static at 35 paise per egg. As a consequence, thousands of poultry farmers found that their operations had become totally uneconomical and a large number of them were forced to close down. The whole segment of poultry farmers industry was possibly on immediate extinction. There was, therefore, a very urgent need for doing away with the strangle-hold of the middlemen and for enduring that poultry farmers got remunerative prices for their eggs. There were other problems also, for example, in a country like India there were misconceptions about eggs and their nutrition value and there was need to increase the market potential by promoting the consumption of eggs. There was thus an urgent need to bring about unity and organisation of the poultry farmers community. It was in these circumstances and with the aforesaid factual background that the assessee society was brought into existence. The assessee society was established as a non-profit, voluntary organisation meant to subserve the interest of poultry farmers throughout India. The activities of the assessee benefit all those connected with poultry business whether they are members or not. For example, if through the efforts of the assessee the price of egg is stabilised at reasonable level, every poultry farmer gets benefit. As a result of the efforts of the assessee, tax exemption for income from poultry farming was provided in the Income-tax Act which benefits all farmers. Further as a result of the publicity, advertisement and consumer education programmes undertaken by the assessee trust, there is a general increase of egg consumption all over India which again benefits the said industry as a whole. Further the publicity campaign of NECC and technical information made available by it to the poultry farmers represent valuable technical assistance rendered to the industry as a whole without making any distinction between members and non-members. It has, therefore, been rightly emphasised on behalf of the assessee that it is not as if the activities of NECC have, at any time, been carried on in such a manner as to benefit any particular industrial growth or concern. The activities of the assessee trust are not meant to promote any particular brand of eggs or brand of chicks or to assist the activities of any particular business organisation. This position has not been disputed by the department.
10. The activities of the assessee were also elaborately stated by way of a Note before the lower authorities. Broadly the activities are : (1) Price declaration and monitoring the demand and supply of eggs based on market information obtained through the net work of the Local and Zonal Committees, (2) the assessee trust provides free information regarding price through newspapers, (3) promotion, publicity, advertisements and consumer education etc. undertaken to promote the egg consumption through advertisements in newspapers, T.V. sets etc., (4) Seminars are arranged for educating the farmers regarding technical, marketing and other aspects of poultry farming. These are available to all free of charge without restriction of membership, (5) Dialogue with Government on matters affecting the poultry sector such as Income-tax exemption, (6) procurement of Maize for the farmers at controlled price etc. This background necessitated for establishing the assessee trust. As also the activities of the assessee society were very elaborately stated before the lower authorities. Neither the Assessing Officer nor the CIT have doubted or disputed the same.
11. The activities of the assessee described above required large amounts of funds. From the beginning the basic idea and function of the NECC was to finance its activities out of donations and voluntary contributions received by it from persons connected with the poultry industry who benefited greatly from the assessee's activities. For that purpose in the General Body Meeting of the assessee trust which was held on 1-6-1982 a resolution was passed the text of which is important for the purpose of deciding the appeals and therefore is reproduced below:
Resolved that, in order to meet the objectives of NECC, requisite funds should be collected from the poultry farmers and hatcheries in the following manner:
The poultry farmers should contribute 6 paise per chick and hatcheries should contribute 4 paise per chick, thus making a total contribution of 10 paise per chick.
It was further resolved that as it is not feasible or practicable to approach hundreds of farmers for the collection of chick contribution every time the farmers purchase the chicks from the hatcheries, an appeal be made to the hatcheries and their co-operation be solicited for collection of chick levy of 6 paise per chick from the farmers and for the contribution of 4 paise per chick by the hatcheries on their own behalf, thus making over 10 paise per chick to NECC. It is further clarified that the chick levy contribution being voluntary in nature, whether the members pay the chick levy or not they should enjoy all the benefits of NECC activities. The said Extraordinary General Meeting was in pursuance of a resolution passed in the Executive Committee Meeting which after putting forward the said proposal specifically stated as under:
It is further clarified that the chick levy contribution being voluntary in nature, whether the members pay the chick levy or not, they should enjoy all the benefits of NECC activities.
It is important to note that there is no provision in the Memorandum and/ or Constitution of the assessee trust for the recovery of the chick levy. Further it can be seen from the text of the resolution passed both at the Executive Committee Meeting and Extraordinary General Meeting that no liability or obligation as such was cast on any particular poultry farmer/ hatchery to pay any amount of chick levy nor could any action whatsoever be taken by the NECC against any such member for recovery of such chick levy. As a matter of fact, several hatcheries and a very large number of poultry farmers who are members of NECC have not contributed towards chick levy. Further even those hatcheries who have contributed the chick levy have done so in a very irregular manner and have made contribution to some purpose and not others. Further even with regard to hatcheries some have contributed amounts whereas many others have not. Moreover, even hatcheries and poultry farmers who are not members of NECC have also contributed their amount. No action whatsoever has been taken by the NECC against any hatchery or any poultry farmer for non-payment of chick levy or for recovery of the same. The said amounts of chick levy received by the NECC have been utilised by it for financing its activities. During the assessment years 1984-85 to 1988-89, there were surpluses of amounts of chick levy received by. the NECC over and above amounts applied by it to its charitable purposes. However, in the accounting year relevant to the assessment year 1989-90 there has been a large deficit of Rs. 22,64,788 which has in one year wiped off 50 per cent of the accumulated surplus of the 5 preceding years. The amounts of chick levy received and surplus every year are as follows:
Asst. year Chick levy Surplus
Rs. Rs.
1984-85 14,40,996 7,28,369
1985-86 15,12,304 4,76,335
1986-87 33,46,380 19,70,246
1987-88 46,34,292 8,62,076
1988-89 72,10,022 12,07,447
1989-90 91,70,304 (-) 22,64,788
Apart from the chick levy, assessee's other receipts which are negligible are interest and in the assessment year 1984-85 donations.
12. After noting the above background from the facts, we may now consider how the assessments came to be made. For the assessment years 1984-85 and 1985-86, the assessee had filed nil returns by invoking provisions of Section 11(2). The same was the case for the subsequent assessment years. The assessments for 1984-85 and 1985-86 were completed on 13-3-1987 and 10-3-1989 respectively. The CIT, Pune, however, initiated proceedings under Section 263 on the ground that the surplus shown by the assessee was assessable as business income. According to the CIT, large amounts could be received only due to the close control of the assessee on prominent hatcheries. The assessee was not a non-profit making organisation as was clear from Clause 3.17 of the Memorandum according to which as per the interpretation of the CIT there was no general prohibition on the distribution of profits and dividends. The CIT further went on to observe, relying on the Supreme Court decision in the case of P. Krishna Menonv. CIT[1959] 35 ITR 48 that profit motive was not essential in order to come to the conclusion that the assessee was carrying on business. The CIT further observed that chick levy paid was not voluntary and if the farmer wanted to buy chick he could not possibly refuse to pay chick levy. The CIT also highlighted the role of Venkateswara Hatcheries Ltd. group by pointing out that the premises, telephone facilities were made available to NECC by Venkateshwara Hatcheries Ltd. and in spite of the fact that the assessee paid compensation for such sharing, visible or invisible influence of VHL group and other hatcheries in the organisation of NECC could not be ignored. The association of the assessee with NAFED for the purpose of market intervention and the assessee's agreeing for 50 per cent of loss was also relied on to show that the assessee was carrying on trading activities. The CIT, after considering these aspects held that the activities of the assessee were concerted and systematic so as to constitute business and therefore, surplus was taxable as business income. The CIT also relied on Section 28(iii) and held that in the case of trading association like that of the assessee where specific services are rendered, the income therefrom is liable to tax. So observing, the CIT directed the Assessing Officer to compute the income and to tax it as business income. This order of the CIT is dated 31-3-1989.
13. The Asstt. Commissioner took up and completed the assessments for 1986-87 on the same day, ie., on 31-3-1989 more or less following the reasons given by the CIT, Pune in the order under Section 263 for assessment years 1984-85 and 1985-86. In doing so, he emphasised the fact that chick levy was not a voluntary payment. According to him, the assessee's activities are controlled by Venkateswara Hatcheries group who are leaders in the hatcheries. In order to increase the demand for eggs it was necessary to increase the demand for chick. Thus development of the market for eggs was also to develop the market for chick, ie., for hatcheries and ultimately Venkateswara Hatcheries. The Asstt. Commissioner held that as the assessee collected necessary information with a set purpose and had all the facilities to suit to its members, it followed that the assessee was in the activity of collecting market information and supplying to its members and also in the activity of sales promotion in mass media. These services were given and in turn its price was collected in the form of chick levy. The quid pro quo was thus there, but itwas subtly hidden behind the garb of chick levy. As regards profit motive, the Asstt. Commissioner held that the large surpluses were indicative of the profit element in the recovery of the price for services in the form of chick levy. According to him, for business, profit motive is not necessary. Mutual associations and even housing societies were held to be in business of supply of services, even when the profit motive is absent. Thus, the Asstt. Commissioner held that the activities of the assessee had all the attributes of a business and whether such activities in a given year resulted in profit or loss was immaterial. The Asstt. Commissioner also drew support from Section 28 on the ground that the assessee was rendering specific services to its members. So holding, the Asstt. Commissioner proceeded to compute profit from the business. This profit would have been charged to tax at the rates appropriate to AOP subject to rider that the assessee fulfilled the conditions of Section 11(5) in regard to its investments and deposits.
14. Then the Asstt. Commissioner went through the balance sheet which revealed to him that there were advances of Rs. 1,20,437 made by the NECC to M/s Agrocorpex India Ltd. Bombay (hereinafter referred to as ACIL). This was a company which the assessee had promoted to supplement its activities. The basic object of ACIL is to carry on egg market operations in different areas of the country for the purpose of ensuring that there were no imbalances' between the demand and supply and the ACIL was intended to identify different market avenues for exploring market segments and exploiting them for boosting sale of eggs in the larger interest of the poultry farming community. In times of glut in the market, the company could buy eggs at supportive prices and it would then preserve them or move them to areas of scarcity so that the price of eggs did not fluctuate in different markets. In order to enable ACIL to carry out its aforesaid objects which subserve the poultry industry, the assessee trust from time to time made interest free advances to ACIL which were repayable by ACIL. The initial interest free advance to ACIL in assessment year 1984-85 was of Rs. 62,407. A further amount of Rs. 56,500 was given in the assessment year 1985-86. In assessment year 1986-87 net balance Increased by Rs. 1,430 taking it as on 31-5-1985 at Rs. 1,20,437. The Asstt.Commissloner, however, disagreed and held that the amounts advanced would be investments because ACIL's activities went to reduce the financial burden of the assessee and in this sense the amount advanced was a trading investment. With this finding, it was held that there was a violation of Section 11(5) read with Section 13(1)(d). Consequently, the entire income of the assessee was taxed at the maximum marginal rate for the assessment year 1986-87 without giving deductions for the expenditure incurred.
15. The assessments for assessment years 1987-88 and 1988-89 were completed almost after a year on 20-3-1991 by repeating the reasons given in the assessment year 1986-87 with a difference that in the assessment year 1988-89 a reference was made to the advances made of Rs. 8 lakhs to NAFED for price support operation. This advance was also considered by the Asstt. Commissioner to be an investment in contravention of Section 11 (5) read with Section 13(1)(d) of the Act. For these two years also income was taxed at the maximum marginal rate.
16. The assessee filed appeals to the CIT (Appeals) against the regular assessment orders for the assessment years 1986-87 to 1988-89 and against two orders giving effect to the CITs order under Section 263 for assessment years 1984-85 and 1985-86. The CIT (Appeals) after taking into account the voluminous submissions made by the assessee and the department concurred with all the findings of the Asstt. Commissioner and also in regard to levy of tax at maximum marginal rate in view of violation of Section 11(5). He did this even for assessment years 1984-85 and 1985-86 without considering the assessee's submission that at least for these two years the question regarding application of Section 13(1)(d) did not arise. All the reasons given by the CIT (Appeals) need not be repeated here because he has confirmed the findings of the Asstt. Commissioner in all respects. His findings in para 27, however, are worth reproducing. He observed that "In the instant case as pointed out earlier, the assessee is performing certain specific services on payment of specific charges related to the services concerned, although it may not be possible to determine as to which service is rendered against which particular payment". Before him, the assessee contended that the provisions of Section 11 (4A) did not apply because the work in connection with the business is mainly carried on by the beneficiaries of the institution, ie., its members. In this regard, the CIT (Appeals) held as follows:
Although it can be said that the Executive Committee and the Zonal Committee is the brain and head behind the activities of NECC, however, the members constituting such Committee do not carry out any work as such, but the actual work is done by the paid staff and the collection of the chick levy is done by the hatcheries and even this collection is automatic and does not require much effort on their part except in including such chick levy in their sale bill and depositing it with NECC.
In other respects also, the CIT (Appeals) confirmed the assessments made. He, however, deleted interest levied under section 217.
17. The assessee has challenged the common order of the CIT (Appeals) for the assessment years 1984-85 to 1988-89 before us. In regard to the appeals against the order of the CIT under Section 263 for assessment years 1984-85 and 1985-86, we are concerned only with the applicability of Section 11 (4A) while in appeals against the order of the CIT (Appeals) we have in addition to consider the violation of Section 11(5) read with Section 13(1)(d) as alleged by the department. With this background regarding the assessments and first appellate decision, we may now consider the various contentions raised by the parties before us.
18. Shri S. Ganesh, learned counsel for the assessee prefaced his arguments by referring to the background facts which have been set out by us in the earlier paras. Referring to its objects, he stated that NECC is a non-profit making body which was brought into existence for propagating and encouraging the interest of the poultry industry as a whole, ie., of the poultry farmers and hatcheries irrespective of whether they are or not members of the NECC and without reference to any particular industrial enterprise or any particular brand of eggs or chicks. The assessee trust promoted consumption of eggs in general and not eggs or chicks of any variety or any brand or even of any particular hatchery. The objects and activities of the assessee benefit all the poultry farmers irrespective of whether they were members of the society or not. Mr. Ganesh further stated that the said object of NECC was clearly one of general public utility and the same is therefore a charitable purpose within the meaning of Section 2(15) of the Income-tax Act and this position in fact has been clearly accepted by the department itself. In this connection, he has strongly relied on the written submission filed on behalf of the department by its Chief Auditor before the CIT (Appeals). He further stated that an object which benefits a particular trade or industry as a whole has consistently been regarded as an object of general public utility and hence a charitable activity. He referred to the decision of the Madras High Court in CITv. Madras Stock Exchange Ltd. (1976] 105ITR 546 and two decisions of the Supreme Court in CITv. Andhra Chamber of Commerce [1965] 55 ITR 722 and CITv. Federation of Indian Chambers of Commerce & Industry [1981] 130 ITR 186.
According to him, the facts of the assessee's case are on much stronger footing and the department has never doubted the genuineness of the assessee trust and activities of the assessee. There was also no allegation that the funds of the assessee were clandestinely used or siphoned off for the benefit of any individual or any concern. There was also no allegation that the assessee was used as a vehicle for converting or channelising undisclosed wealth of any individual or any concern. Mr. Ganesh then referred to Clauses 3.16 and 3.17 of the Memorandum of Objectives as reproduced in para 7 above. The Clause 3.17 was referred by the CIT in his order under Section 263 in para 3.2 of his order. According to the CIT. the implication of stating that any activity carried out shall not be construed to be an activity for profit means that the assessee was not prohibited from carrying out an activity for profit. Mr. Ganesh submitted that in considering this clause, the CIT had completely omitted to consider the specific prohibition contained in Clause 3.16 on payment of dividend to any member or to paras 9.6 and 9.7 of the Rules which required the assessee to apply its residual funds in accordance with Societies Registration Act. That had to be read with Section 14 of the said Act which lays a statutory prohibition on the distribution of any part of the funds of the trust as profits and which also lays down that in the event of dissolution of the society, its assets and properties cannot be distributed among its members, but had to be handed over to another society or charitable society with similar objects. He stated that in the opening sentence of para 3.17 there was a bar to the assessee from operating for profits in its functioning to achieve the objects of the assessee. Thus the constitution of NECC itself contained several specific provisions for the purpose of ensuring that NECC would be a non-profit organisation which neither may not distribute any profits and which existed and carried on its activities only for the benefit of poultry industry as a whole.
Mr. Ganesh further submitted that the chick levy received by NECC is nothing but a purely voluntary contribution to be made by only some of the hatcheries who are members of the NECC and also by non-members hatcheries as well and that the NECC has no right whatsoever to recover said chick levy from any hatchery or to insist on its payments. Mr. Ganesh first explained the purpose of and necessity of raising funds by way of chick levy. He stated that the activities undertaken by the assessee on monitoring market operations, giving information about market conditions to the poultry farmers and insertion of advertisements for promotion of consumption of eggs required large funds. The assessee had also to keep in mind that large funds may also be necessary in cases of emergency or major calamity like earthquake or drought etc. In these times, poultry farmers' financial position would be precarious and generation of required funds at short notice would not be possible. Thus the funds to be raised should be adequate to cover the regular activities as also be useful in times of difficulties. Mr. Ganesh then referred to the resolutions of the Executive Committee and Extraordinary General Meeting on 1-6-1982. He pointed out that in the resolution itself it was made sufficiently clear that the amount to be collected from the farmers or members was not compulsory. Whether the members pay me levy or not, they were to enjoy all the facilities of the benefit of the assessee and also benefit of the membership of NECC. In other words, no penal or judicial action could at all be taken against any member if he had not contributed the chick levy. Mr. Ganesh stated that in view of the voluntary nature, the collections were not a levy at all. According to him, the use of the word 'chick levy' was nevertheless misnomer and if the amounts were described as 'chick contribution' there would not have been any of the problems which the department had purported to raise. In order to prove that the levy was purely voluntary, Mr. Ganesh invited our attention to the sale bills of hatcheries at pages to 167 of the paper book. Before the lower authorities also, he pointed out that there were many occasions when the purchasing farmers have not paid chick levy. There are instances where the concerned hatchery did not recover the amount from the farmers but had paid full share of 10 paise per chick to the assessee. It is not as if only members have paid the levy, even non-members have paid such levy. Thus according to Mr. Ganesh the benefits of the assessee flowed to every member of poultry industry whether he has paid any levy or not. There is no provision in the constitution of NECC for either imposing or recovering from members any levy or to take any action for non-payment by any hatchery or a farmer.
He placed strong reliance on the decision of the Madhya Pradesh High Court in the case of CITV. MadhyaPradeshAnajTilhan VyapartMahasangh [1988] 171 ITR 677. A reference was also made to the decision of the Calcutta High Court in CIT v. Bengal Mills & Steamers Presbyterian Association [ 1983] 140 ITR 586. This was a case of association existing for public religious purpose. It derived income by way of subscriptions from member mills. The member mills had no legally enforeeable obligation to make contribution. It was held that these contributions were entitled to exemption. He also relied on the decision of the Income-tax Appellate Tribunal, Delhi Bench in the case of Institute of Marketing Managementv. LAC .
Mr. Ganesh pointed out that the facts of these two High Court decisions and the Tribunal are very close to the facts of the present case and in fact the said decisions covered the present case in favour of the appellant. He further submitted that the said surplus of NECC merely signifies that the voluntary contributions received by it in certain years are in excess of the assets required to be applied to the purposes of the trust. Such surplus cannot possibly lead to the inference that NECC is carrying on a business activity. Indeed Sections 11(1) and 12 read with Section 11(5) of the Income-tax Act themselves clearly and specifically contemplate that a charitable institution may make large surpluses year after year without loosing its status or eligibility for tax exemption as a charitable institution. The Income-tax Act not only permits such large surpluses to be made by a charitable trust but also permits the same to be invested for a period as long as 10 years. The fact that the voluntary contributions received by the NECC have been in excess of what was applied by it to its charitable purposes during the assessment years 1984-85 to 1988-89 cannot, therefore, possibly lead to the result that NECC would loose its entitlement to tax exemption.
19. Mr. Ganesh then summarised the factual position regarding chick levy as under:
(a) Out of 31 hatcheries who were members of NECC only 22 have contributed towards chick levy, as many as 9 have not paid the amount.
(b) Even as regards the said 22 hatcheries, contributions have been irregular and have varied heavily during period to period.
(c) Out of 25,000 farmers who are members of NECC thousands of them have not contributed chick levy.
(d) Some hatcheries as also poultry farmers who are not members of NECC have contributed chick levy.
(e) No penal action has been taken against any member of NECC for nonpayment of chick levy or attempt whatsoever has been made by NECC to recover any such unpaid amount of chick levy.
There is no provision of law nor any provision in the Constitution of NECC or any other document which confers a right in law on NECC to levy and recover chick levy or which imposes any obligation on any member of NECC or any other person to pay the said amount of chick levy to NECC.
Mr. Ganesh further pointed out that in spite of there being no compulsion for payment of chick levy, if the farmers have in fact paid large amounts it is because it made for them very good business sense. Further the direct result of the activities of the NECC was to increase the demands for eggs which might otherwise go waste because of want of adequate storage facilities. If as a result the demand for eggs went up high by even 5 eggs per chick, then at the current rate of 0.7 per egg, the poultry farmers would benefit to the extent of 3.5 per chick per year as against only 6 paise per chick paid by him. Thus the amount of chick levy contributions from the point of view of each contributor was extremely small or negligible as compared to the value of benefits conferred on them by the activities of NECC. Mr. Ganesh further submitted that NECC has been financing its charitable activities out of the said voluntary contributions in the form of chick levy received by it. In fact the extent and nature of NECC's charitable activities themselves depended on the amount of contributions received by NECC.
2O. Accepting that there were sizable surpluses each year from assessment years 1984-85 to 1988-89, Mr. Ganesh pointed out that in assessment year 1989-90 there was shortage of Rs. 22,64,000 or so which wiped out almost half of the accumulated surplus. He therefore submitted that surpluses were made by the NECC only in certain years. He further pointed out that these surpluses and deficits were on account of operational reasons and factors which were dictated by the needs of poultry industry as a whole from year to year. Responding to a query from us as to what will happen if nobody paid any amount if there was no compulsion, Mr. Ganesh stated that if the collections were low then the assessee would have to curtail many of its activities. The assessee could carry on its activities only to the extent it had funds. Mr. Ganesh submitted that the mere fact that the voluntary contributions received by NECC in a particular year happened to be in excess of the amount which was applied to charitable purposes in that year would not possibly lead to the inference that NECC was carrying on its activity with profit motive or for profit. Mr. Ganesh pointed out that it is of utmost importance to clearly understand that it is not as if NECC activities generate any income or profit as such. On the contrary, it is the voluntary contributions received by the NECC which make it possible for it to carry out its charitable activities. He further submitted that if an organisation carrying out charitable purposes makes surplus, then it does not, on that account, ceases to be charitable nor it looses its entitlement to exemption under Section 11 so long as there is no scope for diversion of any part of such surpluses for private gain.
21. Mr. Ganesh then made a reference to Sections 11(4) and 11(4A). according to him, both these Sections have to be read together. He submitted that the object of insertion of Section 11(4A) was to get over the difficulty created by certain decisions, like that of the Supreme Court in the case of Dharmadeepti v. CIT [1978] 114 ITR 454 in which it was held where a business was held under trust and the profits of that business were employed to feed charity, such profits also enjoy the benefit of exemption from tax under Section 11. In Dharmadeepti's case the assessee held under trust a business of kurries or chitti funds, the profits arising from which was applied entirely to charitable purposes. The Supreme Court held that the said income arising from the carrying on of the kurrie business was also exempt under Section 11. The Government took a decision in certain cases profits arose from carrying on of business then the same should be subjected to tax irrespective of the .manner of application of such profits, i.e., whether a charitable purpose or otherwise. It was with this object that Section 11 (4A) was inserted in the statute book. It is significant to note that it was inserted after Section 11(4) which referred to separate business held under trust for charitable purposes. Further Section 11 (4A) while providing for availability of tax exemption on the fulfilment of certain conditions even in respect of business income received by charitable trust stipulates that separate books of accounts must be maintained in respect of such business. Thus it is clearly indicated that Section 11 (4A) was intended to apply to and cover a separate business owned by a trust which was distinct and different from the carrying on of the charitable activity of the trust itself. In support of the said interpretation of Section 11(4A), Mr. Ganesh placed reliance on the decision of the Madras Bench of the Tribunal in Auoboutique Trustv. ITO [1990] 36 TTJ (Mad.) 318 which specifically states that the object of insertion of Section 11 (4A) was to get over the decision of the Supreme Court in the case of Dharmadeepti (supra). It is submitted that, as in the present case, there is no distinct business which is owned by NECC but there are merely surpluses arising to NECC in the course of carrying on of its charitable activities, for that reason alone and by itself, Section 11 (4A) has no application. It was submitted that Section 11 (4A) applies only in a case where a charitable trust or organisation owns an independent business, the profits of which arise from charitable activities in question. In other words, if the carrying on of charitable activities results in surplus, that does not operate as violation of Section 11(4A). On this ground itself, Section 11 (4A) has no application.
22. Without prejudice to the above basic contention, he also advanced the following arguments and submissions in the alternative while contending that Section 11 (4A) was not applicable. It was submitted that, for a business to exist, there have to be a series of transactions which adapt an activity which produces income. Without such series of transactions, there cannot be any business. In support of this proposition, reliance was placed on the decision of the Supreme Court in the case of State of Gujarat v. Raipur Mfg. Co. Ltd. [1967] 19 STC 1 in which it has been held by the Supreme Court as follows:-
In taxing statutes, the expression business is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person normally with the object of making profit. To regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit motive, and not for sport or pleasure. Whether a person, carried on business in a particular commodity must depend upon the volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transactions of purchase must ordinarily be entered into with a profit motive.
This decision was followed in Bharat Development (P.) Ltd. v. CIT[1980] 4 Taxman 58 (Delhi) where the High Court reiterated that:
'To regard an activity as business, there must be a course of dealings continued or contemplated to be continued with a profit motive and not for sport or pleasure". It was submitted that in the present case there are no such transactions whatsoever. NECC merely receives voluntary contributions which it then proceeds to apply for the purpose of financing its charitable activities. It is not as if the carrying on of the charitable activities produces income for NECC. The said receipt of voluntary contributions and the application of the same to charitable purposes cannot possibly be considered by any principle of reasoning to a business activity. In the present case, it is not as if the assessee trust is collecting a levy and in return gives benefit of some services to persons paying levy. On the contrary, the assessee trust has merely and passively been receiving voluntary contributions which it has been using to finance its charitable activities. Thus, there are no transactions in that sense as such between the assessee trust and the persons paying levy. In this situation, there is no question of any business at all being carried on by the assessee. It was submitted that on this account it had to be held that NECC was not carrying on any business within the meaning of Section 11(4A).
23. It was further submitted without prejudice to the earlier submissions, that an activity can be considered to be business only if it is undertaking with a profit motive. It was submitted that to constitute business, there must not only be a series of business transactions, but these transactions should be undertaken with profit motive. In support, reliance was placed on the following decisions:
(1) Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC), (2) Senairam Doongarmall v. C1T [1961] 42 ITR 392 (SC), (3) Eclat Construction (P.) Ltd. v. CIT [1988] 172 ITR 84 (Pat.).
(4) Gannon Dunkerley & Co. (Madras) Ltd. v. State of Madras [1954] 5 STC 216 (Mad.) affirmed in State of Madras v. Gannon Dunkerley &. Co. (Madras) Ltd. [1958] 9 STC 353 (SC).
(5) Raipur Mfg. Co. Ltd. 's case (supra).
(6) Bharat Development (P.) Ltd. 's case (supra).
It was submitted that in the present case, the constitution of NECC contains an extensive provision against making of any profit as also disposition of the same among members. Consequently, on this ground alone again NECC activity cannot possibly be considered to be business activity. It was further submitted that the trust subsists on voluntary contributions cannot possibly be considered to be carrying with business activity with profit motive. In fact, the Income-tax Act itself draws a clear line of distinction for trusts carrying on business activities. Trusts receiving voluntary contributions are covered by Section 11 whereas a trust which is carrying on business activity is covered by distinct and separate provisions under Section 11(4A).
24. It was then contended that even assuming that considering that NECC activity is a business activity which is covered by Section 11 (4A) then the income from the same is used in any event exempt from tax as same is covered by Section 1 l(4A)(b) which provides that income of the institution carrying on business shall be exempt if the work of the institution is mainly being carried on by the beneficiaries. It was submitted that this condition is fulfilled in the present case, inasmuch as all the activities were carried on by members at various levels, ie., members of the local committees and members of the zonal committees. The work of collecting market information and its monitoring was done with the help of members only. It may be in carrying out the work in connection with business the metnbers had utilised the services of subordinate staff, like clerks and peons, but then it could not be said that it was the clerks and peons who were mainly carrying on the activities of the assessee. It was submitted that, for the purpose of determining whether the work in connection with the business was mainly carried on by the beneficiaries of the institution, it had to be seen whether the basic and essential functions and working which lead to the continuation of the fundamental object of the trust was being carried on by the beneficiaries. The fact that routine and clerical work such as delivery of letters, writing of account letters, typing of letters, answering of telephone calls etc. was done by persons other than beneficiaries will not in any way lead to the conclusion that Sub-clause (b) of Section 11 (4A) was therefore rendered inapplicable. It was submitted that Section 11 (4A)(b) did not prohibit the employment of clerks, peons, stenographers, accountants, telephone operators etc. In fact, the lower authorities had accepted that the members were the mind and brain of the activities carried on. If this was the accepted position, then according to Mr. Ganesh, provisions of Clause (b) clearly applied and therefore, for this reason also provisions of Section 11 (4A) did not apply.
25. Referring to the points raised by the CIT as also by the CIT (Appeals) that provisions of Section 28(iii) were applicable, Mr. Ganesh stated that this was answered completely by the decision of the Supreme Court in the case of CITv. Calcutta Stock Exchange Association Ltd. [1959] 36ITR 222. In this decision, the expression "performing specific services" was explained by the Supreme Court to mean "for conferring particular benefits" that is, conferring on the members some tangible benefits which would not be available to them unless they paid the specific fees charged for such special benefits. If this test was applied to the facts of the present case, then it would be clear that the assessee was not performing any specific services within the meaning of Section 28(iii) of the Income-tax Act, 1961. As has been stated earlier, the question of the members getting any specific tangible benefit as a return or quid pro quo for the payment of chick levy did not arise at all. There was nothing in the activity of the assessee by which the member was deprived of the benefit of NECC services, if he did not pay. On the contrary, benefit of NECC services were available to any one and every one in the poultry industry as a whole irrespective of whether or not he was a member of the NECC or not. Further even members of NECC and also others get benefits of such services without making any payment in respect thereof. Mr. Ganesh submitted that the provisions of Section 28(iii) could not be invoked to show that the character of the income received from chick levy was in the nature of business.
26. Mr. Ganesh then briefly referred to the allegation of the authorities that V.H. Ltd. was the master-mind in the activities of the assessee. He referred to the fact that out of 17 members of the Executive Committee only 4 members were from V.H. Ltd. whereas all others were independent poultry farmers. He also denied the allegation that V.H. Ltd. had provided premises to the assessee all over India. He stated that whenever any space was provided by V.H. Ltd. or services of staff were utilised or expenses were incurred by V.H. Ltd. for the assessee, all such provisions or premises or staff services etc. were duly reimbursed. He also emphasised the fact that there was no evidence at all on record to show that the assessee was carrying out any activity for popagating or promoting any products of V.H. Ltd. It was also not an allegation that any part of income of the assessee was diverted or utilised by V.H. Ltd. for their own benefit. In this behalf, Mr. Ganesh also made reference to the decision of the Madras High Court in the case of Madras Stock Exchange Ltd. (supra) for the proposition that activities of the members who promoted the trust are not relevant for the purpose of considering exemption under Section 11. The High Court observed that concentration and attention must be on the assessee as such and not on those who either promoted it or were benefited by or from it. Merely because the members who constituted the Chamber were businessmen, it did not follow that their activity tainted the Chamber as such. Mr. Ganesh stated that'these observations of the Madras High Court aptly refuted the allegations made by the lower authorities regarding involvement of V.H. Ltd. in the activities of the assessee trust.
27. It was submitted by Shri Ganesh that the impugned order of the CIT under Section 263 of the Income-tax Act, is patently erroneous as it was based on complete mis-conception of chick levy is a compulsory exertion of NECC. Further the provisions of NECC constitution including, in particular, Clauses 3.16 and 3.17 have been completely mis-read and misunderstood. The crucial provisions in the rules have been completely overruled. Further the impugned.order completely dis-regards the Supreme Court judgment in the case of Calcutta Stock Exchange Association Ltd. (supra) which covers the case so far as interpretation of Section 28(iii) is concerned. Further the impugned order completely disregards a large number of Supreme Court decisions holding that profit motive is not discriminative to the existence of the business activity. The impugned order also proceeds on a misreading of the Supreme Court judgment in P. Krishna Menon's case (supra). The CITs objections and contentions about. the role of V.H. Ltd. are also patently erroneous and untenable and apart from being factually incorrect are legally of no relevance or significance. Further the CIT has adopted totally incorrect approach inasmuch as he has placed reliance on the fact that the assessee has large gross receipts whereas there are innumerable charitable trusts having far greater receipts which have got exemption. It was submitted that the impugned order of the CIT (Appeals) is also manifestly untenable as it is also based on the belief that chick levy is compulsory that a poultry farmer has no (sic)"ption except paying chick levy and that a legal obligation is cast on every member of NECC to pay chick levy. Further the CIT (Appeals) has adopted a completely erroneous approach by holding that the activities of the NECC have been conducted in a systematic manner which follows that NECC was carrying on a business activity. It is submitted that existence of business activity .does not at all depend on whether the activity is being carried on in a systematic or in a haphazard manner.
28. Further the CIT (Appeals) also has adopted totally incorrect approach in holding that it were the employees of NECC who did work of institution for the benefit of Section 1 l(4A)(b) and was not available to the assessee.
29. Mr. Ganesh then dealt with the second contention of the Income-tax department, that is, advances made by the NECC to ACIL constituted investment or deposit of the funds of the assessee trust which was otherwise than as permitted by Section 11(5) and, therefore, mischief of Section 13(1)(d) was attracted and, secondly, the assessee not only lost benefit of Section 11, but was also liable to pay tax at the maximum marginal rate of its income. Firstly, Mr. Ganesh made a reference to the Memorandum and Association of ACIL and pointed out that the objectives of the ACIL were like objects of the assessee-trust, ie., advancement of interest of the poultry industry as a whole. It was also pointed out that the main objects of ACIL were totally in harmony with those of the assessee trust. It was also submitted that for the purpose of achieving the basic object of the NECC it was absolutely essential to carry on extensive market survey operation by way of buying and selling of eggs and such operations could be carried on only by a separate company, which was why ACIL had been incorporated. It was pointed out that it was not sought to be contended by the Income-tax department that ACIL was employed for some other collateral or other purpose. The shareholders of ACIL were completely farmers and the assessee did not hold any shares of ACIL. The amounts in question were advanced to ACIL only for the purpose of assisting the NECC to achieve its objects and purposes which also were the objectives of the assessee trust. Further the assessee's representative also placed strong reliance on the minutes of the meeting of the National Bank for Agriculture & Rural Development (NABARD) wherein the said proposal or object of carrying on market support operation through ACIL was discussed in detail and it was pointed out that the said operations would be highly beneficial to the poultry industry as a whole. On this basis, it was submitted that the advance of monies paid by NECC to ACIL constituted an application of its income by NECC for the attainment of its object.
30. In support of this proposition that the said advances constituted application of income of the trust, reliance was placed on the following decisions:
(1) CIT v. St. George Farana Church [1988] 170 ITR 62 (Ker.), (2) CIT v. Sarladevi Sarabhai Trust No. 2 [1988] 172 ITR 698 (Guj.), (3) CIT v. Hindusthan Charity Trust [1983] 139 ITR 913 (Cal), (4) CIT v. Trustees of H.E.H. The Nizam's Charitable Trust [1981] 131 ITR 497 (AP).
It was pointed out that in the abovementioned decisions, the Courts had given widest possible meaning to the term "application of income" within the meaning and for the purpose of Section 11 of the Income-tax Act. It has been held that to constitute application of income, all that was necessary was to see whether outlay was made in order to subserve the objects of the trust. It did not matter whether outlay was revenue or capital in nature, whether it was spent away irretrievably by once for all payments and whether it remained payable to the trust. It was further laid down that it was not even necessary in order to constitute application of income that the monies in question should be spent for charitable purposes by the assessee trust. It was laid down that if the assessee trust made a contribution to another charitable trust then that straightaway constitutes application of income, even without recipient having applied the amount received by it for charitable purposes. It was further laid down by the Courts that mere application or earmarking of monies by the assessee was sufficient to constitute application of income even without any payment being made by the assessee trust. Further in the case of Hindusthan Charity Trust (supra) before the Calcutta High Court where the donation was made under the bona fide, but erroneous belief that donation was made to public charitable trust, even such a donation was considered to constitute application of income.
31. Mr. Ganesh placed reliance on the decision of the Karnataka High Court in the case of CITv. CutchiMenon Union [1985] 155 ITR 51 in which it was held that the grant of interest-free loans by the trust to needy persons such as widows or other persons who were very poor constituted application of income by the trust in the year in which the money was given. The Karnataka High Court had placed reliance on the CBDT circular No. 100 dated 24-1 -1973 which laid down that if an educational trust give loan scholarships to students, the loan scholarships should be considered to be application of income. Mr. Ganesh, therefore, submitted that in the present case also the advances made by the assessee to ACIL would be regarded as application of the assessee's Income to charitable purposes. Mr. Ganesh further submitted that provisions of Sections 11(5) and 13(1)(d) apply only with regard to the investments of that income of the trust which remains after application of the portion thereafter to the attainment of the charitable purposes. Section 13(1)(d) has no application at all to the income of the trust which has already been applied to charitable purposes. It was also pointed out that if this interpretation was not accepted and if the stand of the revenue was upheld, it would lead to absurd consequences Inasmuch as no trust would then possibly give loan to any person without forfeiting its tax exemption and further having to pay tax at the maximum marginal rate, inasmuch as such a loan cannot possibly be in conformity with Section 11(5). The consequences would therefore be that even though the trust would be making the loan as part of its charitable activity and for attainment of its charitable objects, it would not only loose tax exemption but also will be liable to pay tax at the maximum marginal rate. It is contended that as advances made to ACIL constitute application of income on that ground alone Section 11(5) read with Section 13(1)(d) have no application whatsoever.
32. In the alternative, it was also submitted that the advances made by the NECC to ACIL were not for the purpose of earning income and therefore, for this additional reason also the said advances are not "investments or deposits" within the meaning of Section 13(1)(d).
33. Mr. Ganesh then made reference to the dictionary meaning of "investment" as also to the judicial decisions explaining the said word. According to various meanings given in the dictionary as also judicial precedence in order to attribute an outlay as an investment, the amount laid down for this purpose should be capable of and result in any Income, return, profit to the investor and in every case of investment, the intention and positive act on the part of the investor should be to earn such income, return, profit. Inasmuch as in the present case, there was no such motive of earning income, return or profits by advancing the amount to ACIL the amount advanced would not be considered to be an investment. Thereafter, the meaning of the word "deposit" also was explained. Mr. Ganesh stated that the word "deposit" has been used in conjunction with the word "investment" and in understanding its meaning, the principles of "Noscitur A Sociis" applied and the expression had to be understood in a cognate sense of the word 'investment'. It would therefore mean that deposit has to be placed with another body for the purpose of earning interest. Wider meaning of deposit such as an amount entrused for safe keeping etc., did not apply. In the assessee's case the amount advanced to ACIL would not be considered as deposit, also. Mr. Ganesh also relied on the Finance Minister's speech and Notes to the Clauses explaining the provisions to the Finance Act, 1983 wherein it. is clear that the expression "invested or deposited" used in Section 13(1)(d.) only reflects the mode of pattern of investment to be complied with by a trust. According to Mr. Ganesh, the lower authorities were not justified in holding that in advancing the amount to ACIL, the assessee had violated the provisions of Section 11 (5) read with Section 13(1)(d) and thereby its income had become liable to be taxed at the maximum marginal rate.
34. It was also submitted that if all the aforesaid contentions of the appellant were rejected and if the appellant's income has to be assessed as if it is business income, then all the business expenditure incurred should be allowed as a deduction. Instead, the Income-tax authorities have assessed the gross amount of contribution received by the NECC as taxable without allowing any expenses whatsoever as deduction from the same.
35. Mr. Ganesh summed up his arguments by submitting that at the highest, what could be contended against the assessee was that it was possible to take another view of the statutory provisions. It was therefore, submitted that in any event since it was possible to take two views of the matter, that view should be adopted which was in favour of the assessee. He further stated that the assessee was doing valuable services to the poultry farmers all over the country. It was genuinely serving the cause of the large number of poultry farmers and if a hard, unrealistic and technical view taken by the department was allowed to stand, the resultant demands are so heavy that the assessee would have to wind up its activity and it would be a great national loss.
36. In his reply, Shri S.U. Pathak, the learned departmental representative vehemently contested the points raised by Mr. Ganesh. He firstly stressed the reason for the amendment to Section 2(15) and insertion of Section 11 (4A). According to him, before the amendment the decision of the Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 held the field. In this decision, the Supreme Court held that even if the business activities were carried on by the charitable trust, exemption under Section 11 was still allowable as long as profits from business were utilised for the purpose of charity. It was to get over such result that the Legislature thought it necessary to amend the definition of "charitable purpose" in Section 2(15). As per amendment of this section effective from 1-4-1984 the expression "not involving carrying on of any activity for profit" was deleted and simultaneously Section 11 (4A) was inserted. The purpose was obvious and as gathered from the observations of the Finance Minister in introducing the provisions, the Government intended to tax business profits of charitable trust. Thus, if any activity of the assessee resulted in business profit, the intention was to tax it as if in the case of any businessman. Mr. Pathak then referred to the figures of surplus shown by the assessee from the assessment years 1984-85 to 1988-89 which were running into lakhs of rupees. He made a reference to the resolution of the Extraordinary General Body Meeting dated 1 -6-1982. According to him, the levy was fixed as a sum per bird sold by hatchery to the poultry farmers. This price structure itself indicated that the levy was proportionate to the advantage gained. More birds a poultry fanner bought the more levy he paid, but equally more was the advantage gained. Thus according to Mr. Pathak, there was sufficient nexus between the chick levy and the activities of the trust. Mr. Pathak also referred to the fact that the levy was raised from 6 paise to 24 paise in April 1976 and even then the farmers continued to pay the levy in large amounts. According to him, unless there was some kind of force or consideration, such large collections were not possible. If the collections were voluntary as was claimed by the assessee, there was no necessity of passing any resolution. The very fact that the assessee had to pass resolution was indicative of the fact that large collections were not otherwise possible. In other words, if the collections were voluntary as was claimed by the assessee, there was no necessity of passing any resolution. The resolution was indicative of the fact that as such it created a binding obligation for all the members to comply with the same. The fact that out of 31 hatcheries, majority of them have come liable under the resolutions showed that it had a binding force. Mr. Pathak, therefore, concluded that the assessee's contention that chick levy collected was purely voluntary and that it had no nexus in the activities of the assessee was not factually correct.
37. In explaining the concept of business, Mr. Pathak referred to the decision of the Supreme Court in the case of P. Krishna Menon (supra). In this case, the assessee was a retired Government servant and was spending his time in studying Vedanta philosophy. One of his disciples from England paid to the assessee a sum of Rs. 2 lakhs without there being any compulsion. Even such a purely voluntary payment was held to be taxable. The Supreme Court held that it was well established that it was not the motive of a person doing an act which decided whether the act done' by him was the carrying on of a business, profession or vocation, and if any business, profession or vocation in fact produced an income, that was taxable income and was nonetheless so because it was carried on without the motive of producing an income. According to Mr. Pathak, this decision of the Supreme Court clearly applied to the facts of the present case. He also referred to the decision of the Gujarat High Court in CITv. Girdharram Hariram Bhagat [1985] 154 ITR 10. This decision was referred to for the purpose of understanding the true purport of the decision of the Supreme Court in Krishna Menon's case. Mr. Pathak then made a reference to another judgment of the Supreme Court in the case of Chief Commissioner v. Federation of Indian Chambers of Commerce & Industry AIR 1974 SC 1527. In this case, the question that arose before the Supreme Court was whether the activities of the Federation of Indian Chambers of Commerce & Industry could be considered to be a business activity. The question arose under the provisions of the Delhi Shops & Establishment Act, 1954 and the Supreme Court held that the activities of the Federation were business activities. According to Mr. Pathak the activities of the assessee were similar to those of the Federation in the above case and if so, it could be clearly concluded that the activities of the assessee would constitute business. He then referred to the decision of the Supreme Court in Mazagaon Dock Ltd. v. CIT[1958J 34 ITR 368. As per this decision, it was not necessary that to constitute a business activity it should yield profits. Then a reference was made to another decision of the Supreme Court in CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83ITR377, according to which the business in its profit sense implied a real and substantive activity. Mr. Pathak thereafter referred to the decision of the Supreme Court in the case of Indian Chamber of Commerce v. CIT[1975] 101 ITR 796. According to this decision, an activity which yields profit or gain in the ordinary course must be presumed to have been done for profit or gain. According to Mr. Pathak, if profit has resulted from the activity of the assessee, the intention of the assessee must be presumed to have been to gain such a profit. Mr. Pathak added that though subsequently this decision was overruled, in other respects, the basic principles laid down by it still hold the field. Mr. Pathak made a pointed reference to the fact that in spite of knowing that large funds would be required for carrying on these activities, admission fee for the members was kept at Rs. 50. Therefore he urged that there was reason to believe that the subsequent resolution to collect chick levy was intended as a regular and profit making activity.
38. Mr. Pathak made a reference to Clause 3.17 of the Memorandum of Association and enquired as to the purpose of the proviso if no profit was to be made. He stated that the question whether the assessee makes a profit or not depends not on the Clauses of the Memorandum but the nature of its activities. Mr. Pathak referred to the example of Gandhi Peace Foundation referred to by the Supreme Court in the case of Surat Art Silk Cloth Manufacturers Association (supra). According to him, if the assessee had decided to charge an amount which will have a surplus, such decision clearly indicated the intention to earn profits. Continuous surplus shown for 5 years itself showed profit motive of the assessee.
39. Dealing with the contention of the assessee that the work connected with the business was mainly being carried on by the beneficiaries, Mr. Pathak stated that this was not borne out from the records. According to him, Section 11 (4A)(b) referred to Institution and not to a trust. Whereas Clause (a) specifically refers to trust, clause (b) only refers to Institution. in this behalf, Mr. Pathak referred to Section 10(22), Section 10(22A) etc., to drive home the point that there was a deliberate distinction made by the Income-tax Act between the charitable trust and an Institution. According to him, since the assessee was not an Institution, Clause (b) does not apply. Then he referred to the meaning of the word "work" as defined in Law lexicon according to which work means physical labour.
40. Mr. Pathak then referred to the arguments of the assessee's representative in regard to the advances made to ACIL. Mr. Pathak emphasised the fact that ACIL was not a charitable body, but was admittedly a commercial concern. The fact that assessee floated such a commercial concern itself indicated that the assessee wanted to take up business activity. He, therefore, argued that the advance given to ACIL was not for charitable purposes and it could not be said that it was application of income of the assessee. It was. therefore, clear that provisions of Section 13(1)(d) clearly applied. In order to see whether the amount advanced was an investment or not, it was not necessary that return thereon should be in the form of interest. The benefit that flowed from the advance to the assessee was clearly indicative of the fact that it was an investment. The word 'investment' always implies some amount of risk as is clear from the decision in the case of CITv. Polisetty Somasundaram Charities [1990] 183 ITR 377 (AP). In this case, it was held that, though the expression 'investment' in a broad sweep takes in lending also, it should be considered as confined to the laying out of an amount in a venture or institution with a profit motive and with no promise of assured return. In the process of investment, an element of risk is involved and the expectation of return or profit is not assured and the depletion of capital itself is not an abnormal feature. According to Mr. Pathak this principle very clearly applies to the advances made by the NECC to the ACIL. Mr. Pathak thus submitted that there was clear violation of Section 13(1)(d). He also made a reference to the decision of the Punjab & Haryana High Court in the case of Sharda Trust v. CIT [1981] 127 ITR 236.
41. Mr. Pathak then proceeded to deal with the specific points raised by the assessee's representative. He said that the case law relating to interpretation, of Section 2(15) before its amendment is no longer good law and it is not relevant. He then stated that the registration under the Societies Registration Act had no material bearing. Prohibition of distribution under the Act is applicable to charitable trust. Yet income-tax considers possibility of charitable trust having business activity. This clearly establishes that a mere registration under the Societies Registration Act did not lead us anywhere.
42. Referring to the argument of Mr. Ganesh in the context of Section 28(iii) particularly with reference to his reliance on the decision of the Supreme Court in the case of Calcutta Stock Exchange Association Ltd. (supra). Mr. Pathak conceded that the department does not rely on 28(iii) but it would rely alternatively on Section 28(i) He stated that even though this was a new contention, the Tribunal can deal with it. He relied for this purpose on the decision of the Special Bench in Detective Devices (P.) Ltd. v. ITO [1987] 22 ITD 9 (Hyd.), decision of the Calcutta High Court in Steel Containers Ltd. v. CIT [1978] 112 ITR 995 and Delhi High Court in CITv. Edward Keventer (Successors) P. Ltd. [1980] 123 ITR 200.
43. Mr. Pathak was very fair in accepting that for the assessment years 1984-85 and 1985-86, the Asstt. Commissioner went beyond the directions of the CIT under Section 263 to tax the assessee at maximum marginal rate by referring to Section 164(2).
44. The question whether the amounts advanced to ACIL were in violation of Section 13(1)(d) was then argued. Mr. Pathak sought to distinguish the various case laws relied on by the assessee. He was not ready to accept that the amount advanced to commercial concern like ACIL was application of income. The assessee's representative had argued that if the department's contentions were accepted, even telephone deposits would amount to violation of Section 11(5). Replying to this, Mr. Pathak stated that the question would not arise because such deposit would be necessary for the purpose of trust and hence the question of considering them as investment will not apply. He also sought to distinguish the Board's Circular No. 100 and the Karnataka High Court judgment in the case of CutchiMenon Union (supra) on the ground that there it was the object of the trust to make loans/advances in question, whereas it is not a specific object of NECC to make advance to ACIL.
45. Mr. Ganesh in his rejoinder highlighted the fact that there was no specific provision that Section 11(5) was applicable only if the trust had a distinct and separate business. He referred, in this behalf, to the decision of the Madras Bench of the Tribunal in Auroboutique Trust's case (supra) on which he had relied and which department had not dealt with on this point. The mere fact that surplus arises to a charitable trust in the course of carrying on of its charitable activities cannot possibly lead to the inference or conclusion that the trust is carrying on a business or that Section 11 (4A) applies to the same. Further, according to him a charitable trust depending on voluntary contributions cannot possibly be said to have profit motive. In regard to the department's reliance on the decision of the Supreme Court in the case of P. Krishna Menon (supra), Mr. Ganesh pointed out that in that case, the Supreme Court had proceeded of the specific basis that the assessee was admittedly carrying on the vocation, i.e., vocation of teaching of Vedanta and the only question which arose for the decision of the Court was whether the receipt of income arose in the course of carrying on of the said vocation. Shri Ganesh, therefore, submitted that the judgment in Krishna Menon's case cannot possibly be relied upon by the department for the purpose of seeking to contend that the particular activity constituted a business or vocation or profession. In the present case, the basic issue which arose was itself whether the activities of the assessee trust constitute a business. The ratio of P. Krishna Menon's case (supra) was really of no relevance for deciding that issue. Further Shri Ganesh relied strongly on the decision of the Gujarat High Court in GirdharramHariramBhagat's case (supra) at 25. He invited our attention to the observations at page 27 of the Report wherein it was laid down that as it had not been established in that case a profession or vocation was being carried on by the assessee, the voluntary payments received by him were held to be not taxable. He, therefore, pointed out that in fact the decision of the Gujarat High Court in Girdharram Harirom Bhagat's case (supra), far from supporting the revenue, actually fully covered the assessee's contention in his favour. Mr. Ganesh further made a similar submission with regard to the other decisions relied upon by the learned departmental representative and pointed out that the ratio of that case was, if it was established that vocation was being carried on by the assessee, then even voluntary payments made to the assessee, but which arose from the carrying on of the profession or vocation would be taxable.
46. Mr. Ganesh then distinguished the decision of the Supreme Court in the case of Indian Chambers of Commerce & Industry (supra). Firstly he pointed out that the question involved was whether the premises occupied by the Federation was a "commercial establishment" under the Delhi Shops & Establishment Act. The said definition of "commercial establishment" was extremely comprehensive and far reaching one and the entire ratio of the judgment of the Supreme Court was in the context of the said special statutory definition and such statutory definition which is entirely at variance with the scheme of the provisions of the Income-tax Act. The said special statutory definition of commercial establishment was worded wide enough to include premises of charitable carrying on business or trade or work in connection with or incidental or ancillary thereto. Thirdly, the Income-tax cases cited by the assessee Federation before the Supreme Court were found to be of little assistance or relevance by the Supreme Court. Thus the Supreme Court itself proceeded on the finding that the scheme of the Income Tax Act was entirely different from the scheme of the statute with which it was concerned. It would straightaway follow from this that the Supreme Court judgment in that case is also not at all applicable to the interpretation of a provision in the Income-tax Act.
47. Fourthly, the Federation was found to be engaged in the publication of periodicals, bulletins etc. which were available on payment of subscription or price even to non-members. This was clearly business activity. In the present case, however, the assessee trust does not carry on any such activity. It was submitted that the activities of the assessee in the present case are different from those of the Federation which included publication of periodicals, bulletins, holding commercial and industrial exhibition, running museums etc. all of which resulted in profit. Mr. Ganesh therefore urged that the above decision given in entirely different context may not be followed. Mr. Ganesh then dealt with the decision of the Supreme Court in the case of Management of the Federation of Indian Chamber of Commerce & Industry v. Their Workman, R.K. Mittal AIR 1972 SC 763 which was followed in Federation of Indian Chambers of Commerce & Industry's case (supra). It was pointed out that R.K. Mittal's case (supra) only dealt with the question or issue as to whether a certain activity was 'industry' within the meaning of Industrial Disputes Act from the point of view of employees protection. This is entirely different question or issue which has nothing whatever to do with the legal principles regarding charitable activities under the provisions of the Income-tax Act. The term "industry" in the Industrial Disputes Act has been given a very wide meaning so as to cover any activity whether charitable or not and which is carried on in an organized manner with the co-operation of capital and labour. Mr. Ganesh further referred to the legal dictionary meaning of the definition of work and staff in State of Bihar v. Mangal Sao AIR 1963 SC 445 which were relied upon by the learned departmental representative for the purpose of seeking to contend that work was confined to physical labour and that the benefit of Section 1 l(4A)(b) was not available unless it was proved and established that physical work of the charitable organisation was carried out by the beneficiaries themselves. Mr. Ganesh pointed out that it was clear from the decision of Supreme Court and legal dictionary that "work" include any type of exertion and the same was no means only confined to physical or manual labour. Consequently, exertion of beneficiaries of NECC for the purpose of attaining its objects would certainly constitute work of NECC, especially so since it related to the most important task on the beneficiaries of NECC. As regards the objection that the assessee had not maintained separate accounts, Mr. Ganesh replied that if only activity of the assessee was to be regarded as business the accounts maintained by the assessee were sufficient. The question of maintaining separate accounts would arise if there was mixed business and non-business activity. Since, for the purpose of alternate submissions, the basic presumption was that the entire activity constituted business, there was no question of maintaining separate books of accounts. He once again emphasised that what was to be considered was whether the beneficiaries were mainly carrying on the activity. Referring to the contention of Mr. Pathak that Clause (b) applied only to Institution, Mr. Ganesh pointed out that Institution would be a public charitable trust or a society registered under the .Societies Registration Act, as is clear from Section 10(23B). He then referred to page 735 of Chaturvedi & Pithisaria's Commentary (4thEdn.) for the meaning of institution as an establishment, organisation or association, instituted for the promotion of some object especially one of public or general utility, religious, charitable, educational, etc. (definition as per Oxford Dictionary).
48. Mr. Ganesh firstly pointed out the legal significance and implication of registration of the assessee trust as a public charitable trust under the provisions of Bombay Public Trust Act. Our attention was invited to the provisions of Section 9 of the Bombay Public Trust Act which defines the term 'charitable purposes'. It is clear that the definition of "charitable purposes" in Section 9 of the Bombay Public Trust Act is virtually identical with that contained in Section 2(15) of the Income-tax Act.
Consequently, a public charitable trust formed under the Bombay Public-Trust Act would necessarily be a charitable trust or institution within the meaning of Income-tax Act.
49. With regard to the advances made to ACIL, Mr. Ganesh stated that though it was a commercial concern it had to be noted that it was a public company entirely of poultry farmers. Its objects were entirely harmonious and complimentary with those of the assessee. Nobody other than poultry farmers would become shareholder. He then distinguished the case law cited by the department in its support. In regard to the judgment of the Andhra Pradesh High Court in Polisetty Somasundaram Charities' case (supra) wherein it was held that in investment there was certain element of risk, Mr. Ganesh submitted that what is overlooked is thus the object of risk is to get a monetary return which was totally absent in the present case. Lastly, Mr. Ganesh referred to the decision of the Bombay Bench 'B' in the case of Gurdayal Berlia Charitable Trust v. Fifth ITO [1990] 34 ITD 489 for the proposition that if Section 13(1)(d) was violated, then only income from the prohibited investment alone would be taxed and that the entire income would not be so subjected to tax.
50. We have gone through the records of the case in detail as also the voluminous paper book, written submissions and case law and other materials placed before us. The main issues which are raised for our decision are once again stated below:
(a) Whether the chick levy received by the assessee trust is a voluntary contribution within the meaning of Section 12 of the Income-tax Act?
(b) Whether the assessee trust can be said to be carrying on business activity within the meaning of Section 11 (4A) ?
(c) Whether the assessee trust is liable to loose benefit of exemption by reason of provisions of Section 11(4A) or the provisions of Section 13(1 )(d) read with Section 11(5) are attracted to the present case; and
(d) Whether by reason therefore the assessee will forfeit tax exemption and also will be liable to be charged tax at the maximum marginal rate ?
51. The main issue which has been argued before us at considerable length is whether the chick levy received by the assessee is a voluntary contribution made to it or not. The department's case is that unless there was some element of compulsion such large amounts would not be paid by the hatcheries and poultry farmers to NECC. The assessee points out that there is absolutely no provision either in any law or in the constitution of the NECC or in any regulation passed by the NECC under which any obligation or liability can possibly be created requiring any hatchery or of any poultry farmer to pay the so-called chick levy to NECC. Further it has also been explained in detail by the assessee that the activities of NECC are very valuable and remunerative to the hatcheries and poultry farmers in general whereas the amount of contribution by way of chick levy is so small and negligible in comparison that the various poultry farmers and hatcheries have agreed to really pay the said chick levy as they realised that it is in their interest to do so. We have perused the constitution of the NECC as also the resolution passed by the General Body of the Executive Committee of NECC by which the decision was taken to raise funds by way of chick levy. We are satisfied that there is nothing on the basis of which it can possibly be contended that NECC has a right to levy and recover chick levy either from its members or from anybody else nor is any liability imposed in law on any poultry farmers or hatcheries to contribute the said amount of chick levy. We have noted that many hatcheries and thousands of poultry farmers have not paid the chick levy at all to NECC and further, even those who have paid the said levy they have done so in a highly irregular manner. Tha NECC has not taken any action whatsoever against any member or non-member for recovery of chick levy. Further the members of NECC retained full membership rights notwithstanding they may not have contributed the said amount of chick levy. These factors go to prove that the chick levy is nothing but purely a voluntary contribution made by the poultry farmers and hatcheries. We agree with the submissions of the assessee's representative that the words "levy" is a mis-nomer and that correct description or nomenclature should have been "chick contribution". We have to point out that the department has not placed any material whatsoever on record to show that the NECC has any right to recover the said amount of chick levy or that the poultry farmers and hatcheries were under any liability or obligations to make the said contribution or that any pressure or compulsion was exerted in any manner to contribute the said chick levy. It is clear that the contributions have been made voluntarily by the poultry farmers and hatcheries only because they were convinced of the larger utility of the activities of the NECC and the value of private industry as a whole.
52. There is another important factor which also conclusively established that the said chick levy amount received by the assessee is voluntary contribution. The nature of the activities of NECC is such that the poultry farmers and hatcheries derive benefit and there are no specific or independent services which are made available by NECC for any individual poultry farmers or hatcheries against the payment of such services. The benefit from NECC's activity will continue to remain available to other poultry farmers or hatcheries, whether or not they are members of NECC or whether or not they pay the chick levy contribution to NECC. These facts themselves rule out the possibility of the said chick levy being the non-voluntary payment or the said payment is consideration for the services rendered by NECC.
53. We have, therefore, no hesitation in holding that the said chick levy is a voluntary contribution received by the assessee trust within the meaning of Section 12 of the Income-tax Act, 1961.
54. To know whether the assessee trust is carrying on business or not, the following decisions would throw light. On reading of the various decisions of the Supreme Court and the High Courts, it is clear that for an activity to constitute a business the following requirements or conditions should be fulfilled :
(a) There should be a series of transactions between the assessee and the persons concerned from whom the amounts are received by the assessee.
(b) The said transactions should be entered into by the assessee with the object of making profit.
These principles have been laid down clearly in the following decisions :
(i) RaipurMfg. Co. Ltd.'s case (supra)
(ii) Bharat Development (P.) Ltd. 's case (supra)
(iii) Barendra Prasad Ray's case (supra)
(iv) Senairam Doongarmall's case (supra)
(v) Eclat Construction (P.) Ltd. 's case (supra)
(vi) Gannon Dunkerley & Co. (Mad.) Ltd. v. State of Madras [1954] 5 STC 216 (Mad.) affirmed in State of Madras v. Gannon Dunkerley & Co. (Mad.) Ltd. [1958] 9 STC 353 (SC).
55. In the present case the assessee trust is merely receiving voluntary contributions. It utilised the said contribution for the purpose of carrying out its charitable activities for the benefit of the poultry industry as a whole. It is an amount of the said voluntary contribution received by the NECC which determined the extent and nature of activities carried out by the NECC. In other words, it is the receipt of voluntary contributions which makes it possible for NECC to carry on its charitable activities. This carrying on of charitable activities generating income in the form of chick levy contribution is sought to be taxed by the revenue. In these circumstances, it is clear to us that there are no transactions as such between the assessee-trust and the hatcheries/poultry farmers from whom the chick levy contribution is received apart from the passive receipt of the said chick levy contribution by NECC. Further, we also hold that the NECC has been carrying on its activities without any profit motive whatsoever. Consequently, having regard to the legal position laid down in the aforesaid decisions, we are clearly of the opinion that the assessee trust has not been carrying on business activities either as commonly understood or within the meaning of Section 11 (4A). In this connection, we are of the opinion that the strong reliance placed by the learned departmental representative on the decision of the Supreme Court in the case of P. Krishna Menon (supra) is misplaced. As pointed out by the assessee's representative in that case, the Supreme Court proceeded on the undisputed factual footing that the assessee was carrying on a vocation and that the only question which arose and which was decided by the Supreme Court was whether the receipt of a large sum of money by the assessee, who was engaged in vocation or preaching on Vedanta, from his disciples constituted receipt arising from carrying on of the said vocation. It was this question or issue which was answered in the negative and against the assessee by the Supreme Court. In the present case, the basic question which arose is whether the assessee can be said to be carrying on business. The decision in P. Krishna Menon's case (supra) is therefore, not relevant and the said decision cannot possibly be relied on by the department for the purpose of contending that the assessee trust is carrying on business. However, with regard to the decision of the Supreme Court in the case of Federation of Indian Chambers of Commerce and Industry (supra), which was strongly relied upon by the learned departmental representative, we have to point out that the same was rendered in an entirely different statutory as well as factual context and the definition of "commercial premises" which was considered by the Supreme Court was entirely as per the scheme of the provisions of the Income-tax Act. Now, in Federation of Indian Chambers of Commerce & Industriy AIR 1974 SC 1527 case (supra) the Supreme Court proceeded on the specific footing that the, legal position under the Income-tax Act was entirely different and on that basis declined to consider the decision which was relied upon by the counsel for the assessee. It is also interesting to know that subsequently in the case of the same Federation of Indian Chambers of Commerce & Industries [1980] 130ITR 186 case (supra) the Supreme Court held that the activities of FICCI did not involve the carrying of any activity for profit and that the same were covered by the definition of "charitable purposes" in terms of Section 2(15) of the Income-tax Act 1961.
56. Besides, we find that the assessee is not carrying on any other activities which the above Federation was carrying on, which were considered to be in the nature of business. The question whether a particular activity can be regarded as business can also be considered from a common sense point of view. In the present case, if we see the overall activities of the assessee, we find that these are the normal activities of any genuine charitable trust. It was in need of funds and these funds were raised on voluntary basis from the members. We do not see how and what business the assessee is supposed to carry on. Thus, we hold from documentary evidence as well as common sense of point of view that the assessee cannot be considered to be carrying on any business and the amount collected by way of chick levy cannot be regarded as income from business as held by the Madras Bench of the Tribunal in the case of SOS Children's Village of India v. ITO [1990] 34 ITD 476, purely fund raising activity to enable the charitable activity to be carried out does not constitute carrying on of a business. Once we hold that there did not exist any business the surplus remaining cannot be treated as business profit. It appears that the department was swayed by the large amount of surplus shown in the assessment years 1984-85 and 1988-89, but in assessment year 1989-90 there was a deficit which wiped out almost 50 per cent of the earlier surplus. Shri Ganesh, therefore, urged that the above decisions given in an entirely different context may not be followed.
57. It is also necessary to appreciate that the existence of the said surplus in the hands of the assessee trust merely denotes that in those years, the amount of voluntary contribution received by the assessee trust happened to be more than the amount which was applied by it to charitable purposes. The amount applied by the NECC for its charitable activities in particular years still necessarily depended on whole range of factors including in particular the circumstances like varying, narrowing hands of the poultry industry and the business of commercial situation affecting that industry in a particular area. The fact that the contribution received in a particular year happened to be more than that the amounts applied for the charitable activities in these years cannot possibly lead to an inference that the assessee could be said to have been carrying on business. We may also point out that the amount paid by the assessee in a particular area is really different from the amount of contribution received by it from that area. Indeed there are many places or areas from which the amount of contribution received by NECC is far less than the amount of expenditure incurred by NECC for that particular area. This runs totally counter to the way in which the business "would easily be run and operate. If the business activities carried on and the chick levy contributions are the consideration received by NECC for the services rendered by it then it would follow that the amount of contribution received by NECC from a particular area would always include a certain margin of profit over and above the cost incurred by NECC for that area. This is not the case with the assessee. This is another clear indication to show that the assessee has merely been carrying on its charitable activities out of the contributions received by it and the assessee is not carrying on business activities in any sense of the term. We are also fortified in reaching this conclusion by the closing words of Section 11 (4A) in which it clearly contemplates that the business in question must be a separate and distinct undertaking as compared to the carrying on charitable activity itself. It is for that reason that the Section requires that a separate books of accounts should be kept for the said business.
58. To support this conclusion that the assessee was running the business, the CIT Pune in his order under Section 263 has referred to two more facts. Firstly reference is made to the association of the assessee called NAFED for market intervention. The CIT himself has noted that in this activity the assessee has agreed for sharing 50 per cent of the losses. We do not see how this association would be doing the business of market intervention so as to pay the remunerative price to the farmers in case of glut in the market. This involved incurring losses and that is why the assessee agreed to suffer part of the losses. Thereby the assessee cannot be said to have appointed NAFED as its agents as alleged. The market intervention was to achieve the charitable object of the assessee and that is why the assessee was ready to suffer financial burden but it did not carry out the market intervention itself. Reference made by the CIT Pune to the decision in the case of CIT v. Bazpur Co-Operative Sugar Factory Ltd. [1988] 172 ITR 321 (SC) is equally misplaced. Secondly, the CIT also relied on the provisions of Section 28(iii). The learned departmental representative has rightly conceded that the said Section does not apply in view of the decision of the Supreme Court in the case of Calcutta Stock Exchange Association Ltd. (supra). The the learned departmental representative, however, has relied on Section 28(i) for the proposition that the assessee is carrying on any business. We have already held in earlier paragraphs that it cannot be said that the assessee is carrying on any business and the chick levy cannot be considered to be profit from business. Thus, on this issue also we hold in favour of the assessee.
59. The next point arose for our consideration is whether Section 11 (4A) is applicable to the present case. We have already laid hereinabove that the assessee trust is not carrying on any business. On this ground alone, Section 11 (4A) is not applicable. We also accept the alternative submission of the assessee's representative that Section 11 (4A) can be applied only if the assessee is bound to carry on a separate and distinct business as compared to carrying on of the charitable activities itself. In other words, the carrying of charitable activities even at a profit does not attract Section 11 (4A) of the Act. As laid doWN by the Madras Bench of the Tribunal in the case of Awoboutique Trust (supra) Section 11 (4A) was inserted into a statute book in order to get over the judgment of the Supreme Court in the case of Driarmadeepti where it was held that where the assessee has a separate and distinct business, the profit of the same are exempt under Section 11. For this independent reason also Section 11 (4A) has no application. Further in any event and in any view of the matter, Section 11(4A)(b) comes to the rescue of the assessee. Section 11 (4A)(b) applies to an institute where the work connected with the business is mainly carried on by the beneficiaries. We have no doubt that the assessee-trust is a charitable institution within the meaning of Section 11(4A)(b) of the term. The term "institution" is wide enough to cover and include the societies registered under the Societies Registration Act. This is clearly brought out by Section 10(23)(b) of the Income-tax Act, 1961. Further the work which is referred to in Section 1 l(4A)(b) cannot merely be charitable work. The clause referred to us is of importance for the purpose of achieving the object of the trust or institution. This-important work should mainly be carried on by the beneficiaries. This condition is fulfilled in the present case. We find that most important aspect of the basic and fundamental activities of NECC are being carried out by the beneficiaries themselves. Section 1 l(4A)(b) does not lay down that the benefit of exemption is lost only because it employs the clerks, stenos, typists, telephone operators, despatch clerks and peons. That would be a highly unreasonable and unjustifiable interpretation of Section 11(4A)(b).
60. It was also contended by the department that the appellant has not maintained separate books of accounts and therefore, the benefit of Section 11 (4A)(b) is not available to the assessee. In the light of our findings that the assessee is not carrying on any business and further that the assessee is, in any case, not carrying on any other business separate or distinct from the carrying of charitable activities this question does not really survive. However, we may point out here, the question arose is whether the separate business is being carried on by the assessee, which is distinct from the charitable activities. This was so in the present case. Secondly, the existing books of accounts themselves would satisfy the condition. We are fortified in our view by the decision of the Bombay Bench of the Tribunal in the case of Bhaktivendanta Book Trust v. ITO [1990] 37 TTJ (Bom.) 671. In this case it was found that the assessee was doing no other business activity other than the publication of books and therefore, it was held that the question of maintaining separate books will not arise. Thus, on alternative contention, we hold in favour of the assessee that if the activities of the assessee are regarded as business the provisions of Clause (e) would apply and the assessee shall be entitled to claim exemption under Section 11.
61. We shall now deal with the issue regarding the forms and modes of investing or depositing the money as per Section 11 (5) read with Section 13(1)(d) of the Act. At the outset, we make it clear that this issue cannot arise in assessment years 1984-85 and 1985-86. In giving effect to the order of the CIT which did not give any finding or direction regarding this issue, the Asstt. CIT could not have travelled beyond the mandate given by the CIT. The learned departmental representative very rightly did not dispute this fact. It is a moot question whether the assessee will loose the benefit of exemption under Section 11 on account of the fact that it had made advances in accordance with Section 11 (5) read with Section 13(1)(d) of the Act. Section 11(5) prescribes the modes of investing or depositing the money referred to in clause (b)of Sub-Section (2) of Section 11. Section 11(2)(b) refers to the money so accumulated or set apart is invested or deposited in the forms or modes specified in Sub-section (5), and it required that such money should be invested or deposited in the forms or modes prescribed under Section 11 (5). The question that arose is, whether the money advanced to ACIL is part of the money "applied". The question of its investment under Section 11(5) will not arise. It is therefore, necessary first to see what is the amount that was "applied". Both the Asstt. CIT and the CIT and the CIT (Appeals) have equated the word "applied" to "spend". The CIT (Appeals) in para 32 of his order states that the amount advanced to ACIL cannot be considered as an application of the assessee's income. He states that the amounts have not gone out irretrievably and, therefore, it cannot be considered as an expenditure and hence there is no application of money. This approach of the CIT (Appeals; regarding the application of income is erroneous and not keeping with the decided cases cited by the assessee's representative and even the Board's circular No. 100 dated 29-1-1973. If the interpretation of the CIT was correct then the Board's instructions to consider the loans, scholarships granted by the educational trusts as application of income would become erroneous and contrary to law.
62. As per the settled legal position, which has been laid down in numerous decisions, it is clear that any amount which is laid out by the charitable trust or institution for achieving its charitable object constitutes an application of income to charitable purposes irrespective of whether the amount in question has been laid out irretrievably or whether the amount continued to belong to the charitable trust or the institution .or it is recoverable by it. Consequently if the charitable trust lends and advances money for the purposes which are connected with its basic charitable object then such advances even though recoverable by the charitable trust from the persons to whom the same has been paid would still constitute application of income in the year in which the advances are made. We have now to see whether the amount which has been advanced by NECC to ACIL achieved the charitable purpose of NECC. We have to see the memorandum of association of ACIL and we find that its objects are harmonious and supplemental to the basic object of NECC. The activities of ACIL are also confined to operation and transaction for the benefit of poultry industry as a whole. The ACIL has been promoted by NECC for the purpose of carrying out the market operations in eggs with object of ensuring that there should not be disparity of supply and demand in different areas.
63. It was emphasised on behalf of the assessee that NECC's basic object of protecting the interest of poultry farmers would never be fully achieved unless and until it was possible to carry out such market operations in eggs on large scale. The shareholders of NECC are exclusively the poultry farmers as explained to us by Shri Ganesh. The main reason why ACIL was promoted is because the assessee could not undertake the activity of stabilising the market process which would have required large scale operations of purchase and sale of eggs. There was also need to construct cold storage in order to provide them the facilities. Large funds were necessary for these purposes. For securing financial assistance from the financial institutions public limited company would have been suitable. For all these reasons, the assessee promoted the ACIL. We find that the assessee does not hold any share in this concern.
64. We also find that the NECC is the division of ACIL for the purpose of carrying on its activities. There is no allegation or suggestions made even by the department that the advances which were made by the NECC were for ulterior motive. We therefore, hold that the amounts advanced to ACIL constituted monies applied by the NECC to its charitable object and activities. Further the minutes of NABARD meeting wherein the said proposal to carry out the market operations was discussed and contains considerable light on the matter which makes it clear that by establishing ACIL and by carrying on regular operations the interest of poultry industries as a whole would be correctly protected. We also agree with the assessee's submissions, which were very fairly accepted by the learned departmental representative, that the provisions of Section 11 (5) read with Section 13(1)(d) have no application at all whereas monies or income of the trust have already been applied to the charitable objects of the trust. Consequently, the mischief of Section 13(1)(d) is not attracted to the present case for that reason alone. It was also contended by the assessee's representative that in any event the amounts advanced by NECC to ACIL are neither investments nor deposits as these two terms signify the lending the monies for the purposes of earning Income or return in some form such as by way of interest, dividends, rents or capital gains. In the present case, the monies have been advanced to ACIL on interest-free basis and not with the object of earning any income or return therefrom but only in order to further the basic object of NECC. Further in our opinion, the decision of the Andhra Pradesh High Court in the case of Polisetty Somasundaram Charities (supra) is of no application. In that case, it was held that the term "investment" implies that th,ere is certain amount of risk involved in the money in question. In the present case the assessee did not advance any amount to ACIL as a lender involving such risk. Further, in lending the investment, risk is undertaken for the purpose of getting return such as interest, profit, capital gains etc. In the present case, there was no such object involved. For this reason also, we are of the opinion that such advances made by the NECC to ACIL did not constitute any investment.
65. The word "deposit" is used in association with the word "invest" and following the principles of "noscitur a sociis". The word "deposit" has to be understood in the cognate sense with the word "invest". Thus the word "deposit" considered with reference to the return thereof and the wider meaning of deposit, Le., "repaying money for safe keeping or by way of security performer's obligation" cannot be considered to be relevant. It can only be considered that the advancing of money is not for the purpose of earning interest. In the context of Section 11 (5) this would appear to be a proper and correct interpretation. If we apply this meaning to deposit then also the advances to ACIL cannot be considered to be "deposit" because no monetary interest was accepted therefrom. We therefore, hold that the advances to ACIL cannot be a deposit either. We are supported in this finding by the Finance Minister's Budget Speech and the notes on Clauses explaining the provisions of the Finance Act, 1983 which clearly brings out that the expression "invest" or "deposit" used in Section 13(1)(d) only directs the modes of investment. Once it is held that the advances made to ACIL was not investment or deposits and advances made in the assessment year 1988-89 also stand on the same footing. The question of contravention of Section 11 (5) read with Section 13(1)(d) does not arise and there would be no question of withdrawing the exemption under Section 11 and sub-section of income to the maximum marginal rate also does not arise. Incidentally, we may observe that the Asstt. CIT was not justified in applying the maximum marginal rate to the gross receipts. Even though exemption under Section 11 was not available, it does not mean that the income of the assessee-trust became equal to that of gross receipts. The income of the assessee in that case should have been computed in a commercial sense, i.e., after allowing all the expenses that were laid out for the purposes of activities. If the entire activity of the assessee was business income then the Asstt. CIT should have applied the maximum rate to the business income separately computed by him and not to the gross receipts. These observations are only incidental and they would arise only if there was any justification for applying the maximum rate at all.
66. For the reasons given above, we hold1 that the assessee was entitled to claim exemption under Section 11 for all the years under appeals. We, therefore, set aside the order of the CIT Pune under Section 263 for the assessment years 1984-85 and 1985-86 and of the CIT (Appeals) for the assessment years 1984-85 to 1988-89 and those of the Asstt. CIT for the assessment years 1984-85' to 1988-89. We direct the Asstt. CIT to compute the income of the assessee after allowing the exemption.
67. In the result, the appellant succeeds and all the appeals are allowed.