Income Tax Appellate Tribunal - Hyderabad
A.P. State Civil Supplies Corpn. vs Income-Tax Officer on 28 August, 1990
Equivalent citations: [1991]37ITD1A(HYD)
ORDER
G. Santhanam, Accountant Member
1. These are two appeals, one by the assessee and the other by the revenue, against the order of the learned CIT( A). As the issues raised in these appeals are inter-laced and inter-twined with each other, the appeals are disposed of in a common order.
2. The assessee, Andhra Pradesh State Civil Supplies Corporation Ltd., was initially incorporated as a private limited company on the 31st day of December 1974, but later the word "Private" was deleted under Section 23(1 A) of the Companies Act, 1956, as per the Corporation's communication dated 21-8-1976. Thus, the assessee has become a public limited company in which public are substantially interested in terms of Section 2(18)(a) of the I.T. Act as the State of Andhra Pradesh is the only shareholder. The objects for which the corporation is established are set out in its Memorandum of Association in Clause 3(a). The main objects of the corporation are as follows :-
To engage in, promote, improve, develop, counsel and finance production, purchase, storage, processing, movement, transport, distribution and sale of foodgrains, foodstuffs and any other essential commodities and to articles establish laboratories for the purpose of ensuring quality control, to train personnel in the technique of quality control, and to provide services and assistance of all kinds of the said purchases including capital credit, means, resources, technical and managerial services, advice and assistance.
There are objects incidental or ancillary to the attainment of the main objects which are set out in Clause 3(b) of the Memorandum. The corporation has its own Articles of Association providing for the rules of indoor management. The corporation was floated by an order issued by Government of Andhra Pradesh in G.O.Ms. No. 701 dated 26-7-1974 which is as follows :-
Government of Andhra Pradesh Abstract Companies-Civil Supplies.- Purchase of foodgrains and other essential articles -Formation of the "Andhra Pradesh State Civil Supplies Corporation Private Limited" - Orders - Issued.
Food & Agriculture (CS. III) Department.
G.O.Ms. No. 701 Dated : 26th July, 1974 ORDER
The Government have decided to set up a State Corporation for handling Civil Supplies matter is respect of procurement, transport, storage and issue activities within the State and to help the Government meet any difficult situation arising in this field.
2. The proposed Corporation shall be called "The Andhra Pradesh State Civil Supplies Corporation (Private) Limited" and shall come into existence after it is registered under the Companies Act, 1956. The following orders are issued :-
(i) The functions and objects of the AP State Civil Supplies Corporation shall be: to engage in, promote, improve, develop, counsel and finance production, purchase, storage, processing, movement, transport, distribution and sale of foodgrains, foodstuffs and any other essential articles and to provide service and assistance of all kinds including capital, credit and technical and managerial service.
(ii) Share capital of the Corporation :
The authorised share capital of the Corporation will be Rs. 3 crores divided into 30,000 equity shares of Rs. 1,000 each. The initial subscribed capital will be Rs. 1.00 crore.
(iii) Management of the Corporation :
The management will rest in the Board of Directors with the Secretary to Government in-charge of Civil Supplies matters as Chairman. The General Manager/Managing Director will conduct and manage the company subject to the control and supervision of the Board of Directors.
(iv) Assets of the Corporation :
The assets owned by the Civil Supplies Deptt., that will be transferred to the Corporation, separately orders will issue listing out the immovable assets to be transferred to the Corporation.
3. Orders regarding sanction of share capital and other incidental expenditure for registration of the Corporation will be issued separately.
4. This order issues with the concurrence of Finance Deptt. vide their U.O. No. 1260/ DFSB/74-1, dated 20-7-1974.
[By order and in the name of the Governor of Andhra Pradesh] To The concerned.
Sd/- B.C. Gangopadhyaya Ex. Officio Secretary to Government.
The Corporation has been carrying out its main objects over the years.
3. The assessee contended before the tax authorities that its income is not liable to tax as the corporation was the just equivalent of State and a Writ Petition was filed before the Andhra Pradesh High Court which was dismissed - Andhra Pradesh State Civil Supplies Corpn. Ltd. v. CIT [1984] 148 ITR 497. The case is pending before the Supreme Court. For the previous year ending on 30-6-1984 relevant to the assessment year 1985-86, it was contended that the assessee is a charitable institution within the meaning of Section 2( 15) and Section 2(31) of the Income-tax Act, and its income is wholly exempt under the provisions of Section 11 of the Act. The Income-tax Officer, for reasons mentioned in the assessment order for the earlier assessment year, held that the assessee was not a charitable institution and had not complied with the conditions laid down under Section 11 of the Act and, therefore, brought to tax its income under the provisions of the Income-tax Act. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals.)
4. (a)(i) The first appellate authority accepted the plea of the assessee that the corporation was established for the purpose of advancement of objects of general public utility and its activities are in accordance with the purpose for which it was established;
(ii) He also upheld the claim of the assessee for deduction of Rs. 38,32,099 being the 2% contribution to Price Stabilisation/Equalisation Fund from its income; and
(iii) He deleted the disallowance of Rs. 10,000 towards audit fees.
(b) However, he dismissed the plea of the assessee that its income would be exempt under the provisions of Section 11 of the Income-tax Act for the following reasons:-
(i) Clause 28 of the Memorandum of Association contained provisions for declaration of dividends on preference shares or for equalisation of dividends. Thus, there was an element of private gain intended for the shareholders of the corporation.
(ii) Article 132 of the Articles of Association provided for distribution of assets in the event of winding up of the corporation in a certain manner among the shareholders.
(iii) The amendment of Article 6 of the Articles of Association whereby all the income of the corporation would belong to the Price Stabilisation/Equalisation Fund of the Department of Civil Supplies, Government of Andhra Pradesh did not have the effect of overriding Clause 28 of the Memorandum of Association.
(iv) Clause (b) of Sub-section (4A) of Section 11 as introduced by the Finance Act, 1983, stipulated that unless the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution and separate books of account are maintained by the trust or the institution in respect of such business, the exemption under Section 11 of the Income-tax Act would not be available, and in the case of the assessee this condition was not satisfied.
(v) Non-compliance of provisions of Section 12A of the Income-tax Act disentitled the assessee to avail exemption for its income.
5. The revenue is aggrieved and the main grounds in its appeal are over the findings of the first appellate authority on issues mentioned in para 4(a)(u) and (iii) above. In its additional ground of appeal, which is admitted, it assails the order of the CIT(A) in holding that the objects of the assessee -corporation are charitable in nature [para 4(a)(i) above)]. The assessee is on appeal in respect of issues cited in para 4(b) above which were decided against it.
6. Sri K.K. Viswanatham, learned Departmental Representative, referred to Clause 3(a) of the Memorandum of Association and submitted that each one of the objects found therein is only of a commercial nature and there is nothing in the main objects to suggest that the corporation was formed to advance any cause of public utility. Merely by dealing in essential commodities, if one were to become charitable institution, every trader in essential commodities either as a wholesaler or retailer or dealer, will have to be held as a charitable institution by himself. This was not the intendment in Section 2(15) of the Income-tax Act. He also referred to the objects incidental or ancillary to the attainment of the main objects which are several in number and submitted that all the objects are non-charitable in their import and content. Thus, there was nothing in the main objects or in the ancillary objects which would show that the corporation was established for advancing the case of public good or utility. The first appellate authority made a distinction between the objects and powers and looked beyond the contents of the Memorandum of Association to justify his finding that the corporation was charity within the meaning of Section 2(15) of the Act. In particular, he assailed the act of the first appellate authority in having referred to G.O.Ms. No. 701 dated 26-7-1974 in order to reach the conclusion that the assessee-corporation was formed for purposes of promoting public good or utility. Whatever might have been stated in that G.O. it is not relevant for deciding the purpose for which the assessee-corporation was established. The purpose or the object of a company is judged only by reference to the Memorandum of Association but not to any other document that might have come into existence prior to the formation of the company. In other words, his submission is that G.O. Ms. No. 701 dated 26-7-1974 authorising the formation of the corporation was an extraneous document and wholly irrelevant for purposes of ascertaining the true object of the corporation.
7. Sri Viswanatham submitted that in the fourth limb of Section 2(15) of the Act, the phrase "not involving the carrying on of any activity for profit" stood deleted with effect from 1 -4-1984. Though an activity of profit can be carried on by a charitable institution in order to achieve its objects, it has to be seen that the profit earned in the course of its activities does not ensure for the benefit of, say, the founder or the trustees in the case of a trust, or the shareholders of charity in the case of a company. The shareholders are owners of the company though technically company is independent of its members. Shareholders have a right to receive dividends if and when declared. The presence of Clause 28 of the Memorandum of Association enabling the corporation to provide for dividends on preference shares or for equalisation of dividends would certainly prove that the shareholders of the assessee-corporation are entitled to derive benefit from the activities of the corporation. When there is such a provision in the Memorandum of Association, the CIT (Appeals), while holding that the assessee is not entitled to any exemption under Section 11 etc., for this reason, ought not to have held that the assessee was formed for charitable purposes. Elucidating further, Sri Viswanatham submitted that even if the objects are avowedly charitable but if the institution had any provision for syphoning off its profits or for distribution of its profits, it has to be held that it is not a charitable institution within the meaning of Section 2(15). Though he has no quarrel with the CIT(A) in his ultimate decision in this behalf, his grievance is that the element of private gain which cuts at the very root of charity has not been considered in the proper perspective qua the charity itself. He relied on the decision of the Supreme Court in CIT v. Indian Sugar Mills Association [1974] 97 ITR 486. He further submitted that the decisions relied on by the CIT(A) as found in para 27 of his order are clearly distinguishable. In the case of CIT v. Andhra Pradesh State Road Transport Corporation [1986] 159 ITR 1, the objects themselves were predominantly charitable and one need not read between the lines. So also in the other cases.
8. Adverting to Clause 28 of the Memorandum of Association, Sri Viswanatham submitted that that clause exposed the real purpose for which the corporation was formed, the real purpose being distribution of dividends. He also referred to the arguments of the learned Chartered Accountant for the assessee in the assessee's appeal to the effect that Clause 28 of the Memorandum stood amended by deletion of the provision for distribution of dividends on preference shares or equalisation of dividends, and submitted that the impugned amendment cannot have any retrospective effect but came into force only upon registration of the alteration of the said clause with the Registrar of Companies which was done only on 2-1-1989. In this connection, he took us through the provisions of Section 17 to Section 19 of the Companies Act and argued that the Companies Act itself provided that the alteration of any of the clauses in the Memorandum of Association would come into force only upon the registration of such alteration with the Registrar of Companies. In particular, he referred to Sub-section (2) of Section 18 wherein it has been provided that the Registrar's certificate is the conclusive evidence that all the requirements of the Companies Act with respect to alteration and confirmation thereof by the Company Law Board have been complied with and "thenceforth the Memorandum as altered shall be the Memorandum of the Company". If the legislature had intended retrospective operation for the alteration of Memorandum of Association, it would not have employed the expression "thenceforth" as occurring in Sub-section (2) of Section 18. Expanding further, he referred to Section 19 of the Companies Act which deals with the effect of failure to register the documents wherein it has been provided that no such alteration as is referred to in Section 17 shall have any effect until it has been duly registered in accordance with the provisions of Section 18. He also invited our attention to Sub-section (2) of Section 19 wherein it has been declared that if the documents dealing with the alteration of Memorandum of Association are not filed with the Registrar within the time allowed, such alteration and order of the Company Law Board upon expiry of such period would become void and inoperative, and submitted that an alteration of Clause No. 28 of the Memorandum of Association does not have any retrospective effect.
9. Sri Viswanatham contended that the deletion of the articles dealing with the distribution of dividends and variation of the rights of shareholders by means of a special resolution passed by the corporation on 15-10-1980 while keeping intact Clause 28 of the Memorandum of Association which was sought to be amended only on 16-11-1981, would not advance the case of the assessee as the Articles of Association of a company are subordinate to the Memorandum of Association and it is always the Memorandum that overrides the Articles. Further, the amendment of Article 6 of the Articles of Association to the effect that all income of the corporation would belong to the price equalisation/stabilisation fund of the Department of Civil Supplies, Government of Andhra Pradesh, is also of no avail to the assessee in the face of Clause 28 of the Memorandum of Association (dealing with the right to create funds for distribution of dividends on preference shares or for equalising the dividends) remaining intact unaltered. He wondered if all the incomes of the corporation belonged to the Civil Supplies Department of Government of Andhra Pradesh, how could there be a provision for distribution of dividends on preference shares or for equalisation of dividends? So it is that notwithstanding the amendment of Article 6 declaring that the entire income of the corporation belonged to the Civil Supplies Department, the company was within its rights to provide for distribution of dividends or for equalisation of dividends. Even assuming that Article No. 6 as altered by the corporation in its resolution dated 15-10-1980 has the effect of making the income of the corporation as only belonging to the Civil Supplies Department, still the Civil Supplies Department cannot claim to have any overriding title over the income of the corporation. In this connection, he took us through Article No. 6 as amended and emphasized that the income which is intended to belong to the price equalisation/stabilisation fund of the Civil Supplies Department has not gone out of the coffers of the corporation during the year under appeal, nor immediately thereafter. Further, he submitted that even as on date, the price equalisation/ stabilisation fund had not been created by the Civil Supplies Department. At any rate, there was no material to say whether such a fund as is referred to in Article No. 6 had been set up with objects and purposes clearly defined. Unless the fund itself had come into existence, no overriding title would in effect be created.
10. Sri Viswanatham submitted that even though the corporation had deleted the articles relating to the variation of shareholders' rights or distribution of dividends, etc., it has by its conduct acted in violation of the amended articles by making declaration and payment of dividends. He referred to the published accounts of the corporation to buttress his point that even after the passing of the special resolution on 15-10-1980, doing away with dividend distribution etc., the corporation had in fact declared dividends and paid the same. Thus, the corporation is stopped from raising the plea that because of the alterations carried out in the Articles of Association, it could still claim to be a charity.
11. Sri Viswanatham finally submitted that in the course of his arguments on the revenue's appeal, he had also answered the points raised by the assessee's counsel in the assessee's appeal, as the issues are related ones.
12. Sri D.V. Anjaneyulu, learned Chartered Accountant for the assessee, submitted that Clause 28 of the Memorandum of Association as amended, came into force on and from 16-11-1981 even though confirmation and registration of the amendment had taken place only in 1988. In other words, he submitted that once the alteration of the Memorandum of Association is approved by the Company Law Board and registered with the Registrar, the alteration takes effect from the date of passing of the special resolution. In this connection, he relied on the decision in the case of Nagaisuree Tea Co. Ltd. v. Ram Chandra Karnani 1966 (2) Com. LJ 208 (Cal.). The CIT (Appeals) had not appreciated in the proper perspective the legal position as regards the alteration of the Memorandum of Association and erred in holding that Clause 28 as it stood before the amendment continued to hold the field until before the registration of the amendment with the Registrar of Companies. The Corporation was promoted by Government of Andhra Pradesh obviously for assisting it in times of difficulties. The corporation is helping the Government in procuring the essential goods and other commodities for distribution among the people of the State and thus assist the Government in holding the price line. It also supplied rice at a fixed price of Rs. 2 per Kg., to people at or below the income of Rs. 6,000 per annum. Helping the Government in the distribution system of essential commodities would certainly be an object of public utility and, therefore, the CIT(A) has rightly held that the assessee was formed for charitable purposes though he erred in holding that the corporation was having provision for distribution of dividends in its Memorandum of Association. He also referred to the decision of the Andhra Pradesh High Court in the case of CIT v. Nehru Pasuvula Santha & Gramabhivrudhi Sangam 1975 Tax LR 246.
13. Addressing himself to the point raised by the learned departmental representative that the amendment of Article 6 of the Articles of Association cannot survive in the light of the unaltered Clause 28 of the Memorandum of Association, Sri Anjaneyulu submitted that in his view there is no substance in the revenue's contention because of the retrospective effect of the amendment of the impugned clause. In terms of Article 6, all the income of the corporation belonged to price equalisation/stabilisation fund of the Civil Supplies Department. The articles create an overriding charge on the income. The object and the purpose of the fund are price equalisation/ stabilisation and it was established in G.O.Ms. 303 dated 30-5-1980. Further, draft proposals are under way and the CIT(A) has referred to the same in para 71 of his order. So far as the corporation is concerned, a charge is created on its income in favour of a fund to be operated by the Civil Supplies Department and the corporation cannot deal with those incomes except to allocate and pay the same to the fund. When and how actually the amount representing the income is recovered from the corporation is not at all relevant in determining whether the income belonged to the corporation or to somebody else. Thus, an overriding title is there on the income of the corporation by virtue of Article 6 of the Articles of Association. There could be no controversy that the amendment to Article 6 carried out by a special resolution on 15-10-1980 would take effect upon filing of the same with the Registrar of Companies within the time allowed and the corporation having complied with the procedures as prescribed in the Companies Act, the amended article had come into force as early as 1980 itself. The assessee cannot be said to have any control over the price equalisation/stabilisation fund to be maintained by the Civil Supplies Department of Government of Andhra Pradesh and, therefore, whatever income the assessee has earned or accrued to the assessee during the year under appeal really belonged to Government of Andhra Pradesh and, therefore, even if it is held that the assessee is not a charitable institution, there is nothing to be taxed in the hands of the assessee because of the overriding title created by virtue of Article 6.
14. As for the payment of dividends made by the corporation, he submitted that these payments related to the dividends of the earliest preceding years prior to alteration of Articles of Association and no dividend was declared for the year under appeal and, therefore, no adverse inference can be drawn against the assessee.
15. In his reply, Sri Viswanatham referred to the draft proposals for the price equalisation/stabilisation fund of the Civil Supplies Department, Government of Andhra Pradesh and submitted that some of the objects of the proposed fund are to sanction loans to the corporation itself for meeting its capital and revenue financial necessities and to give grants to the corporation for the purpose of construction of buildings etc., and to grant loans to the employees of the corporation. Thus, even if for a moment it is assumed that an overriding title had been created on the income of the corporation by virtue of Article 6, the incomes would be ploughed back to the corporation for its own benefits. Thus, the price equalisation/stabilisation fund ensures for the benefit of the corporation itself and hence there is no charitable element therein.
16. The assessee in its appeal objects to the finding of the CIT(A) that because of Clause 28 of the Memorandum of Association, the assessee is not entitled to exemption. The arguments advanced for and against this facet have been elaborately set out while dealing with the revenue's appeal. Another point on which the first appellate authority denied the exemption was with regard to the distribution of surplus in the even of winding up of the corporation. Sri Anjaneyulu submitted that during the lifetime of the corporation, Article 132 would not come into operation, and relied on the decision in CIT v. Western India Chamber of Commerce Ltd. [ 1982] 136 ITR 67 (Born.). Sri Viswanatham submitted that the revenue has not accepted the above decision.
17. Yet another ground on which exemption was denied by the CIT(A) was that the work in connection with the business of the trust or institution is not mainly carried out by the beneficiaries themselves. Sri Anjaneyulu in this connection submitted that the corporation, being a wholly owned Government company, is an instrumentality of the State and under Article 12 of the Articles of Association, it has to act according to the dictates and directives of the Government and, therefore, the beneficiary can be held to be the Government itself. He also referred to Article 12 of the Constitution of India and submitted that a Government corporation is only an instrumentality of the State and the managerial personnel are appointed by the Government and are liable to be transferred under instructions from the Government and, therefore, work in connection with the business of the corporation was in fact carried on by the public servants at the dictate of the Government. The CIT(A) had taken a very narrow view of the whole issue by saying that the work is not carried on by the beneficiaries at the bolts and nuts level. If the activities of the corporation involving transactions worth crores of rupees are kept in view, it could be easily said that the bolt and nut concept of beneficiaries would be a far-fetched concept or at least an unworkable one and the section should be interpreted pragmatically. Alternatively many of the clerks and lower category of employees serving the corporation are also beneficiaries of the activities of the corporation in that they are entitled to subsidised rice at Rs. 2 per Kg., if their income falls below Rs. 6,000 per annum. Even the other categories of employees and general public, whose income is above Rs. 6,000 per annum, also get essential commodities through the fair price shops at reasonable prices at the behest of the corporation. Therefore, it cannot be said that there has been no compliance of the provisions of Section 11(4A)(6) of the Income-tax Act.
18. Sri Viswanatham submitted that the corporation has got a distinct and different legal personality of its own and it cannot be equated with the State itself as has been held in the decision of the Andhra Pradesh High Court in assessee's own case in Andhra Pradesh State Civil Supplies Corporation Ltd.'s case (supra). Neither can the supply of rice at Rs. 2 per Kg., be viewed as an act of charitable dispensation on the part of the corporation, because such supplies were made at the instance of the Government in return for the reimbursement of any loss arising from the supply of Subsidised rice including the administrative charges in connection therewith. When the assessee itself is getting substantial subsidy for any loss that might arise in the course of carrying on its trade or business the element of charity, if any, disappears in thin air. It is not possible to identify the beneficiary in the case of corporation of this type and the employees who may be getting subsidised rice cannot be equated with the beneficiaries. The mere granting of certain concessions to the employees would not mean that the work itself is performed by the beneficiaries. Merely because rice is supplied to certain categories of people at subsidised rate, it cannot be said that the assessee is constituted for charitable purposes. By way of illustration, he cited the example of a hotelier providing cheap food at appointed hours at the instance of the Government and submitted that while there could be a case for allowing the loss arising on the provision of cheap food in such a case, it cannot be said that the hotelier existed for charitable purposes. Moreover, the business at field level, i.e., Fair Price Shops is carried on by different individuals and only the administrative part of the business is performed by the corporation through its staff.
19. Sri Anjaneyulu in his reply submitted that such a comparison of the corporation with a hotelier is not germane to the issue on hand. What is relevant is that the Corporation is actuated by considerations of public good in its activities and the work in connection with business was carried on by beneficiaries which in this case either the Government or members of the public on the staff of the corporation or both.
20. We have heard rival submissions and perused the records. It is contended by the revenue that the objects of Andhra Pradesh State Civil Supplies Corporation are not charitable in nature. We are not persuaded by the argument of the revenue. In Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1980] 121 ITR 1 (SC), the objects of the company were as follows :-
(a) to promote commerce and trade in art silk yarn, raw silk cotton yarn, art silk cloth, silk cloth and cotton cloth;
(b) to carry on all and any of the business of art silk yarn, raw silk, cotton yarn, as well as art silk cloth, silk cloth and cotton cloth, belonging to and on behalf of its members;
(c) to obtain import licences for import of art silk yarn, raw silk, cotton yarn, and other raw materials as well as accessories required by its members for the manufacture of art silk, silk and cotton fabrics;
(d) to obtain export licences and export cloth manufactured by the members;
(e) to buy and sell and deal in all kinds of cloth and other goods and fabrics belonging to and on behalf of the members;
** ** **
(n) to do all other lawful things as are incidental or conducive to the attainment of the above objects.
From a perusal of the objects of the association detailed above barring Clause (a) above it would appear prima facie that the objects in Clauses "(b) to (e)" are purely commercial in nature without any charitable intendment. However, their Lordships of the Supreme Court by their majority judgment held that the dominant or primary purpose of the assessee was to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth as set out in Clause (a) and the objects specified in Clauses (b) to (e) were merely powers incidental to the carrying out of that dominant and primary purpose. In the light of this pronouncement of the Supreme Court in the case cited supra, it should not be difficult for us to hold that the predominant objects of the corporation as contained in its Memorandum of Association are charitable in nature. Whether the income of the corporation would be exempt or not is totally a different question and the points involved in taking a decision on that count need not influence us in holding that the corporation is established for charitable purposes. To elucidate, it may be stated that the corporation is dealing in essential commodities by way of procuring, storing, transporting and arranging for the distribution of such goods under the directives of the Government and that is obviously for the purpose of public good. In fact the raison d'etre behind the formation of this corporation and the history of its activities subsequent to its formation would underline the fact that the corporation was assisting the State of Andhra Pradesh in ensuring the supply of essential commodities at the fair-price shops. As a matter of fact, the corporation was promoted by the State of Andhra Pradesh under G.O.Ms. No. 701 of Food and Agriculture (CS-III) Department dated 26-7-1974. The order stated that "the Government have decided to set up a corporation for handling civil supplies matter in respect of procurement, transport, storage and issue activities within the State and to help the Government meet any difficult situation arising in this field." The order mentions about the functions and objects of the proposed corporation, its capital and provides for the management of the corporation. In addition, the assets owned by the Civil Supplies Department are to be transferred to the corporation by issue of separate orders listing out the immovable assets that are to be transferred to the corporation. Thus, the corporation owes its existence to a Government Order issued in public interest and for public purpose.
21. Sri Viswanatham objects that it is not necessary, in order to decide the issue, to look beyond the Memorandum of Association to determine whether the assessee is established for charitable purpose. We are unable to accept this contention. Once it is known that the State of Andhra Pradesh is the promoter or the founder of the corporation, it is germane to the issue to find out the intention of the founder or the promoter of the corporation and whether those intentions are being carried out by the corporation. Even in the case of a trust, the intendment of the author of the trust if not clear from the deed of the trust, the correspondence and other documents which are available at about the formation of the trust or leading to the coming into being of the trust could be looked into in order to find out the guiding motive. Their Lordships of the Andhra Pradesh High Court took the aid of a Government Order which led to the formation of a cooperative society in ascertaining the substance of the matter in Girijan Co-operative Corporation Ltd. v. CIT. Similarly, in order to decide the real purpose for which the corporation is formed, it is but necessary to go beyond the Memorandum of Association of the corporation and look into the documents that gave rise to the formation of the institution. It is this G.O.Ms. No. 701 dated 26-7-1974 which gave birth to the corporation and the purpose is stated to be to help the Government meet any difficult situation arising in the procurement, transport, storage and issue activities for essential commodities. The history of the corporation's activities which are reflected in its annual accounts also proves that the corporation was engaging itself in procuring, storing, transporting and arranging for the distribution of essential commodities to the fair price shops. The promoter, which is State of Andhra Pradesh, has a hold on the corporation and in this connection the provisions of Clause 122 of the Articles of Association are worth recalling :-
Notwithstanding anything contained in any of these articles, Government may from time to time issue such directives as it may consider necessary in regard to the affairs of the company or directors thereof and in like manner may vary and anew any such directive. The director shall give immediate effect to the directive so issued.
22. In CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722, the Supreme Court held that the advancing or promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the entire community. That prosperity would be shared also by those who engaged in trade, commerce and industry, but on that account the purpose was not rendered any the less an object of general public utility. The definition of "charitable purpose" was an inclusive one but not exhaustive or exclusive and that the expression "object of general public utility" was not restricted to objects beneficial to the whole of mankind. An object beneficial to a section of the public was an object of general public utility. It was not necessary that the object should be to benefit the whole of mankind or even all persons living in a particular country or province. It was sufficient if the intention was to benefit a section of the public as distinguished from specified individuals. An object of general public utility such as promotion, protection, aiding and stimulation of trade, commerce and industries, need not, to be valid, specify the modus or the steps by which the object might be achieved or secured. Lastly, if the primary purpose be advancement of objects of general public utility, it would remain charitable even if an incidental entry into the political domain for achieving that purpose, e.g., promotion of or opposition to legislation concerning that purpose, was contemplated. Such an object ought to be regarded as purely ancillary or subsidiary and not the primary object. Explaining further this decision of Theirs, Their Lordships of the Supreme Court in Surat Art Silk Cloth Mfrs. Association's case (supra), held that the Andhra Chamber of Commerce did not cease to be charitable merely because all the members of the Chamber were incidentally benefited in carrying out its main charitable purpose and the Court relied very strongly on the decision in IRC v. Yorkshire Agricultural Society [1928] 1 KB611 (CA) and Institution of Civil Engineers v. IRC [1931] 16 TC 158 (CA), for reaching the conclusion that merely because some benefits incidentally arose to the members of the society or institution in the course of carrying out its main charitable purpose, it would not by itself prevent the association or institution from being a charity. It would be a question of fact in each case "whether there is so much personal benefit, intellectual or professional, to the members of the society or body of persons as to be incapable of being disregarded".
23. In the light of the ratio laid down by the highest court of the country in interpreting and elucidating the expression "charitable purposes", we have no hesitation in holding that the corporation, which was formed at the behest of the Government for the purpose of ensuring distribution of essential commodities to the people of the Suite through the media of fair-price shops at reasonable prices has in its heart and soul the lofty ideals of advancement of public utility. Though much of the litigation could have been avoided if the contents of G.O.Ms. No. 701 had been drafted into the Memorandum of Association as its preamble, there is no gainsaying the real purpose or the predominant motive of the assessee-corporation. The conduct of the corporation subsequent to its formation underlines the fact that it was actively carrying out its predominant objects. In CIT v, Vyas and Dhotiwala [1959] 35 ITR 55 (SC) a partnership firm undertook to finance, without charging any interest or profit, a scheme evolved by the Deputy Commissioner, Amraoti to solve a difficulty felt about cloth in Amraoti. There was an agreement between the firm and the Deputy Commissioner. Paragraph 14 of the scheme provided: "Profits resulting from scheme shall be utilised for such charitable purposes as may be decided by the Deputy Commissioner in the scheme". But the assessee firm was taxed on such profits. In the appeal, the Supreme Court held that profits had accrued to the assessee in working out the scheme and exemption under Section 4(1)(a) of the Indian Income-tax Act, 1922 (which is in relation to the income of charitable or religious institution) would not be available to the assessee . The reason was that the business was not carried on on behalf of any religious or charitable institution. Thus the facts of this case are clearly distinguishable from the facts of the case before us. For the above reasons, we hold that the assessee is a charitable institution within the meaning of Section 2(15) of the Income-tax Act.
24. Strong objection is taken by the revenue that even if the objects are charitable in nature, the fact that there is a clause in the Memorandum of Association which provided for distribution of dividends on preference shares and equalisation of dividends would cut at the very root of the proposition that the purpose of the corporation is charitable. Clause 28 of the Memorandum of Association was as follows at the time of formation of the corporation :-
To create any depreciation fund, reserve fund, sinking fund or any other special fund whether for depreciation or for repairing, improving, expanding or maintaining any of the property of the company or for redemption of debentures or redeemable, preference shares for special dividends or for equalising dividend or for any other purpose whatsoever and to transfer any such fund or part thereof to any other fund herein mentioned.
In view of this clause, it is vehemently contended that the corporation can declare special dividends on preference shares or can make provision for equalising dividends. In other words, there was an element of private gain because profits can be distributed among the shareholders and this provision robbed the corporation of its charitable nature. Sri Anjaneyulu argued that Clause 28 of the Memorandum of Association stood amended with effect from 16-11 -1981 and, therefore, there was no provision for distribution of dividends. Even if there is any such provision, the only shareholder being the Government, the profits were appropriated only by the Government which cannot be equated with appropriation for private gain. Sri Viswanatham took us through the provisions of Sections 17 to 19 of the Companies Act, 1956, (vide, para 8 supra). To appreciate his contentions, reference to Section 13 is necessary. Section 13 sets out the conditions to be stated in the Memorandum of Association. The main objects and the objects incidental to the attainment of the main objects are one such condition stated in the Memorandum of Association.
Any alteration of the conditions stated in the Memorandum of Association as prescribed in Section 13 of the Companies Act will be carried out in the following manner:-
(a) passing special resolution proposing the alteration;
(b) Approval by the Company Law Board of the special resolution;
(c) Filing of the documents i.e., the special resolution and the order of the Company Law Board conveying the approval, with the Registrar within 3 months from the date of receipt of the order of the Company Law Board;
(d) Issue of certificate by the Registrar of Companies.
Sub-section 2 of Section 18 of the Companies Act is as follows :-
The certificate shall be conclusive evidence that all the requirements of this Act with respect to the alteration and confirmation thereof had been complied with and thenceforth the memorandum as so altered shall be the Memorandum of the company.
Section 19 of the Companies Act is as follows : -
19. (1) No such alteration as is referred to in Section 17 shall have any effect until it has been duly registered in accordance with the provisions of Section 18.
(2) If the documents required to be filed with the Registrar under Section 18 are not filed within the time allowed under that section, such alteration and the order of the Company Law Board made under Sub-section (5) of Section 17 and all proceedings connected therewith shall, at the expiry of such period, become void and inoperative.
Looking into the expression "thenceforth" occurring in Sub-section (2) of Section 18 and the clear provisions of Section 19 of the Companies Act, 1956, we agree with Sri Viswanatham that the alteration of the condition prescribed in Section 13 unless it is registered with the Registrar of Companies after complying with the other procedures stated in Sections 17 and 18, does not come into force. However, there is another aspect to this issue. The question is whether Clause 28 providing for special dividends on preference shares or for equalisation of dividend really mattered as an object of the company or is only in the nature of a power conferred on the company in the guise of an object. Though the assessee's counsel has not advanced arguments on this aspect, he has relied on the Supreme Court's decision in Surat Art Silk Cloth Mfrs. Association's case (supra) wherein the Supreme Court noticed the distinction between the objects and powers. That case was also relied on by the CIT (Appeals). Moreover, the CIT (Appeals) has dealt with the distinction between objects and powers in his order and the Revenue in its appeal has assailed this distinction in the course of its arguments. Therefore, we feel that in order to ascertain whether Clause 28 of Memorandum of Association stood amended on the date of passing of special resolution or not (upon which much turns), it is necessary for us to examine whether that Clause represented an object by itself or merely a power conferred on the assessee-corporation. If it is an object, certainly it would be a condition to be stated in the Memorandum of Association under Section 13 of the Companies Act. If it is not, it is not a condition to be stated in the Memorandum of Association according to Section 13 of the Companies Act even though it might have been described as an object in the Memorandum of Association. It is not uncommon for the companies to mix both a variety of objects and a catena of powers in the Memorandum of Association and occasions do arise for the courts to distinguish the objects from the powers. This practice of mixing up the objects and the powers is deprecated by the courts as for instance in Nehru Pasuvula Santha & Gramabhivrudhi Sangam's case (supra), in the following words :-
For a proper appreciation of the objects of a trust, it is necessary that one should draw a line of distinction between what are the objects of the trust and what are the powers conferred upon the trustees for achieving the objects. It will not be proper to mix the objects of the trust with the powers conferred on the trustees as incidental to the carrying out of the trust.... This is so because the powers relate to the method and manner of its actual working or functioning whereas the objects indicate its ultimate goal or achievements. The powers should, under no circumstances, be confused with objects or purposes.
25. In the light of the above decision, we hold that Clause 28 providing for special dividends or for equalising dividend is only a power conferred on the corporation but not an object by itself, or an object incidental to attaining the main object of the corporation which deals with procurement and distribution of essential and other commodities. Once it is held to be not an object, it will not fall within "the conditions" to be stated in the Memorandum of Association in terms of Section 13 of the Companies Act. In this view of the matter, we draw support from the case of Rampuria Cotton Mills Ltd., In re AIR 1959 Cal. 253. In that case, Clause 5 of the Memorandum of Association dealt with the right to dividend in respect of any class of shareholders, limiting the dividend to a certain percentage. The court upheld the contention of Sri Chowdary who had argued that Clause 5 cannot be regarded as "a condition in the Memorandum as is contemplated in Section 16(1) of the Companies Act, 1956, because it is clear from Sub-section (2) of Section 16 that only those provisions which were required by Section 13 of the Act or any other specific provision in the Act to be stated in the Memorandum of the company can be deemed to be conditions contained in the Memorandum and the other provisions which are to be found in the Memorandum but which are not required to be inserted in the Memorandum by reason of Section 13 of the Act or any other section of the Act, can be altered in the same manner as the articles of the company." The court proceeded to observe that "this is made clear by Sub-section 3 of Section 16. And Sub-section 4 of Section 16 provides that all references to articles of a company shall be construed as references to the other provisions referred to in Sub-section (3) of Section 16. Now, a reference to Section 13 of the Act of 1956 makes it clear that there is no provision in Section 13 which requires the right to a dividend to be inserted in the Memorandum of Association of a company nor is there any other provision in the Act which enjoins that the right to receive dividends for a class of shares is one which should be inserted in the Memorandum." Therefore, the court concluded that "it is clear that the clause in the nature of Clause 5 with which we are concerned in this application cannot be regarded as condition within the meaning of Section 16(1) of the Act and, therefore, hold that Clause 5 of the Memorandum is not a condition and it can be altered by a special resolution." It was further held that the approval of the court was not called for to effectuate the amendment. Respectfully following the decision of the Calcutta High Court, we hold that the provision for special dividends on preference shares or for equalisation of dividend is not a condition to be stated in the Memorandum of Association under Section 13 of the Companies Act and, as such, the cumbersome process, if we may say so, of going through the approval of the Company Law Board and registering the special resolution along with the approval with the Registrar of Companies in terms of Sections 18 and 19 of the Companies Act, is not at all required. It is a different matter that the corporation had undergone this process in a mistaken view of law. No one can confer, by consent, jurisdiction on an authority lacking jurisdiction on certain matters. Looked at from this angle, Clause 28 of the Memorandum of Association stood amended upon the passing of the special resolution with effect from 16-11 -1981 as that resolution was in effect dealing with the power of the corporation.
26. Looking from a different angle also, we derive the same conclusion. Article No. 3 of the Articles of Association is as follows : -
Regulations contained in table A in the first schedule to the Act shall not apply to the company except insofar as they have been specifically by or under these articles.
Table A in first schedule to the Companies Act deals with model articles of Association of a company. Clauses 85 to 94 deal with declaration and payment of dividends. Thus, the power to declare dividend or to provide for dividend is to be found in the Articles of Association as prescribed under the Companies Act. In the case of the assessee-corporation also, Articles 93 to 107 dealt with dividends. But, these articles stood deleted with effect from 15-10-1980 on the passing of a special resolution to that effect. Thereafter, the corporation is not empowered to declare dividends. In other words, the charge levelled by the revenue that the corporation could declare dividends cannot legally be substantiated with the deletion of the Articles of Association relating to dividends from 15-10-1980 and also the amendment of Clause 28 of Memorandum of Association with effect from 16-11-1981. Hence, we hold that the assessee-corporation, formed primarily to help the State of Andhra Pradesh in the procurement-cum-distribution of essential and other commodities, is a charitable institution and the corporation is barred from declaring any dividend with effect from 16-11-1981. Inlndian Sugar Mills Association's case (supra). Rule 64 which permitted distribution of dividends co-existed with other rules and the court declined to re-write the rule. There is no such contingency or circumstance in the case before us for the year under appeal and that decision is not applicable to the facts of the case before us.
27. Sri Viswanatham submitted that whatever might have been the intention of the corporation, it had in fact declared and paid dividends. We have considered his submissions very carefully. For the year ending on 30-4-1976, the corporation had proposed a 5% dividend in a sum of Rs. 4,99,750, but at the annual general body meeting held on 28-6-1976, the consideration of the accounts by the shareholders was adjourned sine die and no dividend was declared. Again, for the year ending on 30-4-1977, a dividend of Rs. 75,000 was proposed by the directors, but at the annual general body meeting, held on 26-9-1977, the question of declaration of dividend was deferred. However, before the third annual general body meeting of the corporation held on 19-12-1978, the dividend proposed for the year 1975-76 would appear to have been paid as the same is not found as proposed dividend under the head "current liabilities" for the year ending on 30-6-1978. As on 19-12-1978, the dividend proposed for the year 1976-77 was remaining unapproved by the shareholders and unpaid. No dividend was proposed for the year 1977-78. For the year ending on 30-6-1979, no dividend was proposed and the dividend proposed for the year 1977 was remaining unapproved and unpaid. In the period from 1 -7-1979 to 30-6-1980, the dividend proposed for 1976-77 in a sum of Rs. 75,000 had been paid and no dividend was proposed for the year ending on 30-6-1980. The directors in their report at page 18 of the Annual Report have stated as follows : -
Dividend.- As the members are aware, the special resolution passed at the Extraordinary General Meeting held on 15-10-1980 adopting the en bloc amendments to the Memorandum and Articles of Association of the Corporation as approved by the Government vide G.O.Rt.No. 2033 dated 9-10-1980 deleted among others all the clauses relating to declaration and payment of dividends and introduced a provision that all income of the company should belong to the Price Equalisation/Stabilisation Fund, Deptt. of Civil Supplies, Government of Andhra Pradesh. However the en bloc amendments are yet to be confirmed by the Company Law Board until when they are inoperative. In view of the fluidity of the matters, we are reluctantly not recommending any dividend for the year.
Since then no dividend was proposed and paid. Thus, it will be evident that the corporation had not declared any dividend after the passing of the special resolution amending its Articles and Memorandum of Association. From the directors' report extracted above, it would be evident that the directors were smarting under an impression that the en bloc amendments in relation to Articles of Association, not to speak of the amendment of Clause 28 of the Memorandum required approval of the Company Law Board which is not warranted in terms of the provisions of the Companies Act as explained in the preceding paragraphs. Moreover, there was no declaration of dividend after the passing of the resolution on 15-10-1980. This decision not to declare dividend is also backed up by G.O.No. 2033. Thus, there is force in Sri Anjaneyulu's contention that whatever might have happened in the past, so far as the previous year ending on 30th June 1984 relevant to the assessment year 1985-86, which is under appeal before us, is concerned, the corporation is not authorised to declare any dividend and no dividend had been paid since the passing of the special resolution on 15-10-1980. For these reasons, we reject the arguments of the learned departmental representative.
28. Sri Viswanatham submitted that Clause 132 of the Articles of Association provided for the distribution of assets among the shareholders and thus it ran counter to the corporation's claim as a charitable institution. Sri Anjaneyulu relied on the decision of the Bombay High Court in Western India Chamber of Commerce's case (supra).
29. Having regard to rival submissions, we uphold the contention of the learned Chartered Accountant for the assessee. In the case before the Bombay High Court, Article 92 of the Memorandum of Association provided that in the case of winding up, the properties of the company were to be distributed among its members. The question was whether the income derived by the assessee from its immovable properties was entitled to exemption under Section 4(3)(() of the Indian Income-tax Act, 1922. It was held therein that the assessee was an organisation formed for charitable purposes and an organisation which provided for distribution of its property along its members on winding up is not for that reason an organisation formed for the private gain of its members. It is only in the case of a winding-up that the property and the income of the organisation arc to be distributed among its members. If during the lifetime of the organisation it is under an obligation to spend its income for charitable purposes, it can claim exemption from taxable on that ground during its lifetime. Respectfully following the ratio of the decision of the Bombay High Court, we hold that the existence of Clause 132 of the Articles of Association cannot detract from charitable character of the assessee-corporation.
30. Another related issue is whether Clause 6 of the Articles of Association constituted diversion of income by overriding title. Sri Anjaneyulu submitted that in the light of Clause 6 of the Articles of Association, all the income of the corporation belonged to the Price Stabilisation/Equalisation Fund, Department of Civil Supplies, Government of A.P., and whatever surplus accrued to the assessee as a result of its activities really belonged to the Government and, therefore, there was nothing left as its income which is exigible to tax. In other words, he submitted that the above clause created a diversion of income by overriding title and hence nothing was taxable in the hands of the corporation. Sri Viswanatham submitted that what was envisaged in the above clause was only an application of the income and did not amount to diversion by overriding title. The Price Stabilisation/Equalisation Fund had not taken shape with the Civil Supplies Department and, therefore, there was no question of diversion by overriding title.
31. We have carefully considered rival submissions. Clause 6 of the Articles of Association is as follows :-
No part of the funds of the Company shall be employed in the purchase of or in loans upon the Security of the Company's shares. All income of the Company shall belong to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh.
In our view, this amounts to only an application of income and not diversion by overriding title. Our reasons are as follows : -
In order to constitute diversion of income by overriding title, there should be an obligation to apply the income in a particular way before it is received by the assessee or before it has accrued or arisen to the assessee . On the other hand, an obligation to apply the income which has accrued or arisen or has been received amounts merely to the apportionment of income and not to its diversion -Raja Bejoy Singh Dudhuria v. CIT [1933] 1 ITR 135 (PC), CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17 (SC). Lord Macmillan in Pondicherry Railway Co. Ltd. v. CIT AIR 1931 PC 165, had stated that income, on its coming into existence, attracts tax at that point and the revenue is not concerned with the subsequent application of such income. In order to decide whether a particular disbursement amounts to diversion or application of income, the true test is to probe into and decide whether the amount sought to be deducted in truth did not or did reach the assessee as his own income. In order to claim deduction from the income on the principle of diversion by overriding title, in our considered opinion, there must be a disbursement before the income reaches the hands of the taxable entity. This disbursement had not taken place in the case of the assessee. In spite of the existence of Clause 6 of the Articles of Association, we notice that no payment had been made to the Price Stabilisation/ Equalisation Fund in the year under appeal or in the preceding years in respect of all the incomes of the assessee-corporation. In other words, Clause 6 of the Articles of Association remains only on paper and it has not been given effect to in the accounts of the corporation for the year under appeal or in any of the preceding years. On the other hand, the surplus, i.e., the net profit, is either carried to the general reserve or building reserve or carried forward as surplus in the balance-sheet. This apart, there is another stipulation backed up by G.O.No. 303 of Food and Agriculture (C.S.-III) Department dated 30-5-1980, whereby the price stabilisation/equalisation fund was created with a direction to the assessee-corporation to pay 2% of its annual sales turnover for the maintenance of price stabilisation/equalisation fund as administered by the Government with effect from financial year 1979-80 onwards. If all the income of the corporation really belonged to the price stabilisation/equalisation fund, where is the need for a separate G.O. directing the corporation to pay 2% of its annual sales turnover for the maintenance of the same fund? From a review of the accounts of the assessee, it is seen that the assessee has been setting apart 2% of its annual sales turnover towards the price stabilisation/equalisation fund but has not chosen to appropriate the entire income to that fund in terms of Clause 6 of the Articles of Association. Therefore, we hold that from the conduct of the assessee also, the stipulation contained in the impugned articles of Association has neither been acted upon nor given effect to by the corporation. Thus, we hold that there was no diversion by overriding title.
32. This leaves us to consider the point raised in the departmental appeal about the deductibility of a sum of Rs. 38,32,099 debited to the price stabilisation/equalisation fund. Sri Viswanatham submitted that this again was an application of income only and there was no diversion by overriding title. For diversion of income by overriding title, there should be a recipient of the income before the income reaches the assessee. In this case, it is stated that the price stabilisation/equalisation fund has an overriding title on the sales turnover. It can at best be only a reserve, because the fund has not yet been created, nor its objects or norms have been finalised. In fact, from the correspondence between the assessee-corporation and the Government in this behalf, it would appear that there are draft proposals to incur expenditure out of the above fund for the benefit of the assessee by way of meeting future capital and revenue expenses and for construction of buildings and for advancing loans to the employees of the corporation. Thus the fund has not taken shape. Therefore, there was no question of any diversion of or any accrual of liability. Sri Anjaneyulu relied on the order of the CIT (Appeals).
33. Having regard to rival submissions and the materials on record, we uphold the order of the CIT(Appeals). The Income-tax Officer in his assessment order for the assessment year 1981-82 had remarked as follows [para 69 of CIT(A)'s order]: -
The fund created by a G.O. of the State Government is held by the Director of Civil Supplies for which norms of utilisation are yet to be finalised. The draft proposals mentioned the following purposes : -
(1) To incur expenditure towards remuneration, salaries, rent, rates, taxes, electricity in connection with the administration of the trust;
(2) To sanction loans to the assessee-corporation for meeting future capital and revenue expenses;
(3) To sanction grants for construction of buildings and godowns;
(4) To advance loans to employees of the corporation ....
From the above extract, there is clear admission on the part of the Income-tax Officer about the existence of the fund created by an order of the State Government, and about its being held by the Director of Civil Supplies. In the wake of this evidence which is available in the Income-tax Records, we fail to appreciate the arguments of the learned departmental representative that the fund is not in existence. No material was left in before us by the Revenue to controvert the statement of the Income-tax Officer as regards the existence of the fund. The only thing is that norms of utilisation are yet to be finalised. The non-finalisation of the norms of the fund, in our opinion, is not the concern of the assessee-corporation, because the fund belonged to the Civil Supplied Department but not to the assessee. In fact, the assessee, because of its close relations with the Government, is bargaining with the Civil Supplies Department for utilising the fund for sanctioning of loans to meet its capital and revenue expenditure and for giving loans to its employees. These persuasive proposals which are in draft form in the letter dated 22-8-1983 bearing AC No. 4/78-79 addressed by the assessee-corporation to the Director of Civil Supplies, would emphasize the fact that the assessee was only coaxing the Civil Supplies Department to sanction certain loans or to provide certain accommodation from the fund. If the fund belonged to the assessee itself, where is the need for the assessee to bargain for taking the loan from the fund to meet its future capital and revenue expenditure? Thus, we are not impressed by the arguments of the learned departmental representative that the fund had not taken shape. This runs counter to the admission made by the Income-tax Officer which has been extracted above.
34. Now, the only point to be seen is whether the assessee is entitled to deduct the sum of Rs. 38,32,099 from its income. This represented the contribution to the price stabilisation/equalisation fund. On a perusal of the profit and loss account and the balance-sheet, we notice that the corporation has been consistently transferring 2% of its sales turnover to the price/stabilisation/equalisation fund as follows : -
----------------------------------------------------------------------------------
A/c year Opening Contribution Cumulative Paid to
ending balance during the total Government
year
----------------------------------------------------------------------------------
30-6-1979 - 3,34,244 - -
30-6-1980 3,34,244 43,65,194 46,99,438 25,770
30-6-1981 46,73,668 1,30,75,331 1,77,48,999 1,25,902
30-6-1982 1,76,23,097 1,30,07,535 3,06,30,632 2,94,543
30-6-1983 3,03,36,089 63,94,253 3,67,30,342 1,12,985
30-6-1984 3,66,17,357 38,32,099 4,04,49,457 -
Balance at the end of the year
3,34,244
46,73,668
1,76,23,097
3,03,36,089
3,66,17,357
4,04,49,457
----------------------------------------------------------------------------------
The annexure to the profit and loss account under the caption "apportionment of administrative and other expenses" gives a commodity-wise analysis of the contribution to the price stabilisation/equalisation fund. The sum total of these contributions is shown under current liabilities and exhibited in the balance-sheet. Similar is the position in the case of preceding years from the year ending on 30-6-1979 onwards. The basis of the contribution is G.O. No. 303 dated 30-5-1980 in which the corporation has been directed to pay 2% of all its sales turnover. Clause 122 of the Articles of Association is as follows : -
Notwithstanding anything contained in any of these articles, the Government may, from time to time, issue such directives as it may consider necessary in regard to the affairs of the company or directors thereof and in like manner may vary and annul any such directive. The Director shall give immediate effect to directives so issued.
In terms of the above article, the Government has got a right to issue directives and the corporation is bound to act upon them and in the case of 2% contribution to the price stabilisation/equalisation fund, the corporation has complied with the Government directive and has in fact transferred the amount to the credit of the fund in its accounts from the year ending on 30-.6-1980 onwards up to and including the year ending on 30-6-1984 relevant to the assessment year 1985-86 which is under appeal before us. The nature of the fund is a committed fund and as the fund belonged to the Government, it was shown under current liabilities. In the face of the directive-contained in G.O.No. 303, we have to hold that a liability has accrued to the corporation at the rate of 2% on all its sales turnover and in accordance with the mercantile system of accounting, the assessee has been regularly transferring the amount calculated at 2% on the sales turnover to the price stabilisation/equalisation fund. Therefore, even on the principle of mercantile system of accounting, we hold that a liability has arisen to the corporation in respect of its contribution at the rate of 2% on its sales turnover and the CIT(Appeals) was right in upholding the claim of the assessee.
35. This apart, the CIT(A) has relied on the decision of the Andhra Pradesh High Court in the case of Armoor Co-operative Marketing Society v. CIT [1987] 167 ITR 565, and also the decision of the Delhi Bench of the Tribunal in ITO v. Minerals & Metals Trading Corporation of India Ltd. [1983] 3 ITD 466. The CIT(A) has held that the liability in the present case was crated by an order of the State Government and that order had a binding force on the assessee. It was issued as early as 1980 and so it was a contemporaneous stipulation. Further, the liability was created with reference to the turnover and not on the net profit. So, the assessee-corporation was under an obligation to pay this amount irrespective of the fact whether it had made profits or incurred loss. The source for making the profit had been provided not by the assessee-corporation itself but by the State Government as in the case decided by the Delhi Bench of the Tribunal. The purchase price and the sale price of the goods were fixed by the Government. Subsidies to cover the losses were also received from the Government. The liability arising on the directive of the Government was cleared in the subsequent years by way of adjustments against the subsidies due to the corporation. Considering the above facts, the CIT(A) has held that the entire framework for conducting the business was provided by the Government and so the ratio of the decision of the Delhi Bench of the Tribunal in the case cited supra applied to the facts of the case. We are in agreement with his findings. Therefore, we reject the arguments of the learned departmental representative on this issue.
36. The last point in the departmental appeal is about the disallowance of Rs. 10,000 out of the, provision of Rs. 25,000 for statutory audit fees. The CIT(A) felt that the sanction of the audit fees was governed by Board resolutions though it was subject to the permission of the Company Law Board and, therefore, the liability has to be allowed. The revenue is on appeal.
37. We have considered rival submissions, Sri Anjaneyulu brought to our notice a communication of the Ministry of Industry, Department of Company Affairs, Company Law Board, No. 4-254/8G IOC dated 7-11-1988, which has modified its earlier communication and thus approved a remuneration of Rs. 25,000. ID the light of the said communication, we allow the claim of the assessee and thus uphold the order of the CIT(A).
38. We have already dealt with the points raised in the assessee's appeal in the preceding paragraphs of our order, except the ground in relation to applicability of the provisions of Section 11(4A)(b) of the Income-tax Act. Sri Viswanatham submitted that the assessee-corporation, even if held to be a charitable institution, is hit by the provisions of Section 11(4A)(6) of the Income-tax Act. Apart from the difficulty of identifying the beneficiaries in the case of this corporation, he submitted that it cannot be held that the work in connection with the business of the corporation was carried on by the beneficiaries. He relied on the order of the CIT(A) as found in paras 51 and 52. Sri Anjaneyulu submitted that the business is conducted under the direction of the Government and all its income belonged to the Government and, therefore, the Government is the beneficiary. Alternatively, he contended that the public are the beneficiaries under the distribution system carried out by the corporation and the public have got dual capacities, or at least some section of the public have got dual capacity, one as a member of the public and another as a member of staff of the corporation. Even the Chairman, Managing Director etc., who are appointed by the Government, and who deal with the policies of the corporation and who are actually engaged in its activities, are also members of the public to say the least. Therefore, the provisions of the section have been complied with. He also submitted that in a corporation of this magnitude, it is idle to expect that all the beneficiaries of the policies of the corporation should be actively associated with the business of the corporation. One should take a pragmatic view bearing in mind the purpose for which the corporation has been formed and the activities carried on by it, its scale, magnitude and size.
39. Having regard to rival submissions, we uphold the contention of Sri Anjaneyulu. Section 11(4A)(6) was introduced for the first time by the Finance Act, 1983, with effect from 1-4-1984 and is relevant for the assessment year 1984-85. It reads as follows : -
Sub-section (1) or (2) or (3) or (3A) shall not apply in relation to any income being profits and gains of business unless -
(a) ...or
(b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution and separate books of account are maintained by the trust or institution in respect of such business.
There are two important words, viz., "wholly" and "mainly" used in this clause. The user of the word "wholly" is in connection with charitable purposes. We have already held that the assessee-corporation is wholly a charitable institution. The user of she word "mainly" is in relation to the work in connection with the business. It is not in dispute that the assessee's business consisting of procuring, storing, transporting aft I distribution of essential commodities and other consumable goods for the purpose of the advancement of object of public utility, is carried on under the directives of the Government by a board of directors appointed by the Government. The board consists of officers in the Indian Administrative Service appointed by the Government. Apart from being public servants, they are also members of the public. The board of directors of the corporation, or for that matter any company registered under the Companies Act, is responsible for formulation of policies and for taking decisions on the conduct of the business and its finances and in fact the company only functions through its board of directors in its affairs. Therefore, it can be said that the business of the corporation is carried on by the staff of the corporation subject to the control and supervision of the board of directors. The staff of the corporation are apart from their being on the pay-rolls of the company have also another status as members of the public. We have already held that the activities of the corporation result in public good as it is an artery for the flow of essential goods and other consumable goods to the members of the public through the medium of fair-price shops at reasonable prices. So, as members of the staff, the members of the public do work in connection with the business of the corporation and, therefore, both at the top level and also at the bolt and nut level, we feel that the members of the public are associated, though as employees, with the work in connection with the business. It was argued vehemently that the subsidised rice scheme was available only to people with an income below Rs. 6,000 per annum and the number of such persons as employees would be negligible. This is to take a very parochial view of the term 'beneficiary' in the context of the activities of the assessee-corporation. The entire public who buy the essential commodities from the fair price shops whether at subsidised price or otherwise, are beneficiaries in the sense that the essential foodgrains and other consumable articles are made available to them through the medium of fair-price shops either at subsidised price or at reasonable price, at any rate prices below those prevailing in the market elsewhere. Therefore, the dichotomy between green card holders and yellow card holders to identify the beneficiaries is not warranted, because both types of card holders are beneficiaries.
40. Now, the question is whether all the beneficiaries should be involved in carrying on the work in connection with the business of the corporation or whether it is enough if some of the beneficiaries are engaged in the task in order to comply with the provisions of Section 1 l(4A)(b) of the Income-tax Act. If an interpretation is placed on the section to the effect that all the beneficiaries must be engaged in conducting the business of the corporation, it would amount to putting an impossible condition, because the assessee-corporation cannot employ the entire public living in the State of Andhra Pradesh. Such an intention cannot be attributed to the august Parliament. It is settled law that even if a section of the public is benefited by the activities of the charitable institution, the institution would be entitled to exemption as a charitable institution. Extending the same concept to identify the beneficiaries in the case of the corporation, we find that at least a section of the public are employed in the corporation, whether numercially large or small, and are engaged in the work in connection with the business of the corporation as members of staff at different levels of the organisation.
41. From a different angle also, we hold that the provisions of Section 11(4A)(b) have been complied with by the assessee. The primary object of forming the corporation is to assist the Government in the matter of procurement and distribution in difficult times. The Government is one of the beneficiaries of the activities of the corporation. In turn it gives directives to the corporation and the corporation is bound to act upon the directives of the Government in terms of Clause 122 of the Articles of Association. Thus, the Government, as a beneficiary apart from being a shareholder, is connected with the work in connection with the business of the corporation. The Government is not a singular person but represents the entire people of the State. Judging from this angle, we hold that the work of the corporation is mainly carried on by the beneficiary or beneficiaries and thus there is substantial compliance of the provisions of Section 11(4A)(6) of the Income-tax Act.
42. The CIT(A) has held at para 56 of his order that the assessee-corporation has not complied with the requirements of Section 12 A of the Income-tax Act. Sri Anjaneyulu submitted that Section 12 A would apply only in cases of trusts having voluntary donations but not to the case of the assessee. He also mentioned that the assessee had submitted an application to the CIT for registration under Section 12A though belatedly. Sri Viswanatham supported the order of the CIT(A).
43. We have heard rival submissions. Section 12A is as follows : -
12A. The provisions of Section 11 and Section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely: -
(a) the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later:
Provided that the Commissioner may, in his discretion, admit an application for the registration of any trust or institution after the expiry of the period aforesaid;
(b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of Section 11 and Section 12 exceeds twenty-five thousand rupees in any previous year, the accounts of the trust or institution for that year have been audited by an accountant as defined in the Explanation below subsection (2) of Section 288 and the person in receipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed.
From the above it would be evident that the provisions of Section 12A are mandatory in nature. The power to condone the delay in the submission of the return lies in the exclusive domain of the Commissioner of Income-tax with which we are not concerned in this appeal. The main clause in Section 12A specifically states that the provisions of Section 11 and Section 12 shall not apply in relation to the income of any trust or institution unless the conditions stated therein are fulfilled. Sub-sections (1) and (2) of Section 11 deals with the income derived from a property held under trust wholly or partly for charitable or religious purposes. Section 12 created a fiction in that the voluntary contributions are deemed as income purposes of Section 11 in certain circumstances. Section 12A cannot be read in isolation but has to be read with Sections 11 and 12 together. Therefore, there is no merit in the contention of the assessee's counsel and we hold that CIT(A) has rightly held the issue against the assessee.
44. To summarise our findings, we hold :
(1) that the assessee-corporation is a charitable institution within the meaning of Section 2(15) of the Income-tax Act, 1961;
(2) that Clause 28 of the Memorandum of Association dealing with dividends represented only a power given to the corporation but not an object in itself and got deleted with the passing of a special resolution on 16-11-1981;
(3) that the Articles of Association dealing with declaration and payment of dividends have been deleted with the passing of a special resolution on 15-10-1980;
(4) that the presence of Article 132 would not detract the assessee-corporation from it being a charitable institution during its lifetime;
(5) that there is no diversion of income by means of overriding title as contended by the assessee in the light of Clause 6 of Articles of Association and what was envisaged in the said clause was only an application of income;
(6) that the sum of Rs. 38,32,099, being the contribution made to the Price Stabilisation/Equalisation Fund, was a liability accrued to the corporation in accordance with the mercantile system of accounting and, therefore, deductible from its income as has been rightly decided by the CIT(A);
(7) that the provisions of Section 11(4A)(/?) of the Income-tax Act have been complied with substantially by the assessee-corporation;
(8) that the disallowance of audit fee in a sum of Rs. 10,000 is deleted in view of the approval given by Company Law Board; and (9) that in the absence of registration of the assessee-corporation under Section 12A of the Income-tax Act, exemption was rightly denied to the assessee.
In the result, the departmental appeal is dismissed and the assessee's appeal is partly allowed.
R.D. Agrawala, Judicial Member (Dissenting)
1. I have had the benefit of going through the order proposed by my learned Brother but find myself unable to agree with the approach and the conclusions arrived at by him on the following two aspects:
(a) that the activities of the Corporation are 'charitable' in nature within the meaning of Section 2(15) of the Income-tax Act, 1961 (referred to as 'Act' for brief) and
(b) the amendment of Clause 28 of the Memorandum of Association takes effect from 16-11-1981, the date of passing of Special Resolution de hors its approval by the Company Law Board and registration with the Registrar of Companies on 2-1-1989.
2. Since I find myself unable to concur with the view taken by my learned Brother on both these issues, I hereby proceed to record my reasons for arriving at a conclusion different than arrived at by him. My reasons for saying so are these.
3. On facts, most of which have been succinctly detailed out in the proposed order and without being repetitive it is to add here that the Andhra Pradesh Civil Supplies Corporation Ltd. ('Corporation' for brief) was registered under the Companies Act, 1956 as a Public Limited Company and not as a Section 25 Company.
4. The Corporation was assessed as a business concerned till upto 1979-80 with all its objects intact. It also unsuccessfully claimed in a Writ Petition before the High Court of Andhra Pradesh that it was a' State' within the meaning of Article 12 of the Constitution of India and therefore its income is not liable to tax.
5. The main objects of the Corporation as incorporated in Clause 3(A) of its Memorandum of Association run as under:
To engage in, promote, improve, develop, counsel and finance production, purchase, storage, processing, movement, transport, distribution and sale of foodgrains, food stuffs and any other essential commodities and to articles establish laboratories for the purpose of ensuring quality control, to train personnel in the technique of quality control, and to provide services and assistance of all kinds of the said purchases including capital credit, means, resources, technical and managerial services, advice and assistance.
6. In addition there are objects incidental or ancillary to the attainment of the main objects, set out in Clause 3(B) of the Memorandum. A few of these objects are extracted below :
(Clause 1) (i) To plan, formulate and execute projects and manage and administer such projects including shops, establishments or rice mills, flour mills or any other processing or manufacturing facilities which in the opinion of the Company is essential for the furtherance of the objects of the Company;
(Clause 2) (ii) To take over from the Government of Andhra Pradesh any of the projects established with the objects of the company in view;
(Clause 3) (iii) To promote and establish Companies and Associations for the furtherance of the objects of the Company, and to acquire and dispose of shares of such Companies and Associations;
(Clause 4) (iv) To undertake investigation, studies for preparation of feasibility, studies and project reports for the establishment of any projects for execution by the Company or by any other agency, connected with the objects of the Company;
(Clause 10) (v) To acquire and undertake the whole or any part of the business, property and liabilities of any person or Company carrying on any business which the Company is authorised to carry on, or possessed of property suitable for the purposes of this Company;
(Clause 20) (vi) To draw, make, accept, endorse, discount, negotiate and execute and to buy, sell and deal in promissory notes, bills of exchange; bills of lading and other negotiable or transferable instruments;
(Clause 28) (Vii) To creat any depreciation fund, reserve fund, sinking fund or any other special fund, whether for depreciation or for repairing, improving expanding or maintaining any of the property of the Company or for redemption of debentures or redeemable preference shares for special dividends or for equalising dividends or for any other purpose whatsoever and to transfer any such fund or part thereof to any other fund, herein mentioned;
(Clause35) (viii) To let out on lease or on hire, all or any of the property of the Company either immovable or movable including all and every description of apparatus or appliances.
7. Then comes the third category of objects under the heading 'Other objects' such as:
To carry on the business of carriers and for this purpose acquisition and maintenance of transport and establish factories for their maintenance of repair.
8. My learned Brother in the proposed order has drawn a distinction between the objects and powers and their overlapping holding that the predominant objects of the Corporation as contained in its memorandum of association are charitable in nature and that the other objects were merely powers incidental to the carrying out of this dominant and primary purpose. In my respectful opinion, each of the objects found in the memorandum of association unmistakably give the impression that they are commercial in nature. None of the objects - main or ancillary - go to show that the Corporation was established for advancement of any genera! public utility within the meaning of Section 2(15) of the Act. Further Clause 28 of the memorandum of association authorising and enabling the Corporation to provide special dividends on preference shares or for equalisation of dividends still more worsens their case.
9. Overlapping of objects and powers is no doubt possible but the occasion to separate the chaff from the grain arises only in a case where a specific pleading is advanced by an assessee laying such a claim. As also pointed out in paragraph 24 of the proposed order when the learned authorised representative for the assessee did not advance any argument on this aspect, a mere reliance placed on behalf of the Corporation on the Supreme Court's decision in Surat An Silk Cloth Mfrs. Association's case (supra), primarily dealing with the meaning and scope of various terminologies appearing in Section 11 of the Act wherein their Lordships of the Summit Court discussing various facets of this provision, inter alia, also noticing such a distinction, in my respectful opinion, does not even empower the Tribunal suo motu to marshal out various facts, scan them and observe that the Corporation's case was afflicted by such overlapping. In my considered opinion, therefore, to say that there was any overlapping between the objects and the powers and some objects as enumerated in the memorandum of association of the Corporation were in fact only powers of the Corporation and to bring into aid the Swat Art Silk Cloth Mfrs. Association s case (supra) is legally out of context. As is manifest from the memorandum of association, each object-whether described as main, ancillary or residuary object is first and foremost an object by itself independent of each other. Therefore even on merits the analogy of objects and powers as enumerated by the Apex Court in Surat Art Silk Cloth Mfrs. Association's case (supra) cannot be brought into the rescue of the assessee.
10. That being so, the unamended Clause 28 of the memorandum of association by itself take out the Corporation from the purview of Section 11 as it doubtlessly goes to prove that its shareholders are entitled to derive private gain or benefit in the form of special dividends etc. out of the activities of the Corporation.
11. I now pass on to the other issue.
12. As far as the amendment of Clause 28 of the memorandum of association seeking to delete the words "or for redemption of debentures or redeemable preference shares for special dividends or for equalising dividends therefrom is concerned, I respectfully differ with the view taken in the proposed order that the deletion takes effect from 16-11-1981 and not 2-1-1989.
13. On facts, the words inverted in the foregoing paragraph were sought to be deleted from Clause 28 of the memorandum on 16-11 -1981 by means of a Special Resolution passed by the Corporation on 15-10-1980. The procedure for the proposed alteration in the memorandum of association has been appropriately dealt with by my learned Brother in paragraph 24 of his order and need not be repeated. Taking a cue from the relevant provisions of the Companies Act, viz., Sections 18 and 19 on this issue no room for any doubt is left to say that in view of the expression "thence" occurring in Section 18(2) read with Section 19 of the Companies Act, 1956 the condition precedent for the effectiveness of the alteration is its registration with the Registrar of Companies. I, however, disagree with my learned Brother whole hog to the legal competence of the Tribunal to barge into the overlapping of objects and powers to hold that what Clause 28 of the memorandum stood for was only a power with the Corporation and not an object, which it is according to me both looking ostensibly and substantively. Even at the cost of repetition, it may be stated here that not an iota of argument was advanced on behalf of the Corporation to the overlapping claim which legally detracts and forbids us from entering into such an investigation and record a finding thereon.
14. The issue before the Tribunal is not as to what could be, i.e., whether one of the items mentioned as an object is really a power. The issue is as to how it has been treated by the Corporation/assessee all along. The Tribunal is a creature of law and bound by the pleadings and the submissions made Before it by the assessee and the revenue. It does not lie within our jurisdiction to infer submissions not made before us, though capable of being advanced by any other assessee as to whether there has been a blending of object and power is a mixed question of law and fact. The relevant law on the issue could be applied and the facts decided therein if - and if only- the assessee has come up with such a plea specifically and not otherwise. Reference is made to a claim of AP High Court in CIT v. GM. Chennabassappa [1959] 35 DER 261.
15. De hors the aforesaid legal premises barring an enquiry into the overlapping between objects and the powers, in my opinion, the Tribunal is altogether estopped from holding that the amendment takes effect from the date of the Special Resolution, i.e., 16-11-1981 rather than the date when it was approved by the Company Law Board and registered with the Registrar of Companies a fortiori, as the Corporation had sought such an approval which became effective only on 2-1-1989.
16. I am in respectful disagreement with my learned Brother in his view that going through the approval of the Company Law Board and registering the Special Resolution along with the approval with the Registrar of Companies in terms of Sections 18 and 19 of the Companies Act, 1956 is not at all required. Once the amendment of the resolution was submitted by the Corporation to the Company Law Board and their approval sought and given it certainly does not lie within our jurisdiction to say that this exercise was not at all required. Even if for argument's sake and without conceding to this proposition that such an exercise was not needed, which law confers a jurisdiction on this Tribunal to erase and annihilate these proceedings, namely, the submission of the impending amendment by the Corporation to the Company Law Board, its long pendency there for several years and its ultimate approval on 2nd January, 1989? Even if all this rigmarole was superfluous it could stand wiped off only by way of appropriate legal proceedings and not in exercise of a jurisdiction vested in this Tribunal by Section 254 of the Income-tax Act, 1961.
17. I may also add that after the Corporation had sought the approval to the amendment of Clause 28 from the Company Law Board is it not that the Board which is the prime statutory body constituted by the Central Government for the Company Law administration could have refused the sanction either wholly or in part to impose such conditions as it had thought fit. The order of the Company Law Board under Section 17 of the Companies Act, 1956 is discretionary and wide power is given to confirm the alteration either wholly or in part and on such terms and conditions as it may think fit. See Jayantilal Ranchhoddas Koticha v. Tata Iron & Steel Co. Ltd. AIR 1958 Bom. 155. Further in Bharat Mining Corpn. In re [1967] 1 Comp. LJ 119 (Cal.) it was held that the Board will not sanction an alteration for carrying on a new and totally independent business if it cannot be conveniently or advantageously combine with any of the existing business.
18. That being so, I am of the view that once the Corporation had submitted the Special Resolution seeking amendment in Clause 28 of the memorandum to the Company Law Board for its confirmation, it cannot be said that it was not at all necessary for the Corporation to adhere to the cumbersome process of seeking the Board's approval. There is no question of a mistaken view of law as has been held by my learned Brother. Primarily and lock, stock and barrel it is a question of fact that the Corporation passed a Special Resolution, submitted itself to the jurisdiction of the Company Law Board seeking their approval as envisaged by Section 17 read with Section 18 of the Companies Act; obtained and then registered it with the Registrar of Companies and thereupon incorporated the amendment in the Memorandum of Association. It is, therefore, impossible to conceive that all these steps stand erased from the record and Clause 28 of the memorandum of association stood amended upon passing of the Special Resolution with effect from 16-11-1981 rather than with effect from 2-1-1989.
19. In the result, both the appeals are partly allowed.
ORDER UNDER SECTION 255(4) OF THE I.T. ACT, 1961 Because of the difference of opinion between the Members of the Bench which heard the above appeals, the orders are being placed before the Hon'ble President for reference to 3rd Member for his opinion on the following issues:
(1) Whether in view of the facts and circumstances of the case, the question of overlapping between the objects and the powers qua the objects - main, ancillary and residuary - could be gone into by the Tribunal particularly when it is not raised by the assessee before us, but dealt in by the first appellate authority?
(2) Whether in view of the facts and circumstances of the case, the amendment to Clause 28 of the memorandum of association could be taken to be effective from 16-11-1981 the date of the passing of the Special Resolution de hors, its approval by the Company Law Board and registration with the Registrar of Companies on 2-1-1989?
(3) Whether on the facts and the circumstances of the case, the Andhra Pradesh State Civil Supplies Corporation Ltd.'s case (supra) is a charitable institution within the meaning of Section 2(15) of the IT Act, 1961?
The Hon'ble President is requested to do the needful in the matter.
THIRD MEMBER ORDER
1. Consequent to a difference of opinion between the Members of A-Bench of the Income-tax Appellate Tribunal, Hyderabad, who heard the above appeals, certain points on which the Members differred were stated and the points of difference of opinion were referred to the President of the Tribunal under the provisions of Section 255(4) of the IT Act on 25-5-89. The President being of the view that the points of difference were such as should be heard by more than one Member assigned the case for hearing to three Members, which is how this matter came before us for our opinion.
2. The assessment year under consideration is 1985-86 and the assessee has been assessed in the status of a company in which the public are substantially interested. The total income computed by the order of assessment dated 18-3-1988 was Rs. 7,29,54,065.
3. In subjecting the aforesaid total income to tax, the Income-tax Officer negatived the claim of the assessee that the income was exempt under Section 11 read with Sections 2(15) and 2(31) of the IT Act. In making the computation, to the returned income of Rs. 6,63,90,898 certain other add backs were also made. The only add back to which there is to be some reference in the course of this order is an amount of Rs. 38,32,099 which was a contribution made by the assessee to what was described 'Price stabilisation/equalisation fund' which was considered an inadmissible revenue expenditure.
4. The assessee appealed to the Commissioner of Income-tax (Appeals) who set out the background starting with the incorporation of the assessee on 31-12-1974 as a Private Limited Company, the word 'private' having been subsequently deleted with effect from 29-8-76. The Commissioner then adverted to several clauses of the memorandum and articles of association on the existence and/or deletion of which the assessee placed reliance in support of the stand that the income was exempt from tax. To quote from the relevant part of the order of the Accountant Member which summarised the points decided by the Commissioner (A) these were as under:
4(a)(i) The first appellate authority accepted the plea of the assessee that the corporation was established for the purpose of advancement of objects of general public utility and its activities are in accordance with the purpose for which it was established;
(ii) He also upheld the claim of the assessee for deduction of Rs. 38,32,099 being the 2 per cent contribution to Price Stabilisation/Equalisation Fund from its income.
(iii) ** ** **
(b) However, he dismissed the plea of the assessee that its income would be exempt under the provisions of Section 11 of the Income-tax Act for the following reasons:
(i) Clause 28 of the Memorandum of Association contained provisions for declaration of dividends on preference shares or for equalisation of dividends. Thus there was an element of private gain intended for the shareholders of the corporation.
(ii) Article 132 of the Articles of Association provided for distribution of assets in the event of winding up of the corporation in a certain manner among the shareholders.
(iii) The amendment of Article 6 of the Articles of Association whereby all the income of the corporation would belong to the Price Stabilisation/Equalisation Fund of the Department of Civil Supplies, Government of Andhra Pradesh did not have the effect of overriding Clause 28 of the Memorandum of Association.
(iv) Clause (b) of Sub-section (4 A) of Section 11 as introduced by the Finance Act, 1983 stipulated that unless the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution and separate books of account are maintained by the trust or the institution in respect of such business, the exemption under Section 11 of the Income-tax Act, would not be available, and in the case of the assessee this condition was not satisfied.
(v) Non-compliance of provisions of Section 12A of the Income-tax Act disentitled the assessee to avail exemption for its income.
5. In the appeal of the revenue before the Tribunal, while the revenue contested in the grounds initially taken the findings of the Commissioner (A) at items 4(a)(ii) & (Hi), it filed an additional ground whereby the revenue assailed the findings of the Commissioner (A) at item 4(a)(i) above that the objects of the assessee-corporation were charitable in nature. The additional ground was admitted by the Tribunal.
6. The Accountant Member eventually held, as far as the issues now under consideration are concerned, as under:
(1) that the assessee-corporation is a charitable institution within the meaning of Section 2(15) of the Income-tax Act, 1961;
(2) that Clause 28 of the Memorandum of Association dealing with dividends represented only a power given to the corporation but not an object by itself and got deleted with the passing of a special resolution on 16-11-1981;
(3) that the Articles of Association dealing with declaration and payment of dividends have been deleted with the passing of a special resolution on 15-10-1980;
(4) that the presence of Article 132 would not detract the assessee-corporation from its being a charitable institution during its lifetime;
(5) that there is no diversion of income by means of overriding title as contended for by the assessee in the light of Clause 6 of Articles of Association and what was envisaged in the said clause was only an application of income;
(6) that the sum of Rs. 38,32,099, being the contribution made to the price stabilisation/equalisation fund, was a liability accrued to the corporation in accordance with the mercantile system of accounting and, therefore, deductible from its income as has been rightly decided by the CIT(A);
(7) that the provisions of Section 11(4A)(b) of the Income-tax Act have been complied with substantially by the assessee-corporation;
(8) ** ** ** (9) that however, in the absence of registration of the assessee-corporation under Section 12A of the Income-tax Act, exemption was rightly denied to the assessee.
7. The Judicial Member, however, differed from the Accountant Member, to quote from his order, as under:
I have had the benefit of going through the order proposed by my learned Brother but find myself unable to agree with the approach and the conclusions arrived at by him on the following two aspects:
(a) that the activities of the corporation are 'charitable' in nature within the meaning of Section 2(15) of the Income-tax Act, 1961 (referred to as 'Act' for brief) and
(b) the amendment of Clause 28 of the Memorandum of Association takes effect from 16-11-1981, the date of passing of Special Resolution de hors its approval by the Company Law Board and registration with the Registrar of Companies on 2-1-1989.
Thus it is seen that out of the various findings given by the Accountant Member, the Judicial Member had stated in his dissenting order that he differed only on the two points which we have extracted above.
8. It would be relevant to mention that the finding given in the order of the Accountant Member, that, in the absence of registration of the assessee corporation under Section 12A of the Income-tax Act, exemption was rightly denied to the assessee, no longer survives, because the Commissioner of Income-tax has subsequently accorded necessary registration. The points of difference formulated and which were referred to the President under Section 255(4) by the two Members are as under:
(1) Whether in view of the facts and circumstances of the case, the question of overlapping between the objects and the powers qua the objects - main, ancillary and residuary - could be gone into by the Tribunal particularly when it is not raised by the assessee before us, but dealt in by the first appellate authority?
(2) Whether in view of the facts and circumstances of the case, the amendment to Clause 28 of the memorandum of association could be taken to be effective from 16-11 -1981 the date of the passing of a Special Resolution de hors its approval by the Company Law Board and registration with the Registrar of Companies on 2-1-1989?
(3) Whether on the facts and in the circumstances of the case, the Andhra Pradesh State Civil Supplies Corporation Ltd.'s case (supra) is a charitable institution within the meaning of Section 2(15) of the IT Act, 1961?
9. Before proceeding to hear the parties on the various issues, the restricted scope of the powers of Third Member in hearing, and deciding upon, the points of differences of opinion referred to the Third Member was brought to the notice of the parties. Their attention was invited to be decisions of the Patna High Court in Hanutram Chandanmul v. CIT [1953] 23 ITR 505 and of the Madras High Court in ITO v. Vice-President, ITAT [1985] 155 ITR 310. The learned Counsel for the assessee and the learned Standing Counsel for the Department accordingly addressed arguments keeping in view the ratio of the aforesaid decisions.
10. On the first point of difference set out aforesaid, the submission of the learned counsel for the assessee was that the question of overlapping of the main powers with objects and vice versa as enunciated in the Memorandum and Articles of Association had been dealt with by the Commissioner (Appeals) in Paragraphs 30 to 37 of his appellate order. Also before the Tribunal though the point was not elaborated upon, with a view to highlight the point, reliance was placed on the decision of the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) wherein the Supreme Court had noticed the distinction between the objects and powers. This fact, the learned counsel submitted had been expressly adverted to by the Accountant Member in paragraph 24 of his order. Further, the revenue in its appeal had assailed such distinction in the course of its arguments before the Tribunal, and this being so the Tribunal had necessarily to pronounce on the same. In support of this view the learned counsel relied on the decision of the Rajasthan High Court in the case of Raja Baldeodas Birla Santati Kosh v. CIT [1986] 158 ITR 601 and the decision of the Supreme Court in the case of Snow White Industrial Corporation v. Collector of Central Excise. Thus, he submitted that it was not correct to say that the point was not raised before the Tribunal, and that the Tribunal took up this point suo motu upon itself. The learned Judicial Member was not right in expressing to the contrary in his opinion.
11. The learned Standing Counsel submitted that on the facts narrated above, it could not be spelt out on the face of the order, that the assessee had raised the plea before the Tribunal, and therefore, the Tribunal should not have embarked upon an examination of the issue.
12. We have considered the contentions. Factually the Commissioner (Appeals) had dealt with the question of overlapping between the main powers and objects in his order and the counsel for the assessee had relied on the decision of the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) before the Tribunal. Further the revenue had advanced specific arguments in this regard before the Tribunal and on behalf of the assessee reliance was placed on the decision in the case of Surat Art Silk Cloth Mfrs. Association (supra). In the judgment there is reference to the objects and powers vis-a-vis the Memorandum and Articles of Association.
13. The Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd. [1967] 66 ITR 710, at page 713 has observed:-
If for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The right of the assessee to relief is not restricted to the plea raised by him.
[Emphasis supplied] In view of the enunciation of law in the case of Mahalakshmi Textile Mills Ltd. (supra) by the Supreme Court that the right of the assessee to relief is not restricted to the plea raised by him, we have to hold having regard to the facts set out by us and particularly because on behalf of revenue arguments were advanced before the Tribunal on the point that it is not correct to say that the point was not taken up before the Tribunal. The Tribunal could go into, rather should go into the issues referred to in the first point of difference. We accordingly answer the first point of difference between the Members as referred to us in the affirmative.
14. Coming to the second point, the learned counsel for the assessee referred to Clause 28 of the Memorandum of Association as it originally stood, which read as under:-
To create any depreciation fund, reserve fund, sinking fund, insurance fund, or any other special fund, whether for depreciation or for repairing, improving expending or maintaining any of the property of the company or for redemption of debentures or redeemable preference shares for special dividends or for equalising dividends or for any other purpose whatsoever and to transfer any such fund or part thereof to any other fund, herein mentioned;
The submission was, that Sections 13,16,17 and 18 of the Companies Act which relate to the procedure for amendment of the clauses in the Memorandum of Association should be read together. Section 13 dealt with the conditions which had to be enumerated in the Memorandum of Association. Section 16 spoke of the manner in which clauses in the Memorandum could be amended and in this regard it was stressed that Section 16(2) clearly stated that "only those provisions which are required by Section 13 or by any other specific section contained in this Act to be stated in the Memorandum of the Company concerned shall be deemed to be conditions contained in its memorandum". According to him, the matters relating to declaration of dividends were procedural aspects which belonged to the realm of day to day work and exercise of powers by a Company in that regard did not fall within the objects for which a company was constituted. Even on a reading of the Companies Act, it was clear that the Legislature had contemplated matters relating to declaration of dividends as falling within the scope of the Articles of a Company alone. Therefore, it was submitted that even if the said matters may have found place in a clause in the Memorandum of Association, in terms of Section 16(3) it was clearly permissible that such provisions could be altered in the same manner as any alteration could be made in the Articles of a Company. For this purpose passing of a Special Resolution was therefore sufficient. Inasmuch as a Special Resolution in this regard had been passed on 16-11-81, notwithstanding such resolution having formed the bedrock for making the subsequent application in 1982 to the Company Law Board the amendment made in Clause 28 of the Memorandum of Association by omitting the words "or for redemption of debentures or redeemable preference Khares for special dividends or for equalising dividends", the teamed counsel contended, took effect from the very date of the Special resolution. Since in substance what was effected was an amendment to the Articles of Association, the coming into force of the amended provisions could not stand postponed till the registration of the approval granted by the Company Law Board took place on 2-1-89 as held by the Judicial Member. The approval by the Company Law Board and the subsequent Registration before the Registrar was a mere superfluity.
15. The learned counsel further emphasised in the course of his arguments, in reply, that even what was originally set out in Clause 28 was the power for creating a fund for equalising dividends in the event of there being no profits in a particular year and it was not a power for declaration of dividends as such. The two aspects, he submitted, were entirely different and the power of declaration of dividends was expressly provided for only in the Articles of Association, in Clauses 93,95,96 to 101 and 102 to 107 etc. as they originally stood. There was, therefore, no conflict between the Memorandum and the Articles of Association. All the aforesaid articles stood deleted w.e.f. 15-10-80 when the special resolution in that regard was passed.
16. Finally, the learned counsel submitted that under the unamended Clause 28 of the Memorandum of Association, there was no specific provision made for declaration of dividends. Even assuming for the sake of argument that Clause 28 of the Memorandum of Association spelt out the power to declare dividends and was in effect till 2-1-89, having regard to the ratio of the decision of the Andhra Pradesh High Court in Girijan Co-operative Corporation Ltd.'s case (supra) such provision for declaration of dividends even if it existed in the Memorandum of Association would not affect the charitable nature of the assessee-company, because in the present case, the State, i.e., the Government of Andhra Pradesh was the sole shareholder, and the dividends even if declared "could have gone only to the State, and therefore the public in general was the beneficiary". The assessee, therefore, would not lose the character of a charitable institution and the assessee could not be deprived of the exemption claimed under the Income-tax Act.
17. The learned standing counsel submitted that the provisions of Clause 28 of the Memorandum of the company as it stood originally, relating to dividends, was clearly an object of the company. He submitted that the Memorandum set out at item III the objects for which the assessee-company was established and this was sub-divided into Main Objects and Objects incidental or ancillary to the attainment of the Main Objects. His submission was that Clause 28 came under the head "Objects incidental or ancillary to the attainment of the main objects". He, therefore, stated that the company clearly envisaged the said clause and its entire contents as forming part of its objects. The learned standing counsel then referred to the statements made in the annual reports of the Directors starting from the accounting period ended 30-6-1980, i.e. the 5th Annual Report for 1979-80 right through to the 9th Annual Report which was for the previous year now under consideration (ended 30-6-1984) to reinforce his argument that Clause 28 was only an object and its amendment took effect from 2-1-1989. The relevant portion of the Directors' report in the 9th Annul Report relating to the previous year under consideration read as under :
Dividend:
As the members are aware, the special resolution passed at the Extraordinary General Meeting held on 15-10-1980 adopting en bloc amendments to the Memorandum and Articles of Association of the Corporation as approved by the Government vide G.O. RT. No. 2033 dated 9-10-1980 deleted among others all the clauses relating to declaration and payment of dividends and introduced a provision that all income of the company should belong to the Price Equalisation/Stabilisation Fund, Deptt. of Civil Supplies, Government of Andhra Pradesh. However, the en bloc amendments are yet to be confirmed by the Company Law Board and until then they are inoperative. In view of this, we are reluctantly not recommending any dividend for the year.
Material changes since the date of the balance sheet:
** ** **
3. As reported earlier certain en bloc amendments to the Memorandum and Articles of Association of your Corporation were approved by the Govt. vide G.O. RT. No. 2033 dated 9-10-1980 and the same were adopted at the Extraordinary General Meeting held on 15-10-80 by passing a special resolution. The amendments involving financial implications on the Corporation were:
(a) A restriction that the total capital of the company should be wholly owned by the State Government,
(b) A provision that all income of the company should belong to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies Government of A.P., and
(c) A summary deletion of all the clauses relating to declaration and payment of dividends.
The en bloc amendments were referred to the Company Law Board Bench, Southern Region, Madras for confirmation. However, the Company Law Board deferred its decision vide its Lr. No. 154/17/SRB/82 dated 30-12-1982 until the disposal of the writ petition filed by the Corporation before the High Court of A.P. against the Income-tax Department. The High Court of A.P. dismissed our writ petition whereupon we filed a special leave petition before the Supreme Court which is pending with it, as reported in detail in the next paragraph. Thus the entire matter is subjudice and in effect the Company Law Board has not so far confirmed the en bloc amendments until which time they are inoperative. Now, attempts are being made for expediting the issue before the Company Law Board.
4. Your Corporation has been trying to obtain exemption from the incidence of income-tax on the grounds that the income of the Corporation is income of the State and as such is exempt from income-tax under Article 289(1) of the Constitution of India and that the Corporation is engaged in public utility service by supplying essential commodities at cheaper rates to the public and thus comes under the definition of charitable purposes as given by the Income-tax Act, 1961, and attracts exemption under the Act. The en bloc amendments as reported above were carried out for satisfying our first contention....
18. Before we proceed further, we may state that to set the record straight, certain clarifications were obtained at the time of hearing from the parties and the correct position that emerged regarding the en bloc amendments referred to above is as under:
Certain amendments which were exclusively pertaining to Articles of Association were passed by a special resolution at the Extraordinary General Meeting held on 15-10-1980. Consequent to this, the Articles of Association, in particular 93 to 107 which dealt with dividends, were deleted. In addition, Article 5 and Article 6 were also amended. Article 5 dealt with increase in the authorised share capital of the company to Rs. 10 crores divided into 1,00,000 equity shares of Rs. 1,000 each and Article 5(b) provided that the total share capital shall be contributed by the State Government. Article 6 as amended stated as under:
No part of the funds of the Company shall be employed in the purchase of or in loans upon the security of the Company's shares. All income of the Company shall belong to the price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh.
There were some other Articles which were repealed or deleted such as Articles 12 to 18 to which we need not advert as they did not figure in the course of arguments. The special resolution of 15-10-1980, therefore, related only to amendments to the Articles of Association. It is not now in dispute that these amendments operated from that date. There was one amendment proposed to the Memorandum. This was not by the special resolution of 15-10-1980 but was proposed by a later special resolution of 16-11-1981. Pursuant to this resolution, a petition was made under Section 17 of the Companies Act to the Company Law Board for effecting the necessary alteration. This petition was numbered as Company Petition No. 154/ 17/SRB/82. It came up for hearing before the Company Law Board Bench, Southern Region, at Madras on 23-12-1982 when it was adjourned to be posted for hearing after disposal of the writ petition before the High Court of Andhra Pradesh. Matters lay there till an order was passed by the Company Law Board on 19-9-1988 with reference to the petition presented on 16-10-1982. This order confirmed the alteration in Clause 28 of the Memorandum. Subsequently, the alteration was registered on 2-1-1989 under Section 18 of the Companies Act.
19. Based on the aforesaid, the submission of the learned standing counsel was that the amendment in Clause 28 of the Memorandum came into effect only when it was registered under Section 18 of the Companies Act particularly because Section 18(2) provided as under:-
The certificate shall be conclusive evidence that all the requirements of this Act with respect to the alteration and the confirmation thereof have been complied with, and thenceforth the memorandum as so altered shall be the memorandum of the company.
[Emphasis supplied] The learned standing counsel went on to state that both the Judicial Member and the Accountant Member were agreed that if the amendment in Clause 28 of the Memorandum related to an object of the company and not exercise of power, then that would be an amendment in the Memorandum itself and would clearly fall within the terms of Section 16(2) of the Companies Act and being a matter falling under the provisions of Section 13, the amendment would take effect only from the date of registration by the Registrar, Company Law Board. The narrow point of difference was whether the deletion of the words referred to in Clause 28 related to making a change in the objects or deletion of a power. According to the Accountant Member it was deletion of a power whereas according to the Judicial Member it was a clear change in the objects. The standing counsel submitted that the second point of difference as referred did not highlight the difference between the interpretation of the deleted matters as to whether it was an object or power that was being affected, but looking to the manner in which the point of difference had been formulated, it was clear that point No. 2 took in within its purview a determination of this facet.
20. The learned counsel for the assessee submitted that the Andhra Pradesh High Court in the case of Nehru Pasuvalla Santha & Gramabhivrudhi Sangham (supra) had observed as under:-
For the purpose of determining the character of a trust, i.e. whether it is intended wholly for charitable purposes or not and whether a particular object is primary or ancillary or subsidiary to the main object, one has to look at the Memorandum of Association of such trust and the admitted facts. Whether a particular object is purely ancillary or subsidiary, or primary is a mixed question of fact and law depending upon the true construction of the Memorandum of Association and the other admitted or proved facts and circumstances. It is the substance but not the form of the objects that really matters. While considering the Memorandum of Association the distinction between the objects of the association and the powers vested in it for carrying out its objects must always be borne in mind by the Courts. The objects and powers are not one and the same but they are different and distinct. Any association has to define and specify in its memorandum only the objects or purposes to be achieved but it need not indicate the powers to be exercised by the association or its management in effecting the objects. The powers relate to the method and manner of its actual working or functioning whereas the objects indicate its ultimate goal or achievements. The powers should, under no circumstances, be confused with objects or purposes. It has become a practice to register Memorandum of Association containing objects mixed up with powers to be exercised in implementing the objects. Such practice must be deprecated. It is apt to notice what was stated by Lord Wrenbury in Cotman v. Brougham 1918 A.C.-514 at page 522 in this context.
There has grown up a pernicious practice of registering memoranda of association which under the clause relating to objects contain paragraph after paragraph not specifying or delimiting the proposed trade or purpose, but confusing power with purpose and indicating every class of act which the corporation is to have power to do. It has arrived now at a point at which the fact is that the function of the memorandum is taken to be not to specify not to disclose, but to bury beneath a mass of words the real object or objects of the company with intent that every conceivable form of activity shall be found included somewhere within its terms.
His submission was that a dichotomy has to be made of the various clauses in the Memorandum and it has to be decided what part thereof constitutes an object and what part thereof would refer to powers to be exercised in implementing the object or the day to day running of the company. If this was done, he submitted that the amendment in Clause 28 of the Memorandum by abolition of the words referred to only made a change in the manner of exercising powers.
21. We have carefully considered the rival submissions. The memorandum of the assessee in item III has made a bifurcation between the main objects [sub-division (a)] and objects incidental or ancillary to the attainment of the main objects [sub division (b)]. Clause 28 falls in sub-division (b). The Memorandum itself describes the clause as an object incidental or ancillary to the attainment of the main objects. Section 13(1) of the Companies Act refers to what the Memorandum of every company shall state and Clause (d) thereof reads:-
In the case of a company formed after such commencement-
(i) the main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects;
(ii) other objects of the company not included in Sub-clause (i);
Clause 28 ex facie falls under Section 13(1)(d)(ii)- It was because of this that an application was moved under Section 17 of the Companies Act for permission to change the Memorandum before the Company Law Board. The Company Law Board also accorded permission thereafter and such fact was duly registered with the Registrar of the Company Law Board. The learned counsel for the assessee submitted that merely because the assessee obtained the permission of the Company Law Board which was a superfluity. It would not convert what was really a power into an object. In our view, Clause 28 of the Memorandum as it originally stood does not admit of a dichotomy in the manner in which it stands, between what would be considered to be the objects, and what may be labelled as powers. The clause has necessarily to be read looking to the language employed, as an integral whole and it cannot be said to be power and therefore, any amendment to Clause 28 has to be considered as an amendment which falls under Section 13(1)(d)(ii. This being so, the amendment can come into effect only from the date of registration. Our answer to the second point of difference formulated is that the amendment to Clause 28 being an amendment to a clause in the Memorandum which deals with objects of the company, comes into force only from 2-1-1989 in view of the provisions of Section 18(2) of the Companies Act.
22. Before parting with this point, we may state that the learned Standing Counsel had put forth an argument that the amendment itself had to be considered to be void because there was no power specifically spelt out in the Memorandum and Articles of Association as to how the Memorandum and Articles of Association were to be amended. In support of this stand, he relied on a judgment of the Madras High Court in Sakthi Charities v. CIT[1990] 182 ITR 483. We have given careful consideration to this contention, but we are unable to agree with the proposition put forth. The case of Sakthi Charities (supra) related to an amendment of a trust deed. The present amendments have been made in conformity with statutory provisions of the Companies Act and further Section 18(2) of the said Act, which we have reproduced, puts the matter beyond doubt that the certificate granted would be conclusive evidence that all the requirements of the Act with respect to the alteration have been complied with and, therefore, the Memorandum as altered shall be the Memorandum of the company. Therefore, with effect from 2-1-1989, the Memorandum of the assessee-company would be the Memorandum with Clause 28 as amended.
23. We now come to the third point of difference which has been referred. The main thrust of the argument of the learned Standing Counsel was that the activities of the Corporation could not be considered to be charitable in nature within the meaning of Section 2(15) of the Income-tax Act, 1961 as held by the Judicial Member. The learned Standing Counsel relied on certain decisions to submit that Courts were declined to hold that those entities were charitable only because they were declared to be so under Section 25 of the Companies Act. The cases relied on in this regard were Dharmadeepti v. CIT [l978] 114 ITR 454 (SC) and Swat Art Silk Cloth Mfrs. Association's case (supra). He also submitted that the objects in the present case related to carrying on of commercial activities. This implied the earning of profits and as long as a clause exists permitting declaration of dividends there was the motive of private gain. He stated that notwithstanding the amendment of Article 6 of the Articles of Association in 1980 to the effect that income of the Company belongs to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh it did notalter the position that there still did exist private gain because the clause that existed in the Memorandum of Association, viz., Clause No. 28 still permitted declaration of dividend. He also submitted that as a fact no income was made over to the Price Equalisation/Stabilisation Fund. By Government order dated 30-5-1980 it had been decided that 2 per cent of the Company's turnover should be made over for maintenance of the Price Stabilisation/Equalisation Fund as administered by the Government. His submission was that the terms of the Government order was contradictory to the terms of Article 6 as amended. He submitted that in the case of Andhra Pradesh State Rond Transport Corporation (supra), the Supreme Court highlighted the fact that the amount left over after utilisation for the purposes set out in Section 30 of the Road Transport Corporations Act was to be made over to the State Government for the purposes of road development. The amount handed over to the State Government did not become part of the general revenues of the State but was impressed with the obligation that it should be utilised only for the purpose for which it was entrusted, i.e., road development which was an object of general public utility. Such, however, was not the case, he submitted, here because the surplus went directly into the coffers of the Government and the nature of the Price Stabilisation/Equalisation Fund was not known as a fund itself perhaps was yet to be set up.
24. The submission of the learned counsel for the assessee was that there was no contradiction between the direction to pay 2 per cent of the annual sales turnover for the maintenance of the Fund and Article 6 which provided that the income would belong to the Price Equalisation/Stabilisation Fund. The first direction was regarding the outgoing to be met prior to arriving at the net income and Article 6 set out the ownership of the net income.
25. In the case of Andhra Pradesh State Road Transport Corpn.'s case (supra) the surplus was to be made over to the State Government for the purpose of road development (see page 9). Section 30 of the Road Transport Corporations Act did not spell out details of how the road development was to be done etc. That was left to the discretion of the State Government. In the present case also under Article 6 the income of the company has been declared to belong to Price Equalisation/ Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh. Therefore, a legal liability has been created by Article 6 whereby all income vests in the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of A.P. Ownership vests in the Fund as such and the amount does not go into the coffers of the State Government. The manner in which the amount which may be in the Fund has to be utilised has not been spelt out. That is left to the discretion of the Government. It necessarily has to be so in view of very rapidly changing economic factors. Holding the price line is essential to counteract inflation and in our view it cannot be disputed that it is an object of general public utility. We see no difference.
26. The Supreme Court in Andhra Pradesh State Road Transport Corporation's case (supra) at page 10 observed as under:-
The submission founded upon Section 22 is based upon a misunderstanding of what that section provides. A road transport corporation cannot be expected or be required to run at a loss. It is not established for the purpose of subsidising the public in matters of transportation of passengers and goods. The objects for establishing a road transport corporation are those set out in Section 3 of the RTC Act which we have already reproduced above. Section 18 shows that it is the duty of a road transport corporation to provide, secure and promote the provision of an efficient, adequate, economical and properly co-ordinated system of road transport services in the State. No activity can be carried on efficiently, properly, adequately or economically unless it is carried on on business principles. If an activity is carried on on business principles it would usually result in profit, but, as pointed out by this Court in Surat Art Silk Cloth Mfrs. Association's case [1980] 120 ITR 1 (SC), it is not possible so to carry on a charitable activity in such a way that the expenditure balances the income and there is no resultant profit, for, to achieve this, would not only be difficult of practical realisation but would reflect unsound principles of management. What Section 22, therefore, does when it states that it shall be the general principle of a road transport corporation that in carrying on its undertakings it shall act on business principles is to emphasise the objects set out in Section 3 for which a road transport corporation is established and to prescribe the manner in which the general duty of the corporation set out in Section 18 is to be performed. It is now firmly established by the decisions of this Court in Surat Art Silk Cloth Mfrs. Association's case [1980] 121 ITR 1 (SC) and Bar Council of Maharashtra's case[1981J 130 ITR 28 (SC), that the test is 'What is the predominant object of the activity - whether it is to carry out a charitable purpose or to earn profit?' If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character merely because some profit arise from the activity.
The main objects of the assessee-company before us as set out in item III(A) of the Memorandum of Association are as under:-
To engage in, promote, improve, develop, counsel and finance production, purchase, storage, processing, movement, transport, distribution and sale of food grains, foodstuffs and any other essential commodities and to articles establish laboratories for the purpose of ensuring quality control, to train personnel in the technique of quality control and to provide services and assistance of all kinds of the said purchases including capital credit, means, resources, technical and managerial services, advice and assistance.
[Emphasis supplied]
27. The assessee is to deal in food grains, foodstuffs and other essential commodities. It is Government run organisation and the purpose of Civil Supplies Corporation is to ensure supply of grains, edible oils etc. to the masses through approved outlets by grant of substantial subsidies and thus hold the price line which is the object of the Fund referred to in Article 6. In this very year a subsidy of Rs. 44,66,51,914 was granted by Government but for which there would have been a huge loss, an undisputed fact. Thus whether the fund has been set up or not would not alter the position in determining whether the primary object of the assessee is charitable purpose or not inasmuch as the income is attached with a legal obligation to hold it for the purpose of creating a fund for equalisation of prices. We have to hold that the primary object of the assessee is charitable.
28. We have also to hold that merely because a profit resulted, the object does not cease to be charitable. As pointed out by the Supreme Court, no activity can be efficiently, properly, adequately or economically carried on unless it is carried on business principles. This is all that the ancillary and incidental objects spell out. In any case the words "not involving the carrying on of any activity for profit" in Section 2(15) were omitted by the Finance Act, 1983 with effect from 1-4-1984. Thus any discussion on profit earned or capable of earning has become academic.
29. We are also unable to agree that the surplus enures for private gain. According to Articles of the Articles of Association which was in force in the previous year, the total share capital is to be contributed and in fact was contributed by the State Government. Therefore, even assuming that any declaration of dividends was permissible under Clause 28 of the Memorandum of Association as it stood before amendment, the dividend would go in its entirety to the Government, i.e., it goes to the public and consequently there would be no chance of any element of private gain, if by private gain it is meant that the gain enures for individuals other than "State". In our view, the decision of the Andhra Pradesh High Court in the case of Girijan Co-operative Corporation Ltd. supports this conclusion, in which it was held, that even if dividends are to be declared, if its utilisation is for public purpose, the entity does not lose its character of charitable nature.
30. Another aspects on which considerable stress was placed by the learned Standing Counsel was on Article 132 of the Articles of Association which reads as under:-
If the Company shall be wounded up and the assets available for distribution among the members as such shall be insufficient to repay the whole of the paid up capital, such assets shall be distributed so that, as nearly as many be the loss shall be borne by the members in proportion to the capital paid up or which ought to have been paid up at the commencement of the winding up, on the shares held by them respectively. And if in a winding up, the assets available for distribution, among the members shall be more than sufficient to repay the whole the capital paid up the excess shall be distributed among the members in proportion to the capital paid up or which ought to have been paid up on the share held by them respectively. But this clause shall be without prejudice to the right of the holders of shares issued upon special terms and conditions.
The submission was that if ultimately the assessee company was to be wound up, then the assets available would go for distribution among the members. According to him, the ratio of the judgment of the Delhi High Court in the case of Truck Operators' Union v. CIT [1981] 132 ITR 62 supported the view that in such an event, the requirement of Section 2(15) was not satisfied. He very fairly pointed out that the ratio of the decision of the Bombay High Court in Western India Chamber of Commerce's case (supra) was to the contrary effect.
31. It is to be remembered that when the assessee corporation was brought into existence by the Government Notification on 26-7-1974, it clearly provided that the assets that were owned by the Government were transferred to the Corporation. Further Government of Andhra Pradesh is the only share-holder. It is thus clear that the assets available for distribution in the event of winding up should go to its previous owner and the only share-holder (i.e.) the State Government. The Government order of 1974 G.O.Ms. No. 701 dt. 26-7-1974 of Food and Agriculture Department may now be reproduced.
Government of Andhra Pradesh Abstract Companies - Civil Supplies - Purchase of food grains and other essential articles -Formation of the "Andhra Pradesh State Civil Supplies Corporation Private Limited" - Orders - Issued.
Food & Agriculture (CS. III) Department.
G.O.Ms.No.701 Dated : 26th July, 1974 ORDER
The Government have decided to set up a State Corporation for handling Civil Supplies matter in respect of procurement, transport, storage and issue activities within the State and to help the Govt. meet any difficult situation arising in this field.
2. The proposed Corporation shall be called "The Andhra Pradesh State Civil Supplies Corporation (Private) Limited" and shall come into existence after it is registered under the Companies Act, 1956. The following orders are issued :-
(i) The functions and objects of the A.P. State Civil Supplies Corporation shall be: to engage in, promote, improve, develop, counsel and finance, production, purchase, storage, processing, movement, transport, distribution and sale of food grains, food stuffs and any other essential articles and to provide service and assistance of all kinds including capital, credit and technical and managerial service.
(ii) Share Capital of the Corporation.- The authorised share capital of the Corporation will be Rs. Scrores divided into 30,000 equity shares of Rs. 1,000 each. The initial subscribed capital will be Rs. 1.00 crore.
(iii) Management of the Corporation.- The management will rest in the Board of Directors with the Secretary to Government in-charge of Civil Supplies matters as Chairman. The General Manager/Managing Director will conduct and manage the company subject to the control and supervision of the Board of Directors.
(iv) Assets of the Corporation.-The assets owned by the Civil Supplies Deptt. that will be transferred to the Corporation, separately orders will issue listing out the immovable assets to be transferred to the corporation.
3. Orders regarding sanction of share capital and other incidental expenditure for registration of the Corporation will be issued separately.
4. This order issues with the concurrence of Finance Deptt. vide their U.O.No. 1260/ DFSB/74-l, dt. 20-7-1974.
(By Order and in the Name of the Governor of Andhra Pradesh) Sd/- B.C. Gangopadhyaya Ex. Office Secretary to Government.
It is clear from item (iv)to repeat and connect to our conclusion that the assessee was set up by assets transferred to it by the Government. It is only in the fitness of the things that in the event of the assessee company being wound up, whatever assets are left out of those which are received on transfer initially together with accretion thereto should revert to the Government which had transferred its own assets to the assessee company for setting it up. Therefore, on the facts the distribution of assets in the present case is only a return of the assets to the government with whose assets the assessee came into being. On the facts, therefore, we consider that Article 132 also does not militate against the conclusion that the assessee is a charitable entity.
32. We have already set out the findings of the Accountant Member. Out of the eight findings given by the Accountant Member, one finding the exemption was to be denied, no longer subsists, because retrospectively the assessee has been granted registration by the Commissioner of Income-tax under Section 12A of the Income-tax Act. The Judicial Member had differed from the learned Accountant Member on the point as to the date from which the amendment to Clause 28 of the Memorandum of Association took effect, i.e., whether it was from 16-11-1981, a date which fell prior to the commencement of the accounting period or 2-1-1989 or a date which fell subsequent to the commencement of the accounting period. We have agreed with the learned Judicial Member that the amendment came into effect only from 2-1-1989. Therefore what was in force in the accounting period was the unamended Clause 28. However, after examining the impact of the same, we have held that in view of the ratio of the judgment of the A.P. High Court in Girijan Co-operative Corporation Ltd.'s case (supra) even if it is interpreted that there is provision for declaration of dividend that would not disentitle the assessee to exemption. For the aforesaid reason and on an analysis of the activities of the Corporation in the light of the various judicial pronouncements, we have come to the conclusion that the activities are charitable in nature within the meaning of Section 2( 15) of the Income-tax Act, 1961 and on this point, therefore, we differ from the conclusion arrived at by the Judicial Member. In other words, we agree with the conclusion of the Accountant Member that the assessee Corporation is a charitable institution within the meaning of Section 2(15) of the Income-tax Act, 1961. In view of the aforesaid position, point No. 3 of the difference of opinion which was referred to us has to be answered in the affirmative, namely, that the A.P. State Civil Supplies Corporation is a charitable institution within the meaning of Section 2(15) of the Income-tax Act, 1961.
33. The case will now go back to the Bench for disposing of the appeal in accordance with the opinion of the majority.